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PHILIPPINE SAVINGS BANK (A banking corporation organized and existing under Philippine Laws)
P3,000,000,000 Unsecured Subordinated Notes Qualifying as Tier 2 Capital Due 2022
Callable in 2017 Issue Price 100%
Philippine Savings Bank (“PSB” or the “Bank” or the “Issuer”) is offering P3,000,000,000 worth of Unsecured Subordinated Notes eligible as Tier 2 Capital due 2022, callable in 2017 (the “Notes”) pursuant to the authority granted by the Bangko Sentral ng Pilipinas (“BSP”) to the Bank on 1 February 2012 and Subsections X116.1 and X119.1 of the Manual of Regulations for Banks, BSP Circular No. 709 (series of 2011), and other applicable regulations and issuances of the BSP, each as amended from time to time. The Notes will bear interest at the rate of 5.75% per annum from and including 20 February 2012 to but excluding 20 February 2022. Unless the Notes are earlier redeemed upon at least 30 days’ notice prior to 21 February 2017 (the “Call Option Date”), the interest shall be payable quarterly in arrears at the end of each Interest Period on 20 May, 20 August, 20 November and 20 February, commencing on 20 February 2012 until the Maturity Date.
Unless previously redeemed, the Notes will be redeemed at their principal amount on Maturity Date or 20 February 2022. Subject to the satisfaction of certain regulatory approval requirements, the Bank may redeem the Notes in whole and not only in part at a redemption price equal to 100% of the principal amount together with accrued and unpaid interest upon at least 30 days’ notice prior to the Call Option Date. (See Terms and Conditions of the Notes – Call Option Date.) The Notes will constitute direct, unconditional, and unsecured obligations of the Bank. The Notes will be subordinated in right of payment of principal and interest to all depositors and other creditors of the Issuer and will rank pari passu and without any preference among themselves, but in priority to the rights and claims of holders of all classes of equity securities of the Bank, including holders of preferred shares, if any. (See Terms and Conditions of the Notes – Status of Notes.) THE NOTES ARE NOT DEPOSITS AND ARE NOT INSURED BY THE PHILIPPINE DEPOSIT INSURANCE CORPORATION. THE NOTES ARE SUBORDINATED TO THE CLAIMS OF DEPOSITORS AND ORDINARY CREDITORS. THE LOANS ARE UNSECURED AND NOT COVERED BY THE GUARANTY OF THE ISSUER NOR OF ITS SUBSIDIARIES AND AFFILIATES. THE NOTES ARE INELIGIBLE AS COLLATERAL FOR A LOAN GRANTED BY THE ISSUER, ITS SUBSIDIARIES AND AFFILIATES. The Notes will be issued in scripless form and in minimum denominations of P500,000.00 and integral multiples of P100,000.00 thereafter and will be registered and lodged with the Registry in the name of the Holders. The Notes will be represented by a Master Note deposited with the Trustee (with copy to the Registry). The Electronic Registry Book (the “Registry Book”) shall serve as the best evidence of ownership with respect to the Notes. However, a written advice will be issued by the Registry to the Holders to confirm the registration of Notes in their name in the Registry Book, in accordance with the regulations of the BSP (“Registry Confirmations”). Once registered and lodged, the Notes will be eligible for transfer or assignment through a Market Maker by electronic book-entry transfers in the Registry Book, and any sale, transfer, or conveyance of the Notes shall be coursed through a Market Maker. In the event that the Notes are listed in a fixed income exchange, the services of the Market Maker shall cease and secondary trading on the Notes would henceforth be conducted in such fixed income exchange in accordance with the rules and regulations of such fixed income exchange. The Notes have been given a PRS Aaa rating by PhilRatings. A rating is not a recommendation to buy sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the rating agency concerned. INVESTING IN THE NOTES INVOLVES CERTAIN RISKS. (SEE “INVESTMENT CONSIDERATIONS” FOR A DISCUSSION OF FACTORS TO BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES).
Lead Manager and Selling Agent
Selling Agent and Market Maker
Limited Selling Agents
Offering Circular 15 February 2012
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The date of this Final Offering Circular is 15 February 2012. The BSP on 29 December 2011 approved the issuance and sale of the Notes. The Bank confirms that this Offering Circular contains all information with respect to the Bank and the Notes which are material in the context of the issue and offering of the Notes, that the information contained herein are true and accurate in all material respects, are not misleading, that the opinions and intentions expressed herein are honestly held and have been reached after considering all relevant circumstances and are based on reasonable assumptions, that there are no other facts, the omission of which would, in the context of the issue and offering of the Notes, make this document as a whole or any of such information or the expression of any such opinions or intentions misleading in any material respect and that all reasonable inquiries have been made by the Bank to verify the accuracy of such information. The Bank accepts responsibility accordingly. In making an investment decision, the recipient of this document must rely on his own examination of the Bank and the terms of the offering of the Notes, including the merits and risks involved. By receiving this Offering Circular, the recipient acknowledges that (i) he has not relied on ING Bank N.V., Manila Branch (‘‘ING Bank’’ or the ‘‘Lead Manager’’), Multinational Investment Bancorporation (‘‘MIB’’)(collectively the “Selling Agents”) or any person affiliated with the Lead Manager or the Selling Agents in connection with his investigation of the accuracy of any information in this Offering Circular or his investment decision, and (ii) no person has been authorized to give any information or to make any representation concerning the Bank, or the Notes other than as contained in this Offering Circular and, if given or made, such information or representation should not be relied upon as having been made or authorized by the Bank or the Lead Manager. This Offering Circular contains forward looking statements that include, among others, statements concerning the Bank’s plans relating to (i) the expansion of its business and operations; (ii) the growth in its customer base and loan portfolio; (iii) the implementation of new information and other technologies; (iv) the ability to provide new products and services; and (v) the increase in its operational efficiencies, and other statements of expectation, belief, future plans and strategies, anticipated developments and other matters that are not historical facts and which may involve predictions of future circumstances. Investors are cautioned that these forward looking statements are subject to risks and uncertainties that could cause actual events or results to differ from those expressed or implied by the statements contained herein and no assurance can be given that the future results will be achieved. Actual events or results may differ materially as a result of the risks and uncertainties the Bank faces. Such risks and uncertainties include, but are not limited to (i) actions taken by the BSP, who is the regulator of the banking industry in the Philippines, and by the Government of the Republic of the Philippines; (ii) actions taken by the Bank’s competitors; and (iii) general economic and political conditions in the Philippines. No representation or warranty, express or implied, is made by the Lead Manager or the Selling Agents as to the accuracy or completeness of the information contained in this Offering Circular. Neither the delivery of this Offering Circular nor the offer of Notes shall, under any circumstances, constitute a representation or create any implication that there has been no change, material or otherwise, in the condition, operations, or affairs of the Bank since the date of this Offering Circular or that any information contained herein is correct as of any date subsequent to the date hereof. None of the Bank, the Lead Manager or the Selling Agents, or any of their respective affiliates or representatives makes any representation to any purchaser of the Notes regarding the legality of an investment by such purchaser under any applicable laws. In addition, the recipient should not construe the contents of this Offering Circular as legal, business, tax, or investment advice. The recipient should be aware that he may be required to bear for an indefinite period the risks, financial, tax, or otherwise of an investment in the Notes. The recipient is encouraged to consult with his own advisers as to the legal, tax, business, financial, and other related aspects of a purchase of the Notes. This document does not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make any such offer or solicitation. Each investor in the Notes must comply with all applicable laws and regulations in force in the jurisdiction in which it purchases or offers to purchase such Notes, and must obtain the necessary consent, approval, or permission for its purchase, or offer to purchase such Notes under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchase or offer, and neither the Bank nor the Lead Manager shall have any responsibility thereof. Interested investors should inform themselves as to the applicable legal requirements under the laws and regulations of the countries of their nationality, residence, or domicile and as to any relevant tax or foreign exchange control laws and regulations that may affect them.
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TABLE OF CONTENTS
GLOSSARY OF TERMS iii
SUMMARY OF THE OFFERING 1
SUMMARY FINANCIAL INFORMATION 8
MANAGEMENT DISCUSSION AND ANALYSIS 11
INVESTMENT CONSIDERATIONS 14
USE OF PROCEEDS 23
CAPITALIZATION OF THE BANK 24
TERMS AND CONDITIONS OF THE NOTES 25
DESCRIPTION OF THE BANK 46
MANAGEMENT, EMPLOYEES, AND SHAREHOLDERS 63
PHILIPPINE BANKING SECTOR 69
BANKING REGULATIONS AND SUPERVISION 72
TAXATION 79
OFFER PROCEDURE 82
SUMMARY OF REGISTRY FEES 84
INDEX TO THE FINANCIAL STATEMENTS 85
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GLOSSARY OF TERMS
Allocation Report The report which summarizes the total amount of Applications to Purchase accepted and the allocation of Notes among the Issuer and the various Selling Agents and Limited Selling Agents
AMLA Anti-Money Laundering Act of the Philippines (Republic Act No.
9160), as amended, and its implementing rules and regulations
AMLC Anti-Money Laundering Council
Anti-Money Laundering Act The Anti-Money Laundering Act of the Philippines (Republic Act No.
9160) as amended
Application to Purchase The application form to be executed by prospective investors in the
form of Schedule 2 to the Registry and Paying Agency Agreement to designate their firm offer to purchase Notes from the Issuer through the Selling Agents and Limited Selling Agents
Applications Schedule The Schedule of Applications to Purchase, which sets out the
aggregate amount of the Notes applied for by each Applicant and summarizes the details of the latter
Arranger ING Bank N.V., Manila Branch or any successor of such entity
ATM Automated Teller Machine
Bank Philippine Savings Bank and, except where the context otherwise
requires, all of its subsidiaries
Banking Day Any day of the week, other than Saturday, Sunday and holidays, when banks are not required or authorized to close in Makati City
BIR Philippine Bureau of Internal Revenue
Board or Board of Directors Board of Directors of the Bank
BSP Bangko Sentral ng Pilipinas, the Central Bank of the Philippines
Call Option The Issuer’s option to redeem all of the Notes before maturity in accordance with the Master Note
Call Option Amount The Issue Price of the Notes plus accrued but unpaid interest thereon up to but excluding the Call Option Date
Call Option Date The Banking Day following the lapse of five years from the Issue Date of the Notes
CAR Capital Adequacy Ratio, computed as Total qualifying capital less deductions divided by total risk weighted assets
Certificate of Indebtedness The certificate to be issued by the Issuer evidencing and covering such amount corresponding to the Notes
Credit Spread The credit spread (which is premium over the Reference Benchmark) as set out in the Notes’ Certificate of Indebtedness
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Director A Director of the Bank
DOSRI Directors, Officers, Shareholders and Related Interests
Eligible Holders All prospective purchasers of the Notes other than those identified
as Prohibited Holders
FCDU Foreign Currency Deposit Unit
GAAP Generally Accepted Accounting Principles
General Banking Law General Banking Law of 2000 (Republic Act No. 8791)
GOCCs Government Owned and Controlled Corporations
Holders Eligible Holders who, at any relevant time, appear in the Registry Book as the registered owners of the Notes
Interest Payment Date The last day of each Interest Period; provided, that if such day is not a Banking Day, the Interest Payment Date shall be the immediately succeeding Banking Day, unless such succeeding Banking Day falls into the next calendar month, in which case, the Interest Payment Date shall be the immediately preceding Banking Day
Interest Period Each successive three-month period commencing on the last day of the immediately preceding Interest Period and ending on (but excluding) the first day of the immediately succeeding Interest Period. Each Interest Period shall end on the numerically corresponding day of each third month after the Issue Date (or if there is no day so corresponding in such month, such Interest Period shall end on the last day of such month); provided, that (i) if any Interest Period would otherwise end on a day which is not a Banking Day, such Interest Period shall be extended to the next succeeding day which is a Banking Day, unless the result of such extension would be to carry such Interest Period over into another calendar month, in which event such Interest Period shall end on the immediately preceding Banking Day; and (ii) the last Interest Period shall end on, but exclude, the Maturity Date or Call Option Date (as the case may be)
Interest Rate
The interest rate per annum as specified in the Certificate of Indebtedness as the interest rate corresponding to the Notes. The Interest Rate for the Notes shall be the sum of the Reference Benchmark and the applicable Credit Spread
Issue Date The date on which such the Notes was issued, as specified in the corresponding Certificate of Indebtedness
Issue Management and Placement Agreement
The Issue Management and Placement Agreement dated 3 February 2012 by and among the Issuer and the Arranger
Issue Price An amount equal to one hundred percent (100%) of the face value of the Notes thereof
Issuer Philippine Savings Bank
LGUs Local Government Units
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Limited Selling Agents The Issuer, First Metro Investment Corporation or any other related entity appointed by the Issuer as agreed with the Arranger to sell and distribute the Notes to prospective Eligible Holders
Majority Holders At any time, the Holder or Holders who hold, represent or account for more than fifty percent (50.0%) of the aggregate outstanding principal amount of the Notes
Market Maker Agreement The Market Maker Agreement dated 3 February 2012 by and among the Issuer and the Market Makers
Market Makers Multinational Investment Bancorporation and thereafter, the institution appointed by the Issuer to perform the role of market maker required under the relevant USD Rules or such fixed-income exchange authorized by the Securities and Exchange Commission on which the Notes may be listed after the Issue Date
Master Note The Master Note issued by the Issuer to evidence its obligations under the Notes and includes the Terms and Conditions of the Note
Maturity Date The date specified as the maturity date in the corresponding Certificate of Indebtedness of the Notes, which is up to 10 years from Issue Date, subject to any exercise of the call option
Maturity Value The amount of the face value of the Notes plus unpaid accrued applicable interest on the Notes up to but excluding the Maturity Date
Metrobank Metropolitan Bank and Trust Company
Metrobank Group Companies and individual shareholders affiliated/associated with Metrobank
Monetary Board Monetary Board of the BSP
MSMEs
Micro, Small and Medium-sized Enterprises
National Government The Government of the Republic of the Philippines
Net Tier 1 Capital
Total Tier 1 capital less deductions, such as deferred income tax, goodwill and unsecured credit accommodations to DOSRI
New Central Bank Act New Central Bank Act of 1993 (Republic Act No. 7653)
NGAs National Government Agencies
Note Agreements Means the Issue Management and Placement Agreement, the Selling Agency Agreement, the Registry and Paying Agency Agreement, the Trust Agreement, and the Market Maker Agreement
Notes Means the Notes with a maximum aggregate principal amount of Three Billion Pesos (P3,000,000,000) to be issued by the Issuer on the terms and conditions set out in the Master Note and the corresponding Certificate of Indebtedness
NPAs Non-Performing Assets
NPLs Non-Performing Loans
Offer An offer for the sale and distribution of the Notes to Eligible Holders
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Offering Circular The preliminary offering circular dated 27 January 2012 and the final offering circular dated 15 February 2012 prepared by the Arranger in connection with the offering of the Notes to the public
Offer Period The period when the Notes are offered for sale by the Issuer through the Selling Agents and the Limited Selling Agents to prospective Eligible Holders, as determined by the Issuer and the Arranger. The Offer Period for the Notes shall commence at the start of business hours of 3 February 2012 and end at the close of business hours of 9 February 2012 or such other day as may be determined by the Issuer and the Arranger
OFWs Overseas Filipino Workers
Option Notes The Notes in respect of which the Issuer exercises the Call Option
Option Notice The notice issued by the Bank indicating its intention to exercise its call option
PA Schedule The schedule of Purchase Advice which summarizes the allocations made among the various applicants
Parent Company Refers to Philippine Savings Bank only, excluding its subsidiaries
Paying Agent Standard Chartered Bank or such successor or substitute paying agent to be appointed by the Issuer upon prior approval of the BSP
Payment Account The account to be opened and maintained by the Issuer with the Registry and Paying Agent, into which the Issuer shall timely deposit the amount of interest and/or principal payments due, to be used exclusively for the payment of the interest on and principal due on the outstanding Notes on the relevant Payment Date, and to be managed solely and exclusively by the Registry and Paying Agent
Payment Date An Interest Payment Date, the Maturity Date, the Call Option Date, and any other date on which principal, interest on and/or any other amounts on the Notes are due and payable to the Holders
PCD Philippine Central Depository, a corporation established to improve operations in securities transactions and provide a fast, safe and highly efficient system for securities settlement in the Philippines
PCD Nominee PCD Nominee Corporation, a corporation wholly-owned by PCD which acts as trustee-nominee for all shares lodged in the PCD
PDIC Philippine Deposit Insurance Corporation
PDST-F
Philippine Dealing System Treasury Fixing
PFRS Philippine Financial Reporting Standards
PhilRatings Philippine Rating Services Corporation
Prohibited Holders (i) The Issuer, its subsidiaries and affiliates, and wholly- or majority-owned or -controlled entities of such subsidiaries and affiliates, and (ii) common trust funds managed by the trust department of the Issuer, its subsidiaries and affiliates, and wholly- or majority-owned or -controlled entities of such subsidiaries and affiliates, provided, that other funds being managed by the trust department of the Issuer may purchase or invest in the Notes subject to the conditions that (x) the fund owners give prior authority/instructions to the trust
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department to purchase or invest in the Notes, and (y) the authority/instructions of the fund owners and their understanding of the risk involved in purchasing the Notes are fully documented. For purposes of this definition, an “affiliate” of the Issuer is an entity at least twenty percent (20.0%) but not more than fifty percent (50.0%) of the outstanding voting stock of which is owned by the Issuer
PSE Philippine Stock Exchange
Purchase Advice The written advice to be issued by a Selling Agent, Limited Selling Agent or the Market Maker, as the case may be, to the Holder and to the Registry, confirming the fact, details, and terms and conditions of the purchase of the Notes by a Holder
Reference Benchmark The interest rate for 10-year Fixed Rate Treasury Notes, as
published on the PDST-F section of the PDEx Market Page under
the heading “Bid Yield” at approximately 11:15 a.m., Manila time, as
of such date mutually agreed upon by Issuer and the Arranger
Registry Standard Chartered Bank or such successor or substitute registry to be appointed by the Issuer upon prior approval of the BSP
Registry and Paying Agency Agreement
The Registry and Paying Agency Agreement dated 3 February 2012 by and between the Issuer and the Registry and Paying Agent
Registry Book The electronic records maintained by the Registry containing the official information on the names of the Holders and the number of Notes they respectively hold, including records of all transfers of the Notes
Registry Confirmation The written advice to be sent by the Registry to the relevant Holder to confirm the number and terms and conditions of Notes registered in the Registry Book in the name of the Holder at any relevant time
Risk Weighted Assets
Consist of on-balance sheet and off-balance sheet assets with applicable credit risk, market risk and operational risk weights
ROPA Real and Other Properties Acquired
RTGS The Philippines Payment System via Real Time Gross Settlement that would allow banks to continually effect electronic payment transfers which are interfaced directly to the automated accounting and settlement systems of the BSP
SEC Philippine Securities and Exchange Commission
Selling Agency Agreement
The Selling Agency Agreement dated 3 February 2012 by and between the Issuer and the Selling Agents
Selling Agents ING Bank N.V., Manila Branch and Multinational Investment Bancorporation or any other entity appointed by the Issuer as agreed with the Arranger to sell and distribute the Notes to prospective Eligible Holders
SGV & Co. SyCip Gorres Velayo & Co., a member firm of Ernst & Young Global Limited
SMEs Small and Medium-sized Enterprises
SPV Act The Special Purpose Vehicle Act of 2002 (Republic Act No. 9182)
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SPVs Special Purpose Vehicle companies
Terms and Conditions The terms and conditions of the Notes, as set out in, and as qualified by, the section “Terms and Conditions of the Notes” of this Offering Circular
Tier 1 Capital
Consists of common stock, additional paid-in capital, retained earnings, undivided profits and cumulative translation adjustment
Total Qualifying Capital
The sum of Net Tier 1 Capital and Net Tier 2 Capital
Trust Agreement The Trust Agreement dated 3 February 2012 by and between the Issuer and the Trustee, setting out the terms and conditions upon which the Trustee shall act as trustee of the Notes for the benefit of the Holders
Trustee Development Bank of the Philippines
USD Rules Means the General Banking Law of 2000 (Republic Act No. 8791), Subsections X116.1 and X119.1 of the Manual of Regulations for Banks, BSP Circular No. 709 (series of 2011), BSP Circular No. 538 (series of 2006), and BSP Memorandum dated 17 February 2003 (as amended by BSP Memorandum dated 5 August 2004 and BSP Memorandum dated 23 March 2006), and other related circulars and issuances, in each case, as amended to date and as may be further amended from time to time
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SUMMARY OF THE OFFERING
This summary highlights information contained elsewhere in this Offering Circular. This summary is
qualified in its entirety by more detailed information and financial statements, including notes thereto,
appearing elsewhere in this Offering Circular. For a discussion of certain matters that should be
considered in evaluating an investment in the Notes, see “Investment Considerations.” Investors are
advised to read this entire Offering Circular carefully, including the Bank’s consolidated financial
statements and related notes contained herein.
Principal Products, Markets and Distribution Philippine Savings Bank (the “Bank”) was established on 30 June 1959 primarily to engage in savings and mortgage banking. The Bank has outpaced some of its key competitors and is, today, the country's second largest thrift bank in terms of assets. The Bank is the country's first publicly listed thrift bank. The Bank caters mainly to the retail and consumer markets and offers a wide range of products and services such as deposits, loans, treasury, and trust. As of 31 October 2011, it has 196 branches. The Bank's total assets stood at P114.83 billion and P104.15 billion as of 31 October 2011 and 31 December 2010, respectively. Its total equity were at P14.79 billion and P11.61 billion as of 31 October 2011 and 31 December 2010, respectively As of 31 October 2011, the Bank is 75.98%-owned by Metrobank, a universal bank that provides a full range of banking and other financial services through its local and international branches. Metrobank is the country's second largest domestic bank with assets of P916.08 billion and has an extensive distribution network of over 585 branches nationwide as of 31 October 2011.
Competitive Strengths Majority owned by the Metrobank Group. PSBank is 75.98%-owned by the Metrobank Group, which is the second largest Philippine commercial bank in terms of assets and deposits. Metrobank is one of the leading expanded commercial banks in the country with more than 800 local and international offices and subsidiaries. Metrobank and PSBank serve distinct core markets and coordinate on market segmentation and branch location. Focused on the consumer market. Its focus is on retail deposit taking and consumer lending to upper- and middle-income classes. Through its 196 branches, it has been able to accumulate P97.04 billion deposit liabilities as of October 2011. Over the years, it has sought to develop products that address the needs of its target market. Consistent customer service and training. PSBank emphasizes Customer Service which is considered a major part of all performance evaluation reviews for both front-line and back-end support personnel. In an industry where homogenous products and services are being offered, PSBank aims to set itself apart through a unique customer-driven experience. Investments in Information Technology. PSBank has been investing in information technology for greater automation and integration of processes. This has resulted in improved efficiency through faster turn-around time for credit decisions, more uniform compliance with credit policies and better profit monitoring for its loan portfolio. PSBank offers one of the fastest turn-around times for mortgage and auto loan applications in the industry. It has a one day turn-around time for Auto Loans, five days for Home Loans and three days for Flexi/Personal Loans.
Strategy The Bank's vision is to be the country's consumer and retail bank of choice. It also aims to become the country's largest and most profitable thrift bank. The Bank will do this by maintaining a strategic management discipline that focuses on the consumer market. It will continue to harness inherent synergies with Metrobank and, at the same time, differentiate itself through its unmatched service, speed and quality. As part of the Metrobank Group, PSBank is able to easily expand its branch network and have access to customer data infrastructure and credit card operations by way of Metro Card Corporation. To grow the business, PSBank will rely on increasing visibility and customer
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convenience by establishing more branches throughout the country. This will be complemented by the Bank’s continued improvements in customer profiling through its unique customer information system. The objective is to stay ahead of the profitability curve and build a competitive advantage by having a focus on its target market. This will be supported by having a customer-centric performance oriented culture within the Bank and an organizational structure which encourages employees to be flexible and motivated contributors. The Bank continues to be fueled and inspired by its mission and mandate to deliver Simple Lang, Maasahan (Simple and Reliable) service at all times. See Description of the Bank — Strategy of the Bank.
Risks of Investing Prospective investors should consider the current and immediate political and economic factors in the Philippines as a principal risk for investing. Political instability and threats to local and regional currencies may also influence the operations, growth, and profitability of the Bank. Of equal importance are the investment considerations regarding the Bank's operations. See Investment Considerations.
Recent Developments On 7 February 2012, the Impeachment Court issued a subpoena to PSBank requiring it to bring before the Senate “original and certified true copies of the account opening form / documents” for ten specified accounts allegedly owned by Chief Justice Renato C. Corona, as well as documents showing the balances of said accounts as of December 31 for the years 2007, 2008, 2009 and 2010. In compliance with the subpoena, the Bank submitted documents and account balances for five Philippine Peso accounts. With respect to other accounts appearing to be foreign currency deposits, PSBank President Pascual M. Garcia III informed the Impeachment Court that the Bank was unable to comply with the subpoena in view of Republic Act No. 6426 or the Foreign Currency Deposit Act of the Philippines. Moreover, Mr. Garcia informed the Impeachment Court that the Bank instructed its attorneys to file a Petition with the Supreme Court (SC) to effectively seek guidance on whether the Bank and its officers would be legally justified in complying with the subpoena of the Impeachment Court without violating RA 6426 and Section 87 of the Manual of Regulations on Foreign Exchange Transactions. The SC issued a Temporary Restraining Order (TRO) restraining the Impeachment Court from requiring the Bank to comply with the subpoena relating to Foreign Currency Deposits on 9 February 2012. On 13 February 2012, the Senate Impeachment Court upheld the TRO granted by the Supreme Court
with a vote from the senator-judges of 13-10 in favor of abiding by the SC decision.
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Summary of the Terms and Conditions Issuer…………………………. Philippine Savings Bank
Notes ................................................ P3,000,000,000 aggregate principal amount of Fixed Rate Unsecured
Subordinated Notes qualifying as Tier 2 Capital issued by the Issuer under these Terms and Conditions.
Issue Price .......................................
100% of the face value of each Note.
Denomination ...................................
The Notes will be offered in minimum denominations of P500,000.00 each and increments of P100,000.00 beyond the minimum. The Notes will be represented by a Master Note which will be deposited with the Public Trustee.
Offer Period ......................................
The period when the Notes shall be offered for sale by the Issuer through the Issuer’s branches and the Selling Agents to prospective Holders, with the Offer Period commencing at 9:00 a.m. of 3 February 2012 and ending at 5:00 p.m. on 9 February 2012 or such other days as may be determined by the Arranger and Selling Agents, in consultation with the Issuer.
Issue Date ........................................
The date when the Notes are issued by the Issuer to the Holders or on 20 February 2012.
Maturity Date ....................................
Up to ten years from the Issue Date at which date the Notes will be redeemed at their Maturity Value; Provided, that if such date is declared to be a non-Business Day, the Maturity Date shall be the next succeeding Business Day. Recognition of the Notes in regulatory capital in the remaining five (5) years before maturity will be amortized on a straight line basis.
Benchmark Rate ..............................
Prevailing Philippine Dealing System Treasury Fixing (“PDST-F”) 10-year treasury securities benchmark rate displayed under the heading “Bid Yield” as published on the PDEx Page (or such successor page) of Bloomberg (or such successor electronic service provider) at approximately 11:30 a.m., Manila time on the Pricing Date.
Interest Rate .....................................
5.75% per annum.
Interest Payment Dates ...................
On the 20th of May; 20th of August; 20th of November and 20th of February of each year until Final Maturity Date. If the Interest Payment Date is not a Business Day, interest will be paid on the next succeeding Business Day, without adjustment to the amount of interest to be paid.
Redemption ...................................... Unless previously redeemed pursuant to the exercise of the Issuer’s Call Option, the Notes will be redeemed on Maturity Date at the Maturity Value. The Notes may not be redeemed at the option of the Holders.
Call Option ....................................... The Issuer may, but is not obliged to, redeem the Notes, in whole but not in part, at the Call Option Amount, on the Call Option Date, subject to the prior approval of the BSP and the compliance by the Issuer with the Regulations and prevailing requirements for the granting by the BSP of its consent therefor, including (i) the capital adequacy ratio of the Issuer is well above the required minimum ratio after redemption; or (ii) the Note is simultaneously replaced, on or prior to the Call Option Date, with issues of new capital which is of the same or of better quality and is done under conditions which are
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sustainable for the income capacity of the Issuer; and (iii) a 30 Banking Day prior written notice to the then Holder on record. Any tax due on interest income already earned by the Holders on the Notes shall be for the account of the Issuer. The notice for the Call Option shall be sent by the Issuer to the Public Trustee (with copy to the Registrar and Paying Agent) and to each of the registered Holders nor less than thirty (30) Business Days or more than forty five (45) Business Days prior to the Call Option Date. The Issuer shall likewise publish the notice of the Call Option in two (2) newspapers of general circulation in Metro Manila once a week for two (2) consecutive weeks at any time prior to the Call Option Date. Such notice shall state the Call Option Date, the Call Option Amount and the manner in which the call will be effected. Nothing herein shall be construed as an indication that the Issuer will exercise its Call Option and the Holders should not expect that such Call Option will be exercised.
Call Option Date ............................... The Banking Day immediately following the fifth (5th) anniversary of
the Issue Date of the Notes.
Call Option Amount ..........................
The principal amount of the Note plus accrued interest covering the accrued and unpaid interest as of but excluding the Call Option Date.
Secondary Trading ........................... All secondary trading of the Notes shall be coursed through the Market Maker referred to in the same Regulations, subject to the payment by the Holder of the proper fees to the Market Maker and the Registrar. In case of a transfer or assignment deemed by the Issuer as a pre-termination, solely for withholding tax purposes, the transferor Holder shall be liable for the resulting tax due on the entire interest income earned on the Notes (if any), based on the holding period of such Notes by the transferor Holder and the amount equal to the final withholding tax, if any, will be deducted from the purchase price due to it. Thereafter, the interest income of a transferee Holder who is an individual shall not be treated as income from long-term deposit or investment certificates, unless the Notes has a remaining maturity of at least 5 years. Transfers or assignments deemed by the Issuer as pre-termination for withholding tax purposes means any transfer or assignment which: (a) is made by a Holder who is a citizen, resident individual, non-resident individual engaged in trade or business in the Philippines, or a trust (subject to certain conditions); (b) under the Regulations, is not considered a pre-termination of the Notes; and (c) under relevant tax laws or revenue regulations, will result in the interest income on the Notes being subject to the graduated tax rates imposed on long-term deposit or investment certificates on the basis of the holding period of the investment instrument. No transfer or assignment of the Notes shall be recorded in the Registry unless the Issuer (or its duly authorized agent) has certified that the amount representing the tax due or arising from any such transfer or assignment has been paid.
Status and Subordination ................. The Issuer, for itself, its successors and assigns, has in the Trust Agreement covenanted and agreed, and each Holder by accepting a Note irrevocably agrees and acknowledges, that:
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(a) the indebtedness evidenced by the Notes constitutes direct, unconditional unsecured and subordinated obligations of the Issuer, and, upon any distribution to creditors of the Issuer in a Winding Up of the Issuer (as defined below), the claims of the Holders in respect of the Notes shall be subordinated in right of payment, to the extent and in the manner provided hereunder, to the prior payment in full of all liabilities (whether actual or contingent, present or future) of the Issuer, including claims of depositors, except those subordinated liabilities which by their terms rank equally in right of payment with or junior to the Notes;
(b) the Notes are not deposits and are not insured by the Philippine
Deposit Insurance Corporation;
(c) The Notes are unsecured and are not covered by a guarantee of the Issuer or Arranger or any other related party of the Issuer or Arranger. Neither are the Notes covered by any other arrangement that legally or economically enhances the priority of the claim of the Holders as against depositors and other creditors of the Issuer;
(d) Claims in respect of the Notes will rank pari passu without
preference among themselves, in priority to the rights and claims of holders of all classes of equity securities of the Issuer, including holders of preference shares, if any;
(e) Upon the distribution to creditors or any assets of the Issuer in
the event of any insolvency or liquidation of the Issuer, the claims of Holders for principal and interest in respect of the Notes shall be subordinated in right of payment to claims (whether actual or contingent, present or future) of all depositors and creditors of the Issuer, except those creditors that are expressly ranked equally with or junior to the Holders in right of payment;
(f) and the Notes may not be used as collateral for any loan made
by the Issuer or any of its subsidiaries or affiliates;
(g) Holders or their transferees shall not be allowed, and hereby waive their right, to set off any amount they owe to the Issuer against the Notes.
(h) Except in the case of bankruptcy and liquidation of the Issuer, no
holder shall have the right to require the Issuer to redeem and repay any or all of the Notes before the Maturity Date.
(i) The recognition of the Notes as regulatory capital in the
remaining five years before maturity shall be amortized on a straight-line basis or in accordance with prevailing regulations at that time.
Holder/s…………………….. Any person who, at any relevant time from the Issue Date, appears in the Registry as the registered owner of the Notes,
Prohibited Holders............................
The following persons and entities shall be prohibited from purchasing and/or holding any Notes of the Issuer: (1) subsidiaries and affiliates of the Issuer, including the subsidiaries and affiliates of the Issuer's subsidiaries and affiliates; or (2) common trust funds managed by the Trust Department of the Issuer, its subsidiaries, and affiliates, or other related entities; or (3) other funds being managed by the Trust Department of the Issuer, its subsidiaries and affiliates or
6
other related entities where (a) the fund owners have not given prior authority or instruction to the Trust Department to purchase or invest in the Notes or (b) the authority or and instruction of the fund owner and his understanding of the risk involved in purchasing or investing in the Notes are not fully documented. For purposes hereof, a “subsidiary” means, at any particular time, a company which is then directly or indirectly controlled, or more than fifty percent (50%) of whose issued voting equity share capital (or equivalent) is then beneficially owned, by the Issuer and/or one or more of its subsidiaries or affiliates and an “affiliate” refers to a related entity at least 20.0% to not more than 50.0% of the outstanding voting stock of which is owned by the Issuer.
Taxation ........................................... In the event that the Holder is either (i) a Filipino citizen, (ii) an alien residing in the Philippines, (iii) a non-resident alien engaged in trade or business in the Philippines, (iv) subject to the clause on Prohibited Holders, a long-term trust account or long-term management account (including common trust funds of banks other than the Issuer) exclusively for Filipino citizens, aliens residing in the Philippines, and non-resident aliens engaged in trade or business in the Philippines; (v) a BIR-tax-qualified employee trust fund established by corporations; or (vi) any other tax-exempt institution (upon presentation of acceptable proof of tax exemption), all payments for principal and interest shall be made free and clear of any deductions or withholding for or on account of any present or future taxes or duties imposed by or on behalf of the Republic of the Philippines, including interest and penalties, unless such withholding or deduction is required by law. In the event there is a change in the tax status of the Notes because of new, or changes in tax laws (and not merely a change in the interpretation of present tax laws and regulations) as a result of which, any payments of principal and/or interest under the Notes shall be subject to deductions or withholdings for or on account of any taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld, or assessed by or within the Philippines or any authority therein or thereof having power to tax, including but not limited to stamp, issue, registration, documentary, value-added or similar tax, or other taxes, duties, assessments, or government charges, including interest, surcharges, and penalties thereon (the "New Taxes"), then all payments of principal and interest in respect of the Notes shall be made free and clear of, and without withholding or deduction for, any such new taxes. In that event, the Issuer shall pay to the Holders concerned such additional amount as will result in the receipt by the Holders of such amounts as would have been received by them had no such withholding or deduction for new taxes been required. For the avoidance of doubt, such taxes and duties imposed shall be for the account of the Holder and the Issuer shall make the necessary withholding or deduction for the account of the Holder concerned; In any case, however, the Issuer shall not be liable for:
(a) the twenty percent (20.0%) or such other final withholding tax applicable on interest earned on the Notes prescribed under the National Internal Revenue Code (“NIRC”) of 1997, as amended;
(b) Gross Receipts Tax under Section 121 of the NIRC; (c) taxes on overall income of any securities dealer or any
Holder, whether or not subject to withholding; and (d) Value Added Tax (“VAT”) under Sections 106 to 108 of
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the NIRC, as amended by Republic Act No. 9337. As required by law, the abovementioned 20.0% final withholding tax on interest income shall be withheld by the Issuer as withholding agent. The Issuer shall, upon request of the relevant Holder, provide the necessary proof of such withholding and corresponding payment to the Philippine revenue authorities. In case of transfers and assignments deemed by the Issuer as a pre-termination for tax purposes, the transferor Holder shall be liable for the resulting tax due on the entire interest income earned on the Notes (if any), based on the holding period of such Notes:
(1) Four (4) years to less than five (5) years: 5.00%; (2) Three (3) years to less than four (4) years: 12.00%; and (3) Less than three (3) years: 20.00%. Documentary stamp tax for the primary issuance of the Notes and the execution of the agreements pursuant thereto, if any, shall be for the Issuer’s account.
Arranger……………………… ING Bank N.V., Manila Branch
Selling Agents……………… ING Bank N.V., Manila Branch, and Multinational Investment
Bancorporation
Limited Selling Agents…….. Philippine Savings Bank (“PSBank”) and First Metro Investment Corporation (“FMIC”) PSBank and FMIC, acting as Limited Selling Agents, shall: (i) distribute no more than fifty percent (50.0%) of the total issuance of the Notes, (ii) enforce adequate client suitability procedures, and (iii) perform the other functions and responsibilities of a Selling Agent.
Registrar and Paying Agent….
Standard Chartered Bank
Market Maker ................................... Multinational Investment Bancorporation
Public Trustee .................................. Development Bank of the Philippines
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SUMMARY FINANCIAL INFORMATION
The following tables provide selected financial information of the Bank which has been derived from its audited financial statements as of and for the years ended 31 December 2010, 2009, and 2008, including the notes thereto, included elsewhere in the document, and for the unaudited interim condensed financial statements of the Bank as of 31 October 2011 and for the ten-month period ended 31 October 2011. The unaudited interim financial statements are provided for reference purposes only and should not be relied upon by investors to provide the quality of information associated with an audit of the Bank. Neither the Bank nor the Underwriter makes any representation regarding the sufficiency of the unaudited interim financial statements for an assessment of the statements of condition, income, and cashflows of the Bank. Statements of Income Data
Unaudited For the ten months ended 31
October
Audited For the year ended 31 December
(In P) 2011 2010 2010 2009 2008
Interest Income 7,433,317,146 6,515,218,981 7,913,097,318 7,529,532,086 6,129,607,034
Interest Expense 2,687,299,931 2,371,107,868 2,900,694,510 2,696,054,957 2,420,109,373
Net interest income 4,746,017,215 4,144,111,113 5,012,402,808 4,833,477,129 3,709,497,661
Net Service Fees and Commission Income
608,966,249 561,741,617 691,681,482 596,241,357 534,365,260
Other Operating Income
821,188,191 2,025,554,370 2,532,453,557 841,618,744 693,595,578
Other Expenses 4,490,881,667 4,344,839,459 5,624,905,692 4,942,951,461 3,843,526,649
Income before Share in Net Income of an Associate and a Joint Venture and Income Tax
1,685,289,988 2,386,567,641 2,611,632,155 1,328,385,769 1,093,931,850
Share in Net Income of an Associate and a Joint Venture
25,095,851 38,465,553 41,563,418 45,129,698 46,820,603
Income before Income Tax
1,710,385,839 2,425,033,194 2,653,195,573 1,373,515,467 1,140,752,453
Provision for (Benefit from) Income Tax
(94,660,218) 782,066,669 845,080,234 133,501,051 200,600,860
Net income 1,805,046,057 1,642,966,525 1,808,115,339 1,240,014,416 940,151,593
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Statements of Condition Data
Unaudited
As of 31 October
Audited As of 31 December
(In P) 2011 2010 2010 2009 2008
Assets
Cash and Other Cash Items
3,231,094,357 2,463,040,552 3,163,939,540 2,632,884,729 1,436,264,455
Due from Bangko Sentral ng Pilipinas
4,425,024,940 2,547,704,393 2,899,592,073 4,937,990,387 3,228,768,914
Due from Other Banks
3,056,716,899 852,833,477 7,520,836,053 1,528,847,687 1,276,768,278
Interbank Loans Receivable and Securities Purchased Under Resale Agreements
3,510,000,000 4,374,580,491 3,586,560,000 5,900,000,000 750,000,000
Fair Value through Profit or Loss Investments
701,886,015 3,376,982,251 868,316,442 248,043,099 1,081,772,381
Available for Sale Investments
20,978,187,045 24,047,673,868 16,200,339,057 18,261,371,820 16,813,786,476
Held-to-Maturity Investments
12,251,096,621 9,175,132,826 9,162,584,959 4,772,851,076 1,610,283,750
Loans and Receivables
58,106,752,194 53,120,182,373 53,207,635,160 47,308,237,957 41,603,346,112
Investment in an Associate and a Joint Venture
1,254,969,606 826,775,890 829,873,755 788,310,337 369,951,789
Property and Equipment
2,374,474,820 2,066,974,373 2,107,316,622 1,985,474,732 1,765,934,385
Investment Properties
2,764,003,768 2,765,678,633 2,772,308,932 2,582,767,705 2,776,144,811
Deferred Tax Assets 1,139,998,870 705,361,218 705,361,217 1,256,530,049 1,110,811,220
Goodwill and Intangible Assets
263,864,696 222,889,617 240,684,552 197,472,852 158,516,420
Other Assets 774,679,147 929,648,872 884,120,899 687,047,211 654,400,472
Total Assets 114,832,748,978 107,475,458,834 104,149,469,261 93,087,829,641 74,636,749,463
Liabilities
Deposit Liabilities
Demand 9,419,906,818 8,018,078,583 7,170,221,822 8,188,088,242 6,393,728,469
Savings 10,676,446,587 9,943,321,042 10,147,794,079 9,403,399,256 8,607,973,024
Time 76,948,499,840 72,127,579,521 70,200,793,366 59,798,723,788 46,676,781,428
Subordinated Notes - 1,976,818,081 1,977,141,032 1,973,881,534 2,208,541,621
Treasurer's, Cashier's and Manager's Checks
465,908,800 571,148,979 649,433,599 505,738,363 339,901,057
Accrued Taxes, Interest and Other Expenses
1,260,431,552 1,042,342,602 1,132,129,341 895,023,135 904,943,414
Income Tax Payable - - - 17,425,906 14,073,344
Other Liabilities 1,269,913,584 1,349,152,393 1,262,878,631 1,293,410,922 1,018,052,404
Total Liabilities 100,041,107,181 95,028,441,201 92,540,391,870 82,075,691,146 66,163,994,761
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Selected Financial Ratios
(1) Net income divided by average total assets for the period indicated. Net income for the ten months ended 31 October 2011
is annualized. Average total assets is based on the two-point average considering outstanding balance as of 31 October 2011 and 31 December 2010, and for the years ended 31 December 2010, 2009, 2008, and 2007.
(2) Net income divided by average total equity for the period indicated. Net income for the ten months ended 31 October 2011 is annualized. Average total equity is based on the two-point average considering outstanding balance as of 31 October 2011 and 31 December 2010, and for the years ended 31 December 2010, 2009, 2008, and 2007.
(3) Net interest income divided by average interest-earning assets. Net income for the ten months ended 31 October 2011. (4) Net Tier 1 capital divided by total risk weighted assets. (5) Total qualifying capital less deductions divided by total risk weighted assets. (6) Annualized net income divided by weighted average number of outstanding common share.
Source: PSBank
Unaudited
As of 31 October
Audited As of 31 December
(In P) 2011 2010 2010 2009 2008
Equity
Common Stock 2,402,524,910 2,402,524,910 2,402,524,910 2,402,524,910 2,402,524,910
Capital Paid in Excess of Par Value
2,818,083,506 2,818,083,506 2,818,083,506 2,818,083,506 2,818,083,506
Surplus Reserves 1,035,275,317 854,463,783 1,035,275,317 854,463,783 730,462,341
Surplus 6,752,063,508 5,106,831,664 5,055,131,075 4,232,673,110 3,296,849,504
Net Unrealized Gain on Available-for-Sale Investments
1,842,353,478 1,358,677,849 355,151,266 819,829,053 (677,288,505)
Cumulative Translation Adjustment
(58,658,922) (93,564,079) (57,088,683) (115,435,867) (97,907,054)
Total Equity 14,791,641,797 12,447,017,633 11,609,077,391 11,012,138,495 8,472,724,702
Unaudited As of 31 October
Audited As of 31 December
2011 2010 2010 2009 2008
Return on Average Assets (1) 2.03% 1.97% 1.83% 1.48% 1.31%
Return on Average Equity (2) 16.78% 16.81% 15.99% 12.73% 12.47%
Net Interest Margin on Average Earning Assets (3) 4.68% 4.53% 5.57% 6.43% 5.75%
Tier 1 Capital Adequacy Ratio (4) 13.65% 12.38% 12.35% 11.34% 13.10%
Capital Adequacy Ratio (5) 13.65% 15.51% 15.37% 14.44% 17.42%
Earnings per share (P) (6) 7.51 6.84 7.53 5.16 3.98
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MANAGEMENT DISCUSSION AND ANALYSIS
Balance Sheet Assets
The Bank’s Total Assets as of 31 October 2011 grew by 6.9% or P7.36 billion to P114.83 billion
compared to 31 October 2010 level of P107.48 billion as the Bank continued to expand its loan and
investment portfolios.
Cash and Cash Equivalents
Interbank Loans Receivable and Securities Purchased under Resale Agreements decreased by
19.8% or P864.58 million to P3.51 billion in 31 October 2011 versus P4.37 billion during the same
period last year. Likewise, Due from Other Banks was higher by P2.20 billion to P3.06 billion as of 31
October 2011 from P852.83 million recorded last year.
On the other hand, Due from Bangko Sentral ng Pilipinas increased by 73.7% or P1.88 billion to P4.43
billion versus the P2.55 billion recorded the previous year due to a 2.0% increase in the statutory/legal
reserve requirements for peso deposit liabilities and deposit substitutes. On 24 June 2011, a 1.0%
increase in statutory requirements for thrift banks took effect, as issued by BSP under Circular No.
726. Further, an additional 1.0% increase was issued effective 5 August 2011, under BSP Circular
No. 732. As a result, the Bank now maintains an 8% reserve requirement from a 6.0% reserve
requirement last year.
Cash and Other Cash Items increased by 31.2% or P768.05 million to P3.23 billion as of 31 October
2011 from P2.46 billion in 31 October 2010.
Loans and Receivables
Gross Loans and Receivables posted a steady growth of 9.8% to P62.88 billion versus the P57.28
billion recorded the previous year. There was a 16.2% increase in Auto Loans in October 2011,
followed by Mortgage Loans with 7.6% and Personal Loans by 5.9%. Commercial loans including
SME portfolio rose by 5.7% to P10.66 billion in October 2011. Net of Allowances, Loans and
Receivables grew by 9.4% to P58.11 billion versus the P53.12 billion recorded in the same period last
year.
Securities and Investments
Held-to-Maturity Investments climbed by 33.5% or P3.08 billion to P12.25 billion as of 31 October
2011 compared to year-ago level of P9.18 billion as the Bank accumulated long-term portfolio
investment in government securities and ROP bonds. On the other hand, Available-for-Sale
Investments was lower by 12.8% or P3.07 billion to P20.98 billion while Fair Value through Profit or
Loss Investments (“FVPL”) was lower by 79.2% or P2.68 billion at P701.89 million.
There was a 51.8% increase in Investments in an Associate and Joint Venture to P1.25 billion, due to
the P400.00 million additional investment in Sumisho Motor Finance Corporation (“SMFC”) last August
2011. This represents the Bank’s 25.0% stake in Toyota Financial Services Philippines Corporation
(“TFSPC”) and 40.0% interest in SMFC.
Meanwhile, Property and Equipment increased by 14.9% or P307.50 million to P2.37 billion due to the
expansion of the Bank’s ATM network, new branches, and renovation. Goodwill and Intangible Assets
increased by 18.4% or P40.98 million to P263.86 million as of 31 October 2011 from P222.89 million
as of 31 October 2010. On the other hand, Other Assets decreased by 16.7% or P154.97 million to
P774.68 million as of 31 October 2011 from P929.65 million the previous year.
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Equity
Equity ended at P14.79 billion as of 31 October 2011, P2.34 billion or 18.8% higher versus the same
period last year as the Bank benefitted from higher net income for the period. The Bank declared
quarterly dividends amounting to P0.15 per quarter, consistent with its dividend policy.
Net Unrealized Gain on Available-for-Sale Investments was recorded at P1.84 billion as of 31 October
2011 compared to P1.36 billion in 31 October 2010. As of 31 October 2011 and 2010, the Bank
recorded a Cumulative translation adjustment under equity amounting to P58.66 million and P93.56
million, respectively.
Deferred Tax
Deferred Tax Asset increased by 61.6% or P434.63 million to P1.14 billion compared to year-ago level
of P705.36 million due to the recognition of deferred income tax on provision for credit and impairment
losses recorded for the period.
Subordinated Notes
Last January 28, 2011, the Bank exercised the call option on its P2.00 billion Unsecured Subordinated
Notes (Tier 2) which was rated PRS Aaa by Philippine Rating Services Corporation (PhilRatings). PRS
Aaa indicates that the Notes are of the highest quality with minimal credit risk and that the Bank’s
capacity to meet its financial commitment is extremely strong.
Deposit Liabilities
The Bank’s deposit liabilities level improved by 7.7% or P6.96 billion to P97.04 billion as of 31 October
2011 from P90.09 billion as of 31 October 2010 as it continued to benefit from various deposit
generation campaigns and expanded branch and ATM network. Time Deposits posted a growth of
6.7% or P4.82 billion while Demand Deposits also edged up by 17.5% or P1.40 billion from P8.02
billion. Likewise, Savings Deposits grew by 7.4% or P733.13 million as of 31 October 2011 from
P9.94 billion during the same period last year.
Income Statement
Net Income
The Bank recorded an after tax net income of P1.80 billion for the first ten months of 2011, 9.9%
higher versus the same period last year.
Interest Income
The Bank posted an increase in total interest income of 14.1% to P7.43 billion for the first ten months
of 2011, better than the P6.52 billion recorded in the same period last year. Interest income from
loans grew 10.6% to P5.38 billion with the expansion of the Bank’s total loan portfolio. Interest income
from investment securities also grew by 36.7% to P1.85 billion in October 2011.
Interest income from Due from Other Banks and Due from Bangko Sentral ng Pilipinas was at P59.11
million in October 2011, 61.0% lower than the P151.46 million previously realized in October 2010.
There was also a slight decrease in interest income from Interbank Loans Receivables and Securities
Purchased under Resale Agreements by 0.9% to P144.53 million.
Interest Expense was higher by 13.3% or P316.20 million, reaching P2.69 billion in October 2011
versus the same period last year as a result of growth in deposit liabilities.
Net Interest Income reached P4.75 billion in October 2011 from P4.14 billion last year or a 14.5%
increase.
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Non-Interest Income
The Bank’s Other Operating Income in October 2011 posted at P821.19 million, 59.5% less than the
P2.03 billion recorded in October 2010 due to lower trading gains for the period. There was a decline
in Income from trading activities by 68.1% to P560.89 million from P1.76 billion. Foreign exchange
gains were recorded at P5.72 million while net Service Fees and Commission were higher at P608.97
million versus P561.74 million from the same period last year.
The Bank reflected a decline on gain on foreclosures of investment properties and chattel to P88.63
million, which was 58.2% lower than the P211.85 million reflected in October 2010. The Bank incurred
gains on the sale of investment properties and chattel including properties and equipment at P16.56
million.
The Bank’s other expenses for the period ended October 2011 were moderate at P4.49 billion from
the year-ago level of P4.34 billion. The Bank set aside a total of P396.42 million provisions for credit
and impairment losses for the ten months ended October 2011 compared to the P547.15 million
provisions in the same period last year.
Occupancy and equipment-related costs increased by 14.5% to P396.45 million due to branch and
ATM expansion during the period. As of October 2011, the Bank had 196 branches and 492 ATMs.
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INVESTMENT CONSIDERATIONS
An investment in the Notes involves a number of investment considerations. You should carefully
consider all the information contained in this Offering Circular including the investment considerations
described below, before any decision is made to invest in the Notes. The Bank's business, financial
condition and results of operations could be adversely affected materially by any of these investment
considerations. The market price of the Notes could decline due to any one of these risks, and all or
part of an investment in the Notes could be lost.
Considerations Relating to the Bank
Significant Shareholding by Metrobank
As of 31 October 2011, a significant portion of the equity of the Bank, or 75.98%, is owned by Metrobank. The next largest shareholder is the Dolor Family, which owns 8.42% of the Bank. There is no assurance that the interests of Metrobank will necessarily coincide with the interests of the Noteholders. Concentration of Loan Portfolio
As of 31 October 2011, the Bank’s top 10 largest exposures account for 12.1% of the Bank’s total loan portfolio. There can be no assurance that these exposures would continue to perform their obligations to the Bank. As of 31 October 2011, 77.58% or P60.14 billion of the Bank’s Gross Loans is concentrated in three major economic activities. These include Real Estate (at P18.79 billion or 31.2%), Wholesale and Retail Trade (at P14.49 billion or 24.1%), and Other Community, Social, and Personal Activities (at P3.38 billion or 22.3%). High Level of Regulation
The Bank, being subject to the supervision and regulation of the BSP, is periodically audited by the BSP through the appropriate Supervision and Examination Sector for compliance with banking rules and regulations. While the Bank believes that as of 31 October 2011, it is fully compliant with all applicable rules and regulations and has effectively and efficiently implemented all corrective actions required, if any, to the satisfaction of the BSP, there can be no assurance that the Bank will at all times be compliant or that the BSP will find the operations or corrective measures taken by the Bank to be proper, acceptable or sufficient. In such cases, the Bank could be reprimanded, fined, or in extreme cases, have its banking license revoked, but at all times after due notice and hearing. Level of Non-Performing Loans
As of 31 October 2011, the Bank’s NPL ratio was at 4.27%. Through the implementation of stringent credit policies, the Bank expects its NPLs to further taper off. Ongoing volatile economic conditions in the Philippines may adversely affect the ability of the Bank’s borrowers to service their indebtedness and as a consequence the Bank may experience an increase in NPLs and provisions for probable losses. Although the Bank monitors closely current and future credit risk exposures, no assurance can be given that the amount of NPLs will not increase and will not have a material effect on the Bank’s capital adequacy ratio, its operations, and financial condition. Credit Risk
Credit risk is the risk that obligations will not be repaid on time and in full as contracted, resulting in a financial loss. It is the broadest category of risk in the Bank and is closely linked with other risk categories. Exposure to credit risk arises primarily from its lending activities.
15
Market Risk
Market risk is the risk that the Bank's earnings decline, either immediately or over time, as a result of a change in market factors. The level of market risk to which the Bank is exposed varies continually as a result of changing market conditions as well as the composition of the Bank's trading and non-trading portfolios.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This risk is a function of internal controls, information systems, employee integrity and operating processes. Operations risk has a very broad category that encompasses any risk not categorized as market or credit risk. The Bank’s operations are centralized in its Head Office in Makati. Although this is intended to promote efficiency, this set-up could also be a source of operational risk. The Bank mitigates this risk through its Business Continuity Program (“BCP”). It conducts regular BCP exercises and targets different recovery times per system. The Bank’s heavy reliance on technology for its operations also presents operational risks.
Liquidity Risk
Liquidity Risk relates to the Bank’s ability to generate sufficient cash or equivalents from internal or external sources, in a timely and cost-effective manner, to meet its commitments as they fall due. Mismanagement of liquidity will have quicker and more severe repercussions than errors in managing other risks. The Bank’s objective in liquidity management is to ensure that the Bank has sufficient liquidity to meet obligations under normal and adverse circumstances and is able to take advantage of lending and investment opportunities as they arise.
Considerations Relating to the Philippine Banking Industry
The Philippine banking industry is highly competitive and increasing competition may result in
declining margins in the Bank's principal businesses
The Bank is subject to significant levels of competition from many other Philippine banks and branches of international banks, including competitors which in some instances have greater financial, capital resources, market share and brand name recognition than the Bank. The banking industry in the Philippines has, in recent years, been subject to consolidation and liberalization, including liberalization of foreign ownership regulations. According to the BSP, as of 30 June 2011, thirty eight (38) domestic and foreign universal and commercial banks operated in the Philippines. These banks comprised three (3) domestic government-owned banks, nineteen (19) private domestic banks and sixteen (16) banks that are either branches or subsidiaries of foreign banks, all of which compete with the Bank in its targeted sectors and products. In the future, the Bank may face increased competition from financial institutions offering a wider range of commercial banking products and services than the Bank and that have larger lending limits, greater financial resources and stronger balance sheets than the Bank. Increased competition may arise from: (1) Other domestic Philippine banking and financial institutions with significant presence in Metro
Manila and large country-wide branch networks; (2) Rural and thrift banks, which may successfully implement strategies targeting customers in the
MSME sector; (3) Foreign banks, due to, among other things, relaxed standards permitting foreign banks to open
branch offices; (4) Domestic banks entering into strategic alliances with foreign banks with significant financial and
management resources; and (5) Continued consolidation in the banking sector involving domestic and foreign banks, driven in part
by the gradual removal of foreign ownership restrictions. There can be no assurance that the Bank will be able to compete effectively in the face of such increased competition. Increased competition may make it difficult for the Bank to continue to increase
16
the size of its loan portfolio and deposit base, as well as cause increased pricing competition, which could have a material adverse effect on its growth plans, margins, results of operations and financial condition. Philippine banks are generally exposed to higher credit risks and greater market volatility than
banks in more developed countries
Philippine banks are subject to the credit risk that Philippine borrowers may not make timely payment of principal and interest on loans and, in particular that, upon such failure to pay, Philippine banks may not be able to enforce the security interest they may have. The credit risk of Philippine borrowers is, in many instances, higher than that of borrowers in developed countries due to: (1) The greater uncertainty associated with the Philippine regulatory, political, legal and economic
environment; (2) The vulnerability of the Philippine economy in general to a severe global downturn due to the
dependence of the Philippine economy in general on remittances and exports for economic growth;
(3) The large foreign debt of the government and corporate sector, relative to the gross domestic product of the Philippines; and
(4) The volatility of interest rates and USD/P exchange rates. Higher credit risk has a material adverse effect on the quality of loan portfolios and exposes Philippine banks, including the Bank, to more potential losses and higher risks than banks in more developed countries. In addition, higher credit risk generally increases the cost of capital for Philippine banks compared to their international counterparts. Such losses and higher capital costs arising from this higher credit risk may have a material adverse effect on the Bank's financial condition, liquidity and results of operations. The average NPL ratios, exclusive of interbank loans, in the Philippine banking system were 4.5%, 4.1%, 3.9% and 3.1% for the years ended 31 December 2008, 2009, and 2010, and 30 June 2011, respectively. Philippine banks in general have exposure to the Philippine property market through holdings
of real and other properties acquired
As with other banks in the Philippines, the Bank has exposure to the Philippine property market due to the level of its real and other properties acquired (“ROPA”) holdings. The Bank’s ROPA (net of allowances for impairment) amounted to P2.55 billion as of 31 October 2011, or approximately 2.2% of the Bank’s total assets. The Philippine property market is highly cyclical, and property prices in general have been volatile through the past decade, though an uptrend has been observed toward the end of 2010 owing in part to recent domestic economic and political developments. Property prices are affected by a number of factors, including, among other things, the supply of and demand for comparable properties, the rate of economic growth in the Philippines and political and economic developments. There can be no assurance that an extended downturn in the property market will not occur, resulting in a significant decline in property values. Thus, there can be no assurance that the Bank will be able to recover all or most of the originally anticipated value of its ROPA in an eventual sale. Furthermore, the Bank is required under PFRS to recognize impairment losses on all ROPA, by reference to the difference between the carrying amount and the fair value less cost to sell. Accordingly, any extended downturn in the Philippine property sector could increase the level of the Bank’s recognized impairment losses, reduce the Bank’s net income and consequently adversely affect the Bank’s business, financial condition and results of operations generally. The Bank is subject to additional regulations and guidelines as a result of the developments in
the international banking industry
While the Bank is regulated principally by, and has reporting obligations to, the BSP and other government agencies, the Bank is also subject to regulations and guidelines imposed by and as a result of the international banking industry. For example, the BSP requires domestic banks to maintain a minimum risk weighted capital adequacy ratio of 10.0%, primarily as a result of the Revised Framework of the International Convergence of
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Capital Measurement and Capital Standards (“Basel II”). The Bank’s capital adequacy ratio as of 31 October 2011 was 13.65%. Pursuant to the second pillar of Basel II, the Bank has also adopted the Internal Capital Adequacy Assessment Process in assessing capital adequacy in relation to risk profiles. In December 2010, the BSP also laid down preliminary guidelines for banks’ compliance with the updated guidelines of the Basel Committee on Banking Supervision (“Basel III”), which included certain amendments to the Basel II capital adequacy framework. As a result of the Basel directives, the Bank is exposed to the risk that the BSP may increase applicable risk weights for different asset classes from time to time. Any incremental capital requirement may adversely impact the Bank’s ability to grow its business and may even require the Bank to withdraw from or curtail some of its current business operations. There can also be no assurance that the Bank will be able to raise adequate additional capital in the future on terms favorable to it. Furthermore, while the Philippines enacted the Anti-Money Laundering Act of 2001 (the Anti-Money Laundering Act) to introduce more stringent anti-money laundering regulations pursuant to updated international standards, these regulations did not initially comply with the standards set by the Financial Action Task Force (“FATF”). However, following pressure from the FATF, an amendment to the Anti-Money Laundering Act became effective on 23 March 2003. In February 2005, the Philippines was removed from the list of Non-Cooperative Countries and Territories, confirming that anti-money laundering measures to remedy deficiencies that were originally identified by the FATF are in place. Anti-money laundering systems (including strict customer identification, suspicious transaction reporting, bank examinations, and legal capacities to investigate and prosecute money laundering) were all identified to be of a satisfactory nature. There can be no assurance that the FATF will not require more stringent money laundering standards in the future, and any failure by the Bank to comply with these standards may adversely affect its profile in the international market and results of operations. Any future changes in PFRS may affect the financial reporting of the Bank
PFRS continues to evolve with the effectivity of new standards and interpretations subsequent to 31 December 2010. The BSP recently approved the guidelines on the early adoption by banks and other BSP-supervised financial institutions of Philippine Financial Reporting Standards (“PFRS”) 9 Financial Instruments under Circular No. 708 s. 2011. PFRS 9 is the local adoption of International Financial Reporting Standards (“IFRS”) 9 Financial Instruments – the first phase of the three-phased improvement project by the International Accounting Standards Board (“IASB”) to ultimately replace International Accounting Standards (“IAS”) 39 Financial Instruments: Recognition and Measurement. Phases 2 and 3 of the project deal with accounting for the impairment of financial assets and hedge accounting, respectively. Phase 1 of IFRS 9, which deals with the classification and measurement of financial assets and financial liabilities, was adopted in the Philippines by the Financial Reporting Standards Council (“FRSC”) as PFRS 9. It will be mandatory beginning 1 January 2013 but entities were permitted to early adopt beginning on or after 1 January 2010. On November 7, 2011, the International Accounting Standards Board amended the mandatory adoption date for IFRS 9 to January 1, 2015. The Securities and Exchange Commission (“SEC”) has approved its adoption as part of its rules and regulations on 6 May 2010. PFRS 9 aims to improve and simplify the classification and measurement of financial instruments. It requires entities to classify and subsequently measure financial assets at either amortized cost or fair value on the basis of both (a) the entities’ business model for managing the financial assets; and (b) the contractual cash flow characteristics of the financial assets. Among others, PFRS 9 does away with “Available-for-Sale” (“AFS”) and “Held-to-Maturity” (“HTM”) categories, together with the “tainting rule” which requires entities to reclassify HTM securities to AFS securities in the event that any instrument booked under the HTM category is sold. PFRS9 also eliminates the requirement to bifurcate embedded derivatives from financial assets host contracts. It also requires enhanced disclosures to help the users of financial statements better understand the risks and the likely cash flows from the financial assets.
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In addition to the required compliance with the provisions of PFRS 9 by banks and other BSP-supervised entities, the newly approved guidelines also provide for certain prudential requirements such as approval by the entities’ board of directors or equivalent governing body of the early adoption and submission by early adopters of the prescribed additional reportorial requirements. Phase 2 will deal with measurements of financial assets classified as amortized cost. This may require recognition of credit loss expectations which may be significantly different from current accounting requirements under IAS 39. On the other hand, Phase 3 will propose significant hedge accounting requirements in IAS 39. The Bank currently does not apply hedge accounting. There can be no assurance as to the implementation of new accounting standards in the Philippines and the significance of the impact it may have on the Bank’s financial statements in the future. The Bank is subject to tax rules specific to financial institutions, which may change
The Bank is subject to certain Philippine tax rules specific to financial institutions. For example, in 2005, the government increased the gross receipts tax, which is applied to the Bank’s non-interest income, from 5.0% to 7.0%, which in turn increased the Bank’s non-interest expenses. There can be no assurance that the government will not make similar changes to tax rules affecting the Philippine banking industry in the future. Any such changes could have a material adverse effect on the Bank’s results of operations and financial condition
Considerations Relating to the Philippines
Substantially all of the Bank's business activities are conducted in the Philippines and
substantially all of its assets are located in the Philippines, which exposes the Bank to risks
associated with the Philippines, including the performance of the Philippine economy
The Bank derives substantially all of its revenues and operating profits operations from the Philippines and its business is generally dependent on the state of the Philippine economy. As a result of the Asian financial crisis that began in 1997, the Philippine economy went through a sharp downturn in the late 1990s. This downturn was further exacerbated during 2000 to 2001 by the political crisis resulting from the impeachment proceedings against, and the subsequent resignation of, former President Joseph Estrada. Most recently, the global financial downturn also resulted in a general slowdown of the global economy in 2008 and 2009. For the first three quarters of 2011, the Philippine economy grew by only 3.6%, which was at the low end of the government’s initial forecast range of 7.0-8.0% of the period. This slower than expected growth was driven down by government under-spending which fell by 17.2%, a modest export growth of 3.3% (compared 18.8% a year earlier), and the continued slow global recovery. In the past, the Philippines has experienced periods of slow or negative growth, high inflation, significant devaluation of its currency and the imposition of exchange controls. In addition, global financial, credit and currency markets have, since the second half of 2007, experienced, and may continue to experience, significant dislocations and liquidity disruptions. There is significant uncertainty as to the potential for a continued downturn in the U.S. and global economy, which would be likely to cause economic conditions in the Philippines to deteriorate. Other factors that may adversely affect the Philippine economy include: (1) Reduced business, industrial, manufacturing or financial activity in the Philippines or elsewhere in
Southeast Asia; (2) Scarcity of credit or other financing available to the government, corporations or individuals in the
Philippines; (3) Fluctuations in currency exchange rates and interest rates or prolonged periods of inflation or
deflation; (4) A downgrade in the long-term foreign and local currency sovereign credit ratings of the Philippines
or the related outlook for such ratings; (5) Significant changes to the government's economic, social or tax policies; (6) Natural disasters, including tsunamis, typhoons, earthquakes, fires, floods and similar events;
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(7) Political instability, terrorism or military conflict in the Philippines, other countries in the region or globally; and
(8) Other regulatory, political or economic developments in or affecting the Philippines. There is a degree of uncertainty regarding the economic and political situation in the Philippines. This uncertainty could have adverse effects on the Bank's business as these factors could reduce demand for the services and products offered by the Bank, impose practical limits on pricing and adversely affect the Bank's results of operations. The Bank's business may be affected by political or social instability in the Philippines
The Philippines is subject to political, social and economic volatility that, directly or indirectly, may have a material adverse impact on business and growth. For example, the Philippines has from time to time experienced a number of street protests and violent civil unrest, including coup d’état attempts against the administration of former President Gloria Macapagal-Arroyo. On 10 May 2010, the Philippines held a presidential election, as well as elections for national (members of the Senate and the Congress) and local positions. This resulted in the election of Benigno Aquino III as the new President of the Philippines, effective 30 June 2010. Although there has been no major public protest of the change in government, there can be no assurance that the political environment in the Philippines will continue to be stable or that the new government will adopt economic policies conducive to sustained economic growth or which do not impact adversely on the current regulatory environment for real estate development, banking, agriculture or other companies. The Aquino government has taken steps toward economic reforms and good governance in line with its campaign against graft and corruption, the latter demonstrated by the filing of high-profile tax evasion cases and graft and corruption charges against some prominent officials of the previous administration. Allegations of tax evasion and corruption with respect to some government officials may result in political and social uncertainty in the Philippines and may adversely affect economic activity within the country. There can also be no assurance that President Aquino will continue to implement the economic and development policies followed by former President Arroyo’s administration, including those policies that have a direct effect on the real estate development, banking or agriculture sectors. Any change in the administration’s economic and development policies in these or other respects could have a material and adverse effect on the Bank’s business, financial condition and results of operations. The Philippines has been subject to a number of terrorist attacks since 2000. In recent years, the Philippine army has also been in conflict with the Abu Sayyaf organization, which has ties to the al-Qaeda terrorist network, and has been identified as being responsible for certain kidnapping incidents and other terrorist activities particularly in the southern part of the Philippines. Moreover, isolated bombings have taken place in the Philippines in recent years, mainly in cities in that part of the country. On 25 January 2011, a bomb was detonated on a bus in the northern city of Makati, Metro Manila, killing five persons. Although no one has claimed responsibility for these attacks, it is believed that the attacks are the work of various separatist groups, possibly including the Abu Sayyaf organization. An increase in the frequency, severity or geographic reach of these terrorist acts could destabilize the Philippines, and adversely affect the country’s economy. There have also been a number of violent crimes in the Philippines, including the August 2010 incident involving the hijacking of a tour bus carrying 25 Hong Kong tourists in Manila, which resulted in the deaths of eight tourists. High profile violent crimes have, in the past, had a material adverse effect on investment and confidence in, and the performance of, the Philippine economy. There can be no assurance that the Philippines will not be subject to further acts of terrorism or violent crimes in the future, which could have a material adverse effect on the Bank’s business, financial condition, and results of operations. The Bank’s business could be materially and adversely affected by the outbreak of public health epidemics in the Philippines. In April 2009, an outbreak of the H1N1 virus, commonly referred to as “swine flu,” occurred in Mexico and spread to other countries, including the Philippines. If the outbreak of swine flu were to become widespread in the Philippines or increase in severity, it could have an adverse effect on economic activity in the Philippines, and could materially and adversely affect the Bank’s business, financial condition and results of operations. Any future public health epidemics in
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the Philippines could materially and adversely affect the Bank’s business, financial condition and results of operations. The Philippines has also experienced a number of major natural catastrophes over the years, including typhoons, floods, droughts, volcanic eruptions and earthquakes. In particular, damage caused by natural catastrophes may materially disrupt and adversely affect the business operations of the Bank’s customers, which may in turn have an adverse effect on the strength of the Bank’s portfolio. The frequency and severity of the occurrence of natural catastrophes and challenges may be further exacerbated through effect of global climate change. There can be no assurance that the occurrence of such natural catastrophes will not materially disrupt the Bank’s operations and that the Bank is fully capable to deal with these situations. Uncertainties and instability in global market conditions could adversely affect the Bank’s
business, financial condition, and results of operations
The ongoing global financial crisis is widely believed to have begun in August 2007, when the bursting of the United States housing bubble and high default rates of “subprime” mortgages caused a loss of confidence by investors in the value of securitized mortgages in the United States and precipitated a liquidity crisis. The crisis entered an acute phase in September 2008, beginning with the bankruptcy of American investment bank Lehman Brothers Holdings Inc. This phase was marked by failures of prominent American and European banks, and efforts by the American and European governments to rescue their distressed financial institutions. Market sentiment also deteriorated rapidly and financial panic ensued, characterized by widespread panic selling by investors in almost all asset classes. Similarly, the European debt crisis, turmoil in the Middle East and natural disaster in Japan which happened in 2011 has had a negative impact on global capital markets and may continue to do so in the near term. These and other related events have had a significant impact on the global capital markets as a whole, and may constrain the ability of Philippine issuers, including the Bank and its corporate customers, to raise new capital or funding and to refinance existing debt. Furthermore, to the extent that the credit of the Bank’s borrowers is adversely affected by recent market conditions, the quality of the Bank’s assets could deteriorate significantly and could adversely affect the Bank’s business and results of operations. Corporate governance and disclosure standards in the Philippines may differ from those in
more developed countries
Financial statements of Philippine banks are prepared in accordance with PFRS which requires the use of certain critical accounting estimates and judgments. Management of institutions are to use their own judgment to come up with estimates on certain balance sheet and income statement accounts such as, but not limited to, credit losses on loans and receivables; fair value of derivatives; impairment of available-for-sale and held-to-maturity securities; and realization of deferred income tax assets among others. With the recent approval by the BSP of PFRS 9, which is the local adoption of IFRS 9, entities can already adopt the PFRS 9 even prior to the mandated adoption on 1 January 2013. PFRS 9 provides for certain rules that are significantly different from the current accounting requirements and proposes additional requirements that the Bank currently does not apply. There is, therefore, no assurance on the impact that PFRS 9 will have on the Bank’s financial statements in the future.
Considerations Relating to the Notes
Unsecured Subordinated Notes
The Notes will constitute direct, unconditional, unsecured and subordinated obligations of the Bank, and will at all times, rank pari passu and without any preference among themselves.
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In the event of any insolvency or liquidation of the Bank, the claims of Holders will be subordinated in right of payment to the prior payment in full of all liabilities (actual or contingent, present or future) of the Bank including all deposit liabilities and other liabilities of the Bank and all offices and branches of the Bank except those liabilities which by their terms rank equal with or junior to the Notes. However, the claims of the Holders will have priority over the rights and claims of holders of all classes of equity securities of the Bank, including holders of preference shares, if any. The Notes are not deposits and are not guaranteed nor insured by the Bank or any party related to the Bank, such as its subsidiaries and affiliates, or the Philippine Depositary Insurance Corporation, or any other person. The Notes are not guaranteed by the Government
The government is not an obligor under the Notes. Payments by the Bank of interest on or principal in relation to the Notes are not backed by the credit of the government. Accordingly, holders of the Notes will not be able to bring any action against the government to enforce payments or any obligations under the Notes. Furthermore, there is generally no statutory or other legal requirement for the government to provide the Bank with direct financial support to meet the Bank's outstanding debt obligations, including the Notes. Hence, there can be no assurance that in the event of default under the terms of the Notes, the government will take any measure to guarantee or make any interest and/or principal payments on the Notes. Limitation as to Use as Collateral
The Notes may not be used as collateral for any loan made by the Bank or any of its subsidiaries or affiliates. The Holders are not allowed to set off any amount that may be due to the Bank against the Notes. Limited Right to Accelerate
If the Bank fails to make a payment on the Notes when due, the Holders thereof may not accelerate payment of such Notes. However, the Holders may institute proceedings to enforce the obligations of the Bank to make such payment and may institute proceedings for the insolvency and liquidation of the Bank. The Holders may accelerate the Notes only if an insolvency or liquidation proceeding is commenced by or against the Bank or upon the occurrence of other certain related events. See “Terms and Conditions of the Notes.” Liquidity of the Notes
There is no existing established market for the Notes. The Lead Manager and the Selling Agents have made no commitment and have no obligation to make a market in the Notes. No assurances can be given that the Lead Manager or the Selling Agents will actually make a market in the Notes; or if they do, that they will continue to make a market in the future. A Market Maker has been engaged by the Bank to perform the functions of a market maker as prescribed by the Regulations. However, there can be no assurance that active trading for the Notes will develop or will be maintained throughout the life of the Notes. Price Risk
The price of the Notes in the secondary market is subject to market fluctuations which may result in the investments being reduced in value. The Notes are not insured by the Bank or any of its branches, affiliates or subsidiaries. During adverse market conditions, a holder of the Notes may not able to liquidate all or part of the Notes as and when required. The Bank may decide not to exercise the Call Option
Subject to the satisfaction of certain regulatory approvals, the Notes may be redeemed in whole and not in part on the Optional Redemption Date at the instance of the Bank by paying the Noteholders the face value of the Notes plus accrued interest at the Initial Interest Rate. No assurance can be given, however, that the Bank will exercise its Redemption Option.
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The Notes may not be a suitable investment for all investors
Each potential investor in the Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should: (1) Have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the
merits and risks of investing in the Notes and the information contained or incorporated by reference in this Offering Circular;
(2) Have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact the Notes will have on its overall investment portfolio;
(3) Have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where the currency for principal or interest payments is different from the potential investor's currency;
(4) Understand thoroughly the terms of the Notes and be familiar with the behavior of any relevant financial markets; and
(5) Be able to evaluate (either alone or with the help of a financial advisor) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.
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USE OF PROCEEDS
The net proceeds of the issue of the Notes, after deducting fees, commissions, and other related
expenses will be utilized to raise additional Tier 2 capital to finance asset growth and increase and
strengthen the Issuer’s capital base
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CAPITALIZATION OF THE BANK
The following table sets out the unaudited capitalization of the Bank and indebtedness of the Bank (i) as of 31 October 2011, and (ii) as adjusted for the proposed issuance of the Notes. This information has been extracted from the unaudited interim condensed financial statements of the Bank as of 31 October 2011 and for the ten months ended 31 October 2011. Such unaudited financial statements are not necessarily indicative of the results of the operations of the Bank for the full year. The following selected financial information should be read together with other portions of this Offering Circular. Capitalization of the Bank
Unaudited
As of 31 October 2011
(P millions)
As adjusted (P millions)
Liabilities Deposit liabilities 97,045 97,045 Bills payable and other liabilities 2,996 2,996 Subordinated Notes due 2022 (currently being issued) 0 3,000
Total liabilities 100,041 103,041
Equity Common stock 2,403 2,403 Capital paid in excess of par value 2,818 2,818 Surplus 6,752 6,752 Surplus reserves 1,035 1,035 Net unrealized gains/loss on ASS and other investments 1,784 1,784
Total equity 14,792 14,792
Total capitalization and indebtedness 114,833 117,833
Notes: (1) On 27 January 2006, the Bank issued P2.00 billion, callable Unsecured Subordinated Notes due
2016 with step-up in 2011.The Bank exercised the call option last 28 January 2011. (2) Par value P10 per share; authorized: 425,000,000 shares; as at 31 October 2011, 240,252,491
shares of common stock were issued and outstanding. (3) Since 31 October 2011, there has been no material change in the capitalization of the Bank. (4) Net unrealized gains/loss on ASS and other investments includes cumulative translation
adjustment
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TERMS AND CONDITIONS OF THE NOTES
The following do not purport to be a complete listing of all the rights, obligations, and privileges of the
Notes. Some rights, obligations, or privileges may be further limited or restricted by other documents.
Prospective investors are encouraged to carefully review the Agreements, other information in this
Offering Circular, and all amendments thereto.
Arranger……………….. ING Bank N.V., Manila Branch
Adverse Effect .................................. Any material and adverse effect on: (a) the ability of the Issuer to duly perform and observe its obligations and duties under the Notes and the Contracts; (b) the condition (financial or otherwise), prospects, results of operations or general affairs of the Issuer; or (c) the legality, validity and enforceability of the Contracts.
Approval……………..... Approval of the BSP authorizing the Issuer to issue and offer the Notes over the course of one (1) year from 29 December 2011 pursuant to and in compliance with the Regulations.
Banking Day ..................................... Any day in a week, other than Saturday or Sunday, when banks are not required or are not authorized to close in Makati City.
Benchmark Rate ..............................
Prevailing Philippine Dealing System Treasury Fixing (“PDST-F”) 10-year treasury securities benchmark rate displayed under the heading “Bid Yield” as published on the PDEx Page (or such successor page) of Bloomberg (or such successor electronic service provider) at approximately 11:30 a.m., Manila time on the Pricing Date.
Call Option ....................................... The Issuer may, but is not obliged to, redeem the Notes, in whole but not in part, at the Call Option Amount, on the Call Option Date, subject to the prior approval of the BSP and the compliance by the Issuer with the Regulations and prevailing requirements for the granting by the BSP of its consent therefor, including (i) the capital adequacy ratio of the Issuer is well above the required minimum ratio after redemption; or (ii) the Note is simultaneously replaced, on or prior to the Call Option Date, with issues of new capital which is of the same or of better quality and is done under conditions which are sustainable for the income capacity of the Issuer; and (iii) a 30 Banking Day prior written notice to the then Holder on record. Any tax due on interest income already earned by the Holders on the Notes shall be for the account of the Issuer. The notice for the Call Option shall be sent by the Issuer to the Public Trustee (with copy to the Registrar and Paying Agent) and to each of the registered Holders no less than thirty (30) Business Days nor more than forty five (45) Business Days prior to the Call Option Date. The Issuer shall likewise publish the notice of the Call Option in two (2) newspapers of general circulation in Metro Manila once a week for two (2) consecutive weeks at any time prior to the Call Option Date. Such notice shall state the Call Option Date, the Call Option Amount and the manner in which the call will be effected. Nothing herein shall be construed as an indication that the Issuer will exercise its Call Option and the Holders should not expect that such Call Option will be exercised.
Call Option Amount ..........................
The principal amount of the Note plus accrued interest covering the accrued and unpaid interest as of but excluding the Call Option Date.
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Call Option Date ............................... The Banking Day immediately following the fifth (5th) anniversary of the
Issue Date of the Notes.
Closing of Registry ........................... The Registrar shall not register any transfer or assignment of the Notes for a period of five (5) Business Days preceding the due date for any payment of interest on the Notes, or during the period of five (5) Business Days preceding the due date for the payment of the principal amount of the Notes, or register the transfer or assignment of any Notes previously called for redemption. The Registrar will treat the person in whose name the Notes is registered immediately before the relevant closed period as the owner of such Notes for the purpose of receiving distributions pursuant to these Terms and Conditions and for all other purposes whatsoever, and the Registrar shall not be affected by any notice to the contrary.
Compliance Reports......................... The Public Trustee shall report promptly and regularly to Holders any non-compliance by the Issuer with the terms and conditions of the Notes and any developments with respect to the Issuer that adversely affect the interest of the Holders, including any default by the Issuer on any of its obligations of which the Public Trustee may have written notice from the Issuer pursuant to the Issuer's Covenants, and upon advice of legal counsel, inform the Holders of the alternative courses of action that they may take to protect their interest; provided, that, for purposes hereof, the Public Trustee shall publish a notice in a newspaper of general circulation, binding upon all the Holders wherever situated or located, for two consecutive days that the Holders or their duly authorized representatives may obtain a report regarding the Notes at the principal office of the Public Trustee upon presentation of sufficient and acceptable identification.
Contracts……………..... The contracts entered into by the Issuer in respect of the issue of the Notes, to wit: (a) the Issue Management and Placement Agreement in the agreed form dated 3 February 2012 between the Issuer and the Arranger; (b) the Selling Agency Agreement in the agreed form dated 3 February 2012 between the Issuer and the Selling Agents(c) the Registry and Paying Agency Agreement in the agreed form dated on or about 3 February 2012 between the Issuer and the Registrar and Paying Agent; (d) the Trust Agreement in the agreed form dated on or about 3 February 2012 between the Issuer and the Public Trustee; (e) the Market Making Agreement in the agreed form dated on or about 3 February 2012 between the Issuer and the Market Maker; (f) the Master Note; (g) these Terms and Conditions; and (h) such other separate letters or agreements covering conditions precedent, fees, expenses and other obligations of the parties, including amendments thereto.
Covenants ........................................ The Issuer covenants and agrees that while any of the Notes are outstanding, the Issuer shall: (a) Pay and discharge all taxes, assessments, and government charges
or levies imposed upon it or upon its income or profits or upon any properties belonging to it prior to the date on which penalties are assessed thereto; pay and discharge when due all lawful claims which, if unpaid, might become a lien or charge upon any of the properties of the Issuer; and take such steps as may be necessary in order to prevent its properties or any part thereof from being subjected to the possibilities of loss, forfeiture, or sale; provided, that the Issuer shall not be required to pay any such tax, assessment, charge, levy, or claim which is being contested in good faith and by proper proceedings or as could not reasonably be expected to have a material adverse effect on the condition, business, or properties of the Issuer; provided, that in the case of a tax, assessment, charge, levy,
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or claim which is being contested in good faith and by proper proceedings, the Public Trustee shall be notified by the Issuer within 30 days from the date of the receipt of written notice of the resolution of such proceedings.
(b) Preserve and maintain its corporate existence. (c) Maintain adequate financial records and prepare all financial
statements in accordance with generally accepted accounting principles and practices in the Philippines consistently applied and in compliance with the regulations of the government body having jurisdiction over it, and, subject to receipt of a written request within a reasonable period before the proposed date of inspection, permit the Public Trustee or its duly designated representatives to inspect the books of accounts and records pertinent to the compliance by the Issuer of the Terms.
(d) Comply with all the requirements, terms, covenants, conditions, and
provisions of all laws, rules, regulations, orders, writs, judgments, indentures, mortgages, deeds of trust, agreements, and other instruments, arrangements, obligations, and duties to which it, its business or its assets may be subject, or by which it, its business, or its assets are legally bound where non-compliance would have a material adverse effect on the business, assets, condition, or operations of the Issuer, or would materially and adversely affect the Issuer's ability to duly perform and observe its obligations and duties under this Agreement and/or the Notes.
(e) Comply with all BSP directives; promptly and satisfactorily take all
corrective measures that may be required under BSP audit reports on its operations; and promptly furnish the Public Trustee with a copy of all its submissions to and audit reports of the BSP.
(f) Use the net proceeds from the Notes exclusively to provide additional
Tier 2 capital in order to strengthen its capital base and allow it to expand and strengthen its banking operations or as otherwise described in the Offering Circular.
(g) Pay all indebtedness and other liabilities and perform all other
contractual obligations pursuant to all other agreements to which it is a party to or by which it or any of its properties may be bound, except those being contested in good faith and by proper proceedings or as could not reasonably be regarded to have a material adverse effect on its business, assets, condition, or operations.
(h) Pay all amounts due under the Notes at the times and in the manner
specified herein, and perform all its obligations, undertakings, and covenants under the Notes.
(i) Ensure that if, under the terms of any bond, note, debenture, or similar
security which shall be or purport to be subordinated obligations of the Issuer, or which shall be considered capital of the Issuer for any regulatory purposes or which ranks pari passu with, or junior to, the Issuer’s obligations under the Notes, the Issuer agrees to a provision that it shall not permit any indebtedness to be secured by or to benefit from any lien in favor of any creditor or class of creditors with respect to any present or future property or the right of the Issuer to receive income, nor shall it permit any creditor to receive any priority or preference arising under Article 2244(14) of the Civil Code of the Philippines over the claims of the holders of any such bond, note, debenture or similar security, the Notes and the Holders shall enjoy
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the same advantage resulting from such provision.
(j) As soon as available and in any event within 120 days after the end of each fiscal year of the Issuer, or at such later date on which the Issuer files such information with the BSP or otherwise makes such information publicly available, furnish the Public Trustee with audited financial statements, consisting of the balance sheet of the Issuer as of the end of such fiscal year and statements of income and retained earnings and of the source and application of funds of the Issuer for such fiscal year, such audited financial statements being prepared in accordance with generally accepted accounting principles and practices in the Philippines consistently applied and being certified by the Commission on Audit of the Republic of the Philippines; and shall furnish the Public Trustee within 10 days from written request with such updates and information as may be reasonably requested by the Public Trustee pertaining to the business, assets, condition, or operations of the Issuer, or affecting the Issuer's ability to duly perform and observe its obligations and duties under this Agreement and/or the Notes.
(k) Give to the Holders, through the Public Trustee, written notice of: (i) all
assessments, litigation, or administrative or arbitration proceedings before or of any court, tribunal, arbitrator, or governmental or municipal authority affecting the Issuer or any of its assets regarding any claim which (1) is in excess of Five Hundred Million Pesos (P500,000,000.00) or (2) could result in an Adverse Effect; (ii) any labor controversy resulting or threatening to result in any action against the Issuer that may materially and adversely affect its financial condition or business operations; (iii) any Event of Default or any event, which, upon a lapse of time or giving of notice or both, would become an Event of Default; (iv) any damage or destruction or loss which might materially and adversely affect its financial condition or business operations; or (v) any other matter or conditions affecting the Bank or which might qualify as, or which could result in an Adverse Effect, immediately upon becoming aware that the same is pending or has been commenced or has occurred.
(l) When so requested in writing, provide any and all information needed
by the Public Trustee to enable it to comply with its responsibilities and duties under the Notes, the Regulations, other BSP regulations, this Agreement and related agreements, and the Terms of the Notes; provided, that, in the event that the Issuer cannot, for any reason, provide the required information, the Issuer shall so immediately advise the Public Trustee.
(m) Promptly advise the Public Trustee: (i) of any request by any
government agency for any information related to the Notes, and (ii) of the issuance by any governmental agency of any cease and desist order suspending the distribution or sale of the Notes or the initiation of any proceedings for any such purpose; provided, that no amendments or supplements to any selling materials, prospectuses, or other documents pertaining to the offer of the Notes have been or will be made without the prior written notice to, and without the approval of, the Public Trustee, which approval shall not be unreasonably withheld.
(n) Exert its best efforts to obtain at the sole expense of the Issuer the
withdrawal of any order suspending the transactions with respect to the Notes at the earliest time possible.
(o) Ensure that any documents related to the Notes will, at all times,
29
comply in all material respects with the applicable laws, rules, regulations, and circulars, and, if necessary, make the appropriate revisions, supplements, and amendments to make them comply with such laws, rules, regulations, and circulars.
(p) Execute and deliver to the Public Trustee such reports, documents,
and other information in respect of the business, properties, condition, or operations, financial or otherwise, of the Issuer as the Public Trustee may from time to time reasonably require, subject to bank secrecy laws and proprietary or private information.
(q) As soon as possible and in any event within five (5) days after the
occurrence of any default on any of the obligations of the Issuer, or other event which, with the giving of any notice and/or with the lapse of time, would constitute a default under the agreements of the Issuer with any party, serve a written notice to the Public Trustee of the occurrence of any such default, specifying the details and the steps which the Issuer is taking or proposes to take for the purpose of curing such default including the Issuer's estimate of the length of time to correct the same.
(r) Make available to the Public Trustee financial and other information
regarding the Issuer by filing with the SEC and/or PSE, at the time required or within any allowed extension, the reports required by the SEC and/or PSE, as the case may be from corporations in general.
(s) Not engage in any business except such business as may be
authorized to be engaged by it under its By-Laws; (t) Not sell, transfer, convey, lend or otherwise dispose of all or
substantially all of its assets; (u) Not extend any loan or advances to its directors and officers, except
loans or advances granted pursuant to benefits, compensation, reimbursements, and allowances as may be allowed under existing Issuer policies and practice and such loans and advances as may be allowed under existing laws and regulations.
(v) Not assign, transfer or otherwise convey any right to receive any of its
income or revenues except in the ordinary course of its business and by way of security.
(w) Not, except in the ordinary course of business, purchase, repurchase
or otherwise acquire, assume, guarantee, endorse or otherwise become directly or contingently liable (including, without limitation, being or becoming liable by way of agreement, contingent or otherwise, to purchase, to use facilities, to provide funds for payment, to supply funds to or otherwise invest in the debtor or otherwise to assure the creditor against loss) for or in connection with any obligation or indebtedness, stock or dividends of any other person.
(x) Not acquire into treasury outstanding shares or decrease or reduce its
authorized capital stock during an Event of Default or if such acquisition or decrease/reduction in the authorized capital stock would result to an Event of Default.
(y) Not voluntarily suspend all or substantially all of its business
operations. (z) Not grant to a creditor, in any future bond, note, debenture, or similar
security which shall be or purport to be subordinated obligations of the
30
Issuer, or which shall be considered capital of the Issuer for any regulatory purposes, any right above and beyond what is provided under Philippine laws to apply amounts on deposit with or in possession of any such creditor by way of set-off in reduction of any amount owing under said loan or credit agreements.
(aa) Not enter into any management contracts, profit-sharing or any similar
contracts or arrangements whereby its commercial banking business or operations are managed by, or its income or profits are, or might be shared with, another person, firm or company, which management contracts, profit-sharing or any similar contracts or arrangements will materially and adversely affect the Issuer’s ability to perform its material obligations under the Notes.
(bb) As long as any obligations under the Notes remain outstanding, the
Issuer shall not create, issue, assume, guarantee, or otherwise incur any bond, note, debenture or similar security which shall be or purport to be subordinated obligations of the Issuer, or which shall be considered capital of the Issuer for any regulatory purposes, unless such obligations rank pari passu with, or junior to, the Issuer’s obligations under the Notes in any proceedings in respect of the Issuer for insolvency, winding up, liquidation, receivership, conservatorship, or other similar proceedings.
Denomination ...................................
The Notes will be offered in minimum denominations of P500,000.00 each and increments of P100,000.00 beyond the minimum. The Notes will be represented by a Master Note which will be deposited with the Public Trustee.
Effects of Events of Default ..............................................
The Public Trustee shall, within three (3) Banking Days after receiving notice of the occurrence of any Event of Default, give to the Holders notice of such Event of Default under Clause 8 of the Trust Agreement. Except in the case of an Event of Insolvency (as defined below), the payment of principal on the Notes may not be accelerated. If any one or more of the Events of Default shall have occurred and be continuing, after any applicable cure period shall have lapsed, the Public Trustee may, upon the written direction of persons holding more than 20.0% of the aggregate principal amount of the then outstanding Notes, require the Issuer to perform any act as the Holders may reasonably require in order to cure the default as may be allowed under the Regulations and applicable circulars; provided, that in case of an Event of Insolvency, the Public Trustee, shall on its own (i) perform any act for the collection of the principal and interest on the Notes on the understanding that the Notes shall be subordinated in the right of payment of principal and interest to all depositors and other creditors of the Issuer, except those creditors expressed to rank equally with, or behind the Holders, and/or (ii) declare the principal of the Notes to be immediately due and payable, without prejudice to the other remedies available to the Holders.
Events of Default ............................. The following shall exclusively be considered ”Events of Default”: (a) The Issuer defaults in the payment of any amount of principal or
premium (if any) in respect of the Notes on the due date for payment thereof or defaults in the payment of any amount of interest in respect of the Notes.
(b) Any representation and warranty of the Issuer or any certificate or
opinion submitted by the Issuer in connection with the issuance of the Notes is untrue, incorrect, or misleading in any material respect or the
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Issuer fails to perform or violates its covenants under the Notes, and such failure or violation is not remediable or, if remediable, continues to be unremedied for a period of 10 days from notice by the Public Trustee to the Issuer.
(c) The Issuer fails to perform or violates its covenants under these
Terms and Conditions (other than the payment obligation under paragraph (a) above) or the Notes, and such failure or violation is not remediable or, if remediable, continues to be unremedied for a period of fifteen (15) days from notice by the Public Trustee to the Issuer.
(d) The Issuer violates any term or condition of any contract executed by
the Issuer with any other bank, financial institution, or other person, corporation, or entity for the payment of moneys which constitutes an event of default under said contract; or, in general, the Issuer violates any contract, law or regulation which (i) if remediable, is not remedied by the Issuer within 10 days from notice by the Public Trustee to the Issuer, or is otherwise not contested by the Issuer, (ii) results in the acceleration or declaration of the whole financial obligation to be due and payable prior to the stated normal date of maturity, or (iii) will, in the reasonable opinion of the Public Trustee, adversely and materially affect the performance by the Issuer of its obligations under the Notes and pay any amount outstanding on the Notes.
(e) Any governmental consent, license, approval, authorization,
declaration, filing or registration which is granted or required in connection with the Notes expires or is terminated, revoked or modified and the result thereof is to make the Issuer unable to discharge its obligations hereunder or thereunder.
(f) It becomes unlawful for the Issuer to perform any of its material
obligations under the Notes. (g) The government or any competent authority takes any action to
suspend the whole or the substantial portion of the operations of the Issuer, or condemns, seizes, or expropriates all or substantially all of the properties of the Issuer.
(h) Any final and executory judgment, decree, or arbitral award for the
sum of money, damages, fine, or penalty in excess of P50,000,000.00 or its equivalent in any other currency is entered against the Issuer and the enforcement of which is not stayed, and is not paid, discharged, or duly bonded within 30 days after the date when payment of such judgment, decree, or award is due under the applicable law or agreement.
(i) Any judgment, writ, warrant of attachment or execution, or similar
process shall be issued or levied against all or substantially all of the Issuer’s assets and such judgment, writ, warrant, or similar process shall not be released, vacated, or fully bonded within 30 days after its issue or levy.
(j) The Issuer voluntarily suspends or ceases operations of a substantial
portion of its business for a continuous period of 30 days, except in the case of strikes or lockouts when necessary to prevent business losses, or when due to fortuitous events or force majeure, or when there is no material adverse effect on the business operations or financial condition of the Issuer.
(k) The Issuer (i) is (or could be deemed by law or a court or the BSP to
be) insolvent or bankrupt or unable to pay its debts, (ii) stops,
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suspends or threatens to stop or suspend payment of all or a material part of (or of a particular type of) its debts, (iii) proposes or makes any agreement for the deferral, rescheduling or other readjustment of all of (or all of a particular type of) its debts (or of any part which it will or might otherwise be unable to pay when due), (iv) proposes or makes a general assignment or an arrangement or composition with or for the benefit of the relevant creditors in respect of any of such debts, or (v) a moratorium is agreed or declared in respect of or affecting all or any part of (or of a particular type of) the debts of the Issuer (“Event of Insolvency”);
(l) The Issuer takes any corporate action or other steps are taken or legal
proceedings are started for its winding up, bankruptcy, dissolution or reorganization (except in any such case for the purposes of a merger, consolidation, reorganization, reconstruction or amalgamation authorized by a law enacted for said purpose upon which the continuing corporation or the corporation formed thereby effectively assumes the entire obligations of the Issuer under the Notes and the terms of which have previously been approved by Holders representing at least two-thirds of the Notes then outstanding) or for the appointment of a receiver, administrator, administrative receiver, conservator, trustee or similar officer of it or of any or all of its revenues and assets;
(m) Any act or condition or thing required to be done, fulfilled or performed
at any time in order (i) to enable the Issuer lawfully to enter into, exercise its rights and perform the obligations expressed to be assumed by it under the Notes, or (ii) to ensure that the obligations expressed to be assumed by the Issuer hereunder are legal, valid and binding, is not done, fulfilled or performed at such time.
Form ................................................. The Notes will be scripless and, subject to the payment of fees to the
Registrar, registered and lodged with the Registrar in the name of the Holders. The Notes will be represented by a Master Note, which will be deposited with the Public Trustee. A Registry Confirmation will be issued by the Registrar in favor of the Holders in accordance with the Regulations.
Governing Law and Jurisdiction .......................................
This Note shall be governed by and shall be construed in accordance with the laws of the Republic of the Philippines. The Issuer irrevocably submits to the exclusive jurisdiction of the courts of Makati City with respect to any legal action, suit, or proceeding against it with respect to its obligations, liabilities or any other matter arising out of or in connection with this Note and these Terms and Conditions (“Proceedings”). The Issuer irrevocably submits to the jurisdiction of such courts and waives any objection to Proceedings in such courts whether on the ground of venue or on the ground that the Proceedings have been brought in an inconvenient forum. This submission is made for the benefit of each Holder and shall not limit the right of any of them to take Proceedings in any other court of competent jurisdiction nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction (whether concurrently or not).
Holder/s………………. Any person who, at any relevant time from the Issue Date, appears in the Registry as the registered owner of the Notes,
Interest Rate .....................................
5.75% per annum
Interest ............................................. Interest on the Notes will accrue for each Interest Period at the Interest Rate multiplied by the principal amount of the Note calculated by the Paying Agent on a 30/360-day year basis. Interest will be paid quarterly in
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arrears. Each Issue of the Notes will bear interest on its principal amount from and including the issue date thereof, up to but excluding the Call Option Date or Maturity Date (as the case may be). In the event the Issuer does not exercise its Call Option on the Call Option Date, interest shall accrue on the Notes at the same Interest Rate and no step-up interest shall accrue on the Notes until Maturity Date.
Interest Payment Dates ...................
On the 20th of May; 20th of August; 20th of November and 20th of February of each year until Final Maturity Date. If the Interest Payment Date is not a Business Day, interest will be paid on the next succeeding Business Day, without adjustment to the amount of interest to be paid.
Interest Periods ................................ A period from and including an Interest Payment Date to but excluding the next Interest Payment Date, provided that the first Interest Period shall commence on and include the Issue Date and the last Interest Period shall end on but exclude the Interest Payment Date falling on the Maturity Date.
Issue Date ........................................
The date when the Notes are issued by the Issuer to the Holders or on 20 February 2012.
Issue Price .......................................
100% of the face value of each Note.
Limited Selling Agents.. Philippine Savings Bank (“PSBank”) and First Metro Investment Corporation (“FMIC”) PSBank and FMIC, acting as Limited Selling Agents, shall: (i) distribute no more than fifty percent (50.0%) of the total issuance of the Notes, (ii) enforce adequate client suitability procedures, and (iii) perform the other functions and responsibilities of a Selling Agent.
Market Maker ................................... Multinational Investment Bancorporation (“MIB”) and/or such other institutions appointed by the Issuer to perform the role of a market maker as required under the Regulations, and, as applicable, may refer to the registered fixed income exchange referred to in the Regulations.
Maturity Date ....................................
Up to ten years from the Issue Date at which date the Notes will be redeemed at their Maturity Value; Provided, that if such date is declared to be a non-Business Day, the Maturity Date shall be the next succeeding Business Day. Recognition of the Notes in regulatory capital in the remaining five (5) years before maturity will be amortized on a straight line basis.
Maturity Value .................................. The Issue Price plus unpaid accrued Interest as of but excluding the Maturity Date.
Meetings of Holders ......................... Meetings of the Holders shall be called and conducted as follows: (a) The Public Trustee may at any time call meetings, on its own accord
or upon the written request by the Issuer or Holders holding at least 20.0% of the aggregate outstanding principal amount of the Notes, for purposes of taking any actions authorized under the Trust Agreement or under the Regulations.
(b) Unless otherwise provided herein, notice of every meeting of the
Holders, setting forth the time and place of such meeting (which shall be within Makati City) and purpose of such meeting in reasonable
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detail, shall be sent by the Public Trustee to the Issuer and to each of the registered Holders not earlier than forty-five (45) days nor later than fifteen (15) days prior to the date fixed for the meeting and published in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks at any time prior to the date stated in the notice for the date of the meeting; provided, that all documented costs and expenses incurred by the Public Trustee for the proper dissemination of the requested meeting shall be advanced or reimbursed, as the case may be, by the Issuer within three Banking Days from receipt of the duly supported invoice or billing statement.
(c) Failure of the Public Trustee to call a meeting upon the written request
of either the Issuer or the Holders holding at least 20.0% of the aggregate outstanding principal amount of the Notes within 10 days from such request shall entitle the requesting party to send the appropriate notice of Holders meeting in accordance with the Trust Agreement.
(d) The presence of persons holding more than 50.0% of the principal
amount of the outstanding Notes (the “Majority Holders”), personally or by proxy, shall be necessary to constitute a quorum to do business at any meeting of the Holders. Further, the affirmative vote of the Majority Holders shall be required to decide or approve any resolution brought before such meeting.
(e) The Public Trustee shall preside at all the meetings of the Holders
until the pertinent Holders are elected as chairman and secretary of the meetings, unless the meeting shall have been called by the Issuer or by the Holders as provided in Clause 10 of the Trust Agreement, in which case the Issuer or the Holders calling the meeting, as the case may be, shall in like manner move for the election of the chairman and secretary of the meeting.
(f) Any meeting of the Holders may be adjourned from time to time for a
period not to exceed in the aggregate one year from the date for which the meeting shall originally have been called, and the meeting as so adjourned may be held without further notice.
Non-Preterminability......................... The Notes shall not be redeemable or terminable at the option of the
Holder before Maturity Date, unless otherwise expressly provided herein. Subject to the conditions on Taxation and Secondary Trading, transfers from one Holder to another do not constitute pre-termination.
Notes ................................................ P3,000,000,000 aggregate principal amount of 5.75% Fixed Rate Unsecured Subordinated Notes qualifying as Tier 2 Capital issued by the Issuer under these Terms and Conditions.
Notice ............................................... Any communication shall be given by letter, fax or telephone, and shall be
given, in the case of notices to the Issuer, to it at: PHILIPPINE SAVINGS BANK PSBank Center 777 Paseo de Roxas corner Sedeño Street Makati City Philippines Telephone no.: (632) 885-8208 local 8538 or 885-8206 Fax no.: (632) 885-8352 Attention: Perfecto Ramon Z. Dimayuga, Jr.
SVP and Chief Finance Officer
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And in the case of notices to the Registrar and Paying Agent to it at: STANDARD CHARTERED BANK 5th Floor Standard Chartered Bank, Sky Plaza Building 6788 Ayala Avenue Makati City Philippines Telephone no.: (632) 886-7888 local 1190 Fax no.: (632) 830-1256 Attention: Jean Pauline Domingo
Acting Trust Officer And in the case of notices to the Holders, through the Public Trustee at:
DEVELOPMENT OF THE PHILIPPINES – TRUST BANKING GROUP 3rd Floor, DBP Building Makati Avenue corner Sen Gil J. Puyat Avenue Makati City Philippines Telephone no.: (632) 818-9511 local 2305 Fax no.: (632) 893-0942 Attention: Roda T. Celis
Vice President, Trust Services which, upon receipt of such notice shall publish the same in two (2) newspapers of general circulation in Metro Manila once a week for two (2) consecutive weeks; Provided, that all documented costs and expenses incurred by the Public Trustee for the proper dissemination of such notice shall be reimbursed by the Issuer in a timely fashion after receipt of the duly supported billing statement. Or any other address or mode of service of which written notice has been given to the parties in accordance with this condition. Such communications will take effect, in the case of a letter, when delivered or, in the case of fax, when dispatched, provided that any communication by fax shall not take effect until 10:00 a.m. on the immediately succeeding Business Day in the place of the recipient, if such communication is received after 5:00 p.m. on a Business Day or is otherwise received on a day which is not a Business Day. Communications not by letter shall be confirmed by letter but failure to send or receive the letter of confirmation shall not invalidate the original communication.
Offer Period ......................................
The period when the Notes shall be offered for sale by the Issuer through the Issuer’s branches and the Selling Agents to prospective Holders, with the Offer Period commencing at 9:00 a.m. of 3 February 2012 and ending at 5:00 p.m. on 9 February 2012 or such other days as may be determined by the Arranger and Selling Agents, in consultation with the Issuer.
Penalty Interest ................................ In case any amount payable by the Issuer under the Notes, whether for principal, interest or otherwise, is not paid on due date, the Issuer shall, without prejudice to its obligations to pay the said principal, interest and other amounts, pay penalty interest on the defaulted amount(s) at the rate of 12.0% per annum from the time the amount falls due until it is fully paid.
Pricing Date…………… 10 February 2012.
Prohibited Holders............................ The following persons and entities shall be prohibited from purchasing
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and/or holding any Notes of the Issuer: (1) subsidiaries and affiliates of the Issuer, including the subsidiaries and affiliates of the Issuer's subsidiaries and affiliates; or (2) common trust funds managed by the Trust Department of the Issuer, its subsidiaries, and affiliates, or other related entities; or (3) other funds being managed by the Trust Department of the Issuer, its subsidiaries and affiliates or other related entities where (a) the fund owners have not given prior authority or instruction to the Trust Department to purchase or invest in the Notes or (b) the authority or and instruction of the fund owner and his understanding of the risk involved in purchasing or investing in the Notes are not fully documented. For purposes hereof, a “subsidiary” means, at any particular time, a company which is then directly or indirectly controlled, or more than fifty percent (50.0%) of whose issued voting equity share capital (or equivalent) is then beneficially owned, by the Issuer and/or one or more of its subsidiaries or affiliates and an “affiliate” refers to a related entity at least 20.0% to not more than 50.0% of the outstanding voting stock of which is owned by the Issuer.
Public Trustee .................................. Development Bank of the Philippines
Purchase Advice……… The written advice, in the form and substance to be agreed upon by the Issuer, Selling Agents and Market Maker, to be sent to a purchaser of the Notes, with a duplicate original copy to the Registrar, by the Selling Agents or the Market Maker, as the case may be, on behalf of the Issuer, confirming the fact, details, and terms and conditions of the sale of Notes to such purchaser.
Purpose of Issuance ........................ To raise additional Tier 2 capital for the Issuer in order to increase its capital base and allow it to expand and strengthen its banking operations.
Qualification Determination ...................................
The Selling Agents (in the case of a primary issuance of the Notes) and the Market Maker (in the case of secondary trading of the Notes) shall verify the identity and other relevant details of each investor and ascertain that the proposed holder or transferee is an Eligible Holder, as the case may be, and is not a Prohibited Holder. Final determination shall, however, vest with the Issuer. The Holder shall immediately submit any and all information reasonably required by the Selling Agents and/or Market Maker with respect to the qualification of the proposed holder or transferee in order to determine that such transferee is an Eligible Holder, and is not a Prohibited Holder.
Registrar and Paying Agent ................................................
Standard Chartered Bank and/or such other institutions appointed by the Issuer to perform the role of a registrar and/or paying agent as required under the Regulations
Redemption ...................................... Unless previously redeemed pursuant to the exercise of the Issuer’s Call Option, the Notes will be redeemed on Maturity Date at the Maturity Value. The Notes may not be redeemed at the option of the Holders.
Registry Confirmation... The written advice to be sent by the Registrar to the Holder to confirm the number and salient terms and conditions of the Notes registered in the name of the Holder in the Registry.
Regulations………....... The General Banking Law of 2000, the New Central Bank Act, Bangko Sentral ng Pilipinas (“BSP”) Memorandum to All Banks and Non-Bank Financial Institutions dated 17 February 2003 and BSP Circular No. 280 (2001) on the issuance of unsecured subordinated debt instruments eligible as Tier 2 capital, Circular 709 (Series of 2011) on the amendment of the risk-based capital adequacy framework for banks/quasi-banks on the definition of qualifying capital instruments, and other related Circulars
37
and issuances, as may be amended from time to time.
Representations and Warranties ........................................
The Issuer hereby represents and warrants to the Holders and the Public Trustee, as follows: (a) The Issuer is a corporation duly organized, validly existing and in good
standing under and by virtue of the laws of the Republic of the Philippines, has its principal office at the address indicated in the Offering Circular, is registered or qualified to do business in every jurisdiction where registration or qualification is necessary and has the corporate power and authority to conduct its business as presently being conducted and to own its properties and assets now owned by it as well as those to be hereafter acquired by it for the purpose of its business.
(b) All corporate action and authorizations, consents, opinions, approvals
and other acts legally necessary for the offer and issuance of the Notes, and for the Issuer to enter into and comply with its obligations under the Terms and agreements related to the issue of the Notes, have been obtained or effected.
(c) The Issuer has the corporate power under the laws of the Republic of
the Philippines and its constitutive documents: (i) to issue the Notes and to enter into and perform its obligations under and to take all other actions and to do all other things provided for or contemplated in the Contracts and these Terms and Conditions; and (ii) to incur the indebtedness and other obligations provided for in the Notes.
(d) The Issuer (and, if applicable, any person on whose behalf it may act
as agent or in a representative capacity) has and will continue to have full capacity and authority to enter into the Contracts and to carry out the transactions contemplated in the Contracts and has taken and will continue to take all action (including the obtaining of all necessary corporate approvals and governmental consents) to authorize the execution, delivery and performance of the Contracts.
(e) All government authorizations, consents, opinions, approvals, rulings,
registrations, and other acts legally necessary for the offer, issuance, and payment of the Notes, Contracts and the Terms, as may be amended or supplemented, and for the Issuer to enter into and comply with its obligations under the Terms and all related agreements, have been obtained and remain valid and subsisting.
(f) All conditions imposed or required under the Regulations, as well as
other regulations of the BSP, Bureau of Internal Revenue, Philippine Stock Exchange and other relevant agencies, have been complied with by the Issuer as of the date and/or time that they are required to be complied with.
(g) None of the information, data, or submissions made by the Issuer to
the various government agencies, the Arranger, Selling Agents, Market Maker, Registrar and Paying Agent, or Holders in connection with the Notes violate any statute or any rule or regulation of any government agency or office, and do not contain any untrue or misleading statement of a material fact, or omit any material fact necessary or required to be stated.
(h) The obligations of the Issuer under these Terms and Conditions, the
Contracts and the Notes will constitute its legal, valid, and binding obligations, enforceable in accordance with their terms, and the compliance by the Issuer with its obligations under these Terms and
38
Conditions, the Contracts and the Notes will not conflict with, nor constitute a breach of or default of, the by-laws, or any resolution of the board of directors of the Issuer, or any rights of the stockholders of the Issuer, or any contract or other instrument by which the Issuer is bound, or by any law of the Republic of the Philippines, or any regulation, judgment, or order of any office, agency, or instrumentality applicable to the Issuer.
(i) The Notes constitute the direct, unconditional, unsecured and
subordinated Peso-denominated obligations of the Issuer, enforceable in accordance with these Terms and Conditions, and will at all times rank pari passu and ratably without any preference among themselves and at least pari passu with all other direct, unconditional, unsecured and subordinated Peso-denominated obligations of the Issuer, present and future, other than obligations mandatorily preferred by law.
(j) The execution and delivery of the Contracts, the issue of the Notes,
the carrying out of the other transactions contemplated by the Contracts and these Terms and Conditions and compliance with their terms do not and will not: (i) conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the documents constituting the Issuer, or any indenture, trust deed, mortgage or other agreement or instrument to which the Issuer or any of the Issuer’s subsidiaries is a party or by which it or any of its properties is bound; or (ii) infringe any existing applicable law, rule, regulation, judgment, order or decree of any government, governmental body or court, domestic or foreign, having jurisdiction over the Issuer, any such subsidiary or any of their properties.
(k) There are no legal, administrative, or arbitration actions, suits, or
proceedings pending or threatened against or affecting the Issuer which, if adversely determined, would have a material adverse effect on the business operations, properties, assets, or financial conditions of the Issuer, or which enjoin or otherwise adversely affect the execution, delivery, or performance of these Terms and Conditions, or the offer and/or issuance of the Notes.
(l) The audited financial statements of the Issuer are in accordance with
the books and records of the Issuer, are complete and correct in all material respects, have been prepared in accordance with generally accepted Philippine accounting principles and practices, and fairly represent the Issuer's financial condition and results of operations.
(m) There has been no material change in the financial condition or results
of operations of the Issuer sufficient to impair its ability to perform its obligations under the Notes according to these Terms and Conditions.
(n) Save as disclosed in the Offering Circular, the Issuer has, as of the
date thereof, no liabilities or obligations of any nature, whether accrued, absolute, contingent, or otherwise, including but not limited to tax liabilities due or to become due and whether incurred in respect of or measured by any income for any period prior to such date or arising out of transactions entered into or any state of facts existing prior thereto, which may in any case or in the aggregate, materially and adversely affect the Issuer's ability to discharge its obligations under these Terms and Conditions.
(o) Since issuance of the various approvals by the relevant government
agencies for the offer or issuance of the Notes, there has been no change in the financial condition, assets, and liabilities of the Issuer,
39
other than changes that do not, either in any case or in the aggregate, materially and adversely affect the Issuer's ability to discharge its obligations under these Terms and Conditions.
(p) No event has occurred and is continuing which constitutes a default
by the Issuer under or in respect of any agreement binding upon the Issuer, and no event has occurred which, with the giving of notice, lapse of time, or other condition, would constitute a default by the Issuer under or in respect of such agreement, which default shall materially affect the Issuer's ability to comply with these Terms and Conditions and pay for the principal and interest that may be due on the Notes.
(q) The Issuer has good and marketable title to all its properties, free and
clear of liens, encumbrances, restrictions, pledges, mortgages, security interest, or charges.
(r) The Issuer is conducting its business and operations in compliance
with the applicable laws and regulations, has filed true, complete, and timely tax returns, and has paid all taxes due in respect of the ownership of its properties and assets or the conduct of its operations, except to the extent that the payment of such taxes is being contested in good faith and by appropriate proceedings.
(s) The Issuer has obtained the necessary concessions, permits, or
privileges required for conducting its business and operations, and shall have free and continued use and exercise thereof.
(t) The Issuer maintains insurance with reputable insurance companies
in such amounts and covering such risks as are prudent and appropriate and as are usually carried by financial institutions engaged in similar business and owning similar properties in the same geographical areas as those in which the Issuer operates.
(u) (i) The Preliminary Offering Circular dated 27 January 2012 and the
final Offering Circular dated 15 February 2012 contains all information with respect to the Issuer and to the Notes which is material in the context of the issue and offering of the Notes (including, without limitation, all information required by the applicable laws and regulations of the Philippines and the information which, according to the particular nature of the Issuer and of the Notes, is necessary to enable potential Holders and their investment advisers to make an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the Issuer and of the rights attaching to the Notes); (ii) the statements contained in the Offering Circular relating to the Issuer are in every material respect true, accurate and not misleading; (iii) the opinions and intentions expressed in the Offering Circular with regard to the Issuer are honestly held, have been reached after considering all relevant circumstances and are based on reasonable assumptions; (iv) there are no other facts in relation to the Issuer or the Notes the omission of which would, in the context of the issue and offering of the Notes, make any statement in the Offering Circular misleading in any material respect; and (v) all reasonable inquiries have been made by the Issuer to ascertain such facts and to verify the accuracy of all such information and statements.
(v) The Offering Circular accurately describes: (i) accounting policies
which the Issuer believes to be the most important in the portrayal of the Group’s financial condition and results of operations (the “Critical Accounting Policies”); (ii) material judgments and uncertainties
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affecting the application of the Critical Accounting Policies; and (iii) an explanation of the likelihood that materially different amounts would be reported under different conditions or using different assumptions, and the Board of Directors and audit committee of the Issuer have reviewed and agreed with the selection and disclosure of the Critical Accounting Policies in the Offering Circular and have consulted with their independent accountants with regards to such disclosure.
(w) The Issuer maintains systems of internal accounting controls sufficient
to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with financial reporting standards in the Philippines for banks and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; and (v) the Issuer has made and kept books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions and provide a sufficient basis for the preparation of the Issuer’s consolidated financial statements in accordance with financial reporting standards in the Philippines for banks; and the Issuer’s current management information and accounting control system has been in operation for at least twelve (12) months during which the Issuer has not experienced any material difficulties with regard to (i) through (v) above.
(x) There are no outstanding guarantees or contingent payment
obligations of the Issuer in respect of indebtedness of third parties except as described in the Offering Circular; the Issuer is in compliance with all of its obligations under any outstanding guarantees or contingent payment obligations as described in the Offering Circular.
(y) The Offering Circular accurately and fully describes: (i) all material
trends, demands, commitments, events, uncertainties and risks, and the potential effects thereof, that the Issuer believes would materially affect liquidity and are reasonably likely to occur; and (ii) all material off-balance sheet transactions, arrangements, and obligations; and the Issuer does not have any material relationships with unconsolidated entities that are contractually limited to narrow activities that facilitate the transfer of or access to assets by the Issuer, such as structured finance entities and special purpose entities that are reasonably likely to have a material effect on the liquidity of the Issuer or the availability thereof or the requirements of the Issuer for capital resources.
(z) All information provided by the Issuer to its auditors required for the
purposes of their comfort letters in connection with the offering and sale of the Notes has been supplied, or as the case may be, will be supplied, in good faith and after due and careful enquiry; such information was when supplied and remains (to the extent not subsequently updated by further information supplied to such persons prior to the date hereof), or as the case may be, will be when supplied, true and accurate in all material respects and no further information has been withheld the absence of which might reasonably have affected the contents of any of such letters in any material respect.
(aa) Save as disclosed in the Offering Circular, all transactions by the
Issuer with its directors, officers, management, shareholders, or any
41
other person, including persons formerly holding such positions, are on terms that are available from other parties on an arm’s-length basis.
(bb) Except as specifically described in the Offering Circular, the Issuer
and its affiliates and subsidiaries own or possess (or can acquire on reasonable terms), all patents, licenses, inventions, copyrights, know-how, trademarks, service marks, trade names or other intellectual property (collectively, “Intellectual Property”) necessary to carry on the business now operated by them; and neither the Issuer nor any of its affiliates or subsidiaries has received notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interests of the Issuer or its affiliates or subsidiaries therein; and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would reasonably be expected to result in an Adverse Effect.
(cc) No event has occurred or circumstance arisen which (whether or not
with the giving of notice and/or the passage of time and/or the fulfillment of any other requirement) constitutes an event described under “Events of Default” hereunder.
(dd) The Issuer is in compliance with the Anti-Money Laundering Laws of
the Philippines in all material respects. (ee) The Issuer is Solvent. As used in this paragraph, the term “Solvent”
means, with respect to a particular date, that on such date: (i) the present fair market value (or present fair saleable value) of the assets of the Issuer is not less than the total amount required to pay the liabilities of the Issuer on its total existing debts and liabilities (including contingent liabilities) as they become absolute and matured; (ii) the Issuer is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and commitments as they mature and become due in the normal course of business; (iii) the Issuer is not incurring debts or liabilities beyond its ability to pay as such debts and liabilities mature; (iv) the Issuer is not engaged in any business or transaction, and does not propose to engage in any business or transaction, for which its property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which the Issuer is engaged; (v) the Issuer will be able to meet its obligations under all its outstanding indebtedness as they fall due; and (vi) the Issuer is not a defendant in any civil action that would result in a judgment that the Issuer is or would become unable to satisfy.
Secondary Trading ........................... All secondary trading of the Notes shall be coursed through the Market
Maker referred to in the same Regulations, subject to the payment by the Holder of the proper fees to the Market Maker and the Registrar. In case of a transfer or assignment deemed by the Issuer as a pre-termination, solely for withholding tax purposes, the transferor Holder shall be liable for the resulting tax due on the entire interest income earned on the Notes (if any), based on the holding period of such Notes by the transferor Holder and the amount equal to the final withholding tax, if any, will be deducted from the purchase price due to it. Thereafter, the interest income of a transferee Holder who is an individual shall not be treated as income from long-term deposit or investment certificates, unless the Notes has a remaining maturity of at least 5 years.
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Transfers or assignments deemed by the Issuer as pre-termination for withholding tax purposes means any transfer or assignment which: (a) is made by a Holder who is a citizen, resident individual, non-resident individual engaged in trade or business in the Philippines, or a trust (subject to certain conditions); (b) under the Regulations, is not considered a pre-termination of the Notes; and (c) under relevant tax laws or revenue regulations, will result in the interest income on the Notes being subject to the graduated tax rates imposed on long-term deposit or investment certificates on the basis of the holding period of the investment instrument. No transfer or assignment of the Notes shall be recorded in the Registry unless the Issuer (or its duly authorized agent) has certified that the amount representing the tax due or arising from any such transfer or assignment has been paid.
Selling Agents…………. ING and MIB (each acting in the capacity of a selling agent) and/or such other institutions appointed by the Issuer to perform the role of a selling agent as required under the Regulations.
Set-off ............................................... Each Holder, by accepting the Note, irrevocably agrees and acknowledges that: (a) it may not exercise or claim any right of set-off in respect of any
amount owed to it by the Issuer arising under or in connection with the Notes; and
(b) it shall, to the fullest extent permitted by applicable law, waive and be
deemed to have waived all such rights of set-off.
Status and Subordination ...................................
The Issuer, for itself, its successors and assigns, has in the Trust Agreement covenanted and agreed, and each Holder by accepting a Note irrevocably agrees and acknowledges, that: (a) the indebtedness evidenced by the Notes constitutes direct,
unconditional unsecured and subordinated obligations of the Issuer, and, upon any distribution to creditors of the Issuer in a Winding Up of the Issuer (as defined below), the claims of the Holders in respect of the Notes shall be subordinated in right of payment, to the extent and in the manner provided hereunder, to the prior payment in full of all liabilities (whether actual or contingent, present or future) of the Issuer, including claims of depositors, except those subordinated liabilities which by their terms rank equally in right of payment with or junior to the Notes;
(b) the Notes are not deposits and are not insured by the Philippine
Deposit Insurance Corporation;
(c) The Notes are unsecured and are not covered by a guarantee of the Issuer or Arranger or any other related party of the Issuer or Arranger. Neither are the Notes covered by any other arrangement that legally or economically enhances the priority of the claim of the Holders as against depositors and other creditors of the Issuer;
(d) Claims in respect of the Notes will rank pari passu without preference
among themselves, in priority to the rights and claims of holders of all classes of equity securities of the Issuer, including holders of preference shares, if any;
(e) Upon the distribution to creditors or any assets of the Issuer in the
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event of any insolvency or liquidation of the Issuer, the claims of Holders for principal and interest in respect of the Notes shall be subordinated in right of payment to claims (whether actual or contingent, present or future) of all depositors and creditors of the Issuer, except those creditors that are expressly ranked equally with or junior to the Holders in right of payment;
(f) and the Notes may not be used as collateral for any loan made by the
Issuer or any of its subsidiaries or affiliates;
(g) Holders or their transferees shall not be allowed, and hereby waive their right, to set off any amount they owe to the Issuer against the Notes.
(h) Except in the case of bankruptcy and liquidation of the Issuer, no
holder shall have the right to require the Issuer to redeem and repay any or all of the Notes before the Maturity Date.
(i) The recognition of the Notes as regulatory capital in the remaining five
years before maturity shall be amortized on a straight-line basis or in accordance with prevailing regulations at that time.
Taxation ........................................... In the event that the Holder is either (i) a Filipino citizen, (ii) an alien residing in the Philippines, (iii) a non-resident alien engaged in trade or business in the Philippines, (iv) subject to the clause on Prohibited Holders, a long-term trust account or long-term management account (including common trust funds of banks other than the Issuer) exclusively for Filipino citizens, aliens residing in the Philippines, and non-resident aliens engaged in trade or business in the Philippines; (v) a BIR-tax-qualified employee trust fund established by corporations; or (vi) any other tax-exempt institution (upon presentation of acceptable proof of tax exemption), all payments for principal and interest shall be made free and clear of any deductions or withholding for or on account of any present or future taxes or duties imposed by or on behalf of the Republic of the Philippines, including interest and penalties, unless such withholding or deduction is required by law. In the event there is a change in the tax status of the Notes because of new, or changes in tax laws (and not merely a change in the interpretation of present tax laws and regulations) as a result of which, any payments of principal and/or interest under the Notes shall be subject to deductions or withholdings for or on account of any taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld, or assessed by or within the Philippines or any authority therein or thereof having power to tax, including but not limited to stamp, issue, registration, documentary, value-added or similar tax, or other taxes, duties, assessments, or government charges, including interest, surcharges, and penalties thereon (the "New Taxes"), then all payments of principal and interest in respect of the Notes shall be made free and clear of, and without withholding or deduction for, any such new taxes. In that event, the Issuer shall pay to the Holders concerned such additional amount as will result in the receipt by the Holders of such amounts as would have been received by them had no such withholding or deduction for new taxes been required. For the avoidance of doubt, such taxes and duties imposed shall be for the account of the Holder and the Issuer shall make the necessary withholding or deduction for the account of the Holder concerned; In any case, however, the Issuer shall not be liable for:
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(a) the twenty percent (20.0%) or such other final withholding
tax applicable on interest earned on the Notes prescribed under the National Internal Revenue Code (“NIRC”) of 1997, as amended;
(b) Gross Receipts Tax under Section 121 of the NIRC; (c) taxes on overall income of any securities dealer or any
Holder, whether or not subject to withholding; and (d) Value Added Tax (“VAT”) under Sections 106 to 108 of the
NIRC, as amended by Republic Act No. 9337. As required by law, the abovementioned 20.0% final withholding tax on interest income shall be withheld by the Issuer as withholding agent. The Issuer shall, upon request of the relevant Holder, provide the necessary proof of such withholding and corresponding payment to the Philippine revenue authorities. In case of transfers and assignments deemed by the Issuer as a pre-termination for tax purposes, the transferor Holder shall be liable for the resulting tax due on the entire interest income earned on the Notes (if any), based on the holding period of such Notes:
(1) Four (4) years to less than five (5) years: 5.0%; (2) Three (3) years to less than four (4) years: 12.0%; and (3) Less than three (3) years: 20.0%. Documentary stamp tax for the primary issuance of the Notes and the execution of the agreements pursuant thereto, if any, shall be for the Issuer’s account.
Title................................................... Legal title to the Notes shall be evidenced by the Registry, which shall be
the official registry and best evidence of ownership and all other information regarding ownership of the Notes. Following receipt from the Selling Agents (including the Issuer and FMIC in such capacity) or Market Maker, as the case may be, of a Purchase Advice evidencing the purchase of Notes by the Holders, a Registry Confirmation will be issued by the Registrar in favor of the said Holders to evidence the registration of such Notes in their names in the Registry.
Transferability ................................... Subject to the conditions on Taxation and Secondary Trading, transfers of the Notes to any person other than the Issuer prior to Maturity Date shall not constitute pre-termination. Transfer from a Holder to a transferee of a different tax status can only be effected on an Interest Payment Date.
Amendment ...................................... Any amendment of these Terms and Conditions is subject to the Governing Regulations.
Non-Waiver ...................................... The failure of any party at any time or times to require the performance by the other of any provision of the Notes or these Terms and Conditions shall not affect the right of such party to require the performance of that or any other provisions and the waiver by any party of a breach under these Terms and Conditions shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself or a waiver of any right under these Terms and Conditions. The remedies herein provided are cumulative in nature and not exclusive of any remedies provided by law.
Ability to File Suit .............................. Nothing herein shall be deemed to create a partnership or collective venture between the Holders. Each Holder shall be entitled, at its option, to take independent measures with respect to its obligations and rights and privileges under these Terms and Conditions, and it shall not be
45
necessary for the other Holders to be joined as a party in any judicial or other proceeding for such purpose.
Severability ....................................... If any provision hereunder becomes invalid, illegal or unenforceable under any law, the validity, legality and enforceability of the remaining provisions of these Terms and Conditions shall not be affected or impaired. The parties agree to replace any invalid provision which most closely approximate the intent and effect of the illegal, invalid or enforceable provision.
Prescription ...................................... Any action upon the Notes shall prescribe within ten (10) years from the time the right of action accrues.
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DESCRIPTION OF THE BANK
Introduction
Philippine Savings Bank is a thrift bank based in the Philippines. It offers a wide range of banking and other financial products and services, including deposits, loans, treasury, credit card, and trust. It caters mainly to the retail and consumer markets. The Bank is ranked second among the country’s 73 thrift banks in terms of assets as of 31 December 2010 based on data from the Bangko Sentral ng Pilipinas (‘‘BSP’’). The Bank’s total assets were P114.83 billion, P104.15 billion and P93.09 billion as at 31 October 2011, 31 December 2010 and 2009, respectively. Total equity were P14.79 billion, P11.61 billion and P11.01 billion as at 31 October 2011, 31 December 2010 and 31 December 2009, respectively. As of end-October 2011, the Bank has a network of 196 branches nationwide and is expected to increase to 200 by year-end. The Bank also has 492 ATMs, which are part of the Bancnet consortium. This is broken down to 207 on-site and 285 off-site locations. The Bank is listed on the Philippine Stock Exchange (the ‘‘PSE’’) with a market capitalization of P16.82 billion as of 31 October 2011. As of 31 October 2011, the Bank’s capital adequacy ratio and Tier 1 capital adequacy ratio were both at 13.65%.
History
The Bank was established in 30 June 1959 primarily to engage in savings and mortgage banking. Its first head office was located in Quiapo, Manila. In 1983, Metrobank acquired majority stake in the Bank, and in 2004 further increased its shareholdings to the present level of 75.98%. In 1991, the Bank was authorized to perform trust functions and in 1995, was granted a quasi-banking license. In 1994, its shares were listed on the PSE and made it the first publicly listed thrift bank in the country. The first offering of 25.0% stock rights to the public raised P602.00 million, and the second, done the following year, provided P544.00 million, accounting for the 63.0% growth in equity. The Bank moved its principal office to its current address at the PSBank Center, 777 Paseo de Roxas corner Sedeno St., Ayala Avenue, Makati City, Philippines in 2003. In September 2010, the Bank celebrated its 50
th anniversary. The website of the Bank is www.psbank.com.ph. No information on the
website should be considered or construed as part of the Offering Circular.
Strategy of the Bank
Throughout its 50 years of operations, the Bank’s philosophy is that of being responsive to its clients’ needs. While its current capitalization of P14.79 billion qualifies it to become a commercial bank, the Bank has decided to remain a thrift bank and use its resources to aggressively compete in retail banking. The Bank will continue to harness inherent synergies with Metrobank but will remain resolute in differentiating itself in terms of markets and products. The Bank and Metrobank have distinct core market focus and have agreed on a coherent strategy on market segmentation. Operational synergies are achieved through coordination on branch expansion, sharing of integrated data and ATM infrastructure, coordination on group-wide concentration limits, and maximization of each institution’s competitive advantage. In 2004, PSBank was focused on launching key pioneering products backed by customer acquisition programs and expanded customer coverage, designing new and more powerful technology applications that reduced the Bank’s turnaround time. The Bank’s strategy is focused on Service Quality, to differentiate the “PSBank Experience” of its customers in an industry where homogenous products and services are being offered.
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The Bank has been constantly at the forefront of developing new products to widen and expand its customer reach. The Bank made it simpler for its customers to avail auto loans via fast approval rates, low interest payments, flexible payment terms and convenient modes of payment. Technological applications were the engine powering the Bank's growth over the past few years. It has put in place continuous system and process improvement projects, which enabled it to deliver faster turnaround time for loan approvals. In 2005, the Bank became the first bank to fully deploy and launch a new Software Management System (“SDMS”) that allows the Bank to update its ATM screens from a central location. SDMS enables the Bank to promote its products, services, on-going promotions, properties for sale, among others, on ATMs, rather than just providing its clients the facility for dispensing cash and bills payment. The Bank invested in various integrated software systems to meet increased business volumes and provide the entire PSBank branch network with quick access to information critical to efficient customer service.
Other technology applications that were harnessed include InfoChannel, an integrated source of information on any bank-related policy and activity, Operation and Processing Integrated Control System (“OPICS”) which automated the entire Treasury operations from deal entry to accounting and reporting; Collection and Asset Management System which automated all phases of collection, remedial account management, legal account management, and asset recovery management; PDC.net, a web-based solution that enables the automated management and control of postdated checks; Integrated Financial Accounting System, and the Signature Verification System.
In 2006, improvements in its service delivery were implemented, noteworthy of which is the Thank Goodness its Five Days (“TGIF”) campaign which limited the waiting time for qualified home loan applications to five days. Another pioneering product offering of the Bank, the PSBank Home Loans with a fixed term payment option of up to 25-years complemented the TGIF launch. The Bank also continued to realign its organizational, operational and business processes to meet the growing customer demand. Its Service Quality Division has instituted various programs and projects designed to maintain high quality service and further enhance and develop the professional advancement of its entire workforce.
In 2007, the Bank continued with its expansion efforts, this time through the internet banking channel. Launched as PSBank Remote Banking, the facility offers access to account information, bills payment, fund transfer, checkbook orders and loan application online. It continued to grow its loan portfolio, expanding at a faster pace compared to industry averages as of mid-2007. Additional branches were able to bring in more loans and deposits within months of opening. The Bank continued with its internal training exercises, adding an officership program to its roster of organizational development activities. It also held a brand building exercise among its top executives to further harness efforts at differentiating the PSBank experience in the market.
In 2008, PSBank remained focused on growing its core business amidst the global financial turmoil. To shore up funding for its loans and investments and to place the Bank in a strong liquidity position, the Bank launched two major deposit generation activities: the PSBank Monthly Millions Draw and the PSBank Save It Forward (“SIF”) program. Through these new programs and intensified marketing efforts, the Bank was able to successfully raise its deposit levels. In 2009, PSBank continued to invest in growing its various delivery channels. It opened its 24/7 Customer Service hotline and email addresses to make PSBank more accessible to its customers, anytime, anywhere. The Bank added more features to its Remote Banking facility to make it a safe and secure option for its customers, attracting a 300.0% growth in users. The Bank strengthened its reach in the OFW market by launching the PSBank Overseas Filipino Savings Account. This account enabled all land and sea-based OFWs or any of their family members to have a savings account that does not require an opening or maintaining balance. PSBank also launched the PSBank Prime Rebate, the first and only rebate program in Philippine banking that rewards borrowers with rebates or savings for advance or excess loan payments. In 2010, PSBank focused on innovating products and services in order to meet its customer’s changing needs. With this, it launched the Prepaid MasterCard, the all-in-one budget card that can be used as an ATM card, debit card, remittance card and Internet cash card for the budget-conscious. Internally, PSBank continued investing in strengthening and enhancing its IT infrastructure.These
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resulted to a faster turnaround time in loan applications which strengthened PSBank’s proposition of being the fastest and most innovative in addressing customer needs. In 2011, PSBank continued introducing innovative products to the market. It launched the PSBank Debit MasterCard, a product which combines the functionality of a debit facility and a savings account in one card. It can be used for shopping, paying bills and making online purchases, both here and abroad. All these product launches continue to be in line with the Bank’s “Simple Lang, Maaasahan” (Simple and Reliable) line of products and services. The Bank aims to maintain a strategic management discipline in serving the consumer market. To grow the business in the coming years, it will rely on increasing visibility and customer convenience by establishing more branches throughout the country. This will be complemented by the Bank’s continued improvements in customer profiling through its unique customer information system. The objective is to stay ahead of the profitability curve, build competitive advantages and focus on its target market. This will be supported by having a customer-centric performance oriented culture within the Bank and an organizational structure which encourages employees to be flexible and motivated contributors.
Strategic Initiatives
From a fourth largest industry ranking in 2001 in terms of assets, the Bank has grown to become the second largest thrift bank in the Philippines today. Strategic initiatives have been undertaken to increase shareholder value, solidify the Bank's market leadership and sustain its growth momentum. However, these anticipated developments are not assured and actual results may materially differ as a result of risks and uncertainties the Bank faces. Achieve Top Industry Standing through Consistent Focus on the Consumer Market. The Bank aims to achieve leading industry standing in the Thrift Bank sector. Although the Bank also caters to select corporate clients through its Large Enterprise Group, the Bank has focused on households as its target market for deposit and loan products. The growth potential of this market is anchored on projected higher domestic consumption due to increasing population and income levels Redefining Business Divisions to Focus on Customer-Centricity. To meet the challenges in an intensely competitive market, the Bank will continue its initiative of reviewing, reorganizing and streamlining of business units to drive productivity and efficiency in the organization, and more so to pursue a customer-centric strategy. Using its customer information system coupled with a robust technology infrastructure, the Bank aims to analyze the demographics, transactions and product availments of all of its customers. Products and services are aligned with clients’ interests and requirements while ensuring that standards are in place to measure the delivery of quality service. Sustained Branch Expansion throughout the Country. The Bank is firm in its resolve to further increase its market share in the consumer banking industry. To achieve this strategic objective, the Bank will pursue the expansion of its branch footprint to improve customer convenience and visibility. The Bank aims to set-up branches, particularly in key provincial cities or municipalities, with sizable levels of deposits and demand for consumer and SME loans. Along with branches, it will also expand its ATM network, further enhance its Internet banking facility and introduce mobile banking to improve customer access and enhance customer experience. The installation of more offsite ATMs is consistent with expanding its reach and becoming more visible in the market. The Internet and Mobile Banking platforms should provide 24/7 online real-time customer access and transaction processing. Optimize Marketing Efforts. Aggressive marketing efforts begin in-branch by providing staff with adequate product and sales training and easy access to information on bank products, policies, and other activities via the in-house InfoChannel. In the marketplace, the Bank's television, radio, and print advertisements aim to increase brand awareness and reinforce the Bank's image as an innovative consumer bank. With the availability of a customer information system, predictive modeling can be applied so that client acquisition and cross-selling efforts can be more targeted.
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Support Initiatives
Internal Processes. The Bank launched improvements and streamlining of internal processes to complement business growth. Various surveys were launched to enable the Bank to capture client perceptions and work on exceeding performance expectations. Technology Applications. The Bank is looking to further develop its customer information system to assist in its customer-focus strategy. This system will allow the Bank to actively profile its clients and analyze their needs. The update of the information will be real-time and accessible from any of the Bank’s branches in the country. In addition to this, the Bank is also continually working on integrating its systems where possible with Metrobank. The Bank has also established a structure where customers can directly apply at the offices of its business partners namely, dealers for Auto Loans, developers for Home Loans, and corporations for Personal and other loans. Information Technology (“IT”) investments are expected yearly to complement powerful key core systems already in place to support its growth strategy. Resource Requirements. Aside from investing in technology, the Bank will continue to invest in the development of its people through continued training on sales, new products, risk appreciation, customer service and other development programs. The Bank also has appropriate incentive packages in place to encourage expansion of the marketing channels of the Bank's products. Product Development, Communications and Marketing. The Bank utilizes various consumer research studies to develop new or enhance existing products and marketing programs. It will continue to maximize the use of customer surveys to measure customer satisfaction drivers such as speed in processing, complaint handling, and problem resolution, and, as a feedback mechanism, to improve customer service. The Bank utilizes external communications to effectively build and reinforce its story among its markets. The Bank has contracted the services of top advertising agencies to launch its advertising campaigns and provide supplemental public relations efforts.
Business Activities
The Bank’s principal business activities are organized as follows: Consumer Banking, Corporate Banking, Branch Banking and Treasury. Segment Report
Contributions of the business segments to the Bank’s operating results for the ten months ended 31 October 2011 is as follows:
Unaudited
For the ten months ended 31 October 2011
(In P thousands) Consumer Banking
Corporate Banking
Branch Banking
Treasury Total
Operating Income
Interest Income 1,278,156 329,411 4,637,857 1,187,893 7,433,317 Service Fees and
Commissions 91,704 37,307 514,842 - 643,853
Other Operating Income 27,374 6,711 226,384 560,719 821,188
Total Operating Income 1,397,234 373,429 5,379,083 1,748,612 8,898,358
Non-cash Expenses
Depreciation and Amortization
93,877 12,035 241,340 1,317 348,569
Provision for Impairment and Credit Losses
151,001 202,691 42,726 - 396,418
Amortization of Software Costs and Deferred Charges
18,308 3,204 21,422 392 43,326
Total Non-cash Expenses 263,186 217,930 305,488 1,709 788,313
Interest Expense - - 1,742,310 944,990 2,687,300
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Unaudited
For the ten months ended 31 October 2011
(In P thousands) Consumer Banking
Corporate Banking
Branch Banking
Treasury Total
Service Fees and Commissions Expense
4,969 2,021 27,897 - 34,887
Subtotal 4,969 2,021 1,770,207 944,990 2,722,187
Compensation and Fringe Benefits
279,532 65,518 1,153,681 10,029 1,508,760
Taxes and Licenses 95,573 22,836 402,521 134,050 654,980
Occupancy and Equipment 28,102 4,665 363,559 119 396,445
Security, Messengerial and Janitorial Services
34,103 2,784 123,870 420 161,177
Miscellaneous 256,370 29,377 683,129 12,330 981,206
Subtotal 693,680 125,180 2,726,760 156,948 3,702,568
Income (Loss) before Share in Net Income of an Associate and Joint Venture
435,399 28,298 576,628 644,965 1,685,290
Equity in Net Income of an Associate and a Joint Venture
- 25,096 - - 25,096
Income before Tax 435,399 53,394 576,628 644,965 1,710,386
Provision for Income Tax - - - - (94,660)
Net Income 1,805,046
Source: PSBank
Consumer Banking
Consumer Banking principally handles individual customer deposits and provides consumer loans, and fund transfer facilities. The Bank’s consumer lending business is predominantly consumption loans and real estate loans. As of 31 October 2011, consumption loans have grown 16.2% to P30.50 billion while real estate loans have grown 7.6% to P18.71 billion compared to the same period last year. It is also engaged in small, medium enterprise lending as well as personal loans. Personal loans are offered either on the basis of payments being made directly by the borrower or, for employees of participating companies, by deduction of payments directly from the borrower’s salary. As of 31 October 2011, personal loans have grown by 5.9% to P6.04 billion compared to the same period last year. Aside from the branches, personal loans are sourced through accredited loan agencies. Retail deposit products include current and savings accounts (“CASA”) and time deposits in peso and US Dollar. The Bank’s branch network is its main distribution channel. It also partners with auto dealers, property developers as well as loan agencies for its different products. In some provincial areas, the Bank has set-up sales desks as another distribution channel for its loan products. Currently, the Bank has 14 sales desks. Credit decision-making for consumer loans utilizes a credit scoring process and is centralized in Head Office. Currently, the Bank has the only loan rebate program in the market. This feature gives rebates to customers who make advance or excess loan payments. The Bank believes that product innovation, consistent service quality and speed in delivery are the key factors to grow market share. Corporate Banking
Corporate Banking principally handles loans and other credit facilities for small and medium enterprises (“SMEs”), corporate and institutional customers. The banking products offered include credit lines, floor stock financing lines, standby letters of credit, domestic letters of credit, and deposit collateral loans. All loans are screened and approved by the Credit Committee. The Bank lends across various industries with a significant portion of its loans to companies in other community, social and personal activities, real estate, wholesale and retail trade and public utilities.
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As of 31 October 2011, the Bank’s commercial loans grew 5.7% to P10.66 billion compared to the same period last year. Branch Banking
As of 31 October 2011, the Bank had 196 branches and has the most number of branches among the top five thrift banks in the country. By end-2011, the Bank expects to have 200 branches. For 2012, the Bank is looking to open 20 new branches. Branch expansion is key to the Bank’s deposit growth strategy. However, instead of just targeting deposit growth, the branches are also mandated to increase their loan client base. The Bank owns the premises it occupies for the Head Office in Makati City and 23 of its branches. These offices/branches are all in good condition and there is no mortgage or lien on any of these properties owned by the Bank. The rest of the Bank’s branch premises are under lease agreements. Terms of leases range from 1 to 20 years renewable under certain terms and conditions. Rentals charged to operations under these lease contracts amounted to P285.10 million for the ten months ended 31 October 2011. Treasury
Treasury provides money market, trading, and treasury services, as well as manages the Bank's funding operations by use of treasury bills, government securities and placements with other banks. The group is composed of the Liquidity and Reserve Management Department, Foreign Currency Deposit Department, Government Securities Trading Department, and Treasury Marketing Department. Treasury products and services available through the group include peso and USD trading government securities, commercial papers sales and regular foreign exchange transactions. All investment and portfolio limits are reviewed by Risk Management Committee (“RMC”) and endorsed to the Board for approval. The basis for the limit setting is the risk tolerance appetite of the Bank and its budget. Stop loss limits are monitored on a daily basis. Any breach in the stop loss limit is reported to the President and in the monthly RMC and Board meetings. In case of breach in stop loss limits, the trader is required to reduce or cut his position until the trader is within the approved limits.
Competition
PSBank ranks second in the thrift banking category and is bigger in terms of total assets than many commercial banks. Although a thrift bank, PSBank competes aggressively with many banks in the field of retail and consumer banking. Competition has become even more challenging amidst the growing number of players in the consumer business and the vigorous campaign by competitor banks to acquire a bigger share of the market. Despite these, the Bank has remained steadfast and focused in its strategies and efforts. The various initiatives to improve product quality, expand delivery channels and infuse service differentiation paved the way for the Bank to exceed its business targets and significantly do better than its peers during the last few years.
Customers/Clients
While the Bank’s client base has been traditionally composed of big and small savers, PSBank has since refocused its strategy towards customers belonging to the class A to middle C market that includes employed individuals, professionals and business entrepreneurs. As of 31 October 2011, the Bank services about 202,200 deposit accounts and 157,400 loan accounts. Many customers have remained loyal depositors and borrowers of the Bank through the years. There is no single customer that accounts for 20.0% or more of the Bank’s deposit liabilities and loans.
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Loan Portfolio
The Bank offers a wide range of consumer and business loans. For consumer loans, these include: Auto Loan, Flexi Personal Loan, Multi-Purpose Loan, Home Loan, Home Credit Line and Home Construction Loan. For business loans, these include: SME Business Credit Line, Credit Line, Term Loan, Standby Credit Line Certification, Domestic Bills Purchase Line, Domestic Letter of Credit / Trust Receipt Line, Floor Stock Financing Line and Second Endorsed Check Accommodation. Industry Concentration and Product Type
The table below shows the Bank’s gross loans classified by economic activity, as defined and categorized by the BSP.
(In P millions) Unaudited
As of 31 October Audited
As of 31 December
2011 % 2010 % 2009 % 2008 %
Wholesale and retail trade
14,487 24.09 10,739 19.46 8,797 18.28 9,196 21.80
Manufacturing, banks, insurance and other financial institutions
2,886 4.80 2,864 5.19 2,707 5.63 1,417 3.36
Real estate 18,787 31.24 17,727 32.12 14,292 29.70 12,827 30.41
Other community, social, and personal activities
12,837 21.34 14,060 25.48 12,353 25.67 11,473 27.20
Mining and quarrying
13 0.02 16 0.03 11 0.02 7 0.02
Agriculture 614 1.02 614 1.11 2,267 4.71 2,635 6.25
Others 10,521 17.49 9,168 16.61 7,697 15.99 4,632 10.98
Total 60,144 100.00 55,188 100.00 48,124 100.00 42,187 100.00 Source: PSBank Note: Loan breakdown is net of unearned discounts
The Bank employs product limits, single borrower limit, DOSRI limit and Metrobank Group lending limits in its exposures. The RMC oversees the system of limits to discretionary authority that the Board delegates to Management and ensures that the system remains effective, limits are observed, and immediate corrective actions are taken whenever limits are breached. These limits are compliant to pertinent BSP regulations.
The table below shows the Bank’s gross loans classified by type of product.
(In P millions)
Unaudited As of 31 October
Audited As of 31 December
2011 % 2010 % 2009 % 2008 %
Commercial (corporates and SMEs)
10,677 17.74 9,712 17.60 9,499 19.74 7,196 17.06
Auto 25,043 41.64 22,514 40.79 17,793 36.97 15,334 36.35
Mortgage 18,709 31.11 17,513 31.73 15,767 32.76 14,513 34.40
Personal 5,676 9.44 5,384 9.76 4,917 10.22 5,062 12.00
Others 50 0.08 66 0.12 148 0.31 82 0.20
Total 60,144 100.00 55,188 100.00 48,124 100.00 42,187 100.00 Source: PSBank Note: Loan breakdown is net of unearned discounts
Over the last three years, the Bank’s loan portfolio has been concentrated with auto and real estate loans. As of 31 October 2011, auto loans have grown 63.3% and real estate loans have grown 28.9% from their respective levels in 2008. W ith the Bank’s continued investments in information technology, greater automation and integration of processes have been achieved. This has also brought out improved efficiency through faster turn-around time for credit decisions, more uniform compliance with
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credit policies and better profit monitoring for its loan portfolio. As a result, the Bank offers one of the fastest turn-around times for mortgage and auto loan applications in the industry with a one day turn-around time for Auto Loans, five days for Home Loans and three days for Flexi/Personal Loans. Maturity
The table below shows the Bank’s gross loans by maturity.
(In P millions)
Unaudited As of 31 October
Audited As of 31 December
2011 % 2010 % 2009 % 2008 %
Due within one year
11,225 18.66 10,941 19.83 10,181 21.16 9,926 23.53
Due within one to five years
32.895 54.69 29,691 53.80 23,815 49.49 20,062 47.56
Due after five years
16,024 26.64 14,556 26.38 14,128 29.36 12,198 28.91
Total 60,144 100.00 55,188 100.00 48,124 100.00 42,187 100.00 Source: PSBank Note: Loan breakdown is net of unearned discounts
Loans due within one year consist of personal loans. Loans due within one to five years consist primarily of auto-loans. Loans due after five years consist primarily of real estate loans for housing purchases.
(In P millions) Unaudited
As of 31 October 2011
Breakdown of Loans by Type and Maturity
Due within 1 year
% Due within 1-5 years
% Due after 5 years
%
Auto 1,659 15.00 23,342 71.00 81 1.00
Personal 4,211 38.00 925 3.00 0 0.00
Mortgage 2,367 21.00 3,288 10.00 13,056 81.00
Commercial 2,675 24.00 5,248 16.00 2,742 17.00
Deposit Collateral Loan 172 2.00 0 0.00 0 0.00
Employee 130 1.00 93 0.00 145 1.00
PDC Discounting Line 11 0.00 0 0.00 0 0.00
Total 11,225 100.00 32,895 100% 16,024 100%
Source: PSBank Note: Loan breakdown is net of unearned discounts
Borrower
The table below shows the Bank’s gross loans by type of borrower.
(In P billion) Unaudited
As of 31 October Audited
As of 31 December
2011 % 2010 % 2009 % 2008 %
Individual 50.25 83.54 46.69 84.60 39.74 82.57 36.53 86.58
Single Proprietorship
1.00 1.66 0.45 0.81 0.67 1.39 0.79 1.87
Cooperative / Corporation
8.90 14.80 8.05 14.59 7.72 16.04 4.87 11.55
Total 60.14 100.00 55.19 100.00 48.12 100.00 42.19 100.00 Source: PSBank Note: Loan breakdown is net of unearned discounts
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Size
The table below shows the Bank’s gross loans by principal amount.
(In P millions) Audited
As of 31 October
2011 %
Less than 1,000,000 33,041 54.94
1,000,001 to 2,000,000 10,101 16.80
2,000,001 to 3,000,000 3,561 5.92
More than 3,000,000 13,441 22.35
Total 60,144 100.00 Source: PSBank
Note: Loan breakdown is net of unearned discounts
The BSP currently imposes a limit on the size of the Bank’s financial exposure to any single person or entity or group of connected persons or entities to 25.0% of the Bank’s net worth. As of 31 October 2011, the Bank has complied with the single borrower’s limit for all of its loans. Secured and Unsecured
The table below shows the Bank’s secured and unsecured loans according to type of collateral.
(In P millions)
Unaudited As of 31 October
Audited As of 31 December
2011 % 2010 % 2009 % 2008 %
Secured 46,220 76.84 44,019 79.76 37,621 78.18 34,502 81.78
Real estate
20,189 33.57 21,290 38.58 19,581 40.69 18,844 44.67
Deposit hold-out
398 0.66 198 0.36 211 0.44 293 0.70
Chattel 25,043 41.64 22,514 40.79 17,793 36.97 15,334 36.35
Others 588 0.98 17 0.03 36 0.07 31 0.07
Unsecured 13,927 23.16 11,170 20.24 10,502 21.82 7,685 18.22
Total 60,144 100.00 55,188 100.00 48,124 100.00 42,187 100.00 Source: PSBank Note: Loan breakdown is net of unearned discounts
Pricing and Rating
Pricing of loans follows the approved mechanics in the respective Product Manuals. The Bank utilizes credit scoring models for its loans. Upon booking of loans, the Bank rates accounts in a scale of 1 to 10, with 1 being the best. This scale is based on the board’s approved interim credit rating system which utilizes both the credit scoring results and the BSP loan grading system. These are mapped to high grade, standard, substandard and impaired to meet PFRS requirements. In addition to credit scoring, the Bank carries out stress testing analyses using Board-approved statistical models relating the default trends to macroeconomic indicators.
Credit Policy and Loan Review
Credit proposals are approved at the Credit Committee level appropriate to the size and risk of each transaction in conformity with corporate policies and procedures in regulating credit risk activities. The Bank’s Executive Committee may approve deviations or exceptions, while the Board approves material exceptions such as large exposures, loans to directors, officers, stockholders and other related interests (“DOSRI”), and loan restructuring. Credit delegation limits are identified, tracked and reviewed at least annually by the head of Credit Administration Group together with the Credit Risk Manager.
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The Bank maintains credit records and documents on all borrowings and capture transaction details in its loan systems. The credit risk policies and system infrastructure ensure that loans are monitored and managed at all times. The Bank’s Management Information System provides statistics that its business units need to identify opportunities for improving rewards without necessarily sacrificing risk. Statistical data on product, productivity, portfolio, profitability, performance and projection are made available regularly. The Bank conducts regular loan review through the RMC, with the support of the RMO. The Bank examines its exposures, credit risk ratios provisions and customer segments. Accounts that turn delinquent are monitored via the automated Collections Systems. Approved collection efforts and strategies are defined in the system. Delinquent accounts are outsourced to collection agencies which get paid based on amounts collected. Loans with collaterals are foreclosed to recover losses. Restructuring of loans may be pursued in order to improve recovery of loan, and not to delay recognition of losses. Loans are subjected to impairment allowance whenever there is evidence of difficulty in generating recovery of the loan. The Bank’s restructured loan portfolio has been continuously dwindling. Majority of the big ticket accounts have been fully settled. Most of the successfully restructured accounts are considered current following a seasoning period of six consecutive installment periods. These have been reclassified to performing status and loan grades were upgraded as well. BSP Classification
In categorizing its loan portfolio, the Bank follows the BSP’s categorization of risk assets according to their risk profile. All risk assets, in particular the Bank’s loan portfolio, are either classified or unclassified. Those loans which do not have a greater than normal risk, and for which no loss on ultimate collection is anticipated, are unclassified. All other loan accounts, comprising those loan accounts which have a greater than normal risk, are classified as “especially mentioned”, “substandard”, “doubtful” or “loss” assets, and the appropriate loan loss allowance (in accordance with BSP guidelines) is made as follows:
BSP Risk Classification % Reserves
Especially mentioned 5
Substandard (secured) 10
Substandard (unsecured) 25
Doubtful 50
Loss 100
The following is a summary of the risk classification of the Bank’s gross loans and allowance for probable loan losses.
(In P millions) Unaudited
As of 31 October Audited
As of 31 December
Risk Classifications
2011 % 2010 % 2009 % 2008 %
Especially mentioned
2,356 3.92 1,915 3.47 1,892 3.93 2,308 5.47
Substandard (unsecured)
428 0.71 292 0.53 690 1.43 599 1.42
Substandard (secured)
450 0.75 596 1.08 1,244 2.58 1,159 2.75
Doubtful 689 1.15 663 1.20 412 0.86 293 0.69
Loss 2,945 4.90 2,665 4.83 1,635 3.40 1,554 3.68
Total Classified 6,868 11.42 6,131 11.11 5,873 12.20 5,913 14.02
Unclassified 53,277 88.58 49,057 88.89 42,251 87.80 36,274 85.98
Total 60,144 100.00 55,188 100.00 48,124 100.00 42,187 100.00
Allowance for Probable Losses
Specific 3,270 87.10 3,694 87.21 2,851 86.81 2,212 84.54
General 551 12.90 542 12.79 433 13.19 405 15.46
Total 3,821 100.00 4,236 100.00 3,284 100.00 2,617 100.00 Source: PSBank Note: Loan breakdown is net of unearned discounts
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Non-Performing Loans
Unless otherwise stated, the presentation of the Bank’s classification of its loan portfolio and related ratios in this section, including impairment losses and allowance for probable losses are on the basis of BSP guidelines. Under BSP guidelines, loans are classified as non-accruing (or past due) if (i) any repayment of principal at maturity or any scheduled payment of principal or interest due quarterly (or longer) is not made when due and (ii) in the case of any principal or interest due monthly, if the amount due is not paid and has remained outstanding for three months. In the case of (i), such loans are treated as nonperforming if the payment is not made within a further 30 days. In the case of (ii), such loans are treated as non-performing upon the occurrence of the default in payment. The following table shows the Bank’s non-performing loans, non-performing assets, allowances and restructured loans.
Unaudited As of 31 October
Audited As of 31 December
2011 2010 2009 2008
Non-performing loans (NPL), net of BSP fully provided loans
2,889 2,545 3,117 2,577
Total gross loans, net of BSP fully provided loans
67,669 62,294 57,051 45,480
NPL as a percentage of gross loans (%) 4.27 4.08 5.46 5.67
Real and other properties acquired (ROPOA, net of impairment
2,736 2,660 2,462 2,624
Non-performing assets (NPA) 7,684 7,267 6,873 6,354
NPA as a percentage of total assets (%) 6.75 7.37 8.20 8.87
NPA as a percentage of adjusted loans (%) 12.17 12.51 13.52 14.14
Allowance for probable loan losses 3,880 3,655 3,154 2,579
Allowance for probable losses (ROPOA) 250 254 260 119
Allowance for probable loan losses as a percentage of total NPL (%)
82.61 83.96 75.98 71.43
Allowance for probable losses as a percentage of NPA (%)
53.76 53.78 49.67 42.46
Total restructured loans 843 939 1,041 1,108 Source: PSBank
Deposit Liabilities
The Bank offers a wide range of deposit products that primarily cater to consumer and retail customers. Deposit products include: ATM Savings, Overseas Filipino Savings, Regular Passbook Savings, Passbook Savings with ATM, Regular Checking, Premium Checking, Prime Time Deposit, US Dollar Savings, US Dollar Time Deposit, and Premium US Dollar Time Deposit. The following table shows the Bank’s deposit liabilities according to type.
(in P millions) Unaudited
As of 31 October Audited
As of 31 December
2011 2010 2010 2009 2008
Current 9,420 8,018 7,170 8,188 6,394
Savings 10,676 9,943 10,148 9,404 8,608
Time 76,949 72,128 70,201 59,799 46,677
Total 97,045 90,089 87,519 77,391 61,678
Source: PSBank
Peso low-cost to total Peso deposit ratio is 19.8% while total low-cost to total deposit ratio is 20.7%. The Bank’s cost of deposit funds is typically at par with its competitors. The Bank lengthened the tenor
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of its funding liabilities by the introduction in 2001 of Prime TD for Peso Deposits and in 2008 of five-year USD TD for Dollar Deposits.
The following table shows the Bank’s deposit liabilities by currency.
(in P millions)
Unaudited As of 31 October
Audited As of 31 December
2011 % 2010 % 2009 % 2008 %
Current 9,420 10% 7,170 8% 8,188 11% 6,394 10%
Peso 9,420 10% 7,170 8% 8,188 11% 6,394 10%
Foreign 0 0% 0 0% 0 0% 0 0%
Savings 10,676 11% 10,148 12% 9,404 12% 8,608 14%
Peso 9,785 10% 9,275 11% 8,595 11% 7,941 13%
Foreign 891 1% 873 1% 809 1% 667 1%
Time 76,949 79% 70,201 80% 59,799 77% 46,677 76%
Peso 66,621 69% 58,439 67% 46,036 59% 34,655 56%
Foreign 10,328 11% 11,762 13% 13,763 18% 12,021 19%
Total 97,045 100% 87,519 100% 77,391 100% 61,678 100% Source: PSBank
As of 31 October 2011, Peso deposits comprise 88.4% of the Bank’s total deposit liabilities while the balance is from dollar deposits. Although the branch network is spread over the country, three-fourths of total deposit liabilities are from Metro Manila. Large fund providers (clients with deposits of at least P100.00 million) are monitored by Market Risk. Large fund providers comprise approximately one fourth of total deposit liabilities as of 31 October 2011.
Capital Adequacy
The following table shows the Bank’s capital base by category.
(in P millions) Unaudited As of 31 October
Audited As of 31 December
2011 2010 2009 2008
Tier 1 capital 11,922 9,960 9,433 8,558
Paid-up common stock 2,403 2,403 2,403 2,403
Surplus 6,516 5,364 5,182 4,868
Surplus reserves 979 846 730 636
Undivided profits 2,025 1,348 1,118 652
Deductions from Tier 1 1,172 1,012 1,701 1,751
Unsecured DOSRI 117 106 266 250
Deferred income tax 1,025 876 1,405 1,471
Goodwill 30 30 30 30
Total Tier 1 capital 10,750 8,948 7,732 6,808
General loan loss provisions 551 542 433 405
Adjusted Tier 1 capital 11,301 11,454 10,129 9,176
Deductions 1,255 831 788 376
Net Tier 1 Capital 10,046 8,532 7,338 6,619
Unsecured subordinated debt (Tier 2) - 1,964 1,964 1,964
Total qualifying capital 10,046 10,622 9,341 8,801 Source: PSBank
As of 31 October 2011, capital adequacy ratio was at 13.65%. This is expected to increase to 16.3% in 2012, inclusive of this planned P3.00 billion Tier 2 issuance in 1Q2012. As the thrift bank arm of Metrobank, the Bank is compliant with Basel II requirements and undergoes an annual ICAAP exercise. The target of the Bank is above 12.0% CAR even with the expansion of its loan portfolio.
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Basel III Impact
With the impending implementation of Basel III, the following are the potential impact to the Bank’s future operations:
Higher minimum Risk-based Capital Adequacy Ratio (“RCAR”) in view of the increase in the minimum common equity capital ratio plus the provisions for conservation and counter-cyclical buffers, and
Reduction of Qualifying Capital in view of capital instruments that no longer qualify as non-core Tier 1 or 2 capital.
Hence, there is for sure an even greater pressure to protect against losses and further build up the Bank’s core capital components and to more effectively manage its risk assets. Extent of impact, however, cannot be clearly quantified yet. The Bank will also have to provide additional liquid assets to comply with the new Liquidity Coverage Ratio that requires a bank to hold sufficient high-quality liquid assets to cover its total net cash flows over 30 days. In addition, it has to provide additional buffer for the compliance of the Net Stable Funding Ratio that requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.
Risk Management
Liquidity Risk Management
The goal of liquidity management is to make a timely payment on any of its financial obligations to customers or counterparties during normal and stress scenarios. It analyzes the net funding requirements under alternative scenarios and diversifies its funding sources thru the management of large fund providers. It has a liquidity contingency funding plan in place to address liquidity problems during liquidity stress scenarios. Daily and weekly cashflow is being managed by Treasury and reported to the Asset and Liability Committee (“ALCO”) during its weekly meeting. The monthly liquidity report is reported to Administrative Risk Management Committee (“ARMC”) /RMC/Board thru its Maximum Cumulative Outflow report which captures the entire assets and liabilities of the Bank. In liquidity position, the Bank ensures that it has more than adequate funds to meet maturing obligations. The Bank uses the Maximum Cumulative Outflow (“MCO”) Model to measure liquidity risk arising from the mismatches of its assets and liabilities. The Bank administers stress testing to assess its funding needs and strategies under different conditions. Stress testing enables the Bank to gauge its capacity to withstand both temporary and long-term liquidity disruptions. The Liquidity Contingency Funding Plan (“LCFP”) helps the Bank manage a liquidity crisis, whether under moderate, severe, or extreme stress scenario. Liquidity limits for normal and stress conditions cap the projected outflows on a cumulative and per tenor basis. The Bank discourages dependence on Large Funds Providers (“LFPs”) by monitoring their concentration as a percentage of total deposits and Deposit Funding Concentration Risk by monitoring high quality liquid assets vs. deposit run-offs. This ensures that the Bank will not be vulnerable to a substantial drop in deposit level should there be an outflow of large deposits. The ALCO is responsible for managing the liquidity of the Bank while Risk Management Office (“RMO”), ARMC, and RMC review and oversee the Bank’s overall liquidity risk management.
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Interest Rate Risk Management
The interest rate sensitivity gap report measures interest rate risk by identifying gaps between repricing dates of assets and liabilities. The Bank’s sensitivity gap model calculates the effect of possible rate movements on its interest rate profile. The Bank uses the sensitivity gap model to estimate its Earnings-At-Risk (“EAR”) should interest rates move against its interest rate profile. Its EAR limits are based on a percentage of PSBank’s projected earnings and capital for the year. The Bank also performs stress-testing analysis to measure the impact of various scenarios based on interest rate volatility and shift in the yield curve. The ALCO is responsible for managing the Bank’s structural interest rate exposure. Its goal is to achieve a desired overall interest rate profile while remaining flexible to interest rate movements and changes in economic conditions. RMO, ARMC, and RMC review and oversee the Bank’s interest rate risks. Market Risk Management
The Bank’s market risk policies and implementing guidelines are regularly reviewed by ALCO, ARMC, RMC and the Board to ensure that these are up-to-date and in line with changes in the economy, environment and regulations. The RMC and the Board set the comprehensive market risk limit structure and define the parameters of market activities that the Bank can engage in. The Bank utilizes various measurement and monitoring tools to ensure risk-taking activities are managed within instituted market risk parameters. The Bank’s trading portfolios are currently composed of peso- and dollar-denominated sovereign debt securities that are marked-to-market daily. The Bank uses Value-at-Risk (“VaR”) to measure the extent of market risk exposure arising from these portfolios. VaR is a statistical measure that calculates the maximum potential loss from a portfolio over a holding period, within a given confidence level. Its current VaR model is based on an historical simulation methodology with a one-day holding period and a 99.0% confidence level. The Bank also performs back testing to validate the VaR model, and stress testing to determine the impact of extreme market movements on its portfolios. The Bank has established position and modified duration limits for its trading portfolios. The Bank closely monitors its daily profit and loss against loss triggers and stop-loss limits. Key Operational Risks
Overall, the Bank’s Operational Risk exposure is assessed to be Moderate relative to the Bank’s large branch and ATM network, continuing expansion mode and competitive lending. As such, the Bank’s Key Operational Risk exposures and their corresponding risk mitigants/controls are as follows:
Regulatory Compliance Risk. This is primarily due to the mandatory credit allocations to Agri-Agra and MSME. The rest of the exposure is posed by recent major regulatory issuances such as the new requirements of the Updated AMLA Rules and Regulations.
Technology Risk. Given the Bank’s heavily automated operating environment, it makes sure that it continuously identifies and quantifies risks to the greatest extent possible and establishes controls to manage technology-associated risks through effective planning, proper implementation, periodic measurement and monitoring of performance.
Execution, Delivery and Process Management; Internal Fraud and External Fraud Risks. The Bank manages these types of risk via a strong set of Know-Your-Customer (“KYC”) controls in the account generation stage, adequate and regular audits conducted by the Internal Audit Group (“IAG”) as well as a centralized independent day-to-day transactions review that is facilitated by an online exception management system.
Business Risks
The Bank is exposed to all business risks that confront all banks in general, such as: credit, market, interest, liquidity, legal, regulatory and operational risk. The Bank’s risk management structure and process that serve as mechanism to identify, assess and manage these risks are as follows:
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The Board of Directors approves risk management strategies and policies and ensures that all risk management initiatives and activities contribute to fulfilling the Bank’s over-all objective;
The Risk Management Committee formulates policies and strategies with regard to identifying, measuring/tracking, managing and limiting risks. The committee also recommends limits on decision-making authority, transactions and material exceptions and processes for making exceptions;
The Executive Committee / Credit Committee reviews and evaluates credit proposals and recommends/ incorporates additional conditions, requirements, changes on credit applications;
The Administrative Risk Management Committee is the management level counterpart of the Board level RMC and it helps formulate policies and strategies with regard to identifying, measuring/tracking, managing and limiting the Bank’s risks. It also recommends limits on decision making authority, transactions and material exceptions, and processes for making exceptions;
The Asset-Liability Committee oversees the structure of the Bank’s entire Balance Sheet, including significant off-balance-sheet positions and decide on the appropriate structural mismatch, liquidity and other asset and liability positions;
The Audit Committee oversees the Bank’s overall operating environment. It sets internal control monitoring policies and ensure that these are relevant and adequate for the Bank’s operations;
The Trust Committee is responsible for establishing fiduciary policies and principles and monitors all trust activities of the Bank;
The Corporate Governance Committee ensures that the conditions whereby the Board of Directors and management acts are in the interest of the Bank and its shareholders.
Internal Audit, Quality assurance and Compliance reviews are undertaken on a continuing basis to ensure that business operations comply with laws, regulations, policies and prescribed processes.
Recent Fraud Cases or Money Laundering Cases
There have been no significant fraud nor any known money laundering cases recently encountered.
Research and Development
The Bank utilizes various consumer research studies to develop new or enhance existing products and marketing programs. It maximizes the use of customer surveys to measure customer satisfaction drivers such as speed in processing, complaint handling and problem resolution, and as a feedback mechanism, to improve customer service. The Bank also supports heavily its products and service delivery with powerful technology applications.
Involvement in Certain Legal Proceedings
Several suits and claims relating to the Bank’s lending operations and labor-related cases remain unsettled. In the opinion of the management, these suits and claims, if decided adversely, will not involve sums having material effect on the financial statements.
Compliance with Leading Practices on Corporate Governance
The Bank’s Corporate Governance revolves around the principles of fairness, accountability and transparency. Corporate Governance in PSBank involves the manner in which the business and affairs of banks are governed by the board of directors and senior management, and affects how the Bank:
Sets corporate objectives;
Operates the Bank’s business on a day-to-day basis;
Meets the obligation of accountability to their shareholders and take into account the interests of other recognized stakeholders;
Aligns corporate activities and behaviors with the expectation that banks will operate in a safe and sound manner, and in compliance with applicable laws and regulations; and
Protects the interests of depositors. The Bank recognizes that effective corporate governance practices are essential to achieving and maintaining public trust and confidence in the banking system, which are critical to the proper
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functioning of the banking sector and economy as a whole. Poor corporate governance may contribute to the Bank’s failure, which can pose significant consequences due to potential impact on the public’s trust and patronage of the Bank. In addition, poor corporate governance can lead stakeholders to lose confidence in the ability of the Bank to properly manage its assets and liabilities, including deposits, which could in turn trigger a bank run or liquidity crisis. Indeed, in addition to the Bank’s responsibilities to shareholders, banks also have a responsibility to their depositors.
The following are the sound corporate governance principles being observed by the Bank:
1. Board members are qualified for their positions, have a clear understanding of their role in corporate governance and can exercise sound judgment about the affairs of the Bank. The Bank’s Board of Directors has undergone the required Corporate Governance Training. They understand and execute their oversight role, including understanding the Bank’s risk profile.
The Board approves the overall business strategy of the Bank, including approval of the overall risk policy and risk management procedures. They avoid conflicts of interest, or the appearance of conflicts, in their activities with, and commitments to, other business interests.
The Board likewise provides oversight of the Senior Management of the Bank by exercising its duty and authority to question and insist upon straightforward explanations from Management, and receives on timely basis sufficient information to judge the performance of Management.
The specialized oversight committees have taken an active role in ensuring sound judgment in the exercise of the affairs of the Bank:
a. Risk Management Committee – provides oversight of Senior Management’s activities in managing credit, market, liquidity, operational, compliance, reputation and other risks of the Bank. It also develops a written plan defining the strategies for managing and controlling risks, and it communicates the risk management plan to affected parties.
b. Compensation and Remuneration Committee – provides oversight of remuneration of Senior Management and other key personnel ensures that compensation is consistent with the Bank’s culture, objectives, strategy, and control environment, as reflected in the formulation of compensation policy. It establishes a formal and transparent procedure for developing a policy on executive remuneration.
c. Nominations Committee – provides assessment of Board effectiveness and directs the process of renewing and replacing Board members. It reviews and evaluates all persons nominated to the Board as well as those nominated to other positions requiring appointment by the Board.
d. Corporate Governance Committee – provides assistance to the Board in fulfilling its corporate governance responsibilities. It ensures the Board’s effectiveness and due performance of corporate governance principles and guidelines.
e. Audit Committee – provides oversight of the Bank’s Financial Reporting and Control and oversees the work of internal and external audit functions; it monitors and evaluates the adequacy and effectiveness of the internal control system.
2. The Board approves and oversees the Bank’s strategic objectives and corporate values that are
communicated throughout the banking organization. The Board likewise avoids conflict of interests.
3. The Board sets and enforces clear lines of responsibility and accountability throughout the
organization, consistent with prudent board policy, transparent and at an arm’s length basis.
4. The Board ensures that there is appropriate oversight by Senior Management consistent with Board policy.
Senior Management consists of a core group of individuals who are responsible for overseeing the day-to-day management of the Bank. These individuals have the necessary skills to manage the
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business under their supervision as well as have appropriate control over the key individuals in these areas.
Senior Officers contribute a major element of the Bank’s sound corporate governance by overseeing line managers in specific business areas and activities consistent with policies and procedures set by the Bank’s Board. Senior Management, under the guidance of the Board of Directors, undertakes an effective system of internal controls and wise decision-making.
5. The Board and Senior Management effectively utilize the work conducted by the internal audit function, external auditors, and internal control functions. The Board recognizes and acknowledges that independent, competent and qualified auditors, as well as internal control functions, which include Compliance and Legal, are important in its operations. In particular, the Board utilizes the work of auditors and control functions to provide an independent check and assurance on the information received from Management on the operations and performance of the Bank. The Bank engages external auditors to audit and express an opinion on the Bank’s financial statements. The auditors consider internal controls relevant to the Bank’s preparation and fair presentation of the financial statements. The Bank likewise ensures that external auditors understand their duty to the Bank to exercise due professional care in the conduct of audit reviews/examination.
6. The Bank is governed in a transparent manner. Appropriate public disclosure is a discipline that is carefully undertaken by the Bank being a publicly listed bank. It facilitates market discipline and thereby sound corporate governance.
7. The Board and Senior Management understand the Bank’s operational structure.
While the Board of Directors is responsible for overall oversight and approval of policies, Senior Management, on the other hand, is responsible for identifying and managing material risks arising from all of the Bank’s activities. Regularly, Senior Management reports to the Board covering the operations of the Bank: risk issues, compliance issues and internal audit findings.
8. The Board together with the Executive Management, continue to undertake efforts to improve
governance and oversight structures and processes in the organization.
9. The Board and Senior Management have conscientiously adhered to the Bank’s Manual of Corporate Governance and as such, no deviation is reported for disclosure purposes.
10. All directors have attended and completed a two-day seminar on Corporate Governance, per
certification submitted to SEC dated 25 January 2011.
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MANAGEMENT, EMPLOYEES, AND SHAREHOLDERS
Organizational Chart
The figure below shows the Bank’s organizational chart as of 31 October 2011.
Directors
The names, positions, and educational attainment of the Bank’s directors follow. The members of the Board of Directors are elected at the Annual Stockholders’ Meeting and hold office until the next annual meeting and their respective successors have been elected.
Name Position
Jose T. Pardo Chairman / Independent Director
Arthur V. Ty Vice Chairman
Pascual M. Garcia III Director / President
David T. Go Director
Amelia B. Cabal Director
Maria Theresa G. Barretto Director
Margaret T. Cham Director
Joaquin Aligguy Director
Samson C. Lim Independent Director
JOSE T. PARDO, Chairman / Independent Director: Chairman of the Bank since 2003. Former Secretary, Department of Finance and Department of Trade and Industry. Member of the Board of Governors, Asian Development Bank and the World Bank. Director of National Grid Corporation of the Philippines. First graduate of the Harvard-DLSU Advisory Program. BS Commerce-Accountancy and MBA, De La Salle University. ARTHUR V. TY, Vice Chairman: Vice Chairman since 2001. President, Metrobank. Director, Metrobank Card Corporation. Chairman, Metrobank Technology, Inc. Vice Chairman, Metrobank Foundation, Inc. BS Economics, University of California-Los Angeles. MBA graduate, Columbia University. PASCUAL M. GARCIA III, Director / President: President since 2001. Adviser, Metrobank. Director, Toyota Financial Services Philippines Corp. and Sumisho Motor Finance Corporation. Trustee, Chamber of Thrift Banks. BS Commerce, Ateneo de Zamboanga.
Response
Recovery
BOARD OF DIRECTORS
Mktg& Comm
Bus InfoMgmt
Services
HumanResources
Risk Mgmt Com
Risk Mgmt Ofc ARMC
Audit Com
Internal Audit Compliance
Corp Gov Com Trust Com
Trust Division
Nom Com Comp/Rem Com
President
Security Command Mgmt Committees
Information Security
Ex Com
AssetSales
ATM
Remote Banking
Mobile Banking
MMProvincial
In-House Sales
Field Sales
Tele-Sales
BranchBankingChannel
DirectSales
Channel
IndirectSales
Channel
Dealers
Developers
MMProvincial
MMProvincial
Agents
ElectronicDeliveryChannel
SpecializedLending
LargeEnterprise
CustomerService
EVP
Treasury FinanceLoanOps
Operations ITCreditAdmin
SystemsQuality
Assurance
Branches
AutoMortgagePersonal
Loans Support
Branch OPS& Service
Network
SME
Auto Asset Sales
ROPA Asset Sales
Business Development
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DAVID T. GO, Director: Director since 2011. Member, Board of Advisor / Director, Metropolitan Bank & Trust Company. Director, Metropolitan Bank (China), Ltd. President, Sumaco Manufacturing Corp. Professional Lecturer, University of the Philippines – Diliman. AMELIA B. CABAL, Director: Director since 2011. Director, Metrobank. Supervisor, Metrobank (China) Limited. Member, External Audit Committee of the International Monetary Fund. Former Senior Adviser of SyCip Gorres Velayo & Co.’s (“SGV”) Regulatory Matters and Financial Markets. Former Vice Chairman and Head, Financial Markets Practice in SGV. MA. THERESA G. BARRETTO, Director: Director of the Bank since 2006, Director, Endel Enterprises. BS Commerce, Assumption College and Curso de Estudios Hispanicos, La Universidad de Madrid in Spain. MARGARET TY CHAM, Director: Director since 2004. Director, Orix Metro Leasing Corp. and Federal Land Inc. President, Glam Holdings Corp. and Glamore Holdings Corp. Vice President, Great Mark Resources Inc., Global Treasure Holdings Inc., Grand Titan Capital Holdings Inc. Vice President, Metrobank Foundation. Vice President / Corporate Secretary, Norberto and Tytana Ty Foundation. BS Humanities, De La Salle University. JOAQUIN ALIGGUY, Director: Director since 2009. Corporate Secretary, Manila Doctors Hospital. Director, Asia Pacific Land (Nanjing) Ltd., and Aspac Land Development (Shanghai) Co. Ltd. Adviser, Metrobank Foundation. Trustee, Kaisa Heritage and Angelo King Foundations. AB Philippine Literature, University of the Philippines. SAMSON C. LIM, Independent Director: Director since 2008. President, Automatic Centre and Blims Fine Furniture. Chairman, Collins International Trading Inc. and Francorp Philippines. President, Philippine Chamber of Commerce and Industry. BS Liberal Arts with honors, Ateneo de Manila University. Masters in Business Economics, University of Asia and the Pacific. Completed the Asian Institute of Management Top Management Program.
Executive Officers
The names, positions and educational attainment of the Bank’s executive officers follow. The Executive Officers are appointed/elected by the Board at the organizational meeting following the stockholders’ meeting, each to hold office for a period of one year.
Name Position
Pascual M. Garcia III President
Jose Vicente L. Alde Executive Vice President
Perfecto Ramon Z. Dimayuga, Jr. Senior Vice President
Noli S. Gomez Senior Vice President
Yolanda L. Dela Paz Senior First Vice President
Ma. Patricia L. Castaneda First Vice President
Norberto M. Coronel III First Vice President
Jose Jesus B. Custodio First Vice President
Neil C. Estrellado First Vice President
Francis C. Llanera First Vice President
Ismael S. Reyes First Vice President
Jose Martin A. Velasquez First Vice President
Leah M. Zamora First Vice President
Andre Manuel L. Abellanosa Vice President
Raye Claudine Q. Baron Vice President
Minda L. Cayabyab Vice President
Emma B. Co Vice President
Jose Nazario R. Cruz Vice President
Dan Jose D. Duplito Vice President
Abigail P. Melicor Vice President
Antonio Jude Martin P. Montinola Vice President
Edeza A. Que Vice President
Stella A. Sampayan Vice President
Victor Albert A. Saplala Vice President
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Name Position
Melissa F. Tong Vice President
Mary Jane M. Valero Vice President
Pablito C. Veloria Vice President
Ma. Rita Rosette R. Villamin Vice President
PASCUAL M. GARCIA III, President: President of the Bank since September 2001. Member, Assets and Liabilities Committee. (See Board of Directors for more information.) JOSE VICENTE L. ALDE, Executive Vice President: Joined the Bank in October 2007. Member, Assets and Liabilities, Credit, Investment, IT Steering, Personnel and Emergency Committees. Former Vice President, ABN-AMRO Bank. Bachelor in Computer Science degree with honors, University of the Philippines. MBA, Asian Institute of Management. PERFECTO RAMON Z. DIMAYUGA, JR., Senior Vice President: Joined the Bank in January 2006. Chief Finance Officer and Head, Finance Group. Member, Assets and Liabilities, IT Steering, Investment, Personnel, and Outsourcing Committees. Worked in the Treasury Departments of Bank of the Philippine Islands, DBS Bank Phils, Inc., Mindanao Development Bank, Citytrust Banking Corporation and Rizal Commercial Banking Corporation. AB in Economics, Ateneo de Manila University and MBA, University of the Philippines. NOLI S. GOMEZ, Senior Vice President: Joined the Bank in October 2001. Head, Operations Group. Member, Assets and Liabilities, Anti-Money Laundering, Policy, Personnel, Outsourcing, IT Steering and Emergency Committees. Former Chief Risk Officer and Head of Systems and Methods, DBS Bank Phils. and Systems Management Officer of the Bank of the Philippine Islands. BS Civil Engineering, Mapua Institute of Technology. Licensed Civil Engineer with distinction. YOLANDA L. DELA PAZ, Senior First Vice President: Joined the Bank in September 1983. Head, Specialized Lending Desk. Member of the Credit Committee. Former Supervisor, Equitable Computer Services and Officer-in-Charge, Equitable Banking Corporation branch. Bachelor of Business Administration, major in Accounting, University of the East. MA. PATRICIA L. CASTANEDA, First Vice President: Joined the Bank in August 2005. Head, Risk Management Office. Member, Assets and Liabilities, Investment, Anti-Money Laundering and IT Steering Committees. Former Market Risk Officer, BDO Private Bank. Former Corporate Finance Manager, TA Bank. Former Risk Management Officer, Bank of the Philippine Islands. BS Business Economics with honors, University of the Philippines. NORBERTO M. CORONEL III, First Vice President: Joined the Bank in December 2007. Head, Large Enterprise Group. Member, Assets and Liabilities Committee. Former FVP and Head of Equity Underwriting and Placements, Investment & Capital Corporation of the Philippines. Former AVP of Investment Banking Division, United Coconut Planters Bank. BS Business Management, Ateneo de Manila University. MBA, University of the Philippines. JOSE JESUS B. CUSTODIO, First Vice President: Joined the Bank in December 2001. Head, Indirect Sales Channel. Member, Assets and Liabilities Committee. Former Head of Auto Loans-Retail Sales, Citytrust Banking Corporation. Former Fleet and Floorstock Department Head, BPI Family Savings Bank. BS Business Management, Ateneo de Manila University. NEIL C. ESTRELLADO, First Vice President: Joined the Bank in March 2002. Head, Information Technology Division. Member, Anti-Money Laundering, Outsourcing, IT Steering and Emergency Committees. Former Project Leader, Oversea-Chinese Banking Corporation Ltd. Former Lead IT Analyst, Development Bank of Singapore. Former Project Manager, DBS Philippines (formerly Bank of Southeast Asia). BS Mathematics, Ateneo de Manila University. FRANCIS C. LLANERA, First Vice President: Joined the Bank in December 2007. Head, Loan Operations Group. Member, Assets and Liabilities and Anti-Money Laundering Committees. Former Credit Card Collections Head, Union Bank of the Philippines. Formerly with American International Group’s Credit Risk Management. BS Commerce, University of Santo Tomas.
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ISMAEL S. REYES, First Vice President: Joined the Bank in September 2008. Head, Branch Banking Group. Member, Assets and Liabilities Committee. Former Division Head of Market Management, iRemit Inc. Former Head and Operations Manager of the Funds Transfer Department, Bank of the Philippine Islands. BS Economics, University of Santo Tomas. JOSE MARTIN A. VELASQUEZ, First Vice President: Joined the Bank in September 2004. Head, Treasury Group. Member, Assets and Liabilities and Investment Committee. Former Deputy Treasurer, First Metro Investment Corporation. Former Senior Dealer, BPI Capital Corporation. BA Economics and BS Commerce major in Management of Financial Institutions and MBA, De La Salle University. Registered Fixed Income Salesman with the Securities and Exchange Commission and Treasury Certified Professional with the Ateneo-Bankers Association of the Philippines. LEAH M. ZAMORA, First Vice President: Joined the Bank in April 2010. Head, Business Information Management Services Division. Member, Assets and Liabilities and IT Steering Committees. Former Vice President for Financial Planning and Analysis, GE Money Bank Philippines. BS Accounting, De La Salle University. Certified Public Accountant. ANDRE MANUEL L. ABELLANOSA, Vice President: Joined the Bank in February 2003. Head, Treasury Marketing and Currencies Division under Treasury Group. Member, Assets and Liabilities Committee. Former Senior Trader, BPI Capital Corporation. Former Head, Foreign Exchange Trading, DBS Forex Corporation. BS Management, Colegio de San Juan de Letran. Registered Fixed Income Salesman with the Securities and Exchange Commission and Treasury Certified Professional with the Ateneo-Bankers Association of the Philippines. RAYE CLAUDINE Q. BARON, Vice President: Joined the Bank in August 2009. Head, Process Management Division under Operations Group. Member, Policy, Outsourcing and Emergency Committees. Former Senior Assistant Vice President for Project Management and Operations Control Department, AIG PhilAm Savings Bank Inc. BS Business Management, Ateneo de Manila University. MBA, University of the Philippines. MINDA L. CAYABYAB, Vice President: Joined the Bank in May 1998. Head, Financial Accounting and Services Division under the Finance Group. Former Senior Auditor, Joaquin Cunanan PricewaterhouseCoopers Phils. BS Business Administration, major in Accounting degree with honors, Pamantasan ng Lungsod ng Maynila. Certified Public Accountant. EMMA B. CO, Vice President: Joined the Bank in December 2001. Chief Audit Executive and Head, Internal Audit Group. Member, Anti-Money Laundering Committees. Former Senior Manager for Audit, Mercator Group. Former IT Audit Officer, Union Bank of the Philippines. BS Commerce, major in Accounting, University of Santo Tomas. Bachelor of Laws, Lyceum of the Philippines. MS in Information Management, Ateneo de Manila University. Certified Public Accountant and lawyer. JOSE NAZARIO R. CRUZ, Vice President: Joined the Bank in August 2001. Chief Compliance Officer. Formerly Assistant Vice President, DBS Bank Philippines. Former Assistant Vice President, Rizal Commercial Banking Corp. Former Country Representative, RCBC Hong Kong. BS Mathematics and MBA, Far Eastern University. Bachelor of Laws, Bulacan State University. DAN JOSE D. DUPLITO, Vice President: Joined the Bank in March 2005. Head, Information Security Department under the Office of the President. Member, IT Steering Committee. Former Information Security Consultant, TIM Corporation and I-Sentry Security Services. BS Mechanical Engineering, University of the Philippines. ABIGAIL P. MELICOR, Vice President: Joined the Bank in March 2006. Head, Indirect Mortgage Channel. Member, Assets and Liabilities Committee. Former Channel Head– Senior Manager for Personal Loans, Standard Chartered Bank. Former Assistant Manager, AIG Credit Cards. BS Commerce major in Economics, University of Santo Tomas. ANTONIO JUDE MARTIN P. MONTINOLA, Vice President: Joined the Bank in March 2009. Head, Electronic Channels Group. Member, Assets and Liabilities and Emergency Committees. Former Group Account Director, Harrison Communications Inc. – McCann-Erickson Philippines. Former Business Unit Director, Arc Worldwide – CRM/Digital Agency of Leo Burnett. BS in Interdisciplinary Studies, Ateneo de Manila University.
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EDEZA A. QUE, Vice President: Joined the Bank in October 2005 as Credit Risk Manager. Former Credit Risk Manager for Consumer Banking, Standard Chartered Bank. Former Risk Management Officer, American International Group Credit Card Co. BS Statistics with honors and MS in Statistics, University of the Philippines. STELLA A. SAMPAYAN, Vice President: Joined the Bank in January 2009. Head of the Bank’s Trust Division. Member, Assets and Liabilities and Investment Committees. Former Funds Business Head, ING Bank NV-Manila. Former Trust Department Head, American Express Bank. BS Business Administration, major in Management of Financial Institutions, De La Salle University. Passed the Trust Operations and Investment Management course of the Trust Institute Foundation of the Philippines. VICTOR ALBERT A. SAPLALA, Vice President: Joined the Bank in June 2002. Head, IT Systems, Operations and Support Department under Information Technology Division. Member, IT Steering and Emergency Committiees. Former Associate Consultant, SQL*Wizard, Inc. Former Database Administrator, Bayan Telecommunication Inc. BS Management Information Systems, Ateneo de Manila University. Oracle Certified Professional DBA. MELISSA F. TONG, Vice President: Joined the Bank in December 2010. Head, Business Development Division under the Branch Banking Group. Former Unit Head for Cash Management Services and Head of Retail Sales and Marketing, BDO Unibank. Formerly Regional Head for Europe, iRemit. BA in Organizational Communication and BS in Commerce major in Marketing Management, De La Salle University. MARY JANE M. VALERO, Vice President: Joined the Bank in August 2002. Head, Customer Service Division. Former Front Office Manager, Mandarin Oriental Hotel Manila. Duty Manager, Westin Philippine Plaza. BS Psychology and BA Guidance and Counseling, St. Scholastica’s College. PABLITO C. VELORIA, Vice President: Joined the Bank in September 2006. Head, General Services Division. Former Head of Consumer Credit Evaluation, Field Support, Credit Investigation, Housing Loan Evaluation, Share Finance Credit and Mortgage Credit Investigation, BPI Family Savings Bank. BS Civil Engineering, Adamson University. MA. RITA ROSETTE R. VILLAMIN, Vice President: Joined the Bank in February 2003. Head of Human Resources Group. Member, Personnel Committee. Formerly Senior Manager for Human Resources, SM Supermalls. Formerly Training Manager, Litton Mills. BS Hotel and Restaurant Management, University of Santo Tomas.
Number of Employees
PSBank’s existing and projected manpower complement is as follows:
As of 31 December 2010 As of 31 October 2011
Senior Officers 60 54
Junior Officers 841 841
Staff 1,854 1,774 Total 2,755 2,669
As of 31 October 2011, the personnel complement of the Bank is comprised of 2,669 employees. Of the total, 31.5% are engaged in a professional managerial capacity and classified as Junior Officers. The rank-and-file employees of the Bank account for 66.5%. The remaining 2.0% comprises the Bank’s senior officers. Although its rank and file employees are unionized, the Bank has been strike-free for its entire history. In 2010, PSBank started implementing a new Collective Bargaining Agreement (“CBA”) that provides salary increases and enhanced benefits in the next three years for rank-and-file employees. The Bank also recognizes the importance of becoming successful not only in its products and services but also in its human resources. Emphasis is now on employee training and development to achieve the Bank’s current mindset on operations quality and efficiency, service quality and effective sales. As of
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31 October 2011, the Bank’s annual average number of training hours per employee stood at 10.10 hours.
Shareholders
The Bank’s Top 10 shareholders as of 31 October 2011 are as follows:
Name of Stockholders No. of Shares % of Total
1. Metropolitan Bank and Trust Co. 182,535,895* 75.98%
2. PCD Nominee Corporation (Filipino) 14,806,182** 6.16%
3. Dolor, Danilo L. 12,610,891 5.25%
4. Dolor, Erlinda L. 7,605,832 3.17%
5. De Leon, Maria Soledad S. 4,000,000 1.66%
6. PSB TID FAO TA#94-00-2-2-006 3,001,369 1.25%
7. De Leon, Gian Carlo S. 2,741,378 1.14%
8. De Leon, Leonard Frederick S. 2,598,334 1.08%
9. De Leon, Alvin Benjamin S. 2,437,887 1.01%
10. De Leon, Kevin Anthony S. 2,407,964 1.00%
* includes shares lodged with PCD Nominee Corporation (Filipino) ** net of Metropolitan Bank and Trust Co. lodged shares equivalent to 29,109,918 shares
Total number of stockholders as of 31 October 2011 is 1,681.
The Bank’s principal shareholders are comprised of four major groups with Metrobank, owning 75.98%, PCD Nominee Corporation (Filipino) owning 6.16%, the Dolor Family collectively owning 8.42%, and De Leon Family owning 5.89%. Other minority shareholders hold the balance of 3.60%.
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PHILIPPINE BANKING SECTOR
The following is a general discussion of the Philippine Banking Industry. It is based on the laws, regulations and administrative rulings in force as at the date of this Offering Circular and is subject to any changes in law occurring after such date, which changes could be made on a retroactive basis. It does not purport to be a comprehensive description of all of the aspects of the industry that may be relevant to a decision to purchase, own or dispose of the Notes. Prospective purchasers should consult their advisors as to the consequences of acquiring, holding and disposing of the Notes.
Overview
The Philippine banking industry is a P7.02 trillion industry composed of 38 Universal and Commercial Banks (“UB/KBs”), 72 thrift banks and 629 rural banks (as of June 30 2011). Out of the total banking industry assets, 89.0% are from UBs and KBs. Thrift banks account for 8.0%, while rural and cooperative banks account for the remaining 3.0%. Total assets of the banking system rose by 11.5% as of June 30 2011 driven by a growth in loans and deposits. These remained primarily funded by deposit liabilities (73.5%) and capital accounts (12.0%).
Philippine Thrift Banks
The Philippine thrift banking industry is dominated by BPI Family Savings Bank (“BPI Family”), Philippine Savings Bank (“PSBank”), and RCBC Savings Bank (“RCBC Savings”), which are subsidiaries of universal banks. As of end-2010, these were the top three thrift banks in terms of total assets, loans, deposit liabilities and equity. The top three thrift banks accounted for about half (49.5%) of the thrift banking sector’s total assets while the top 15 accounted for 82.7%; the remaining 17.3% is accounted for by 58 other thrift banks. The table below shows the top five thrift banks in the Philippines as of December 2010. (P millions) Total Assets Total Equity Total Loans Total Deposits
BPI Family Savings Bank 139,295 12,592 93,262 122,327 Philippine Savings Bank 104,149 11,609 53,208 87,519 RCBC Savings Bank 57,936 6,867 34,785 48,089 Planters Development Bank 50,749 3,712 31,271 38,529 HSBC Savings Bank 25,337 2,639 7,894 21,456 Source: BSP reports and publications
The chart below shows the top 15 Thrift Banks in the Philippines by Total Assets as of December
2010.
6
6
6
7
9
12
11
22
22
24
25
51
58
103
139
Malayan
UCPB Savings
LBC Devt
First Consolidated
City Savings
Real Bank
Citibank Savings
Robinsons
Phil Business
Sterling
HSBC Savings
Planters Devt
RCBC Savings
PSBank
BPI Family
Top 15 Thrift Banks by Assets (as of 31 December 2010)amount in P billions
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Balance Sheet Growth
Total assets of the banking system rose by 11.5% to P7.02 trillion as of 30 June 2011, driven primarily by increases in loans and deposits. Given the continued low interest rate environment in 2011, the banking system’s loan portfolio (excluding interbank loans) expanded by 17.1% to P3.04 billion in the first half of 2011, twice as high as the 8.5% growth recorded for the same period in 2010. As of 30 June 2011, total deposits grew by 8.5% to reach P5.16 billion reflecting consumers’ continued confidence in the banking system. Loans-to-deposits ratio grew further to 68.8% from 66.1% as the acceleration in loans outpaced deposit growth. Additional liquidity is provided by the banking system’s special deposit accounts (“SDA”) with the BSP which was at P1.70 trillion as of end-2011, growing by 33.9% from the P1.20 trillion recorded in 2010. Capital accounts also increased by 15.3% to P844.5 billion as of 30 June 2011, much higher than the 12.3% growth recorded in the same period in 2010. In preparation for Basel III, Philippine banks have started taking action to further improve their capital base to support their growth. In 2011, banks like BDO and PNB raised Tier 2 capital in line with the BSP’s new guidelines regarding qualifying capital under Basel III rules.
Asset Quality
The banking system’s asset quality continued to improve as NPL / Gross Loans (excluding interbank loans) eased down to 3.1% as of 30 June 2011 from 3.9% in 2010. The adoption of prudent lending standards and adequate loan loss provisioning helped banks maintain minimal levels of bad debts. The loan exposure of banks remained covered as the banking system’s declining NPL pushed up the NPL coverage ratio to 103.9% as of 30 June 2011 from 97.6% as of end-2010, 93.1% in 2009, 86.0% in 2008, and from less than 50.0% in 2001. NPA / Gross Assets was down to 3.6% in the first half of 2011 from 4.4% for the same period in 2010 while the NPA Coverage Ratio also increased to 56.0% from 50.5%. Net ROPA also declined by 9.1% to P133.6 billion while ROPA coverage slightly grew by 1.8% to 21.1% as of 30 June 2011. The banking system remained adequately capitalized with CAR (solo basis) up at 16.5% as of 30 June 2011 compared to 15.2% for the same period in 2010. CAR continued to exceed the minimum standard set by BSP at 10.0% and Bank of International Settlements (“BIS”) at 8.0%.
Profitability
The banking system’s strong performance persisted in the first half of 2011 on the back of positive results from lending operations. Net profit as of 30 June 2011 was at P51.9 billion, 28.0% higher than the P40.6 billion recorded for the same period in 2010. Return on average equity also increased to 13.0% in the first half of 2011 from 12.2% in 2010, 10.8% in 2009 and 10.7% in pre-crisis 2007. With the BSP raising key policy rates by 50bps for the first half of 2011, yield for earning assets and funding costs continued to decline to 6.0% and 2.1%, respectively. This led to a slight decrease in interest spread to 3.9% as of 30 June 2011 from 4.1% for the same period in 2010. Net interest margin also decreased by the same amount for the period at 4.0%. However, given the acceleration of banks’ loan portfolio, net interest income grew by 7.0%, much higher than the 1.8% growth for the same period in 2010, to P114.3 billion as of 30 June 2011. The industry’s cost to income ratio also slightly improved to 63.2% in 30 June 2011 from 64.5% for the same period in 2010.
Industry Outlook
The first three quarters of 2011 have seen global oil and food prices go up due to the continuing conflict in the Middle East, natural disaster in Japan and sustained global strong demand for commodities. Coupled with the continuing debt problems of the United States and Europe, the global financial climate has been volatile. Philippine inflation has averaged 4.3% in the first nine months,
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prompting the BSP to raise key policy rates by 50 bps and banks’ reserve requirements by 200 bps. T-bill and T-bond rates have also fallen to historic lows, as a result of the Philippine market’s high liquidity and investors’ flight to safety. Due to market volatility, UB/KBs have turned their focus on expanding their loan portfolios and supporting the growth of the Philippine economy. This becomes more important as Gross Domestic Product (“GDP”) only grew by 3.6% for the first three quarters of 2011, below the forecast range of 7.0-8.0%. Banks have also indicated their interest in funding the Public Private Partnership (“PPP”) program prioritized by the government. For thrift and rural banks, the expansion of their lending businesses has focused on consumer and micro, small and medium enterprise (“MSME”) loans. Mortgage and auto loans will continue to grow due to the low interest rate environment and the on-going influx of Overseas Filipino Workers’ (“OFW”) remittances. Consolidation is also expected to persist given the recent increase in the minimum capital requirements and increasing competitiveness of UB/KBs in their niche markets.
Key Growth Drivers
Robust GDP Growth
Real GDP grew by 7.6% in 2010, boosted by remittance-driven consumption, investments and net exports. A significant part of the high growth in GDP was due to recovery from a low base in 2009, indicating that these growth rates may not continue in 2011 and beyond without structural changes in the economy. The National Economic Development Authority (“NEDA”) initially set an ambitious 7.0-8.0% GDP growth as target for 2011. However, due to the continued slow recovery of the global economy leading to lower export levels, the continuing debt crisis in Europe, the conflict in the Middle East, and supply chain disruptions from the Japan natural disaster, Philippine GDP growth in the first three quarters of 2011 was 3.2%, below the government’s forecast range. Also contributing to this slow growth is government’s under spending for infrastructure projects in the first half of the year. This saw a deceleration in public construction activity by 51.2%, compounded by the delay in the implementation of the Private Public Partnership Program of the government. With this, analysts revised forecasts to a slower average annual growth of 4.8% for 2011-2012 from an initial 5.1%. OFW Remittances
The global economic crisis had impacted on the growth of OFW remittances: from double-digit growth rates in 2008, these grew by 6.0% in 2009 and slightly improved to 8.0% in 2010. Despite slower growth, remittances posted a record high in terms of amount at USD18.8 billion in 2010. Even as the U.S. and a number of economies in the Eurozone continued to face difficult economic conditions, the January to November remittances grew by 7.3% to USD18.3 billion as of November 2011. The sustained overseas demand for Filipino manpower helped support the flows of remittances. Stable Interest Rates
The December inflation rate eased to 4.2% in December 2011, from 4.8% in November, bringing the annual average for 2011 to 4.8%. The BSP has set an inflation target of 3.0-5.0% for 2011 to 2014 and is expected to continue its growth-supportive interest rate policy. At its 19 January 2012 meeting, the Monetary Board decided to reduce the BSP’s key policy interest rates by 25 basis points to 4.25%. The Monetary Board’s decision was based on its assessment that the inflation outlook remains comfortably within the target range. The Monetary Board expects that average annual inflation rates to fall within the lower half of the 3.0-5.0% target range until 2013. Weaker global growth prospects are expected to ease pressures on global commodity prices. However, the impact of strong capital inflows on domestic liquidity and the effect of geopolitical tensions in the Middle East and North Africa region on global oil prices may continue to pose upside risks to inflation.
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BANKING REGULATIONS AND SUPERVISION
The following is a general discussion of the Philippine Banking Regulation and Supervision. It is based on the laws, regulations, and administrative rulings in force as at the date of this Offering Circular and is subject to any changes in law occurring after such date, which changes can be made on a retroactive basis. It does not purport to be a comprehensive description of all of the laws, regulations, and administrative rulings of the Philippine banking industry.
General
The New Central Bank Act of 1993 (Republic Act No. 7653) and the General Banking Law of 2000 (the "General Banking Law") (Republic Act No. 8791) vest the Monetary Board of the BSP with the power to regulate and supervise financial intermediaries in the Philippines. Financial intermediaries include banks or banking institutions such as universal banks, commercial banks, savings banks, mortgage banks, development banks, rural banks, stock savings and loan associations as well as branches and agencies of foreign banks in the Philippines. Entities performing quasi-banking functions, trust companies, non-stock savings and loan associations and other non-deposit accepting entities, while not considered banking institutions, are also subject to regulation by the Monetary Board. The BSP’s Manual of Regulations for Banks (the ‘‘Manual’’) is the principal source of rules and regulations to be complied with and observed by banks in the Philippines. The Manual contains regulations applicable to universal banks, commercial banks, savings banks, rural banks and non-bank financial intermediaries performing quasi-banking functions. These regulations include those relating to the organization, management and administration, deposit and borrowing operations, loans, investments and special financing programs, and trust and other fiduciary functions, of the relevant financial intermediaries. Supplementing the Manual are rules and regulations promulgated in various circulars, memoranda, letters and other directives issued by the Monetary Board. The Manual and other BSP rules and regulations are principally implemented by the Supervision and Examination Sector (the ‘‘SES’’) of the BSP. The SES is responsible for ensuring the observance of applicable laws and rules and regulations by banking institutions operating in the Philippines including government credit institutions, their subsidiaries and affiliates, non-bank financial intermediaries, and subsidiaries and affiliates of non-bank financial intermediaries performing quasi-banking functions.
Permitted Activities
A thrift bank, such as the Bank, in addition to powers provided in other laws, has the authority to perform any or all of the following services: (i) grant loans, whether secured or unsecured, (ii) invest in readily marketable bonds and other debt securities, commercial papers and accounts receivable, drafts, bills of exchange, acceptances or notes arising out of commercial transactions, (iii) issue domestic letters of credit, (iv) extend credit facilities to private and government employees, (v) extend credit against the security of jewelry, precious stones and articles of similar nature, (vi) accept savings and time deposits, (vii) rediscount paper with the Land Bank of the Philippines, Development Bank of the Philippines and other government-owned or –controlled corporations, (viii) accept foreign currency deposits as provided under R.A. No. 6426, as amended, (ix) act as correspondent for other financial institutions, and (x) purchase, hold and convey real estate as specified under Sections 51 and 52 of R.A. No. 8791. Thrift Banks are also allowed to a certain extent to invest in allied (both financial and non-financial) undertakings. Financial allied undertakings include leasing companies, banks, investment houses, financial companies, credit card companies, and financial institutions catering to small- and medium-scale industries, including venture capital companies, companies engaged in stock brokerage securities dealership and brokerage and companies engaged in foreign exchange dealership/brokerage. Non-financial allied undertakings include, warehousing companies, storage companies, safe deposit box companies, companies engaged in the management of mutual funds, insurance agencies, among others.
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The total equity investments of a thrift bank in financial allied enterprises are not permitted to exceed 49.0% of the enterprise’s net worth. Its equity investment in non-financial undertakings shall remain less than 50.0% of the voting shares in that enterprise, which is subject to the prior approval of the Monetary Board if the investment is in excess of 40.0%. In addition to those functions specifically authorized by the General Banking Law and the Manual, banking institutions in general (other than building and loan associations) are allowed to (i) receive in custody funds, documents and valuable objects, (ii) act as financial agents and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities, (iii) make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business, (iv) act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts, upon prior approval of the Monetary Board and (vi) rent out safety deposit boxes.
Regulations
The Manual and various BSP regulations impose the following restrictions on thrift banks: Minimum Capitalization
Under the Manual, thrift banks with a head office in Metro Manila are required to have capital accounts of at least P1.00 billion. These minimum levels of capitalization may be changed by the Monetary Board from time to time. For the purposes of these requirements, the Manual provides that capital shall be unimpaired capital and surplus, combined capital accounts, and net worth and shall refer to the combined total of the unimpaired paid-in capital, surplus, and undivided profits, net of: (a) such unbooked valuation reserves and other capital adjustments as may be required by the BSP, (b) total outstanding unsecured credit accommodations, both direct and indirect, to DOSRI, (c) unsecured loans, other credit accommodations and guarantees granted to subsidiaries and affiliates; (d) deferred income tax, (e) appraisal increment reserve (revaluation reserve) as a result of appreciation or increase in the book value of bank assets, (f) equity investment of a bank in another bank or enterprise (foreign or domestic) if the other bank or enterprise has a reciprocal equity investment in the investing bank, although if such bank or enterprise has reciprocal equity investment in the investing bank, the lower figure of the investment of the bank or the reciprocal investment of the other bank or enterprise should be used; and (g) in the case of rural banks, the government counterpart equity, except those arising from conversion of arrears under BSP's Rehabilitation Program. Capital Adequacy Requirements
In July 2001, the Philippines adopted the capital adequacy framework of the Basel Committee on Banking Supervision. The Manual provides that the net worth of a bank must not, as a general rule, be less than an amount equal to 10.0% of its risk assets. This general rate applies to the Bank. Under the Manual, net worth is synonymous with capital as defined above. Risk assets are the total assets of the bank less assets such as: (a) cash on hand; (b) amount due from the BSP; (c) evidence of indebtedness issued by the Philippines and the BSP or fully guaranteed by the Philippines; (d) loans to the extent covered by hold-outs on or assignment of deposits/deposit substitutes maintained with a lending bank in the Philippines; (e) loans or acceptances under letters of credit to the extent covered by margin deposits; and (f) balances maintained with any bank designated by the Monetary Board for clearing checks drawn on banks located in places not serviced by the BSP clearing offices. In August 2006, the BSP published Circular No. 538-06 setting out the implementing guidelines for the revised capital adequacy framework of the Basel Committee on Banking Supervision (“Basel II”). These guidelines impact, among other things, banks’ capital adequacy structure, investment policies and risk management procedures. For example, the guidelines require banks to assign a full risk weight to all foreign currency non-investment grade securities, which requires banks to take capital charges for foreign currency-denominated government securities. On 10 January 2011, BSP published Circular No. 709, which amended the capital adequacy framework for Philippine banks pursuant to new international standards on regulatory capital issued by the Basel Committee of Banking Supervision (“Basel III”). The circular aligned the eligibility of capital
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instruments to be issued as Hybrid Tier 1 and Lower Tier 2 capital under Basel III. Basel III will require a more stringent capital adequacy structure to be adopted in stages prior to 2019. On 10 January 2012, BSP published Memorandum No. M-2012-002, which discussed their implementation plans for the capital standards contained in Basel III. The BSP will release further implementation plans and guidelines. The BSP may implement Basel III in the Philippines in a manner that differs from the Basel Committee’s guidelines including requiring higher or additional capital requirements. Reserve Requirements
Under the New Central Bank Act, the BSP requires banks to maintain cash reserves and liquid assets in proportion to deposits in prescribed ratios. If a bank fails to meet this reserve during a particular week on an average basis, it must pay a penalty to the BSP on the amount of any deficiency. Thrift banks are required to maintain regular reserves of 6.0% against Peso demand, savings and time deposits, negotiable order of withdrawal accounts, and deposit substitutes. The liquidity reserve requirement for thrift banks is equivalent to 2.0%. During its meeting on 2 February 2012, the BSP decided to approve three operational adjustments in its reserve requirement policy, which are (1) the unification of the existing statutory reserve requirement and liquidity reserve requirement into a single set of reserve requirement; (2) the non-remuneration of the unified reserve requirement; and (3) the exclusion of vault cash (for banks) and demand deposits (for non-bank financial institutions with quasi-banking functions) as eligible forms of reserve requirement compliance. The rationalization of the reserve requirement policy is expected to increase the effectiveness of reserve requirement as a monetary policy tool, simplify its implementation, and improve the monitoring of banks’ compliance. However, the BSP anticipates that the operational reforms may increase the banks’ intermediation costs and as such, decided to reduce the reserve requirement ratio by three (3) percentage points. The reduction will apply to the reservable liabilities of universal/commercial banks, thrift banks, rural banks, cooperative banks, and non-bank financial institutions with quasi-banking functions. The operational adjustments and the new reserve requirement ratios shall take effect on the reserve week beginning on 6 April 2012. Loan Limit to a Single Borrower
Under the General Banking Law and its implementing regulations, the total amount of loans, credit accommodations and guarantees that may be extended by a bank to any borrower shall at no time exceed 25.0% of the net worth of such bank (or 30.0% of the net worth of the bank in the event that certain types and levels of security are provided). This ceiling may be adjusted by the Monetary Board from time to time. A circular issued by the BSP in May 2009 amended the ceiling on loans to subsidiaries and affiliates. This allowed a bank’s subsidiaries and affiliates, engaged in energy and power generation, to a separate individual limit of 25.0% of bank’s net worth while the unsecured amount to not exceed 12.5% of the said net worth. On 9 February 2011, the BSP issued out an amendment to the Regulations on Single Borrower’s Limit. The amendment allowed for increases (on top of the 25.0% as already mentioned) on the amount of loans, credit accommodations and guarantees that a bank may issue out to a borrower. The following are the increases given certain conditions: (a) an additional 10.0% of the net worth of the bank as long as the additional liabilities are secured by shipping documents, trust or warehouse receipts or other similar documents which cover marketable, non-perishable goods which must be full covered by insurance, (b) an additional 25.0% of the net worth of the bank provided that the additional loans, credit accommodations and guarantees are used to finance the infrastructure and/or development projects under the Philippine government’s PPP Program; that these additional liabilities should not exceed 25.0% and will be allowed for a period three years from 6 December 2010, (c) an additional 15.0% of the net worth of the bank provided that the additional loans, credit accommodations and guarantees are used to finance oil importation of oil companies which are not subsidiaries or affiliates of the lending bank which is also engaged in energy and power generation.
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Lending Policies, Secured and Unsecured Lending
Banks are generally required to ascertain the purpose of a proposed loan, and the proceeds of the loan are to be used for that purpose only. Thrift banks are generally prohibited from lending on a secured basis in an amount exceeding 70.0% of the appraised value of land and insured improvements, except for residential loans not exceeding P3.50 million and housing loans extended or guaranteed under the government's National Shelter Program, which shall be allowed a maximum value of 70.0% of the appraised value, and, subject to certain conditions, loans for home-building and subdivision development for low- and middle-income families and other housing loans, which may be granted up to an 80.0% ceiling. Prior to lending on an unsecured basis, a bank must investigate the borrower's financial condition and ability to service the debt and must obtain certain documentation from the borrower, such as financial statements and tax returns. Any unsecured lendings should be only for a time period essential for completion of the operations to be financed. Priority Lending Requirements
The Agri-Agra Reform Credit Act of 2009 or Republic Act No. 10000 mandates that all banks shall set aside 25.0% of their total loanable funds for agriculture and agrarian reform credit in general, of which at least 10.0% shall be made available for agrarian reform beneficiaries. In the alternative, banks can buy government and debt securities whose proceeds shall be used for lending to the agriculture and agrarian reform sectors, subscription to shares of stock of accredited rural financial institutions (preferred shares only), Quedan and Rural Credit Guarantee Corporation and the Philippine Crop Insurance Corporation; open special deposit accounts with accredited rural financial institutions, provide rediscounting on eligible agriculture, fisheries and agrarian credits, and provide lending for construction and upgrading of infrastructure including farm-to-market roads. The BSP shall impose administrative sanctions and penalties of 0.5% of the total amount of its non-compliance and under-compliance. BSP regulations also provide that, for a period of ten years from 17 June 2008 to 16 June 2018, banks are required to set aside at least 8.0% for micro and small-sized and 2.0% for medium-sized enterprises, of their total loan portfolio based on their balance sheet as of the end of the previous quarter for lending to such enterprises. Investments in government securities other than the instruments offered by the government-controlled Small Business Corporation will not satisfy such obligation. Banks may be allowed to report compliance on a group-wide basis (i.e. on a parent-subsidiary consolidated basis), so that excess compliance of any bank in the group can be used as compliance for any deficient bank in the group, provided that the subsidiary bank(s) is at least majority-owned by the parent bank, and provided further that the parent bank shall be held responsible for the compliance of the group. Qualifications of Directors and Officers
Under the Manual, bank directors and officers must meet certain minimum qualifications. For instance, directors must be at least 25 years old, have a college degree or have at least five years' business experience, while officers must be at least 21 years old, have a college degree, or have at least five years' banking or trust experience. Certain persons are disqualified from acting as bank directors, including (a) persons who have been convicted of an offence involving moral turpitude or have been declared insolvent or incapacitated, (b) persons who have been removed by the Monetary Board, (c) persons who refuse to disclose business interests, (d) resident directors who have been absent for more than half of directors' meetings, (e) persons who are delinquent in their obligations, (f) persons who have been found to have willfully refused to comply with applicable banking laws or regulations, and (g) persons who have been dismissed for cause from any institution under the supervision of the BSP. In addition, except as permitted by the Monetary Board, directors or officers of banks are also generally prohibited from simultaneously serving as directors or officers of other banks or non-bank financial intermediaries. Under the Manual, independent directors shall have the additional qualifications that he: (a) is not or has not been an officer or employee of the bank, its subsidiaries or affiliates within three years from his
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election; (b) is not a director or officer of the related companies of the bank's majority stockholder; (c) is not a majority stockholder of the bank; (d) is not a relative within the fourth degree of consanguinity or affinity, legitimate or common-law of any director, officer or majority shareholder of the bank or any of its related companies; (e) is not acting as a nominee or representative of any director or substantial shareholder or any of its related companies; and (f) is not retained as a professional adviser, consultant or counsel of the bank and is independent of the management and free from any business or other relationship. Loans to DOSRI
The amount of individual outstanding loans, other credit accommodations and guarantees to DOSRI should not exceed an amount equivalent to their unencumbered deposits and book value of DOSRI's paid-in capital investment in the bank. In the aggregate, outstanding loans, other credit accommodations and guarantees to DOSRI generally should not exceed 100.0% of the bank's net worth or 15.0% of the total loan portfolio of the bank, whichever is lower. In no case shall the total unsecured loans, other credit accommodations and guarantees to DOSRI exceed 30.0% of the aggregate ceiling or of the outstanding loans, other credit accommodations and guarantees, whichever is lower. For the purpose of determining compliance with the ceiling on unsecured loans, other credit accommodations and guarantees, banks shall be allowed to average their ceiling on unsecured loans, other credit accommodations and guarantees every week, in accordance with Section 331 of the BSP Manual of Regulations for Banks. The credit card operations of banks shall not be subject to these regulations where the credit cardholders are the bank's directors, officers, stockholders, and their related interests, subject to certain conditions. On 31 January 2007, the BSP issued Circular No. 560, which provides that total outstanding loans, other credit accommodations and guarantees to each of the bank's subsidiaries and affiliates shall not exceed 10.0% of the net worth of the bank and the unsecured loans, other credit accommodations and guarantees to each of the bank's subsidiaries and affiliates shall not exceed 5.0% of the bank's net worth. In the aggregate, outstanding loans, other credit accommodations and guarantees to all subsidiaries and affiliates shall not exceed 20.0% of the net worth of the bank. BSP Circular No. 560 further provides that these subsidiaries and affiliates should not be a related interest of any of the directors, officers and/or stockholders of the lending institution, except where such director, officer, or stockholder sits in the board of directors or is appointed as an officer of such corporation as representative of the bank. However, loans, other credit accommodations and guarantees secured by assets considered as non-risk under existing BSP regulations as well as interbank call loans shall be excluded in determining compliance with these prescribed ceilings. Valuation Reserves for Probable Losses against Loans
In general, banking regulations define past due accounts of a bank as referring to all accounts in a bank's loan portfolio, all receivable components of trading account securities, and other receivables that are not paid at maturity. In the case of loans or receivables payable in installments, banking regulations consider the total outstanding obligation past due in accordance with the following schedule:
Mode of Payment Minimum Number of Installments in Arrears
Monthly 3 Quarterly 1 Semi-Annually 1 Annually 1
However, when the total amount of arrears reaches 20.0% of the total outstanding balance of the loan or receivable, the total outstanding balance of the loan or receivable is considered past due notwithstanding the number of installments in arrears. BSP regulations allow loans and advances to be written off as bad debts only if they have been past due for six months or more, and can be justified to be uncollectible. The board of directors of a bank has the discretion as to the frequency of write-off provided that the loan is deemed worthless and the write-offs are made against allowance for probable losses or against current operations. The prior approval of the Monetary Board of the BSP is required to write off loans to DOSRI.
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On 26 January 2003, the Special Purpose Vehicles Act (SPV Act) came into force. The SPV Act provides the legal framework for the creation of private management companies that will acquire NPLs, real estate and other assets from financial institutions in order to encourage new lending to support economic growth. The Congress of the Philippines passed the SPV Act's implementing rules and regulations on 19 March 2003 and they came into force on 12 April 2003. Under the SPV Act, the original deadline for the creation of asset management companies entitled to tax breaks was 19 September 2004. On 24 April 2006, the Philippine president signed into law an amendment to the SPV Act extending the deadline for the creation of asset management companies entitled to tax breaks to 18 months after 14 May 2006, the date the amended SPV Act took effect. Guidelines on General Reserves
Under existing BSP regulations, a general provision for loan losses shall also be set up as follows: (i) 5.0% of the outstanding balance of unclassified restructured loans less the outstanding balance of restructured loans which are considered non-risk under existing laws and regulations; and (ii) 1.0% of the outstanding balance of unclassified loans other than restructured loans less loans which are considered non-risk under existing laws and regulations. Restrictions on Branch Opening
Section 20 of the General Banking Law provides that thrift banks may open branches within or outside the Philippines subject to the governance of pertinent laws. The same provision of law allows banks, with prior approval from the Monetary Board, to use any or all of their branches as outlets for the presentation and/or sale of financial products of their allied undertakings or investment house units. In line with this, the Manual provides various minimum capitalization requirements for branches of thrift banks, depending on the location of the branch, ranging from a minimum of P2.50 million for branches of thrift banks to be located in fifth and sixth class municipalities to a maximum of P15.00 million (to be increased to P25.00 million by 1 July 2014) for the same to be located in the Metro Manila. A bank must first comply with this minimum capital requirement in order to be given authority to establish more branches. Thrift banks may establish branches on a nationwide basis. Once approved, a branch may be opened within six months from the date of approval (extendable for another six-month period, upon the presentation of justification therefore). Pursuant to BSP Circular No. 624, issued on 13 October 2008, banks shall be allowed to establish branches in the Philippines, except in the cities of Makati, Mandaluyong, Manila, Paranaque, Pasay, Pasig, Quezon and San Juan. However, microfinance-orientated thrift banks be allowed to establish a branch in Metro Manila, including the restricted areas, if it has a combined capital accounts of at least P325.00 million On 23 June 2011, the BSP issued a circular approving the phased lifting of branching restrictions in the eight restricted cities in Metro Manila which are Makati, Mandaluyong, Manila, Paranaque, Pasay, Pasig, Quezon, and San Juan. The BSP will implement a two-phased liberalization. For the first phase, only private domestically incorporated universal and commercial banks and thrift banks (with less than 200 branches in the restricted areas) will be allowed to establish branches in the said areas until 30 June 2014. The second phase allows all banks except rural banks and cooperative banks to establish branches in the said areas. Banks will be allowed to establish as many branches as their qualifying capital can support subject to the final adjustment determined by the Monetary Board on the optimal number to be approved. Based on this, banks will be given a pro-rate share on the total number of branches they applied for. Foreign Ownership in Domestic Banks
There are separate provisions in the Manual regarding foreign ownership in domestic banks depending on whether the acquirer is a foreign bank, individual or non-bank corporation. For foreign banks, they can purchase or own up to sixty percent (60.0%) of the voting stock of an existing domestic bank (which include banks under receivership or liquidation, provided no final court liquidation order has been issued). These foreign banks will be subject to the following criteria to be reviewed by the Monetary Board: geographic representation and complementation, strategic trade and investment relationships between the Philippines and the foreign bank’s country of incorporation, relationship between the foreign bank and the Philippines, demonstrated capacity and global
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reputation for financial innovations, reciprocity rights enjoyed by Philippine banks in the foreign bank’s country and willingness to fully share technology. For foreign individuals and non-bank corporations, they can purchase or own up to an aggregate of forty percent (40.0%) of the voting stock of a domestic bank. The prior review of the Monetary Board is not required for them. Anti-Money Laundering Law
The Anti-Money Laundering Act was passed on 29 September 2001 and was amended on 23 March 2003. Under its provisions, as amended, (i) certain financial intermediaries including banks, offshore banking units, quasi-banks, trust entities, non-stock savings and loan associations, and all other institutions including their subsidiaries and affiliates supervised and/or regulated by the BSP, (ii) insurance companies and/or institutions regulated by the Insurance Commission, and (iii) securities brokers, dealers, salesmen, associated persons of brokers and dealers, investment banks, mutual funds, foreign exchange corporations and certain other entities regulated by the Philippine SEC, are required to submit a "covered" transaction report involving a single transaction in cash or other equivalent monetary instruments in excess of P0.50 million within one Banking Day. These institutions are also required to submit a "suspicious" transaction report if any of the circumstances mentioned in Section 3 of the Anti-Money Laundering Act exists or if there is a reasonable ground to believe that any amounts processed are the proceeds of money laundering activities. BSP regulations also require all banks in the Philippines to have an electronic money laundering transaction monitoring system in place by October 2007. Each system will be required to detect and bring to the relevant institution's attention all transactions and/or accounts that either qualify as "covered transactions" or "suspicious transactions". The Anti-Money Laundering Council (“AMLC”) has also enumerated certain transactions considered red flags that would obligate covered institutions to exercise extra diligence, such as instances where a client was reported in the news to be involved in or is under investigation for terrorist activities. These transactions are reported to the AMLC within five banking days from the discovery the transaction by the covered institution. The Court of Appeals, upon application by the AMLC, has the authority to order the freezing of any accounts that it suspects are being used for money laundering. When directed by the AMLC, supervising authorities may also require all suspicious transactions with covered institutions, irrespective of the amounts involved, to be reported to the AMLC when there is a reasonable belief that any money laundering activity or any money laundering offense or any violation of the law is being or has been committed. Institutions that are subject to the Anti-Money Laundering Act are also required to establish and record the identities of their clients based on official documents. Covered institutions are required to develop clear customer acceptance policies and procedures when conducting business relations or specific transactions. Anonymous accounts, accounts under fictitious names, and all other similar accounts are absolutely prohibited. In addition, all records of transactions are required to be maintained and stored for five years from the date of a transaction. Records of closed accounts must also be kept for five years after their closure.
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TAXATION
The following is a general description of certain tax aspects of the Notes under the Philippine National
Internal Revenue Code and its implementing regulations (the "Tax Code"). It is based on the laws in
force as at the date of this Offering Circular and is subject to any changes in law occurring after such
date, which changes could be made on a retroactive basis. It does not purport to be a comprehensive
description of all of the tax considerations that may be relevant to a decision to purchase, own or
dispose of the Notes. Prospective purchasers should consult their tax advisers as to the laws of
applicable jurisdictions and the specific tax consequences of acquiring, holding and disposing of the
Notes.
As used in this section, the term “resident alien” refers to an individual whose residence is within the
Philippines but who is not a citizen of the Philippines; a “non-resident alien” is an individual whose
residence is not within the Philippines and who is not a citizen of the Philippines; a non-resident alien
who is actually within the Philippines for an aggregate period of more than 180 days during any
calendar year is considered a “non-resident alien doing business in the Philippines”; otherwise, such
non-resident alien who is actually within the Philippines for an aggregate period of 180 days or less
during any calendar year is considered a “non-resident alien not doing business in the Philippines.” A
“resident foreign corporation” is a foreign corporation engaged in trade or business within the
Philippines; and a “non-resident foreign corporation” is a foreign corporation not engaged in trade or
business within the Philippines. The term “foreign” when applied to a corporation means a corporation
which is not domestic while the term “domestic” when applied to a corporation means a corporation
created or organized in the Philippines or under its laws.
Taxation of Interest
Under the Tax Code, interest income from long term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the BSP and issued by banks only (not by nonbank financial intermediaries and finance companies) to individuals in denominations of one thousand pesos (P1,000.00) and other denominations as may be prescribed by the BSP is exempt from income tax. However, should investors of such instruments preterminate the deposit or investment before the fifth (5
th) year, a final
tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long term deposit or investment certificate based on the remaining maturity thereof: (1) Four (4) years to less than five (5) years: 5.0%; (2) Three (3) years to less than four (4) years: 12.0%; and (3) Less than three (3) years: 20.0%. In a ruling dated 22 July 2005, the Bureau of Internal Revenue clarified that interest income of an individual investor holding Notes through a common trust fund, individual trust account or individual investment management account would be exempt from withholding tax if such investment or participation is evidenced by long-term deposit or investment certificates in the form prescribed by the BSP and the investor holds on to such investment certificates for at least five years. Otherwise, distribution of the common trust fund, individual trust account or individual investment management account to the individual investor would be subject to the 20.0% withholding tax imposed on trust funds and other similar arrangements. In the event that the Holder is either (i) a Filipino citizen, (ii) an alien residing in the Philippines, (iii) a non-resident alien engaged in trade or business in the Philippines, (iv) subject to the clause on Prohibited Holders, long-term trust accounts and long-term management accounts (including common trust funds of banks other than the Issuer) exclusively for Filipino citizens, aliens residing in the Philippines, and non-resident aliens engaged in trade or business in the Philippines; (v) a BIR-tax-
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qualified employee trust fund established by corporations; or (vi) any other tax-exempt institution (upon presentation of acceptable proof of tax exemption), all payments or principal and interest shall be made free and clear of any deductions or withholding for or on account of any present or future taxes or duties imposed by or on behalf of the Republic of the Philippines, including interest and penalties, unless such withholding or deduction is required by law or regulation. In the event that such taxes and duties are imposed, the same shall be for the account of such Holder. In any other case, however, the Issuer shall not be liable for: (1) the applicable final withholding tax applicable on interest earned on the Notes prescribed under
the NIRC; (2) Gross Receipts Tax under Section 121 of the NIRC; (3) taxes on overall income of any securities dealer or Holder, whether or not subject to withholding;
and (4) VAT under Sections 106 to 108 of the NIRC, as amended by Republic Act No. 9337. Interest Income from the Notes received by domestic and resident foreign corporations is subject to a final withholding tax of 20.0%. Interest income from the Notes received by individual non-resident aliens not engaged in a trade or business within the Philippines is subject to a final withholding tax of 25.0% while interest received by non-resident foreign corporations shall be subject to a final withholding tax of 30.0%. In the case of non-residents, the applicable rate of withholding is subject to reduction under tax treaties executed between the Philippines and the country of residence of such holders. The tax shall be for the account of the affected holder. In the absence of any regulation or definitive ruling or guidelines from the BIR, the Bank has taken the position that transfers or assignments of the Notes by the aforesaid Holders to another Holder may be construed as pre-termination solely for tax purposes. Accordingly, a final tax may be due on the interest income already earned by the transferor Holder (depending on the holding period of such Notes), which shall be borne by the Holder. As required by law, the abovementioned 20.0% final withholding tax on interest income shall be withheld by the Issuer as withholding agent. The Issuer shall, upon request of the relevant Holder, provide the necessary proof of such withholding and corresponding payment to the Philippine revenue authorities. In consideration for the purchase of the Notes, Holders and their transferees undertake to inform the Issuer or other appropriate party of any change in tax status or of any suspension or revocation of any tax exemption certificate. The Holder further agrees to indemnify and hold the Issuer and the Registry free and harmless against any losses, expenses, claims, actions, suits and liabilities resulting from the Issuer’s withholding tax obligation.
Gross Receipts Tax
Bank and non-bank financial intermediaries are subject to gross receipts tax on gross receipts derived from sources within the Philippines in accordance with the following schedule: On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived:
Maturity period is five years or less: 5.0% and Maturity period is more than five years 1.0%.
In case the maturity period referred above is shortened through pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction and the correct rate shall be applied accordingly. Net trading gains realized within the taxable year on the sale or disposition of the Notes shall be taxed at 7.0%.
81
Documentary Stamp Taxes
Philippine law imposes a documentary stamp tax on all bonds, loan agreements and promissory notes at the rate of P1.00 on every P200.00, or fractional part thereof, of the face value of such securities. The Bank has undertaken in the Arrangement Agreement to pay the Philippine documentary stamp taxes on the issuance of the Notes. Currently, no documentary stamp tax is due on a subsequent sale or disposition of the Notes.
Taxation on Sale or Other Disposition of the Notes
A Holder will recognize gains or losses upon the sale or other disposition (including a redemption at maturity) of a Note in an amount equal to the difference between the amount realized from such disposition and such Holder’s base cost in the Note. Under the Tax Code, any gain realized from the sale, exchange or retirement of securities, debentures and other certificates of indebtedness with an original maturity date of more than five years (as measured from the date of issuance of such securities, debentures or other certificates of indebtedness) will not be subject to income tax. Since the Notes have a maturity of more than five years from the date of issuance, any gains realized by a holder from the sale of the Notes will not be subject to Philippine income tax.
Value-Added Tax
At issuance, no VAT shall be imposable upon the Notes. Subsequent transfers shall similarly be free of VAT, unless the Holder is a dealer in securities, in which case, the Holder will be subject to VAT at the rate of 12.0% of the gross income from the sale of the Notes. Under Republic Act No. 9337 (2005), services rendered in the Philippines by, among others, banks, non-bank financial intermediaries, quasi-banks, finance companies, and other financial intermediaries not performing quasi-banking functions (excluding insurance companies) are exempted from the coverage of the VAT.
Estate and Donor’s Tax
The transfer of Notes by a deceased foreign individual to his heirs, whether or not such individual was resident in the Philippines, will be subject to an estate tax which is levied on the net estate of the deceased at progressive rates ranging from 5.0% to 20.0% if the net estate is over P200,000.00. A holder of such Notes will be subject to donor’s tax upon the donation of the Notes to strangers at a flat rate of 30.0% of the net gifts. A stranger is defined as any person who is not a brother, sister (whether by whole- or half-blood), spouse, ancestor and lineal descendant or relative by consanguinity in the collateral line within the fourth degree of relationship. A donation to a non-stranger will be subject to a donor’s tax at progressive rates ranging from 2.00% to 15.00% if the net gifts made during the calendar year exceed P100,000.00. The estate tax, as well as the donor’s tax in respect of the Notes, shall not be collected (i) if the deceased at the time of death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country or (ii) if the laws of the foreign country of which the deceased or the donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.
Taxation outside the Philippines
The tax treatment of non-resident Holders in jurisdictions outside the Philippines may vary depending on the tax laws applicable to such holder by reason of domicile or business activities and such holder’s particular situation. This Offering Circular does not discuss the tax considerations on such non-resident holders under laws other than those of the Philippines.
82
OFFER PROCEDURE
The following summary is qualified in its entirety by, and should be read in conjunction with, the more
detailed information found elsewhere in this Offering Circular and the Agreements regarding the
issuance, maintenance, servicing, trading, and settlement of the Notes. Prospective investors should
read this entire Offering Circular and the Agreements fully and carefully. In case of any inconsistency
between this summary and the more detailed information in this Offering Circular or the Agreements,
then the more detailed portions and/or the Agreements, as the case may be, shall at all times prevail.
Offering Period Procedure
Pursuant to the Issue Management and Placement Agreement dated 3 February 2012, the Selling Agency Agreement dated 3 February 2012 and the Registry and Paying Agency Agreement dated 3 February 2012 (in this section, the “Agreements”) entered into by the Issuer with the relevant counterparties, the Notes shall be offered for sale through the Selling Agents during the Offer Period. Prior to the Offer Period
The Issuer shall enter into the Issue Management and Placement Agreement with the Arranger, the Registry and Paying Agency Agreement with the Registry and Paying Agent and the Selling Agency Agreement with the Selling Agents and the Limited Selling Agents. The Offer Period
During the relevant Offer Period, the Issuer, the Arranger, the Selling Agents and the Limited Selling Agents shall solicit subscriptions for the Notes. There shall be no limitation on the amount of Notes that an Applicant may apply for. Each interested investor (an “Applicant”) will be required to execute an Application to Purchase in four copies and return the completed Applications to Purchase to the Issuer or the relevant Selling Agent or Limited Selling Agent, as the case may be (with one duplicate to be provided to the Applicant). Applications to Purchase must be accompanied by payment for the Notes applied for. Payment may be in the form of cash, checks made out to the order of “PSB TIER 2 NOTES – 2022”, debit instructions or other instructions acceptable to the Issuer or the relevant Selling Agent or Limited Selling Agent, and must cover the entire purchase price. Each of the Issuer, the Selling Agents and the Limited Selling Agents shall determine its own settlement procedure for its Applicants. Each of the Issuer, the Selling Agents and the Limited Selling Agents shall hold the purchase price received from their respective Applicants as deposit for the purchase of the Notes. Each of the Issuer, the Selling Agents and Limited Selling Agents shall prepare a Schedule of Applications to Purchase (the “Applications Schedule”), which sets out the aggregate amount of Notes applied for by their respective Applicants and summarizes the details of the latter. Each of the Issuer, the Selling Agents and Limited Selling Agents shall deliver their Applications Schedule (together with a copy of each of the completed Applications to Purchase) to the Arranger no later than 5:00 p.m. of the last day of the Offer Period. Allocation Period
Based on the aggregate amount of Notes applied for, the Arranger shall agree with the Issuer on the total size of the issue. The Arranger may, at its discretion, reject any Application to Purchase. In addition, if the Notes are insufficient to accommodate all Applications to Purchase, the Arranger may, in consultation with the Issuer, allocate the Notes among the Issuer, the Selling Agents and Limited Selling Agents by accepting or reducing the aggregate amount of Notes covered by the Issuer’s and each Selling Agent’s and Limited Selling Agent’s Applications Schedule. The Arranger shall prepare a report which summarizes the total amount of Applications to Purchase accepted and the allocation of Notes among the Issuer and the various Selling Agents and Limited Selling Agents (the “Allocation Report”) and
83
provide the Issuer, the Selling Agents and the Limited Selling Agents with a copy thereof by 5:00 p.m. on the second Banking Day following the end of the Offer Period. Each of the Issuer, the Selling Agents and Limited Selling Agents shall implement the allocation set out in the Allocation Report and establish its own policies and procedures regarding the allocation of Notes among their respective Applicants. The Issuer, Selling Agents and Limited Selling Agents shall then accept the corresponding Applications to Purchase, prepare a schedule of purchase advices (the “PA Schedule”) which summarizes the allocations made among the various Applicants, and execute and issue Purchase Advices in accordance with the PA Schedule to the corresponding Applicants. The Issuer, Selling Agents and Limited Selling Agents shall: (a) deliver the PA Schedule to the Registry and Paying Agent no later than 5:00 p.m. of the Banking Day immediately preceding the Issue Date; and (b) deliver the executed Purchase Advices to the Registry and Paying Agent no later than five Banking Days from the Issue Date.
Issue Date
On the Issue Date, the Issuer shall issue Notes with the aggregate Issue Price set out in the Allocation Report. The Registry and Paying Agent shall record the initial issuance of the Notes in the Registry Book and thereafter issue and distribute the relevant Registry Confirmation to the Holders in accordance with the PA Schedule and the executed Purchase Advices issued by the Issuer, the Selling Agents and Limited Selling Agents. The Issuer, Selling Agents and Limited Selling Agents shall refund any payments made by Applicants whose Applications were rejected or scaled down, in full (in case of rejection) or in a proportionate sum (in case of scale down), in each case, without interest.
84
SUMMARY OF REGISTRY FEES
Fees Payable by Holders
Issuance of Registry Confirmation and Maintenance Fees
1. Issuance of Registry Confirmation P80.00 (for secondary
market trading)
*Payable for each Registry Confirmation issued.
2. Registry Maintenance Fee 0.02% per annum based
on face value
*Deductible from the gross interest due on the Note on the interest payment dates. Regardless
of holding period, full amount of Registry Maintenance Fees corresponding to the entire
interest period shall be charged to the Holder as a deduction from interest proceeds.
Transaction Fees
1. Transfer Fee P80.00 for the account of
the transferor
Other Fees
1. Requested Statement P100.00
This fee is payable by the Holder when he requests for a statement (other than the quarterly
securities statements). This charge is payable to the Registry at the time of collection of the
statement subject to presentation of acceptable proof of identification or signed written
authorization letter from the Holder.
2. Replacement of Lost or Damaged Registry Confirmation after
submission of duly notarized Sworn Affidavit of Loss
P80.00 per Registry
Confirmation issued
3. Certification P100.00 per Certification
85
INDEX TO THE FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2010
AND 2009……………………………………...……………………………………………………………….F-6
NOTES TO AUDITED FINANCIAL STATEMENTS AS AT AND FOR THE YEARS ENDED 31
DECEMBER 2010 AND 2009…………….…………………………………………………………..….....F-14
INTERIM CONDENSED FINANCIAL STATEMENTS AS AT AND FOR THE TEN MONTHS ENDED
31 OCTOBER 2011 AND 2010………………………………………………………………...………......F-96
NOTES TO THE INTERIM CONDENSED FINANCIAL STATEMENTS AS AT AND FOR THE TEN
MONTHS ENDED 31 OCTOBER 2011 AND 2010.……………...…………………………………….F-104
F-1
ANNEXES: FINANCIAL STATEMENTS
Philippine Savings Bank
Financial Statements December 31, 2010 and 2009 and Years Ended December 31, 2010, 2009 and 2008 and Independent Auditors’ Report SyCip Gorres Velayo & Co.
F-2
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Philippine Savings Bank
PSBank Center
777 Paseo de Roxas corner Sedeño Street
Makati City
Report on the Financial Statements
We have audited the accompanying financial statements of Philippine Savings Bank, which comprise
the statements of condition as at December 31, 2010 and 2009, and the statements of income, the
statements of comprehensive income, the statements of changes in equity and the statements of cash
flows for each of the three years in the period ended December 31, 2010, and a summary of significant
accounting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with Philippine Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that
we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines
Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-2
F-3
- 2 -
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of
Philippine Savings Bank as at December 31, 2010 and 2009, and its financial performance and its cash
flows for each of the three years in the period ended December 31, 2010 in accordance with Philippine
Financial Reporting Standards.
Report on Bureau of Internal Revenue Requirement
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken
as a whole. The supplementary information on taxes and licenses in Note 34 to the financial statements
is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the
basic financial statements. Such information has been subjected to the auditing procedures applied in
our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as whole.
SYCIP GORRES VELAYO & CO.
Aris C. Malantic
Partner
CPA Certificate No. 90190
SEC Accreditation No. 0326-AR-1
Tax Identification No. 152-884-691
PTR No. 2641538, January 3, 2011, Makati City
February 22, 2011
F-4
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Philippine Savings Bank
Report on the Financial Statements
We have audited the accompanying financial statements of Philippine Savings Bank, which comprise
the statements of condition as at December 31, 2010 and 2009, and the statements of income, the
statements of comprehensive income, the statements of changes in equity and the statements of cash
flows for each of the three years in the period ended December 31, 2010, and a summary of significant
accounting policies and other explanatory information.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with Philippine Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that
we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements.
F-5
- 2 -
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our audit opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of
Philippine Savings Bank as at December 31, 2010 and 2009, and its financial performance and its cash
flows for each of the three years in the period ended December 31, 2010 in accordance with Philippine
Financial Reporting Standards.
Report on Bureau of Internal Revenue Requirement
Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken
as a whole. The supplementary information on taxes and licenses in Note 34 to the financial statements
is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the
basic financial statements. Such information has been subjected to the auditing procedures applied in
our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as whole.
SYCIP GORRES VELAYO & CO.
Aris C. Malantic
Partner
CPA Certificate No. 90190
SEC Accreditation No. 0326-AR-1
Tax Identification No. 152-884-691
PTR No. 2641538, January 3, 2011, Makati City
February 22, 2011
F-6
PHILIPPINE SAVINGS BANK
STATEMENTS OF CONDITION
December 31
2010 2009
ASSETS
Cash and Other Cash Items (Note 16) P=3,163,939,540 P=2,632,884,729
Due from Bangko Sentral ng Pilipinas (Note 16) 2,899,592,073 4,937,990,387
Due from Other Banks (Note 29) 7,520,836,053 1,528,847,687
Interbank Loans Receivable and Securities Purchased
Under Resale Agreements (Note 7) 3,586,560,000 5,900,000,000
Fair Value Through Profit or Loss Investments (Note 8) 868,316,442 248,043,099
Available-for-Sale Investments (Notes 8 and 16) 16,200,339,057 18,261,371,820
Held-to-Maturity Investments (Note 8) 9,162,584,959 4,772,851,076
Loans and Receivables (Notes 9 and 29) 53,207,635,160 47,308,237,957
Investments in an Associate and a Joint Venture
(Notes 10 and 29) 829,873,755 788,310,337
Property and Equipment (Note 11) 2,107,316,622 1,985,474,732
Investment Properties (Note 12) 2,772,308,932 2,582,767,705
Deferred Tax Asset (Note 27) 705,361,217 1,256,530,049
Goodwill and Intangible Assets (Note 13) 240,684,552 197,472,852
Other Assets (Note 14) 884,120,899 687,047,211
P=104,149,469,261 P=93,087,829,641
LIABILITIES AND EQUITY
Liabilities
Deposit Liabilities (Notes 16 and 29)
Demand P=7,170,221,822 P=8,188,088,242
Savings 10,147,794,079 9,403,399,256
Time 70,200,793,366 59,798,723,788
87,518,809,267 77,390,211,286
Subordinated Notes (Notes 17 and 33) 1,977,141,032 1,973,881,534
Treasurer’s, Cashier’s and Manager’s Checks 649,433,599 505,738,363
Accrued Taxes, Interest and Other Expenses (Note 18) 1,132,129,341 895,023,135
Income Tax Payable (Note 27) – 17,425,906
Other Liabilities (Note 19) 1,262,878,631 1,293,410,922
92,540,391,870 82,075,691,146
(Forward)
F-7
- 2 -
December 31
2010 2009
Equity
Common Stock (Note 21) P=2,402,524,910 P=2,402,524,910
Capital Paid in Excess of Par Value 2,818,083,506 2,818,083,506
Surplus Reserves (Note 30) 1,035,275,317 854,463,783
Surplus (Note 21) 5,055,131,075 4,232,673,110
Net Unrealized Gain on Available-for-Sale Investments
(Note 8) 355,151,266 819,829,053
Cumulative Translation Adjustment (Note 2) (57,088,683) (115,435,867)
11,609,077,391 11,012,138,495
P=104,149,469,261 P=93,087,829,641
See accompanying Notes to Financial Statements.
F-8
PHILIPPINE SAVINGS BANK
STATEMENTS OF INCOME
Years Ended December 31
2010 2009 2008
INTEREST INCOME ON
Loans and receivables (Notes 9 and 29) P=5,872,206,677 P=5,376,067,642 P=4,745,054,266
Investment securities (Note 8) 1,714,742,134 1,944,869,980 1,012,129,324
Due from Bangko Sentral ng Pilipinas 158,509,526 92,985,420 85,433,773
Due from other banks (Note 29) 7,126,287 5,844,863 24,609,925
Interbank loans receivable and securities purchased
under resale agreements (Note 7) 160,512,694 109,764,181 262,379,746
7,913,097,318 7,529,532,086 6,129,607,034
INTEREST EXPENSE ON
Deposit liabilities (Notes 16 and 29) 2,693,229,929 2,485,486,486 2,196,675,829
Subordinated notes (Note 17) 206,037,289 205,737,407 205,983,474
Bills payable (Note 29) 1,427,292 4,831,064 17,450,070
2,900,694,510 2,696,054,957 2,420,109,373
NET INTEREST INCOME 5,012,402,808 4,833,477,129 3,709,497,661
Service fees and commission income (Note 22) 758,628,630 642,921,038 631,459,004
Service fees and commission expense (Note 22) 66,947,148 46,679,681 97,093,744
NET SERVICE FEES AND COMMISSION INCOME
(Note 22) 691,681,482 596,241,357 534,365,260
OTHER OPERATING INCOME (CHARGES)
Trading and securities gains - net (Note 8) 2,229,490,724 543,632,852 199,740,186
Gain on foreclosure of investment properties (Note 12) 224,362,420 206,142,134 211,126,132
Gain on sale of chattel mortgage properties (Note 14) 45,391,188 41,803,965 28,578,089
Gain on sale of investment properties (Note 12) 15,239,154 31,579,888 40,429,690
Foreign exchange gain 15,054,607 12,337,918 186,796,847
Gain on sale of property and equipment (Note 11) 2,366,740 9,804,030 3,833,000
Loss on foreclosure of chattel mortgage (Note 14) (108,401,098) (91,966,009) (60,137,420)
Miscellaneous (Note 23) 108,949,822 88,283,966 83,229,054
2,532,453,557 841,618,744 693,595,578
Total Operating Income 8,236,537,847 6,271,337,230 4,937,458,499
OTHER EXPENSES
Compensation and fringe benefits (Notes 24 and 29) 1,740,616,046 1,488,633,458 1,223,833,877
Provision for credit and impairment losses (Note 15) 912,282,236 1,109,756,584 577,400,627
Taxes and licenses (Notes 27 and 34) 777,135,211 559,775,883 451,660,304
Occupancy and equipment-related costs (Note 25) 424,277,820 362,869,511 307,401,215
Depreciation and amortization (Note 11) 352,038,108 328,535,606 274,104,098
Security, messengerial and janitorial services 163,935,978 147,976,617 128,687,095
Amortization of intangible assets (Note 13) 41,692,711 27,761,608 26,750,792
Miscellaneous (Note 26) 1,212,927,582 917,642,194 853,688,641
5,624,905,692 4,942,951,461 3,843,526,649
(Forward)
F-9
- 2 -
Years Ended December 31
2010 2009 2008
INCOME BEFORE SHARE IN NET INCOME
OF AN ASSOCIATE AND A JOINT VENTURE
AND INCOME TAX P=2,611,632,155 P=1,328,385,769 P=1,093,931,850
SHARE IN NET INCOME OF AN ASSOCIATE
AND A JOINT VENTURE (Notes 10 and 29) 41,563,418 45,129,698 46,820,603
INCOME BEFORE INCOME TAX 2,653,195,573 1,373,515,467 1,140,752,453
PROVISION FOR INCOME TAX (Note 27) 845,080,234 133,501,051 200,600,860
NET INCOME P=1,808,115,339 P=1,240,014,416 P=940,151,593
Basic/Diluted Earnings Per Share (Note 28) P=7.53 P=5.16 P=3.98
See accompanying Notes to Financial Statements.
F-10
PHILIPPINE SAVINGS BANK
STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
2010 2009 2008
NET INCOME P=1,808,115,339 P=1,240,014,416 P=940,151,593
Other Comprehensive Income (Loss)
Changes in net unrealized gain on Available-for-sale
investments (Note 8) (464,677,787) 1,497,117,558 (805,848,857)
Cumulative translation adjustment (Note 2) 58,347,184 (17,528,813) (97,907,054)
TOTAL COMPREHENSIVE INCOME,
NET OF TAX P=1,401,784,736 P=2,719,603,161 P=36,395,682
See accompanying Notes to Financial Statements.
F-11
PHILIPPINE SAVINGS BANK
STATEMENTS OF CHANGES IN EQUITY
Common Stock
(Note 21) Capital Paid in
Excess of Par Value
Surplus Reserves
(Note 30) Surplus
(Note 21)
Net Unrealized
Gain (Loss) on
Available-for-Sale
Investments
(Note 8)
Cumulative
Translation
Adjustment
(Note 2) Total
Balance at January 1, 2010 P=2,402,524,910 P=2,818,083,506 P=854,463,783 P=4,232,673,110 P=819,829,053 (P=115,435,867) P=11,012,138,495
Total comprehensive income (loss) for the year – – – 1,808,115,339 (464,677,787) 58,347,184 1,401,784,736
Appropriation of surplus for trust business – – 180,811,534 (180,811,534) – – –
Cash dividends (Note 21) – – – (804,845,840) – – (804,845,840)
Balance at December 31, 2010 P=2,402,524,910 P=2,818,083,506 P=1,035,275,317 P=5,055,131,075 P=355,151,266 (P=57,088,683) P=11,609,077,391
Balance at January 1, 2009 P=2,402,524,910 P=2,818,083,506 P=730,462,341 P=3,296,849,504 (P=677,288,505) (P=97,907,054) P=8,472,724,702 Total comprehensive income (loss) for the year – – – 1,240,014,416 1,497,117,558 (17,528,813) 2,719,603,161
Appropriation of surplus for trust business – – 124,001,442 (124,001,442) – – –
Cash dividends (Note 21) – – – (180,189,368) – – (180,189,368)
Balance at December 31, 2009 P=2,402,524,910 P=2,818,083,506 P=854,463,783 P=4,232,673,110 P=819,829,053 (P=115,435,867) P=11,012,138,495
Balance at January 1, 2008 P=2,019,383,150 P=1,220,819,206 P=636,447,182 P=2,594,864,566 P=128,560,352 P=– P=6,600,074,456
Total comprehensive income (loss) for the year – – – 940,151,593 (805,848,857) (97,907,054) 36,395,682 Appropriation of surplus for trust business – – 94,015,159 (94,015,159) – – –
Issuance of common stock 383,141,760 1,597,264,300 – – – – 1,980,406,060
Cash dividends (Note 21) – – – (144,151,496) – – (144,151,496)
Balance at December 31, 2008 P=2,402,524,910 P=2,818,083,506 P=730,462,341 P=3,296,849,504 (P=677,288,505) (P=97,907,054) P=8,472,724,702
See accompanying Notes to Financial Statements.
F-12
PHILIPPINE SAVINGS BANK
STATEMENTS OF CASH FLOWS
Years Ended December 31
2010 2009 2008
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax P=2,653,195,573 P=1,373,515,467 P=1,140,752,453
Adjustments for:
Realized gain on sale of available-for-sale investments
(Note 8) (2,323,447,276) (503,223,604) (230,643,975)
Provision for credit and impairment losses (Note 15) 912,282,236 1,109,756,584 577,400,627
Depreciation and amortization (Note 11) 352,038,108 328,535,606 274,104,098
Gain on foreclosure of investment properties (Note 12) (224,362,420) (206,142,134) (211,126,132)
Loss on foreclosure of chattel mortgage properties (Note 14) 108,401,098 91,966,009 60,137,420
Gain from sale of chattel mortgage properties (Note 14) (45,391,188) (41,803,965) (28,578,089)
Amortization of intangible assets (Note 13) 41,692,711 27,761,608 26,750,792
Share in net income of an associate and a joint
venture (Note 10) (41,563,418) (45,129,698) (46,820,603)
Gain from sale of investment properties (Note 12) (15,239,154) (31,579,888) (40,429,690)
Amortization of debt issuance costs (Note 17) 3,259,498 2,939,913 2,664,778
Gain from sale of property and equipment (Note 11) (2,366,740) (9,804,030) (3,833,300)
Unrealized trading loss on fair value through
profit or loss investments (Note 8) 793,423 11,127,300 18,710,369
Changes in operating assets and liabilities:
Decrease (increase) in:
Fair value through profit or loss investments (620,889,068) 822,456,959 318,693,818
Loans and receivables (8,004,900,540) (7,540,645,333) (7,337,206,992)
Other assets (227,469,061) (100,044,178) (176,504,283)
Increase (decrease) in:
Deposit liabilities 10,160,268,335 15,703,125,456 3,780,725,331
Treasurer’s, cashier’s and manager’s checks 143,695,236 165,837,306 (37,801,879)
Accrued taxes, interests and other expenses 237,142,974 (9,936,508) 39,901,023
Other liabilities 5,555,938 239,305,697 16,082,613
Cash generated from (used in) operations 3,112,696,265 11,388,018,567 (1,857,021,621)
Income taxes paid (226,340,247) (275,867,318) (146,001,219)
Net cash provided by (used in) operating activities 2,886,356,018 11,112,151,249 (2,003,022,840)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of:
Other intangible assets (Note 13) (84,904,411) (66,718,040) (19,097,954)
Property and equipment (Note 11) (396,765,121) (474,230,433) (230,060,966)
Held-to-maturity investments (4,384,256,019) (3,163,556,793) (87,733,714)
Available-for-sale investments (52,626,689,622) (10,014,727,372) (17,773,948,651)
Proceeds from sale of:
Available-for-sale investments 56,547,892,402 10,467,963,860 13,655,161,223
Investment properties (Note 12) 432,950,999 599,814,459 229,599,094
Chattel mortgage properties (Note 14) 592,678,122 563,585,587 328,405,707
Property and equipment (Note 11) 26,802,180 39,380,202 40,368,764
Proceeds from redemption of held-to-maturity investments at
maturity – – 258,255,187
Dividends received (Note 10) – 26,771,150 –
Investment in a joint venture (Note 10) – (400,000,000) –
Net cash provided by (used in) investing activities 107,708,530 (2,421,717,380) (3,599,051,310)
(Forward)
F-13
- 2 -
Years Ended December 31
2010 2009 2008
CASH FLOWS FROM FINANCING ACTIVITIES
Settlements of bills payable (P=6,327,836,992) (P=2,706,900,000) (P=6,177,600,000)
Availments of bills payable 6,327,836,992 2,469,300,000 6,415,200,000
Dividends paid (Note 21) (840,883,714) (144,151,496) (143,863,698)
Issuance of common stock – – 1,980,406,060
Net cash provided by (used in) financing activities (840,883,714) (381,751,496) 2,074,142,362
Effect of exchange rate differences 18,024,029 (731,217) (4,105,551)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,171,204,863 8,307,951,156 (3,532,037,339)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
Cash and other cash items (Note 16) 2,632,884,729 1,436,234,455 1,093,135,036
Due from Bangko Sentral ng Pilipinas (Note 16) 4,937,990,387 3,228,768,914 3,280,015,727
Due from other banks (Note 29) 1,528,847,687 1,276,768,278 544,196,039
Interbank loans receivable and securities purchased under
resale agreements (Note 7) 5,900,000,000 750,000,000 5,306,462,184
14,999,722,803 6,691,771,647 10,223,808,986
CASH AND CASH EQUIVALENTS AT
END OF YEAR
Cash and other cash items (Note 16) 3,163,939,540 2,632,884,729 1,436,234,455
Due from Bangko Sentral ng Pilipinas (Note 16) 2,899,592,073 4,937,990,387 3,228,768,914
Due from other banks (Note 29) 7,520,836,053 1,528,847,687 1,276,768,278
Interbank loans receivable and securities purchased under
resale agreements (Note 7) 3,586,560,000 5,900,000,000 750,000,000
P=17,170,927,666 P=14,999,722,803 P=6,691,771,647
OPERATIONAL CASH FLOWS FROM INTEREST
Interest paid P=2,890,090,324 P=2,740,452,986 P=2,289,195,803
Interest received 8,211,376,642 7,391,750,548 5,658,615,033
See accompanying Notes to Financial Statements.
F-14
PHILIPPINE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
1. Corporate Information
Philippine Savings Bank (the Bank) was incorporated in the Philippines primarily to engage in
savings and mortgage banking. The Bank’s shares are listed in the Philippine Stock Exchange
(PSE). The Bank offers a wide range of products and services such as deposit products, loans,
treasury and trust functions that serve mainly to the retail and consumer market. On September 6,
1991, the Bank was authorized to perform trust functions.
As of December 31, 2010 and 2009, the Bank had 180 and 170 branches, respectively. The Bank
added 74 Automated Tellering Machines (ATMs) in Metro Manila and in provincial locations in
2010, bringing the total number of ATMs to 380 as of December 31, 2010 from 306 as of
December 31, 2009.
The original Certificate of Incorporation of the Bank was issued by the Securities and Exchange
Commission on June 30, 1959. On March 28, 2006, the board of directors (BOD) of the Bank
approved the amendment of Article Four of its Amended Articles of Incorporation to extend the
corporate term of the Bank, which expired on June 30, 2009, for another 50 years or up to June 30,
2059.
On March 23, 2010, the Board of Directors approved the amendment of the Bank’s Articles of
Incorporation and By-laws for the purpose of reducing the number of directors from eleven (11) to
a maximum of nine (9).
As of December 31, 2010, the Bank is seventy-six percent (76%) owned by Metropolitan Bank &
Trust Company (MBTC), its parent company.
The Bank’s principal place of business is located at PSBank Center, 777 Paseo de Roxas corner
Sedeño Street, Makati City.
2. Accounting Policies
Basis of Preparation
The accompanying financial statements have been prepared under the historical cost basis except
for fair value through profit or loss (FVPL) investments and available-for-sale (AFS) investments
that have been measured at fair value.
The accompanying financial statements of the Bank include the accounts maintained in the
Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The functional
currency of the RBU and the FCDU is Philippine Peso and United States Dollar (USD),
respectively. For financial reporting purposes, FCDU accounts and foreign currency-denominated
accounts in the RBU are translated into their equivalents in Philippine pesos (see accounting
policy on Foreign Currency Translation). The financial statements of these units are combined
after eliminating inter-unit accounts.
Statement of Compliance
The financial statements of the Bank have been prepared in compliance with Philippine Financial
Reporting Standards (PFRS).
F-15
Changes in Accounting Policies and Disclosure
The accounting policies adopted are consistent with those of the previous financial year. The
issuance of and the amendments to the following standards and interpretations which became
effective as of January 1, 2010, did not have any impact on the accounting policies, financial
position or performance of the Bank:
PFRS 2 Amendments - Group Cash-settled Share-based Payment Transaction, effective for
annual periods beginning on or after January 1, 2010
PFRS 3, Business Combinations (Revised), effective for annual period beginning on or after
July 1, 2009
Philippine Accounting Standard (PAS) 27, Consolidated and Separate Financial Statements
(Amended), effective for annual periods beginning on or after July 1, 2009
PAS 39 Amendment - Eligible Hedged Items, effective for annual periods beginning on or
after July 1, 2009
Philippine Interpretation International Financial Reporting Interpretation Committee (IFRIC)
17, Distributions of Non-Cash Assets to Owners, effective for annual periods beginning on or
after July 1, 2009 with early application permitted
Improvements to PFRSs
Improvements to PFRSs, an omnibus of amendments to standards, deal primarily with a view to
removing inconsistencies and clarifying wording. There are separate transitional provisions for
each standard. The adoption of the following amendments resulted in changes to accounting
policies but did not have any impact on the financial position or performance of the Bank.
Improvements to PFRSs 2008
The amendment arising from the 2008 Improvements to PFRSs is effective for annual periods
beginning on or after July 1, 2009.
PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, clarifies that when a
subsidiary is classified as held for sale, all its assets and liabilities are classified as held for
sale, even when the entity remains a non-controlling interest after the sale transaction.
Improvements to PFRSs 2009
The amendments in the 2009 Improvements to PFRSs are effective for annual periods beginning
on or after July 1, 2009, except for the amendments to PFRS 5, PFRS 8, PAS 1, PAS 7, PAS 17,
PAS 36 and PAS 39, which are effective for annual periods beginning on or after January 1, 2010.
The amendment to PAS 18 was effective from issue date of the standard in April 2009.
PFRS 5, clarifies that the disclosures required in respect of non-current assets and disposal
groups classified as held for sale or discontinued operations are only those set out in PFRS 5.
The disclosure requirements of other PFRSs only apply if specifically required for such non-
current assets or discontinued operations. The amendment has no impact on the financial
position or financial performance of the Bank.
PFRS 8, Operating Segments, clarifies that segment assets and liabilities need only be
reported when those assets and liabilities are included in measures that are used by the chief
operating decision maker. As the Bank’s chief operating decision maker reviews segment
assets and liabilities, the Bank has continued to disclose this information in Note 6.
F-16
PAS 7, Statement of Cash Flows, states that only expenditure that results in recognizing an
asset can be classified as a cash flow from investing activities. This amendment has no impact
on the Bank’s statements of cash flows.
PAS 36, Impairment of Assets, The amendment clarifies that the largest unit permitted for
allocating goodwill, acquired in a business combination, is the operating segment as defined in
PFRS 8 before aggregation for reporting purposes. The amendment has no impact on the
Bank as the annual impairment test is performed before aggregation.
Other amendments resulting from the 2009 Improvements to PFRSs to the following standards did
not have any impact on the accounting policies, financial position or performance of the Bank.
PFRS 2, Share-based Payment
PAS 1, Presentation of Financial Statements
PAS 17, Leases
PAS 38, Intangible Assets
PAS 39, Financial Instruments: Recognition and Measurement
Philippine Interpretation IFRIC-9, Reassessment of Embedded Derivatives
Philippine Interpretation IFRIC-16, Hedge of a Net Investment in a Foreign Operation
Summary of Significant Accounting Policies
Foreign Currency Translation
The financial statements are presented in Philippine pesos, which is the Bank’s functional and
presentation currency.
The books of accounts of the RBU are maintained in Philippine pesos, while those of the FCDU
are maintained in USD.
RBU
As at reporting date, foreign currency monetary assets and liabilities of the RBU are translated in
Philippine pesos based on the Philippine Dealing System (PDS) closing rate prevailing at end of
the year and foreign currency-denominated income and expenses, at the exchange rates as at the
date of the transaction. Foreign exchange differences arising from restatements of foreign
currency-denominated assets and liabilities in the RBU are credited to or charged against profit or
loss in the year in which the rates change. Non-monetary items that are measured in terms of
historical cost in a foreign currency are translated using the exchange rates as at the dates of the
initial transactions. Non-monetary items measured at fair value in a foreign currency are
translated using the exchange rates at the date when the fair value is determined.
FCDU
As at the reporting date, the assets and liabilities of the FCDU are translated to the Bank’s
presentation currency (the Philippine Peso) at PDS closing rate prevailing at the statement of
condition date, and its income and expenses are translated using the exchange rates as at the dates
of the transaction. Exchange differences arising on translation to the presentation currency are
taken to the statement of comprehensive income under ‘Cumulative translation adjustment’. Upon
disposal of the FCDU, the deferred cumulative amount recognized in the statement of
comprehensive income is recognized in the statement of income. The Bank adopted this policy
when the Bangko Sentral ng Pilipinas (BSP) issued BSP Circular No. 601 on February 13, 2008.
This Circular included a provision requiring Banks to use the USD as the functional currency of
its FCDU. As of December 31, 2010 and 2009, the Bank recorded ‘Cumulative translation
adjustment’ under equity amounting to P=57.1 million and P=115.4 million, respectively.
F-17
Financial Instruments - Initial Recognition and Subsequent Measurement
Date of recognition
Purchases or sales of financial assets that require delivery of assets within the time frame
established by regulation or convention in the marketplace are recognized on the settlement date.
Deposits, amounts due to banks and loans are recognized when cash is received by the Bank or
advanced to the borrowers.
Initial recognition of financial instruments
All financial instruments, including trading and investment securities and loans and receivables,
are initially measured at fair value. Except for FVPL investments and liabilities, the initial
measurement of financial instruments includes transaction costs. The Bank classifies its financial
assets in the following categories: FVPL investments, Held-to-maturity (HTM) investments, AFS
investments, and loans and receivables. Financial liabilities are classified into liabilities at FVPL
and other financial liabilities at amortized cost. The classification depends on the purpose for
which the investments are acquired and whether they are quoted in an active market. Management
determines the classification of its investments at initial recognition and, where allowed and
appropriate, re-evaluates such designation at every statement of condition date. As of
December 31, 2010 and 2009, the Bank had no liabilities at FVPL.
Determination of fair value
The fair value for financial instruments traded in active markets at the statement of condition date
is based on their quoted market price or dealer price quotations (bid price for long positions and
asking price for short positions), without any deduction for transaction costs. When current bid
and asking prices are not available, the price of the most recent transaction is used since it
provides evidence of the current fair value as long as there has not been a significant change in
economic circumstances since the time of the transaction.
For all other financial instruments not listed in an active market, the fair value is determined by
using appropriate valuation techniques. Valuation techniques include net present value
techniques, comparison to similar instruments for which market observable prices exist, options
pricing models, and other relevant valuation models.
‘Day 1’ difference
Where the transaction price in a non-active market is different from the fair value from other
observable current market transactions in the same instrument or based on a valuation technique
whose variables include only data from observable market, the Bank recognizes the difference
between the transaction price and fair value (a ‘Day 1 difference’) in the statement of income in
‘Trading and securities gains - net’, unless it qualifies for recognition as some other type of asset.
In cases where transaction price used is made of data which is not observable, the difference
between the transaction price and model value is only recognized in the statement of income when
the inputs become observable or when the instrument is derecognized. For each transaction, the
Bank determines the appropriate method of recognizing the ‘Day 1 difference’ amount.
Derivatives
Derivative financial instruments are initially recorded at fair value on the date at which the
derivative contract is entered into and are subsequently remeasured at fair value. Any gains or
losses arising from changes in fair values of derivatives (except those accounted for as cash flow
hedges) are taken directly to the statement of income and are included in ‘Trading and securities
gain - net’. Derivatives are carried as assets when the fair value is positive and as liabilities when
the fair value is negative. As of December 31, 2010 and 2009, derivatives comprise Republic of
the Philippines (ROP) paired warrants acquired to lower the risk weighted assets and improve the
capital adequacy ratio of the Bank.
F-18
For purposes of hedge accounting, hedges, if any, are classified primarily as either: a) a hedge of
the fair value of an asset, liability or a firm commitment (fair value hedge); or b) a hedge of the
exposure variability in cash flows attributable to an asset or a liability or a forecasted transaction
(cash flow hedge). Hedge accounting is applied to derivatives designated as hedging instruments
in a fair value, cash flow, or net investment hedge provided certain criteria are met. In 2010 and
2009, the Bank did not apply hedge accounting treatment for its derivative transactions.
Designated financial assets or financial liabilities at FVPL
Designated financial assets or financial liabilities classified in this category are designated by
management on initial recognition when the following criteria are met:
the designation eliminates or significantly reduces the inconsistent treatment that would
otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them
on a different basis; or
the assets and liabilities are part of a group of financial assets, financial liabilities or both
which are managed and their performance evaluated on a fair value basis, in accordance with a
documented risk management or investment strategy; or
the financial instrument contains an embedded derivative, unless the embedded derivative
does not significantly modify the cash flows or it is clear, with little or no analysis, that it
would not be separately recorded.
Designated financial assets and financial liabilities at FVPL are recorded in the statement of
condition at fair value. Changes in fair value of financial assets and liabilities designated at FVPL
are recorded in ‘Trading and securities gains - net’. Interest earned or incurred is recorded in
interest income or expense, respectively, while any dividend income is recorded in other operating
income according to the terms of the contract, or when the right of the payment has been
established. As of December 31, 2010 and 2009, the Bank had no designated financial assets or
financial liabilities at FVPL.
Other financial assets or financial liabilities held-for-trading (HFT)
Other financial assets or financial liabilities HFT (classified as FVPL investments) are recorded in
the statement of condition at fair value. Changes in fair value relating to the HFT positions are
recognized in ‘Trading and securities gains - net’. Interest earned or incurred is recorded as
interest income or expense, respectively, while dividend income is recorded in other operating
income when the right to receive payment has been established.
Included in this classification are debt securities which have been acquired principally for the
purpose of selling in the near term.
Embedded derivatives
An embedded derivative is separated from the host contract and accounted for as a derivative if all
of the following conditions are met:
the economic characteristics and risks of the embedded derivative are not closely related to the
economic characteristic of the host contract;
a separate instrument with the same terms as the embedded derivative would meet the
definition of a derivative; and
the hybrid or combined instrument is not recognized at fair value through profit or loss.
F-19
The Bank assesses whether embedded derivatives are required to be separated from host contracts
when the Bank first becomes a party to the contract. Subsequent reassessment is prohibited unless
there is a change in the terms of the contract that significantly modifies the cash flows that
otherwise would be required under the contract, in which case reassessment is required. The Bank
determines whether a modification to cash flows is significant by considering the extent to which
the expected future cash flows associated with the embedded derivative and the host contract and
whether the change is significant relative to the previously expected cash flow on the contract.
As of December 31, 2010 and 2009, the Bank does not have any embedded derivatives required to
be separated from the host contract.
HTM investments
HTM investments are quoted non-derivative financial assets with fixed or determinable payments
and fixed maturities for which the Bank’s management has the positive intention and ability to
hold to maturity. Where the Bank sells other than an insignificant amount of HTM investments,
the entire category would be tainted and reclassified to AFS investments. After initial
measurement, these investments are subsequently measured at amortized cost using the effective
interest rate (EIR) amortization method, less impairment in value. Amortized cost is calculated by
taking into account any discount or premium on acquisition and fees that are an integral part of the
EIR. The amortization is included in ‘Interest income on investment securities’ in the statement of
income. Gains and losses are recognized in the statement of income when the HTM investments
are derecognized and impaired, as well as through the amortization process. The losses arising
from impairment of such investments are recognized in the statement of income under ‘Provision
for credit and impairment losses’.
The effects of restatement on foreign currency denominated HTM investments are recognized in
the statement of income.
Amounts due from BSP and other banks, interbank loans receivable and securities purchased
under resale agreements (SPURA), loans and receivables
These are non-derivative financial assets with fixed or determinable payments and fixed maturities
that are not quoted in an active market. They are not entered into with the intention of immediate
or short-term resale and are not classified as ‘FVPL investments’, designated as ‘AFS
investments’ or ‘designated financial assets at FVPL’.
After initial measurement, ‘Due from BSP’, ‘Due from other banks’, ‘Interbank loans receivable
and SPURA’ and ‘Loans and receivables’ are subsequently measured at amortized cost using the
EIR amortization method, less allowance for credit losses. Amortized cost is calculated by taking
into account any discount or premium on acquisition and fees and costs that are an integral part of
the EIR. The amortization is included in the ‘Interest income’ in the statement of income. The
losses arising from impairment are recognized in ‘Provision for credit and impairment losses’ in
the statement of income.
AFS investments
AFS investments are those which are designated as such or do not qualify to be classified as FVPL
investments, HTM investments or loans and receivables. They are purchased and held
indefinitely, and may be sold in response to liquidity requirements or changes in market
conditions. They include equity investments, money market papers and other debt instruments.
F-20
After initial measurement, AFS investments are subsequently measured at fair value. The
effective yield component of AFS debt securities, as well as the impact of restatement on foreign
currency-denominated AFS debt securities, is reported in income. The unrealized gains and losses
arising from the fair valuation of AFS investments are excluded, net of tax, from reported income
and are reported as ‘Net unrealized gain (loss) on AFS investments’ in other comprehensive
income (OCI).
When the security is disposed of, the cumulative gain or loss previously recognized in OCI is
recognized as ‘Trading and securities gains - net’ in the statement of income. Where the Bank
holds more than one investment in the same security, these are deemed to be disposed on a
weighted average basis. Interest earned on holding AFS debt investments are reported as interest
income using the EIR. Dividends earned on holding AFS equity investments are recognized in the
statement of income as ‘Miscellaneous income’ when the right of the payment has been
established. The losses arising from impairment of such investments are recognized as ‘Provision
for credit and impairment losses’ in the statement of income.
Other financial liabilities carried at amortized cost
This category represents issued financial instruments or their components, which are not
designated at FVPL and comprises ‘Deposit liabilities’, ‘Subordinated notes and bills payable’,
‘Treasurer’s, cashier’s and manager’s checks’, ‘Accrued interest payable’, ‘Accounts payable’,
‘Bills purchased-contra’, ‘Other credits’, ‘Due to BSP’, ‘Dividends payable’, ‘Due to Treasurer of
the Philippines’ and ‘Deposits for keys-Safety deposit boxes (SDB)’, where the substance of the
contractual arrangement results in the Bank having an obligation either to deliver cash or another
financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of own equity shares. The
components of issued financial instruments that contain both liability and equity elements are
accounted for separately, with the equity component being assigned the residual amount after
deducting from the instrument as a whole the amount separately determined as the fair value of the
liability component on the date of issue.
After initial measurement, financial liabilities not qualified as and not designated as FVPL, are
subsequently measured at amortized cost using the EIR amortization method. Amortized cost is
calculated by taking into account any discount or premium on the issue and fees that are an
integral part of the EIR.
Derecognition of Financial Assets and Liabilities
Financial asset
A financial asset (or, where applicable a part of a financial asset or part of a group of financial
assets) is derecognized where:
the rights to receive cash flows from the asset have expired; or
the Bank retains the right to receive cash flows from the asset, but has assumed an obligation
to pay them in full without material delay to a third party under a “pass-through” arrangement;
or
the Bank has transferred its rights to receive cash flows from the asset and either (a) has
transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor
retained the risk and rewards of the asset but has transferred control over the asset.
F-21
Where the Bank has transferred its rights to receive cash flows from an asset or has entered into a
pass-through arrangement, and has neither transferred nor retained substantially all the risks and
rewards of the asset nor transferred control over the asset, the asset is recognized to the extent of
the Bank’s continuing involvement in the asset. Continuing involvement that takes the form of a
guarantee over the transferred asset is measured at the lower of original carrying amount of the
asset and the maximum amount of consideration that the Bank could be required to repay.
Financial liability
A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or has expired. Where an existing financial liability is replaced by another from the
same lender on substantially different terms, or the terms of an existing liability are substantially
modified, such an exchange or modification is treated as a derecognition of the original liability
and the recognition of a new liability, and the difference in the respective carrying amounts is
recognized in the statement of income.
Repurchase and Reverse Repurchase Agreements
Securities sold under agreements to repurchase at a specified future date (‘repos’) are not
derecognized from the statement of condition. The corresponding cash received, including
accrued interest, is recognized in the statement of condition as a loan to the Bank, reflecting the
economic substance of such transaction. The Bank had no outstanding repurchase agreements as
of December 31, 2010 and 2009.
Conversely, securities purchased under agreements to resell at a specified future date (‘reverse
repos’) are not recognized in the statement of condition. The corresponding cash paid, including
accrued interest, is recognized in the statement of condition as SPURA, and is considered a loan to
the counterparty. The difference between the purchase price and resale price is treated as interest
income and is accrued over the life of the agreement using the EIR amortization method.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the statement of
condition if, and only if, there is a currently enforceable legal right to offset the recognized
amounts and there is an intention to settle on a net basis, or to realize the asset and settle the
liability simultaneously. This is not generally the case with master netting agreements, and the
related assets and liabilities are presented gross in the statement of condition.
Impairment of Financial Assets
The Bank assesses at each statement of condition date whether there is objective evidence that a
financial asset or group of financial assets is impaired. A financial asset or a group of financial
assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a
result of one or more events that has occurred after the initial recognition of the asset (an incurred
‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the
financial asset or the group of financial assets that can be reliably estimated. Evidence of
impairment may include indications that the borrower or a group of borrowers is experiencing
significant financial difficulty, default or delinquency in interest or principal payments, the
probability that they will enter bankruptcy or other financial reorganization and where observable
data indicate that there is measurable decrease in the estimated future cash flows, such as changes
in arrears or economic conditions that correlate with defaults.
F-22
Financial assets carried at amortized cost
For financial assets carried at amortized cost, which includes loans and receivables, due from
banks and HTM investments, the Bank first assesses at each statement of condition date whether
objective evidence of impairment exists individually for financial assets that are individually
significant, or collectively for financial assets that are not individually significant.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of the
estimated future cash flows (excluding future credit losses that have not been incurred). The
present value of the estimated future cash flows is discounted at the financial asset’s original EIR.
If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the
current EIR, adjusted for the original credit risk premium. The calculation of the present value of
the estimated future cash flows of a collateralized financial asset reflects the cash flows that may
result from foreclosure less costs for obtaining and selling the collateral, whether or not
foreclosure is probable.
The carrying amount of the asset is reduced through use of an allowance account and the amount
of loss is charged to the statement of income. Interest income continues to be recognized based on
the original EIR of the asset. Loans and receivables, together with the associated allowance
accounts, are written off when there is no realistic prospect of future recovery and all collateral has
been realized. If, in a subsequent year, the amount of the estimated impairment loss decreases
because of an event occurring after the impairment was recognized, the previously recognized
impairment loss is reduced by adjusting the allowance account. If a future write-off is later
recovered, any amounts formerly charged are credited to ‘Provision for credit and impairment
losses’ in the statement of income.
If the Bank determines that no objective evidence of impairment exists for individually assessed
financial asset, whether significant or not, it includes the asset in a group of financial assets with
similar credit risk characteristics and collectively assesses for impairment. Those characteristics
are relevant to the estimation of future cash flows for groups of such assets by being indicative of
the debtors’ ability to pay all amounts due according to the contractual terms of the assets being
evaluated. Assets that are individually assessed for impairment and for which an impairment loss
is, or continues to be, recognized are not included in a collective assessment for impairment.
Assets individually assessed for impairment for which no impairment loss was measured are also
collectively assessed for impairment.
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis
of such credit risk characteristics as industry and age of receivables.
Future cash flows in a group of financial assets that are collectively evaluated for impairment are
estimated on the basis of historical loss experience for assets with credit risk characteristics similar
to those in the group.
Historical loss experience is adjusted on the basis of current observable data to reflect the effects
of current conditions that did not affect the period in which the historical loss experience is based
and to remove the effects of conditions in the historical period that do not exist currently.
Estimates of changes in future cash flows reflect, and are directionally consistent with changes in
related observable data from period to period (such as changes in unemployment rates, property
prices, commodity prices, payment status, or other factors that are indicative of incurred losses in
the group and their magnitude). The methodology and assumptions used for estimating future
cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates
and actual loss experience.
F-23
Restructured loans
Where possible, the Bank seeks to restructure loans rather than to take possession of collateral.
This may involve extending the payment arrangements and the agreement on new loan conditions.
Once the terms have been renegotiated, the loan is no longer considered past due. Management
continuously reviews restructured loans to ensure that all criteria are met and that future payments
are likely to occur. The loans continue to be subjected to an individual or collective impairment
assessment, calculated using the loan’s original EIR if the original loan has fixed interest rate and
the current repriced rate if the original loan is repriceable. The difference between the recorded
value of the original loan and the present value of the restructured cash flows, discounted at the
applicable interest rate, is recognized in ‘Provision for credit and impairment losses’ in the
statement of income.
AFS investments
For AFS investments, the Bank assesses at each statement of condition date whether there is
objective evidence that a financial asset or group of financial assets is impaired.
In case of equity investments classified as AFS investments, this would include a significant or
prolonged decline in the fair value of the investments below its cost. Where there is evidence of
impairment, the cumulative loss - measured as the difference between the acquisition cost and the
current fair value, less any impairment loss on that financial asset previously recognized in the
statement of income - is removed from equity and recognized in the statement of income.
Impairment losses on equity investments are not reversed through the statement of income.
Increases in fair value after impairment are recognized in the statement of comprehensive income.
In the case of debt instruments classified as AFS investments, impairment is assessed based on the
same criteria as financial assets carried at amortized cost. Future interest income is based on the
reduced carrying amount and is accrued based on the rate of interest used to discount future cash
flows for the purpose of measuring impairment loss. Such accrual is recorded as part of ‘Interest
income’ in the statement of income. If, in subsequent years, the fair value of a debt instrument
increased and the increase can be objectively related to an event occurring after the impairment
loss was recognized in the statement of income, the impairment loss is reversed through the
statement of income.
Revenue and Expense Recognition
Revenue is recognised when it is probable that future economic benefits will flow to the entity and
these benefits can be measured reliably. The Bank assesses its revenue arrangements against
specific criteria in order to determine if it is acting as principal or agent. The Bank concluded that
it is acting as a principal in all of its revenue arrangement. The following specific recognition
criteria must also be met before revenue is recognized:
Interest income and expense
For all financial instruments measured at amortized cost and interest bearing financial instruments
classified as AFS investments, interest income is recorded at the EIR, which is the rate that exactly
discounts estimated future cash payments or receipts through the expected life of the financial
instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset
or financial liability. The calculation takes into account all contractual terms of the financial
instrument (for example, prepayment options), includes any fees or incremental costs that are
directly attributable to the instrument and are an integral part of the EIR, but not future credit
losses.
F-24
The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its
estimates of payments or receipts. The adjusted carrying amount is calculated based on the
original EIR and the change in carrying amount is recorded as interest income.
Once the recorded value of a financial asset or group of similar financial assets has been reduced
due to an impairment loss, interest income continues to be recognized using the original EIR used
to discount future cash flows.
Fee and commission income
Fees earned for the provision of services over a period of time are accrued over that period. These
fees include investment fund fees, custodian fees, fiduciary fees, portfolio fees, credit related fees
and other service and management fees.
Dividends
Dividend income is recognized when the Bank’s right to receive payment is established.
Trading and securities gains - net
Income results from disposal of AFS investments and trading activities including all gains and
losses from changes in fair value for financial assets at FVPL.
Rental income
Rental income arising from leased properties is accounted for on a straight-line basis over the
lease terms on ongoing leases and is recorded in the statement of income under ‘Other operating
income’.
Income from sale of property and equipment, investment property and chattel mortgage properties
Income from sale of properties is recognized upon completion of the earning process and the
collectibility of the sales price is reasonably assured.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and other cash items,
amounts due from BSP and other banks, and interbank loans receivable and SPURA that are
convertible to known amounts of cash with original maturities of three months or less from dates
of placements and that are subject to insignificant risk of changes in value.
Business Combination and Goodwill
Business combinations are accounted for using the acquisition method. This involves recognizing
identifiable assets (including previously unrecognized intangible assets) and liabilities (including
contingent liabilities and excluding future restructuring) of the acquired business at fair value.
Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is
recognized as goodwill. If the cost of acquisition is less than the fair values of the identifiable net
assets acquired, the discount on acquisition is recognized directly in the statement of income in the
year of acquisition.
Goodwill is initially measured at cost being the excess of the acquisition cost over the share in the
net fair value of the acquired identifiable assets, liabilities and contingent liabilities. The Bank’s
goodwill arose from past purchases of branch business/offices from the Parent Company.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses.
For the purpose of impairment testing, goodwill acquired is, from the acquisition date, allocated to
each of the cash generating units that are expected to benefit from the synergies of the
combination, irrespective of whether the acquired other assets or liabilities are assigned to those
units.
F-25
Where goodwill forms part of a cash-generating unit and part of the operation within that unit is
disposed of, the goodwill associated with the operation disposed of is included in the carrying
amount of the operation when determining the gain or loss on disposal of the operation. Goodwill
disposed of in this circumstance is measured based on the relative values of the operation disposed
of and the portion of the cash-generating unit retained.
Investment in an Associate
Associates are entities over which the Bank has significant influence but not control, generally
accompanying a shareholding of between 20.00% and 50.00% of the voting rights. The Bank’s
investment in an associate represents its 25.00% interest in Toyota Financial Services Philippines
Corp. (TFSPC), an entity not listed in the PSE. Investment in an associate is accounted for under
the equity method of accounting.
The reporting period of TFSPC is the fiscal year-ending March 31. However, TFSPC prepares
financial statements for a 12-month period ending December 31 for the use of the Bank in
applying the equity method. The length of the reporting period is the same from period to period.
Where necessary, adjustments are made to bring the accounting policies in line with those of the
Bank.
Investment in a Joint Venture
Investment in a joint venture represents the Bank’s interest in a jointly controlled entity, whereby
the venturers have a contractual arrangement that establishes joint control over the economic
activities of Sumisho Motor Finance Corporation (SMFC), an entity not listed in the PSE. The
Bank’s investment in a joint venture represents its 40.00% interest in SMFC. Investment in a joint
venture is accounted for under the equity method of accounting.
The reporting period of SMFC is the calendar year ending December 31. Where necessary,
adjustments are made to bring the accounting policies in line with those of the Bank.
Under the equity method, an investment in an associate and a joint venture is carried in the
statement of condition at cost plus post-acquisition changes in the Bank’s share in the net assets of
the associate and a joint venture. Goodwill relating to an associate and a joint venture is included
in the carrying value of the investment and is not amortized. The Bank’s share in an associate’s
and a joint venture’s post-acquisition profits or losses is recognized in the statement of income,
and its share of post-acquisition movements in the associate’s and joint venture’s other
comprehensive income is recognized in the statement of comprehensive income. When the
Bank’s share of losses in an associate and a joint venture equals or exceeds its interest in the
associate or joint venture, including any other unsecured receivables, the Bank does not recognize
further losses, unless it has incurred obligations or made payments on behalf of the associate or
joint venture. The Bank’s interest in the associate or joint venture is the carrying amount of the
investment in the associate or joint venture under the equity method together with any long-term
interests that form part of the Bank's net investment in the associate or joint venture. Profits and
losses resulting from transactions between the Bank and an associate or joint venture are
eliminated to the extent of the Bank’s interest in the associate or joint venture.
Property and Equipment
Land is stated at cost less any impairment in value and depreciable properties including building,
furniture, fixtures and equipment, and leasehold improvements are stated at cost less accumulated
depreciation and accumulated impairment losses. The initial cost of property and equipment
consists of its purchase price and any directly attributable costs of bringing the asset to its working
condition and location for its intended use. Expenditures incurred after the assets have been put
F-26
into operation, such as repairs and maintenance, are normally charged against profit or loss in the
year in which the costs are incurred. In situations where it can be clearly demonstrated that the
expenditures have resulted in an increase in the future economic benefits expected to be obtained
from the use of property and equipment beyond its originally assessed standard of performance,
the expenditures are capitalized as additional cost of property and equipment.
Depreciation is calculated on a straight-line basis over the useful life of the asset as follows:
Buildings 25-50 years
Furniture, fixtures and equipment 3-5 years depending on the type of assets
Leasehold improvements 5 years or the term of the related leases,
whichever is shorter
An item of property and equipment is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the
asset (calculated as the difference between the net disposal proceeds and the carrying amount of
the asset) is included in the statement of income in the year the asset is derecognized.
The carrying values of property and equipment are reviewed for impairment when events or
changes in circumstances indicate the carrying value may not be recoverable. If any such
indication exists and where the carrying values exceed the estimated recoverable amount, the asset
or cash-generating units are written down to their recoverable amount (see policy on Impairment
of Nonfinancial Assets).
The asset’s residual values, useful lives and methods of depreciation are reviewed, and adjusted if
appropriate, at each financial year-end to ensure that these are consistent with the expected pattern
of economic benefits from the items of property and equipment.
Investment Properties
Investment properties are measured initially at cost, including transaction costs. An investment
property acquired through an exchange transaction is measured at fair value of the asset acquired
unless the fair value of such an asset cannot be measured in which case the investment property
acquired is measured at the carrying amount of asset given up. Foreclosed properties are
classified under investment properties from foreclosure date. Expenditures incurred after the
investment properties have been put into operations, such as repairs and maintenance costs, are
normally charged to income in the period in which the costs are incurred.
Subsequent to initial recognition, investment properties are carried at cost less accumulated
depreciation and impairment in value except for land which is stated at cost less impairment in
value. Depreciation is calculated on a straight-line basis using the remaining useful lives from the
time of acquisition of the investment properties.
The estimated useful lives of the depreciable assets are as follows:
Building and Condominium Units 10-40 years
Investment properties are derecognized when they have either been disposed of or when the
investment property is permanently withdrawn from use and no future benefit is expected from its
disposal. Any gains or losses on the retirement or disposal of an investment property are
recognized in the statement of income in ‘Gain (loss) on sale of investment properties’ in the year
of retirement or disposal.
F-27
Transfers are made to investment properties when, and only when, there is a change in use
evidenced by ending of owner occupation, commencement of an operating lease to another party
or ending of construction or development. Transfers are made from investment properties when,
and only when, there is a change in use evidenced by commencement of owner occupation or
commencement of development with a view to sale.
Chattel Mortgage Properties
Chattel mortgage properties comprise of repossessed vehicles. Chattel mortgage properties are
stated at cost less accumulated depreciation and impairment in value. Depreciation is calculated
on a straight-line basis using the remaining useful lives from the time of acquisition of the
vehicles. The useful lives of chattel mortgage properties are estimated to be 5 years.
Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of
intangible assets acquired in a business combination is its fair value as at the date of acquisition.
Following initial recognition, intangible assets are carried at cost less any accumulated
amortization and any accumulated impairment losses. Internally generated intangible assets,
excluding capitalized development costs, are not capitalized and expenditure is reflected in the
statement of income in the year in which the expenditure is incurred.
The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets
with finite lives are amortized over the useful economic life and assessed for impairment
whenever there is an indication that the intangible assets may be impaired. The amortization
period and the amortization method for an intangible asset with a finite useful life are reviewed at
least at each financial year-end. Changes in the expected useful life or the expected pattern of
consumption of future economic benefits embodied in the asset is accounted for by changing the
amortization period or method, as appropriate, and treated as changes in accounting estimates.
The amortization expense on intangible assets with finite lives is recognized in the statement of
income in the expense category consistent with the function of the intangible asset.
Intangible assets with indefinite useful lives are tested for impairment annually either individually
or at the cash generating unit level. Such intangibles are not amortized. The useful life of an
intangible asset with an indefinite life is reviewed annually to determine whether indefinite life
assessment continues to be supportable. If not, the change in the useful life assessment from
indefinite to finite is made on a prospective basis.
Gains or losses arising from the derecognition of an intangible asset are measured as the difference
between the net disposal proceeds and the carrying amount of the asset and are recognized in the
statement of income when the asset is derecognized.
License fees
License fees arose from acquisition of branches from a local bank. License fees have indefinite
useful lives and are tested for impairment on an annual basis.
F-28
Software costs
Software costs are carried at cost less accumulated amortization and any impairment in value.
Given the history of rapid changes in technology, computer software are susceptible to
technological obsolescence. Therefore, it is likely that their useful life is short. Software costs are
amortized on a straight-line basis over 5 years but maybe shorter depending on the period over
which the Bank expects to use the asset.
Impairment of Nonfinancial Assets
Property and equipment, investment and chattel mortgage properties
At each statement of condition date, the Bank assesses whether there is any indication that its
nonfinancial assets may be impaired. When an indicator of impairment exists or when an annual
impairment testing for an asset is required, the Bank makes a formal estimate of the recoverable
amount. Recoverable amount is the higher of an asset’s (or cash-generating unit’s) fair value less
costs to sell and its value in use and is determined for an individual asset, unless the asset does not
generate cash inflows that are largely independent of those from other assets or groups of assets, in
which case the recoverable amount is assessed as part of the cash generating unit to which it
belongs. Where the carrying amount of an asset (or cash generating unit) exceeds its recoverable
amount, the asset (or cash generating unit) is considered impaired and is written down to its
recoverable amount. In assessing value in use, the estimated future cash flows are discounted to
their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset (or cash generating unit).
An impairment loss is charged to operation in the year in which it arises.
An assessment is made at each statement of condition date as to whether there is any indication
that previously recognized impairment losses may no longer exist or may have decreased. If such
indication exists, the recoverable amount is estimated. A previously recognized impairment loss is
reversed only if there has been a change in the estimates used to determine the asset’s recoverable
amount since the last impairment loss was recognized. If that is the case, the carrying amount of
the asset is increased to its recoverable amount. That increased amount cannot exceed the
carrying amount that would have been determined, net of depreciation, had no impairment loss
been recognized for the asset in prior years. Such reversal is recognized in the statement of
income unless the asset is carried at a revalued amount, in which case the reversal is treated as a
revaluation increase. After such a reversal, the depreciation expense is adjusted in future years to
allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its
remaining life.
Goodwill
Goodwill is reviewed for impairment, annually or more frequently if events or changes in
circumstances indicate that the carrying value may be impaired.
Impairment is determined for goodwill by assessing the recoverable amount of the cash generating
unit (or group of cash generating units) to which the goodwill relates. Where the recoverable
amount of the cash generating unit (or group of cash generating units) is less than the carrying
amount of the cash generating unit (or group of cash generating units) to which goodwill has been
allocated, an impairment loss is recognized immediately in the statement of income. Impairment
losses relating to goodwill cannot be reversed for subsequent increases in its recoverable amount
in future periods. The Bank performs its annual impairment test of goodwill at the statement of
condition date.
F-29
Intangible assets
Intangible assets with indefinite useful lives are tested for impairment annually at the statement of
condition date either individually or at the cash generating unit level, as appropriate.
Intangible assets with finite lives are assessed for impairment whenever there is an indication that
the intangible asset may be impaired.
Investment in an associate and a joint venture
After application of the equity method, the Bank determines whether it is necessary to recognize
an impairment loss on the Bank’s investment in an associate and a joint venture. The Bank
determines at each statement of condition date whether there is any objective evidence that the
investment in an associate and a joint venture are impaired. If this is the case, the Bank calculates
the amount of impairment as being the difference between the fair value of the associate and joint
venture and the carrying amount and recognizes the amount in the statement of income.
Leases
The determination of whether an arrangement is, or contains a lease is based on the substance of
the arrangement at inception date of whether the fulfillment of the arrangement is dependent on
the use of a specific asset or assets or the arrangement conveys a right to use the asset. A
reassessment is made after inception of the lease only if one of the following applies:
(a) there is a change in contractual terms, other than a renewal or extension of the arrangement;
(b) a renewal option is exercised or extension granted, unless that term of the renewal or
extension was initially included in the lease term;
(c) there is a change in the determination of whether fulfillment is dependent on a specified asset;
or
(d) there is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date when the
change in circumstances gives rise to the reassessment for scenarios (a), (c) or (d) above, and at
the date of renewal or extension period for scenario (b).
Bank as a lessee
Finance leases, which transfer to the Bank substantially all the risks and benefits incidental to
ownership of the leased item, are capitalized at the inception of the lease at the fair value of the
leased property or, if lower, at the present value of the minimum lease payments. Lease payments
are apportioned between the finance charges and reduction of the lease liability so as to achieve a
constant rate of interest on the remaining balance of the liability. Finance charges are reflected in
the statement of income under ‘Interest expense’.
Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset
and the lease term, if there is no reasonable certainty that the Bank will obtain ownership by the
end of the lease term.
Leases where the lessor retains substantially all the risk and benefits of ownership of the assets are
classified as operating leases. Operating lease payments are recognized as an expense in the
statement of income on a straight-line basis over the lease term.
F-30
Bank as a lessor
Leases where the Bank does not transfer substantially all the risks and benefits of ownership of the
asset are classified as operating leases. Initial direct costs incurred in negotiating an operating
lease are added to the carrying amount of the leased asset and recognized over the lease term on
the same basis as rental income. Contingent rents are recognized as income in the period in which
they are earned.
Retirement Cost
The Bank has a funded, noncontributory defined benefit retirement plan, administered by trustees,
covering their permanent employees.
The retirement cost of the Bank is determined using the projected unit credit method. Under this
method, the current service cost is the present value of retirement benefits payable in the future
with respect to services rendered in the current period.
The liability recognized in the statement of condition in respect of defined benefit pension plan is
the present value of the defined benefit obligation at the statement of condition date less the fair
value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past
service costs. The defined benefit obligation is calculated annually by an independent actuary
using the projected unit credit method. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows using interest rate on government
bonds that have terms to maturity approximating the terms of the related retirement liability.
Actuarial gains and losses arising from experience adjustments and changes in actuarial
assumptions are credited to or charged against income when the net cumulative unrecognized
actuarial gains and losses at the end of the previous period exceeded 10% of the higher of the
defined benefit obligation and the fair value of plan assets at that date. These excess gains or
losses are recognized over the expected average remaining working lives of the employees
participating in the plan.
Past-service costs, if any, are recognized immediately in income, unless the changes to the pension
plan are conditional on the employees remaining in service for a specified period of time (the
vesting period). In this case, the past-service costs are amortized on a straight-line basis over the
vesting period.
The defined benefit asset or liability comprises the present value of the defined benefit obligation
less past service costs not yet recognized and less the fair value of plan assets out of which the
obligations are to be settled directly. The value of any asset is restricted to the sum of any past
service cost not yet recognized and the present value of any economic benefits available in the
form of refunds from the plan or reductions in the future contributions to the plan.
Provisions
Provisions are recognized when the Bank has a present obligation (legal or constructive) as a
result of a past event and it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. Where the Bank expects some or all of a provision to be reimbursed, for example,
under an insurance contract, the reimbursement is recognized as a separate asset but only when the
reimbursement is virtually certain. The expense relating to any provision is presented in the
statement of income, net of any reimbursement. If the effect of the time value of money is
material, provisions are determined by discounting the expected future cash flows at a pre-tax rate
that reflects current market assessments of the time value of money and, where appropriate, the
risks specific to the liability. Where discounting is used, the increase in the provision due to the
passage of time is recognized as ‘Interest expense’.
F-31
Contingent Liabilities and Contingent Assets
Contingent liabilities are not recognized in the financial statements but are disclosed unless the
possibility of an outflow of resources embodying economic benefits is remote. Contingent assets
are not recognized but are disclosed in the financial statements when an inflow of economic
benefits is probable.
Debt Issue Costs
Issuance, underwriting and other related expenses incurred in connection with the issuance of debt
instruments are deferred and amortized over the terms of the instruments using the EIR method.
Unamortized debt issuance costs are netted against the carrying amount of the debt instrument in
the statement of condition.
Income Taxes
Income tax on profit or loss for the year comprises current and deferred tax. Income tax is
determined in accordance with Philippine tax law. Income tax is recognized in the statement of
income, except to the extent that it relates to other comprehensive income items recognized
directly in the statement of comprehensive income.
Current income tax
Current income tax is the expected tax payable on the taxable income for the period, using the tax
rates enacted at the statement of condition date, together with adjustments to tax payable in respect
to prior years.
Deferred income tax
Deferred tax is provided, using the balance sheet liability method, on all temporary differences at
the statement of condition date between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary differences, including asset
revaluation. Deferred tax assets are recognized for all deductible temporary differences and
carryforward of unused tax losses and tax credits from excess minimum corporate income tax
(MCIT) over the regular corporate income tax (RCIT), to the extent that it is probable that taxable
profit will be available against which the deductible temporary differences and carryforward of
unused tax losses and MCIT can be utilized.
The carrying amount of deferred tax assets is reviewed at each statement of condition date and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to
allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are
reassessed at each statement of condition date and are recognized to the extent that it has become
probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set
off current tax assets against current tax liabilities and deferred taxes related to the same taxable
entity and the same taxation authority.
Deferred tax assets and liabilities are measured at the tax rates that are applicable to the period
when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been
enacted or substantively enacted at the statement of condition date.
Current tax and deferred tax relating to items recognized directly in OCI is also recognized in
equity and not in the statement of income.
F-32
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income for the year by the weighted
average number of common shares issued and outstanding during the year, after giving retroactive
effect to stock dividends declared, stock rights exercised and stock splits, if any, declared during
the year. As of December 31, 2010 and 2009, there were no potential common shares with
dilutive effect on the basic EPS of the Bank.
Dividends on Common Shares
Dividends on common shares are recognized as a liability and deducted from equity when
approved by the BOD of the Bank and the BSP. Dividends for the year that are approved after the
statement of condition date are dealt with as an event after the statement of condition date.
Subsequent Events
Post year-end events that provide additional information about the Bank’s position at the statement
of condition date (adjusting events) are reflected in the financial statements.
Post year-end events that are not adjusting events are disclosed in the notes to the financial
statements when material.
Segment Reporting
The Bank’s operating businesses are organized and managed separately according to the nature of
the products and services provided, with each segment representing a strategic business unit that
offers different products and serves different markets. Financial information on business
segments is presented in Note 6. The Bank’s assets generating revenues are all located in the
Philippines (i.e., one geographical location). Therefore, geographical segment information is no
longer presented.
Fiduciary Activities
Assets and income arising from fiduciary activities together with related undertakings to return
such assets to customers are excluded from the financial statements where the Bank acts in a
fiduciary capacity such as nominee, trustee or agent.
Standards Issued but not yet Effective
Standards issued but not yet effective up to the date of issuance of the Bank’s financial statements
are listed below. This listing is of standards and interpretations issued, which the Bank reasonably
expects to be applicable at a future date. The Bank intends to adopt those standards when they
become effective. Except as otherwise indicated, the Bank does not expect the adoption of these
amended PFRS and Philippine Interpretation to have significant impact on its financial statement.
PAS 12, Income Taxes (Amendment) - Deferred Tax: Recovery of Underlying Assets
The amended standard is effective for annual periods beginning on or after January 1, 2012. The
amendment provides a practical solution to the problem of assessing whether recovery of an asset
will be through use or sale. It introduces a presumption that recovery of the carrying amount of an
asset will, normally, be through sale.
PAS 24 (Amended), Related Party Disclosures
The amended standard is effective for annual periods beginning on or after January 1, 2011. It
clarified the definition of a related party to simplify the identification of such relationships and to
eliminate inconsistencies in its application. The revised standard introduces a partial exemption of
disclosure requirements for government-related entities. Early adoption is permitted for either the
partial exemption for government-related entities or for the entire standard.
F-33
PAS 32, Financial Instruments: Presentation (Amendment) - Classification of Rights Issues
The amendment to PAS 32 is effective for annual periods beginning on or after February 1, 2010
and amended the definition of a financial liability in order to classify rights issues (and certain
options or warrants) as equity instruments in cases where such rights are given pro rata to all of
the existing owners of the same class of an entity’s non-derivative equity instruments, or to
acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency.
PFRS 7, Financial Instruments: Disclosures (Amendments) - Disclosures-Transfers of Financial
Assets
The amendments of PFRS 7 are effective for annual periods beginning on or after July 1, 2011.
The amendments will allow users of financial statements to improve their understanding of
transfer transactions of financial assets (for example, securitizations), including understanding the
possible effects of any risks that may remain with the entity that transferred the assets. The
amendments also require additional disclosures if a disproportionate amount of transfer
transactions are undertaken around the end of a reporting period.
PFRS 9, Financial Instruments: Classification and Measurement
PFRS 9, as issued in 2010, reflects the first phase of the work on the replacement of PAS 39 and
applies to classification and measurement of financial assets and financial liabilities as defined in
PAS 39. The standard is effective for annual periods beginning on or after January 1, 2013. In
subsequent phases, hedge accounting and derecognition will be addressed. The completion of this
project is expected in early 2011. The adoption of the first phase of PFRS 9 will have an effect on
the classification and measurement of the Bank’s financial assets. The Bank will quantify the
effect in conjunction with the other phases, when issued, to present a comprehensive picture of
impact of adoption on the financial position or performance of the Bank.
Philippine Interpretation IFRIC-14 (Amendment) - Prepayments of a Minimum Funding
Requirement
The amendment to Philippine Interpretation IFRIC-14 is effective for annual periods beginning on
or after January 1, 2011, with retrospective application. The amendment provides guidance on
assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat
the prepayment of a minimum funding requirement as an asset.
Philippine Interpretation IFRIC-15, Agreement for Construction of Real Estate
This Interpretation, effective for annual periods beginning on or after January 1, 2012, covers
accounting for revenue and associated expenses by entities that undertake the construction of real
estate directly or through subcontractors. The Interpretation requires that revenue on construction
of real estate be recognized only upon completion, except when such contract qualifies as
construction contract to be accounted for under PAS 11, Construction Contracts, or involves
rendering of services in which case revenue is recognized based on stage of completion. Contracts
involving provision of services with the construction materials and where the risks and reward of
ownership are transferred to the buyer on a continuous basis will also be accounted for based on
stage of completion.
Philippine Interpretation IFRIC-19, Extinguishing Financial Liabilities with Equity Instruments
This Interpretation is effective for annual periods beginning on or after July 1, 2010. The
interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability
qualify as consideration paid. The equity instruments issued are measured at their fair value. In
case that this cannot be reliably measured, the instruments are measured at the fair value of the
liability extinguished. Any gain or loss is recognized immediately in profit or loss.
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Improvements to PFRSs 2010
Improvements to IFRSs are an omnibus of amendments to PFRSs. The amendments have not been
adopted as they become effective for annual periods on or after either July 1, 2010 or January 1,
2011. The Bank, however, expects no impact from the adoption of the following amendments on
its financial position or performance:
PFRS 3, Business Combinations
PFRS 7, Financial Instruments: Disclosures
PAS 1, Presentation of Financial Statements
PAS 27, Consolidated and Separate Financial Statements
Philippine Interpretation IFRIC-13, Customer Loyalty Programmes
3. Significant Accounting Judgments and Estimates
The preparation of the financial statements in accordance with PFRS requires the Bank to make
judgments and estimates that affect the reported amounts of assets, liabilities, income and
expenses and disclosure of contingent assets and contingent liabilities. Future events may occur
which will cause the judgments and assumptions used in arriving at the estimates to change. The
effects of any change in judgments and estimates are reflected in the financial statements as they
become reasonably determinable.
Judgments and estimates are continually evaluated and are based on historical experience and
other factors, including expectations of future events that are believed to be reasonable under the
circumstances.
Judgments
(a) Operating leases
Bank as lessor
The Bank has entered into on its properties. The Bank has determined based on an evaluation
of the terms and conditions of the arrangements (i.e., the lease does not transfer ownership of
the asset to the lessee by the end of the lease term, the lessee has no option to purchase the
asset at a price that is expected to be sufficiently lower than the fair value at the date the
option is exercisable and the lease term is not for the major part of the asset’s economic life),
that it retains all the significant risks and rewards of ownership of these properties which are
leased out on operating leases.
Bank as lessee
The Bank has entered into leases on premises it uses for its operations. The Bank has
determined, based on the evaluation of the terms and condition of the lease agreement, that all
significant risks and rewards of ownership of the properties it leases on operating lease are not
transferable to the Bank.
(b) Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded on the statement of
condition cannot be derived from active markets, they are determined using a variety of
valuation techniques that include the use of mathematical models. The input to these models
is taken from observable markets where possible, but where this is not feasible, a degree of
judgment is required in establishing fair values. These estimates may include consideration of
liquidity, volatility and correlation.
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(c) HTM investments
The classification to HTM investment requires significant judgment. In making this
judgment, the Bank evaluates its intention and ability to hold such investments to maturity. If
the Bank fails to keep these investments to maturity other than in certain specific
circumstances - for example, selling an insignificant amount close to maturity - it will be
required to reclassify the entire portfolio to AFS investments. The investments would
therefore be measured at fair value and not at amortized cost.
As of December 31, 2010 and 2009, the fair market value of HTM investments amounted to
P=10.4 billion and P=5.1 billion, respectively (see Note 4). The carrying value of HTM
investments amounted to P=9.2 billion and P=4.8 billion as of December 31, 2010 and 2009,
respectively (see Note 8).
(d) Financial assets not quoted in an active market
The Bank classifies financial assets by evaluating, among others, whether the asset is quoted
or not in an active market. Included in the evaluation on whether a financial asset is quoted in
an active market is the determination on whether quoted prices are readily and regularly
available, and whether those prices represent actual and regularly occurring market
transactions on an arm’s length basis.
(e) Functional currency
PAS 21 requires management to use its judgment to determine the entity’s functional currency
such that it most faithfully represents the economic effects of the underlying transactions,
events and conditions that are relevant to the entity. In making this judgment, the Bank
considers the following:
a) the currency that mainly influences sales prices for financial instruments and services (this
will often be the currency in which sales prices for its financial instruments and services
are denominated and settled);
b) the currency in which funds from financing activities are generated; and
c) the currency in which receipts from operating activities are usually retained.
Estimates
(a) Credit losses on loans and receivables
The Bank reviews its loans and receivables at each statement of condition date to assess
whether an impairment loss should be recorded in the statement of income. In particular, the
management estimates the amount and timing of future cash flows based on a number of
factors and calculates the impairment loss. Actual results may differ, at which event, the Bank
adjusts the impairment loss and ensures that allowance for it remains adequate.
In addition to specific allowance against individually significant loans and receivables, the
Bank also makes a collective impairment allowance against exposures which, although not
specifically identified as requiring a specific allowance, have a greater risk of default than
when originally granted. This collective allowance is based on any deterioration in the
internal rating of the loan or investment since it was granted or acquired. This collective
allowance is based on changes in factors that are indicative of incurred losses, such as
deterioration in payment status and underlying property prices, among others.
As of December 31, 2010 and 2009, the allowance for credit losses on loans and receivables
amounted to P=4.5 billion and P=3.9 billion, respectively (see Note 15). Loans and receivables
are carried at P=53.2 billion and P=47.3 billion as of December 31, 2010 and 2009, respectively
(see Note 9).
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(b) Valuation of unquoted AFS equity investments
The Group’s investments in equity securities that do not have quoted market price in an active
market and whose fair value cannot be reliably measured are carried at cost.
As of December 31, 2010 and 2009, carrying amounts of unquoted equity securities amounted
to P=1.4 million as of December 31, 2010 and 2009 (see Note 8).
(c) Impairment of quoted AFS equity investments
The Bank treats AFS equity investments as impaired when there has been a significant or
prolonged decline in the fair value below its cost or where other objective evidence of
impairment exists. The determination of what is ‘significant’ or ‘prolonged’ requires
judgment. The Bank treats ‘significant’ generally as 20% or more of the original cost of the
investment, and ‘prolonged’, greater than 6 months. In addition, the Bank evaluates other
factors, including normal volatility in share price for quoted equities.
As of December 31, 2010 and 2009, the allowance for impairment losses on quoted AFS
equity investments amounted to P=2.2 million. Quoted AFS equity investments are carried at
P=3.0 million as of December 31, 2010 and 2009 (see Note 8).
(d) Impairment of nonfinancial assets
Property and equipment, chattel mortgage properties, and intangible assets
The Bank assesses impairment on assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The factors that the
Bank considers important which could trigger an impairment review include the following:
significant underperformance relative to expected historical or projected future operating
results;
significant changes in the manner of use of the acquired assets or the strategy for overall
business; and
significant negative industry or economic trends.
The Bank recognizes an impairment loss whenever the carrying amount of an asset exceeds
its recoverable amount. The recoverable amount is computed using the fair value less costs to
sell for property and equipment, investment properties and chattel mortgage properties.
Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-
generating unit to which the asset belongs. As of December 31, 2010 and 2009, there were no
main events and circumstances that led to the recognition of impairment losses for
individually significant investment properties.
As of December 31, 2010, the carrying values of property and equipment, investment
properties, intangible assets and chattel mortgage properties amounted to P=2.1 billion,
P=2.8 billion, P=187.1 million and P=233.5 million, respectively. As of December 31, 2009, the
carrying values of property and equipment, investment properties, intangible assets and chattel
mortgage properties amounted to P=2.0 billion, P=2.6 billion, P=143.9 million and P=180.4 million,
respectively (see Notes 11, 12, 13 and 14).
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Investments in an associate and a joint venture
The Bank assesses impairment on its investments in an associate and a joint venture whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Among others, the factors that the Bank considers important which could trigger
an impairment review on its investments in an associate and a joint venture include the
following:
Deteriorating or poor financial condition;
Recurring net losses; and
Significant changes (i.e. technological, market, economic, or legal environment in which
the subsidiary or associate operates) with an adverse effect on the subsidiary or associate
have taken place during the period, or will take place in the near future.
An impairment loss is recognized whenever the carrying amount of an asset exceeds its
recoverable amount. The recoverable amount is determined based on the asset’s value in use.
As of December 31, 2010 and 2009, the carrying values of the Bank’s investments in an
associate and a joint venture amounted to P=829.9 billion and P=788.3 million, respectively
(see Note 10).
Goodwill
The Bank’s management conducts an annual review for any impairment in value of the
goodwill. Goodwill is written down for impairment where the net present value of the
forecasted future cash flows from the business is insufficient to support its carrying value.
The Bank used its weighted average cost of capital in discounting the expected cash flows
from specific cash generating units.
Future cash flows from the business are estimated based on the theoretical annual income of
the cash generating units. Average growth rate was derived from the average increase in
annual income during the last 5 years.
The recoverable amount of the cash generating unit has been determined based on a value-in-
use calculation using cash flow projections from financial budgets approved by senior
management covering a five-year period. The pre-tax discount rate applied to cash flow
projections is 12.00%.
Key assumptions in value-in-use calculation of cash generating units are most sensitive to the
following assumptions: a.) interest margin; b.) discount rates; and c.) projected growth rates
used to extrapolate cash flows beyond the budget period.
As of December 31, 2010 and 2009, the Bank’s goodwill amounted to P=53.6 million
(see Note 13).
(e) Fair value of investment properties
The fair values of the Bank’s investment properties have been derived on the basis of recent
sales of similar properties in the same areas as the investment properties and taking into
account the economic conditions prevailing at the time the valuations were made.
(f) Present value of retirement obligation
The cost of defined benefit pension plan and other post employment benefits is determined
using actuarial valuation. The actuarial valuation involves making assumptions about
discount rates, expected rates of return on plan assets, future salary increases, mortality rates
and future pension increases. Due to the long term nature of this plan, such estimates are
subject to significant uncertainty.
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The expected rate of return on plan assets of 8.44% and 6.00% as of January 1, 2010 and
2009, respectively, was based on market prices prevailing on the date of valuation, applicable
to the period over which the obligation is to be settled. The assumed discount rates were
determined using the market yields on Philippine government bonds with terms consistent
with the expected employee benefit payout as of statement of condition dates. Refer to Note
24 for the details of assumptions used in the actuarial valuation.
As of December 31, 2010 and 2009, the present value of the retirement obligation of the Bank
amounted to P=647.0 million and P=512.3 million, respectively (see Note 24).
(g) Recognition of deferred income taxes
Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that
taxable profit will be available against which the losses can be utilized. Significant
management judgment is required to determine the amount of deferred tax assets that can be
recognized, based upon the likely timing and level of future taxable profits together with
future tax planning strategies.
Estimates of future taxable income indicate that temporary differences will be realized in the
future. As discussed in Note 27, net recognized deferred tax assets as of December 31, 2010
and 2009 amounted to P=705.4 million and P=1.3 billion, respectively.
(h) Contingent liabilities
The Bank is a defendant in legal actions arising from normal business activities. Management
believes that the ultimate liability, if any, resulting from these cases will not have a material
effect on the Bank’s financial statements (see Note 31).
(f) Estimated useful lives of property and equipment, investment properties and software cost
The Bank estimates the useful lives of its property and equipment, investment properties and
software cost. This estimate is reviewed periodically to ensure that the period of depreciation
and amortization are consistent with the expected pattern of economic benefits from the items
of property and equipment and investment properties.
As of December 31, 2010, carrying value of depreciable property and equipment and
investment properties amounted to P=1.9 billion and P=1.2 billion, respectively. As of
December 31, 2009, carrying value of depreciable property and equipment and investment
properties amounted to P=1.8 billion and P=1.1 billion, respectively (see Note 11 and 12). As of
December 31, 2010 and 2009, carrying value of software costs amounted to P=163.0 million
and P=120.8 million, respectively (see Note 13).
4. Fair Value Measurement
The following describes the methodologies and assumptions used to determine the fair values of
financial instruments:
Cash and other cash items, due from BSP, due from other banks, interbank loans receivable and
SPURA, accounts receivable, accrued interest receivables, bills purchased, returned checks and
other cash items (RCOCI), shortages, and petty cash fund - Carrying amounts approximate fair
values due to the relatively short-term maturities of these assets.
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Debt investments - Fair values are generally based on quoted market prices. If the market prices
are not readily available, fair values are estimated using either values obtained from independent
parties offering pricing services or adjusted quoted market prices of comparable investments or
using the discounted cash flow methodology using rates currently available for debt on similar
terms, credit risk and remaining maturities.
Quoted AFS equity investments - Fair values are based on quoted prices published in markets.
Unquoted AFS equity investments - Fair values could not be reliably determined due to the
unpredictable nature of future cash flows and the lack of suitable methods of arriving at a reliable
fair value. Hence, these investments are carried at cost less allowance for impairment losses.
Currently, there is no available market to sell these unquoted AFS equity investments. The Bank
will hold unto the investment until management decides to sell them when there will be offers to
buy out such investments on the appearance of an available market where the investments can be
sold.
Receivable from customers and other receivables except accounts receivable, Accrued interest
receivable, Bills purchased and Security deposits - Fair values of loans are estimated using the
discounted cash flow methodology, using the Bank’s current incremental lending rates for similar
types of loans.
Subordinated notes and Time deposit - Fair values are estimated using the discounted cash flow
methodology using the Bank’s current incremental borrowing rates for similar borrowings with
maturities consistent with those remaining for the liability being valued.
Demand deposits, savings deposits, treasurer’s, cashier’s and manager’s checks, accrued interest
payable, accounts payable, bills purchased-contra, other credits, dividends payable, due to
Treasurer of the Philippines, due to BSP, and deposits for keys-SDB - Carrying amounts
approximate fair values due to either the demand nature or the relatively short-term maturities of
these liabilities.
Set out below is a comparison by class of carrying amounts and fair values of financial
instruments that are carried in the financial statements (in thousands):
2010 2009
Carrying Value Fair Value Carrying Value Fair Value
Financial Assets
Loans and receivables Cash and other cash items P=3,163,940 P=3,163,940 P=2,632,885 P=2,632,885
Due from BSP 2,899,592 2,899,592 4,937,990 4,937,990
Due from other banks 7,520,836 7,520,836 1,528,848 1,528,848 Interbank loans receivable and SPURA 3,586,560 3,586,560 5,900,000 5,900,000
Receivable from customers:
Consumption loans 22,038,472 24,453,677 17,225,020 13,567,880 Real estate loans 17,340,010 17,414,597 15,595,543 10,176,751
Commercial loans 8,942,653 9,211,419 8,816,419 7,096,661
Personal loans 3,147,757 4,947,987 3,191,161 3,624,792 Bills discounted 11,792 10,913 12,897 12,305
Other receivables: Accrued interest receivable 617,452 617,452 1,002,095 1,002,095
Sales contract receivable 612,086 590,946 636,924 402,252
Unquoted debt securities 400,000 446,065 400,000 435,803 Accounts receivable 44,383 44,383 299,479 299,479
Bills purchased 53,030 53,030 128,699 128,699
Other assets (Note 14):
(Forward)
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2010 2009
Carrying Value Fair Value Carrying Value Fair Value
Others Security deposits P=76,325 P=69,701 P=69,064 P=53,497
RCOCI 27,842 27,842 46,062 46,062
Petty cash fund 300 300 384 384 Shortages 86 86 402 402
FVPL investments
HFT - Government securities 797,427 797,427 173,265 173,265 Derivatives - Republic of the Philippines (ROP)
warrants 70,889 70,889 74,778 74,778
AFS investments Government debt securities 16,195,916 16,195,916 18,256,949 18,256,949
Quoted equity securities 3,005 3,005 3,005 3,005
Unquoted equity securities 1,418 1,418 1,418 1,418 HTM investments
Treasury notes 5,570,500 6,484,348 1,643,756 1,723,631
Government bonds 3,592,085 3,921,087 3,129,095 3,353,275
Total assets P=96,714,356 P=102,533,416 P=85,706,138 P=75,433,106
Financial Liabilities
Other liabilities at amortized cost Deposit liabilities:
Demand P=7,170,222 P=7,170,222 P=8,188,088 P=8,188,088 Savings 10,147,794 10,147,794 9,403,399 9,403,399
Time 70,200,793 71,142,589 59,798,724 61,327,885
Subordinated notes 1,977,141 2,039,082 1,973,882 2,171,165 Treasurer’s, cashier’s and manager’s checks 649,434 649,434 505,738 505,738
Accrued interest payable 200,097 200,097 189,492 189,492
Accrued expense payable 752,779 752,779 620,027 620,027 Other liabilities (Note 19):
Accounts payable 676,738 676,738 636,652 636,652
Other credits 186,438 186,438 189,583 189,583 Bills purchased-contra 54,333 54,333 130,002 130,002
Due to BSP – – 7,495 7,495
Dividends payable – – 36,038 36,038 Due to Treasurer of the Philippines 6,303 6,303 6,332 6,332
Deposits for keys 1,040 1,040 1,132 1,132
Others* 1,764 1,764 2,412 2,412
Total liabilities P=92,024,876 P=93,028,613 P=81,688,996 P=83,415,440
* Others under financial liabilities comprise of payment orders payable and overages.
The following table shows financial instruments recognized at fair value (in thousands); analyzed
among those whose fair value is based on:
Level 1 - quoted market prices in active markets for identical assets or liabilities; when fair
values of listed equity and debt securities, as well as publicly traded derivatives at the
reporting date are based on quoted market prices or binding dealer price quotations, without
any deduction for transaction costs, the instruments are included within Level 1 of the
hierarchy.
Level 2 - those involving inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (as prices) or indirectly (derived from
prices); for all other financial instruments, fair value is determined using valuation techniques.
Valuation techniques include net present value techniques, comparison to similar instruments
for which market observable prices exist and other revaluation models; and
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Level 3 - those with inputs for the asset or liability that are not based on observable market
data (unobservable inputs); instruments included in Level 3 are those for which there are
currently no active market.
2010
Level 1 Level 2 Level 3 Total
Financial Assets
FVPL investments
HFT - government
securities P=797,427 P=– P=– P=797,427
Derivatives - ROP warrants – 70,889 – 70,889
AFS investments
Government securities 14,599,372 1,596,544 – 16,195,916
Quoted equity securities 3,005 – – 3,005
2009
Level 1 Level 2 Level 3 Total
Financial Assets
FVPL investments
Held for trading - government
securities P=173,265 P=– P=– P=173,265
Derivatives - ROP warrants – 74,778 – 74,778
AFS investments
Government securities 17,196,092 1,060,857 – 18,256,949
Quoted equity securities 3,005 – – 3,005
5. Financial Risk Management Policies and Objectives
The Bank has exposure to the following risks from its use of financial instruments:
Credit risk
Market risk
Liquidity risk
Organization risk management structure continues to be a top-down organization, with the BOD at
the helm of all major initiatives.
Discussed below are the relevant sections on roles and responsibilities from the Risk Management
Committee (RMC) Charter:
BOD
The corporate powers of the Bank are vested in and are exercised by the BOD, who conducts its
business and controls its property. The BOD approves broad risk management strategies and
policies and ensures that risk management initiatives and activities are consistent with the Bank’s
overall objectives. The BOD appoints the members of the RMC.
RMC
The RMC is composed of at least three BOD members who possess a range of expertise and
adequate knowledge of the Bank’s risk exposures to be able to develop appropriate strategies for
preventing losses and minimizing the impact of losses when they occur.
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The BOD may also appoint non-Directors to the RMC as part of the Metrobank Group risk
oversight measures. However, only Bank Directors shall be considered as voting members of the
RMC. Non-voting members are appointed in an advisory capacity.
The RMC oversees the system of limits to discretionary authority that the BOD delegates to the
management and ensures that the system remains effective, the limits are observed, and that
immediate corrective actions are taken whenever limits are breached.
The RMC meets on a monthly basis and is supported by the Risk Management Office (RMO). In
the absence of the RMC Chairman, a non-executive Director shall preside. RMC resolutions,
which require the concurrence of the majority of its voting members, are presented to the BOD for
confirmation.
RMO
The RMO, headed by the Chief Risk Officer, is a function that is independent from the Bank’s
business line functions and reports directly to the BOD, through the RMC. The RMO assists the
RMC in carrying out its responsibilities by:
analyzing, communicating, implementing, and maintaining the Risk Management Policies
approved by the RMC and the BOD;
spearheading the regular review of the Bank’s Risk Management Policy Manual and making
or elevating recommendations that enhance the risk management process to the RMC and the
BOD, for their approval;
ensuring that the risks arising from the Bank’s activities are identified, measured, analyzed,
reported to and understood by Risk Takers, Management, and the Board. The RMO analyzes
limit exceptions and recommends enhancements to the limits structure.
The RMO does not assume risk-taking accountability nor does it have approving authority. The
RMO’s role is to act as liaison and to provide support to the Board, RMC, the President, the
Administrative Risk Management Committees (ARMC) and other Management Committees, Risk
Takers and other Support and Control Functions on risk-related matters.
President
The President is the Chief Executive Officer of the Bank and has the primary responsibility of
carrying out the policies and objectives of the BOD. The President exercises the authorities
delegated to him by the BOD and may recommend such policies and objectives he deems
necessary for the continuing progress of the Bank.
ARMC
The ARMC is the management-level counterpart of the BOD-level RMC, and provides the latter
with the necessary support of Senior Management on risk-related matters.
As defined in the Risk Management Policy Manual, Senior Management is actively involved in
planning, approving, reviewing and assessing all risks through various committees. The ARMC,
in particular, provides a means of facilitating overall risk management.
It is composed of Senior Officers with overall responsibility for the lending business, Branch
Banking, Internal Audit, Compliance, Finance, Operations, Credit Administration, Treasury and
Risk Management.
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An Executive Vice President serves as Chair and the President serves as Adviser to the ARMC.
The ARMC oversees operational, credit, market and liquidity risk management, and recommends
to the RMC and the BOD enhancements to the risk management policies and strategies of the
Bank, including limits on decision-making, positions, transactions and exceptions.
The ARMC exercises the authorities delegated to it by the RMC and the BOD, and the ARMC’s
corporate acts are subject to the review and confirmation by the RMC and the BOD.
Risk management
The risk management framework aims to maintain a balance between the nature of the Bank’s
businesses and the risk appetite of the BOD. Accordingly, policies and procedures are reviewed
regularly and revised as the organization grows and as financial markets evolve. New policies or
proposed changes in current policies are presented to the RMC and the BOD for approval.
a. Credit risk and concentration of assets and liabilities and off-balance sheet items
Credit risk is the risk that a counterparty will not settle its obligations in accordance with the
agreed terms.
The Bank’s lending business follows credit policy guidelines set by the BOD, RMC and
RMO. These policies serve as minimum standards for extending credit. The people engaged
in the credit process are required to understand and adhere to these policies.
Product manuals are in place for all loans and deposit products that actually or potentially
expose the Bank to all types of risks that may result in financial or reputational losses. They
define the product and the risks associated with the product plus the corresponding risk-
mitigating controls. They embody the business plans and define the business parameters
within which the product or activity is to be performed.
The system of checks around extension of credit includes approval by at least two credit
officers through CreCom, Executive Committee (ExCom) or BOD. The ARMC and RMC
review the business strategies and ensure that revenue-generating activities are consistent with
the risk tolerance and standard of the Bank. Regular audit and quality assurance checks are
conducted across all functional units. The BOD - through the ExCom, CreCom, ARMC and
RMC - ensure that sound credit policies and practices are followed through all the business
segments.
Credit Approval
Credit approval is the documented acceptance of credit risk in the credit proposal or
application.
The Bank’s credit decision-making for consumer loans utilizes the recommendation of the
credit scoring and is performed at the CreCom level appropriate to the size and risk of each
transaction in conformity with corporate policies and procedures in regulating credit risk
activities. The Bank’s ExCom may approve deviations or exceptions, while the BOD
approves material exceptions such as large exposures, loans to directors, officers, stockholders
and other related interests (DOSRI), and loan restructuring.
Credit delegation limits are identified, tracked and reviewed at least annually by the Bank’s
Senior Credit Officer together with the Credit Risk Manager.
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Borrower Eligibility
The Bank’s credit processing commences when a customer expresses his intention to borrow
through a credit application. The Bank gathers data on the customer; ensure they are accurate,
up-to-date and adequate to meet the minimum regulatory requirements and to render credit
decision. These data are used for the intended purpose only and are managed in adherence to
the customer information secrecy law.
The customer’s credit worthiness, repayment ability and cash flow are established before
credit is extended. The Bank independently verifies critical data from the customer, ensuring
compliance with Know Your Customer requirements under the Anti-Money Laundering Act
of 2000. The Bank requires that customer income be derived from legitimate sources and
supported with government-accepted statements of income, assets and liabilities.
The Bank makes certain that a customer is capable of entering into a credit contract by
accepting guarantors or sureties provided they are a relative or a financial partner who have
passed its credit acceptance criteria.
Loan Structure
The Bank structures loans for its customers based on the customer’s capability to pay, the
purpose of loan, and for collateralized loan, the collateral’s economic life and liquidation
value over time.
The Bank establishes debt burden guidelines and minimum income requirement to assess the
customer’s capacity to pay.
The Bank utilizes credit bureau data, both external and internal, to obtain information on
customer’s current commitments and credit history. These are sourced from the databases of
the Banker’s Association of the Philippines and the Credit Management Association of the
Philippines.
The Bank takes into account environmental and social issues when reviewing credit proposals
of small business and commercial mortgage customers. The Bank ensures that all qualified
securities pass through the BOD for approval. Assignments of securities are confirmed and
insurance are properly secured.
The Bank uses credit scoring models and decision systems for consumer loans as approved by
the BOD.
Initial loan limits are recommended by the CreCom and ExCom and approved by the BOD.
The Bank ensures that secured loans are within ceilings set by local regulators. Succeeding
loan availments are based on account performance and customer’s credit worthiness.
The CreCom and ExCom recommend to the BOD any credit exceptions that merit approval
provided they are supported by strong business rationale. The Bank relays credit approval at
once thru Short Messaging Service but loan proceeds are paid out after documentations are
completed.
F-45
Credit Management
The Bank maintains credit records and documents on all borrowings and capture transaction
details in its loan systems. The credit risk policies and system infrastructure ensure that loans
are monitored and managed at all times.
The Bank’s Management Information System provides statistics that its business units need to
identify opportunities for improving rewards without necessarily sacrificing risk. Statistical
data on product, productivity, portfolio, profitability, performance and projection are made
available regularly.
The Bank conducts regular loan review through the RMC, with the support of the RMO. The
Bank examines its exposures, credit risk ratios, provisions and customer segments. The
Bank’s unique customer identification and unique group identification methodology enables it
to aggregate credit exposures by customer or group of borrowers. Aggregate exposures of at
least P=0.1 billion are put on a special monitoring.
The RMC assesses the adequacy of provisions for credit losses regularly. The Bank’s
automated loan grading system enables the Bank to set up provision per account. The Bank
also performs impairment analyses on loans and receivables, whether on individual or
collective basis, in accordance with PFRS.
In 2010, the Bank carried out stress testing analyses using BOD-approved statistical models
relating the default trends to changes in macroeconomic indicators. Separately, it continued to
enhance its credit rating systems. The new Auto Loan and Mortgage Loan credit scoring
models promise portfolio growth, with improvement in credit performance as a result of better
targeting. The new Small Medium Enterprise Loan credit scoring model was run parallel with
the qualitative evaluation method.
Maximum Exposure to Credit Risk Without Taking Account of Any Collateral and Other
Credit Enhancements
The table below shows the Bank’s gross maximum credit exposure, net of allowance for credit
and impairment losses, to on-and-off-financial condition credit risk exposures without
deducting collateral and other credit enhancements to credit risk for the component of the
statement of condition (in thousands):
2010 2009
FVPL investments
HFT - Government securities P=797,427 P=173,265
Derivatives - ROP warrants 70,890 74,778
AFS investments
Government securities 16,195,916 18,256,949
Quoted equity securities 3,005 3,005
Unquoted equity securities 1,418 1,418
HTM investments
Treasury notes 5,570,500 1,643,756
Government bonds 3,592,085 3,129,095
(Forward)
F-46
2010 2009
Loans and receivables
Due from BSP P=2,899,592 P=4,937,990
Due from other banks 7,520,836 1,528,848
Interbank loans receivable and SPURA 3,586,560 5,900,000
Receivables from customers:
Consumption loans 22,038,472 17,225,020
Real estate loans 17,340,010 15,595,543
Commercial loans 8,942,653 8,816,419
Personal loans 3,147,757 3,191,161
Bills discounted 11,792 12,897
Other receivables:
Accrued interest receivable 617,452 1,002,095
Sales contract receivable 612,086 636,924
Unquoted debt instrument 400,000 400,000
Accounts receivable 44,383 299,479
Bills purchased 53,030 128,699
Other assets:
Security deposits 76,325 69,064
RCOCI 27,842 46,062
Shortages 86 402
Total 93,550,117 83,072,869
Stand-by credit lines (Note 31) 112,514 104,023
Total credit risk exposure P=93,662,631 P=83,176,892
Concentration of risk is managed by borrower, by group of borrower, by geographical region
and by industry sector. As of December 31, 2010 and 2009, the maximum credit exposure to
any borrower amounted to P=2.2 billion and P=1.9 billion, respectively, before taking account of
collateral or other credit enhancement.
The distribution of the Bank’s financial assets and off-balance sheet items before taking into
account any collateral held or other credit enhancements can be analyzed by the following
geographical regions (in thousands):
2010
Banking
Activities
Trading
Activities Others Total
Luzon P=18,683,941 P=30,927,554 P=44,519,867 P=94,131,362
Visayas 80,729 179,730 1,775,821 2,036,280
Mindanao 89,840 311,545 1,662,600 2,063,985
18,854,510 31,418,829 47,958,288 98,231,627
Less allowance for credit and
impairment losses 894,907 201,295 3,472,794 4,568,996
Total P=17,959,603 P=31,217,534 P=44,485,494 P=93,662,631
2009
Banking
Activities
Trading
Activities Others Total
Luzon P=16,948,236 P=28,345,516 P=35,820,896 P=81,114,648
Visayas 85,464 184,362 2,653,947 2,923,773
Mindanao 121,874 380,785 2,652,050 3,154,709
17,155,574 28,910,663 41,126,893 87,193,130
Less allowance for credit and
impairment losses 780,227 340,334 2,895,677 4,016,238
Total P=16,375,347 P=28,570,329 P=38,231,216 P=83,176,892
F-47
Additionally, the tables below show the distribution of maximum credit exposure by industry
sector of the Bank as of December 31, 2010 and 2009 (in thousands):
2010
Loans and
Receivables
Loans and
Advances to
Banks*
Investment
Securities** Others*** Total
Financial intermediaries P=2,457,197 P=14,006,988 P=26,277,251 P=104,252 P=42,845,688
Real estate, renting and business activities 13,913,795 – – – 13,913,795
Other community, social and personal
activities 16,057,412
–
–
– 16,057,412
Transportation, storage and communication 11,318,006 – – – 11,318,006
Wholesale and retail trade 4,628,272 – – 65,415 4,693,687
Private households 676,723 – – – 676,723
Public administration and defense
compulsory social security 1,182,165
–
–
– 1,182,165
Manufacturing 1,349,775 – – – 1,349,775
Agricultural, hunting and forestry 1,448,765 – – – 1,448,765
Electricity, gas and water 532,233 – – – 532,233
Construction 531,081 – – 47,000 578,081
Hotel and restaurants 35,980 – – – 35,980
Mining and quarrying 97,593 – – – 97,593
Others 3,501,624 – – 100 3,501,724
57,730,621 14,006,988 26,277,251 216,767 98,231,627
Less allowance for credit and impairment
losses 4,522,986 – 46,010 – 4,568,996
Total P=53,207,635 P=14,006,988 P=26,231,241 P=216,767 P=93,662,631
* Comprised of due from BSP, due from other banks and interbank loans receivable and SPURA.
** Comprised of FVPL investments, AFS investments and HTM investments.
*** Comprised of financial assets classified under other assets (such as RCOCI, security deposits and shortages) and stand-by credit lines.
2009
Loans and
Receivables
Loans and
Advances to
Banks*
Investment
Securities** Others*** Total
Financial intermediaries P=3,336,764 P=12,366,838 P=23,420,776 P=115,528 P=39,239,906
Real estate, renting and business activities 13,403,671 – – 13,403,671
Other community, social and personal activities 14,661,003 – – 2,229 14,663,232
Transportation, storage and communication 3,699,425 – – – 3,699,425
Wholesale and retail trade 8,903,959 – – 66,542 8,970,501 Private households 126,699 – – – 126,699
Public administration and defense
compulsory social security 866,251 – – – 866,251 Manufacturing 1,357,032 – – – 1,357,032
Agricultural, hunting and forestry 2,279,255 – – – 2,279,255
Electricity, gas and water 1,472,316 – – – 1,472,316 Construction 495,459 – – 35,251 530,710
Hotel and restaurants 440,726 – – – 440,726
Mining and quarrying 9,192 – – – 9,192 Others 134,214 – – – 134,214
51,185,966 12,366,838 23,420,776 219,550 87,193,130
Less allowance for credit and impairment
losses 3,877,728 – 138,510 – 4,016,238
Total P=47,308,238 P=12,366,838 P=23,282,266 P=219,550 P=83,176,892
* Comprised of due from BSP, due from other banks and interbank loans receivable and SPURA.
** Comprised of FVPL investments, AFS investments and HTM investments. *** Comprised of financial assets classified under other assets (such as RCOCI, security deposits and shortages) and stand-by
credit lines.
F-48
Credit Quality
Description of the loan grades for loans, receivables and stand-by credit lines:
Internal Credit Rating System
In 2010, credit quality monitoring changed to use the 10-point Internal Credit Rating System
(ICRS) which maps each risk rating to the loan grading system of BSP for credit exposures.
This enabled the Bank to reclassify accounts that were earlier classified as High Standard, to
Standard, in view of default incidence in the past. The ICRS performance is assessed and
updated regularly. Validation of the risk rating vis-à-vis actual credit losses is performed by
the Credit Risk Management Unit.
Neither Past Due nor Individually Impaired
The Bank classifies those accounts under current status having the following loan grades:
High grade (ICRS 1 - 4)
Accounts belonging to this category have been rated as good by the Bank’s internal scoring
system based on its defined factors. Using statistical means, the Bank has established the
borrowers’ ability to meet their obligations in full and no loss is anticipated. The credit
scoring system considers the combination of application data, internal and external data.
Standard grade (ICRS 5 - 7)
Accounts that display potential weaknesses, by the occurrence of limited or random
delinquency, which when left uncorrected, may affect the repayment of the loan and increase
credit risk to the Bank.
Substandard grade (ICRS 8 - 10)
These accounts involve a substantial and unreasonable degree of risk to the Bank because of
unfavorable record or unsatisfactory characteristics. These accounts show possibility of future
loss to the Bank due to their weaknesses that may include impaired collateral or minimum
repayment of loan.
Unrated grade
Other credit assets which cannot be classified as High, Standard or Sub-standard are tagged as
Unrated.
Past Due but not Individually Impaired
These are accounts which are classified as delinquent but the Bank assesses that there is no
objective evidence that these accounts are impaired as of statement of condition date.
Individually Impaired
Accounts which show evidence of impairment as of statement of condition date.
F-49
The tables below show the credit quality per class of financial assets under loans and
receivables (in thousands):
2010
Neither Past Due nor Individually Impaired
High Grade
Standard
Grade
Substandard
Grade Unrated
Past Due
but not
Individually
Impaired
Individually
Impaired Total
Loans and receivables
Receivables from customers:
Consumption loans P=19,569,571 P=301,226 P=4,242 P=– P=2,638,636 P=– P=22,513,675
Real estate loans 14,650,183 337,014 57,519 – 2,147,380 320,827 17,512,923
Commercial loans 8,332,250 70,314 49,204 – 132,771 1,127,174 9,711,713
Personal loans 2,990,381 58,873 105,059 – 2,229,643 – 5,383,956
Bills discounted 121 – – – 11,671 – 11,792
Other receivables:
Accrued interest receivable 235,817 325,215 430 – 89,269 234,456 885,187
Sales contract receivable 479,118 87,764 – – 54,893 18,313 640,088
Unquoted debt instrument 400,000 – – – – 95,611 495,611
Accounts receivable 3,718 23 15 – 339,333 178,256 521,345
Bills purchased – 54,333 – – 54,333
Other assets:
Security deposits – – – 76,325 – – 76,325
RCOCI – – – 27,842 – – 27,842
Shortages – – – 86 – – 86
Total P=46,661,159 P=1,180,429 P=216,469 P=158,586 P=7,643,596 P=1,974,637 P=57,834,876
Shown gross of allowance for credit and impairment losses
2009
Neither Past Due nor Individually Impaired
High Grade
Standard
Grade
Substandard
Grade Unrated
Past Due
but not
Individually
Impaired
Individually
Impaired Total
Loans and receivables
Receivables from customers:
Consumption loans P=14,953,074 P=3,456 P=480 P=– P=2,836,383 P=– P=17,793,393 Real estate loans 12,948,465 25,438 26,055 – 2,411,582 355,344 15,766,884
Commercial loans 7,689,776 93,870 235,797 – 210,189 1,269,563 9,499,195
Personal loans 2,900,851 48 – – 2,015,878 – 4,916,777
Bills discounted 1,443 – – – 11,454 – 12,897
Other receivables:
Accrued interest receivable 279,234 393,373 264,176 – 54,327 192,356 1,183,466
Sales contract receivable 443,834 – – – 55,702 168,942 668,478
Unquoted debt instrument 400,000 – – – – 95,611 495,611 Accounts receivable 263,895 1 8 – 365,202 85,530 714,636
Bills purchased 130,002 – – – 4,628 – 134,630
Other assets:
Security deposits – – – 69,064 – – 69,064
RCOCI – – – 46,062 – – 46,062
Shortages – – – 402 – – 402
Total P=40,010,574 P=516,186 P=526,516 P=115,528 P=7,965,345 P=2,167,346 P=51,301,495
Shown gross of allowance for credit and impairment losses
External Ratings
In ensuring quality investment portfolio, the Bank uses the credit risk rating based on the
rating of Moody’s Investors Service (Moody’s rating) as follows:
Credit Quality External Rating
High grade Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3
Standard grade Ba1 Ba2 Ba3 B1 B2 B3
Substandard grade Caa1 Caa2 Caa3 Ca C
F-50
High grade - represents those investments which fall under any of the following grade:
Aaa - fixed income obligations are judged to be of the highest quality, with the smallest
degree of risk.
Aa1, Aa2, Aa3 - fixed income are judged to be of high quality and are subject to very low
credit risk, but their susceptibility to long-term risks appears somewhat greater.
A1, A2, A3 - fixed income obligations are considered upper-medium grade and are subject to
low credit risk, but have elements present that suggest a susceptibility to impairment over the
long term.
Baa1, Baa2, Baa3 - fixed income obligations are subject to moderate credit risk. They are
considered medium grade and as such protective elements may be lacking or may be
characteristically unreliable.
Standard grade - represents those investments which fall under any of the following grade:
Ba1, Ba2, Ba3 – obligations are judged to have speculative elements and are subject to
substantial credit risk.
B1, B2, B3 – obligations are considered speculative and are subject to high credit risk.
Substandard grade - represents those investments which fall under any of the following grade:
Caa1, Caa2, Caa3 - are judged to be of poor standing and are subject to very high credit risk.
Ca - are highly speculative and are likely in, or very near, default, with some prospect of
recovery of principal and interest.
C - are the lowest rated class of bonds and are typically in default, with little prospect for
recovery of principal or interest.
The tables below show the credit quality per class of financial assets (in thousands):
2010
Neither Past Due nor Individually Impaired
High Grade
Standard
Grade
Substandard
Grade Unrated
Past Due
but not
Individually
Impaired
Individually
Impaired Total
FVPL investments
HFT - Government securities P=– P=797,427 P=– P=– P=– P=– P=797,427
Derivatives - ROP warrants – 70,890 – – – – 70,890
AFS investments
Government debt securities – 16,195,916 – – – – 16,195,916
Quoted equity securities – – – – – 5,194 5,194
Unquoted equity securities – – – – – 45,239 45,239
HTM investments
Treasury notes – 5,570,500 – – – – 5,570,500
Government bonds – 3,592,085 – – – – 3,592,085
Loans and receivables
Due from BSP – 2,899,592 – – – – 2,899,592
Due from other banks – 7,520,836 – – – – 7,520,836
Interbank loans receivable and
SPURA 2,586,560 1,000,000 – – – – 3,586,560
Total P=2,586,560 P=37,647,246 P=– P=– P=– P=50,433 P=40,284,239
Shown gross of allowance for credit and impairment losses
F-51
2009
Neither Past Due nor Individually Impaired
High Grade
Standard
Grade
Substandard
Grade Unrated
Past Due
but not
Individually
Impaired
Individually
Impaired Total
FVPL investments
Derivatives - ROP warrants P=– P=74,778 P=– P=– P=– P=– P=74,778
HFT - Government securities – 173,265 – – – – 173,265 AFS investments
Government debt securities – 18,256,949 – – – 92,500 18,349,449
Quoted equity securities – – – – – 5,194 5,194
Unquoted equity securities – – – – – 45,239 45,239
HTM investments
Treasury notes – 3,129,095 – – – – 3,129,095
Government bonds – 1,643,756 – – – – 1,643,756 Loans and receivables
Due from BSP – 4,937,990 – – – – 4,937,990
Due from other banks – 1,528,848 – – – – 1,528,848
Interbank loans receivable and
SPURA – 5,900,000 – – – – 5,900,000
Total P=– P=35,644,681 P=– P=– P=– P=142,933 P=35,787,614
Shown gross of allowance for credit and impairment losses
Impairment Assessment
Impairment losses are recognized based on the results of specific (individual) and collective
assessment of credit exposures. Impairment has taken place when there is a presence of
known difficulties in the payments of obligation by counterparties, a significant credit rating
downgrade takes place, infringement of the original terms of the contract has happened or
when there is inability to pay principal or interest overdue beyond a threshold (e.g. 90 days).
These and other factors, either singly or in tandem with other factors, constitute observable
events or data that meet the definition of objective evidence of impairment.
Individually assessed allowances
The Bank determines the allowances appropriate for each significant loan or advance on an
individual basis. Items considered when determining amounts of allowances include an
account’s age, payment and collection history, timing of expected cash flows and realizable
value of collateral.
The Bank sets criteria for specific loan impairment testing and uses the discounted cash flow
to compute for impairment loss. Accounts subjected to specific impairment and are found to
be impaired shall be excluded from the collective impairment computation.
Collectively assessed allowances
Allowances are assessed collectively for losses on commercial loans and advances that are not
significant or are found to be not individually impaired. Impairment losses are estimated by
taking into consideration the historical losses on the portfolio and the expected receipts and
recoveries once impaired. The Bank is responsible for deciding the length of historical loss
period which can extend for as long as five years. The impairment allowance is then reviewed
by the Bank to ensure alignment with the Bank’s overall policy.
The Bank uses the Net Flow Rate method to determine the credit loss rate of a particular
delinquency age bucket based on historical data of flow-through and flow-back of loans across
specific delinquency age buckets. The method applies to consumer loans, as well as, salary
and home equity loans granted to employees of the Bank. For commercial loans, the Bank
uses Historical Loss Rate method in determining the credit loss rate based on the actual
historical loss experienced by the Bank on each specific industry type.
F-52
Aging Analysis of Past Due but not Impaired Loans per Class of Financial Assets
The succeeding tables show the total aggregate amount of gross past due but not individually
impaired loans and receivables per delinquency bucket. Under PFRS, a financial asset is past
due when the counterparty has failed to make a payment when contractually due (in
thousands):
2010
Past Due but not Individually Impaired
Less than
30 days
31 to
60 days
61 to
90 days
91 to
180 days
Over
180 days Total
Loans and receivables
Receivables from customers: Consumption loans P=1,104,087 P=554,285 P=205,851 P=228,124 P=546,289 P=2,638,636
Real estate loans 1,287,399 481,089 124,651 88,471 165,770 2,147,380
Commercial loans 81,717 22,542 11,762 2,505 14,245 132,771
Personal loans 141,988 61,253 37,412 90,753 1,898,237 2,229,643
Bills discounted – – – – 11,671 11,671
Other receivables:
Accrued interest receivable 19,339 9,409 4,224 5,659 50,638 89,269
Sales contract receivable 28,499 10,704 1,446 2,691 11,553 54,893
Accounts receivable 42,281 15,539 530 1,415 279,568 339,333
Total P=2,705,310 P=1,154,821 P=385,876 P=419,618 P=2,977,971 P=7,643,596
Shown gross of allowance for impairment and credit losses
2009
Past Due but not Individually Impaired
Less than
30 days
31 to
60 days
61 to
90 days
91 to
180 days
Over
180 days Total
Loans and receivables Receivables from customers:
Consumption loans P=1,193,582 P=– P=751,145 P=235,027 P=656,629 P=2,836,383
Real estate loans 1,504,995 – 751,734 109,886 44,967 2,411,582 Commercial loans 150,587 – 46,653 69 12,880 210,189
Personal loans 199,021 74,036 44,358 116,023 1,582,440 2,015,878
Bills discounted – – – – 11,454 11,454 Other receivables:
Accrued interest receivable 23,379 2,310 14,323 5,731 8,584 54,327
Sales contract receivable 22,886 – 18,611 – 14,205 55,702 Accounts receivable 3,206 – 2,772 1,977 357,247 365,202
Bills purchased – – – – 4,628 4,628
Total P=3,097,656 P=76,346 P=1,629,596 P=468,713 P=2,693,034 P=7,965,345
Shown gross of allowance for impairment and credit losses
Of the total aggregate amount of gross past due but not individually impaired loans and
individually impaired loans and advances to customers, the fair value of the related collateral
that the Bank held as at December 31, 2010 and 2009 was P=9.6 billion and P=9.4 billion,
respectively.
Collateral and Other Credit Enhancements
The amount and type of collateral required depends on an assessment of the credit risk of the
counterparty. Guidelines are implemented regarding acceptability of types of collateral and
valuation parameters.
The main types of collaterals obtained are as follow:
- For SPURA; investment securities
- For commercial lending; mortgages over real estate properties, deposit accounts and
securities
- For consumer lending; mortgages over real estate and chattel
F-53
Management monitors the market value of collateral, requests additional collateral in
accordance with the underlying agreement, and monitors the market value of collateral
obtained during its review of the adequacy of the allowance for credit and impairment losses.
It is the Bank’s policy to dispose of repossessed properties in an orderly fashion and proceeds
are used to repay or reduce the outstanding claim. In general, the Bank does not occupy
repossessed properties for business use.
The Bank holds collateral against loans and receivables in the form of real estate and chattel
mortgages, guarantees, and other registered securities over assets. Estimates of fair value are
based on the value of collateral assessed at the time of borrowing and generally are not
updated except when a loan is assessed to be impaired. Generally, collateral is not held over
loans and advances to banks except for SPURA. The Bank is not allowed to sell or pledge
collateral held under SPURA. Collateral usually is not held against investment securities, and
no such collateral was held as of December 31, 2010 and 2009. The following table shows the
fair value of collateral held against loans and receivables (in thousands):
2010 2009
On individually impaired
Land P=801,640 P=919,817
Building 660,377 639,103
Chattel mortgage properties 363,371 504,670
1,825,388 2,063,590
On past due but not impaired loans
Land 2,274,753 2,306,114
Building 3,347,949 2,773,357
Chattel mortgage properties 3,981,234 4,309,038
9,603,936 9,388,509
On neither past due nor impaired loans
Land 18,427,846 14,276,253
Building 27,184,948 17,448,794
Chattel mortgage properties 29,638,052 23,034,545
Debt securities 999,240 5,728,369
76,250,086 60,487,961
P=87,679,410 P=71,940,060
Carrying Amount per Class of Financial Assets which Terms have been Renegotiated
Restructured loans are defined as performing or non-performing loans (NPL) which principal
terms and conditions have been modified in accordance with an agreement setting forth a new
plan of payment or a schedule of payment on a periodic basis. When the loan account
becomes past due and is being restructured or extended, the approval of the BOD is required
before loan booking and is always governed by the BSP rules on restructuring. Restructuring
of DOSRI loans also requires BOD approval.
F-54
The table below shows the total aggregate amount of gross restructured loans (in thousands).
2010 2009
Receivables from customers
Commercial loans P=839,919 P=918,896
Real estate loans 98,822 121,926
Consumption loans – 15
Total restructured financial assets P=938,741 P=1,040,837
b. Market risk
Market risk management covers the areas of trading and interest rate risks. The Bank utilizes
various measurement and monitoring tools to ensure that risk-taking activities are managed
within instituted market risk parameters. The Bank revalues its trading portfolios on a daily
basis and checks the revenue or loss generated by each portfolio in relation to their level of
market risk.
The Bank’s risk policies and implementing guidelines are regularly reviewed by ALCO,
ARMC, RMC and BOD to ensure that these are up-to-date and in line with changes in the
economy, environment and regulations. The RMC and the BOD set the comprehensive
market risk limit structure and define the parameters of market activities that the Bank can
engage in.
Market risk is the risk to earnings and capital arising from changes in the value of traded
portfolios of financial instruments (trading market risk) and from movements in interest rates
(interest rate risk). The Bank’s market risk originates primarily from holding peso and dollar-
denominated debt securities. The Bank utilizes Value-at-Risk (VaR) to measure and manage
market risk exposure. VaR estimates the potential decline in the value of a portfolio, under
normal market conditions, for a given confidence level over a specified holding period.
Trading activities
The Bank’s trading portfolios are currently composed of peso and dollar-denominated
sovereign debt securities that are marked-to-market daily. The Bank also uses VaR to measure
the extent of market risk exposure arising from these portfolios.
VaR is a statistical measure that calculates the maximum potential loss from a portfolio over a
holding period, within a given confidence level. The Bank’s current VaR model uses
historical simulation for Peso and USD HFT and AFS portfolios of Reuters KVaR with
confidence level at 99% and a 1 day holding period. It utilizes a 260 days rolling data most
recently observed daily percentage changes in price for each asset class in its portfolio. In
2009, the Bank’s VaR model used Bloomberg’s parametric model for Peso and USD HFT and
AFS portfolios with confidence level at 99% and a 1 day holding period.
VaR reports are prepared on a daily basis to the President, Treasury and RMO. The Bank’s
BOD and management are advised whenever potential losses exceed prudent levels. VaR
reports are reported to the RMC and BOD on a monthly basis.
When there is a breach in VaR limits, Treasury is expected to close or reduce their position
and bring it down within the limit unless approval from the President is obtained to retain the
same. All breaches are reported to the President for regularization. In addition to the
regularization and approval of the President, breaches in VaR limits and special approvals are
likewise reported to the RMC and BOD for their information and confirmation.
F-55
Back testing is employed to verify the effectiveness of the VaR model. The bank performs
back-testing to validate the VaR model and stress testing to determine the impact of extreme
market movements on the portfolios. Results of backtesting are reported to the RMC and
BOD on a monthly basis. Stress testing is also conducted, based on historical maximum
percentage daily movement and on an ad-hoc rate shock to estimate potential losses in a crisis
situation.
The Bank has established position, VaR, stop loss, loss trigger, and modified duration limits
for its trading portfolios. Daily profit or loss of the trading portfolios is closely monitored
against loss triggers and stop-loss.
Responsibility for managing the Bank’s trading market risk remains with the RMC. With the
support of RMO and the ARMC, the RMC recommends to the BOD changes in market risk
limits, approving authorities and other activities that need special consideration.
Discussed below are the limitations and assumptions applied by the Bank on its VaR
methodology:
a. VaR is a statistical estimate and thus, does not give the precise amount of loss;
b. VaR is not designed to give the probability of bank failure, but only attempts to quantify
losses that may arise from a bank’s exposure to market risk;
c. Historical simulation does not involve any distributional assumptions, scenarios that are
used in computing VaR are limited to those that occurred in the historical sample; and
d. VaR systems are backward-looking. It attempts to forecast likely future losses using past
data. As such, this assumes that past relationships will continue to hold in the future.
Major shifts therefore (i.e. an unexpected collapse of the market) are not captured and may
inflict losses much bigger than anything the VaR model may have calculated.
The Bank’s interest rate VaR follows (in thousands):
2010 2009
As of year-end P=11,770 P=3,459
Year to date average 5,760 11,325
High 21,206 32,371
Low 3 32
Non-trading activities
Interest Rate Risk
The Bank follows a prudent policy on managing its assets and liabilities to ensure that
exposure to fluctuations in interest rates are kept within acceptable limits.
One method by which the Bank measures the sensitivity of its assets and liabilities to interest
rate fluctuations is by way of “gap” analysis. This analysis provides the Bank with a static
view of the maturity and repricing characteristics of the positions of its statement of condition.
An interest rate gap report is prepared by classifying all assets and liabilities into various time
period categories according to contracted maturities or anticipated repricing dates, whichever
is earlier. The difference in the amount of assets and liabilities maturing or being repriced in
any time period category would then give the Bank an indication of the extent to which it is
exposed to the risk of potential changes in net interest income.
F-56
The interest rate sensitivity gap report measures interest rate risk by identifying gaps between
the repricing dates of assets and liabilities. The Bank’s sensitivity gap model calculates the
effect of possible rate movements on its interest rate profile.
The Bank uses sensitivity gap model to estimate Earnings-at-Risk (EaR) should interest rates
move against its interest rate profile. The Bank’s EaR limits are based on a percentage of the
Bank’s projected earnings for the year. The Bank also performs stress-testing analysis to
measure the impact of extreme interest rate movements.
The ALCO is responsible for managing the Bank’s structural interest rate exposure. The
ALCO’s goal is to achieve a desired overall interest rate profile while remaining flexible to
interest rate movements and changes in economic conditions. The RMO, ARMC and RMC
review and oversee the Bank’s interest rate risks.
The tables below demonstrate the sensitivity of net interest income and equity to reasonably
possible changes in interest rates. Net interest income sensitivity was calculated by assuming
interest rate shifts upon repricing of floating-rate financial instruments. Equity sensitivity was
computed by calculating mark-to-market changes of AFS debt instruments, assuming a
parallel shift in the yield curve.
2010
Sensitivity of equity
Change in
basis points
Sensitivity of
net interest
income
0 up to
6 months
Over
6 months
to 1 year
Over
1 year to
5 years
More than
5 years Total
(Amounts in Pesos)
Currency
PHP +10 165,249,172 (252,395) – (1,176,552) (139,912,232) (141,341,179)
USD +10 7,661,877 – – – (3,895,799) (3,895,799)
Currency
PHP -10 (165,191,732) 252,578 – 1,198,973 142,512,815 143,964,366
USD -10 (7,661,877) – – – 3,928,773 3,928,773
2009
Sensitivity of equity
Change in
basis points
Sensitivity of
net interest
income
0 up to
6 months
Over
6 months
to 1 year
Over
1 year to
5 years
More than
5 years Total
(Amounts in Pesos)
Currency
PHP +10 7,701,610 (31,625) – (2,400,190) (32,632,285) (35,064,100)
USD +10 95,253,160 – – – (121,536,310) (121,536,310)
Currency
PHP -10 (7,701,207) 31,640 – 2,407,680 32,908,110 35,347,430
USD -10 (96,600,660) – – – 123,386,360 123,386,360
The impact on the Bank’s equity excludes the impact on transactions affecting the statement
of income.
Foreign Currency Risk
Foreign currency risk is the risk of an investment's value changing due to an adverse
movement in currency exchange rates. It arises due to a mismatch in the Bank's foreign
currency assets and liabilities.
F-57
The Bank’s policy is to maintain foreign currency exposure within the approved
position and loss limit and within existing regulatory guidelines. To compute for VaR, the
Bank uses Bloomberg’s historical simulation model for USD/PHP FX position, with
confidence level at 99% and a 1 day holding period. The Bank’s VaR for its foreign exchange
position for trading and non-trading activities are as follow (in thousands):
2010 2009
As of year-end P=1,252 P=724
Year to date Average 762 4,276
High 2,631 7,562
Low 4 355
The table below summarizes the Bank’s exposure to foreign exchange risk as of December 31,
2010 and 2009. Included in the table are the Bank’s assets and liabilities at carrying amounts
(in thousands).
2010 2009
Assets
Cash $1,782 $1,570
Due from other banks 164,014 25,594
FVPL investments 1,617 5,317
AFS investments 12,744 257,351
HTM investments 49,847 36,277
Other assets – 20,176
Total assets 230,004 346,285
Liabilities
Deposit liabilities
Savings deposits 19,908 17,507
Time deposits 268,285 297,903
Bills payable – –
Accrued taxes, interest and other expenses 335 595
Other liabilities 458 547
Total liabilities 288,986 316,552
Net exposure ($58,982) $29,733
c. Liquidity Risk
The Bank’s policy on liquidity management emphasizes on three elements of liquidity,
namely, cashflow management, ability to borrow in the interbank market, and maintenance of
a stock of high quality liquid assets. These three approaches complement one another with
greater weight being given to a particular approach, depending upon the circumstances. The
Bank’s objective in liquidity management is to ensure that the Bank has sufficient liquidity to
meet obligations under normal and adverse circumstances and is able to take advantage of
lending and investment opportunities as they arise.
F-58
The main tool that the Bank uses for monitoring its liquidity is the Maximum Cumulative
Outflow (MCO) reports, which is also called liquidity gap or maturity matching gap
reports. The MCO is a useful tool in measuring and analyzing the Bank’s cash flow
projections and monitoring liquidity risks. The liquidity gap report shows the projected cash
flows of assets and liabilities representing estimated funding sources and requirements under
normal conditions, which also forms the basis for the Bank’s Contingency Funding Plan
(CFP). The CFP projects the Bank’s funding position during both temporary and long-term
liquidity changes to help evaluate the Bank’s funding needs and strategies under changing
market conditions.
The Bank discourages dependence on large funds providers (LFPs) by capping the
concentration of LFPs as a percentage of total deposits. This ensures that the Bank will not be
vulnerable to a substantial drop in deposit level as a result of an outflow due to large
depositors.
Financial assets
Analysis of equity and debt securities at FVPL and AFS investments into maturity groupings is
based on the expected date on which these assets will be realized. For other assets, the analysis
into maturity grouping is based on the remaining period from the end of the reporting period to the
contractual maturity date or if earlier the expected date the assets will be realized.
Financial liabilities
The maturity grouping is based on the remaining period from the end of the reporting period to the
contractual maturity date and does not consider the behavioral pattern of the creditors. When
counterparty has a choice of when the amount is paid, the liability is allocated to the earliest
period in which the Bank can be required to pay.
Analysis of Financial Assets and Liabilities by Remaining Maturities
The tables below show the maturity profile of the Bank’s financial assets and liabilities based on
contractual undiscounted repayment obligations (in millions):
2010
On demand
Up to
1 month
Over 1 to
3 months
Over 3 to
6 months
Over 6 to 12
months
Total within
1 year
Beyond
1 year Total
Financial Assets
FVPL investments
HFT - Government
Securities P=797 P=– P=– P=– P=– P=797 P=– P=797
Derivatives - ROP warrants 71 – – – – 71 – 71
AFS investments
Government securities – 105 210 15,992 – 16,307 – 16,307
Quoted equity securities – – – – – – 5 5
Unquoted equity securities – – – – – – 1 1
HTM investments
Treasury notes – 41 82 123 246 492 13,613 14,105
Government bonds – 26 51 70 154 301 3,603 3,904
Loans and receivables
Due from BSP 1,330 3 1,573 – – 2,906 – 2,906
Due from other banks 7,521 – – – – 7,521 – 7,521
Interbank loans receivable and
SPURA 3,587 – – – – 3,587 – 3,587
Receivables from customers:
Consumption loans 241 910 1,824 2,528 4,686 10,189 16,156 26,345
Real estate loans 55 383 874 1,415 2,855 5,582 23,529 29,111
Commercial loans 284 830 628 656 1,154 3,552 8,407 11,959
Personal loans 2,301 243 595 840 1,439 5,418 737 6,155
Bills discounted 12 – – – – 12 – 12
(Forward)
F-59
2010
On demand
Up to
1 month
Over 1 to
3 months
Over 3 to
6 months
Over 6 to 12
months
Total within
1 year
Beyond
1 year Total
Other receivables:
Accrued interest receivable P=658 P=184 P=43 P=– P=– P=885 P=– P=885
Sales contract receivable 1 12 23 36 67 139 825 964
Unquoted debt instrument – 1 7 19 – 27 420 447
Accounts receivable 521 – – – – 521 – 521
Bills purchased 54 – – – – 54 – 54
Other assets:
Security deposits – 4 2 3 11 20 74 94
RCOCI 28 – – – – 28 – 28
P=17,461 P=2,742 P=5,912 P=21,682 P=10,612 P=58,409 P=67,370 P=125,779
Financial Liabilities
Deposit liabilities
Demand P=7,170 P=– P=– P=– P=– P=7,170 P=– P=7,170
Savings 10,148 – – – – 10,148 – 10,148
Time – 47,458 8,108 1,110 991 57,667 16,951 74,618
17,318 47,458 8,108 1,110 991 74,985 16,951 91,936
Subordinated notes – 2,051 – – – 2,051 – 2,051
Treasurer’s, cashier’s and
manager’s checks 649 – – – – 649 – 649
Accrued interest payable 1 163 37 – – 201 – 201
Accrued other expenses payable 753 – – – – 753 – 753
Other liabilities
Accounts payable – – – 677 – 677 – 677
Other credits – – – – – – 186 186
Bills purchased-contra 54 – – – – 54 – 54
Due to Treasurer of the
Philippines – – – – – – 6 6
Deposit for keys 1 – – – – 1 – 1
Others 2 – – – – 2 – 2
P=18,778 P=49,672 P=8,108 P=1,787 P=991 P=79,373 P=17,143 P=96,516
2009
On demand
Up to
1 month
Over 1 to
3 months
Over 3 to
6 months
Over 6 to 12
months
Total within
1 year
Beyond
1 year Total
Financial Assets
FVPL investments
Derivatives - ROP warrants P=75 P=– P=– P=– P=– P=75 P=– P=75
HFT - Government
securities 173 – – – – 173 – 173
AFS investments
Government securities – 317 634 18,021 – 18,972 – 18,972
Quoted equity securities – – – – – – 5 5
Unquoted equity securities – – – – – – 45 45
HTM investments
Government bonds – 23 46 68 137 274 4,666 4,940
Treasury notes – 13 27 40 81 161 3,240 3,401
Loans and receivables
Due from BSP 1,163 2,507 1,285 – – 4,955 – 4,955
Due from other banks 1,528 – – – – 1,528 – 1,528
Interbank loans receivable and
SPURA 5,902 – – – – 5,902 – 5,902
Receivables from customers:
Consumption loans 358 857 1,647 2,325 4,120 9,307 12,772 22,079
Real estate loans 71 367 772 1,234 2,574 5,018 21,839 26,857
Commercial loans 307 420 823 676 1,346 3,572 9,336 12,908
Personal loans 1,933 162 401 624 1,539 4,659 717 5,376
Bills discounted 12 – 1 – – 13 – 13
Other receivables:
Accrued interest receivable 1,023 123 38 – – 1,184 – 1,184
Sales contract receivable – 12 24 36 69 141 893 1,034
Unquoted debt instrument 96 2 – 15 2 115 400 515
Accounts receivable 715 – – – – 715 – 715
Bills purchased 134 – – – – 134 – 134
Other assets:
Security deposits – 2 1 2 5 10 72 82
RCOCI 46 – – – – 46 – 46
P=13,536 P=4,805 P=5,699 P=23,041 P=9,873 P=56,954 P=53,985 P=110,939
(Forward)
F-60
2009
On demand
Up to
1 month
Over 1 to
3 months
Over 3 to
6 months
Over 6 to 12
months
Total within
1 year
Beyond
1 year Total
Financial Liabilities
Deposit liabilities
Demand P=8,188 P=– P=– P=– P=– P=8,188 P=– P=8,188
Savings 9,403 – – – – 9,403 – 9,403
Time – 40,197 7,097 1,859 1,103 50,256 12,536 62,792
17,591 40,197 7,097 1,859 1,103 67,847 12,536 80,383
Subordinated notes – – – – – – 2,171 2,171
Treasurer’s, cashier’s and
manager’s checks 505 – – – – 505 – 505
Accrued interest payable – – 152 37 – 189 – 189
Accrued other expenses payable 620 – – – – 620 – 620
Other liabilities
Accounts payable – – – 637 – 637 – 637
Other credits – – – – – – 190 190
Bills purchased-contra 130 – – – – 130 – 130
Due to Treasurer of the
Philippines – – – – – – 6 6
Deposit for keys 1 – – – – 1 – 1
Others 2 – – – 2 – 2
P=18,849 P=40,197 P=7,249 P=2,533 P=1,103 P=69,931 P=14,903 P=84,834
6. Segment Information
The Bank’s operating segments are organized and managed separately according to the nature of
services provided and the different markets served, with each segment representing a strategic
business unit that offers different products and serves different markets. The Bank’s reportable
segments are as follows:
(a) Consumer Banking - principally provides consumer-type loans generated by the Home Office;
(b) Corporate Banking - principally handles loans and other credit facilities for corporate and
institutional customers acquired in the Home Office;
(c) Branch Banking - serves as the Bank’s main customer touch point which offers consumer and
corporate banking products; and
(d) Treasury - principally handles institutional deposit accounts, providing money market, trading
and treasury services, as well as managing the Bank’s funding operations by use of
government securities and placements and acceptances with other banks.
These segments are the bases on which the Bank reports its primary segment information. The
Bank evaluates performance on the basis of information about the components of the Bank that
Chief Operating Decision Maker (CODM) uses to make decisions about operating matters. There
are no other operating segments than those identified by the Bank as reportable segments. There
were no inter-segment revenues and expenses included in the financial information. The Bank has
no single customer with revenues from which is 10.00% or more of the Bank’s total revenue.
F-61
The accounting policies of the operating segments are the same as those described in the summary
of significant accounting policies. Primary segment information (by business segment) for the
years ended December 31, 2010, 2009 and 2008 follows (in thousands):
2010
Consumer
Banking
Corporate
Banking
Branch
Banking Treasury Total
Operating Income
Interest income P=1,611,072 P=172,645 P=5,291,378 P=838,002 P=7,913,097
Service fees and commissions 117,953 48,238 592,438 – 758,629
Other operating income 69,750 2,330 215,828 2,244,546 2,532,454
Total operating income 1,798,775 223,213 6,099,644 3,082,548 11,204,180
Non-cash expenses
Depreciation and amortization 95,787 13,026 242,332 893 352,038
Provision for credit and
impairment losses 290,786 401,697 219,799
–
912,282
Amortization of other intangible
assets 17,178 3,297 21,006
212
41,693
Total non-cash expenses 403,751 418,020 483,137 1,105 1,306,013
Interest expense – – 1,996,974 903,721 2,900,695
Service fees and commissions expense
10,409
4,257
52,281
–
66,947
Subtotal 10,409 4,257 2,049,255 903,721 2,967,642
Compensation and fringe benefits 348,600 91,464 1,291,192 9,360 1,740,616
Taxes and licenses 118,728 29,895 415,237 213,275 777,135
Occupancy and equipment 42,090 7,384 374,369 435 424,278
Security, messengerial and janitorial
services 33,569 2,989 126,852 526 163,936
Miscellaneous 347,919 48,852 796,959 19,198 1,212,928
Subtotal 890,906 180,584 3,004,609 242,794 4,318,893
Income (loss) before share in
net income of an associate and a joint venture
493,709
(379,648)
562,643
1,934,928
2,611,632
Equity in net income of an associate
and a joint venture
41,563
Income before income tax 2,653,195
Provision for income tax 845,080
Net income P=1,808,115
Segment assets P=19,812,908 P=7,861,455 P=34,518,181 P=40,421,690 P=102,614,234
Investments in an associate and a joint venture 829,874
Deferred tax asset 705,361
Total assets P=104,149,469
Segment liabilities P=535,437 P=123,695 P=68,410,903 P=23,470,357 P=92,540,392
2009
Consumer
Banking
Corporate
Banking
Branch
Banking Treasury Total
Operating Income Interest income P=1,535,965 P=144,319 P=5,539,707 P=309,541 P=7,529,532
Service fees and commissions 94,149 43,129 505,643 – 642,921
Other operating income 86,252 26,975 172,421 555,971 841,619
Total operating income 1,716,366 214,423 6,217,771 865,512 9,014,072
Non-cash expenses Depreciation and amortization 93,360 9,553 223,504 2,119 328,536
Provision for credit and
impairment losses 340,309 408,408 201,079 159,960 1,109,756 Amortization of other intangible
assets 10,703 2,392
14,274 393 27,762
Total non-cash expenses 444,372 420,353 438,857 162,472 1,466,054
Interest expense – – 1,532,559 1,163,496 2,696,055 Service fees and commissions
expense 6,836 3,131 36,713 – 46,680
Subtotal 6,836 3,131 1,569,272 1,163,496 2,742,735
(Forward)
F-62
2009
Consumer
Banking
Corporate
Banking
Branch
Banking Treasury Total
Compensation and fringe benefits P=296,481 P=80,889 P=1,094,701 P=16,562 P=1,488,633 Taxes and licenses 106,462 23,780 317,653 111,881 559,776
Occupancy and equipment 33,104 5,727 322,910 1,129 362,870
Security, messengerial and janitorial services 27,850 2,139 117,112 876 147,977
Miscellaneous 238,398 35,457 629,522 14,265 917,642
Subtotal 702,295 147,992 2,481,898 144,713 3,476,898
Income (loss) before equity in net income of an associate and
a joint venture 562,863 (357,053) 1,727,744 (605,169) 1,328,385
Equity in net income of an associate and a joint venture
45,130
Income before income tax 1,373,515
Provision for income tax 133,501
Net income P=1,240,014
Segment assets P=17,158,612 P=8,175,634 P=29,757,312 P=35,951,432 P=91,042,990
Investments in an associate and
a joint venture
788,310
Deferred tax asset 1,256,530
Total assets P=93,087,830
Segment liabilities P=426,585 P=365,166 P=60,985,784 P=20,298,156 P=82,075,691
2008
Consumer
Banking Corporate
Banking Branch
Banking Treasury Total
Operating Income
Interest income P=1,239,707 P=145,570 P=4,721,928 P=22,402 P=6,129,607
Service fees and commissions 102,197 31,060 498,202 – 631,459 Other operating income 71,603 57,356 193,233 371,404 693,596
Total operating income 1,413,507 233,986 5,413,363 393,806 7,454,662
Non-cash expenses
Depreciation and amortization 86,241 9,057 176,631 2,175 274,104 Provision for credit and
impairment losses 252,126 103,864 197,223 24,187 577,400
Amortization of other intangible assets 11,822 2,065 12,328 536 26,751
Total non-cash expenses 350,189 114,986 386,182 26,898 878,255
Interest expense 1,918,395 501,714 2,420,109
Service fees and commissions expense 15,714 4,776 76,604 – 97,094
Sub total 15,714 4,776 1,994,999 501,714 2,517,203
Compensation and fringe benefits 237,785 59,942 911,752 14,355 1,223,834 Taxes and licenses 109,315 15,876 264,429 62,041 451,661
Occupancy and equipment 22,899 4,963 278,351 1,188 307,401
Security, messengerial and janitorial services 104,289 23,121 1,277 – 128,687
Miscellaneous 219,381 37,301 584,034 12,973 853,689
Subtotal 693,669 141,203 2,039,843 90,557 2,965,272
Income (loss) before equity in net earnings of an associate 353,935 (26,979) 992,339 (225,363) 1,093,932
Equity in net earnings of an associate 46,820
Income before income tax 1,140,752
Provision for income tax 200,600
Net income P=940,152
Segment assets P=16,573,009 P=5,049,098 P=27,691,411 P=23,842,438 P=73,155,956
Investment in an associate 369,952 Deferred tax asset 1,110,811
Total assets P=74,636,719
Segment liabilities P=387,085 P=68,309 P=53,999,038 P=11,709,563 P=66,163,995
F-63
7. Interbank Loans Receivable and Securities Purchased Under Resale Agreements
SPURA are lending to counterparties collateralized by government securities with face value
amounting to P=1.0 billion and P=5.9 billion as of December 31, 2010 and 2009, respectively. The
market values of the collateralized government securities amounted to P=999.2 million and
P=5.7 billion as of December 31, 2010 and 2009, respectively.
The Bank is not allowed to resell to third parties collateral held under SPURA.
Interest income on interbank loans receivable and SPURA consists of:
2010 2009 2008
Interbank loans receivable P=13,031,027 P=7,315,639 P=131,102,732
SPURA 147,481,667 102,448,542 131,277,014
P=160,512,694 P=109,764,181 P=262,379,746
8. Fair Value Through Profit or Loss, Available-for-Sale and Held-to-Maturity Investments
FVPL investments consist of the following:
2010 2009
HFT securities P=798,230,717 P=173,347,309
ROP warrants 81,437,118 85,821,050
879,667,835 259,168,359
Less unrealized loss on FVPL investments 11,351,393 11,125,260
P=868,316,442 P=248,043,099
As of December 31, 2010 and 2009, the Bank has outstanding ROP paired warrants which give
the Bank the option or right to exchange its holdings of ROP Global Bonds (Paired Bonds) into
peso-denominated government securities upon occurrence of a predetermined credit event. Paired
Bonds shall be risk weighted at 0.00%, provided that the 0.00% risk weight shall be applied only
to the Bank’s holdings of Paired Bonds equivalent to not more than 50.00% of the total qualifying
capital. Further, the Bank’s holdings of said warrants booked in the FVPL category are likewise
exempted from capital charge for market risk as long as said instruments are paired with ROP
Global Bonds up to a maximum of 50.00% of the total qualifying capital.
On August 19, 2009, the BSP approved the Bank’s application for Type 3 Limited User Authority
for plain vanilla foreign exchange (FX) forwards which is limited to outright buying or selling of
FX forwards at a specific price and date in the future and do not include non-deliverable forwards.
As of December 31, 2010 and 2009, the Bank has no outstanding forward buy and sell contracts.
AFS investments consist of the following:
2010 2009
Government securities (Note 30) P=16,195,916,217 P=18,349,448,980
Equity securities:
Quoted 5,194,005 5,194,005
Unquoted 45,239,002 45,239,002
16,246,349,224 18,399,881,987
Less allowance for impairment losses 46,010,167 138,510,167
P=16,200,339,057 P=18,261,371,820
F-64
On December 1, 2010, the Philippine Government, as part of its Domestic Debt Consolidation
program to manage its liabilities, made an offer to owners of certain eligible bonds and to new
investors (the Invitation). The Government invited owners of series of Eligible Bonds to submit
offers to exchange series of Eligible bonds for New Bonds due 2020 (10-year Benchmark Bonds)
or 2035 (25-year Benchmark Bonds) or to tender Eligible Bonds for cash. The Government also
invited new investors to submit offers to subscribe 25-year Benchmark Bonds.
The Bank participated in the bond exchange transaction and exchanged its HFT and AFS
investment securities for 10-year Benchmark Bonds with a minimum coupon of 5.88% and face
value of P=798.2 million at a price of 100.00% and 25-year Benchmark Bonds with a minimum
coupon of 8.13% and face value of P=11.7 billion at a price of 100.00%, respectively. The Bank
realized net trading gain of P=1.2 billion from the bond exchange transaction.
Movements in the net unrealized gain (loss) on AFS investments follow:
2010 2009
Balance at beginning of year P=819,829,053 (P=677,288,505)
Net gain from sale of AFS investments
taken to profit or loss (2,323,447,276) (503,223,604)
Changes in fair values of AFS investments 1,858,769,489 2,000,341,162
(464,677,787) 1,497,117,558
Balance at end of year P=355,151,266 P=819,829,053
Movements in the allowance for impairment losses on AFS investments follow:
2010
Quoted Unquoted Total
Balance at beginning of year P=94,688,665 P=43,821,502 P=138,510,167
Provisions charged to current
operations – – –
Reclassification (Note 15) (92,500,000) – (92,500,000)
Balance at end of year P=2,188,665 P=43,821,502 P=46,010,167
2009
Quoted Unquoted Total
Balance at beginning of year P=2,188,665 P=43,821,502 P=46,010,167
Provisions charged to current
operations (Note 15) 92,500,000 – 92,500,000
Balance at end of year P=94,688,665 P=43,821,502 P=138,510,167
In 2010, the Bank reclassified certain government securities with cost of P=92.5 million from AFS
investments to accounts receivable. The related allowance for impairment credit losses of the
same amount was also reclassified.
HTM investments consist of the following:
2010 2009
Treasury notes (Note 29) P=5,570,500,179 P=3,129,095,361
Government bonds 3,592,084,780 1,643,755,715
P=9,162,584,959 P=4,772,851,076
F-65
As of December 31, 2010 and 2009, treasury bills (classified under HTM investments) with total
face value of P=50.0 million are pledged by the Bank to MBTC to secure its payroll account with
MBTC (see Note 29).
Interest income on investment securities consists of:
2010 2009 2008
AFS investments P=1,077,452,402 P=1,595,771,154 P=762,851,508
FVPL investments 38,762,928 60,178,392 35,435,937
HTM investments 598,526,804 288,920,434 213,841,879
P=1,714,742,134 P=1,944,869,980 P=1,012,129,324
Peso-denominated AFS investments bear nominal annual interest rates ranging from 0.00% to
14.00% in 2010, 2009 and 2008 while foreign currency-denominated AFS investments bear
nominal annual interest rates ranging from 6.50% to 9.50% in 2010 and from 7.50% to 10.63% in
2009 and 2008.
Peso-denominated HTM investments bear nominal annual interest rates ranging from 4.57% to
18.25% in 2010 and 2009, and from 10.75% to 18.25% in 2008 while foreign currency-
denominated HTM investments bear nominal annual interest rates ranging from 6.38% to 9.50%
in 2010 and 2009, and 9.00% in 2008.
Trading and securities gains - net on investment securities consist of:
2010 2009 2008
FVPL investments:
Realized (P=93,163,129) P=51,536,548 (P=12,193,420)
Unrealized (793,423) (11,127,300) (18,710,369)
(93,956,552) 40,409,248 (30,903,789)
AFS investments 2,323,447,276 503,223,604 230,643,975
P=2,229,490,724 P=543,632,852 P=199,740,186
Trading gains on AFS investments represent the net gains realized and reclassified by the Bank
from net unrealized gain under the equity section of the statement of condition.
9. Loans and Receivables
This account consists of:
2010 2009
Receivables from customers:
Consumption loans P=27,496,864,284 P=21,577,160,469
Real estate loans 17,512,923,273 15,766,884,237
Commercial loans 9,711,712,998 9,499,195,319
Personal loans 5,728,150,973 5,194,328,260
Bills discounted 11,792,346 12,912,847
60,461,443,874 52,050,481,132
Less unearned discounts 5,327,384,627 4,061,334,981
55,134,059,247 47,989,146,151
(Forward)
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2010 2009
Other receivables:
Accrued interest receivable P=885,186,590 P=1,183,465,914
Sales contract receivable 640,088,026 668,477,904
Accounts receivable 521,344,187 714,635,789
Unquoted debt instrument 495,610,552 495,610,552
Bills purchased (Note 19) 54,332,644 134,629,291
57,730,621,246 51,185,965,601
Less allowance for credit losses (Note 15) 4,522,986,086 3,877,727,644
P=53,207,635,160 P=47,308,237,957
Personal loans comprise deposit collateral loans, employee salary and consumer loan products
such as Money Card, multi-purpose loan and flexi-loan.
Unquoted debt instrument represents investments in convertible notes and in private bonds. The
convertible notes amounting to P=95.6 million are provided with 100% allowance for credit losses
as of December 31, 2010 and 2009.
As of December 31, 2010, 2009 and 2008, 55.09%, 48.51% and 44.92%, respectively, of the total
receivables from customers are subject to periodic interest repricing. Remaining receivables
earned average annual fixed interest rates of 14.74%, 15.39% and 15.17% in 2010, 2009 and 2008,
respectively.
Interest income on loans and receivables consists of:
2010 2009 2008
Receivables from customers:
Consumption loans P=2,260,849,552 P=1,896,953,617 P=1,749,224,772
Real estate loans 1,649,959,185 1,465,738,219 1,218,544,529
Personal loans 926,817,250 945,735,689 950,225,398
Commercial loans 918,727,776 977,615,675 761,248,012
Bills discounted 233,354 460,547 356,631
Other receivables:
Sales contract receivables 65,388,714 63,606,126 65,454,924
Unquoted debt instrument 50,230,846 25,957,769 –
P=5,872,206,677 P=5,376,067,642 P=4,745,054,266
Interest income accreted on impaired loans and receivables classified under real estate loans and
commercial loans amounting to P=72.4 million, P=104.3 million and P=108.3 million in 2010, 2009
and 2008, respectively.
Interest income from restructured loans amounted to P=101.2 million, P=112.2 million and
P=145.2 million in 2010, 2009 and 2008, respectively.
On April 23, 2007, the Bank participated in a private auction to bid for the 1st batch of performing
residential mortgage loan portfolio consisting of 357 accounts of Balikatan Housing Finance, Inc.
(BHFI) with principal balance of P=126.8 million.
On May 15, 2007, BHFI selected the Bank as the successful bidder.
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On July 30, 2008 and December 12, 2008, the Bank purchased the 2nd and 3rd batch of
performing residential mortgage loans from BHFI. Details of the loans purchased follow:
First Sale Second Sale Third Sale
Number of accounts purchased 357 643 88
Principal balance of loans
purchased P=126,817,101 P=247,777,405 P=35,618,314
Bid Price 136,431,599 256,346,373 36,633,930
As of December 31, 2010, the carrying value and fair value of the collateral loans amounted to
P=260.2 million and P=144.5 million, respectively. As of December 31, 2009, the carrying value
and fair value of the collateral loans amounted to P=315.2 million and P=178.5 million, respectively.
An Assignment Agreement for each portfolio was executed between BHFI (the Assignor) and the
Bank (the Assignee). The Assignment Agreement contains the terms of the sale including the
representations and warranties of the assignor and assignee.
BSP Reporting
The breakdown of loans and receivables from customers (gross of unearned discounts) as to
secured and unsecured and as to type of security follows:
2010 % 2009 %
Secured by:
Chattel P=27,496,864,284 45.48 P=21,577,160,470 41.45
Real estate 21,290,164,034 35.21 19,581,311,859 37.62
Deposit hold-out 198,151,608 0.33 210,857,877 0.41
48,985,179,926 81.02 41,369,330,206 79.48
Unsecured 11,476,263,948 18.98 10,681,150,926 20.52
P=60,461,443,874 100.00 P=52,050,481,132 100.00
Details of NPLs follow:
2010 2009
Unsecured P=2,392,225,160 P=1,958,506,774
Secured 1,960,892,609 2,192,769,144
P=4,353,117,769 P=4,151,275,918
Generally, NPLs refer to loans and receivables whose principal and/or interest is unpaid for thirty
(30) days or more after due date or after they have become past due in accordance with existing
BSP rules and regulations. This shall apply to loans payable in lump sum and loans payable in
quarterly, semi-annual, or annual installments, in which case, the total outstanding balance thereof
shall be considered nonperforming.
In the case of loans and receivables that are payable in monthly installments, the total outstanding
balance thereof shall be considered nonperforming when three (3) or more installments are in
arrears.
In the case of loans and receivables that are payable in daily, weekly, or semi-monthly
installments, the total outstanding balance thereof shall be considered nonperforming at the same
time that they become past due in accordance with existing BSP regulations, i.e., the entire
outstanding balance of the receivable shall be considered as past due when the total amount of
arrearages reaches ten percent (10%) of the total receivable balance.
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Loans and receivables are classified as nonperforming in accordance with BSP regulations, or
when, in the opinion of management, collection of interest or principal is doubtful. Receivables
are not reclassified as performing until interest and principal payments are brought current or the
loans are restructured in accordance with existing BSP regulations, and future payments appear
assured.
Restructured loans and receivables which do not meet the requirements to be treated as performing
receivables shall also be considered as NPLs.
Current banking regulations allow banks with no unbooked valuation reserves and capital
adjustments to exclude from nonperforming classification loans classified as Loss in the latest
examination of the BSP which are fully covered by allowance for credit and impairment losses,
provided that interest on said receivables shall not be accrued.
The NPLs of the Bank not fully covered by allowance for credit losses follow:
2010 2009
Total NPLs P=4,353,117,769 P=4,151,275,918
NPLs fully covered by allowance for credit losses (2,737,974,312) (2,650,628,890)
P=1,615,143,457 P=1,500,647,028
Restructured loans as of December 31, 2010 and 2009 amounted P=938.7 million and P=1.0 billion,
respectively. The Bank’s loan portfolio includes non-risk loans as defined under BSP regulation
totaling P=4.0 billion and P=6.3 billion as of December 31, 2010 and 2009, respectively.
Loan concentration as to economic activity follows (gross of unearned discounts):
2010 % 2009 %
Other community, social and personal
activities P=19,332,703,363 31.98 P=16,279,744,883 31.28
Real estate 17,726,774,884 29.32 14,292,466,286 27.46
Wholesale and retail trade 10,739,412,101 17.76 8,796,860,213 16.90
Public utilities 5,062,908,930 8.37 4,050,290,496 7.78
Banks, insurance and other financial
institutions 2,001,898,357 3.31 1,833,787,458 3.52
Manufacturing 862,201,288 1.43 873,144,519 1.68
Agriculture 614,169,127 1.01 2,266,926,621 4.35
Services 585,662,677 0.97 494,440,157 0.95
Mining and quarrying 15,967,948 0.03 10,601,965 0.02
Others 3,519,745,199 5.82 3,152,218,534 6.06
P=60,461,443,874 100.00 P=52,050,481,132 100.00
Others relates to economic activities classified as electricity, gas and water, construction, health
and social work, public administration and defense, extra-territorial organization and bodies,
education and fishing. Thrift banks are not covered by the loan concentration limit of 30% prescribed by the BSP.
F-69
10. Investments in an Associate and a Joint Venture
The composition of this account follows:
2010 2009
Investment in an associate P=458,921,659 P=393,214,989
Investment in a joint venture 370,952,096 395,095,348
P=829,873,755 P=788,310,337
Investment in an Associate
The Banks owns 2,500,000 shares of TFSPC representing 25% ownership.
The following illustrates the summarized financial information of TFSPC:
2010 2009
Total assets P=18,775,952,714 P=13,994,948,280
Total liabilities 16,936,261,946 12,422,088,320
Net assets 1,839,690,768 1,572,859,960
Gross revenue for the year 1,720,926,662 2,702,784,096
Net income for the year 262,826,678 200,137,400
Movement in this account follows:
2010 2009
Acquisition cost P=270,546,789 P=270,546,789
Accumulated equity in net income:
Balance at beginning of year 122,668,200 99,405,000
Share in net income 65,706,670 50,034,350
Cash dividend – (26,771,150)
Balance at end of year 188,374,870 122,668,200
Carrying value P=458,921,659 P=393,214,989
Investment in a Joint Venture
In August 2009, the Bank entered into a joint venture agreement (JVA) with Sumitomo
Corporation, Sumitomo Corporation of the Philippines and Philippine Savings Bank Retirement
Fund. The objective of the parties was to establish a joint venture that will primarily engage in the
business of providing financing in the form of lending and leasing services for the purchase of
motorcycles. The JVA outlines the roles and responsibilities of each party, pre-incorporation
activities, formation of the joint venture corporation, pre-emptive rights, funding and financial
support of the parties, shareholders and board of directors’ matters, composition of key
management personnel as nominated by the parties, pre-emptive rights and rights of first refusal.
On September 11, 2009, the BSP approved the Bank’s application to form a joint venture with
Sumitomo Corporation. SMFC, the joint venture company was incorporated on November 26,
2009. The Bank owns 4,000,000 shares of SMFC representing 40% ownership.
SMFC started its commercial operations in March 2010.
F-70
The following illustrates the summarized financial information of the Bank’s investment in
SMFC:
2010 2009
Share in the joint venture’s statement of financial
condition:
Current assets P=347,314,556 P=401,693,653
Non-current assets 49,747,029 15,666,131
Non-current liabilities (26,109,489) (22,264,436)
Equity P=370,952,096 P=395,095,348
2010 2009
Share in the joint venture’s statement of income:
Other income P=25,400,098 P=1,727,706
Pre-operating expenses (62,506,255) (8,981,167)
Loss before income tax (37,106,157) (7,253,461)
Benefit from income tax 12,962,905 2,348,809
Loss for the year (P=24,143,252) (P=4,904,652)
The following illustrates the summarized financial information of SMFC:
2010 2009
Total current assets P=868,286,391 P=1,004,234,133
Non-current assets 124,367,571 39,165,328
Non-current liabilities (65,273,723) (55,661,090)
Total other income 63,500,245 4,319,265
Pre-operating expenses (156,265,639) (22,452,918)
Benefit from income tax 32,407,263 5,872,023
Movement in this account follows:
2010 2009
Acquisition cost P=400,000,000 P=400,000,000
Accumulated share in net losses:
Balance at beginning of year (4,904,652) –
Share in net loss (24,143,252) (4,904,652)
Balance at end of year (29,047,904) (4,904,652)
Carrying value P=370,952,096 P=395,095,348
The Bank has no share of any contingent liabilities of SMFC or capital commitments to SMFC as
of December 31, 2010 and 2009.
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11. Property and Equipment
The composition of and movements in this account follow:
2010
Land Building
Furniture,
Fixtures and
Equipment
Leasehold
Improvements Total
Cost
Balance at beginning of year P=208,802,981 P=1,347,901,391 P=1,232,145,141 P=248,060,915 P=3,036,910,428
Acquisitions – 67,802,500 288,045,940 40,916,681 396,765,121
Disposals – – (57,001,109) (663,080) (57,664,189)
Balance at end of year 208,802,981 1,415,703,891 1,463,189,972 288,314,516 3,376,011,360
Accumulated Depreciation and
Amortization
Balance at beginning of year – 164,690,306 733,504,557 153,240,833 1,051,435,696
Depreciation – 20,970,370 199,136,045 30,381,376 250,487,791
Disposals – – (33,132560) (96,189) (33,228,749)
Reclassification – 8,497,905 – (8,497,905) –
Balance at end of year – 194,158,581 899,508,042 175,028,115 1,268,694,738
Net Book Value P=208,802,981 P=1,221,545,310 P=563,681,930 P=113,286,401 P=2,107,316,622
2009
Land Building
Furniture,
Fixtures and Equipment
Leasehold Improvements Total
Cost
Balance at beginning of year P=183,623,179 P=1,327,535,732 P=1,077,277,112 P=180,522,818 P=2,768,958,841
Acquisitions 25,179,802 20,365,659 361,146,875 67,538,097 474,230,433 Disposals – – (206,278,846) – (206,278,846)
Balance at end of year 208,802,981 1,347,901,391 1,232,145,141 248,060,915 3,036,910,428
Accumulated Depreciation and
Amortization
Balance at beginning of year – 148,099,163 736,456,938 118,468,355 1,003,024,456 Depreciation – 16,591,143 173,750,293 34,772,478 225,113,914
Disposals – – (176,702,674) – (176,702,674)
Balance at end of year – 164,690,306 733,504,557 153,240,833 1,051,435,696
Net Book Value P=208,802,981 P=1,183,211,085 P=498,640,584 P=94,820,082 P=1,985,474,732
Gain on sale of property and equipment amounted to P=2.4 million, P=9.8 million and
P=3.8 million in 2010, 2009 and 2008, respectively.
The details of depreciation and amortization under the statements of income follow:
2010 2009 2008
Property and equipment P=250,487,791 P=225,113,914 P=177,707,230
Investment properties (Note 12) 62,360,031 59,779,588 54,747,337
Chattel mortgage properties (Note 14) 39,190,286 43,642,104 41,649,531
P=352,038,108 P=328,535,606 P=274,104,098
The Bank declared loss on properties arising from casualty brought about by the calamities in
2009 amounting to P=4.9 million included under ‘Miscellaneous expense’.
As of December 31, 2010 and 2009, property and equipment of the Bank with gross carrying
amounts of P=531.9 million and P=392.0 million, respectively, is fully depreciated but still being
used.
F-72
12. Investment Properties
The composition of and movements in this account follow:
2010
Land
Building
Improvements Total
Cost
Balance at beginning of year P=1,709,420,443 P=1,500,141,233 P=3,209,561,676
Additions 300,157,262 399,579,969 699,737,231
Disposals (260,740,442) (246,713,253) (507,453,695)
Balance at end of year 1,748,837,263 1,653,007,949 3,401,845,212
Accumulated Depreciation
Balance at beginning of year – 366,846,356 366,846,356
Depreciation (Note 11) – 62,360,031 62,360,031
Disposals – (53,204,299) (53,204,299)
Balance at end of year – 376,002,088 376,002,088
Allowance for Impairment Losses
Balance at beginning of year 224,809,168 35,138,447 259,947,615
Provisions for the year (Note 15) 28,558,362 1,565,766 30,124,128
Disposals (26,877,833) (9,659,718) (36,537,551)
Balance at end of year 226,489,697 27,044,495 253,534,192
Net Book Value P=1,522,347,566 P=1,249,961,366 P=2,772,308,932
2009
Land
Building
Improvements Total
Cost
Balance at beginning of year P=1,861,068,518 P=1,370,371,532 P=3,231,440,050
Additions 271,355,783 316,318,373 587,674,156
Disposals (423,003,858) (186,548,672) (609,552,530)
Balance at end of year 1,709,420,443 1,500,141,233 3,209,561,676
Accumulated Depreciation
Balance at beginning of year – 336,302,333 336,302,333
Depreciation (Note 11) – 59,779,588 59,779,588
Disposals – (29,235,565) (29,235,565)
Balance at end of year – 366,846,356 366,846,356
Allowance for Impairment Losses
Balance at beginning of year 83,397,041 35,595,865 118,992,906
Provisions for the year (Note 15) 149,517,260 3,519,843 153,037,103
Disposals (8,105,133) (3,977,261) (12,082,394)
Balance at end of year 224,809,168 35,138,447 259,947,615
Net Book Value P=1,484,611,275 P=1,098,156,430 P=2,582,767,705
Depreciation and provision for impairment losses on investment properties amounted to
P=54.7 million and P=51.0 million, respectively, in 2008.
The details of the net book value of investment properties follow:
2010 2009
Real estate properties acquired in settlement of
loans and receivables P=2,492,947,062 P=2,286,402,095
Bank premises leased to third parties and held for
capital appreciation 279,361,870 296,365,610
P=2,772,308,932 P=2,582,767,705
F-73
As of December 31, 2010 and 2009, the aggregate fair value of investment properties amounted to
P=3.0 billion and P=2.7 billion, respectively.
Gain on foreclosure of investment properties amounted to P=224.4 million, P=206.1 million and
P=211.1 million in 2010, 2009 and 2008, respectively.
Gain on sale of investment properties amounted to P=15.2 million, P=31.6 million and P=40.4 million
in 2010, 2009 and 2008, respectively.
Rental income on investment properties included in miscellaneous income amounted to
P=61.8 million, P=52.9 million and P=53.1 million in 2010, 2009 and 2008, respectively
(see Notes 23 and 25).
Operating expenses incurred in maintaining investment properties amounted to P=7.5 million,
P=5.2 million and P=4.6 million in 2010, 2009 and 2008, respectively.
13. Goodwill and Intangible Assets
This account consists of:
2010 2009
Goodwill P=53,558,338 P=53,558,338
Intangible assets
Software costs 163,002,477 120,790,777
License fees 24,123,737 23,123,737
187,126,214 143,914,514
P=240,684,552 P=197,472,852
The movements of other intangible assets follow:
2010
Software Costs License Fees Total
Balance at beginning of year P=120,790,777 P=23,123,737 P=143,914,514
Additions 83,904,411 1,000,000 84,904,411
Amortization (41,692,711) – (41,692,711)
Balance at end of year P=163,002,477 P=24,123,737 P=187,126,214
2009
Software Costs License Fees Total
Balance at beginning of year P=82,634,345 P=22,323,737 P=104,958,082
Additions 65,918,040 800,000 66,718,040
Amortization (27,761,608) – (27,761,608)
Balance at end of year P=120,790,777 P=23,123,737 P=143,914,514
Amortization of software costs in 2008 amounted to P=26.8 million.
F-74
14. Other Assets
This account consists of:
2010 2009
Prepaid taxes on investment securities P=325,130,153 P=104,920,294
Chattel mortgage properties - net 233,529,702 180,437,602
Security deposits 76,324,741 69,064,080
Creditable withholding tax 55,395,096 17,116,379
Other prepaid expenses 53,792,479 71,758,680
Prepaid rent 32,251,010 32,383,373
Documentary stamps on hand 28,203,719 32,702,233
RCOCI 27,841,860 46,062,282
Inter-office float items 12,844,125 8,431,511
Sundry debits 11,396,210 43,714,076
Stationeries and supplies on hand 8,838,714 61,954,548
Prepaid insurance 8,609,272 4,712,372
Deferred charges 6,450,781 9,676,172
Others 3,513,037 4,113,609
P=884,120,899 P=687,047,211
The movements of chattel mortgage properties - net follow:
2010 2009
Cost
Balance at beginning of year P=206,398,160 P=279,116,918
Additions (Note 32) 639,569,321 498,026,288
Disposals (578,778,108) (570,745,046)
Balance at the end of year 267,189,373 206,398,160
Accumulated Depreciation
Balance at beginning of year 25,344,468 30,665,788
Depreciation (Note 11) 39,190,286 43,642,104
Disposals (31,491,173) (48,963,424)
Balance at the end of year 33,043,581 25,344,468
Allowance for Impairment Losses
Balance at beginning of year 616,090 –
Provisions for the year – 616,090
Balance at end of the year 616,090 616,090
Net Book Value P=233,529,702 P=180,437,602
Loss on foreclosure of chattel mortgage properties amounted to P=108.4 million, P=92.0 million,
P=60.1 million in 2010, 2009 and 2008, respectively.
Gain on sale of chattel mortgage properties amounted to P=45.4 million, P=41.8 million and
P=26.8 million in 2010, 2009 and 2008, respectively.
F-75
15. Allowance for Credit and Impairment Losses
Details of the provision for credit and impairment losses charged to current operations follow:
2010 2009 2008
Loans and receivables P=882,158,108 P=863,603,391 P=526,352,518
Investment properties (Note 12) 30,124,128 153,037,103 51,048,109
AFS investments (Note 8) – 92,500,000 –
Chattel mortgage properties (Note 14) – 616,090 –
P=912,282,236 P=1,109,756,584 P=577,400,627
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Changes in the allowance for credit losses on loans and receivables follow (in thousands):
Receivables from Customers Other Receivables
Accrued
Interest Accounts Sales Contract Unquoted Debt Bills
Purchased
2010 Consumption Real Estate Commercial Personal Receivable Receivable Receivable Investment Total
Balance at beginning of year P=568,372 P=171,341 P=682,776 P=1,725,616 P=181,371 P=415,157 P=31,554 P=95,611 P=5,930 P=3,877,728
Provisions for the year charged against profit or
loss 77,405 1,572 86,284 593,414 121,616 1,867 – – – 882,158
Reversal of allowance – – – – (35,252) (32,563) (3,552) – – (71,367)
Amount written off (170,575) – – (82,831) – – – – (4,627) (258,033)
Reclassification – – – – – 92,500 – – – 92,500
Balance at end of year P=475,202 P=172,913 P=769,060 P=2,236,199 P=267,735 P=476,961 P=28,002 P=95,611 P=1,303 P=4,522,986
Individual impairment P=– P=127,746 P=574,569 P=– P=52,409 P=178,699 P=18,313 P=95,611 P=– P=1,047,347
Collective impairment 475,202 45,167 194,491 2,236,199 215,326 298,262 9,689 – 1,303 3,475,639
P=475,202 P=172,913 P=769,060 P=2,236,199 P=267,735 P=476,961 P=28,002 P=95,611 P=1,303 P=4,522,986
Gross amount of loans individually impaired,
before deducting any individual impairment
allowance P=– P=320,827 P=1,127,174 P=– P=234,456 P=178,256 P=18,313 P=95,611 P=– P=1,974,637
Receivables from Customers Other Receivables
Accrued
Interest Accounts Sales Contract Unquoted Debt Bills
Purchased
2009 Consumption Real Estate Commercial Personal Receivable Receivable Receivable Investment Total
Balance at beginning of year P=428,858 P=94,152 P= 665,280 P=1,385,048 P=89,873 P=328,530 P=31,005 P=95,611 P=5,930 P=3,124,287
Provisions for the year charged against profit or
loss 139,514 116,876 43,770 340,568 110,928 111,398 549
863,603
Reversal of allowance – (39,687) (26,274) – (19,430) – – – – (85,391)
Amount written off – – – – – (24,771) – – – (24,771)
Balance at end of year P=568,372 P=171,341 P=682,776 P=1,725,616 P=181,371 P=415,157 P=31,554 P=95,611 P=5,930 P=3,877,728
Individual impairment P=– P=123,441 P=520,657 P=– P=46,333 P=85,530 P=25,446 P=95,611 P=– P=897,018
Collective impairment 568,372 47,900 162,119 1,725,616 135,038 329,627 6,108 – 5,930 2,980,710
P=568,372 P=171,341 P=682,776 P=1,725,616 P=181,371 P=415,157 P=31,554 P=95,611 P=5,930 P=3,877,728
Gross amount of loans individually impaired,
before deducting any individual impairment
allowance P=– P=355,344 P=1,269,563 P=– P=192,356 P=85,530 P=168,942 P=95,611 P=– P=2,167,346
F-77
16. Deposit Liabilities
As of December 31, 2010 and 2009, under existing BSP regulations, non-FCDU deposit liabilities
are subject to statutory reserve of 4.00% and liquidity reserve of 2.00%. As of December 31, 2010
and 2009, the Bank is in compliance with such regulation.
Available reserves follows:
2010 2009
Cash P=3,083,626,629 P=2,555,221,249
Due from BSP 1,047,234,412 914,926,770
AFS investments 1,490,060,774 1,236,249,084
P=5,620,921,815 P=4,706,397,103
Deposit liabilities earned average fixed interest rate of 3.29%, 3.53%, and 4.87% in 2010, 2009
and 2008, respectively.
17. Subordinated Notes
On January 27, 2006, the Bank issued P=2.0 billion, callable Unsecured Subordinated Notes due
2016 with step-up in 2011 (the Notes). The issuance of the Notes under the terms approved by the
BOD was approved by the BSP on December 28, 2005.
Among the significant terms and conditions of the issuance of the Notes are:
a. Issue price at 100% of the principal amount.
b. The Notes bear interest at the rate of 10.00% per annum from and including January 27, 2006
with step-up after five years. Interest shall be payable quarterly in arrears every 27th of
January, April, July and October of each year, commencing April 27, 2006.
c. The Notes will constitute direct, unconditional and unsecured obligations of the Bank and
claim in respect of the Notes shall be at all times pari passu and without any preference
among themselves.
d. Subject to satisfaction of certain regulatory approval requirements, the Bank may redeem all
and not less than the entire outstanding Notes, at a redemption price equal to the face value of
the Notes together with accrued and unpaid interest based on the interest rate.
e. On January 27, 2011 (the Reset date), the Step-up Interest Rate will be based on a 5-year
Mart1 FXTN as of Reset date multiplied by 80.00%, plus the Step-up Credit Spread on the
twenty-first interest period up to the last interest period in the event that the issuer does not
exercise the Call Option. The Step-up Credit Spread is equivalent to 4.2815%.
As of December 31, 2010 and 2009, the Bank is in compliance with the terms and conditions upon
which the subordinated notes have been issued.
On October 14, 2010, the BOD of the Bank approved the option to call the Notes on January 27,
2011. The request of the Bank to exercise the call option on the Note was approved by the BSP on
December 10, 2010. The Bank exercised the call option on January 28, 2011 (see Note 33).
F-78
The movements in subordinated notes payable follow:
2010 2009
Amortized cost P=1,973,881,534 P=1,970,941,621
Amortization of debt issuance costs 3,259,498 2,939,913
P=1,977,141,032 P=1,973,881,534
18. Accrued Taxes, Interest and Other Expenses
This account consists of:
2010 2009
Accrued interest payable P=200,096,655 P=189,492,469
Accrued other taxes and licenses payable 179,253,734 85,503,262
Accrued other expenses payable 752,778,952 620,027,404
P=1,132,129,341 P=895,023,135
Accrued other expenses payable consists of accruals for salaries and wages, fringe benefits,
insurance on deposits, professional fees, advertisements and information technology expenses.
19. Other Liabilities
This account consists of:
2010 2009
Accounts payable P=676,738,250 P=636,651,703
Net retirement liability (Note 24) 192,844,011 120,484,387
Other credits 186,437,555 189,582,529
Withholding taxes payable 55,645,940 59,832,957
Bills purchased-contra (Note 9) 54,332,644 130,001,594
Sundry credits 18,794,710 43,328,325
Due to the Treasurer of the Philippines 6,303,446 6,332,337
SSS, Medicare, ECP & HDMF premium payable 6,061,448 5,445,395
Dividends payable (Note 21) – 36,037,874
Due to BSP – 7,495,204
Miscellaneous 65,720,627 58,218,617
P=1,262,878,631 P=1,293,410,922
Accounts payable includes payable to suppliers and service providers, and loan payments and
other charges received from customers in advance.
Other credits represent long-outstanding unclaimed balances from inactive and dormant accounts.
Miscellaneous liabilities include incentives for housing loan customers that are compliant with the
payment terms amounting to P=44.7 million and P=39.1 million as of December 31, 2010 and 2009,
respectively.
F-79
20. Maturity Analysis of Assets and Liabilities
The following table shows an analysis of assets and liabilities analyzed according to whether they
are expected to be recovered or settled within one year and beyond one year from statement of
condition date (in thousands):
2010 2009
Within
One Year
Beyond
One Year Total
Within
One Year
Beyond
One Year Total
Financial Assets Cash and other cash items P=3,163,940 P=– P=3,163,940 P=2,632,885 P=– P=2,632,885
Due from BSP 2,899,592 – 2,899,592 4,937,990 – 4,937,990
Due from other banks 7,520,836 – 7,520,836 1,528,848 – 1,528,848
Interbank loans receivable and SPURA 3,586,560 – 3,586,560 5,900,000 – 5,900,000
FVPL investments 868,316 – 868,316 248,043 – 248,043
AFS investments - gross (Note 8) 16,246,349 – 16,246,349 18,399,882 – 18,399,882 HTM investments – 9,162,585 9,162,585 – 4,772,851 4,772,851
Loans and receivables - gross (Note 9) 11,149,148 51,908,858 63,058,006 11,065,435 44,181,866 55,247,301
Other assets - gross* (Note 14) 48,169 56,384 104,553 66,887 49,025 115,912
45,482,910 61,127,827 106,610,737 44,779,970 49,003,742 93,783,712
Nonfinancial Assets
Investment in an associate and joint venture – 829,874 829,874 – 788,310 788,310
Property and equipment - gross (Note 11) – 3,376,011 3,376,011 – 3,036,910 3,036,910 Investment properties - gross (Note 12) – 3,401,845 3,401,845 – 3,209,562 3,209,562
Deferred tax assets 59,809 645,552 705,361 27,510 1,229,020 1,256,530
Other assets - gross** (Note 14) 770,642 250,226 1,020,868 415,984 353,241 769,225
830,451 8,503,508 9,333,959 443,494 8,617,043 9,060,537
Less allowance for credit and impairment losses – – 4,823,146 – – 4,276,802
Accumulated depreciation
(Notes 11 and 12) – – 1,644,696 – – 1,418,282 Unearned discounts (Note 9) – – 5,327,385 – – 4,061,335
– – 11,795,227 – – 9,756,419
P=46,313,361 P=69,631,335 P=104,149,469 P=45,223,464 P=57,620,785 P=93,087,830
* Others assets under financial assets comprise of petty cash fund, shortages, RCOCI and security deposits.
** Other assets under nonfinancial assets comprise of inter-office float items, prepaid expenses, stationery and supplies on hand,
sundry debits, documentary stamps on hand, deferred charges, postages stamps, chattel mortgage properties, goodwill and intangible assets.
2010 2009
Within
One Year
Beyond
One Year Total
Within
One Year
Beyond
One Year Total
Financial Liabilities
Deposit liabilities P=73,074,011 P=14,444,798 P=87,518,809 P=65,362,751 P=12,027,460 P=77,390,211 Subordinated notes 1,977,141 – 1,977,141 – 1,973,882 1,973,882
Treasurer’s, cashier’s and manager’s checks 649,434 – 649,434 505,738 – 505,738
Accrued other expenses payable 752,779 – 752,779 620,027 – 620,027
Accrued interest payable 200,097 – 200,097 189,492 – 189,492
Other liabilities
Accounts payable 676,738 – 676,738 636,652 – 636,652 Other credits – 186,438 186,438 – 189,583 189,583
Bills purchased-contra 54,333 – 54,333 130,002 – 130,002
Due to BSP – – – 7,495 – 7,495 Dividends payable – – – 36,038 – 36,038
Due to Treasurer of the Philippines – 6,303 6,303 – 6,332 6,332
Deposits for keys 1,040 – 1,040 1,132 – 1,132 Others* 1,764 – 1,764 2,412 – 2,412
77,387,337 14,637,539 92,024,876 67,491,739 14,197,257 81,688,996
Nonfinancial Liabilities
Accrued other taxes and licenses payable 179,254 – 179,254 85,503 – 85,503 Accrued income tax payable – – – 17,426 – 17,426
Other liabilities** 7,315 328,947 336,262 108,607 175,159 283,766
186,569 328,947 515,516 211,536 175,159 386,695
P=77,573,906 P=14,966,486 P=92,540,392 P=67,703,275 P=14,372,416 P=82,075,691
* Others under financial liabilities comprise of payment orders payable and overages.
** Other liabilities under nonfinancial liabilities comprise of advance rentals on bank premises, sundry credits, withholding taxes,
SSS, Medicare, ECP & HDMF premium payable, net retirement liability, and miscellaneous liabilities.
F-80
21. Equity
Issued Capital
The Bank’s capital stock consists of:
2010 2009
Shares Amount Shares Amount
Authorized common stock - P=10 par value 425,000,000 P=4,250,000,000 425,000,000 P=4,250,000,000
Issued and outstanding Balance at beginning and end of year (Note 28) 240,252,491 P=2,402,524,910 240,252,491 P=2,402,524,910
Dividends Paid and Proposed
Details of the Bank’s dividend distributions as approved by the Bank’s BOD and the BSP follow:
Cash Dividends
Date of declaration Per share Total amount Date of BSP approval Record date Payment date
December 19, 2007 0.15 P=36,037,874 February 07, 2008 February 27, 2008 March 7, 2008
February 13, 2008 0.15 36,037,874 May 19, 2008 June 05, 2008 June 16, 2008 April 29, 2008 0.15 36,037,874 July 16, 2008 August 5, 2008 August 20, 2008
July 21, 2008 0.15 36,037,874 September 11, 2008 October 13, 2008 October 27, 2008
October 28, 2008 0.15 36,037,874 March 6, 2009 March 26, 2009 April 15, 2009 January 20, 2009 0.15 36,037,874 June 29, 2009 July 23, 2009 August 7, 2009
May 18, 2009 0.15 36,037,874 August 17, 2009 September 15, 2009 September 30, 2009
July 28, 2009 0.15 36,037,874 October 20, 2009 November 13, 2009 December 1, 2009 October 13, 2009 0.15 36,037,874 December 15, 2009 January 14, 2010 January 28, 2010
January 19, 2010 0.15 36,037,874 March 8, 2010 March 31, 2010 April 16, 2010
February 19, 2010 2.75 660,694,350 April 22, 2010 May 17, 2010 May 31, 2010 May 17, 2010 0.15 36,037,874 June 15, 2010 July 13, 2010 August 3, 2010
July 27, 2010 0.15 36,037,874 September 6, 2010 September 29, 2010 October 14, 2010
October 14, 2010 0.15 36,037,874 November 15, 2010 December 8, 2010 December 23, 2010 January 20, 2011 0.15 36,037,874
On January 20, 2011, the BOD of the Bank declared a 1.50% regular cash dividend for the fourth
quarter of 2010 amounting to P=36.04 million or P=0.15 per share on which the Bank is awaiting for
the approval of BSP.
Capital Management
The primary objectives of the Bank’s capital management are to ensure that the Bank complies
with externally imposed capital requirements, as mandated by the BSP, and that the Bank
maintains healthy capital ratios in order to support its business and maximize returns for its
shareholders. The Bank considers its paid in capital and surplus as its capital.
The Bank manages its capital structure and makes adjustments in the light of changes in economic
conditions and the risk characteristic of its activities. In order to maintain or adjust the capital
structure, the Bank may adjust the amount of dividend payment to shareholders or issue capital
securities. The major activities in this area include the following:
On March 2, 2005, the Bank’s BOD approved an amendment to the Bank’s Dividend Policy
which provides for an annual regular cash dividend of 6.00% of the par value of the total
capital stock payable quarterly at the rate of 1.50% or P=0.15 per share payable not later than
March 31, June 30, September 30 and December 31 of each year.
The Bank has issued additional common shares for its qualified stockholders in 2008 and 2006
through stock rights offerings that raised P=2.0 billion and P=750.0 million in capital,
respectively.
F-81
Regulatory Capital
Under Section 9 of the Thrift Banks Act, the combined capital accounts of each bank should not
be less than an amount equal to 10.00% of its risk assets. Risk assets consist of total assets after
exclusion of cash on hand, due from BSP, loans covered by hold out or assignment of deposits,
loans or acceptances under letters of credit to the extent covered by margin deposits and other
non-risk items as determined by the Monetary Board.
On June 2, 2006, the Monetary Board of the BSP approved major revisions to the risk-based
capital adequacy framework which took effect on July 1, 2007, to align the existing Basel I-
compliant framework with the new Basel II standards. As approved, the BSP decided to maintain
the present minimum overall capital adequacy ratio (CAR) of banks and quasi-banks at 10.00%.
However, consistent with Basel II recommendations, it approved major methodological revisions
to the calculation of minimum capital that universal banks, commercial banks and their subsidiary
banks and quasi-banks should hold against actual credit risk exposures.
The guidelines for allocating minimum capital to cover market risk was also amended to some
extent, primarily to align specific market risk charges on trading book assets with the revised
credit risk exposure guidelines. A completely new feature is the introduction of bank capital
charge for operational risk. The required disclosures to the public of bank capital structure and
risk exposures are also enhanced to promote greater market discipline in line with the so-called
Pillar 3 of the Basel II recommendations.
The determination of the Bank’s compliance with regulatory requirements and ratios is based on
the amount of the Bank’s “unimpaired capital” (regulatory net worth) as reported to the BSP,
which is determined on the basis of regulatory accounting practices which differ from PFRS in
some respects.
The Bank complied with all externally imposed capital requirement throughout the period.
The table below shows the Bank’s CAR as of December 31, 2010 and 2009 as reported to the BSP
(in millions).
2010 2009
Tier 1 capital P=9,960 P=9,433
Tier 2 capital 2,506 2,397
Gross qualifying capital 12,466 11,830
Less required deductions 1,844 2,489
Total qualifying capital P=10,622 P=9,341
Risk weighted assets P=69,091 P=64,693
Tier 1 capital adequacy ratio 12.35% 11.34%
Capital adequacy ratio 15.37% 14.44%
Regulatory capital consists of Tier 1 capital, which comprises capital stock, surplus, surplus
reserves, cumulative translation adjustment and net unrealized losses on AFS investments.
Certain adjustments are made to PFRS-based results and reserves, as prescribed by the BSP. The
other component of regulatory capital is Tier 2 capital, which is comprised of the Bank’s
subordinated notes. Certain items are deducted from the regulatory Gross Qualifying Capital,
such as but not limited to equity investments in financial allied undertakings, but excluding
insurance companies (for solo basis); investments in debt capital instruments of unconsolidated
subsidiary banks (for solo basis); equity investments in subsidiary insurance companies and
subsidiary non-financial allied undertakings; and reciprocal investments in equity of other
banks/enterprises.
F-82
Risk-weighted assets are determined by assigning defined risk weights to amounts of on-statement
of condition exposures and to the credit equivalent amounts of off-statement of condition
exposures. Certain items are deducted from risk-weighted assets, such as the excess of general
loan loss provision over the amount permitted to be included in Tier 2 capital.
The issuance of BSP Circular No. 639 covering the Internal Capital Adequacy Assessment Process
(ICAAP) in 2009 supplements the BSP’s risk-based capital adequacy framework under Circular
No. 538. In compliance with this new circular, the Metrobank Group has adopted and developed
its ICAAP framework to ensure that appropriate level and quality of capital are maintained by the
Group. Under this framework, the assessment of risks extends beyond the Pillar 1 set of credit,
market and operational risks and onto other risks deemed material by the Group. The level and
structure of capital are assessed and determined in light of the Group’s business environment,
plans, performance, risks and budget; as well as regulatory edicts. The Bank follows the Group’s
ICAAP framework and submits the result of its assessment to the Parent Company. The BSP
requires submission of an ICAAP document on a group-wide basis every January 31. The Group
through the Parent Company has complied with the submission deadline of the first final ICAAP
document.
Financial Performance
The following basic ratios measure the financial performance of the Bank:
2010 2009 2008
Return on average equity 15.99% 12.73% 12.47%
Return on average assets 1.83% 1.48% 1.31%
Net interest margin on average earning assets 5.57% 6.43% 5.75%
22. Net Service Fees and Commission Income
This account consists of:
2010 2009 2008
Service Fees and Commission Income
Deposit related and other fees received P=381,902,596 P=293,022,473 P=415,242,909
Credit related fees and commissions 369,748,426 345,031,112 206,609,207
Trust fees 6,977,608 4,867,453 9,606,888
758,628,630 642,921,038 631,459,004
Service Fees and Commission Expense
Commissions 54,734,353 41,041,024 93,337,094
Brokerage 12,212,795 5,638,657 3,756,650
66,947,148 46,679,681 97,093,744
Net Service Fees and Commission Income P=691,681,482 P=596,241,357 P=534,365,260
23. Miscellaneous Income
This account consists of:
2010 2009 2008
Rent (Notes 12 and 25) P=64,271,909 P=55,586,122 P=56,000,310
Insurance commission income 20,158,376 5,739,049 8,389,706
Others 24,519,537 26,958,795 18,839,038
P=108,949,822 P=88,283,966 P=83,229,054
F-83
Rent income arises from the lease of properties and safety deposit boxes of the Bank.
Others include income from recovery of charged-off assets, dividend income and other
miscellaneous income.
24. Retirement Benefits
The Bank has a funded, noncontributory defined benefit plan covering substantially all of its
employees. The benefits are based on years of service and final compensation.
The retirement expense amount included in ‘Compensation and fringe benefits’ in the statements
of income follows:
2010 2009
Current service cost P=61,963,347 P=5,212,147
Interest cost 54,098,714 120,375,419
Expected return on plan assets (41,426,599) (18,553,880)
Net actuarial gain recognized during the year (2,275,838) (61,607)
Net retirement expense P=72,359,624 P=106,972,079
The amount of net retirement liability recognized in the statements of condition under ‘Other
liabilities’ follow:
2010 2009
Present value of defined benefit obligation P=647,032,949 P=512,298,428
Fair value of plan assets (Note 29) 556,233,035 490,836,483
Deficit 90,799,914 21,461,945
Unrecognized actuarial gains 102,044,097 99,022,442
Net retirement liability P=192,844,011 P=120,484,387
The movements in net retirement liability recognized in the statements of condition follow:
2010 2009
Balance at beginning of year P=120,484,387 P=81,512,308
Retirement expense 72,359,624 106,972,079
Contributions – (68,000,000)
Balance at end of year P=192,844,011 P=120,484,387
Changes in the present value of the defined benefit obligation are as follow:
2010 2009
Balance at beginning of year P=512,298,428 P=354,045,351
Current service cost 61,963,347 5,212,147
Interest cost 54,098,714 120,375,419
Benefits paid (16,290,008) (36,580,421)
Actuarial loss 34,962,468 69,245,932
Balance at end of year P=647,032,949 P=512,298,428
F-84
Changes in the fair value of plan assets are as follow:
2010 2009
Balance at beginning of year P=490,836,483 P=309,231,332
Expected return 41,426,599 18,553,880
Contributions – 68,000,000
Benefits paid (16,290,008) (36,580,421)
Actuarial gains 40,259,961 131,631,692
Balance at end of year P=556,233,035 P=490,836,483
The actual return on plan assets amounted to P=81.69 million and P=150.2 million in 2010 and 2009,
respectively.
The movements in unrecognized actuarial gains are as follow:
2010 2009
Balance at beginning of year P=99,022,442 P=36,698,289
Actuarial losses for the year - obligation (34,962,468) (69,245,932)
Actuarial gains for the year - plan assets 40,259,961 131,631,692
Actuarial gains recognized (2,275,838) (61,607)
Balance at end of year P=102,044,097 P=99,022,442
The Bank expects to contribute P=155.5 million to its noncontributory defined benefit plan in 2011.
The major categories of plan assets as a percentage of the fair value of total plan assets are as
follow:
2010 2009
Equity instruments 90.4% 95.77%
Other assets 9.6% 4.23%
Other assets include investment in savings and time deposits, and accrued interest receivable.
The following table shows the aggregate fair value of equity instruments included in the plan
assets:
2010 2009
Bank’s shares P=310,595,481 P=274,802,678
SMFC 100,000,000 100,000,000
Other listed companies 89,239,280 95,315,300
P=499,834,761 P=470,117,978
The principal actuarial assumptions used in determining retirement liability as of January 1, 2010
and 2009 are shown below:
2010 2009
Average remaining working life 21 21
Discount rate 10.56% 34.00%
Expected rate of return on assets 8.44% 6.00%
Future salary increases 8.00% 10.00%
F-85
The overall expected rate of return on assets is determined based on market prices prevailing on
the date of the valuation, applicable to the period over which the obligation is to be settled.
As of December 31, 2010, the discount rate used in determining retirement obligation is 11.16%.
There has been a widening spread between the rates of return on risk-free fixed income securities
and the rates of return on high quality fixed-income securities that reflect credit or risk premiums
in 2008. This increased spread has resulted in higher yields-to-maturity and, accordingly, higher
discount rates.
Information on the Bank’s retirement plan for the current and previous years follows:
2010 2009 2008 2007 2006
Present value of unfunded obligation P=647,032,949 P=512,298,428 P=354,045,351 P=433,309,127 P=489,386,549
Fair value of plan assets (556,233,035) (490,836,483) (309,231,332) (385,586,980) (296,707,051)
Deficit 90,799,914 21,461,945 44,814,019 47,722,147 192,679,498 Experience adjustments on plan liabilities 21,694,823 (29,041,046) (54,151,522) (23,289,277) 8,250,112
Experience adjustments on plan assets 40,259,961 131,631,692 (159,193,210) 50,211,854 31,118,332
25. Leases
The Bank leases the premises occupied by its branches for periods ranging from 1 to 20 years
renewable under certain terms and conditions. Various lease contracts include escalation clauses,
most of which bear an annual rent increase of 10.00%. Rentals charged against profit or loss
under these lease contracts amounting to P=293.2 million in 2010, P=261.8 million in 2009 and
P=209.5 million in 2008 are shown under ‘Occupancy and equipment-related costs’ in the
statements of income.
Future minimum rentals payable under non-cancelable operating leases are as follow:
2010 2009
Within one year P=213,444,471 P=198,766,942
After one year but not more than five years 529,572,538 497,656,000
More than five years 304,859,316 274,637,504
P=1,047,876,325 P=971,060,446
The Bank entered into commercial property leases on its surplus office space. These non-
cancelable leases have remaining non-cancelable lease terms between 1 and 5 years. As of
December 31, 2010 and 2009, there is no contingent rental income. Rent income of the Bank
related to these property leases amounting to P=61.8 million in 2010, P=52.9 million in 2009 and
P=53.1 million in 2008 are shown under ‘Miscellaneous income’ in the statements of income.
Future minimum rentals receivable under non-cancelable operating leases are as follow:
2010 2009
Within one year P=61,416,868 P=57,933,061
After one year but not more than five years 111,983,488 173,758,668
P=173,400,356 P=231,691,729
F-86
26. Miscellaneous Expenses
This account consists of:
2010 2009 2008
Insurance P=195,235,643 P=158,506,606 P=195,557,385
Advertising 155,924,174 100,586,400 122,464,960
Information technology 141,207,719 110,418,684 95,608,286
Litigation 115,923,187 123,384,434 104,091,093
Communications 111,515,834 100,864,563 86,169,131
Stationery and supplies 111,403,081 31,159,010 23,798,870
Transportation and traveling 75,311,632 59,416,287 45,397,237
Repairs and maintenance 70,140,352 55,149,320 37,439,332
Management and professional fees 41,200,354 55,108,460 41,357,364
Banking activities expenses 25,028,402 5,628,722 7,317,428
Donations and charitable contributions 22,442,565 12,179,450 10,937,663
Fines, penalties and other charges 21,937,212 20,952,591 1,114,661
Supervision and examination fees 17,652,078 26,432,612 23,435,135
Training and seminars 15,957,749 11,175,319 10,177,282
Membership fees and dues 7,436,067 5,341,052 4,347,683
Rewards and incentives 7,273,273 5,026,581 5,740,739
Entertainment, amusement and recreation
(EAR) (Note 27) 3,617,682 2,328,921 1,521,350
Meeting allowance 2,729,876 3,265,093 3,148,445
Others 70,990,702 30,718,089 34,064,597
P=1,212,927,582 P=917,642,194 P=853,688,641
Insurance expense includes premiums paid to the Philippine Deposit Insurance Corporation
amounting to P=172.1 million, P=132.2 million and P=107.4 million in 2010, 2009 and 2008,
respectively.
Other expenses include sponsorship expenses, home free loan expenses, appraisal fees and
notarial fees. In 2010 and 2009, other expenses include payments to union members amounting to
P=9.25 million and P=6.72 million, respectively, for the successful completion of the collective
bargaining agreement, while there is no payment made to union members in 2008.
27. Income and Other Taxes
Under Philippine tax laws, the Bank is subject to percentage and other taxes (presented as ‘Taxes
and licenses’ in the statement of income) as well as income taxes. Percentage and other taxes paid
consist principally of gross receipts tax (GRT) and documentary stamps taxes (DST).
Income taxes include corporate income tax, discussed below, and final taxes paid at the rate of
20.00%, which is a final withholding tax on gross interest income from government securities, and
other deposit substitutes.
Current tax regulations provide that the RCIT rate shall be 35.00% until December 31, 2008.
Starting January 1, 2009, the RCIT rate shall be 30.00%. The interest allowed as a deductible
expense is reduced by 42.00% of interest income subjected to final tax under the 35.00% corporate
tax regime and 33.00% under the 30.00% corporate tax regime.
F-87
RA No. 9504, An Act Amending National Internal Revenue Code, provides that starting July 1,
2008, the optional standards deduction (OSD) equivalent to 40.00% of gross income may be
claimed as an alternative deduction in computing for the RCIT. The Bank elected to claim
itemized expense deductions instead of the OSD in computing for the RCIT in 2010 and 2009.
Current tax regulations also provide for the ceiling on the amount of EAR expense that can be
claimed as a deduction against taxable income. Under the regulations, EAR expense allowed as a
deductible expense for a service company is limited to the actual EAR paid or incurred but not to
exceed 1.00% of net revenue. The regulations also provide for MCIT of 2.00% on modified gross
income and allow a NOLCO. The MCIT and NOLCO may be applied against the Bank’s income
tax liability and taxable income, respectively, over a three-year period from the year of inception.
FCDU offshore income (income from non-residents) is tax-exempt while gross onshore income
(income from residents) is subject to 10.00% income tax. In addition, interest income on deposit
placements with other FCDUs and offshore banking units (OBUs) is taxed at 7.50%.
Under current tax regulation, the income derived by the FCDU from foreign currency transactions
with non-residents, OBUs, local commercial banks, including branches of foreign banks, is tax-
exempt while interest income on foreign currency loans from residents other than OBUs or other
depository banks under the expanded system is subject to 10.00% income tax.
Provision for (benefit from) income tax consists of:
2010 2009 2008
Current:
Final tax P=293,911,402 P=216,715,098 P=109,842,912
RCIT/MCIT 69,561,338 62,504,782 46,721,314
363,472,740 279,219,880 156,564,226
Deferred 481,607,494 (145,718,829) 44,036,634
P=845,080,234 P=133,501,051 P=200,600,860
Net deferred tax asset consists of:
2010 2009
Deferred tax asset on:
Allowance for credit and impairment losses P=798,540,262 P=1,268,692,219
Carryforward benefits of MCIT 59,809,450 129,370,788
Net pension liability 57,853,203 36,145,316
Accumulated depreciation on investment
properties 50,196,685 52,551,088
Accrued rent 38,408,448 35,138,839
Unamortized pension cost contribution 20,294,967 26,977,585
Unrealized foreign exchange loss 4,598,296 1,847,548
1,029,701,311 1,550,723,383
Deferred tax liability on:
Net unrealized gain on investment properties (256,132,063) (239,226,809)
Accretion of interest on impaired loans (68,208,031) (54,966,525)
(324,340,094) (294,193,334)
P=705,361,217 P=1,256,530,049
F-88
As of December 31, 2010, the Bank did not recognize deferred tax asset from its allowance for
credit losses amounting to P=635.3 million.
In 2009, the Bank’s MCIT and RCIT amounted to P=62.5 million and P=7.4 million, respectively,
resulting in an excess MCIT of P=55.1 million.
Details of the Bank’s excess MCIT follow:
Inception Year Amount Applied/Expired Balance Expiry Year
2007 P=27,510,337 P=27,510,337 P=– 2010
2008 46,721,314 42,051,001 4,670,313 2011
2009 55,139,137 – 55,139,137 2012
P=129,370,788 P=69,561,338 P=59,809,450
As of December 31, 2010, the Bank had already applied P=69.6 million of its excess MCIT against
its RCIT due.
The reconciliation between the statutory income tax and effective income tax follows:
2010 2009 2008
Statutory income tax P=795,959 P=412,055 P=399,263
Tax effect of:
FCDU Income (167,694) (183,502) (37,927)
Tax-paid and tax-exempt income (621,778) (190,877) (314,381)
Nondeductible expenses 168,141 95,825 74,375
Effect of deferred income tax 670,452 – 79,271
Effective income tax P=845,080 P=133,501 P=200,601
28. Earnings Per Share
The following table presents information used to calculate basic Earnings Per Share (EPS):
2010 2009 2008
a. Net income P=1,808,115,339 P=1,240,014,416 P=940,151,593
b. Weighted average number
of common shares for basic
earnings per share 240,252,491 240,252,491 236,306,590
c. Basic/Diluted EPS (a/b) P=7.53 P=5.16 P=3.98
As of December 31, 2010, there were no potential common shares with dilutive effect on the basic
EPS of the Bank.
29. Related Party Transactions
Parties are considered to be related if one party has the ability, directly or indirectly, to control the
other party or exercise significant influence over the other party in making financial and operating
decisions. Corporate entities are also considered to be related if they are subjected to common
control or common significant influence. Transactions between related parties are based on terms
similar of those offered to non-related parties.
F-89
In the ordinary course of business, the Bank has loans and other transactions with its affiliates, and
with certain DOSRI. Under the Bank's policy, these loans and other transactions are made
substantially on the same terms as with other individuals and businesses of comparable risks. The
General Banking Law limits the amount of direct credit accommodations to DOSRI, 70.00% of
which must be secured and should not exceed the total of their respective deposits and book value
of their respective investments in the Bank. In the aggregate, loans to DOSRI generally should
not exceed the lower of the Bank's total equity or 15.00% of the Bank's total loan portfolio.
BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts.
The following table shows information relating to the loans, other credit accommodations and
guarantees classified as DOSRI accounts under regulations existing prior to said circular and new
DOSRI loans and other credit accommodations granted under said circular as of December 31,
2010 and 2009:
2010 2009
Total outstanding DOSRI accounts P=2,996,655,559 P=1,740,885,192
Percent of DOSRI accounts granted under
regulations existing prior to BSP Circular
No. 423 to total loans 4.96% 3.34%
Percent of new DOSRI accounts granted under BSP
Circular No. 423 to total loans – –
Percent of unsecured DOSRI accounts to total
DOSRI accounts 9.68% 15.29%
Percent of past due DOSRI accounts to total
DOSRI accounts 19.83% 34.70%
Percent of nonperforming DOSRI accounts to
total DOSRI accounts 19.83% 34.70%
As of December 31, 2010 and 2009, the Bank has no loans, other credit accommodations and
guarantees, as well as availments of previously approved loans and committed credit lines not
considered DOSRI accounts prior to the issuance of said circular but are allowed a transition
period of two years from the effectivity of the said circular until said circular or said loan, other
credit accommodations and guarantees become past due, or are extended, renewed or restructured,
whichever comes later.
On January 31, 2007, BSP Circular No. 560 was issued providing the rules and regulations that
govern loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of
banks and quasi-banks. Under the said circular, the total outstanding exposures to each of the
bank's subsidiaries and affiliates shall not exceed 10.00% of bank's net worth, the unsecured
portion of which shall not exceed 5.00% of such net worth. Further, the total outstanding
exposures to subsidiaries and affiliates shall not exceed 20.00% of the net worth of the lending
bank. BSP Circular No. 560 became effective February 15, 2007.
Total interest income from DOSRI loans amounted to P=63.6 million, P=60.8 million and
P=63.2 million in 2010, 2009 and 2008, respectively.
F-90
The following table shows the other related party transactions included in the financial statements
(in thousands):
Elements of Transaction
Statements of Condition Statements of Income
Related Party Relationship Nature of Transaction 2010 2009 2010 2009 2008
MBTC Parent Company Due from other banks P=2,179,284 P=830,688 Interest income P=2,300 P=5,244 P=97,780
Interest expense 1,427 4,851 17,450
TFSPC Associate Investment in an associate 458,922 393,215
Share in net earnings of
an associate 65,707 50,034 46,821 SMFC Joint venture Investment in a joint
venture 370,952 395,095
Accounts receivable – 27,675
Share in net loss of
a joint venture (24,143) (4,905) –
Deposit liabilities include deposits of related parties amounting to P=2.3 billion in 2010 and
P=4.0 billion in 2009. The related interest expense from these deposits amounted to P=32.2 million,
P=4.4 million and P=17.3 million in 2010, 2009 and 2008, respectively.
The total assets of the retirement fund of employees amounting to P=556.2 million and
P=490.8 million as of December 31, 2010 and 2009, respectively, is being managed by the Bank’s
Trust Department (see Note 30).
For the years ended December 31, 2010, 2009 and 2008, HFT and AFS investment securities
transactions with related parties include outright purchases totaling to P=9.6 billion, P=15.9 billion
and P=12.6 billion, respectively, and outright sales totaling to P=12.7 billion, P=17.0 billion and
P=35.8 billion, respectively.
Compensation of key management personnel (covering assistant vice presidents and up) included
under ‘Compensation and fringe benefits’ in the statements of income follows:
2010 2009
Short-term employee benefits P=171,664,182 P=151,067,152
Post-employment pension benefits 2,890,081 2,742,364
P=174,554,263 P=153,809,516
Short-term employee benefits include salaries and other non-monetary benefits.
As of December 31, 2010 and 2009, treasury bills (classified under HTM investments) with total
face value of P=50.0 million are pledged by the Bank to MBTC to secure its payroll account with
MBTC. As of December 31, 2010 and 2009, MBTC has assigned to the Bank, government
securities with total face value of P=3.0 billion and P=1.5 billion, respectively, to secure the Bank’s
deposits to MBTC.
F-91
30. Trust Operations
Securities and other resources held by the Bank in fiduciary or agency capacity for its customers
are not included in the accompanying statements of condition since these are not assets of the
Bank.
In connection with the trust functions of the Bank, government securities (classified under AFS
investments) with face value of P=30.0 million and P=51.5 million as of December 31, 2010 and
2009, respectively, are deposited with the BSP in compliance with trust regulations.
Additionally, at least 10.00% of the Bank’s net profit resulting from the operations of the Bank’s
Trust Department is appropriated to surplus reserve until such reserve for trust functions amounts
to 20.00% of the Bank’s regulatory capital. No part of such surplus reserve shall at any time be
paid out in dividends, but losses accruing in the course of its trust business may be charged against
surplus.
31. Commitments and Contingent Liabilities
In the normal course of the Bank's operations, there are various outstanding commitments and
contingent liabilities such as guarantees and commitments to extend credit, which are not reflected
in the accompanying financial statements. The Bank does not anticipate significant losses as a
result of these transactions.
The following is a summary of the Bank’s commitments and contingent liabilities at their
equivalent peso contractual amounts:
2010 2009
Trust department accounts (Note 30) P=631,063,745 P=630,040,803
Stand-by credit lines 112,514,393 104,023,029
Late deposits/payments received 58,460,284 88,146,816
Items held for safekeeping 336,370 232,334
Outward bills for collection – 82,141
Others 24,994 24,107
Also, several suit and claims relating to the Bank’s lending operations and labor-related cases
remain unsettled. In the opinion of management, these suits and claims, if decided adversely, will
not involve sums having a material effect on the financial statements.
32. Non-cash Investing Activities
The following is a summary of certain non-cash investing activities that relate to the analysis of
the statements of cash flows:
2010 2009 2008
Addition to investment properties in
settlement of loans P=475,374,811 P=381,532,020 P=393,424,106
Addition to chattel mortgage in
settlement of loans 639,569,321 498,026,288 449,959,936
Net unrealized gain (loss) in AFS
investment (464,677,787) 1,497,117,558 (805,848,857)
Cumulative translation adjustment (6,878,392) 7,904,401 43,028,326
F-92
33. Subsequent Events
The Bank exercised the call option on its Unsecured Subordinated Notes (see Note 17) amounting
to P=2.0 billion last January 28, 2011.
The redemption fell under the call provisions of the bond, which had an original maturity of ten
years or until 2016. The call option allowed Bank to buy back the bonds after five years from the
date of issuance.
The Bank recorded an expense amounting to P=22.5 million from the amortization of remaining
debt issuance cost relative to the redemption of the Notes.
34. Disclosures Required Under Revenue Regulations No. 15-2010
On November 25, 2010, the Bureau of Internal Revenue issued Revenue Regulations (RR)
15-2010 to amend certain provisions of RR 21-2002. The Regulations provide that starting 2010
the notes to financial statements shall include information on taxes, duties and license fees paid or
accrued during the taxable year.
The Bank reported and/or paid the following types of taxes for the year:
Taxes and licenses
As of December 31, 2010, taxes and licenses of the Bank consist of:
Amount
Gross Receipts Tax P=512,440,078
Documentary stamps tax 221,906,936
Local taxes 36,580,920
Fringe benefit tax 2,565,298
Others 3,641,979
P=777,135,211
Withholding taxes
Details of total remittances of withholding taxes as of December 31, 2010 are as follows:
Amount paid
Withholding taxes on compensation and benefits P=270,582,255
Expanded withholding taxes 52,586,782
Final withholding taxes 362,150,349
P=685,319,386
35. Approval for the Release of the Financial Statements
The accompanying comparative financial statements were reviewed and approved for release by
the Bank’s Audit Committee and the BOD on February 10, 2011 and confirmed by the BOD on its
meeting on February 22, 2011.
F-93
Philippine Savings Bank
Unaudited Interim Condensed Financial Statements October 31, 2011 and for the ten months ended October 31, 2011 and 2010 (With Comparative Audited Statement of Condition as of December 31, 2010) and Report on Review of Unaudited Interim Condensed Financial Statements SyCip Gorres Velayo & Co.
F-94
REPORT ON REVIEW OF UNAUDITED INTERIM CONDENSED FINANCIAL
STATEMENTS
The Stockholders and the Board of Directors
Philippine Savings Bank
PSBank Center
777 Paseo de Roxas corner Sedeño Street
Makati City
Introduction
We have reviewed the accompanying unaudited interim condensed financial statements of Philippine
Savings Bank, which comprise the unaudited interim statement of condition as at October 31, 2011
and the related unaudited interim statements of income, statements of comprehensive income,
statements of changes in equity and statements of cash flows for the ten-month periods ended
October 31, 2011 and 2010, and other explanatory notes. Management is responsible for the
preparation and fair presentation of these unaudited interim condensed financial statements in
accordance with Philippine Accounting Standards 34, Interim Financial Reporting. Our responsibility
is to express a conclusion on these unaudited interim condensed financial statements based on our
review.
Scope of Review
We conducted our review in accordance with Philippine Standard on Review Engagements 2410,
Review of Interim Financial Information Performed by the Independent Auditor of the Entity.
A review of interim financial information consists of making inquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with Philippine
Standards on Auditing. Consequently, it does not enable us to obtain assurance that we would become
aware of all significant matters that might be identified in an audit. Accordingly, we do not express an
audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the
accompanying unaudited interim condensed financial statements are not prepared, in all material
respects, the financial position of Philippine Savings Bank as of October 31, 2011, and its financial
performance, and its cash flows for the ten-month periods ended October 31, 2011 and 2010 in
accordance with Philippine Accounting Standards 34, Interim Financial Reporting.
SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines
Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-2
F-95
- 2 -
We have audited the December 31, 2010 statement of condition of Philippine Savings Bank, presented
for comparative purposes, in accordance with Philippine Standards on Auditing, on which we
expressed an unqualified opinion in our report dated February 22, 2011.
SYCIP GORRES VELAYO & CO.
Vicky B. Lee-Salas
Partner
CPA Certificate No. 86838
SEC Accreditation No. 0115-AR-1
Tax Identification No. 129-434-735
BIR Accreditation No. 08-001998-53-2009,
June 1, 2009, Valid until May 31, 2012
PTR No. 3174802, January 2, 2012, Makati City
January 27, 2012
F-96
PHILIPPINE SAVINGS BANK
UNAUDITED INTERIM STATEMENT OF CONDITION AS OF OCTOBER 31, 2011
(With Comparative Audited Figures as of December 31, 2010)
October 31, December 31,
2011 2010
(Unaudited) (Audited)
ASSETS
Cash and Other Cash Items (Note 14) P=3,231,094,357 P=3,163,939,540
Due from Bangko Sentral ng Pilipinas (Note 14) 4,425,024,940 2,899,592,073
Due from Other Banks (Note 25) 3,056,716,899 7,520,836,053
Interbank Loans Receivable and Securities Purchased
Under Resale Agreements (Note 5) 3,510,000,000 3,586,560,000
Fair Value Through Profit or Loss Investments (Note 6) 701,886,015 868,316,442
Available-for-Sale Investments (Notes 6 and 14) 20,978,187,045 16,200,339,057
Held-to-Maturity Investments (Note 6) 12,251,096,621 9,162,584,959
Loans and Receivables (Notes 7 and 25) 58,106,752,194 53,207,635,160
Investments in an Associate and a Joint Venture
(Notes 8 and 25) 1,254,969,606 829,873,755
Property and Equipment (Note 9) 2,374,474,820 2,107,316,622
Investment Properties (Note 10) 2,764,003,768 2,772,308,932
Deferred Tax Assets (Note 23) 1,139,998,870 705,361,217
Goodwill and Intangible Assets (Note 11) 263,864,696 240,684,552
Other Assets (Note 12) 774,679,147 884,120,899
P=114,832,748,978 P=104,149,469,261
LIABILITIES AND EQUITY
Liabilities
Deposit Liabilities (Notes 14 and 25)
Demand P=9,419,906,818 P=7,170,221,822
Savings 10,676,446,587 10,147,794,079
Time 76,948,499,840 70,200,793,366
97,044,853,245 87,518,809,267
Subordinated Notes (Note 15) – 1,977,141,032
Treasurer’s, Cashier’s and Manager’s Checks 465,908,800 649,433,599
Accrued Taxes, Interest and Other Expenses 1,260,431,552 1,132,129,341
Other Liabilities (Note 16) 1,269,913,584 1,262,878,631
100,041,107,181 92,540,391,870
(Forward)
F-97
- 2 -
October 31, December 31,
2011 2010
(Unaudited) (Audited)
Equity
Common Stock (Note 18) P=2,402,524,910 P=2,402,524,910
Capital Paid in Excess of Par Value 2,818,083,506 2,818,083,506
Surplus Reserves (Note 26) 1,035,275,317 1,035,275,317
Surplus (Note 18) 6,752,063,508 5,055,131,075
Net Unrealized Gain on Available-for-Sale Investments
(Note 6) 1,842,353,478 355,151,266
Cumulative Translation Adjustment (58,658,922) (57,088,683)
14,791,641,797 11,609,077,391
P=114,832,748,978 P=104,149,469,261
See accompanying Notes to Financial Statements.
F-98
PHILIPPINE SAVINGS BANK
UNAUDITED INTERIM STATEMENTS OF INCOME FOR THE TEN MONTHS ENDED OCTOBER 31, 2011 AND 2010
2011 2010
INTEREST INCOME ON
Loans and receivables (Notes 7 and 25) P=5,376,147,245 P=4,861,917,970
Investment securities (Note 6) 1,853,531,369 1,355,955,883
Interbank loans receivable and securities purchased
under resale agreements (Note 5) 144,527,085 145,886,661
Due from Bangko Sentral ng Pilipinas 56,611,157 145,441,792
Due from other banks (Notes 14 and 25) 2,500,290 6,016,675
7,433,317,146 6,515,218,981
INTEREST EXPENSE ON
Deposit liabilities (Notes 14 and 25) 2,649,972,907 2,197,910,613
Subordinated notes (Note 15) 37,327,024 171,800,224
Bills payable – 1,397,031
2,687,299,931 2,371,107,868
NET INTEREST INCOME 4,746,017,215 4,144,111,113
Service fees and commission income 643,852,815 618,923,093
Service fees and commission expense 34,886,566 57,181,476
NET SERVICE FEES AND COMMISSION INCOME 608,966,249 561,741,617
OTHER OPERATING INCOME (CHARGES)
Trading and securities gains - net (Note 6) 560,886,876 1,757,605,306
Gain on foreclosure of investment properties (Note 10) 175,363,257 303,486,396
Gain from sale of chattel mortgage properties (Note 12) 38,269,323 38,200,928
Foreign exchange gain (loss) 5,721,237 (1,741,525)
Gain from sale of property and equipment (Note 9) 3,071,662 2,217,966
Loss from sale of investment properties (Note 10) (24,783,637) (76,020,180)
Loss on foreclosure of chattel mortgage properties
(Note 12) (86,738,131) (91,634,992)
Miscellaneous (Note 19) 149,397,604 93,440,471
821,188,191 2,025,554,370
Total Operating Income 6,176,171,655 6,731,407,100
OTHER EXPENSES
Compensation and fringe benefits (Notes 20 and 25) 1,508,760,229 1,463,719,594
Taxes and licenses 654,980,123 572,364,896
Occupancy and equipment-related costs (Note 21) 396,445,117 346,351,824
Provision for credit and impairment losses (Note 13) 396,418,045 547,152,973
Depreciation and amortization (Note 9) 348,569,283 293,004,973
Security, messengerial and janitorial services 161,177,238 133,755,949
Amortization of intangible assets (Note 11) 43,325,584 27,469,756
Miscellaneous (Note 22) 981,206,048 961,019,494
4,490,881,667 4,344,839,459
(Forward)
F-99
- 2 -
2011 2010
INCOME BEFORE SHARE IN NET INCOME OF
AN ASSOCIATE AND A JOINT VENTURE
AND INCOME TAX P=1,685,289,988 P=2,386,567,641
SHARE IN NET INCOME OF AN ASSOCIATE
AND A JOINT VENTURE (Notes 8 and 25) 25,095,851 38,465,553
INCOME BEFORE INCOME TAX 1,710,385,839 2,425,033,194
PROVISION FOR (BENEFIT FROM) INCOME TAX
(Note 23)
Current 399,786,885 298,712,404
Deferred (494,447,103) 483,354,265
(94,660,218) 782,066,669
NET INCOME P=1,805,046,057 P=1,642,966,525
Basic/Diluted Earnings Per Share (Note 24) P=7.51 P=6.84
See accompanying Notes to Financial Statements.
F-100
PHILIPPINE SAVINGS BANK
UNAUDITED INTERIM STATEMENTS OF COMPREHENSIVE INCOME FOR THE TEN MONTHS ENDED OCTOBER 31, 2011 AND 2010
2011 2010
NET INCOME P=1,805,046,057 P=1,642,966,525
Other Comprehensive Income (Loss)
Changes in net unrealized gain on Available-for-sale
investments (Note 6) 1,487,202,212 538,848,796
Cumulative translation adjustment (1,570,239) 21,871,789
TOTAL COMPREHENSIVE INCOME, NET OF TAX P=3,290,678,030 P=2,203,687,110
See accompanying Notes to Unaudited Interim Condensed Financial Statements.
F-101
PHILIPPINE SAVINGS BANK
UNAUDITED INTERIM STATEMENTS OF CHANGES IN EQUITY FOR THE TEN MONTHS ENDED OCTOBER 31, 2011 AND 2010
Common Stock
(Note 18)
Capital
Paid in Excess
of Par Value
Surplus
Reserves
(Note 26) Surplus
(Note 18)
Net Unrealized
Gain (Loss) on
Available-for-Sale
Investments
(Note 6)
Cumulative
Translation
Adjustment Total
Balance at January 1, 2011 P=2,402,524,910 P=2,818,083,506 P=1,035,275,317 P=5,055,131,075 P=355,151,266 (P=57,088,683) P=11,609,077,391
Total comprehensive income (loss) for the period – – – 1,805,046,057 1,487,202,212 (1,570,239) 3,290,678,030
Cash dividends (Note 18) – – – (108,113,624) – – (108,113,624)
Balance at October 31, 2011 P=2,402,524,910 P=2,818,083,506 P=1,035,275,317 P=6,752,063,508 P=1,842,353,478 (P=58,658,922) P=14,791,641,797
Balance at January 1, 2010 P=2,402,524,910 P=2,818,083,506 P=854,463,783 P=4,232,673,110 P=819,829,053 (P=115,435,867) P=11,012,138,495
Total comprehensive income (loss) for the period – – – 1,642,966,525 538,848,796 21,871,789 2,203,687,110
Cash dividends (Note 18) – – – (768,807,971) – – (768,807,971)
Balance at October 31, 2010 P=2,402,524,910 P=2,818,083,506 P=854,463,783 P=5,106,831,664 P=1,358,677,849 (P=93,564,078) P=12,447,017,634
See accompanying Notes to Unaudited Interim Condensed Financial Statements.
F-102
PHILIPPINE SAVINGS BANK
UNAUDITED INTERIM STATEMENTS OF CASH FLOWS FOR THE TEN MONTHS ENDED OCTOBER 31, 2011 AND 2010
2011 2010
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax P=1,710,385,839 P=2,425,033,194
Adjustments for:
Provision for credit and impairment losses (Note 13) 396,418,045 547,152,973
Depreciation and amortization (Note 9) 348,569,283 293,004,973
Loss on foreclosure of chattel mortgage properties
(Note 12) 86,738,131 91,634,992
Amortization of intangible assets (Note 11) 43,325,584 27,469,752
Loss from sale of investment properties (Note 10) 24,783,637 76,020,180
Amortization of debt issuance costs (Note 15) 22,858,968 2,936,547
Unrealized trading loss (gain) on fair value through
profit or loss investments (Note 6) (6,711,741) 85,390,211
Gain from sale of property and equipment (Note 9) (3,071,662) (2,217,966)
Share in net income of an associate and a joint venture
(Note 8) (25,095,851) (38,465,553)
Gain from sale of chattel mortgage properties (Note 12) (38,269,323) (38,200,928)
Gain on foreclosure of investment properties (Note 10) (175,363,257) (303,486,396)
Realized gain on sale of available-for-sale investments
(Note 6) (556,291,786) (1,715,297,014)
Changes in operating assets and liabilities:
Decrease (increase) in:
Fair value through profit or loss investments 173,137,458 (3,212,042,557)
Loans and receivables (6,258,108,555) (7,269,457,513)
Other assets 164,037,276 (295,464,578)
Increase (decrease) in:
Deposit liabilities 9,525,277,200 12,709,177,488
Accrued taxes, interests and other expenses 128,301,249 144,627,505
Treasurer’s, cashier’s and manager’s checks (183,524,799) 65,410,616
Other liabilities 7,030,237 78,836,748
Cash generated from operations 5,384,425,933 3,672,062,674
Income taxes paid (276,729,436) (163,326,683)
Net cash provided by operating activities 5,107,696,497 3,508,735,991
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of:
Other intangible assets (Note 11) (66,505,728) (52,886,516)
Property and equipment (Note 9) (474,925,930) (311,002,721)
Held-to-maturity investments (3,088,712,465) (4,400,618,996)
Available-for-sale investments (33,751,541,989) (26,331,433,015)
Proceeds from sale of:
Available-for-sale investments 31,016,736,491 22,805,356,675
Chattel mortgage properties (Note 12) 420,542,785 499,651,885
Investment properties (Note 10) 374,789,768 296,707,518
Property and equipment (Note 9) 22,076,068 14,487,319
Additional investment in a joint venture (Note 8) (400,000,000) –
Net cash used investing activities (5,947,541,000) (7,479,737,851)
(Forward)
F-103
- 2 -
2011 2010
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (Note 18) (P=108,113,622) (P=791,880,071)
Settlement of subordinated debt (Note 15) (2,000,000,000) –
Net cash used in financing activities (2,108,113,622) (791,880,071)
Effect of exchange rate differences (133,345) 1,318,041
NET DECREASE IN CASH AND CASH
EQUIVALENTS (2,948,091,470) (4,761,563,890)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
Cash and other cash items (Note 14) 3,163,939,540 2,632,884,729
Due from Bangko Sentral ng Pilipinas (Note 14) 2,899,592,073 4,937,990,387
Due from other banks (Note 25) 7,520,836,053 1,528,847,687
Interbank loans receivable and securities purchased under
resale agreements (Note 5) 3,586,560,000 5,900,000,000
17,170,927,666 14,999,722,803
CASH AND CASH EQUIVALENTS AT END OF
PERIOD
Cash and other cash items (Note 14) 3,231,094,357 2,463,040,552
Due from Bangko Sentral ng Pilipinas (Note 14) 4,425,024,940 2,547,704,393
Due from other banks (Note 25) 3,056,716,899 852,833,477
Interbank loans receivable and securities purchased under
resale agreements (Note 5) 3,510,000,000 4,374,580,491
P=14,222,836,196 P=10,238,158,913
OPERATIONAL CASH FLOWS FROM INTEREST
Interest paid P=2,710,998,517 P=2,360,743,983
Interest received 6,959,761,381 6,055,171,401
See accompanying Notes to Financial Statements
F-104
PHILIPPINE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
1. Corporate Information
Philippine Savings Bank (the Bank) was incorporated in the Philippines primarily to engage in
savings and mortgage banking. The Bank’s shares are listed in the Philippine Stock Exchange
(PSE). The Bank offers a wide range of products and services such as deposit products, loans,
treasury and trust functions that serve mainly to the retail and consumer market. On September 6,
1991, the Bank was authorized to perform trust functions.
As of October 31, 2011 and December 31, 2010, the Bank had 196 and 170 branches, respectively.
The Bank added 112 Automated Tellering Machines (ATMs) in Metro Manila and in provincial
locations in 2011, bringing the total number of ATMs to 492 as of October 31, 2011 from 380 as
of December 31, 2010.
The original Certificate of Incorporation of the Bank was issued by the Securities and Exchange
Commission on June 30, 1959. On March 28, 2006, the board of directors (BOD) of the Bank
approved the amendment of Article Four of its Amended Articles of Incorporation to extend the
corporate term of the Bank, which expired on June 30, 2009, for another 50 years or up to
June 30, 2059.
On March 23, 2010, the BOD approved the amendment of the Bank’s Articles of Incorporation
and By-laws for the purpose of reducing the number of directors from eleven (11) to a maximum
of nine (9).
As of October 31, 2011, the Bank is seventy-six percent (76%) owned by Metropolitan Bank &
Trust Company (MBTC), its parent company.
The Bank’s principal place of business is located at PSBank Center, 777 Paseo de Roxas corner
Sedeño Street, Makati City.
2. Accounting Policies
Basis of Preparation
The accompanying unaudited interim condensed financial statements have been prepared in
accordance with Philippine Accounting Standards (PAS) 34, Interim Financial Reporting.
Accordingly, the unaudited interim condensed financial statements do not include all of the
information and disclosures required in the annual financial statements, and should be read in
conjunction with the Bank’s annual financial statements as of and for the year ended
December 31, 2010. The unaudited interim condensed financial statements were prepared solely
for inclusion in the Bank’s offering circular for the issuance of unsecured subordinated notes
qualifying as tier 2 capital due 2022 callable in 2017 for the purpose of raising additional capital
of up to P=3.0 billion.
The accompanying unaudited interim condensed financial statements have been prepared under
the historical cost basis except for fair value through profit or loss (FVPL) investments and
available-for-sale (AFS) investments that have been measured at fair value.
F-105
The accompanying unaudited interim condensed financial statements of the Bank include the
accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit
(FCDU). The functional currency of the RBU and the FCDU is Philippine Peso and United States
Dollar (USD), respectively. For financial reporting purposes, FCDU accounts and foreign
currency-denominated accounts in the RBU are translated into their equivalents in Philippine
pesos (see accounting policy on Foreign Currency Translation). The financial statements of these
units are combined after eliminating inter-unit accounts
Changes in Accounting Policies and Disclosure
The accounting policies adopted in the preparation of the interim condensed financial statements
are consistent with those followed in the preparation of the Bank’s annual financial statements as
of and for the year ended December 31, 2010, except for the adoption of new standards and
interpretations as of January 1, 2011, noted below:
PAS 24, Related Party Transactions (Amendment)
PAS 24 clarifies the definitions of a related party. The new definitions emphasize a
symmetrical view of related party relationships as well as clarifying in which circumstances
persons and key management personnel affect related party relationships of the entity.
Secondly, the amendment introduces an exemption from the general related party
requirements for transactions with a government and entities that are controlled, jointly
controlled or significantly influenced by the same government as the reporting entity. The
adoption of the amendment will be disclosed by the Bank in its annual financial statements as
of and for the period ended December 31, 2011.
PAS 32, Financial Instruments: Presentation (Amendment)
The amendment alters the definition of a financial liability in PAS 32 to enable entities to
classify rights issues and certain options and warrants as equity instruments. The amendment
is applicable if the rights are given pro rata to all of the existing owners of the same class of an
entity’s non-derivative equity instruments, to acquire a fixed number of the entity’s own
equity instruments for a fixed amount in any currency. The amendment has no effect on the
financial position or performance of the Bank.
Philippine Interpretation International Financial Reporting Interpretation Committee (IFRIC)
14, Prepayments of a Minimum Funding Requirement (Amendment),
The amendment removes an unintended consequence when an entity is subject to minimum
funding requirement (MFR) and makes an early payment of contributions to cover such
requirements. The amendment permits a prepayment of future service cost by the entity to be
recognized as pension asset. The amendment to the Interpretation has no effect on the
financial position or performance of the Bank.
Improvements to Philippine Financial Reporting Standards (PFRS) (issued May 2010)
Improvements to PFRSs, an omnibus of amendments to standards, deal primarily with a view to
removing inconsistencies and clarifying wording. There are separate transitional provisions for
each standard. The adoption of the following amendments resulted in changes to accounting
policies but did not have any impact on the financial position or performance of the Bank.
PFRS 7, Financial Instruments - Disclosures: The amendment was intended to simplify the
disclosures provided by reducing the volume of disclosures around collateral held and
improving disclosures by requiring qualitative information to put the quantitative information
in context.
F-106
PAS 1, Presentation of Financial Statements: The amendment clarifies that an option to
present an analysis of each component of other comprehensive income may be included either
in the statement of changes in equity or in the notes to the financial statements.
PAS 34, Interim Financial Statements: The amendment requires additional disclosure for fair
values and changes in classification of financial assets, as well as changes to contingent assets
and liabilities in interim condensed financial statements. The required additional disclosure
for fair values was presented in Note 3.
Other amendments resulting from the Improvements to PFRSs to the following standards did not
have any impact on the accounting policies, financial position or performance of the Bank.
PFRS 3, Business Combinations
PAS 27, Consolidated and Separate Financial Statements
Philippine Interpretation IFRIC-13, Customer Loyalty Programmes
Future Changes in Accounting Policies
Standards issued but not yet effective up to the date of issuance of the Bank’s financial statements
are listed below. This listing is of standards and interpretations issued, which the Bank reasonably
expects to be applicable at a future date. The Bank intends to adopt those standards when they
become effective. Except as otherwise indicated, the Bank does not expect the adoption of these
amended PFRS and Philippine Interpretation to have significant impact on its financial statement.
PAS 1, Financial Statement Presentation - Presentation of Items of Other Comprehensive Income
The amendment is effective for annual periods beginning on or after July 1, 2012. The
amendments to PAS 1 change the ouping of items presented in OCI. Items that could be
reclassified (or ‘recycled’) to profit or loss at a future point in time (for example, upon
derecognition or settlement) would be presented separately from items that will never be
reclassified. The amendment affects presentation only and has there no impact on the Bank’s
financial position or performance.
PAS 12, Income Taxes (Amendment) - Deferred Tax: Recovery of Underlying Assets
The amended standard is effective for annual periods beginning on or after January 1, 2012. The
amendment provides a practical solution to the problem of assessing whether recovery of an asset
will be through use or sale. It introduces a presumption that recovery of the carrying amount of an
asset will, normally, be through sale.
PAS 19, Employee Benefits (Amendment)
The amendment to PAS 19 is effective for annual periods beginning on or after January 2013. The
IASB has issued numerous amendments to PAS 19. These range from fundamental changes such
as removing the corridor mechanism and the concept of expected returns on plan assets to simple
clarifications and re-wording. The Bank is currently assessing the full impact of the remaining
amendments.
PAS 27, Separate Financial Statements (as revised in 2011)
The amended standard is effective for annual periods beginning on or after January 1, 2013.
As a consequence of the new PFRS 10 and PFRS 12, what remains of PAS 27 is limited to
accounting for subsidiaries, jointly controlled entities, and associates in separate financial
statements. The Bank does not present separate financial statements.
F-107
PAS 28, Investment in Associate and Joint Ventures (as revised in 2011)
The amended standard is effective for annual periods beginning on or after January 1, 2013. As a
consequence of the new PFRS 11 and PFRS 12, PAS 28 has been renamed PAS 28, Investment in
Associates and Joint Ventures, and describes the application of the equity method to investments
in joint ventures in addition to associates.
PFRS 7, Financial Instruments: Disclosures (Amendments) - Disclosures-Transfers of Financial
Assets
The amendments of PFRS 7 are effective for annual periods beginning on or after July 1, 2011.
The amendments will allow users of financial statements to improve their understanding of
transfer transactions of financial assets (for example, securitizations), including understanding the
possible effects of any risks that may remain with the entity that transferred the assets. The
amendments also require additional disclosures if a disproportionate amount of transfer
transactions are undertaken around the end of a reporting period.
PFRS 9, Financial Instruments: Classification and Measurement
PFRS 9, as issued in 2010, reflects the first phase of the work on the replacement of PAS 39 and
applies to classification and measurement of financial assets and financial liabilities as defined in
PAS 39. The standard is effective for annual periods beginning on or after January 1, 2013. In
subsequent phases, hedge accounting and derecognition will be addressed. The completion of this
project is expected in early 2011. The adoption of the first phase of PFRS 9 will have an effect on
the classification and measurement of the Bank’s financial assets. The Bank will quantify the
effect in conjunction with the other phases, when issued, to present a comprehensive picture of
impact of adoption on the financial position or performance of the Bank.
PFRS 10, Consolidated Financial Statements
PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements that
addresses the accounting for consolidated financial statements. It also includes the issues raised in
SIC-12 Consolidation - Special Purpose Entities.
PFRS 10 establishes a single control model that applies to all entities including special purpose
entities. The changes introduced by PFRS 10 will require management to exercise significant
judgement to determine which entities are controlled, and therefore, are required to be
consolidated by a parent, compared with the requirements that were in PAS 27. This standard
becomes effective for annual period beginning on or after January 1, 2013.
PFRS 11, Joint Arrangements
This standard becomes effective for annual periods beginning on or after January 1, 2013.
PFRS 11 replaces PAS 31, Interest in Joint Ventures and SIC-13 Jointly-controlled Entities -
Non-monetary Contributions by Venturers. PFRS 11 removes the option to account for jointly
controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the
definition of a joint venture must be accounted for using the equity method. The application will
have no impact on the financial position of the Bank.
PFRS 12, Disclosure of Involvement with Other Entities
This standard becomes effective for annual periods beginning on or after January 1, 2013. PFRS
12 includes all the disclosures that were previously in PAS 27 related to consolidated financial
statements, as well as all of the disclosures that were previously included in PAS 31 and PAS 28.
These discloisure relate to an entity’s interest in subsidiaries, joint arrangements, associates and
structured entitites. A number of new disclosures are also required.
F-108
PFRS 13, Fair Value Measurement
This standard becomes effective for annual periods beginning on or after January 1, 2013.
PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements.
PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance
on how to measure fair value under PFRS when fair value is required or permitted. The Bank is
currently assessing the impact that this standard will have on the financial position and
performance.
Philippine Interpretation IFRIC-15, Agreement for Construction of Real Estate
This Interpretation, effective for annual periods beginning on or after January 1, 2012, covers
accounting for revenue and associated expenses by entities that undertake the construction of real
estate directly or through subcontractors. The Interpretation requires that revenue on construction
of real estate be recognized only upon completion, except when such contract qualifies as
construction contract to be accounted for under PAS 11, Construction Contracts, or involves
rendering of services in which case revenue is recognized based on stage of completion. Contracts
involving provision of services with the construction materials and where the risks and reward of
ownership are transferred to the buyer on a continuous basis will also be accounted for based on
stage of completion.
3. Fair Value Measurements
The methods and assumptions used by the Bank in estimating the fair value of financial
instruments have been consistently applied in the unaudited interim condensed financial
statements.
The following table shows financial instruments recognized at fair value (in thousands); analyzed
among those whose fair value is based on:
Level 1 - quoted market prices in active markets for identical assets or liabilities; when fair
values of listed equity and debt securities, as well as publicly traded derivatives at the
reporting date are based on quoted market prices or binding dealer price quotations, without
any deduction for transaction costs, the instruments are included within Level 1 of the
hierarchy.
Level 2 - those involving inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (as prices) or indirectly (derived from
prices); for all other financial instruments, fair value is determined using valuation techniques.
Valuation techniques include net present value techniques, comparison to similar instruments
for which market observable prices exist and other revaluation models; and
Level 3 - those with inputs for the asset or liability that are not based on observable market
data (unobservable inputs); instruments included in Level 3 are those for which there are
currently no active market.
F-109
October 31, 2011
(Unaudited)
Level 1 Level 2 Level 3 Total
Financial Assets
FVPL investments
HFT - government securities P=619,555 P=– P=– P=619,555
ROP warrants – 68,917 – 68,917
Foreign exchange forward contracts – 13,415 – 13,415
AFS investments
Government securities 20,051,580 922,185 – 20,973,765
Quoted equity securities 3,005 – – 3,005
December 31, 2010
(Audited)
Level 1 Level 2 Level 3 Total
Financial Assets
FVPL investments
HFT - government securities P=797,427 P=– P=– P=797,427
ROP warrants – 70,889 – 70,889
AFS investments
Government securities 14,599,372 1,596,544 – 16,195,916
Quoted equity securities 3,005 – – 3,005
During the ten-month period ended October 31, 2011 and 2010, there were no transfers between
Level 1 and Level 2 fair value measurement, and no transfers into and out of Level 3 fair value
measurement.
4. Segment Information
The Bank’s operating segments are organized and managed separately according to the nature of
services provided and the different markets served, with each segment representing a strategic
business unit that offers different products and serves different markets. The Bank’s reportable
segments are as follows:
(a) Consumer Banking - principally provides consumer-type loans generated by the Home Office;
(b) Corporate Banking - principally handles loans and other credit facilities for corporate and
institutional customers acquired in the Home Office;
(c) Branch Banking - serves as the Bank’s main customer touch point which offers consumer and
corporate banking products; and
(d) Treasury - principally handles institutional deposit accounts, providing money market, trading
and treasury services, as well as managing the Bank’s funding operations by use of
government securities and placements and acceptances with other banks.
These segments are the bases on which the Bank reports its primary segment information. The
Bank evaluates performance on the basis of information about the components of the Bank that
Chief Operating Decision Maker (CODM) uses to make decisions about operating matters. There
are no other operating segments than those identified by the Bank as reportable segments. There
were no inter-segment revenues and expenses included in the financial information. The Bank has
no single customer with revenues from which is 10.00% or more of the Bank’s total revenue.
F-110
The accounting policies of the operating segments are the same as those described in the summary
of significant accounting policies. Primary segment information (by business segment) for the
periods ended October 31, 2011 and 2010 follow (in thousands):
October 31, 2011
(Unaudited)
Consumer
Banking
Corporate
Banking
Branch
Banking Treasury Total
Operating Income
Interest income P=1,278,156 P=329,411 P=4,637,857 P=1,187,893 P=7,433,317
Service fees and commissions 91,704 37,307 514,842 – 643,853
Other operating income 27,374 6,711 226,384 560,719 821,188
Total operating income 1,397,234 373,429 5,379,083 1,748,612 8,898,358
Non-cash expenses
Depreciation and amortization 93,877 12,035 241,340 1,317 348,569
Provision for credit and impairment
losses 151,001 202,691 42,726
– 396,418
Amortization of other intangible assets 18,308 3,204 21,422 392 43,326
Total non-cash expenses 263,186 217,930 305,488 1,709 788,313
Interest expense – – 1,742,310 944,990 2,687,300
Service fees and commissions expense 4,969 2,021 27,897 – 34,887
Subtotal 4,969 2,021 1,770,207 944,990 2,722,187
Compensation and fringe benefits 279,532 65,518 1,153,681 10,029 1,508,760
Taxes and licenses 95,573 22,836 402,521 134,050 654,980
Occupancy and equipment - related cost 28,102 4,665 363,559 119 396,445
Security, messengerial and janitorial services 34,103 2,784 123,870 420 161,177
Miscellaneous 256,370 29,377 683,129 12,330 981,206
Subtotal 693,680 125,180 2,726,760 156,948 3,702,568
Income before share in net income of an
associate and a joint venture and income tax 435,399 28,298 576,628 644,965 1,685,290
Share in net income of an associate and a
joint venture – 25,096 – – 25,096
Income before income tax 435,399 53,394 576,628 644,965 1,710,386
Provision for income tax (94,660)
Net income P=1,805,046
Segment assets P=21,402,373 P=8,154,721 P=37,639,993 P=45,240,693 P=112,437,780
Investments in an associate and a joint venture 1,254,970
Deferred tax assets 1,139,999
Total assets P=114,832,749
Segment liabilities P=487,452 P=112,028 P=70,830,257 P=28,614,689 P=100,044,426
F-111
October 31, 2010
(Unaudited)
Consumer
Banking
Corporate
Banking
Branch
Banking Treasury Total
Operating income
Interest income P=1,295,985 P=275,675 P=4,224,040 P=719,519 P=6,515,219 Service fees and commission 91,179 47,035 480,709 – 618,923
Other operating income 69,688 33,509 166,493 1,755,864 2,025,554
Total operating income 1,456,852 356,219 4,871,242 2,475,383 9,159,696
Non-cash expenses Depreciation and amortization 82,169 11,387 198,705 744 293,005
Provision for credit and impairment
losses 150,321 369,816 27,016 – 547,153 Amortization of other intangible assets 11,282 2,152 13,887 149 27,470
Total non-cash expenses 243,772 383,355 239,608 893 867,628
Interest expense – – 1,655,726 715,382 2,371,108
Service fees and commission expense 8,424 4,346 44,411 – 57,181
Subtotal 8,424 4,346 1,700,137 715,382 2,428,289
Compensation and fringe benefits 295,540 78,791 1,081,317 8,071 1,463,719 Taxes and licenses 98,154 25,660 346,734 101,817 572,365
Occupancy and equipment - related cost 34,062 5,967 305,963 360 346,352
Security, messengerial and janitorial services 26,212 2,454 104,671 419 133,756
Miscellaneous 259,204 32,684 652,196 16,935 961,019
Subtotal 713,172 145,556 2,490,881 127,602 3,477,211
Income (loss) before share in net income of an associate and a joint venture and
income tax 491,484 (177,038) 440,616 1,631,506 2,386,568
Share in net income of an associate and a joint venture – 38,466 – – 38,466
Income before income tax 2,425,034
Provision for income tax 782,067
Net income P=1,642,967
Segment assets P=19,812,908 P=7,861,455 P=34,518,181 P= 40,421,690 P=102,614,234
Investments in an associate and a joint venture 829,874
Deferred tax assets 705,361
Total assets P=104,149,469
Segment liabilities P=535,437 P=123,695 P=68,410,903 P=23,470,357 P=92,540,392
5. Interbank Loans Receivable and Securities Purchased Under Resale Agreements
SPURA are lending to counterparties collateralized by government securities with face value
amounting to P=3.5 billion and P=1.0 billion as of October 31, 2011 and December 31, 2010,
respectively. The market values of the collateralized government securities amounted to P=3.5
billion and P=999.2 million as of October 31, 2011 and December 31, 2010, respectively.
Interbank loans receivable amounted to P=2.6 billion as of December 31, 2010.
The Bank is not allowed to resell to third parties collateral held under SPURA.
Interest income on interbank loans receivable and SPURA for the ten months ended October 31
consists of:
2011
(Unaudited)
2010
(Unaudited)
Interbank loans receivable P=10,765,904 P=12,627,216
SPURA 133,761,181 133,259,445
P=144,527,085 P=145,886,661
F-112
6. Fair Value Through Profit or Loss, Available-for-Sale and Held-to-Maturity Investments
FVPL investments consist of the following:
October 31
2011
(Unaudited)
December 31
2010
(Audited)
HFT securities P=612,756,092 P=798,230,717
ROP warrants 79,170,848 81,437,118
Foreign exchange forward contracts 13,414,530 –
705,341,470 879,667,835
Less unrealized loss on FVPL investments 3,455,455 11,351,393
P=701,886,015 P=868,316,442
As of October 31, 2011 and December 31, 2010, the Bank has outstanding ROP paired warrants
which give the Bank the option or right to exchange its holdings of ROP Global Bonds (Paired
Bonds) into peso-denominated government securities upon occurrence of a predetermined credit
event. Paired Bonds shall be risk weighted at 0.00%, provided that the 0.00% risk weight shall be
applied only to the Bank’s holdings of Paired Bonds equivalent to not more than 50.00% of the
total qualifying capital. Further, the Bank’s holdings of said warrants booked in the FVPL
category are likewise exempted from capital charge for market risk as long as said instruments are
paired with ROP Global Bonds up to a maximum of 50.00% of the total qualifying capital.
On August 19, 2009, the BSP approved the Bank’s application for Type 3 Limited User Authority
for plain vanilla foreign exchange (FX) forwards which is limited to outright buying or selling of
FX forwards at a specific price and date in the future and do not include non-deliverable forwards.
As of October 31, 2011 the Bank has an outstanding forward buy and sell contracts amounting to
P=596.7 million. These forward contracts will mature in December 2011.
AFS investments consist of the following:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Government securities P=20,973,764,205 P=16,195,916,217
Equity securities:
Quoted 5,194,005 5,194,005
Unquoted 45,239,002 45,239,002
21,024,197,212 16,246,349,224
Less allowance for impairment losses 46,010,167 46,010,167
P=20,978,187,045 P=16,200,339,057
F-113
Movements in the net unrealized gain (loss) on AFS investments follow:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Balance at beginning of period P=355,151,266 P=819,829,053
Net gain from sale of AFS investments
taken to profit or loss (556,291,786) (2,323,447,276)
Changes in fair values of AFS investments 2,043,493,998 1,858,769,489
1,487,202,212 (464,677,787)
Balance at end of period P=1,842,353,478 P=355,151,266
For the ten months ended October 31, 2010, net gain from sale taken to profit or loss and changes
in net unrealized gain on AFS investments amounted to P=1.64 billion and P=538.8 million,
respectively.
In 2010, the Bank reclassified certain fully impaired government securities with cost of
P=92.5 million from AFS investments to accounts receivable. The related allowance for
impairment losses of the same amount was also reclassified. There were no movements in the
allowance for impairment lossess of AFS investments in 2011.
HTM investments consist of the following:
October 31, December 31,
2011
(Unaudited)
2010
(Audited)
Government bonds P=8,022,318,431 P=3,592,084,780
Treasury notes 4,228,778,190 5,570,500,179
P=12,251,096,621 P=9,162,584,959
As of October 31, 2011 and December 31, 2010, treasury bills (classified under HTM
investments) with total face value of P=50.0 million are pledged by the Bank to MBTC to secure
the latter’s payroll account with the Bank (see Note 25).
Interest income on investment securities for the ten months ended October 31, consists of:
2011
(Unaudited)
2010
(Unaudited)
AFS investments P=1,153,027,853 P=848,214,967
HTM investments 684,061,018 478,787,463
FVPL investments 16,442,498 28,953,453
P=1,853,531,369 P=1,355,955,883
Peso-denominated AFS investments bear nominal annual interest rates ranging from 0.00% to
14.00% in 2011 and 2010while foreign currency-denominated AFS investments bear nominal
annual interest rates ranging from 6.38% to 9.50% in 2011 and from 3.88% to 9.50% in 2010.
Peso-denominated HTM investments bear nominal annual interest rates ranging from 6.38% to
18.25% in 2011 and from 0.00% to 18.25% in 2010 while foreign currency-denominated HTM
investments bear nominal annual interest rates ranging from 6.38% to 10.63% in 2011 and 6.38%
to 9.50% in 2010.
F-114
Trading and securities gains - net on investment securities for the ten months ended
October 31consist of:
2011
(Unaudited)
2010
(Unaudited)
FVPL investments:
Realized (P=8,005,515) P=89,424,307
Unrealized 6,711,741 (85,390,211)
(1,293,774) 4,034,096
AFS investments 556,291,786 1,715,297,014
Unquoted debt securities 5,888,864 38,274,196
P=560,886,876 P=1,757,605,306
Trading gains on AFS investments represent the net gains realized and reclassified by the Bank
from net unrealized gain under the equity section of the statement of condition.
7. Loans and Receivables
This account consists of:
October 31, December 31,
2011
(Unaudited)
2010
(Audited)
Receivables from customers:
Consumption loans P=30,504,702,327 P=27,496,864,284
Real estate loans 18,711,513,198 17,512,923,273
Commercial loans 10,664,324,920 9,711,712,998
Personal loans 6,037,083,797 5,728,150,973
Bills discounted 11,469,846 11,792,346
65,929,094,088 60,461,443,874
Less unearned discounts 5,823,073,425 5,327,384,627
60,106,020,663 55,134,059,247
Other receivables:
Accrued interest receivable 1,358,742,353 885,186,590
Accounts receivable 509,809,480 521,344,187
Sales contract receivable 475,643,182 640,088,026
Unquoted debt instrument 395,610,552 495,610,552
Bills purchased (Note 16) 38,437,945 54,332,644
62,884,264,175 57,730,621,246
Less allowance for credit losses (Note 13) 4,777,511,981 4,522,986,086
P=58,106,752,194 P=53,207,635,160
Personal loans comprise deposit collateral loans, employee salary and consumer loan products
such as Money Card, multi-purpose loan and flexi-loan.
Unquoted debt instrument represents investments in convertible notes and in private bonds. The
convertible notes amounting to P=95.6 million are provided with 100% allowance for credit losses
as of October 31, 2011 and December 31, 2010.
F-115
As of October 31, 2011 and December 31, 2010, 44.81% and 50.87%, respectively, of the total
receivables from customers are subject to periodic interest repricing. Remaining receivables
earned average annual fixed interest rates of 14.52% and 11.80% as of October 31, 2011 and
December 31, 2010.
Interest income on loans and receivables for the ten months ended as of October 31 consists of:
October 31, December 31,
2011
(Unaudited)
2010
(Audited)
Receivables from customers:
Consumption loans P=2,233,461,174 P=1,849,442,880
Real estate loans 1,473,852,133 1,351,690,545
Commercial loans 872,421,818 880,906,980
Personal loans 724,610,679 690,321,182
Bills discounted 392,245 218,651
Other receivables:
Sales contract receivable 43,146,002 55,037,441
Unquoted debt instrument 28,263,194 34,300,291
P=5,376,147,245 P= 4,861,917,970
Interest income accreted on impaired loans and receivables classified under real estate loans and
commercial loans amounted to P=67.7 million and P=84.0 million in 2011 and 2010, respectively.
Interest income from restructured loans amounted to P=84.1 million and P=95.4 million in 2011 and
2010, respectively.
BSP Reporting
The breakdown of loans and receivables from customers (gross of unearned discounts) as to
secured and unsecured and as to type of security follows:
October 31, 2011
(Unaudited) %
December 31, 2010
(Audited) %
Secured by:
Chattel P=30,504,701,874 46.27 P=27,496,864,284 45.48
Real estate 22,080,163,858 33.49 21,290,164,034 35.21
Deposit hold-out 171,712,005 0.26 198,151,608 0.33
52,756,577,737 80.02 48,985,179,926 81.02
Unsecured 13,172,516,351 19.98 11,476,263,948 18.98
P=65,929,094,088 100.00 P=60,461,443,874 100.00
Details of NPLs follow:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Unsecured P=2,615,211,444 P=2,392,225,160
Secured 2,081,860,073 1,960,892,609
P=4,697,071,517 P=4,353,117,769
F-116
Generally, NPLs refer to loans and receivables whose principal and/or interest is unpaid for thirty
(30) days or more after due date or after they have become past due in accordance with existing
BSP rules and regulations. This shall apply to loans payable in lump sum and loans payable in
quarterly, semi-annual, or annual installments, in which case, the total outstanding balance thereof
shall be considered nonperforming.
In the case of loans and receivables that are payable in monthly installments, the total outstanding
balance thereof shall be considered nonperforming when three (3) or more installments are in
arrears.
In the case of loans and receivables that are payable in daily, weekly, or semi-monthly
installments, the total outstanding balance thereof shall be considered nonperforming at the same
time that they become past due in accordance with existing BSP regulations, i.e., the entire
outstanding balance of the receivable shall be considered as past due when the total amount of
arrearages reaches ten percent (10%) of the total receivable balance.
Loans and receivables are classified as nonperforming in accordance with BSP regulations, or
when, in the opinion of management, collection of interest or principal is doubtful. Receivables
are not reclassified as performing until interest and principal payments are brought current or the
loans are restructured in accordance with existing BSP regulations, and future payments appear
assured.
Restructured loans and receivables which do not meet the requirements to be treated as performing
receivables shall also be considered as NPLs.
Current banking regulations allow banks with no unbooked valuation reserves and capital
adjustments to exclude from nonperforming classification loans classified as Loss in the latest
examination of the BSP which are fully covered by allowance for credit and impairment losses,
provided that interest on said receivables shall not be accrued.
The NPLs of the Bank not fully covered by allowance for credit losses follow:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Total NPLs P=4,697,071,517 P=4,353,117,769
NPLs fully covered by allowance for credit losses (2,944,624,920) (2,737,974,312)
P=1,752,446,597 P=1,615,143,457
Restructured loans as of October 31, 2011 and December 31, 2010 amounted P=842.5 million and
P=938.7 million, respectively. The Bank’s loan portfolio includes non-risk loans as defined under
BSP regulation totaling P=4.0 billion as of October 31, 2011 and December 31, 2010.
F-117
Loan concentration as to economic activity follows (gross of unearned discounts):
October 31, 2011
(Unaudited) %
December 31, 2010
(Audited) %
Other community, social and personal
activities P=18,768,273,345 28.47 P=19,332,703,363 31.98
Real estate 18,786,788,437 28.50 17,726,774,884 29.32
Wholesale and retail trade 14,487,488,647 21.97 10,739,412,101 17.76
Public utilities 5,101,660,157 7.74 5,062,908,930 8.37
Banks, insurance and other financial
institutions 2,193,886,716 3.33 2,001,898,357 3.31
Manufacturing 692,367,370 1.05 862,201,288 1.43
Agriculture 66,799,298 0.10 614,169,127 1.01
Services 549,479,783 0.83 585,662,677 0.97
Mining and quarrying 12,678,642 0.02 15,967,948 0.03
Others 5,269,671,693 7.99 3,519,745,199 5.82
P=65,929,094,088 100.00 P=60,461,443,874 100.00
Others relates to economic activities classified as electricity, gas and water, construction, health
and social work, public administration and defense, extra-territorial organization and bodies,
education and fishing.
Thrift banks are not covered by the loan concentration limit of 30% prescribed by the BSP.
8. Investments in an Associate and a Joint Venture
The composition of this account follows:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Investment in an associate P=511,478,486 P=458,921,659
Investment in a joint venture 743,491,120 370,952,096
P=1,254,969,606 P=829,873,755
Investment in an Associate
The Banks owns 2,500,000 shares of Toyota Financial Services Philippines Corp. (TFSPC)
representing 25% ownership.
The following illustrates the summarized financial information of TFSPC:
October 31,
2011
December 31,
2010
Total assets P=20,976,357,878 P=18,775,952,714
Total liabilities 18,887,727,477 16,936,261,946
Net assets 2,088,630,401 1,839,690,768
Gross revenue for the period 1,562,677,233 1,720,926,662
Net income for the period 210,227,312 262,826,678
F-118
Movement in this account follows:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Acquisition cost P=270,546,789 P=270,546,789
Accumulated equity in net income:
Balance at beginning of period 188,374,870 122,668,200
Share in net income (Note 25) 52,556,827 65,706,670
Balance at end of period 240,931,697 188,374,870
Carrying value P=511,478,486 P=458,921,659
The Bank’s share in the net income of TFSPC for the ten months ended October 31, 2010
amounted to P=52.4 million.
Investment in a Joint Venture
As of October 31, 2011, the Bank owns 8,000,000 shares of SMFC representing 40% ownership.
The following illustrates the summarized financial information of the Bank’s investment in
SMFC:
October 31,
2011
December 31,
2010
Share in the joint venture’s statement of financial
condition:
Current assets P=700,101,288 P=347,314,556
Non-current assets 76,034,265 49,747,029
Non-current liabilities (32,644,433) (26,109,489)
Equity P=743,491,120 P=370,952,096
October 31,
2011
December 31,
2010
Share in the joint venture’s statement of income:
Other income (loss) (P=5,400,393) P=25,400,098
Operating expenses (34,666,775) (62,506,255)
Loss before income tax (40,067,168) (37,106,157)
Benefit from income tax 12,606,192 12,962,905
Loss for the period (P=27,460,976) (P=24,143,252)
The following illustrates the summarized financial information of SMFC:
October 31,
2011
December 31,
2010
Total current assets P=1,750,253,221 P=868,286,391
Non-current assets 190,085,663 124,367,571
Non-current liabilities (91,611,081) (65,273,723)
Total other income (loss) (13,500,983) 63,500,245
Total expenses (86,666,938) (156,265,639)
Benefit from income tax 31,515,481 32,407,263
F-119
Movements in this account follow:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Acquisition cost P=400,000,000 P=400,000,000
Capital infusion 400,000,000 –
Accumulated share in net losses:
Balance at beginning of period (29,047,904) (4,904,652)
Share in net loss (Note 25) (27,460,976) (24,143,252)
Balance at end of period (56,508,880) (29,047,904)
Carrying value P=743,491,120 P=370,952,096
The Bank’s share in the loss of Sumisho Motor Finance Corporation (SMFC) for the ten months
ended October 31, 2010 amounted to P=13.9 million.
In 2011, the Bank invested additional P=400.0 million in SMFC in accordance with the provisions
of the BSP approval issued on September 9, 2009 which allowed the Bank to invest up to 40%
interest or P=800.0 million in SMFC. The Bank initially invested P=400.0 million in SMFC in 2009.
The Bank has no share of any contingent liabilities of SMFC or capital commitments to SMFC as
of October 31, 2011 and December 31, 2010.
9. Property and Equipment
The composition of and movements in this account follow:
October 31, 2011
(Unaudited)
Land Buildings
Furniture,
Fixtures and
Equipment
Leasehold
Improvements Total
Cost
Balance at beginning of period P=208,802,981 P=1,415,703,891 P=1,463,189,972 P=288,314,516 P=3,376,011,360
Acquisitions 17,074,889 102,460,883 248,581,804 106,808,354 474,925,930
Disposals – – (38,008,963) – (38,008,963)
Reclassification (Note 10) – 95,432,414 – – 95,432,414
Balance at end of period 225,877,870 1,613,597,188 1,673,762,813 395,122,870 3,908,360,741
Accumulated Depreciation and
Amortization
Balance at beginning of period – 194,158,581 899,508,042 175,028,115 1,268,694,738
Depreciation – 20,831,974 183,650,006 36,989,782 241,471,762
Disposals – – (19,004,557) – (19,004,557)
Reclassification (Note 10) – 42,723,978 – – 42,723,978
Balance at end of period – 257,714,533 1,064,153,491 212,017,897 1,533,885,921
Net Book Value P=225,877,870 P=1,355,882,655 P=609,609,322 P=183,104,973 P=2,374,474,820
F-120
December 31, 2010
(Audited)
Land Buildings
Furniture,
Fixtures and
Equipment
Leasehold
Improvements Total
Cost Balance at beginning of year P=208,802,981 P=1,347,901,391 P=1,232,145,141 P=248,060,915 P=3,036,910,428
Acquisitions – 67,802,500 288,045,940 40,916,681 396,765,121
Disposals – – (57,001,109) (663,080) (57,664,189)
Balance at end of year 208,802,981 1,415,703,891 1,463,189,972 288,314,516 3,376,011,360
Accumulated Depreciation and
Amortization
Balance at beginning of year – 164,690,306 733,504,557 153,240,833 1,051,435,696 Depreciation – 20,970,370 199,136,045 30,381,376 250,487,791
Disposals – – (33,132,560) (96,189) (33,228,749)
Reclassification – 8,497,905 – (8,497,905) –
Balance at end of year – 194,158,581 899,508,042 175,028,115 1,268,694,738
Net Book Value P=208,802,981 P=1,221,545,310 P=563,681,930 P=113,286,401 P=2,107,316,622
Gain on sale of property and equipment amounted to P=3.1 million and P=2.2 million in 2011 and
2010, respectively. The total cost of additions and disposals for the ten months ended October 31,
2010 amounted to P=311.0 million and P=49.4 million, respectively. The related accumulated
deprecation on the disposals for the ten months period ended October 31, 2010 amounted to
P=37.2 million.
The details of depreciation and amortization under the statements of income for the ten months
ended October 31 follow:
2011
(Unaudited)
2010
(Unaudited)
Property and equipment P=241,471,762 P=209,753,480
Investment properties (Note 10) 54,156,122 51,578,745
Chattel mortgage properties (Note 12) 52,941,399 31,672,748
P=348,569,283 P=293,004,973
As of October 31, 2011 and December 31, 2010, property and equipment of the Bank with gross
carrying amounts of P=591.9 million and P=531.9 million, respectively, are fully depreciated but are
still being used.
10. Investment Properties
The composition of and movements in this account follow:
October 31, 2011
(Unaudited)
Land
Building
Improvements Total
Cost
Balance at beginning of period P=1,748,837,263 P=1,653,007,949 P=3,401,845,212
Additions 183,695,566 324,179,257 507,874,823
Disposals (262,401,386) (172,363,284) (434,764,670)
Reclassifications (Note 9) – (95,432,414) (95,432,414)
Balance at end of period 1,670,131,443 1,709,391,508 3,379,522,951
(Forward)
F-121
October 31, 2011
(Unaudited)
Land
Building
Improvements Total
Accumulated Depreciation
Balance at beginning of period P=– P=376,002,088 P=376,002,088
Depreciation (Note 9) – 54,156,122 54,156,122
Disposals – (22,389,819) (22,389,819)
Reclassifications (Note 9) – (42,723,978) (42,723,978)
Balance at end of period – 365,044,413 365,044,413
Allowance for Impairment Losses
Balance at beginning of period 226,489,697 27,044,495 253,534,192
Provisions for the period (Note 12) 3,333,429 6,408,595 9,742,024
Disposals (10,467,413) (2,334,033) (12,801,446)
Balance at end of period 219,355,713 31,119,057 250,474,770
Net Book Value P=1,450,775,730 P=1,313,228,038 P=2,764,003,768
December 31, 2010
(Audited)
Land
Building
Improvements Total
Cost
Balance at beginning of year P=1,709,420,443 P=1,500,141,233 P=3,209,561,676
Additions 300,157,262 399,579,969 699,737,231
Disposals (260,740,442) (246,713,253) (507,453,695)
Balance at end of year 1,748,837,263 1,653,007,949 3,401,845,212
Accumulated Depreciation
Balance at beginning of year – 366,846,356 366,846,356
Depreciation – 62,360,031 62,360,031
Disposals – (53,204,299) (53,204,299)
Balance at end of year – 376,002,088 376,002,088
Allowance for Impairment Losses
Balance at beginning of year 224,809,168 35,138,447 259,947,615
Provisions for the year 28,558,362 1,565,766 30,124,128
Disposals (26,877,833) (9,659,718) (36,537,551)
Balance at end of year 226,489,697 27,044,495 253,534,192
Net Book Value P=1,522,347,566 P=1,249,961,366 P=2,772,308,932
The details of the net book value of investment properties follow:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Real estate properties acquired in settlement of
loans and receivables P=2,550,436,206 P=2,492,947,062
Bank premises leased to third parties and held for
capital appreciation 213,567,562 279,361,870
P=2,764,003,768 P=2,772,308,932
As of October 31, 2011 and December 31, 2010, the aggregate fair value of investment properties
amounted to P=3.0 billion and P=2.9 billion, respectively.
The total cost of additions for the ten months ended October 31, 2010 and the related accumulated
depreciation amounted to P=622.7 million and P=37.4 million, respectively.
F-122
Gain on foreclosure of investment properties amounted to P=175.4 million and P=303.5 million for
2011 and 2010, respectively.
Total cost of disposals for the ten months ended October 31, 2010 and the related accumulated
depreciation amounted to P=436.7 million and P=38.1 million, respectively.
Loss on sale of investment properties amounted to P=24.8 million and P=76.0 million for 2011and
2010, respectively.
Rental income on investment properties included in miscellaneous income amounted to
P=56.0 million and P=52.5 million in 2011 and 2010, respectively
Operating expenses incurred in maintaining investment properties amounted to P=7.8 million and
P=6.1 million in 2011 and 2010, respectively.
11. Goodwill and Intangible Assets
This account consists of:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Goodwill P=53,558,338 P=53,558,338
Intangible assets
Software costs 182,982,621 163,002,477
License fees 27,323,737 24,123,737
210,306,358 187,126,214
P=263,864,696 P=240,684,552
The movements of other intangible assets follow:
October 31, 2011
(Unaudited)
Software Costs License Fees Total
Balance at beginning of period P=163,002,477 P=24,123,737 P=187,126,214
Additions 63,305,728 3,200,000 66,505,728
Amortization (43,325,584) – (43,325,584)
Balance at end of period P=182,982,621 P=27,323,737 P=210,306,358
December 31, 2010
(Audited)
Software Costs License Fees Total
Balance at beginning of year P=120,790,777 P=23,123,737 P=143,914,514
Additions 83,904,411 1,000,000 84,904,411
Amortization (41,692,711) – (41,692,711)
Balance at end of year P=163,002,477 P=24,123,737 P=187,126,214
Amortization of other intangible assets amounted to P=30.2 million for the ten months ended
October 31, 2010.
F-123
12. Other Assets
This account consists of:
October 31, December 31,
2011
(Unaudited)
2010
(Audited)
Chattel mortgage properties – net P=351,380,643 P=233,529,702
Prepayments 108,826,634 419,782,914
Creditable withholding tax 94,241,527 55,395,096
Security deposits 88,125,938 76,324,741
Inter-office float items 35,837,893 12,844,125
Sundry debits 26,886,797 11,396,210
Documentary stamps on hand 26,281,011 28,203,719
Deferred charges 15,111,289 6,450,781
Stationeries and supplies on hand 13,190,408 8,838,714
RCOCI 11,266,209 27,841,860
Others 3,530,798 3,513,037
P=774,679,147 P=884,120,899
Prepayments include prepaid insurance, prepaid taxes on investment securities, prepaid rent, and
other prepaid expenses.
The movements of chattel mortgage properties - net follow:
October 31, December 31,
2011
(Unaudited)
2010
(Audited)
Cost
Balance at beginning of period P=267,189,373 P=206,398,160
Additions 553,065,802 639,569,321
Disposals (414,805,817) (578,778,108)
Balance at the end of period 405,449,358 267,189,373
Accumulated Depreciation
Balance at beginning of year 33,043,581 25,344,469
Depreciation (Note 9) 52,941,399 39,190,286
Disposals (32,532,355) (31,491,174)
Balance at the end of period 53,452,625 33,043,581
Allowance for Impairment Losses
Balance at beginning and of period 616,090 616,090
Net Book Value P=351,380,643 P=233,529,702
Total cost of additions and increase in accumulated depreciation for the ten months ended
October 31, 2010 P=522.5 million and P=31.7 million, respectively.
Loss on foreclosure of chattel mortgage properties amounted to P=86.7 million and P=91.6 million
for the ten months ended October 31, 2011 and 2010, respectively.
The cost of disposals and related decrease in accumulated depreciation for the ten months ended
October 31, 2010 amounted to P=488.1 million and P=26.6 million, respectively.
F-124
Gain on sale of chattel mortgage properties amounted to P=38.3 million and P=38.2 million for the
ten months ended October 31, 2011 and 2010, respectively.
13. Allowance for Credit and Impairment Losses
Details of the provision for credit and impairment losses charged to current operations for the ten
months ended October 31 follow:
2011
(Unaudited)
2010
(Unaudited)
Loans and receivables P=386,676,022 P=525,013,334
Investment properties (Note 10) 9,742,023 22,139,639
P=396,418,045 P=547,152,973
F-125
Changes in the allowance for credit losses on loans and receivables as of October 31, 2011 and December 31, 2010 follow (in thousands):
Receivables from Customers Other Receivables
Accrued
Interest Accounts Sales Contract Unquoted Debt Bills
Purchased
October 31, 2011 (Unaudited) Consumption Real Estate Commercial Personal Receivable Receivable Receivable Investment Total
Balance at beginning of period P=475,202 P=172,913 P=769,060 P=2,236,199 P=267,735 P=476,961 P=28,002 P=95,611 P=1,303 P=4,522,986
Provisions for the period charged
against profit or loss (32,840) (4,557) 189,338 189,224 45,511 – – – – 386,676
Reversal of allowance (27,526) – – – – (12,228) (4,233) – – (43,987)
Amount written off (75,354) – – (12,809) – – – – – (88,163)
Balance at end of period P=339,482 P=168,356 P=958,398 P=2,412,614 P=313,246 P=464,733 P=23,769 P=95,611 P=1,303 P=4,777,512
Individual impairment P=– P=122,866 P=582,230 P=– P=56,248 P=178,466 P=18,313 P=95,611 P=– P=1,053,734
Collective impairment 339,482 45,490 376,168 2,412,614 256,998 286,267 5,456 – 1,303 3,723,778
P=339,482 P=168,356 P=958,398 P=2,412,614 P=313,246 P=464,733 P=23,769 P=95,611 P=1,303 P=4,777,512
Gross amount of loans individually impaired,
before deducting any
individual impairment allowance P=– P=337,085 P=1,000,760 P=– P=287,352 P=178,466 P=18,313 P=95,611 P=– P=1,917,587
Receivables from Customers Other Receivables
Accrued
Interest Accounts Sales Contract Unquoted Debt Bills Purchased
December 31, 2010 (Audited) Consumption Real Estate Commercial Personal Receivable Receivable Receivable Investment Total
Balance at beginning of year P=568,372 P=171,341 P=682,776 P=1,725,616 P=181,371 P=415,157 P=31,554 P=95,611 P=5,930 P=3,877,728
Provisions for the year charged
against profit or loss 77,405 1,572 86,284 593,414 121,616 1,867 – – – 882,158 Reversal of allowance – – – – (35,252) (32,563) (3,552) – – (71,367)
Amount written off (170,575) – – (82,831) – – – – (4,627) (258,033)
Reclassification – – – – – 92,500 – – – 92,500
Balance at end of year P=475,202 P=172,913 P=769,060 P=2,236,199 P=267,735 P=476,961 P=28,002 P=95,611 P=1,303 P=4,522,986
Individual impairment P=– P=127,746 P=574,569 P=– P=52,409 P=178,699 P=18,313 P=95,611 P=– P=1,047,347
Collective impairment 475,202 45,167 194,491 2,236,199 215,326 298,262 9,689 – 1,303 3,475,639
P=475,202 P=172,913 P=769,060 P=2,236,199 P=267,735 P=476,961 P=28,002 P=95,611 P=1,303 P=4,522,986
Gross amount of loans
individually impaired, before deducting any individual
impairment allowance P=– P=320,827 P=1,127,174 P=– P=234,456 P=178,256 P=18,313 P=95,611 P=– P=1,974,637
F-126
The Bank reversed allowance for credit losses amounting to P=94.5 million and wrote-off accounts with
allowance for credit losses amounting to P=240.3 million for the ten months ended October 31, 2010.
14. Deposit Liabilities
On June 24, 2011, a 1.0% increase in statutory requirements for thrift banks took effect, as issued
by BSP under Circular No. 726. Further, an additional 1.0% increase was issued effective
August 5, 2011, under BSP Circular No. 732. As a result, the Bank now maintains 8.0% reserve
requirement from 6.0% reserve requirement last year.
As of October 31, 2011 and December 31, 2010, the Bank is in compliance with such regulation.
Available reserves follows:
October 31, December 31,
2011
(Unaudited)
2010
(Audited)
Cash and other cash items P=3,231,094,357 P=3,083,626,629
Due from BSP 2,233,106,250 1,047,234,412
AFS investments 1,747,006,602 1,490,060,774
P=7,211,207,209 P=5,620,921,815
Deposit liabilities earned average fixed interest rate of 3.57% and 3.30% in 2011 and 2010,
respectively.
15. Subordinated Notes
On October 14, 2010, the BOD of the Bank approved the option to call the Notes on January 27,
2011. The request of the Bank to exercise the call option on the Notes was approved by the BSP
on December 10, 2010. The Bank exercised the call option on January 28, 2011.
The redemption fell under the call provisions of the bond, which had an original maturity of ten
years until 2016. The call option allowed the Bank to buy back the bonds at its face value after
five years from the date of issuance.
The Bank recorded an expense amounting to P=22.5 million for the amortization of the remaining
unamortized debt issuance cost relative to the redemption of the Notes.
The movements in subordinated notes payable follow:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Amortized cost P=1,977,141,032 P=1,973,881,534
Amortization of debt issuance costs 22,858,968 3,259,498
Settlement of subordinated notes (2,000,000,000) –
P=– P=1,977,141,032
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16. Other Liabilities
This account consists of:
October 31, December 31,
2011
(Unaudited)
2010
(Audited)
Accounts payable P=725,224,836 P=676,738,250
Other credits 190,523,226 186,437,555
Net retirement liability (Note 20) 82,844,011 192,844,011
Withholding taxes payable 64,471,470 55,645,940
Sundry credits 58,846,558 18,794,710
Bills purchased-contra (Note 7) 38,437,945 54,332,644
Due to the Treasurer of the Philippines 7,004,003 6,303,446
SSS, Medicare, ECP & HDMF premium payable 6,115,400 6,061,448
Miscellaneous 96,446,135 65,720,627
P=1,269,913,584 P=1,262,878,631
Accounts payable includes payable to suppliers and service providers, and loan payments and
other charges received from customers in advance.
Other credits represent long-outstanding unclaimed balances from inactive and dormant accounts.
17. Maturity Analysis of Assets and Liabilities
The following table shows an analysis of assets and liabilities analyzed according to whether they
are expected to be recovered or settled within one year and beyond one year from statement of
condition date (in thousands):
October 31, 2011
(Unaudited)
December 31,2010
(Audited)
Within
One Year
Beyond
One Year Total
Within One Year
Beyond One Year Total
Financial Assets
Cash and other cash items P=3,231,094 P=– P=3,231,094 P=3,163,940 P=– P=3,163,940
Due from BSP 4,425,025 – 4,425,025 2,899,592 – 2,899,592 Due from other banks 3,056,717 – 3,056,717 7,520,836 – 7,520,836
Interbank loans receivable and SPURA 3,510,000 – 3,510,000 3,586,560 – 3,586,560
FVPL investments 701,886 – 701,886 868,316 – 868,316 AFS investments - gross (Note 6) 21,024,197 – 21,024,197 16,246,349 – 16,246,349
HTM investments – 12,251,097 12,251,097 – 9,162,585 9,162,585
Loans and receivables - gross (Note 7) 13,214,013 55,493,324 68,707,337 11,149,148 51,908,858 63,058,006 Other assets - gross* (Note 12) 11,668 88,126 99,794 48,169 56,384 104,553
49,174,600 67,832,547 117,007,147 45,482,910 61,127,827 106,610,737
(Forward)
F-128
October 31, 2011
(Unaudited)
December 31,2010
(Audited)
Within
One Year
Beyond
One Year Total
Within One Year
Beyond One Year Total
Nonfinancial Assets
Investment in an associate and joint venture P=– P=1,254,970 P=1,254,970 P=– P=829,874 P=829,874
Property and equipment - gross (Note 9) – 3,908,361 3,908,361 – 3,376,011 3,376,011 Investment properties - gross (Note 10) – 3,379,523 3,379,523 – 3,401,845 3,401,845
Deferred tax assets – 1,139,999 1,139,999 59,809 645,552 705,361
Other assets - gross** (Note 12) 658,295 281,070 939,365 770,642 250,226 1,020,868
658,295 9,963,923 10,622,218 830,451 8,503,508 9,333,959
Less: Allowance for credit and impairment losses 5,074,613
4,823,146
Accumulated depreciation
(Notes 9 and 10) 1,898,930
1,644,696
Unearned discounts (Note 7) 5,823,073
5,327,385
12,796,616
11,795,227
P=49,832,895 P=77,796,470 P=114,832,749 P=46,313,361 P=69,631,335 P=104,149,469
* Others assets under financial assets comprise of petty cash fund, shortages, RCOCI and security deposits. ** Other assets under nonfinancial assets comprise of inter-office float items, prepaid expenses, stationery and supplies on hand,
sundry debits, documentary stamps on hand, deferred charges, postages stamps, chattel mortgage properties, goodwill
and intangible assets.
October 31, 2011
(Unaudited)
December 31, 2010
(Audited)
Within
One Year
Beyond
One Year Total
Within One Year
Beyond One Year Total
Financial Liabilities
Deposit liabilities P=80,948,633 P=16,096,220 P=97,044,853 P=73,074,011 P=14,444,798 P=87,518,809
Subordinated notes – – – 1,977,141 – 1,977,141 Treasurer’s, cashier’s and manager’s checks 465,909 – 465,909 649,434 – 649,434
Accrued other expenses payable 1,084,033 – 1,084,033 752,779 – 752,779
Accrued interest payable 176,398 – 176,398 200,097 – 200,097 Other liabilities
Accounts payable 725,225 – 725,225 676,738 – 676,738
Other credits 190,523 190,523 – 186,438 186,438 Bills purchased-contra 38,438 – 38,438 54,333 – 54,333
Due to BSP – – – – – –
Dividends payable – – – – – – Due to Treasurer of the Philippines – 7,004 7,004 – 6,303 6,303
Deposits for keys – – – 1,040 – 1,040
Others* 1,041 – 1,041 1,764 – 1,764
83,439,677 16,293,747 99,733,424 77,387,337 14,637,539 92,024,876
Nonfinancial Liabilities Accrued other taxes and licenses payable – – – 179,254 – 179,254
Other liabilities** 247,042 60,641 307,683 328,947 7,315 336,262
247,042 60,641 307,683 508,201 7,315 515,516
P=83,686,719 P=16,354,388 P=100,041,107 P=77,895,538 P=14,644,854 P=92,540,392
* Others under financial liabilities comprise of payment orders payable and overages.
** Other liabilities under nonfinancial liabilities comprise of advance rentals on bank premises, sundry credits, withholding
taxes, SSS, Medicare, ECP & HDMF premium payable, net retirement liability, and miscellaneous liabilities.
18. Equity
Issued Capital
The Bank’s capital stock consists of:
October 31, 2011
(Unaudited)
December 31, 2010 (Audited)
Shares Amount Shares Amount
Authorized common stock – P=10 par value 425,000,000 P=4,250,000,000 425,000,000 P=4,250,000,000
Issued and outstanding Balance at beginning and end of year 240,252,491 P=2,402,524,910 240,252,491 P=2,402,524,910
F-129
Dividends Paid and Proposed
Details of the Bank’s dividend distributions as approved by the Bank’s BOD and the BSP follow:
Cash Dividends
Date of declaration Per share Total amount Date of BSP approval Record date Payment date
October 13, 2009 0.15 36,037,874 December 15, 2009 January 14, 2010 January 28, 2010 January 19, 2010 0.15 36,037,874 March 8, 2010 March 31, 2010 April 16, 2010
February 19, 2010 2.75 660,694,350 April 22, 2010 May 17, 2010 May 31, 2010
May 17, 2010 0.15 36,037,874 June 15, 2010 July 13, 2010 August 3, 2010 July 27, 2010 0.15 36,037,874 September 6, 2010 September 29, 2010 October 14, 2010
October 14, 2010 0.15 36,037,874 November 15, 2010 December 8, 2010 December 23, 2010
January 20, 2011 0.15 36,037,874 February 23, 2011 March 18, 2011 April 4, 2011 April 4, 2011 0.15 36,037,874 May 13, 2011 August 4, 2011 August 19, 2011
July 26, 2011 0.15 36,037,874 August 16, 2011 September 8, 2011 September 23, 2011
October 27, 2011 0.15 36,037,874 November 23, 2011 December 20, 2011 January 5, 2012
Capital Management
The primary objectives of the Bank’s capital management are to ensure that the Bank complies
with externally imposed capital requirements, as mandated by the BSP, and that the Bank
maintains healthy capital ratios in order to support its business and maximize returns for its
shareholders. The Bank considers its paid in capital and surplus as its capital.
The Bank manages its capital structure and makes adjustments in light of changes in economic
conditions and risk characteristics of its activities. In order to maintain or adjust the capital
structure, the Bank may adjust the amount of dividend payment to shareholders or issue capital
securities. The major activities in this area include the following:
On March 2, 2005, the Bank’s BOD approved an amendment to the Bank’s Dividend Policy
which provides for an annual regular cash dividend of 6.00% of the par value of the total
capital stock payable quarterly at the rate of 1.50% or P=0.15 per share payable not later than
March 31, June 30, September 30 and October 31 of each year.
The Bank has issued additional common shares for its qualified stockholders in 2008 and 2006
through stock rights offerings that raised P=2.0 billion and P=750.0 million in capital,
respectively.
Regulatory Capital
Under Section 9 of the Thrift Banks Act, the combined capital accounts of each bank should not
be less than an amount equal to 10.00% of its risk assets. Risk assets consist of total assets after
exclusion of cash on hand, due from BSP, loans covered by hold out or assignment of deposits,
loans or acceptances under letters of credit to the extent covered by margin deposits and other
non-risk items as determined by the Monetary Board.
On June 2, 2006, the Monetary Board of the BSP approved major revisions to the risk-based
capital adequacy framework which took effect on July 1, 2007, to align the existing Basel I-
compliant framework with the new Basel II standards. As approved, the BSP decided to maintain
the present minimum overall capital adequacy ratio (CAR) of banks and quasi-banks at 10.00%.
However, consistent with Basel II recommendations, it approved major methodological revisions
to the calculation of minimum capital that universal banks, commercial banks and their subsidiary
banks and quasi-banks should hold against actual credit risk exposures.
F-130
The guidelines for allocating minimum capital to cover market risk was also amended to some
extent, primarily to align specific market risk charges on trading book assets with the revised
credit risk exposure guidelines. A completely new feature is the introduction of bank capital
charge for operational risk. The required disclosures to the public of bank capital structure and
risk exposures are also enhanced to promote greater market discipline in line with the so-called
Pillar 3 of the Basel II recommendations.
The determination of the Bank’s compliance with regulatory requirements and ratios is based on
the amount of the Bank’s “unimpaired capital” (regulatory net worth) as reported to the BSP,
which is determined on the basis of regulatory accounting practices which differ from PFRS in
some respects.
The Bank complied with all externally imposed capital requirement throughout the period.
The table below shows the Bank’s CAR as of October 31, 2011 and December 31, 2010 as
reported to the BSP (in millions):
2011 2010
Tier 1 capital P=12,473 P=9,960
Tier 2 capital – 2,506
Gross qualifying capital 12,473 12,466
Less required deductions 2,427 1,844
Total qualifying capital P=10,046 P=10,622
Risk weighted assets P=73,592 P=69,091
Tier 1 capital adequacy ratio 13.65% 12.35%
Capital adequacy ratio 13.65% 15.37%
Regulatory capital consists of Tier 1 capital, which comprises capital stock, surplus, surplus
reserves, cumulative translation adjustment and net unrealized losses on AFS investments.
Certain adjustments are made to PFRS-based results and reserves, as prescribed by the BSP. The
other component of regulatory capital is Tier 2 capital, which is comprised of the Bank’s
subordinated notes and other capital items. Certain items are deducted from the regulatory Gross
Qualifying Capital, such as but not limited to equity investments in financial allied undertakings,
but excluding insurance companies (for solo basis); investments in debt capital instruments of
unconsolidated subsidiary banks (for solo basis); equity investments in subsidiary insurance
companies and subsidiary non-financial allied undertakings; and reciprocal investments in equity
of other banks/enterprises.
Risk-weighted assets are determined by assigning defined risk weights to amounts of on-statement
of condition exposures and to the credit equivalent amounts of off-statement of condition
exposures. Certain items are deducted from risk-weighted assets, such as the excess of general
loan loss provision over the amount permitted to be included in Tier 2 capital.
The issuance of BSP Circular No. 639 covering the Internal Capital Adequacy Assessment Process
(ICAAP) in 2009 supplements the BSP’s risk-based capital adequacy framework under Circular
No. 538. In compliance with this new circular, the Metrobank Group has adopted and developed
its ICAAP framework to ensure that appropriate level and quality of capital are maintained by the
Group. Under this framework, the assessment of risks extends beyond the Pillar 1 set of credit,
market and operational risks and onto other risks deemed material by the Group. The level and
structure of capital are assessed and determined in light of the Group’s business environment,
plans, performance, risks and budget; as well as regulatory edicts. The Bank follows the Group’s
F-131
ICAAP framework and submits the result of its assessment to the Parent Company. The BSP
requires submission of an ICAAP document on a group-wide basis every January 31. The Group
through the Parent Company has complied with the submission deadline of the first final ICAAP
document.
Financial Performance
The following basic ratios measure the annualized financial performance of the Bank as of
October 31:
2011
(Unaudited)
2010
(Unaudited)
Return on average equity 16.78% 16.81%
Return on average assets 2.03% 1.97%
Net interest margin on average earning assets 4.68% 4.53%
19. Miscellaneous Income
For the ten months ended October 31, this account consists of:
2011
(Unaudited)
2010
(Unaudited)
Rent (Note 10) P=57,926,615 P=54,661,810
Insurance commission income 8,434,306 17,270,026
Others 83,036,683 21,508,635
P=149,397,604 P=93,440,471
Rent income arises from the lease of properties and safety deposit boxes of the Bank.
Others include income from recovery of charged-off assets, dividend income and other
miscellaneous income.
20. Retirement Benefits
The Bank has a funded, noncontributory defined benefit plan covering substantially all of its
employees. The benefits are based on years of service and final compensation. Total retirement
expense which amounted to P=104.1 million in October 31, 2011 is included in ‘Compensation and
fringe benefits’ in the statements of income.
The amount of net retirement liability recognized in the statements of condition under ‘Other
liabilities’ as of October 31, 2011 and December 31, 2010 amounted to P=82.4 million and
P=192.8 million, respectively. The actual return on plan assets amounted to P=68.2 million and
P=81.7 million in 2011 and 2010, respectively.
The Bank expects to contribute P=114.7 million to its noncontributory defined benefit plan in 2012.
Plan assets include investment in savings and time deposits, and accrued interest receivable.
The overall expected rate of return on assets is determined based on market prices prevailing on
the date of the valuation, applicable to the period over which the obligation is to be settled.
F-132
As of October 31, 2010, the discount rate used in determining retirement obligation is 11.16%.
21. Leases
The Bank leases the premises occupied by its branches for periods ranging from 1 to 20 years
renewable under certain terms and conditions. Various lease contracts include escalation clauses,
most of which bear an annual rent increase of 10.00%. Rentals charged against profit or loss
under these lease contracts amounting to P=285.1 million in 2011 and P=237.4 million in 2010 are
shown under ‘Occupancy and equipment-related costs’ in the statement of income.
Future minimum rentals payable under non-cancelable operating leases are as follows:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Within one year P=224,039,477 P=213,444,471
After one year but not more than five years 580,228,810 529,572,538
More than five years 307,366,309 304,859,316
P=1,111,634,596 P=1,047,876,325
The Bank entered into commercial property leases on its surplus office space. These non-
cancelable leases have remaining non-cancelable lease terms between 1 and 5 years. As of
October 31, 2011 and December 31, 2010, there is no contingent rental income. Rent income of
the Bank related to these property leases amounting to P=56.0 million in 2011 and P=52.5 million in
2010 are shown under ‘Miscellaneous income’ in the statement of income.
Future minimum rentals receivable under non-cancelable operating leases are as follow:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Within one year P=56,232,040 P=61,416,868
After one year but not more than five years 61,539,534 111,983,488
P=117,771,574 P=173,400,356
F-133
22. Miscellaneous Expenses
For the ten months ended October 31, this account consists of:
2011
(Unaudited)
2010
(Unaudited)
Insurance P=191,507,649 P=156,892,359
Advertising 154,020,552 131,984,676
Information technology 144,955,546 115,164,884
Litigation 101,435,565 99,218,460
Communications 93,455,045 92,310,743
Transportation and traveling 68,942,403 61,160,885
Repairs and maintenance 65,026,405 53,975,879
Stationery and supplies 49,294,163 99,059,736
Management and professional fees 29,688,824 34,288,702
Supervision and examination fees 24,566,327 15,603,475
Fines, penalties and other charges 12,542,984 19,679,959
Membership fees and dues 6,687,645 6,752,153
Training and seminars 5,576,143 12,916,002
Rewards and incentives 4,696,629 6,922,916
Meeting allowance 1,943,764 2,311,930
Entertainment, amusement and recreation (EAR)
(Note 23) 1,226,281 2,303,513
Donations and charitable contributions 869,188 11,850,826
Others 24,770,935 38,622,396
P=981,206,048 P=961,019,494
Insurance expense includes premiums paid to the Philippine Deposit Insurance Corporation
amounting to P=148.9 million, P=172.1 million in 2011 and 2010, respectively.
Other expenses include sponsorship expenses, home free loan expenses, appraisal fees and
notarial fees.
23. Income and Other Taxes
Under Philippine tax laws, the Bank is subject to percentage and other taxes (presented as ‘Taxes
and licenses’ in the statement of income) as well as income taxes. Percentage and other taxes paid
consist principally of gross receipts tax (GRT) and documentary stamps taxes (DST).
Income taxes include corporate income tax, discussed below, and final taxes paid at the rate of
20.00%, which is a final withholding tax on gross interest income from government securities, and
other deposit substitutes.
Current tax regulations provide that the RCIT rate shall be 30.00% starting January 1, 2009. The
RCIT rate shall be 30.00%. The interest allowed as a deductible expense is reduced by 33.00% of
interest income subjected to final tax.
F-134
Republic Act No. 9504, An Act Amending National Internal Revenue Code, provides that starting
July 1, 2008, the optional standards deduction (OSD) equivalent to 40.00% of gross income may
be claimed as an alternative deduction in computing for the RCIT. The Bank elected to claim
itemized expense deductions instead of the OSD in computing for the RCIT in 2011 and 2010.
Current tax regulations also provide for the ceiling on the amount of EAR expense that can be
claimed as a deduction against taxable income. Under the regulations, EAR expense allowed as a
deductible expense for a service company is limited to the actual EAR paid or incurred but not to
exceed 1.00% of net revenue. The regulations also provide for MCIT of 2.00% on modified gross
income and allow a NOLCO. The MCIT and NOLCO may be applied against the Bank’s income
tax liability and taxable income, respectively, over a three-year period from the year of inception.
FCDU offshore income (income from non-residents) is tax-exempt while gross onshore income
(income from residents) is subject to 10.00% income tax. In addition, interest income on deposit
placements with other FCDUs and offshore banking units (OBUs) is taxed at 7.50%.
Under current tax regulation, the income derived by the FCDU from foreign currency transactions
with non-residents, OBUs, local commercial banks, including branches of foreign banks, is tax-
exempt while interest income on foreign currency loans from residents other than OBUs or other
depository banks under the expanded system is subject to 10.00% income tax.
Provision for (benefit from) income tax for the ten months ended October 31consists of:
2011
(Unaudited)
2010
(Unaudited)
Current:
Final tax P=330,511,549 P=231,141,249
RCIT 69,275,336 67,571,155
399,786,885 298,712,404
Deferred (494,447,103) 483,354,265
(P=94,660,218) P=782,066,669
Net deferred tax asset consists of:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Deferred tax asset on:
Allowance for credit and impairment losses P=1,327,785,288 P=798,540,262
Carryforward benefits of MCIT – 59,809,450
Net pension liability 57,853,203 57,853,203
Accumulated depreciation on investment
properties 55,800,815 50,196,685
Accrued rent 38,570,397 38,408,448
Unamortized pension cost contribution 14,208,135 20,294,967
Unrealized foreign exchange loss – 4,598,296
1,494,217,838 1,029,701,311
Deferred tax liability on:
Net unrealized gain on investment properties (253,976,930) (256,132,063)
Accretion of interest on impaired loans (85,615,781) (68,208,031)
Unrealized foreign exchange gain (14,626,257)
(354,218,968) (324,340,094)
P=1,139,998,870 P=705,361,217
F-135
The Bank did not recognize deferred tax asset from its allowance for credit losses amounting to
P=61.5 million and P=635.3 million as of October 31, 2011 and December 31, 2010, respectively.
As of October 31, 2011, the Bank had already applied P=59.8 million of its excess MCIT against its
RCIT due.
The reconciliation between the statutory income tax and effective income tax for the ten months
ended October 31 follows:
2011
(Unaudited)
2010
(Unaudited)
Statutory income tax P=513,115,752 P=727,509,958
Tax effect of:
Nondeductible expenses 327,800,472 111,687,981
FCDU Income (30,837,684) (414,832,948)
Tax-paid and tax-exempt income (332,174,233) (189,728,893)
Effect of deferred income tax (572,564,525) 547,430,571
Effective income tax (P=94,660,218) P=782,066,669
24. Earnings Per Share
The following table presents information used to calculate basic Earnings Per Share (EPS) for the
ten months ended October 31:
2011
(Unaudited)
2010
(Unaudited)
a. Net income P=1,805,046,057 P=1,642,966,525
b. Weighted average number of common shares
for basic earnings per share 240,252,491 240,252,491
c. Basic/Diluted EPS (a/b) P=7.51 P=6.84
As of October 31, 2011 and 2010, there were no potential common shares with dilutive effect on
the basic EPS of the Bank.
25. Related Party Transactions
Parties are considered to be related if one party has the ability, directly or indirectly, to control the
other party or exercise significant influence over the other party in making financial and operating
decisions. Corporate entities are also considered to be related if they are subjected to common
control or common significant influence. Transactions between related parties are based on terms
similar to those offered to non-related parties.
In the ordinary course of business, the Bank has loans and other transactions with its affiliates, and
with certain DOSRI. Under the Bank's policy, these loans and other transactions are made
substantially on the same terms as with other individuals and businesses of comparable risks. The
General Banking Law limits the amount of direct credit accommodations to DOSRI, 70.00% of
which must be secured and should not exceed the total of their respective deposits and book value
of their respective investments in the Bank. In the aggregate, loans to DOSRI generally should
not exceed the lower of the Bank's total equity or 15.00% of the Bank's total loan portfolio.
F-136
BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts.
The following table shows information relating to the loans, other credit accommodations and
guarantees classified as DOSRI accounts under regulations existing prior to said circular and new
DOSRI loans and other credit accommodations granted under said circular:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Total outstanding DOSRI accounts P=2,374,972,824 P=2,996,655,559
Percent of DOSRI accounts granted under
regulations existing prior to BSP Circular
No. 423 to total loans
3.60% 4.96%
Percent of new DOSRI accounts granted under BSP
Circular No. 423 to total loans _ –
Percent of unsecured DOSRI accounts to total
DOSRI accounts 10.41% 9.68%
Percent of past due DOSRI accounts to total
DOSRI accounts 23.03% 19.83%
Percent of nonperforming DOSRI accounts to
total DOSRI accounts 23.03% 19.83%
As of October 31, 2011 and December 31, 2010, the Bank has no loans, other credit
accommodations and guarantees, as well as availments of previously approved loans and
committed credit lines not considered DOSRI accounts prior to the issuance of said circular but
are allowed a transition period of two years from the affectivity of the said circular until said
circular or said loan, other credit accommodations and guarantees become past due, or are
extended, renewed or restructured, whichever comes later.
On January 31, 2007, BSP Circular No. 560 was issued providing the rules and regulations that
govern loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of
banks and quasi-banks. Under the said circular, the total outstanding exposures to each of the
bank's subsidiaries and affiliates shall not exceed 10.00% of bank's net worth, the unsecured
portion of which shall not exceed 5.00% of such net worth. Further, the total outstanding
exposures to subsidiaries and affiliates shall not exceed 20.00% of the net worth of the lending
bank. BSP Circular No. 560 became effective on February 15, 2007.
Total interest income from DOSRI loans amounted to P=62.4 million in October 31, 2011.
F-137
The following table shows the other related party transactions included in the financial statements
(in thousands):
Elements of Transaction
Statements of Condition Statements of Income
Related Party Relationship Nature of Transaction
October 31,
2011
(Unaudited)
December 31,
2010 (Audited)
October 31,
2011
(Unaudited)
October 31
2010 (Unaudited)
MBTC Parent Company Due from other banks P=1,627,576 P=2,179,284 Interest income P=1,405 P=1,674
Interest expense – 1,372
TFSPC Associate Investment in an associate 511,478 458,922
Share in net income of an
associate 52,557 57,578 SMFC Joint venture Investment in a joint
venture 743,491 370,952
Share in net loss of
a joint venture (27,461) (18,801)
Deposit liabilities include deposits of related parties amounting to P=4.1 billion and P=2.3 billion as
of October 31, 2011 and December 31, 2010, respectively. The related interestfrom these deposits
for the ten months ended October 31, 2011 and 2010 amounted to P=12.7 million and P=6.5 million,
respectively.
The total assets of the retirement fund of employees amounting to P=705.3 million and
P=556.2 million as of October 31, 2011 and December 31, 2010, respectively, is being managed by
the Bank’s Trust Department (see Note 26).
For the periods ended October 31, 2011 and December 31, 2010, FVPL and AFS investment
securities transactions with related parties include outright purchases totaling to P=14.2 billion and
P=9.6 billion, respectively, and outright sales totaling to P=9.7 billion and P=12.7 billion, respectively.
Compensation of key management personnel (covering assistant vice presidents and up) included
under ‘Compensation and fringe benefits’ in the statements of income for the ten months ended
October 31 follows:
2011
(Unaudited)
2010
(Unaudited)
Short-term employee benefits P=143,349,513 P=132,698,803
Post-employment pension benefits 14,151,436 1,864,079
P=157,500,949 P=134,562,882
Short-term employee benefits include salaries and other non-monetary benefits.
As of October 31, 2011 and December 31, 2010, treasury bills (classified under HTM
investments) with total face value of P=50.0 million are pledged by the Bank to MBTC to secure
the latter’s payroll account with the Bank. As of October 31, 2011 and December 31, 2010, the
Bank has secured DOSRI account with MBTC. Such DOSRI account is covered by a pledge of
MBTC’s government securities with a total face value of P=3.0 billion.
F-138
26. Trust Operations
Securities and other resources held by the Bank in fiduciary or agency capacity for its customers
are not included in the accompanying statements of condition since these are not assets of the
Bank.
In connection with the trust functions of the Bank, government securities (classified under AFS
investments) with face value of P=30.0 million as of October 31, 2011 and December 31, 2010,
respectively, are deposited with the BSP in compliance with trust regulations.
Additionally, at least 10.00% of the Bank’s net profit resulting from the operations of the Bank’s
Trust Department is appropriated to surplus reserve until such reserve for trust functions amounts
to 20.00% of the Bank’s regulatory capital. No part of such surplus reserve shall at any time be
paid out in dividends, but losses accruing in the course of its trust business may be charged against
surplus.
27. Commitments and Contingent Liabilities
In the normal course of the Bank's operations, there are various outstanding commitments and
contingent liabilities such as guarantees and commitments to extend credit, which are not reflected
in the accompanying financial statements. The Bank does not anticipate significant losses as a
result of these transactions.
The following is a summary of the Bank’s commitments and contingent liabilities at their
equivalent peso contractual amounts:
October 31,
2011
(Unaudited)
December 31,
2010
(Audited)
Trust department accounts P=2,061,609,691 P=631,063,745
Stand-by credit lines 117,230,070 112,514,393
Late deposits/payments received 44,305,369 58,460,284
Items held for safekeeping 344,904 336,370
Others 16,162 24,994
Also, several suit and claims relating to the Bank’s lending operations and labor-related cases
remain unsettled. In the opinion of management, these suits and claims, if decided adversely, will
not involve sums having a material effect on the financial statements.
F-139
28. Other Matters
The Bank has no significant matters to report in 2011 on the following:
a. Known trends, events or uncertainties that would have material impact on liquidity and on the
sales or revenues.
b. Explanatory comments about the seasonality or cyclicality of operations.
c. Issuances, repurchases and repayments of debt and equity securities except for the exercise of
the call option on its Unsecured Subornidated notes amounting to P=2.0 billion by the Bank as
discussed in Note 15.
29. Approval for the Release of the Financial Statements
The accompanying financial statements of the Bank were authorized for issue by the management
on January 27, 2012.
PARTIES TO THE ISSUE
ISSUER
Philippine Savings Bank
PSBank Center 777 Paseo de Roxas corner
Sedeno St., Makati City
LEAD MANAGER AND SELLING AGENT
ING Bank N.V., Manila Branch 21/F Tower One, Ayala Triangle
Ayala Avenue, Makati City
MARKET MAKER AND SELLING AGENT
Multinational Investment Bancorporation 41/F Rufino Pacific Tower
6784 Ayala Ave. Makati City
LIMITED SELLING AGENTS
Philippine Savings Bank PSBank Center
777 Paseo de Roxas corner Sedeno St., Makati City
First Metro Investment Corporation 44/F GT Tower International 6813 Ayala Avenue Corner
HV Dela Costa Street, Makati City
REGISTRY AND PAYING AGENT
Standard Chartered Bank
G/F 6788 Ayala Avenue, Makati City
PUBLIC TRUSTEE
Development Bank of the Philippines Trust Services Department
DBP Bldg., Sen. Gil J. Puyat Ave Makati City
LEGAL ADVISER TO THE ISSUE
Picazo Buyco Tan Fider and Santos 19/F, 18/F and 17/F Liberty Center
104 H.V. de la Costa St., Makati City
EXTERNAL AUDITOR
SyCip, Gorres, Velayo & Co. 6760 Ayala Ave., Makati City