IMPORTANT: You must read the following disclaimer before … · 2018-10-07 · preferen e or priority estalished under Philippine laws. See “Terms and onditions of the LTNCDs —

IMPORTANT: You must read the following disclaimer before continuing. The following disclaimer applies to the Offering Circular following this page. You are therefore advised to read this disclaimer carefully before reading, accessing or making any other use of the Offering Circular. In accessing the Offering Circular, you agree to be bound by the following terms and conditions, including any modifications to it from time to time, each time you receive any information from the Issuer, the Joint Lead Arrangers, and the Selling Agents (as such terms are defined in the attached Offering Circular). NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICITON WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT, BE REGISTERED WITH THE PHILIPPINE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"). Confirmation of your representation: This Offering Circular is being sent at your request and by accepting the email and accessing this Offering Circular, you shall have confirmed that (1) you are a person to whom it is lawful to deliver, or to grant access to the attached Offering Circular through electronic means, and (2) that you consent to the delivery of, or your being granted access to this document through electronic means. This document has been made available to you in electronic form. You are reminded that documents made available to you through this medium may have been altered or changed during the process of electronic transmission or access and consequently the Issuer, the Joint Lead Arrangers, and the Selling Agents and their respective affiliates accept no liability or responsibility whatsoever in respect of any difference between this electronic version of the Offering Circular made available to you and the hard copy version. You are reminded this Offering Circular has been delivered to you on the basis that you are a person into whose possession this Offering Circular may be lawfully delivered or made available in accordance with the laws of the jurisdiction in which you are located. You are responsible for protecting against viruses and other destructive items. Your use of this electronic document is at your own risk and it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature.

PHILIPPINE BANK OF COMMUNICATIONS

(a banking corporation organized and existing under Philippine Laws)

P2,902,730,000 5.625% LONG-TERM NEGOTIABLE CERTIFICATES OF TIME DEPOSIT DUE 2024. ISSUE PRICE 100% OF FACE VALUE

Philippine Bank of Communications (“PBCOM”, the “Bank” or the “Issuer”) is offering P2,902,730,000 billion worth of Long-Term Negotiable Certificates of Time Deposit due 2024 (“LTNCDs”). The LTNCDs will bear fixed interest at the rate of 5.625% per annum from and Including 8 October 2018 up to but excluding 8 April 2024. The interest of LTNCDs for the entire term will be payable quarterly in arrears on 8 October, 8 January, 8 April and 8 July of each year, commencing on 8 January 2019. The LTNCDs will mature on 8 April 2024 (the “Maturity Date”). Subject as set out below and in “Terms and Conditions of the LTNCDs”, the LTNCDs may be redeemed, in whole but not in part only, at the option of the Issuer on the Pre-Termination Date, at 100% of the face value (as defined in “Terms and Conditions of the LTNCDs”) of the LTNCDs plus accrued and unpaid interest as of but excluding the Pre-Termination Date. In the event of the proper exercise of the Pre-Termination Option, the Issuer shall shoulder the taxes due, if any, on the interest income already earned by the CD Holders.

The LTNCDs will constitute direct, unconditional, unsecured and unsubordinated obligations of the Issuer. The LTNCDs shall, at all times, rank pari passu and ratably without any preference or priority amongst themselves, and at least pari passu with all other present and future direct, unconditional, unsecured, and unsubordinated obligations of the Bank, except for any obligation enjoying a statutory preference or priority established under Philippine laws. See “Terms and conditions of the LTNCDs — Status and PDIC Insurance”.

See “Investment Considerations” beginning on page 17 for a discussion of certain factors to be considered in connection with an investment in the LTNCDs.

The LTNCDs will be issued in scripless form and in minimum denominations of P50,000.00 and increments of P10,000.00 thereafter, or such other minimum denomination as may be prescribed or approved by the Bangko Sentral ng Pilipinas (“BSP”). The LTNCDs will be represented by a Master CD which will be deposited with the Registrar. It is intended that, upon issuance, the LTNCDs will be immobilized and lodged with the Registrar. A Registry Confirmation will be issued by the Registrar in favor of the holders of the LTNCDs in accordance with the regulations of the BSP. Once lodged, the LTNCDs will be eligible for electronic book-entry transfers in the Registry Book without the issuance of other evidences of certificates, and any sale, transfer, or conveyance of the LTNCDs shall be coursed through an accredited exchange. The LTNCDs will be listed in the trading platform of the Philippine Dealing & Exchange Corp. (“PDEx”) for secondary market trading pursuant to the BSP rules. Upon listing of the LTNCDs in the PDEx, investors shall course their secondary market trades through the trading participants of the PDEx for execution in the PDEx Trading Platform in accordance with the PDEx Trading Rules, Conventions and Guidelines, as these may be amended or supplemented from time to time, and shall settle such trades on a Delivery versus Payment (DvP) basis in accordance with PDEx Settlement Rules and Guidelines.

Joint Lead Arranger and, Bookrunners

Selling Agents

Final Offering Circular 8 October 2018

PBCOM LTNCDs due 2024 – Final Offering Circular

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The LTNCDs will be issued pursuant to General Banking Law of 2000 (Rep. Act No. 8791), BSP Circular No. 304 (Series of 2001) on Guidelines Governing the Issuance of Long-Term Negotiable Certificates of Time Deposit With a Minimum Maturity of Five Years as amended by BSP Circular No. 877 (Series of 2015) on Amendments to the Guidelines on the Issuance of Long-Term Negotiable Certificates of Time Deposits, BSP Circular No. 778 (Series of 2012) Amendments to the Qualification Requirements of Selling Agents and/or Market Makers of Long-Term Negotiable Certificates of Time Deposit and/or Unsecured Subordinated Debt; BSP Circular No. 810 (Series of 2013) on Amendments to the Guidelines Governing the Issuance of Long-Term Negotiable Certificate of Time Deposits, BSP Circular No. 824 (Series of 2014) on Amendment to the Regulations on Long-Term Negotiable Certificates of Time Deposits, BSP Circular No. 834 (Series of 2014) on Amendments to the Guidelines Governing the Issuance of Long-Term Negotiable Certificate of Time Deposits and Unsecured Subordinated Debt, Sections X233.9 of the Manual of Regulations for Banks (“MORB”), BSP Memorandum No. M-2014-034 (Series of 2014) on Availability of an Exchange for Long-Term Negotiable Certificates of Time Deposits, Monetary Board Resolution No. 1220 dated 26 July 2018 which authorized the Bank to issue up to P5.0 Billion worth of long-term negotiable certificates of time deposit in one or more issuances (the “BSP Approval”), and other related circulars and issuances of the BSP (the "BSP Rules"). The issuance of the LTNCDs is exempt from the registration requirement under the Securities Regulation Code pursuant to Section 9.1(e) of the said law. No offer or invitation or solicitation shall be made or received, and no agreement shall be made, on the basis of this document, to purchase or subscribe for any of the LTNCDs. The Bank confirms that this document contains all information with respect to the Bank and its subsidiaries and associates and the LTNCDs which is material in the context of the issue and offering of said LTNCDs, that the information contained herein is true and accurate in all material respects and is 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 LTNCDs, make this document as a whole or any such information or the expression of any such opinions or intentions misleading in any material respect and that all reasonable enquiries have been made by the Bank to verify the accuracy of such information. The Bank accepts responsibility accordingly. More information on the Bank can be accessed at www.pbcom.com.ph. In making an investment decision, you must rely on your own examination of the Bank and the terms of the offering of the LTNCDs, including the merits and risks involved. By receiving this Final Offering Circular (the “Offering Circular”), you acknowledge that (i) you have not relied on the Development Bank of the Philippine and/or ING Bank N.V., Manila Branch (“ING”) (the “Joint Lead Arrangers and Bookrunners”) or any person affiliated with the Joint Lead Arrangers and Bookrunners in connection with your investigation of the accuracy of any information in this Offering Circular or your investment decision, and (ii) no person has been authorized to give any information or to make any representation concerning the Bank or the LTNCDs other than as contained in this Offering Circular and, if given or made, any such other information or representation should not be relied upon as having been authorized by the Bank or the Joint Lead Arrangers and Bookrunners. No representation or warranty, express or implied, is made by the Joint Lead Arrangers and Bookrunners 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 the LTNCDs shall, under any circumstances, constitute a representation or create any implication that there has been no change in the affairs of the Bank since the date of this Offering Circular or that any information contained herein is correct as at any date subsequent to the date hereof. None of the Bank, the Joint Lead Arrangers and Bookrunners, Selling Agents or any of their respective affiliates or representatives is making any representation to any purchaser of LTNCDs regarding the legality of an investment by such purchaser under applicable laws. In addition, you should not construe the contents of this Offering Circular as legal,


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business or tax advice. You should be aware that you may be required to bear the financial risks of an investment in the LTNCDs for an indefinite period. You should consult with your own advisers as to the legal, tax, business, financial and related aspects of a purchase of LTNCDs. 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 LTNCDs must comply with all applicable laws and BSP rules in force in the jurisdiction in which it purchases or offers to purchase such LTNCDs, and must obtain the necessary consent, approval, or permission for its purchase, or offer to purchase such LTNCDs under the laws and BSP rules 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 Joint Lead Arrangers and Bookrunners shall have any responsibility thereof. Interested investors should inform themselves as to the applicable legal requirements under the laws and BSP rules of the countries of their nationality, residence, or domicile and as to any relevant tax or foreign exchange control laws and BSP rules that may affect them. See “Distribution and Sale”. CONVENTIONS WHICH APPLY TO THIS OFFERING CIRCULAR In this Offering Circular, unless otherwise specified or the context otherwise requires, all references to the “Philippines” are references to the Republic of the Philippines. All references to the “Government” herein are references to the Government of the Philippines. All references to “United States” or “U.S.” herein are to the United States of America. All references to “Peso” and “P” herein are to the lawful currency of the Philippines and all references to “U.S. dollars” or “US$” herein are to the lawful currency of the United States. Unless otherwise indicated, the description of the Bank’s business activities in this Offering Circular is presented on a consolidated basis. For further information on the Bank, see “Description of the Bank — Subsidiaries and Associates”.


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TABLE OF CONTENTS

OFFERING CIRCULAR SUMMARY ........................................................................................................................... 6 SUMMARY OF FINANCIAL INFORMATION ............................................................................................................. 9 MANAGEMENT DISCUSSION AND ANALYSIS ......................................................................................................... 15 INVESTMENT CONSIDERATIONS ........................................................................................................................... 17 USE OF PROCEEDS ................................................................................................................................................. 33 CAPITALIZATION AND INDEBTEDNESS ................................................................................................................. 34 TERMS AND CONDITIONS OF THE LNTCDS ........................................................................................................... 35 DESCRIPTION OF THE BANK .................................................................................................................................. 51 ASSETS AND LIABILITIES ........................................................................................................................................ 57 MANAGEMENT, EMPLOYEES AND SHAREHOLDERS .............................................................................................. 77 THE PHILIPPINE BANKING SECTOR ....................................................................................................................... 85 BANKING REGULATIONS AND SUPERVISION ........................................................................................................ 87 TAXATION .............................................................................................................................................................. 94 OFFER PROCEDURE ................................................................................................................................................ 97


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OFFERING CIRCULAR SUMMARY This summary highlights information contained elsewhere in this Offering Circular. This summary is qualified in its entirety by, and must be read in conjunction with, the more detailed information and financial statements, including notes thereto, appearing elsewhere in this Offering Circular. You should read this entire Offering Circular carefully, including the Group’s consolidated financial statements and related notes and “Investment Considerations”. OVERVIEW PHILIPPINE BANK OF COMMUNICATIONS (“PBCOM” or the “Bank” or the “Issuer”) is a commercial bank based in the Philippines with a wide range of products and services to clients. These include basic commercial banking services such as deposit products, credit and loan facilities, trade-related services, treasury products, cash management services and trust and investment management services. As of 31 March 2018, based on the statements of condition posted in the Bangko Sentral ng Pilipinas (“BSP”) website, PBCOM is the 20

th largest bank, under the Universal and Commercial Banking category, in the country in terms of asset with

a total asset size P98.4 Billion and in terms of deposits, with total deposits of ₱73.3bn. History and Recent Developments PBCOM was incorporated as one of the earliest non-American foreign banks in the country on 23 August 1939. It received the authority to engage in commercial banking from the then Bureau of Banking of the Department of Finance under the Philippine Commonwealth, with a capitalization of Two Million Pesos. The Bank commenced operations on September 4, 1939. However, its operations were temporarily interrupted during World War II, but were reconstituted in 1945 through the infusion of fresh funds. The Bank came under full Filipino ownership in 1974 when a group of industrialists led by Ralph Nubla Sr. bought majority of the Bank’s outstanding shares. The Bank is a registered government securities dealer, having been granted the license on 14 December 1981. It also has a Trust license which was approved on 24 August 1961. PBCOM acquired a license to operate as an expanded commercial bank from the Bangko Sentral ng Pilipinas (“Bangko Sentral” or “BSP”) on 24 December 1993 and operated as such until the year 2000. In order to focus on its core strengths and maximize utilization of available resources, the Bank applied for the conversion of its expanded commercial bank license into a regular commercial banking license which was approved by the Monetary Board of the BSP on 31 March 2000. PBCOM has since opted to capitalize on its core strength by focusing on and pursuing traditional commercial banking operations. In December 2000, the Bank acquired 100% of Consumer Savings Bank as part of its strategy to expand its consumer banking business. On 26 July 2011, the major shareholders of the Bank, namely the Chung, Luy, and Nubla Groups, signed a Memorandum of Agreement (“MOA”) with a group of investors led by ISM Communications Corporation (the “ISM Group”), involving the sale of their entire stake in the Bank to the ISM Group and the commitment of the Chung and Nubla groups to reinvest the proceeds of the sale of their respective shares amounting to approximately P2.8 Billion in the Bank. The ISM Group is a listed Philippine holding company with investments in the production and sale of media information systems for the hospitality industry and development of software and hardware internet solutions under its associate, Acentic Holdings Limited. ISM is led by its Chairman, Mr. Eric O. Recto. It is owned by Monfortino Holdings, Inc., Dennison Holdings Corporation, Accion Common Development Fund SPC and as well as other strategic partners. On 13 October 2011, the Monetary Board approved the acquisition of PBCOM by the ISM Group. On 23 December 2011, the acquisition by the ISM Group of a controlling interest in the Group was successfully transacted through the facilities of the Philippine Stock Exchange. On 27 December 2011, the Chung and Nubla Groups reinvested P2.4 Billion as deposits for future subscription of PBCOM shares of stock. Another P0.4 Billion was deposited in March 2012 and additional P22 Million in April 2012 to complete their commitment of


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approximately P2.8 Billion. On 31 May 2012, the LFM Properties Group deposited P0.7 Billion for future subscription to PBCOM shares of stock. Another P30 Million was subsequently deposited by the LFM Properties Group on 24 October 2012. On 8 February 2013, the BSP issued a Certificate of Authority to the Group for it to register its Amended Articles of Incorporation and Amended By-Laws with the SEC. On 8 March 2013, the Group obtained approval from the Securities and Exchange Commission (“SEC”) for a quasi-reorganization and an increase in authorized capital stock. The Articles of Incorporation was amended to implement the following:

a. Reclassification of the Bank’s existing 120,000,000 preferred shares to common shares; b. Reduction of the par value of all its common shares from P100 per share to P25 per share; and c. Increase in authorized capital stock to P19,000,000,000 divided into 760,000,000 common shares with a par value of P25

per share. The reclassification of the said preferred shares to common shares took effect on 19 March 2013. On December 2013, the Bank received the approval of both the BSP and SEC to apply P3.94 Billion in Additional Paid-in Capital (“APIC”) to partially wipe out the bank’s outstanding deficit. On 26 March 2014, the Bank exited from the 10-year Financial Assistance Agreement with the Philippine Deposit Insurance Corporation (“PDIC”) by settling the loan of P7.6 Billion provided by PDIC as financial assistance to the Bank in 2004. The subscription by P.G. Holdings (“PGH”) to the new PBCOM shares amounting to P6.0 Billion was approved by the BSP on 23 September 2014. The first installment of P1.8 Billion was paid by PGH on 25 September 2014. Subsequently on 1 October 2014, VFC Land Resources Inc. (VFC) bought P1.95 Billion PBCOM shares from ISM Communications Corporation. PGH and VFC are beneficially owned by the Co Family. On 11 September 2017, PGH paid the last installment of its subscribed shares, amounting to P1.4 Billion, the same amount paid to the Bank on 22 September 2015 and 29 June 2016. Key Businesses PBCOM offers a wide range of products and services to clients. These include basic commercial banking services such as deposit products, credit and loan facilities, trade-related services, treasury products, cash management services and trust and investment management services. Deposit products and services include peso and dollar savings, checking and time deposit accounts, ATM accounts, foreign and domestic remittance services, cash management services such as deposit pick-up and cash delivery, payroll and check-writing services. Ancillary services such as safety deposit boxes and manager’s checks, demand drafts and acceptance of tax payments are also available. These products are offered on a retail basis to individuals and to corporate clients as well. Credit and loan facilities include working capital financing, post-dated check discounting, as well as specialized lending programs such as mortgage and contract-to-sell financing. Structured Products including trade financing were introduced in August 2005. The Bank continues to see the potential of the expanding consumer market. In 2012, the Bank launched home and auto loans while the personal loan product was launched in April 2013. Trade-related services include import LCs, standby LCs, credit bank guaranty and shipside bond, export LC advising, export packing credits & export bills negotiation and collections, trade financing of receivables and payables, domestic LCs and trust receipt financing. These services are financing facilities offered to importers and exporters. Treasury products include dealership and brokering of government securities and commercial papers, both domestic and international, deposit substitutes like promissory notes and repurchase agreements, foreign exchange proprietary trading and commercial client servicing.


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Trust services include investment management services, personal trust funds, escrow agency services, employee benefit trust services and estate planning. Distribution Channels As of 30 June 2018, the Bank’s liability and ancillary products and services are distributed primarily through its 117 branches (including Banco Dipolog, Inc., A Rural Bank). These branches are supported by a network of 147 automated teller machines deployed in strategic branch sites including 67 off-site locations. PBCOM clients may also access and conduct its transactions through the Bank’s Internet and Mobile Banking facilities, which the BSP approved for launching last 21 June 2017 and 28 September 2017, respectively. Competition As of end 2017, the Philippine commercial banking industry is composed of 20 commercial banks (KB) of which 5 are private domestic commercial banks and 15 are foreign banks with either established subsidiaries or foreign branch licenses. Customer Base PBCOM has nurtured and grown a strong core clientele in the Filipino-Chinese community over the years and this has become a significant market for the Bank. Today, the Filipino-Chinese market continues to be its major customer base despite the Bank’s recent success in expanding into other markets where the larger universal banks dominate. The Bank continues to strengthen its presence in the middle market by focusing on the products that will address the needs of these customers. Subsidiaries and Affiliates The Bank acquired two rural banks in 2014 -- the Rural Bank of Nagcarlan Inc. (“RBNI”) on July 28, 2014 and Banco Dipolog, Inc., A Rural Bank (“BDI”) on September 8, 2014. When the Bank acquired BDI, the latter was in the process of acquiring another rural bank, the Rural Bank of Kabasalan (Zamboanga del Sur), Inc. (RBKI). RBNI was registered with the SEC on May 31, 1962 and was authorized by the BSP on June 2, 1962 to engage in rural banking business. Its head office is located at 692 Jose Coronado St., Nagcarlan, Laguna and has 6 branches located in various cities and municipalities of Laguna. BDI was formally organized under the Corporation Code of the Philippines on October 17, 1957 and was the first bank established in Dipolog City and in the Zamboanga Peninsula. It is one of the leading rural banks in Southern Philippines. To capitalize on the strength of its rural banks, PBCOM directed the merger of BDI, RBNI and RBKI, with BDI as the surviving entity. The SEC approved the Articles and Plan of Merger by and among BDI, RBKI and RBNI last December 11, 2017. The merger of the three entities brought BDI’s network to 19 branches and 9 branch lite locations. On July 9, 2018, the SEC approved the change of corporate name of BDI to PBCOM Rural Bank, Inc. to enable the Bank’s rural bank subsidiary to benefit from its parent bank’s goodwill. The Bangko Sentral ng Pilipinas (BSP) subsequently gave its authorization for the change of corporate name on July 27, 2018. Employees As of 30 June 2018, the Bank and BDI have a total of 1,547 employees with 823 officers and 724 rank and file employees. All rank and file employees of the Bank are covered by a collective bargaining agreement (CBA), negotiations for the most recent one having just been completed and signing scheduled for 21 September 2018. There had been neither dispute nor occurrence of employees’ strike for the past years.


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SUMMARY OF FINANCIAL INFORMATION The following tables provide selected financial information of the Group which has been derived from its audited consolidated financial statements as of and for the years ended 31 December 2017, 2016, and 2015 and unaudited interim consolidated financial statements of the Group as of and for the six months ended 30 June 2018 and 2017, were prepared in accordance with Philippine Financial Reporting Standards (PFRS).

Statements of Income (Audited)

For the years ended

31 December

(in Php thousands) 2015 2016 2017

INTEREST INCOME Loans and receivables P2,597,337 P2,902,068 P3,215,921 Investment securities 628,963 676,016 690,658 Interbank loans receivable and securities purchased under resale agreements 11,431 19,073 38,905 Deposits with other banks 61,835 37,583 15,826

3,299,566 3,634,740 3,961,310

INTEREST AND FINANCE CHARGES Deposit liabilities 869,926 861,401 834,585 Bills payable, borrowings and others 103,672 177,385 225,167

973,598 1,038,786 1,059,752

NET INTEREST INCOME 2,325,968 2,595,954 2,901,558 Rent income 404,072 474,213 563,259 Service charges, fees and commissions 426,556 363,635 362,842 Fair value gain from investment properties 941,728 286,404 353,992 Foreign exchange gain – net 10,200 11,474 69,787 Income from trust operations 18,300 16,864 15,404 Trading and securities gain (loss) - net (40,465) 48,339 (13,243) Profit from assets sold 5,335 (7,316) 11,953 Gain on asset exchange – net 3,702 12,170 5,487 Gain on reclassification of investment securities from amortized cost to fair value through profit and loss - 198,700 - Gain on disposal of investment securities at amortized cost 48,174 - - Miscellaneous 90,827 51,071 121,066

TOTAL OPERATING INCOME 4,234,397 4,051,508 4,392,105

OPERATING EXPENSE Compensation and fringe benefits 1,344,158 1,181,173 1,162,952 Taxes and licenses 435,777 406,471 457,442 Provision for credit and impairment losses - net 443,802 477,968 338,495 Depreciation and amortization 290,531 345,578 326,915 Occupancy and other equipment-related costs 217,691 184,412 224,351 Insurance 128,052 126,452 131,050 Management and professional fees 162,627 150,628 108,090 Security, clerical, messengerial and janitorial services 99,563 84,980 94,006 Entertainment, amusement and recreation 62,879 77,515 82,364 Communications 67,378 58,180 55,852 Miscellaneous 292,389 323,713 369,939

TOTAL OPERATING EXPENSES 3,544,847 3,417,070 3,351,456

INCOME BEFORE SHARE IN NET INCOME OF AN ASSOCIATE 689,550 634,438 1,040,649 SHARE IN NET INCOME OF AN ASSOCIATE 468 263 692


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Statements of Income (Audited)

For the years ended

31 December


INCOME BEFORE INCOME TAX 690,018 634,701 1,041,341 PROVISION FOR INCOME TAX 486,336 234,821 322,639

NET INCOME P203,682 P399,880 P718,702

Attributable to: Equity holders of the Parent Company P203,301 P400,052 P718,699 Non-controlling interest 381 (172) 3

P203,682 P399,880 P718,702

Statement of Financial Position (Audited) As of 31 December


ASSETS Cash and Other Cash Items P1,343,340 P1,042,611 P974,207 Due from Bangko Sentral ng Pilipinas 11,909,774 13,356,075 15,340,711 Due from Other Banks 2,008,522 2,996,758 1,166,063 Interbank Loans Receivable 229,281 310,131 534,925 Financial Assets at Fair Value Through Profit or Loss 395,258 300,483 2,740,471 Financial Assets at Fair Value through Other Comprehensive Income 44,452 52,242 90,639 Investment Securities at Amortized Cost 14,468,390 13,135,494 15,417,201 Loans and Other Receivables 36,502,141 46,089,437 53,352,967 Investments in Subsidiaries and an Associate 12,113 12,376 13,068 Property and Equipment

At Cost 1,271,792 1,130,034 955,106 At Appraised Value 519,010 519,010 518,482 Investment Properties Condominium units for lease 4,799,635 5,044,552 5,365,080 Foreclosed properties 880,234 957,000 1,020,710 Office units for lease 19,142 23,858 50,343 Goodwill 178,456 178,456 182,227 Intangible Assets 824,816 781,166 744,179 Deferred Tax Assets - net 49,545 59,717 55,928 Other Assets 620,415 509,333 697,943

TOTAL ASSETS P76,076,316 P86,498,733 P99,220,250

LIABILITIES AND EQUITY LIABILITIES Deposit Liabilities Demand P12,523,472 P15,464,230 P19,400,193 Savings 5,054,764 6,943,767 8,329,526 Time 40,724,117 40,737,984 43,006,098

58,302,353 63,145,981 70,735,817 Bills Payable 6,481,620 10,099,384 12,567,399 Outstanding Acceptances 42,065 34,357 64,085 Manager's Checks 108,914 300,385 427,405 Accrued Interest, Taxes and Other Expenses 539,185 414,575 421,666 Income Tax Payable 29,774 240 13,458 Deferred Tax Liabilities - net 1,033,544 1,105,523 1,228,855


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Statement of Financial Position (Audited) As of 31 December


Other Liabilities 614,838 616,552 831,201

TOTAL LIABILITIES 67,152,293 75,716,997 86,289,886

EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT COMPANY Common stock P7,489,114 P7,489,114 P12,016,129 Subscribed common stock - net 3,187,019 4,581,340 - Additional paid-in capital 813,601 813,515 2,252,826 Surplus reserves 105,772 105,772 105,824 Deficit (2,745,295) (2,345,243) (1,626,290) Unrealized gain on equity securities carried at fair value through other comprehensive income 25,831 33,621 64,104 Revaluation increment on land, office units and condominium properties 280,228 280,228 301,846 Cumulative translation adjustment (52,394) (72,739) (122,263) Remeasurement losses on retirement liability (172,665) (95,679) (61,868)

8,931,211 10,789,929 12,930,308 NON-CONTROLLING INTERESTS (7,188) (8,193) 56

TOTAL EQUITY 8,924,023 10,781,736 12,930,364

TOTAL LIABILITIES AND EQUITY P76,076,316 P86,498,733 P99,220,250

Statements of Income

For the Six-Months

Ended June 30

2017

(Restated) 2018

(Unaudited)

INTEREST INCOME Loans and other receivables P1,523,616 P1,844,288 Investment securities 387,311 324,867 Interbank loans receivable and securities purchased under resale agreements 22,012 26,415 Deposits with other banks 8,412 5,110

1,941,351 2,200,680

INTEREST AND FINANCE CHARGES Deposit liabilities 389,009 523,372 Bills payable, borrowings and others 107,806 156,300

496,815 679,672

NET INTEREST INCOME 1,444,536 1,521,008 Rent income 279,135 314,582 Service charges, fees and commissions 171,507 175,817 Foreign exchange gain - net 31,559 15,014 Income from trust operations 7,839 7,488 Trading and securities gain (loss) - net (10,316) 31,041 Profit (loss) from assets sold 10,975 56,079 Gain on assets exchange - net 836 7,286 Miscellaneous 79,390 59,938

TOTAL OPERATING INCOME 2,015,461 2,188,253

OPERATING EXPENSE Compensation and fringe benefits 577,190 582,617


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Statements of Income

For the Six-Months

Ended June 30

2017

(Restated) 2018

(Unaudited)

Taxes and licenses 223,863 292,889 Provision for credit and impairment losses - net 81,468 127,502 Depreciation and amortization 204,727 197,780 Occupancy and other equipment-related costs 117,400 126,361 Insurance 66,198 70,511 Management and professional fees 58,744 52,984 Security, clerical, messengerial and janitorial services 45,075 53,516 Entertainment, amusement and recreation 40,205 41,391 Communications 28,046 27,868 Miscellaneous 181,756 186,506

TOTAL OPERATING EXPENSES 1,624,672 1,759,925

INCOME BEFORE SHARE IN NET INCOME OF AN ASSOCIATE 390,789 428,328 SHARE IN NET INCOME OF AN ASSOCIATE 113 104

INCOME BEFORE INCOME TAX 390,902 428,432 PROVISION FOR INCOME TAX 99,789 115,986

NET INCOME P291,113 P312,446

Attributable to: Equity holders of the Parent Company P290,993 P312,439 Non-controlling interest 120 7

P291,113 P312,446

Statement of Financial Position

(in Php thousands) 31 December

2017 30 June 2018

(As restated) (Unaudited)

ASSETS Cash and Other Cash Items P974,207 P973,542 Due from Bangko Sentral ng Pilipinas 15,340,711 15,003,245 Due from Other Banks 1,166,063 629,203 Interbank Loans Receivable and Securities Purchased Under Resale Agreements 534,925 1,089,537 Financial Assets at Fair Value Through Profit or Loss 2,740,471 293,491 Investment Securities at Fair Value through Other Comprehensive Income 90,639 3,448,781 Investment Securities at Amortized Cost 15,417,201 13,640,854 Loans and Other Receivables 53,352,967 56,869,223 Investments in an Associate 13,068 13,172 Property and Equipment 1,108,869 1,058,448 Investment Properties Condominium units for lease 1,883,696 1,858,029 Foreclosed properties 736,539 789,993 Office units for lease 3,999 3,824 Goodwill 182,227 182,227 Intangible Assets 744,179 724,693 Deferred Tax Assets 123,566 104,291 Other Assets 697,943 815,745

TOTAL ASSETS P95,111,270 P97,498,298


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Statement of Financial Position

(in Php thousands) 31 December

2017 30 June 2018

(As restated) (Unaudited)

LIABILITIES AND EQUITY LIABILITIES Deposit Liabilities Demand P19,400,193 P21,039,814 Savings 8,329,526 8,030,627 Time 43,006,098 45,179,054

70,735,817 74,249,495 Bills Payable 12,567,399 11,518,569 Outstanding Acceptances 64,085 54,376 Manager's Checks 427,405 371,902 Accrued Interest Taxes and Other Expenses 421,666 570,460 Income Tax Payable 13,458 22,863 Deferred Tax Liabilities 107,070 107,005 Other Liabilities 831,201 776,239

TOTAL LIABILITIES 85,168,101 87,670,909

EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT COMPANY Common stock P12,016,129 P12,016,129 Additional paid-in capital 2,252,826 2,252,826 Surplus reserves 105,824 105,824 Deficit (4,311,609) (4,302,158) Unrealized gain on equity securities carried at fair value through other comprehensive income 64,104 (10,275) Cumulative translation adjustment (122,263) (176,720) Remeasurement losses on retirement liability (61,868) (58,265)

9,943,143 9,827,361 NON-CONTROLLING INTERESTS 26 28

TOTAL EQUITY 9,943,169 9,827,389

TOTAL LIABILITIES AND EQUITY P95,111,270 P97,498,298

Selected Financial Ratios

For the Year ended December 31

For the Six-Months ended

June 30

(in % except for Earnings per Share) 2015

(Audited) 2016

(Audited) 2017

(Audited) 2018

(Unaudited)

(1) Return on Average Assets 0.28 0.49 0.77 0.32 (2) Return on Average Equity 2.52 4.06 6.06 3.16 (3) Net Interest Margin on Average Earning Assets 4.32 4.42 4.26 2.04 (4) Tier 1 Capital Ratio 11.54 11.61 12.95 12.25 (5) Total Capital Ratio 14.97 14.67 15.85 15.01 (6) Earnings per share P0.68 P1.34 P2.00 P0.65


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(1) Net income divided by average total assets for the period indicated. Average total assets are based on outstanding balances at the beginning and end of the period divided by two. Restated figures were used in the computation for 30 June 2018.

(2) Net income divided by average total equity for the period indicated. Average total equity is based on outstanding balances at the beginning and end of the period divided by two. Restated figures were used in the computation for 30 June 2018.

(3) Net interest income divided by average interest-earning assets. Average interest earning assets are based on outstanding balances at beginning and end of the period divided by two. (Due from BSP Special Deposit Account and Overnight Deposit Facility, Due from Other Banks, Interbank Loans Receivable, Financial Assets at Fair Value through Profit or Loss, Investment Securities at Amortized Cost, Debt Financial Assets at FVOCI and Loans and Other Receivables.

(4) Total Tier 1 capital divided by total risk weighted assets as reported to the BSP. (5) Total qualifying capital divided by total risk-weighted assets, as reported to the BSP. (6) Net income divided by time-proportion average number of outstanding common share.

Source: PBCOM


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MANAGEMENT DISCUSSION AND ANALYSIS Analysis of Statement of Financial Position As of 30 June 2018 (Unaudited) and 31 December 2017 (Restated) Total assets of the Bank stood at P97.50 billion as of 30 June 2018, a 2.51% increase from the P95.11 billion level as of 31 December 2017 as it continues its growth track. Its loans and receivables books increased by P 3.52 billion or a 6.59% growth year-to-date. Deposit liabilities increased by P3.51 billion due to higher time and demand deposit levels. Discussion of Results of Operations For the six months ended 30 June 2018 (Unaudited) versus 30 June 2017 (Restated) For the first semester of year 2018, the Bank registered a net income of P312.45 million, a 7.33% growth versus the same period last year. The growth was primarily due to the increase in earnings from loans and receivables due to the expansion of the Bank’s loan books as well as higher margins from consumer loans. Other income contributors include higher rent income due to higher contract rates from renewals and sales from ROPA. Operating income grew by P172.79 million (or 8.57%) as the Bank sustains its business growth. Operating expense increased by 8.32% as the impact of the TRAIN Law increased taxes payable, mostly from documentary stamp tax, and increase in provision for credit and impairment losses. The Group's consolidated Risk-Based Capital Adequacy ratio is 15.10% as of June 2018 under BASEL III and is above the 10% minimum requirement. Comparative Highlights on Key Indications:

Ratio June 2018

(Unaudited)

December 2017

(Restated) Remarks

Liquidity Ratio (Liquid Assets to Total Deposits) Liquid Assets include cash, due from

banks, interbank loans, and trading and inv. Securities Total deposit refers to the

total peso and foreign currency deposits.

0.47 0.51 Ratio declined by 0.04 due to a higher deposit base

which increased by P3.51 billion

Debt Ratio (Total Liability to Total Assets)

0.90 0.90 Relatively flat as assets grew in line with liabilities.

Asset to Equity Ratio (Total Asset to Total Equity)

9.92x 9.57x The increase is due to growth in total assets

amounting to P2.39 billion

RATIO June 2018

(Unaudited)

June 2017

(Restated) Remarks

Return on Average Assets (Net Income divided by Average Assets)

0.32% 0.34% Higher net income during the current period outpaced the increase in average assets resulted in lower ROA.

Return on Average Equity (Net Income divided by Average Equity)

3.16% 3.54% Decrease is due to a combination of higher net income and average equity by 7.33% and 20.09%, respectively


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RATIO June 2018

(Unaudited)

June 2017

(Restated) Remarks

Net Profit Margin (Net Income divided by Operating Income)

14.28% 14.44% Ratio declined by 0.16% due primarily to higher DST with the enactment of the TRAIN Law and higher impairment losses

Interest Rate Coverage Ratio (Earnings before Interest Expense & Income Taxes over Interest Expense)

1.63x 1.79x The ratio declined due to the interest expense outpacing the income growth. The increase in cost of funds is mainly due to the overall increase in interest rates given a rising inflation backdrop

Net Interest Margin on Average Earning Assets (Net Interest Margin over Average Earning Assets)

2.04% 2.22% The slight drop by 0.18% is due to higher cost of funds, higher taxes payable due to the TRAIN Law and higher provisioning partially offsetting the growth in revenues


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INVESTMENT CONSIDERATIONS An investment in the LTNCDs involves a number of 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 LTNCDs. 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 LTNCDs could decline due to any one of these risks, and all or part of an investment in the LTNCDs could be lost.

Considerations Relating to the Philippines Substantially all of the Bank’s operations and assets are based in the Philippines and, therefore, a slowdown in economic growth in the Philippines could materially and adversely affect the Bank’s business, financial position and results of operations. Substantially all of the Bank’s business activities and assets are based in the Philippines, which exposes the Bank to risks associated with the country, including the performance of the Philippine economy. Historically, the Bank has derived substantially all of its revenues and operating profits from the Philippines and, as such, their businesses are highly dependent on the state of the Philippine economy. Demand for banking services, residential real estate, automotive, electricity and insurance are all directly related to the strength of the Philippine economy (including its overall growth and income levels), the overall levels of business activity in the country, as well as the amount of remittances received from OFWs and overseas Filipinos. Factors that may adversely affect the Philippine economy include:

decreases in business, industrial, manufacturing or financial activities in the Philippines, the Southeast Asian region or globally;

scarcity of credit or other financing, resulting in lower demand for products and services provided by companies in the Philippines, the Southeast Asian region or globally;

• exchange rate fluctuations and foreign exchange controls; • rising inflation or increases in interest rates; • levels of employment, consumer confidence and income; • changes in the Government’s fiscal and regulatory policies; • Government budget deficits, adverse trends in the current accounts and balance of payments of the Philippine economy;

re-emergence of Middle East Respiratory Syndrome-Corona virus (MERS-CoV), SARS, avian influenza (commonly known as bird flu), or H1N1, or the emergence of another similar disease (such as Zika) in the Philippines or in other countries in Southeast Asia;

• natural disasters, including but not limited to tsunamis, typhoons, earthquakes, fires, floods and similar events; • political instability, terrorism or military conflict in the Philippines, other countries in the region or globally; and • other regulatory, social, political or economic developments in or affecting the Philippines.

There can be no assurance that the Philippines will maintain strong economic fundamentals in the future. Changes in the conditions of the Philippine economy could materially and adversely affect the Bank’s business, financial condition and results of operations. Political instability in the Philippines could destabilize the country and may have a negative effect on the Bank’s businesses. The Philippines has from time to time experienced severe political and social instability. The Philippine Constitution provides that, in times of national emergency, when the public interest so requires, the Government may take over and direct the operation of any privately-owned public utility or business. In the last few years, there were instances of political instability, including public and military protests arising from alleged misconduct by the previous administration. The Philippine Presidential elections were held on 9 May 2016 and on 30 June 2016. President Rodrigo Duterte assumed the presidency with a mandate to advance his “Ten-Point Socio-Economic Agenda” focusing on policy continuity, tax reform, infrastructure spending and countryside development, among others. The Duterte government has initiated efforts to build peace with communist rebels and other separatists through continuing talks with these groups. The shift to the federal-parliamentary form of government is likewise targeted to be achieved in two years.


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Last 23 May 2017, President Duterte issued Proclamation No. 216 declaring a state of martial law in the Mindanao group of islands for a period not exceeding sixty (60) days and suspending the privilege of the writ of habeas corpus in the aforesaid area during the duration of the martial law. The President issued this proclamation in response to the alleged attempt of a certain Maute terrorist group, which is said to have links to the Islamic State of Iraq and Syria (ISIS) terrorist group, to remove from the allegiance of the Philippine government the province of Marawi City in Lanao del Sur thereby depriving the President of his powers and prerogatives to enforce the laws of the land and maintain public order and safety in Mindanao. Currently, the same group continues to sow terror, cause death and damage to property in this part of Mindanao. Proclamation No. 216 was immediately met with criticism from different sectors of society because of Congress’ refusal to convene to review the propriety of the declaration as required by Article VII, Section 18 of the 1987 Constitution. Moreover, anti-martial law groups are questioning the coverage of the proclamation as, according to them, the declaration is too expansive and not limited to the area of the actual conflict and that the presence of an actual rebellion is still questionable. Presently, the Supreme Court is conducting the presentation of oral arguments in relation to the petition to nullify the declaration of martial law in Mindanao by the President. There can be no assurance that the current administration will continue to implement social and economic policies favored by the previous administration. Major deviation from the policies of the previous administration or fundamental change of direction, including with respect to Philippine foreign policy, may lead to an increase in political or social uncertainty and instability. Any potential instability could have an adverse effect on the Philippine economy, which may impact the Bank’s businesses, prospects, financial condition and results of operations. Acts of terrorism could destabilize the country and could have a material adverse effect on the Bank’s business, financial position 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. 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 can be no assurance that the Philippines will not be subject to further acts of terrorism and violence in the future. Terrorist attacks have, in the past, had a material adverse effect on investment and confidence in, and the performance of, the Phil ippine economy and, in turn, the Bank’s business. Any terrorist attack or violent acts arising from, and leading to, instability and unrest, could cause interruption to parts of the Bank’s businesses and materially and adversely affect the Bank’s financial conditions, results of operations and prospects. Unresolved international disputes with neighboring countries may cause disruption and destabilization in the Philippines. Specifically, the Philippines is currently locked in an international dispute with China due to conflicting claims of sovereignty over Scarborough Shoal. China bases its claim on historical ownership, while the Philippines supports its claim by asserting that Scarborough Shoal is located 124 nautical miles west of Zambales, and therefore it is part of the 200-nautical mile exclusive economic zone (EEZ) and continental shelf of the Philippines. The Philippines also asserts its rights on the United Nations Convention on the Law of the Sea. The Permanent Court of Arbitration in Hague has ruled in favor of the Philippines over territorial disputes in the South China Sea in July 2016. However, the issue is far from being resolved as China neither acknowledged nor accepted the ruling on the basis that the tribunal has no jurisdiction over sovereign-related matters. To date, there has been no resolution of this issue as talks between the involved parties dubbed cordial, at best. Should territorial disputes between the Philippines and other countries in the region continue or escalate further, the Philippines and its economy may be disrupted, and the Bank’s operations could be adversely affected as a result. In particular, further disputes between the Philippines and other countries may lead to reciprocal trade restrictions on the other’s imports or suspension of visa-free access and/or overseas Filipinos permits. Any impact from these disputes in countries in which the Bank has operations could materially and adversely affect the Bank’s business, financial condition and results of operations.


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The sovereign credit ratings of the Philippines may adversely affect the Bank’s business. The sovereign credit ratings of the Philippines directly affect companies residing and domiciled in the Philippines as international credit rating agencies issue credit ratings by reference to that of the sovereign. In 2013, the Philippines earned investment grade status from all three major credit ratings agencies — Fitch (BBB-), Standard and Poor’s (BBB-) and Moody’s (Baa3). In 2014, S&P and Moody’s upgraded their ratings to “BBB” and “Baa2” in May and December, respectively, with both agencies affirming these ratings in 2015. In December 2017, Fitch upgraded the country’s rating to BBB, with a stable outlook, on strong economic conditions and planned tax reform, while S&P raised its outlook to Positive from Stable last April 2018. All ratings are a notch above investment grade and the highest that the country has received so far from any credit ratings agency. International credit rating agencies issue credit ratings for companies with reference to the country in which they reside. As a result, the sovereign credit ratings of the Philippines directly affect companies that reside in the Philippines, such as the Bank. There is no assurance that Fitch, Moody’s, S&P or other international credit rating agencies will not downgrade the credit rating of the Philippines in the future. Any such downgrade could have a material adverse effect on liquidity in the Philippine financial markets and the ability of the Philippine government and Philippine companies, including the Bank, to raise additional financing, and will increase borrowing and other costs. An increase in interest rates could decrease the value of the Bank’s securities portfolio and raise the Bank’s funding costs. At the last Monetary Board meeting on 9 August 2018, the BSP raised its key policy rates by 50 basis points to 4.0% for overnight borrowing and 4.5% for overnight lending. Policy interest rates may be further increased in the future as price pressures build from domestic as well as external factors. The Bank realizes income from the margin between income earned on its interest-earning assets and interest paid on its interest-bearing liabilities. As some of its assets and liabilities are re-priced at different times, the Bank is vulnerable to fluctuations in market interest rates and any changes in the liquidity of the Philippine market. As a result, volatility in interest rates could have a material adverse effect on the Bank’s financial position, liquidity and results of operations. An increase in interest rates could lead to a decline in the value of securities in the Bank’s portfolio and the Bank’s ability to earn trading gains as revenue. A sustained increase in interest rates will also raise the Bank’s funding costs without a proportionate increase in loan demand (if at all). Rising interest rates will therefore require the Bank to re-balance its assets and liabilities in order to minimize the risk of potential mismatches and maintain its profitability. In addition, rising interest rate levels may adversely affect the economy in the Philippines and the financial position and repayment ability of its corporate and retail borrowers, which in turn may lead to a deterioration of the Bank’s credit portfolio in addition to lower levels of liquidity in the system which may lead to an increase in the cost of funding. Uncertainties and instability in global market conditions could adversely affect the Bank’s business, financial condition, and results of operations. Global markets have experienced, and may continue to experience, significant dislocation and turbulence due to economic and political instability in several areas of the world. These ongoing global economic conditions have led to significant volatility in capital markets around the world, including Asia, and further volatility could significantly impact investor risk appetite and capital flows into emerging markets including the Philippines. In 2015, the effect of the devaluation of the Renminbi by the People’s Republic of China (“PRC”), coupled with the slowing of economic growth in various regions around the world, have had an impact on the prospective economic growth in the global financial markets and downward pressure on equity prices. Moreover, the continued appreciation of the U.S. dollar relative to a number of emerging economy currencies (including the Peso) in 2016 resulted in capital outflows from these economies. Meanwhile, the three-year bailout granted by the Eurozone leaders in August 2015 provided Greece a temporary relief from the liquidity pressure at that time, but concerns remain on whether the Greek government will be successful in implementing the proposed austerity measures and necessary economic reforms to satisfy the conditions of the bailout and its creditors.


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Further, economic conditions in some Eurozone sovereign states could possibly lead to these member states re-negotiating or restructuring their existing debt obligations, which may lead to a material change in the current political and/or economic framework of the European Monetary Union. One potential change that may result from the crisis is an end to the single-currency system that prevails across much of Europe, with some or all European member states reverting to currency forms used prior to adoption of the euro. The crisis could also lead to the restructuring or breakup of other political and monetary institutions within the European Union. The risk may have been exacerbated by the referendum on membership of the European Union, held in the United Kingdom (“UK”) on 23 June 2016, where the public voted in favor of leaving the European Union. If the other certain states within the Eurozone were to exit the European Union, or following the occurrence of such other reform as contemplated herein, such countries may not be able to meet their existing debt obligations or may default on these obligations, which could have a ripple effect across sovereign states and the private sector in Europe and the rest of the world and possibly lead to a global economic crisis. Any changes to the euro currency could also cause substantial currency readjustments across Europe and other parts of the world, further exacerbating the credit crisis. These events and uncertainties could adversely impact the Bank’s business, financial condition and results of operations. The broad ramifications of “Brexit” to the UK, the EU and the global economy have yet to unravel, casting uncertainty to global prospects and possible volatility in financial markets. In addition, the uneven and divergent conditions across major economies and the resulting desynchronization in policy environment persist, with the US continuing to show firmer signs of economic growth and possible monetary tightening in the horizon, while Japan and the Eurozone require more economic stimulus and unconventional monetary measures (e.g., negative interest rates) to revive their economies. Likewise putting a downside risk to the global outlook are the protracted economic slowdown in China, the ongoing geopolitical crises that include among others, Syrian civil war and terrorist acts committed by the Islamic State of Iraq and the Levant (“ISIS”). The global trade tensions resulting from US trade policies can already be seen as adversely affecting the global market. There can be no assurance that the uncertainties affecting global markets will not negatively impact credit markets in Asia, including in the Philippines. The success of the Bank’s banking business is highly dependent upon its ability to maintain certain minimum liquidity levels, and any rise in market interest rates could materially and adversely affect the Bank’s liquidity levels and force it to reduce or cease its offering of certain banking and other financial services. These developments may adversely affect trade volumes with potentially negative effects on the Philippines. Corporate governance and disclosure standards in the Philippines may differ from those in more developed countries. Although a principal objective of Philippine securities laws and The Philippine Stock Exchange’s (PSE) listing rules is to promote full and fair disclosure of material corporate information, there may be less publicly available information about Philippine public companies, such as the Bank, than is regularly made available by public companies in the U.S. and other countries. As a result, LTNCD Holders may not have access to the same amount of information or have access to information in as timely of a manner as may be the case for companies listed in the U.S. and many other jurisdictions. Furthermore, although the Bank complies with the requirements of the Philippine SEC with respect to corporate governance standards, these standards may differ from those applicable in other jurisdictions. For example, the Securities Regulation Code of the Philippines (Republic Act No. 8799) (the SRC) requires the Bank to have at least two independent Directors or such number of independent Directors as is equal to 20.0% of the Board, whichever is the lower number. The Bank currently has five independent Directors. Many other jurisdictions may require more independent directors. Furthermore, corporate governance standards may be different for public companies listed in the Philippine securities markets than for securities markets in developed countries. Rules and policies against self-dealing and regarding the preservation of LTNCD Holder interests may be less defined and enforced in the Philippines than elsewhere, putting LTNCD Holders at a potential disadvantage. Because of this, the directors of Philippine companies may be more likely to have interests that conflict with the interests of LTNCD Holders, which may result in them taking actions that are contrary to the interests of LTNCD Holders.


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Natural or other catastrophes, including severe weather conditions, may adversely affect the Bank’s business materially disrupt the Bank’s operations and result in losses not covered by its insurance. The Philippines has experienced a number of major natural catastrophes over the years, including typhoons, droughts, volcanic eruptions and earthquakes. There can be no assurance that the occurrence of such natural catastrophes will not materially disrupt the Bank’s operations. These factors, which are not within the Bank’s control, could potentially have significant effects on the Bank’s branches and operations. While the Bank carries insurance for certain types of catastrophic events, in amounts and with deductibles that the Bank believes are in line with general industry practices in the Philippines, there are losses for which the Bank cannot obtain insurance at a reasonable cost or at all. The Bank also does not carry any business interruption insurance. Should an uninsured loss or a loss in excess of insured limits occur, the Bank could lose all or a portion of the capital invested in such business, as well as the anticipated future turnover, while remaining liable for any costs or other financial obligations related to the business. Any material uninsured loss could materially and adversely affect the Bank’s business, financial condition and results of operations.

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 and other capital resources, a greater market share and greater brand name recognition than the Bank. The mergers and consolidations in the banking industry, as well as the liberalization of foreign ownership regulations in banks, have allowed the emergence of foreign and bigger local banks in the market. For example, there has been increased foreign bank participation in the Philippines following the Monetary Board’s lifting of the ban on granting of new licenses, as well as the amendment of banking laws with respect to the limit on the number of foreign banks. This has led to Sumitomo Mitsui Banking Corporation, Cathay United Group, Industrial Group of Korea, Shinhan Group, Yuanta Group and United Overseas Group being granted new licenses, and also equity investments by Group of Tokyo-Mitsubishi UFJ into Security Group, Cathay Life into Rizal Commercial Banking Corporation and Woori Group into Wealth Development Group. In addition, the establishment of the ASEAN Economic Community in 2015 may enhance cross border flows of financial services (in addition to goods, capital, and manpower) among member nations and potentially increase the level of competition both from Philippine banks and branches of international banks. This may impact the Philippine banks’ operating margins, but this would also enhance the industry’s overall efficiency, business and service delivery. As of 31 March 2018, according to data from the BSP, there were a total of 43 domestic and foreign universal and commercial banks operating in the Philippines. In the future, the Bank may face increased competition from financial institutions offering a wider range of commercial banking services and products, larger lending limits, greater financial resources and stronger balance sheets than the Bank. Increased competition may arise from:

• Other large Philippine banks and financial institutions with significant presence in Metro Manila and large country-wide branch networks;

• Full entry of foreign banks in the country through any of the following modes allowed under Republic Act No. 10641 (approved on 15 July 2014): (a) the acquisition, purchase or ownership of up to 100% of the voting stock of an existing bank; (b) investment of up to 100% of the voting stock in a new banking subsidiary incorporated under Philippine law; or (c) establishment of branches with full banking authority;

• Foreign banks, due to, among other things, relaxed standards which permitted large foreign banks to open branch offices; • Domestic banks entering into strategic alliances with foreign banks with significant financial and management resources,

and in some cases resulting in excess capital that can be leverages for asset growth and market share gains; and • Continued consolidation and increased mergers and acquisitions 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 the size of its loan portfolio and deposit base, as well as cause


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increased pricing competition, which could have a material adverse effect on its growth plans, margins, results of operations and financial condition. The Philippine banking sector may face another downturn, which could materially and adversely affect the Bank. The Philippine banking sector has generally recovered from the global economic crisis. According to data published by the BSP as of 31 May 2018, past due ratios in the Philippine commercial banking system was at 2.70%, an improvement from a 4-5% range reported from 2009-2011. Further, the NPL coverage ratio in the Philippine commercial banking system reached 146.38% as of 31 May 2018, higher than the 59-74% range reported from 2009 to 2011, according to the BSP. The Bank has realized some benefits from this recovery, including increased liquidity levels in the Philippine market, lower levels of interest rates as well as lower levels of NPLs. However, the Philippine banking industry may face significant financial and operating challenges. These challenges may include, among other things, a sharp increase in the level of NPLs, variations of asset and credit quality, significant compression in bank net interest margins, low loan growth and potential or actual under-capitalization of the banking system. Fresh disruptions in the Philippine financial sector, or general economic conditions in the Philippines, may cause the Philippine banking sector in general, and the Bank in particular, to experience similar problems to those faced in the past, including substantial increases in NPLs, problems meeting capital adequacy requirements, liquidity problems and other challenges. The Bank may have to comply with strict BSP rules and guidelines issued by banking regulatory authorities in the Philippines, including the BSP, the BIR and international bodies, including the Financial Action Task Force (“FATF”). The Bank’s banking interests are regulated and supervised principally by, and have reporting obligations to, the BSP. The Bank is also subject to the banking, corporate, taxation and other regulations and laws in effect in the Philippines, administered by agencies such as the Bureau of Internal Revenue (“BIR”) and the Anti-Money Laundering Council (AMLC), as well as international bodies such as the Financial Action Task Force (FATF). In recent years, existing rules and regulations have been modified, new rules and regulations have been enacted and reforms have been implemented which are intended to provide tighter control and added transparency in the Philippine banking sector. These rules include new guidelines on the monitoring and reporting of suspected money laundering activities as well as regulations governing the capital adequacy of banks in the Philippines. Institutions that are subject to the AMLA are required to establish and record the identities of their clients based on official documents. In addition, records of transactions are required to be maintained and stored for a minimum of ten years from the date of a transaction. Records of closed accounts must also be kept for five years after their closure. The BSP has also recently ordered universal, commercial and thrift banks to conduct Real Estate Stress Tests (“REST”) to determine whether their capital is sufficient to absorb a severe shock. The Real Estate Stress Test Limit (REST Limit) combines a macroprudential overlay of a severe stress test scenario, the principle of loss absorbency through minimum capital ratio thresholds and heightened supervisory response. Should a bank fail to comply with the prescribed REST Limits, it shall be directed to explain why its exposures do not warrant immediate remedial action. Should the same be found insufficient, the bank shall be required to submit an action plan to meet the REST Limits within a reasonable time frame. In June 2016, the BSP implemented the Interest Rate Corridor (IRC) which effectively narrowed the band among the BSP’s key po licy rates. The pricing benchmark, which used to be the Special Deposit Account (SDA) prior to the IRC, was replaced by the Overnight Deposit Facility (ODF) which is now at 3.5% and forms the lower bound of the IRC. Meanwhile, the rate for the Overnight Lending Facility (OLF) has replaced the Repurchase Facility (RP). The rate for the OLF, which forms the upper bound of the IRC, is now at 4.5%. The BSP likewise introduced the Term Deposit Facility (TDF) to serve as the main tool for absorbing liquidity through weekly TDF auctions, the frequency for which may be changed depending on the BSP’s liquidity forecasts. According to the BSP, the changes from IRC are purely operational in nature to allow it to conduct monetary policy effectively. The BIR has also promulgated rules on the submission of an Alphabetical List (Alphalist) of portfolio investors receiving income payments and dividends. The BIR requires all withholding agents to submit an Alphalist of payees on income payments subject to creditable and withholding taxes and prohibit the lumping into a single amount and account of various income payments and taxes withheld. The Supreme Court, however, issued a temporary restraining order against the said BIR rule on 9 September 2014 with regard to the lumping into a single amount.


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With the implementation of the TRAIN LAW under Republic Act No. 10963, higher operating costs are expected due to higher Documentary Stamp Tax (“DST”) imposed on certificated bank deposit products, debt instruments and other accommodations covered by said law. Philippine banks also face the threat of being assessed for documentary stamp tax upon their issue of passbooks for higher interest rate deposits. The Court of Tax Appeals has, in several cases against other Philippine banks, affirmed the BIR’s position that passbooks for higher interest rate deposits having the essential features of a certificate of deposit are subject to the documentary stamp tax imposed on certificates of deposit. These proceedings are currently on appeal and if the BIR’s position is upheld it could result in the Bank’s taxation charge being increased. In addition, new taxation regulations issued by the BIR may have an adverse effect on the Bank. If the Bank is unable to comply with existing and new rules and regulations applicable to it, it could incur penalties and its business reputation may suffer, which could have a material adverse effect on its business, financial position and results of operations. In the event of any changes to the existing guidelines or rules, or introduction of additional regulations, the Bank, as far as applicable, will have to comply with the same and may incur substantial compliance and monitoring costs. The Bank’s failure to comply with current or future regulations and guidelines issued by regulatory authorities in the Philippines and in other relevant jurisdictions could have a material adverse effect on the Bank’s business, financial condition and results of operations. The Bank may experience difficulties due to the implementation of Basel III in the Philippines. On 15 January 2009, the BSP issued Circular No. 639 covering the Internal Capital Adequacy Assessment Process (ICAAP) which supplements the BSP’s risk-based capital adequacy framework under BSP Circular No. 538. The BSP requires banks to have in place an ICAAP that (i) takes into account not just the credit, market and operational risks but also all other material risks to which a bank is exposed (such as interest rate risk in the banking book, liquidity risk, compliance risk, strategic/business risk and reputation risk); (ii) covers more precise assessments and quantification of certain risks (i.e., credit concentration risk); and (iii) evaluates the quality of capital. In 2011, the BSP issued BSP Circular 709, which aligns with the Basel Committee on Banking Supervision (BCBS) on the eligibility criteria on Additional Bank Concern Capital and Tier 2 Capital to determine eligibility of capital instruments to be issued by Philippine banks/quasi-banks as Hybrid Tier 1 Capital and Lower Tier 2 Capital. Further, in January 2013, the BSP issued Circular No. 781 as the Basel III Implementing Guidelines on Minimum Capital Requirements, which shall take effect in January 2014, highlights of which include: adopting a new categorization of the capital base;

adopting eligibility criteria for each capital category that is not yet included in Circular 709;

as applicable, allowing the BSP to adopt regulatory deductions in Basel III;

keeping minimum CAR at 10%, and prescribing: o a minimum Common Equity Tier 1 (CET1) ratio of 6.0%; o a minimum Tier 1 CAR ratio of 7.5% o an additional capital conservation buffer (CCB) of 2.5%;

revaluation of certain AFS securities and the impairments that could arise from trading losses;

if the Bank is classified as “systemically important”, it may be required to hold additional capital reserves; • by 1 January 2014, rendering ineligible existing capital instruments as at 31 December 31 that do not meet eligibility criteria

for capital instruments under the revised capital framework; • by 1 January 2016, rendering ineligible regulatory capital instruments issued under Circulars No. 709 and 716 before the

revised capital framework became effective; and • by subjecting covered banks and quasi-banks to the enhanced disclosure requirements pertaining to regulatory capital.

On 29 October 2014, the BSP issued Circular No. 856, or the “Implementing Guidelines on the Framework for Dealing with Domestic Systemically Important Banks (D-SIBs) under Basel III” to address systemic risk and interconnectedness by identifying banks which are deemed systemically important within the domestic banking industry. Banks that will be identified as D-SIBs shall be required to have higher loss absorbency, on top of the minimum CET1 capital and CCB. Identified D-SIBs will need to put up an additional 1.5 — 3.5% common equity Tier 1 depending on their classification. Compliance with this requirement was phased-in starting 1 January 2017, with full compliance required by 1 January 2019.


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Furthermore, banks face new liquidity requirements under Basel III’s new liquidity framework, namely, the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). On 10 March 2016, the BSP issued Circular No. 905, or the “Implementation of Basel III Framework on Liquidity Standards — Liquidity Coverage Ratio and Disclosure Standards”. The LCR requires banks to hold sufficient level of high-quality liquid assets to enable them to withstand a 30 day-liquidity stress scenario. Beginning 1 January 2018, the LCR threshold that banks will be required to meet will be 90% which will then be increased to 100% beginning 1 January 2019. During the observation period prior to 1 January 2018, banks are required to submit quarterly LCR reports for monitoring purposes. Meanwhile, the NSFR requires that banks’ assets and activities are structurally funded with long-term and more stable funding sources. BSP Circular No. 1007 issued on 24 May 2018 contains the implementing guidelines on the adoption of the Basel III Framework on Liquidity Standards – NSFR. The implementation of the minimum NSFR shall be phased in to help ensure that the covered banks/QBs can meet the standard. It shall undergo an observation period from July to December 2018 before the minimum 100% NSFR becomes a requirement in January 2019. These may result in an increase in the capital adequacy requirement of the Bank. Unless the Bank is able to access the necessary amount of additional capital, any incremental increase in the capital requirement due to the implementation of ICAAP and Basel III, may impact the Bank’s ability to grow its business and may even require the Bank to withdraw from or to curtail some of its current business operations, which could materially and adversely affect the Bank’s business, financial condition and results of operations. There can also be no assurance that the Bank will be able to raise adequate additional capital in the future at all or on terms favorable to it. In addition, the implementation of Basel III may require the Bank to divest itself of certain non-allied undertakings. If the Bank is forced to sell all or a portion of certain subsidiaries or associates, its business, financial condition or results of operations could be adversely affected. There can be no assurance that the Bank will be able to meet the requirements of Basel III as implemented by the BSP. In addition, the limitations or restrictions imposed by the BSP’s implementation of Basel III could materially and adversely affect the Bank’s business, financial condition and results of operations. Whenever the capital accounts of a bank are deficient with respect to the prescribed risk-based CAR of 10%, the Monetary Board may impose monetary and non-monetary sanctions. The Monetary Board will also prohibit opening of new branches whenever a bank’s CAR falls below 12% on a non-consolidated and consolidated basis. Likewise, it will also prohibit the distribution of dividends whenever a bank’s CET1 ratio and CAR falls below 8.5% and 10% respectively. As of 31 March 2018, according to the BSP and under the Revised Basel III standards (Memorandum No. M-2013-056), the Philippine commercial banking industry’s CAR was 21.36% on a consolidated basis and 21.29% on a nonconsolidated basis. As of 31 March 2018, the Group’s consolidated Tier 1 capital adequacy ratio/CET1 ratio and total consolidated capital adequacy ratio were 12.27% and 15.21%, respectively, as reported to the BSP. In addition, the BSP issued BSP Circular No. 855 (Series of 2014) regarding guidelines on sound credit risk management practices, including the amendment on loan loss provisions on loans secured by real estate mortgages. Under the new regulations, loans may be considered secured by collateral to the extent the estimated value of net proceeds at disposition of such collateral can be used without legal impediment to settle the principal and accrued interest of such loan, provided that such collateral has an established market and a sound valuation methodology. Under the new rules, the maximum collateral value for real estate collateral shall be 60% of the value of such collateral, as appraised by an appraiser acceptable to the BSP. While this maintains existing regulations already applicable to universal and commercial banks, the collateral value cap will be particularly relevant in securing DOSRI transactions and in potentially accelerating the setting up of allowable loan for losses in case a loan account gets distressed. The BSP also clarified that the collateral cap on real estate mortgages is not the same as a loan-to-value (LTV) ratio limit. Even under the new rules, the minimum borrower equity requirement remains a bank-determined policy (which, according to the BSP, averages 20% under current industry practice). Under the enhanced guidelines of the BSP however, the bank’s internal policy as to minimum borrower equity will be subject to closer regulatory scrutiny as to whether the borrower equity requirement of a bank is prudent given the risk profile of its target market. Stricter lending and prudential regulations may reduce the lending appetite of the Bank or cause the Bank to alter its credit risk management systems, which may adversely affect the Bank’s business, financial condition and results of operations.


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Although intended to strengthen banks’ capital positions and thwart potential asset bubbles, the new BSP and Monetary Board regulations will add pressure to local banks to meet these additional capital adequacy requirements, which may effectively create greater competition among local banks for deposits and temper bank lending in the commercial property and home mortgage loan sectors given that banks’ ability to lend to these sectors depends on their exposure to the sector and the capital levels they maintain. This may also lead banks in the Philippines to conduct capital raising exercises. Through its compliance with these regulations, the Bank’s business, financial position and results of operations may be adversely affected. The Bank’s provisioning policies in respect of classified loans require significant subjective determinations, which may increase the variation of application of such policies. BSP regulations require that Philippine banks, including the Bank, classify NPLs based on four different categories corresponding to levels of risk: Loans Especially Mentioned, Substandard, Doubtful and Loss. Generally, classification depends on a combination of a number of qualitative as well as quantitative factors such as the number of months payment is in arrears, the type of loan, the terms of the loan and the level of collateral coverage. These requirements have in the past, and may in the future, be subject to change by the BSP. Periodic examination by the BSP of these classifications may also result in changes being made by the Bank to such classifications and to the factors relevant thereto. In addition, these requirements in certain circumstances may be less stringent than those applicable to banks in other countries and may result in particular loans being classified as non-performing later than would be required in such countries or being classified in a category reflecting a lower degree of risk. On 20 January 2017, BSP fine-tuned the definition of Past-Due and Non-Performing Exposures as follows: (With comparison versus old policy)

New Policy Old Policy

Mode of Payment Past Due NPL Past Due NPL

Monthly Installment 1 day after due date excluding cure period, if any

Past due for more than 90 days

3 installments missed 3 installments missed

Quarterly/Semestral/Annual 1 installment missed Past due for more than 30 days At Maturity Not paid at maturity

Daily/Weekly/Semi-Monthly 1 day after contractual due date; 11th day if with cure period

Arrears is 10% of O/S balance

Upon past due

Microfinance 1 installment Upon past due

The level of provisions currently recognized by the Bank in respect of their loan portfolios depends largely on the quality of the portfolio and estimated value of the collateral coverage for the portfolio. Although the Bank has a policy to test their loan portfolios for impairment on a quarterly basis in order to ensure adequacy of provisions as needed and in line with changing market conditions, the level of the Bank’s provisions may not be adequate to cover increases in the amount of their NPLs, or any deterioration in the overall credit quality of the Bank’s loan portfolios, including the value of the underlying collateral. In particular, the amount of the Bank’s reported loan losses may be influenced by factors beyond their control. For instance, certain accounting standards have been adopted in the Philippines based on International Accounting Standards, which currently require the Bank’s loan loss provisions to reflect the net present value of the cash flows of the loan and underlying collateral. Furthermore, the introduction of new accounting standards may result in the Bank recognizing significantly higher provisions for loan loss in the future. While the Bank believes its current level of provisions and collateral position are more than adequate to cover its NPL exposure, an unexpected or significant increase in NPL levels may result in the need for higher levels of provisions in the future. Any future changes in the Philippine Financial Reporting Standards (“PFRS”) may affect the financial reporting of the Bank’s business. PFRS 16 “Leases” replaces the accounting requirements for leases under the old Standard (PAS 17, Leases). The new standard requires all leases to be reported on balance sheet as assets and liabilities. PFRS 16 shall be effective for annual periods beginning on or after 1 January 2019. The early adoption of PFRS 16 by entities is allowed provided such entities have also adopted PFRS 15, “Revenue from Contracts with Customers”. The Bank is currently assessing the impact of adopting this standard. The Bank believes


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that other amendments and improvement to PFRS issued effective 1 January 2019 and onwards will not have material impact on the Bank’s future financial statements. The Philippine banking industry is generally exposed to higher credit risks and greater market volatility than that of 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:

The greater uncertainty associated with the Philippine regulatory, political, legal and economic environment;

The vulnerability of the Philippine economy in general to a severe global downturn as it impacts on its export sector, employment in export-oriented industries, and OFW remittances;

The large foreign debt of the Government and the corporate sector, relative to the gross domestic product (GDP) of the Philippines; and

• Volatility of interest rates and U.S. dollar/Peso 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. According to data from the BSP, the average NPL ratios exclusive of interbank loans in the Philippine commercial banking industry were 1.66%, 1.84%, and 2.34% as at the years ended 31 December 2017, 2016 and 2015, respectively. The Bank’s ability to assess, monitor and manage risks inherent in its business is limited by the quality and timeliness of available data. The Bank is exposed to a variety of risks including credit, market, foreign exchange and operational risks. The effectiveness of the Bank’s risk management, particularly, its credit risk management, is limited by the quality and timeliness of available data in the Philippines in relation to factors such as the credit history of proposed borrowers and the loan exposure borrowers have with other financial institutions. Limitations in the Bank’s risk management systems may result in the Bank granting loans or taking positions that expose the Bank to significant credit risks or otherwise result in the Bank being over exposed to interest rate, liquidity, foreign exchange rate and other risks. If the Bank were not to comply with FATCA, this may cause material and adverse impact on the Bank’s business, financial conditions and results of operations. FATCA is the Foreign Account Tax Compliance Act enacted into law in the U.S. on 18 March 2010 as part of the Hiring Incentives to Restore Employment Act. It is a new regime for finding income overseas as a response to a landmark court case in which a large international bank agreed to pay $780 Million in fines for their role in assisting U.S. citizens in evading income taxes. FATCA impacts a number of organizations and individuals. It affects U.S. persons with income abroad., Foreign Financial Institutions (FFIs) that invest in U.S. markets will be impacted as well as U.S. financial institutions that do business with Foreign Financial Institutions (“FFIs”). Additionally, local government and taxing authorities in each country will see the effects of the act as well. It also brought forth an expansion of tax reporting for non-resident aliens. An FFI will have to set up a process to identify U.S. accounts as part of its onboarding procedures. Once that is in place, it will also have to identify any current accounts with U.S. indicia. Additionally, there is a need to set up a process to monitor account changes for indicia of U.S. status. After the identification of impacted accounts, an FFI will have to collect documentation on each of these accounts to prove whether or not they are a U.S. person. If they are not a U.S. person and the FFI has the appropriate documentation, the FFI’s obl igations have been fulfilled. If they are a U.S. person, the FFI’s next move will depend on the country that has jurisdiction over the FFI. By default,


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the Participating Foreign Financial Institutions (PFFIs) in countries without an intergovernmental agreement will directly report to the US Internal Revenue Service (IRS). There is a requirement for PFFIs to withhold 30% of income from recalcitrant account holders in order to comply with FATCA. A recalcitrant account holder is one who fails to comply with reasonable requests pursuant to IRS mandated verification and due diligence procedures to identify U.S. accounts, to provide a name, address and TIN or fails to provide a bank secrecy waiver upon request.

Considerations Relating to the Bank Synergies with the Lucio Co Group The strategic entry of the Lucio Co Group in 2014 has enabled the Issuer to access more opportunities in the ecosystem of Puregold Price Club, Inc. (“Puregold”) and Cosco Capital, Inc. (Cosco). To maximize opportunities, the Issuer has focused on building its capabilities in order to leverage the more than 3,000 suppliers and trade partners and 1.1 million loyal customers of Puregold and 600,000 active members of S&R. The natural ecosystem brought about by the strategic partnership affords the Issuer an opportunity to expand in the vicinity of the more than 300-branch store network of the Lucio Co Group. Concentration of Loan Portfolio As of 30 June 2018, the Bank’s top 10 largest exposures account for 24.10% of the Bank’s gross loan portfolio. There can be no assurance that these exposures would continue to perform their obligations to the Bank. As of 30 June 2018, 71.66% or P40.2 Billion of the Bank’s gross loan portfolio is concentrated in four major economic activities. These include (1) wholesale and retail trade, (2) real estate activities, and (3) activities of households as employers and undifferentiated goods-and-services producing activities of households for own use, and (4) manufacturing at P12.4 Billion, P10.0 Billion, P9.6 Billion, and P8.3 Billion, respectively. The Bank has significant exposure to the Philippine real estate market as well as the level of real estate it holds as collateral. As of

30 June 2018, 35% of the total loan portfolio is secured, and 17.48% (or P9.9 Billion) of which are secured with real estate. The

Philippine real estate market is highly cyclical, and real estate prices in general have been volatile. Real estate 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, remittances from OFWs and political and economic developments. Accordingly, an extended downturn in the Philippine real estate sector could increase the level of the Bank’s NPLs and related provisions for impairment loan losses, reduce the Bank’s net income and consequently, materially and adversely affect the Bank’s business, financial condition and results of operations. 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. As of 30 June 2018, the bank 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 30 June 2018, the Bank’s net NPL ratio was at 4.96%. 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 debt. Consequently, 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.


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Secured Loans As of 31 December 2016, 2017, and 30 June 2018, the Bank’s secured loans represented 29.87%, 29.08%, and 35.38% of the Bank’s total loans, and 16.46%, 15.36%, and 17.59%, respectively, of the total loans were secured with real estate properties. There can be no assurance that the collateral securing any particular loan will protect the Bank from suffering a partial or complete loss if the loan becomes non-performing. The recorded values of the Bank’s collateral may not accurately reflect its liquidation value, which is the maximum amount the Bank is likely to recover from a sale of collateral, less expenses of such sale. There can be no assurance that the realized value of the collateral would be adequate to cover the Bank’s loans. In addition, some of the valuations in respect of the Bank’s collateral may also be out-of-date or may not accurately reflect the value of the collateral. Any decline in the value of the collateral securing the Bank’s loans, including with respect to any future collateral taken by the Bank, would mean that its provision for credit losses may be inadequate and the Bank may need to increase such provision. Any increase in the Bank’s provisions for credit losses could materially and adversely affect the Bank’s business, financial condition and results of operations. Furthermore, the Bank may not be able to recover in full the value of any collateral or enforce any guarantee due, in part, to difficulties and delays involved in enforcing such obligations through the Philippine legal system. Consumer Debt Concentration The Bank plans to continue to expand its consumer loan operations. Such expansion plans will increase the Bank’s exposure to consumer debt and vulnerability with respect to changes in general economic conditions affecting Philippine consumers. Accordingly, economic difficulties in the Philippines that have a significant adverse effect on Philippine consumers could result in reduced growth and deterioration in the credit quality of the Bank’s consumer loan portfolios. A rise in unemployment or an increase in interest rates, among others, could have an adverse impact on the ability of borrowers to make payments and increase the likelihood of potential defaults and reduce demand for consumer loans, which could materially and adversely affect the Bank’s business, financial condition and results of operations. Implementation of Strategies The Bank’s ability to grow its revenue will partly depend on its ability to successfully implement its business strategies, which may expose the Bank to a number of risks and challenges, including, among others, the following:

new and expanded business activities may have less growth or profit potential than the Bank anticipates, and there can be no assurance that new business activities will become profitable at the level the Bank desires or at all;

the Bank’s competitors may have substantially greater experience and resources for the new and expanded business activities; and

economic conditions, such as rising interest rates or inflation, could hinder the Bank’s expansion, particularly in the consumer loan industry.

In addition, new business endeavors may require knowledge and expertise which differ from those used in the current business operations of the Bank, including different management skills, risk management procedures, guidelines and systems, credit risk evaluation, monitoring and recovery procedures. The Bank may not be successful in developing such knowledge and expertise. The Bank’s inability to implement its business strategy could materially and adversely affect the Bank’s business, financial condition and results of operations. The Bank’s success in implementing new strategies also depends upon, among other factors, the retention of its key management, senior executives and upon its ability to attract and retain other highly capable individuals. The loss of some of the Bank’s key management, senior executives or an inability to attract or retain other key individuals could hinder the Bank’s implementation of its strategies. The Bank’s inability to implement its business strategies could materially and adversely affect the Bank’s business, financial condition and results of operations.


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Credit Risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The risk arises any time when the Bank’s funds are extended, committed, invested or exposed through actual or implied contractual agreements. Capital depletion through loan losses has been the ultimate cause of most institutions' failures. The Bank’s credit risk arises from its lending and trading of securities and foreign exchange activities. Market Risk Market risk is the risk of loss to future earnings, fair values or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes. The Bank’s market risk originates from the Parent Company’s holdings of foreign exchange instruments, debt securities, equity securities and derivatives. Operational Risk Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. It includes legal risk and people risk but excludes strategic and reputational risk. Operational risk is inherent in all activities, products and services and cuts across multiple activities and business lines within the Bank and across its subsidiaries and affiliates. The Philippine Bank of Communications 2018 SEC Form 20-IS primary tool in controlling operational risk is an effective system of internal controls approved by the Board and participated by each and every employee of the Bank. The Bank has in place a Business Continuity Management Framework that provides guidance for continuous operations in the event of any disruptions, and proactive mechanisms designed to prevent interruptions to critical business functions and improved Bank’s resiliency. Liquidity Risk Liquidity risk is the risk that the Bank will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind and monitors future cash flows and liquidity on a daily basis. The Bank maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flows. Reputational Risk The Bank is exposed to the risk that fraud and other misconduct committed by employees or outsiders could occur. Such incidences may adversely affect banks and financial institutions more significantly than companies in other industries due to the large amounts of cash that flow through their systems. Any occurrence of such fraudulent events may damage the reputation of the Bank and may adversely affect its business, financial position, results of operations and prospects. In addition, failure on the part of the Bank to prevent such fraudulent actions may result in administrative or other regulatory sanctions by the BSP or other Government agencies, which may be in the form of suspension or other limitations placed on the Bank’s banking and other business activities. Although the Bank has in place certain internal procedures to prevent and detect fraudulent activities, such as a code of conduct, daily trading limits and compliance monitoring, these may be insufficient to prevent such occurrences from transpiring. There can be no assurance that the Bank will be able to avoid incidents of fraud that could materially and adversely affect the Bank’s business, financial condition or results of operations.


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Considerations Relating to the LTNCDs Certain actions relating to the LTNCDs require prior approval of the BSP. Certain actions relating to the LTNCDs, such as early redemptions and payments of principal, are subject to the prior approval of the BSP. There is no assurance that such approval will be obtained in a timely manner, if at all. Neither the Issuer nor the Joint Lead Arranger and Bookrunner makes any such assurance that such approval will be obtained in a timely manner, if at all. Decisions of LTNCD Holders are subject to quorum and voting requirements and restrictions. Unless otherwise specified in the Terms and Conditions of the LTNCDs, the presence of persons holding more than 50% of the principal amount of the outstanding LTNCDs (the “Majority Noteholders”), personally or by proxy, shall be necessary to constitute a quorum to do business at any meeting of the LTNCD Holders as well as to vote, approve, consent, acquiesce, or assent on any matter requiring the vote or consent of the LTNCD Holders. In case no meeting is called, and alternative forms of obtaining consent, approval, acquiescence, or assent are undertaken, then the affirmative votes, approval, consent, acquiescence, or assent of the Majority Noteholders shall still be required. Any appropriate vote, consent, approval, acquiescence, or assent on the matter requiring the vote or consent of the LTNCD Holders shall be binding on all LTNCD Holders (whether or not they were present at the meeting at which such resolution was passed, if applicable) and shall be deemed as a waiver of their rights to claim under the original terms and conditions of the Terms and Conditions. Any resolution of the LTNCD Holders which has been duly approved with the required number of votes of the LTNCD Holders as herein provided shall be binding upon any and all the LTNCD Holders and the Issuer as if the votes were unanimous. The specific consent, approval, acquiescence, or assent of each LTNCD Holder therefore, is subject to a collective vote, and there is no assurance that the specific vote or decision of one or some LTNCD Holder may be carried. All redemption rights are at the Issuer’s discretion and the timing of redemption of the LTNCDs may not correspond with the LTNCD Holders’ expectations or preferences. The Terms and Conditions of the LTNCDs provide that the LTNCDs are redeemable at the Issuer’s option, in whole but not in part, on the Early Redemption Date at the Early Redemption Price. The date on which the Issuer elects to redeem the LTNCDs may not accord with the preference of individual LTNCD Holders. This may be disadvantageous to LTNCD Holders in light of market conditions or the individual circumstances of the LTNCD Holders. An LTNCD Holder’s ability to realize value at a certain time may be limited to selling the LTNCDs into the secondary market. In addition, an investor may not be able to reinvest the redemption proceeds in comparable securities at an effective distribution rate at the same level as that of the LTNCDs. Liquidity for the LTNCDs LTNCD Holders may not redeem or pre-terminate the LTNCDs before Maturity Date. LTNCD Holders may, however, negotiate or transfer the LTNCDs to purchasers who are not Prohibited LTNCD Holders. In accordance with the Manual of Regulations for Banks, as amended, negotiations/transfers from one LTNCD Holder to another do not constitute pre-termination. Any change in the interpretation of current tax laws subjecting the LTNCDs to deductions or withholdings of whatever nature shall, however, be for the account of the LTNCD Holder. The Bank may, subject to the General Banking Law of 2000, Section X233.9 of the Manual of Regulations for Banks, Circular No. 304 Series of 2001 of the BSP and other related circulars and issuances, as may be amended from time to time, redeem all and not only part of the outstanding LTNCDs on any Interest Payment Date prior to Maturity Date, at an Early Redemption Amount equal to the Issue Price plus interest accrued and unpaid up to but excluding the Early Redemption Date. The Bank intends to list the LTNCDs with PDEx. The liquidity for the LTNCDs will depend in part upon the activity of the trading participants of PDEx. No assurance can be given that an active trading market for the LTNCDs will develop.


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Upon listing of the LTNCDs with PDEx, investors shall course their secondary market trades through the trading participants of PDEx for execution in the PDEx Trading Platform in accordance with the PDEx Trading Rules, Conventions and Guidelines, as these may be amended or supplemented from time to time and must settle such trades on a Delivery versus Payment (DvP) basis in accordance with PDEx Settlement Rules and Guidelines. These Settlement Rules and Guidelines include guidelines on minimum trading lots and record dates. The secondary trading of LTNCDs in PDEx may be subject to such fees and charges of PDEx, the trading participants of PDEx, and other providers necessary for the completion of such trades. The PDEx rules and conventions are available in the PDEx website (www.pds.com.ph). An investor Frequently Asked Questions (“FAQ”) discussion on the secondary market trading, settlement, documentation and estimated fees are also available in the PDEx website. As with other fixed income securities, the LTNCDs trade at prices higher or lower than the initial offering price due to prevailing interest rates, the Bank’s operations, and the overall market for debt securities, among others. It is possible that a selling LTNCD Holder would receive sales proceeds lower than his initial investment should a LTNCD Holder decide to sell his LTNCDs prior to maturity. Transfers subject to BSP rules and transaction related fees The LTNCDs may not be issued or transferred to (i) the Bank; (ii) the subsidiaries or affiliates of the Bank; or (iii) wholly or majority-owned or controlled entities of such subsidiaries and affiliates of the Bank; (iv) non-resident aliens not engaged in trade or business in the Philippines; and (v) non-resident foreign corporations. The Registry is authorized to refuse any transfer or transaction in the Registry Book that may be in violation of these restrictions. In addition, transactions on the LTNCDs will be subject to the relevant rules of the exchange, including guidelines on minimum trading lots and record dates, all in accordance with guidelines for holding and trading of the LTNCDs as may be prescribed by the BSP. Such rules and regulations may include maintaining the minimum denomination for the LTNCDs as prescribed by the BSP at all times such that negotiation or secondary trading may be allowed if the result is that a remaining LTNCD Holder of the LTNCDs will hold less than the minimum denomination as prescribed or approved by the BSP. The trading rules and regulations of the BSP or PDEx, and other providers necessary for the completion of such trades may affect the liquidity of the LTNCDs. Additionally, any trading or negotiations of the LTNCDs may be subject to fees and charges of PDEx or its trading participants, and other providers necessary for the completion of such trades. Taxation of the LTNCDs If, because of new or changes in the interpretations or conventions regarding current taxes, such that any payments of principal and/or interest under the LTNCDs shall be subject to deductions or withholdings for or on account of any present 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 the 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 “Taxes”), then such Taxes shall be for the account of the LTNCD Holder concerned, and if the Issuer shall be required by law or regulation to deduct or withhold such Taxes, then the Issuer shall make the necessary withholding or deduction for the account of the LTNCD Holder concerned; provided, however, that all sums payable by the Issuer to tax-exempt persons shall be paid in full without deductions for Taxes or government charges, subject to the submission by the relevant LTNCD Holder claiming the exemption of reasonable and acceptable evidence of such exemption to the Registrar. In relation to the foregoing, the BIR has also issued Revenue Memorandum Circular No. 8-2014 (RMC 8-2014) which applies to exemptions from withholding tax in general. Under BIR RMC 8-2014, taxpayers claiming exemption from withholding taxes shall be required by the concerned withholding agent to submit a copy of a valid, current and subsisting tax exemption certificate or ruling, as per existing administrative issuances and any issuance that may be issued from time to time, before payment of related income. If the taxpayer fails to submit the said proof of tax exemption, he or she shall be subjected to the payment of appropriate withholding taxes due on the transaction.


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In March 2015, the BIR has issued Revenue Memorandum Circular (RMC) 7-2015 which clarifies that interest income from LTNCDs can be considered tax-exempt if held by an individual taxpayer for a period of at least five years. See “Taxation” Section for details. However, there is no assurance that any subsequent changes in related regulations will not affect the tax-exempt status of LTNCDs. In such an event, the Bank may be compelled to apply the prescribed rates of withholding tax and proceed to withhold the necessary tax due on the LTNCDs based on the related BIR rules. The LTNCDs may not be a suitable investment for all investors. Each potential investor in the LTNCDs must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:

• have sufficient knowledge and experience to make a meaningful evaluation of the LTNCDs, the merits and risks of investing in the LTNCDs and the information contained or incorporated by reference in this Offering Circular or any applicable supplement;

• have access to, and knowledge of, the appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the LTNCDs and the impact the LTNCDs will have on its overall investment portfolio;

• have sufficient financial resources and liquidity to bear all of the risks of an investment in the LTNCDs, including where the currency for principal or interest payments is different from the potential investor’s currency;

• understand thoroughly the terms of the LTNCDs and be familiar with the behavior of any relevant indices and financial markets; and

• be able to evaluate (either individually or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

Investors may purchase LTNCDs as a way to manage risk or enhance yields. A potential investor should not invest in the LTNCDs unless it has the expertise (either individually or with a financial adviser) to evaluate how the LTNCDs will perform under changing conditions, the resulting effects on the value of the LTNCDs and the impact this investment will have on the potential investor’s overall investment portfolio. PDIC Insurance Coverage of the LTNCDs The LTNCDs, which are considered bank deposits, are insured with the Philippine Deposit Insurance Corporation (“PDIC”) for up to the maximum insurance coverage set out in, and subject to PDIC’s applicable rules and regulations, as may be amended from time to time, including, without limit, the following:

a) Deposits are insured by the PDIC up to a maximum amount of Five Hundred Thousand Pesos (P500,000.00) per depositor. b) PDIC shall presume that the name/s appearing on the deposit instrument is/are the actual/beneficial owner/s of the

deposit, except as provided therein. c) In case of transfers or break-up of deposits, PDIC shall recognize actual/beneficial ownership of transferees who are

qualified relatives of the transferor. Qualified relatives are transferees within the third degree of consanguinity or affinity of the transferor.

d) In case of: (i) deposits in the name of, or transfers or break-up of deposits in favor of entities, either singly or jointly with individuals; and (ii) transfers or break-up of deposits in favor of non-qualified relatives, whenever such transfers/ break up will result in increased deposit insurance coverage, PDIC shall recognize beneficial ownership of the entity or transferee provided that the deposit account records show the following:

(i) details or information establishing the right and capacity or the relationship of the entity with the individual/s; or (ii) details or information establishing the validity or effectivity of the deposit transfer; or (iii) copy of the board resolution, order of competent government body/agency, contract or similar document as

required/provided by applicable laws. e) In the absence of any of the foregoing, PDIC shall deem the outstanding deposit as maintained for the benefit of the

transferor although in the name of the transferee, subject to consolidation with the other deposits of the transferor.

f) PDIC may require additional documents from the depositor to ascertain the details of the deposit transfer or the right and capacity of the transferee or his relationship to the transferor.


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USE OF PROCEEDS

The net proceeds of the issue of the LTNCDs, after deducting fees, commissions, and other related expenses will be utilized to support business expansion especially, long-term lending.


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CAPITALIZATION AND INDEBTEDNESS The following table sets out the capitalization of the Bank and indebtedness of the Bank (i) as of 30 June 2018, and (ii) as adjusted for the aggregate principal amount of the LTNCDs being issued. The following selected financial information should be read together with other portions of this Offering Circular.

(in Php thousands) Actual Adjusted

Liabilities Deposit liabilities P 74,249,495 P 74,249,495

New long-term negotiable certificates of time deposit - 2,902,730

Bills payable 11,518,569 11,518,569

Manager's checks 371,902 371,902

Outstanding acceptances 54,376 54,376

Subordinated debt - -

Other liabilities 1,476,567 1,476,567

Total liabilities 87,670,909 90,573,639

Non-controlling Interest 28 28

Capitalization Common stock 12,016,129 12,016,129

Additional paid-in capital 2,252,826 2,252,826

Surplus reserves 105,824 105,824

Deficit (4,302,158) (4,302,158) Unrealized loss on financial assets at fair value through other comprehensive income (10,275) (10,275)

Cumulative translation adjustment (176,720) (176,720)

Remeasurement losses on retirement liabilities (58,265) (58,265)

9,827,361 9,827,361

Total capitalization and indebtedness P97,498,298 P100,401,028


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TERMS AND CONDITIONS OF THE LTNCDS The following do not purport to be a complete listing of all the rights, obligations, and privileges of the LTNCDs. 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. 1 Interpretation

1.1 Definitions: In these Terms and Conditions and the Contracts (as hereinafter defined): “Adverse Effect” means any material and adverse effect on: (a) the ability of the Bank to duly perform and observe its

obligations and duties under the LTNCDs and the Contracts; (b) the condition (financial or otherwise), prospects, results of operations or general affairs of the Bank; or (c) the legality, validity and enforceability of the Contracts;

“Anti-Money Laundering Laws of the Philippines” or “AMLA” means Republic Act No. 9160, Republic Act No. 9194 and

Republic Act No. 10365, BSP Circular Nos. 251, 253, 279, 527, 564, 608, 612 and 950, and all other amendatory and implementing laws, regulations, jurisprudence, notices or orders of any Philippine governmental body relating thereto;

“Auditors” mean SyCip Gorres & Velayo Co.; “Bank” means Philippine Bank of Communications, the issuing bank of the LTNCDs; “BIR” means the Philippine Bureau of Internal Revenue; “BSP” means Bangko Sentral ng Pilipinas; “BSP Rules” means General Banking Law of 2000 (Republic Act No. 8791), BSP Circular No. 304 (Series of 2001), BSP Circular

No. 778 (Series of 2012), BSP Circular No. 810 (Series of 2013), BSP Circular No. 824 (Series of 2014), BSP Circular No. 834 (Series of 2014), BSP Circular No. 877 (Series of 2015), Section X233.9 of the Manual of Regulations for Banks (“MORB”) and other related circulars and issuances of the BSP, as may be amended from time to time;

“Business Day” means any day (other than a Saturday or Sunday or holiday) on which commercial banks and foreign exchange

markets in Manila and Makati City are required or authorized to be open for business. All other days not otherwise specified in these Terms and Conditions shall mean calendar days;

“Cash Settlement Account” means an account designated by a CD Holder with a Cash Settlement Bank into which shall be

credited the interests, principal, and other payments on the LTNCDs; “Cash Settlement Bank” means a bank licensed and authorized under the laws of the Philippines and designated by the CD

Holder as the bank with which the CD Holder's Cash Settlement Account is maintained, such designation to be made in accordance with the procedures of the Paying Agent;

“CD Holder” means a person who, at any relevant time, appears in the Registry as the registered owner of LTNCDs; “Closed Period” shall have the meaning set forth in Condition 9.6; “Contracts” mean the Placement Agreement, the Registry and Paying Agency Agreement, the Bank’s Master CD, these Terms

and Conditions, including amendments thereto and such other separate letters or agreements covering conditions precedent, fees, expenses and other obligations of the parties to the Contracts, including any amendments or accessions thereto;

“Event of Default” means an event specified as such under Condition 12 hereof; “Face Value” means the face value of the LTNCDs as indicated in the Master CD;


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“Interest” means, in respect of a series of LTNCDs, for any Interest Period, the interest payable on the LTNCDs at such rate as set out in the Terms and Conditions;

“Interest Payment Date” means in respect of series of LTNCDs, the last day of an Interest Period when payment for Interest in

respect of the relevant LTNCDs becomes due, as set out in these Terms and Conditions; Provided that, if any Interest Payment Date would otherwise fall on a day which is not a Business Day, the Interest Payment Date shall be the next succeeding Business Day; Provided, further, that if such succeeding Business Day falls into the next calendar month, the Interest Payment Date shall be the immediately preceding Business Day, in either case, without adjustment to the amount of interest to be paid. For the avoidance of doubt, each Interest Payment Date for the relevant series of LTNCDs shall be specified in the relevant Master CD;

“Interest Period” means, in respect of a series of LTNCDs, the period commencing on the relevant Issue Date and having a

duration of three (3) months and, thereafter, each successive three (3) month period commencing on the last day of the immediately preceding relevant Interest Period up to, but excluding the first day of the immediately succeeding relevant Interest Period. Each Interest Period for the LTNCDs shall end on the numerically corresponding day of each third (3

rd) month

after the Issue Date or the immediately preceding Interest Period, except in the case of the last Interest Period, where the Interest Period will be the period from and including the last day of the immediately preceding relevant Interest Period up to, but excluding, the relevant Maturity Date;

“Interest Rate” means the rate equal to the rate fixed on Pricing Date, payable to the CD Holder for the period from and

including the relevant Issue Date up to but excluding (a) the Maturity Date (if the Pre-termination Option is not exercised); or (b) the Pre-termination Date (if the Pre-termination Option is exercised); “Issue Date” means each date when a series or tranche of the LTNCDs is issued by the Issuer to CD Holders, as determined by the Bank and the Join Lead Arrangers; provided that, the Bank shall advise PDTC and PDEx in writing, within a reasonable time prior to the relevant Issue Date; and provided further, that each Issue Date shall be within the validity of the BSP Approval to offer and sell the LTNCDs;

“Issue Price” means the percentage of the aggregate amount for which the LTNCDs of a relevant tranche are issued, or such other price as may be determined by the Issuer in consultation with the Joint Lead Arrangers to be fixed prior to the relevant Issue Date. LTNCDs will be issued at par, discount, or premium depending on market conditions at the time of its issuance (and will include a price adjustment for interest accrued for the relevant Interest Period as applicable) based on a formula to be uniformly applied per tranche;

“Joint Lead Arrangers” means Development Bank of the Philippines (“DBP”) and ING Bank N.V., Manila Branch (“ING”); “LTNCDs” means long-term negotiable certificates of time deposit in the amount of up to P5,000,000,000 to be issued by the

Bank under these Terms and Conditions and pursuant to the authority granted by the BSP to the Bank and the BSP Rules, represented by the Master CD; “Master CD” means the master form representing the LTNCDs or a series of LTNCDs setting forth the Terms and Conditions. For the avoidance of doubt, each Master CD shall specify the series or tranche of LTNCDs to which it pertains, as well as the relevant terms and conditions specific to such series or tranche;

“Maturity Date” means five (5) years and six (6) months from the Issue Date, or on April 8, 2024, at which date the LTNCDs

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;

“Maturity Value” means the relevant Face Value plus unpaid and accrued applicable interests up to but excluding the Maturity

Date;


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“Offer Period” means the period when a series or tranche of the LTNCDs shall be offered for sale by the Bank to the public, through the Bank’s branches and the Selling Agents, to prospective CD Holders, commencing at 10:00 a.m. and ending at 5:00 p.m. on such days or dates as may be determined by the Bank and the Joint Lead Arrangers;

“Offering Circular” means the relevant Offering Circular (including, for the avoidance of doubt, the consolidated financial

statements of the Bank included therein) in preliminary and final forms in respect of the LTNCDs in a relevant tranche (the final form being dated as of the Issue Date), and all amendments, supplements and addenda thereto, including the supplemental offering circular(s) for the issuance of subsequent tranche(s) of LTNCDs in preliminary and final form;

“Paying Agent” means PDTC, as appointed by the Bank under the Registry and Paying Agency Agreement to perform the role

of a paying agent required under the BSP Rules, and includes its successor entity, in respect of the LTNCDs, or the paying agent in respect of the LTNCDs appointed from time to time under the Registry and Paying Agency Agreement or an agreement supplemental to it;

“Payment Date” means each date on which payment for interest and/or principal in respect of the LTNCDs become due. The

date on which a payment in respect of the LTNCDs becomes due means the first date on which the CD Holders could claim the relevant interest or principal payment;

“PDEx” means the Philippine Dealing & Exchange Corp, a domestic corporation duly registered with the SEC to operate an

exchange and trading market for fixed income securities and a member of the Philippine Dealing System Group of Companies; “PDEx Rules” shall refer to the rules and regulations of the PDEx applicable to the LTNCDs, as may be amended from time to

time; “PDEx Trading Participant” means a trading participant of PDEx defined as such under its rules; “PDTC” means the Philippine Depository & Trust Corp.;

“Placement Agreement” means the Placement Agreement in the agreed form dated on or about September 14, 2018 among the Bank, the Joint Lead Arrangers and the Selling Agents; “Pre-termination Date” means, in respect if a series of LTNCDs, the Interest Payment Date on which the Bank may exercise its Pre-termination Option for such series following compliance by the Bank with the pre-termination requirements under Condition 6 hereof, as a consequence of which the Bank becomes obliged to redeem the LTNCDs; “Pre-termination Option” means the option of the Bank to pre-terminate the LTNCDs pursuant to Condition 6.3 hereof; “Pre-termination Value” means the relevant Face Value of a relevant series of LTNCDs, plus unpaid and accrued applicable interests up to but excluding the Pre-termination Date; “Pricing Date” means any day within the relevant Offer Period and prior to the Issue Date or the relevant Subsequent Issue Date, as may be applicable, and as may be determined by the Bank in consultation with the Joint Lead Arrangers; “Prohibited Holders” mean persons or entities which are prohibited from holding the LTNCDs, specifically: (1) the Bank; and (2) the subsidiaries and affiliates of the Bank; (3) wholly or majority-owned or controlled entities of the subsidiaries and affiliates of the Bank, (4) non-resident aliens not engaged in trade or business in the Philippines; and (5) non-resident foreign corporations. A “subsidiary” means, at any particular time, a company which is then directly controlled, or more than fifty percent (50%) of whose issued voting equity share capital (or equivalent) is then beneficially owned, by the Bank and/or one or more of its subsidiaries or affiliates. An “affiliate” means, at any particular time, a company at least twenty percent (20%) but not more than fifty percent (50%) of whose issued voting equity share capital is then owned by the Bank. For a company to be “controlled” by another means that the other (whether directly or indirectly and whether by the ownership of share capital, the possession of voting power, contract or otherwise) has the power to appoint and/or remove all or the majority of


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the members of the board of directors or other governing body of that company or otherwise controls or has the power to control the affairs and policies of that company; “Purchase Advice” means the written advice sent by the Selling Agent (in case of the primary issuance of the LTNCDs) or, upon listing of the LTNCDs in PDEx, PDEx Trading Participant (in case of secondary transfers of the LTNCDs), to CD Holder confirming the acceptance of its offer to purchase LTNCDs and consequent ownership thereof and stating the details, including the tax status, and summary terms and conditions, of the issue, sale or assignment of LTNCDs to such CD Holder; “Registrar” means PDTC, as appointed by the Bank under the Registry and Paying Agency Agreement to perform the role of a registrar in respect of the LTNCDs, under the BSP Rules, and includes its successor entity, or the registrar in respect of the LTNCDs appointed from time to time under the Registry and Paying Agency Agreement or an agreement supplemental to it; “Registry” means the electronic registry book of the Registrar and Paying Agent containing the official information on the CD Holders and the amount of LTNCDs they respectively hold, including all transfers and assignments thereof or any liens or encumbrances thereon; “Registry and Paying Agency Agreement” means the agreement in the agreed form dated on or about September 14, 2018 executed by and between the Bank and the Registrar and Paying Agent, stipulating the rights and obligations of the Registrar and Paying Agent with respect to the LTNCDs; “Registry Confirmation” means the written advice sent by the Registrar to the CD Holders, confirming the registration in the name of such CD Holder in the Registry of the specified amount of LTNCDs issued to or purchased by a CD Holder, in the Registry, and setting forth the declarations required by the BSP; “Registry Rules” mean the rules of the Registrar as may be amended from time to time; “RTGS” means the Philippine Payment Settlement System via Real Time Gross Settlement that allows banks to effect electronic payment transfers which are interfaced directly to the automated accounting and settlement systems of the BSP; “SEC” means the Securities and Exchange Commission of the Philippines and its successor agency/ies; “Selling Agents” means the Bank, DBP and ING, and includes their respective successor entities, or the selling agent(s) in respect of the LTNCDs appointed from time to time under Placement Agreement or an agreement supplemental to it; “SRC” means the Securities Regulations Code of the Philippines and its Implementing Rules and Regulations, as these may be amended from time to time;

“Tax Exempt/Treaty Documents” shall have the meaning set forth in Condition 8.2; and

“Terms and Conditions” mean these Terms and Conditions of the LTNCDs as may be amended from time to time;

2 The LTNCDs

2.1 Form: The LTNCDs shall be in scripless form and, subject to the payment of fees to the Registrar, registered and lodged with the Registrar in the name of the CD Holders. Once lodged, the LTNCDs shall be eligible for electronic transfer in the Registry, without the issuance or cancellation of certificates. The LTNCDs shall comply with the provisions of Republic Act No. 8792 or the Electronic Commerce Act, particularly on the existence of an assurance on the integrity, reliability and authenticity of the LTNCDs in electronic form.

2.2 Denomination: The LTNCDs will be issued in minimum denominations of Fifty Thousand Pesos (P50,000) and integral multiples of Ten Thousand Pesos (P10,000) thereafter, and will likewise be transferable in the secondary market in such minimum denominations as may be in accordance with the requirements of PDEx under the PDEx Rules.


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2.3 Title: Legal title to the LTNCDs shall be shown in the Registry, which shall be the official registry and best evidence of ownership and all other information regarding ownership of the LTNCDs. However, following receipt from the Selling Agents of the Final Sales Report and complete account opening documents evidencing the purchase of LTNCDs by the CD Holders, a Registry Confirmation shall be issued by the Registrar in favor of the said CD Holders to evidence the registration of such LTNCDs in their name in the Registry. Provided, however, that upon the listing of the LTNCDs with the PDEx, the registration of the LTNCDs shall, in addition to the Registry Rules, be subject to the PDEx Rules and fixed income trading conventions.

2.4 SEC Registration: The LTNCDs have not been and will not be registered with the SEC. Since the LTNCDs qualify as exempt securities under Section 9.1 (e) of the SRC, the LTNCDs may be sold and offered for sale or distribution in the Philippines without registration.

3 Status

The LTNCDs constitute the direct, unconditional, unsecured and unsubordinated Peso-denominated obligations of the Bank, 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 unsubordinated Peso-denominated obligations of the Bank, present and future, other than obligations mandatorily preferred by law.

4 PDIC

The LTNCDs are insured with the Philippine Deposit Insurance Corporation (“PDIC”) for up to the maximum insurance coverage set out in, and subject to PDIC’s applicable rules and regulations, as may be amended from time to time, including, without limit, the following: (a) Deposits are insured by the PDIC up to a maximum amount of Five Hundred Thousand Pesos (₱500,000.00) per

depositor. (b) PDIC shall presume that the name/s appearing on the deposit instrument is/are the actual/beneficial owner/s of the

deposit, except as provided therein. (c) In case of transfers or break-up of deposits, PDIC shall recognize actual/beneficial ownership of transferees who are

qualified relatives of the transferor. Qualified relatives are transferees within the third degree of consanguinity or affinity of the transferor.

(d) In case of: (i) deposits in the name of, or transfers or break-up of deposits in favor of, entities, either singly or jointly with individuals; and (ii) transfers or break-up of deposits in favor of non-qualified relatives, whenever such transfers/ break up will result in increased deposit insurance coverage, PDIC shall recognize beneficial ownership of the entity or transferee provided that the deposit account records show the following: (i) details or information establishing the right and capacity or the relationship of the entity with the individual/s;

or (ii) details or information establishing the validity or effectivity of the deposit transfer; or (iii) copy of the board resolution, order of competent government body/agency, contract or similar document as

required/provided by applicable laws. (e) In the absence of any of the foregoing, PDIC shall deem the outstanding deposit as maintained for the benefit of the

transferor although in the name of the transferee, subject to consolidation with the other deposits of the transferor. (f) PDIC may require additional documents from the depositor to ascertain the details of the deposit transfer or the right

and capacity of the transferee or his relationship to the transferor. 5 Interest 5.1 Interest Accrual: The LTNCDs shall earn interest on its principal amount from and including the relevant Issue Date up to but

excluding the Maturity Date or Pre-termination Date (as the case may be), unless upon due presentation, payment of principal is improperly withheld or refused by the Bank. In such event it shall continue to bear interest in accordance with these Terms and Conditions (both before and after judgment) until all sums in respect of such LTNCDs are received by or on behalf of the relevant CD Holder.

5.2 Interest Payment Dates: Interest shall be payable on each Interest Payment Date; Provided, that if any Interest Payment Date would fall on a day which is not a Business Day, such Interest Payment Date shall be deemed to be the next succeeding


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Business Day, without, however, any adjustment to the amount of Interest to be paid, except in the case of the last Interest Payment Date, such that, the amount of Interest paid on such date shall be adjusted up to, but excluding, the Maturity Date, Provided, further, that if such succeeding Business Day falls into the next calendar month, the Interest Payment Date shall be the immediately preceding Business Day, in either case, without adjustment to the amount of interest to be paid.

5.3 Interest Calculation: The amount of interest payable in respect of the LTNCDs for each Interest Period shall be calculated by the Registrar on a European 30/360 basis and at the Interest Rate. The determination by the Registrar of the amount of interest payable (in the absence of manifest error) is final and binding upon all parties.

6 Repayment and Pre-termination 6.1 Repayment at Maturity Date: Unless previously pre-terminated and cancelled in accordance with these Terms and

Conditions, the LTNCDs shall be redeemed by the Bank at their Maturity Value on Maturity Date. If Maturity Date shall fall on the date that is not a Business Day, the Maturity Date shall fall on the immediately succeeding Business Day, without adjustment on interest payable with respect to the LTNCDs.

6.2 Pre-termination by the CD Holder: Presentation of the LTNCDs to the Bank for payment before the Maturity Date is not

allowed, unless there occurs an event described under “Events of Default” in these Terms and Conditions. CD Holders may, however, assign or transfer their LTNCDs to another holder who is not a Prohibited Holder. Negotiations or transfer/assignment from one CD Holder to another do not constitute pre-termination. For tax purposes, negotiations/transfers from one CD Holder to another shall be subject to the pertinent provisions of the National Internal Revenue Code of 1997, as amended and Bureau of Internal Revenue regulations.

6.3 Pre-termination by the Bank: Subject to the BSP Rules, the Bank shall have the option (but not the obligation) to pre-terminate the LTNCDs as a whole, but not in part, prior to the Maturity Date and on any Interest Payment Date at the Pre-termination Value, for any cause as may be allowed under the BSP Rules, including, without limitation if or when: (i) there shall occur at any time during the term of the LTNCDs any change in any applicable law, rule or regulation or in the terms and/or interpretation or administration thereof or a new applicable law should be enacted, issued or promulgated which shall result in payments by the Bank becoming subject to additional or increased taxes, other than the taxes and rates of such taxes prevailing on the Issue Date, and such additional or increased rate of such tax cannot be avoided by use of reasonable measures available to the Bank; or (ii) at any time during the term of the LTNCDs, long term negotiable certificates of deposit issuances become subject to additional or increased reserves required by the BSP, other than the seven percent (7%) statutory regular reserves required in BSP Circular No. 832, Series of 2014.

6.4 Notice of Pre-termination: The Bank may pre-terminate all and not only part of the LTNCDs as permitted under Clause 6.3

above on any Interest Payment Date prior to the Maturity Date , provided that: (i) prior notice in writing is given to the appropriate department of the Supervisory and Examination Sector of the BSP, together with the justification for the pre-termination; (ii) prior notice in writing is given to the CD Holders (with copy to PDEx and the Registrar and Paying Agent), which notice shall state the Interest Payment Date on which such LTNCDs are to be redeemed and the redemption price. The notice to the CD Holders will be effected in two (2) newspapers of general circulation in Metro Manila (one of which shall be the Philippine Daily Inquirer) once a week for two (2) consecutive weeks. The foregoing notices shall be given not more than sixty (60) calendar days nor less than thirty (30) calendar days before the relevant Interest Payment Date, shall be irrevocable and shall oblige the Bank to redeem all of the LTNCDs on the Pre-termination Date at their Pre-termination Value.

6.5 Consequence of Pre-termination: Any incremental tax that may be due on the interest income already earned under the

LTNCDs prior to or as a result of the exercise by the Bank of its option for pre-termination shall be for the account of the Bank. In addition, the Bank shall re-compute its reserve positions retroactively based on the applicable reserve rate(s) for regular time deposits during the period between the Issue Date or the relevant Subsequent Issue Date, as may be applicable, and the Pre-termination Date.


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7 Payments The Paying Agent shall pay, or cause to be paid, on behalf of the Bank on or before 12:00 p.m. on each Payment Date the total

amounts due in respect of the LTNCDs through a direct credit (via RTGS) of the proper amounts, net of taxes and fees (if any) to the Cash Settlement Banks of the CD Holders, for onward remittance to the relevant Cash Settlement Account of the CD Holders with the Cash Settlement Bank no later than 3:00 p.m. on each Payment Date.

8 Taxation

8.1 Taxes on the LTNCDs: Documentary stamp taxes on the primary issue of the LTNCDs shall be for the account of the Bank.

All payments of principal and interest in respect of the LTNCDs are to 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 Republic of the Philippines, including but not limited to, stamp, issue, registration, documentary, value added or any similar tax or other taxes and duties, including interest and penalties. If such taxes or duties are imposed, the Bank will, subject to customary exceptions, pay additional amounts so that holders of the LTNCDs will receive the full amount of principal and interest which otherwise would have been due and payable. Provided, however, that the Bank shall not be liable for: (a) any applicable final withholding tax on interest earned on the LTNCDs prescribed under the National Internal Revenue Code of 1997, as amended (the “Tax Code”), except as may be provided under the BSP Rules; (b) gross receipts tax under Section 121 of the Tax Code; and (c) taxes on the overall income of any holder of the LTNCDs, whether or not subject to withholding. Provided, furthermore, that all sums payable by the Bank to tax exempt entities shall be paid in full without deductions for taxes, duties, assessments or government charges, subject to the submission by such entities of documents reasonably required by the Bank to determine their tax-exempt status. In case the Bank pre-terminates the LTNCDs, as a result of which a final tax is imposed on the interest already earned by a CD Holder who, save for such pre-termination, would have otherwise been exempt from such final tax pursuant to the Tax Code and appropriate revenue regulations, any such final tax imposed on the interest already earned by the individual shall be for the account of the Bank. The Bank shall be required to abide by the terms of the BIR accreditation of the PDS Group Corporate Action Auto-Claim (CAAC) System to the extent of its applicability, and to the extent that it affects information processed by the CAAC system in relation to the Bank’s listed issues.

8.2 Claim of Tax-Exempt Status: CD Holders claiming exemption from any applicable tax shall be required to submit two (2) sets of the following documentary requirements (collectively, the “Tax Exempt/Treaty Documents”) as proof of its tax-exempt status to the Registrar (who shall forthwith provide copies to the Bank), upon its purchase of the LTNCDs.

(a) Current and valid BIR-certified true copies of the tax exemption certificate, ruling or opinion issued by the BIR; (b) Duly notarized declaration warranting its tax-exempt status or entitlement to reduced treaty rates and undertaking to

immediately notify the Bank and the Registrar and Paying Agent of any suspension or revocation of its tax exemption or treaty privileges and agreeing to indemnify and hold the Bank and Registrar and Paying Agent free and harmless against any claims, actions, suits and liabilities arising from the non-withholding or reduced withholding of the required tax, substantially in the form to be separately agreed upon between the Bank and the Registrar and Paying Agent; and

(c) such other documentary requirements as may be reasonably required by the Bank or the Registrar or Paying Agent, or required under applicable regulations of the relevant taxing or other authorities.

Unless properly provided with satisfactory proof of the tax-exempt status of a CD Holder, the Registrar and Paying Agent may assume that such CD Holder is taxable and proceed to apply the tax due on the LTNCDs. Notwithstanding the submission by the CD Holder, or the receipt by the Bank or any of its agents, of documentary proof of the tax-exempt status of a CD Holder, the Bank may, in its sole and reasonable discretion, determine that such CD Holder is taxable and require the Registrar and Paying Agent to proceed to apply the tax due on the LTNCDs. Any question on such determination shall be referred to the Bank.


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9 Transfers

9.1 Transfers: Presentation of the LTNCDs to the Bank for payment before the Maturity Date is not permitted, unless there occurs an event described under “Events of Default” in the Terms and Conditions. CD Holders may, however, transfer or assign their LTNCDs to another holder who is not a Prohibited Holder and such transfer or assignment shall not be considered a pre-termination. For tax purposes, negotiations/transfers from one CD Holder to another shall be subject to the pertinent provisions of the National Internal Revenue Code of 1997, as amended and Bureau of Internal Revenue regulations.

All transfers or assignments of the LTNCDs shall be coursed through a PDEx Trading Participant and shall be made in accordance with the rules of PDEx.

9.2 Restricted Transfers: Subject to Condition 9.6, compliance with all procedures and provisions set out by PDEx under PDEx

Rules, including submission by the relevant CD Holder of such other documents required by PDEx to effect the transfer, and payment by the relevant CD Holder of the proper fees, if any, to PDEx and/or the Registrar, a transfer or assignment of LTNCDs may generally be done at any time. Any transfer between investors of different tax status with respect to the LTNCDs may be done at any time when the LTNCDs are listed with PDEx, subject to the applicable PDEx rules, conventions, and guidelines governing trading and settlement between LTNCD Holders of different tax statuses. In case of a transfer or assignment deemed by the Bank as a pre-termination, solely for withholding tax purposes, the transferor CD Holder shall be liable for the resulting tax due on the entire interest income earned on the LTNCDs (if any), based on the holding period of such LTNCDs by the transferor CD 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 CD Holder who is an individual shall not be treated as income from long-term deposit or investment certificates and accordingly be subject to 20% withholding tax, unless the LTNCDs has a remaining maturity of at least five (5) years. “Transfers or assignments deemed by the Bank as pre-termination for withholding tax purposes” means any transfer or assignment which: (a) is made by a CD 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 BSP Rules, is not considered a pre-termination of the LTNCDs; and (c) under relevant tax laws or revenue regulations, will result in the interest income on the LTNCDs 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.

9.3 Registration of Transfer: The Registrar shall, upon receipt of the transfer form(s) referred to in Condition 9.4 below and in any case not later than five (5) Business Days from the date the said form(s)is/are received by it: (a) summarize the information contained therein and, subject to the timely submission of the documents required under Condition 9.4 below, accordingly update the entries in the Registry; (b) prepare the Registry Confirmation for issuance to the transferee CD Holder; and (c) directly issue such Registry Confirmation to the transferee CD Holder at its address specified in its/his/her Investor Registration Form. The date of registration as appearing in the Registry shall be the treated as the date of transfer.

9.4 Documents for Transfer: The Registrar shall register any transfer or assignment of LTNCDs upon presentation to it of the following documents in the form and substance acceptable to it: 9.4.1 the relevant Purchase Advice (with the information provided therein duly set forth in typewritten form); 9.4.2 proof of the qualified tax-exempt status of the transferee, if applicable, in accordance with Condition 8.2; 9.4.3 the Trade-Related Transfer Form duly accomplished by the transferor CD Holder and endorsed by the relevant PDEx

Trading Participant based on the Registry Confirmation and Purchase Advice of the Transferor, in the form agreed upon between the Bank and the Registrar; Provided, that the use of the transferor’s Registry Confirmation in the completion of the above-stated form shall not operate as an unconditional acceptance of the information stated therein, it being understood that in case of conflict between such Registry Confirmation and the Registry, the Registry shall prevail;

9.4.4 the Investor Registration Form duly accomplished by the transferee CD Holder and endorsed by the relevant PDEx Trading Participant, in the form agreed upon between the Bank and the Registrar;


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9.4.5 written consent of the transferee CD Holder to be bound by the terms of the LTNCDs and the Registry Rules, in the form agreed upon between the Bank and the Registrar;

9.4.6 such documents as may be required by the Registrar to be submitted by the transferee CD Holder in support of the transfer or assignment of the LTNCDs in its favour including, without limit, (a) the original duly endorsed signature cards of the transferee CD Holder and such other original or certified true copies of other documents that the Registrar may reasonably require; and (b) the appropriate secretary’s certificate attesting to the board resolutions of the transferor and transferee authorizing the transfers and acceptances, as well as designating the authorized signatories, together with specimen signature cards duly signed by the parties, and duly authenticated by each party’s corporate secretary; and

9.4.7 in cases of Non-Trade Transactions, the duly accomplished Non-Trade Related Transfer Form duly accomplished and endorsed by the relevant PDEx Trading Participant, in the form agreed upon between the Bank and the Registrar and, in addition: 9.4.7.1 in the case of inheritance, a court order of partition or deed of extrajudicial settlement, together with the

proper documentation evidencing the payment of applicable taxes and a certificate from the BIR authorizing the transfer of the LTNCDs;

9.4.7.2 in case of donations, a valid deed of donation, together with documents to evidence the payment of applicable taxes and a certificate from the BIR authorizing the transfer of the LTNCDs;

9.4.7.3 in the case of requests for recording or annotation of interests or liens on the LTNCDs, a proper contract of pledge or escrow agreement; and

9.4.7.4 such other documents that may be required by the Registrar for transfers arising from “free-of-payment” transactions pursuant to transfer guidelines to be separately agreed upon between the Bank and the Registrar; Provided, that in such case, the burden of proving the validity of a “free of payment” transaction rests with the transferor of the LTNCDs.

9.5 Place of Registry: The Registry shall be kept at the specified office of the Registrar.

9.6 Closing of Registry: The Registrar shall not register any transfer or assignment of the LTNCDs for a period of two (2) Business Days preceding any Interest Payment Date, or during the period of two (2) Business Days preceding the due date for any payment of the principal amount of the LTNCDs, or register the transfer or assignment of any LTNCDs previously called for redemption (the “Closed Period”). The Registrar shall treat the person in whose name the LTNCDs is registered immediately before the relevant Closed Period as the owner of such LTNCDs for the purpose of receiving distributions pursuant to the Terms and Conditions and for all other purposes whatsoever, and the Registrar shall not be affected by any notice to the contrary.

9.7 Qualified Purchasers: Any person or entity, including Filipino citizens, aliens residing in the Philippines, trust accounts and investment management accounts, BIR tax-qualified employee trust funds established by corporations, qualified institutional investors and non-residents (subject to the provisions of the Memorandum to all Authorized Agent Banks dated 29 August 1967 issued by the BSP) who is not otherwise a Prohibited Holder may purchase the LTNCDs. The relevant PDEx Trading Participant shall verify the identity and other relevant details of each transferee (including without limitation its tax status) and ascertain that it is not a Prohibited Holder. Final determination shall, however, vest with the Bank.

9.8 Void Transfers: Transfers or assignments of the LTNCDs made in violation of the restrictions on transfer under these Terms and Conditions shall be null and void and shall not be registered by the Registrar.

9.9 Compliance with Registry Rules: To the extent not inconsistent with or contrary to these Terms and Conditions, the registry rules of the Registrar (a copy of which shall be separately provided by the Registrar to the Bank and the CD Holders) shall be observed and complied in the implementation of the functions of the Registrar, including, without limit, transfers of the LTNCDs.

9.10 Taxes: Documentary stamp taxes as well as other taxes due on the transfer or assignment of LTNCDs, if any, shall be for the account of the CD Holder or its counterparty as market convention or the agreement between them would dictate.


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9.11 Tax Status: Upon a transfer or assignment of the LTNCDs and in any case within the period provided in Condition 8.2, a transferee CD Holder claiming tax-exempt status shall submit the required transfer documents to the Registrar, together with the supporting documents specified under Condition 8.2 above. Unless properly provided with satisfactory proof of the tax-exempt status of a CD Holder, the Registrar and Paying Agent may assume that said CD Holder is taxable and proceed to apply the tax due on the LTNCDs. Notwithstanding the submission of documentary proof of the tax-exempt status of a CD Holder, the Bank may, in its sole and reasonable discretion, determine that such CD Holder is taxable and require the Registrar and Paying Agent to proceed to apply the tax due on the LTNCDs. Any question on such determination shall be referred to the Bank.

9.12 Service Charges: A service charge shall be imposed for any registration of transfer or assignment of the LTNCDs, and the Registrar may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or assignment of the LTNCDs, each for the account of the person requesting the registration of transfer or assignment of the LTNCDs.

10 Representations and Warranties The Bank hereby represents and warrants as follows: (a) Corporate Existence: The Bank is a corporation duly organized and validly existing under and by virtue of the laws of

the Republic of the Philippines, 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, and to incur the indebtedness and other obligations provided for in the LTNCDs.

(b) Corporate Authorizations: All corporate authorizations, approvals, and other acts legally necessary for the offer and issuance of the LTNCDs, for the circulation of the Offering Circulars and for the Bank to enter into and comply with its obligations under the LTNCDs, have been obtained or effected.

(c) Government Authorizations: All government authorizations, approvals, rulings, registrations, and other acts legally necessary for the offer, issuance, and payment of the LTNCDs, the Terms and Conditions, as may be amended or supplemented, and for the Bank to enter into and comply with its obligations under the LTNCDs, have been obtained and remain valid.

(d) BIR and BSP Regulations: All conditions imposed or required under the BSP Rules, as well as regulations of the BIR and other relevant agencies, in respect of the offer, issuance, and payment of the LTNCDs, including the prohibitions of Section X233.9 (h) of the Manual of Regulations for Banks, which qualifications and conditions continue to be complied with, have been or will be complied with by the Bank as of the date and/or time that they are required to be complied with.

(e) Complete Information: The Offering Circulars contain all information with respect to the Bank and to the LTNCDs which is material in the context of the issue and offering of the LTNCDs (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 Bank and of the LTNCDs, is necessary to enable applicants and their investment advisers to make an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the Bank and of the rights attaching to the LTNCDs), and the Offering Circulars do not contain any untrue or misleading statement of a material fact, or omit any material fact necessary or required to be stated.

(f) Binding Obligation: The obligations of the Bank under the LTNCDs, when issued, constitute the Bank's legal, valid, binding, direct, and unconditional obligations, enforceable in accordance with their terms, and the compliance by the Bank with its obligations under the LTNCDs will not conflict with, nor constitute a breach or default of, the articles of incorporation, by-laws, or any resolution of the board of directors of the Bank, or any rights of the stockholders of the Bank, or any contract or other instrument by which the Bank is bound, or any law, regulation, or judgment or order of any office, agency, or instrumentality applicable to the Bank.


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(g) Permits and Licenses for Bank’s Business: The Bank has all authorizations, approvals, permits, licenses, and privileges

from all governmental and regulatory bodies necessary to carry on its banking business and operations as well as those of its subsidiaries and affiliates as currently conducted; and will have free and continued use and exercise thereof.

(h) BSP Compliance: The Bank has complied with, corrected, and has successfully and effectively implemented, to the satisfaction of the BSP, all final findings and recommendations of the BSP resulting from all past audits and examinations conducted by the BSP on the Bank.

(i) Proceedings: Except as specifically described in the Offering Circulars, there are no legal, administrative, or arbitration actions, suits, or proceedings pending or threatened against or affecting the Bank which, if adversely determined, would have an Adverse Effect on the financial condition or business operations of the Bank, or which enjoin or otherwise adversely affect the execution, delivery, or performance of the LTNCDs, or its offer or issuance.

(j) Financial Statements: The 2017 audited financial statements of the Bank are in accordance with the books and records of the Bank, are complete and correct in all material respects, have been prepared in accordance with Philippine Financial Reporting Standards and fairly represent the Bank’s financial condition and results of operations. Since the date of the last audited consolidated financial statements of the Consolidated Group referred to in the Offering Circular, there has been no material change in the financial condition or results of operations of the Bank sufficient to impair its ability to perform its obligations under the LTNCDs according to their terms as contained in the Terms and Conditions.

(k) Liabilities: The Bank has, as of the date hereof, 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 Bank's ability to discharge its obligations under the LTNCDs.

(l) Default: No event has occurred and is continuing which constitutes a default by the Bank under or in respect of any agreement binding upon the Bank, and no event has occurred which, with the giving of notice, lapse of time, or other condition, would constitute a default by the Bank under or in respect of such agreement, which default shall materially affect the Bank's ability to comply with the LTNCDs and pay the principal and interest that may be due on the LTNCDs.

(m) Bank’s Operations: The Bank 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.

(n) External Auditor: The Bank maintains the services of a responsible and reputable external auditor.

(o) Pari Passu Obligation: The LTNCDs constitute the direct, unconditional, unsecured and unsubordinated Peso-denominated obligations of the Bank, 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 unsubordinated Peso-denominated obligations of the Bank, present and future, other than obligations mandatorily preferred by law.

(p) PDEx Listing Approval: The approval of PDEx for the listing of the LTNCDs are in full force and effect unless applicable laws no longer require listing of long-term negotiable certificates of time deposit with an exchange.

These representations and warranties are true and correct as of the Issue Date and shall be deemed repeated with reference to the facts and circumstances then existing on each Interest Payment Date, and shall remain true and correct as long as the LTNCDs remains outstanding.


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11 Covenants The Bank hereby covenants and agrees that, for as long as the LTNCDs remain outstanding: (a) Payment: It shall pay all amounts due under the LTNCDs and the Contracts at the times and in the manner specified in,

and perform all its obligations, undertakings, and covenants under the LTNCDs and the Contracts;

(b) Taxes: It shall 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; pay and discharge when due all lawful claims which, if unpaid, might become a lien or charge upon any of its properties; and take such steps as may be necessary in order to prevent its properties from being subjected to the possibilities of loss, forfeiture or sale; Provided, that it shall not be required to pay any such tax, assessment, charge, levy, or claim which is being contested by it in good faith and by proper proceedings. As a public listed entity the Bank is duty bound to disclose material tax assessments, and government charges or levies with the Philippine Stock Exchange. CD holders are advised to monitor closely the disclosures of the Bank to the Philippine Stock Exchange. In case the Bank is made aware of any changes in the interpretation of the present law or regulation or any changes in the applicable law or regulation relating to the tax treatment of the income on LTNCDs based on holding period of the LTNCDs by the BIR, the Bank will notify the CD Holders, through the Registrar, of such change in tax treatment;

(c) Corporate Existence: It shall preserve and maintain its corporate existence;

(d) Financial Records: It shall 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;

(e) Compliance with Laws: It shall 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 are legally bound, except where non-compliance would not have an Adverse Effect;

(f) Compliance with BSP Directives: It shall fully and promptly comply with all BSP directives, orders, issuances, and letters, including those regarding its capital, licenses, risk management, and operations and promptly and satisfactorily take all corrective measures that may be required under BSP audit reports;

(g) Obligations: It shall pay all indebtedness and other liabilities and perform all contractual obligations pursuant to all agreements to which it is a party 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 an Adverse Effect;

(h) Financial Statements: It shall, as soon as practicable, make available copies of its audited financial statements, consisting of the balance sheet of the Bank as of the end of its latest fiscal year and statements of income and retained earnings and of the source and application of funds of the Bank 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 an independent certified public accountant of recognized standing in the Philippines; and shall, as soon as practicable, upon written request from a CD Holder, furnish to such requesting CD Holder such updates and information as may be reasonably requested by a CD Holder pertaining to the business, assets, condition, or operations of the Bank, or affecting the Bank's ability to duly perform and observe its obligations and duties under the LTNCDs and the Contracts;

(i) LTNCDs Documents: It shall ensure that any documents related to the LTNCDs will, at all times, 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;

(j) Default: It shall, as soon as possible and in any event within five (5) Business days after the occurrence of any default


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on any of the obligations of the Bank, or other event which, with the giving of any notice and/or with the lapse of time, would constitute a default under any agreement of the Bank with any party, including, without limitation the Contracts, serve a written notice to the CD Holders, through the Registrar and Paying Agent, of the occurrence of any such default, specifying the details and the steps which the Bank is taking or proposes to take for the purpose of curing such default, including the Bank's estimate of the length of time to correct the same;

(k) Request for Information: It shall, when so requested in writing, provide any and all information reasonably needed by PDEx, the Paying Agent and/or Registrar, as the case may be, to enable them to respectively comply with their respective responsibilities and duties under the BSP Rules and the Contracts; provided, that, in the event that the Bank cannot, for any reason, provide the required information, the Bank shall immediately advise the party requesting the same and shall perform such acts as may be necessary to provide for alternative information gathering;

(l) Government Agency Orders: It shall promptly advise the CD Holders, through the Registrar and Paying Agent of: (i) any request by any government agency for any information related to the LTNCDs, or (ii) the issuance by any governmental agency of any cease-and-desist order suspending the distribution or sale of the LTNCDs or the initiation of any proceedings for any such purpose and shall use its best efforts to obtain at its sole expense the withdrawal of any order suspending the transactions with respect to the LTNCDs at the earliest time possible; and

(m) PDEx Listing Approval: It shall ensure that the LTNCDs are listed with PDEx unless applicable laws no longer require listing of long-term negotiable certificates of time deposit with an exchange.

These covenants of the Bank shall survive the issuance of the LTNCDs and shall be performed fully and faithfully by the Bank at all times while the LTNCDs or any portion thereof remains outstanding.

12 Events of Default The Bank shall be considered in default under the LTNCDs in case any of the following events shall occur: (a) it fails to pay any principal and/or interest due on the LTNCDs;

(b) any of its representations and warranties or any certificate or opinion submitted by it in connection with the issuance

of the LTNCDs is untrue, incorrect, or misleading in any material respect;

(c) it fails to perform or violates its other covenants under these Terms and Conditions (other than the payment obligation under paragraph (a) above) or the Contracts and such failure or violation is not remediable or, if remediable, continues to be unremedied for a period of thirty (30) calendar days from written notice to the Bank;

(d) the government or any competent authority takes any action to suspend the whole or the substantial portion of the operations of the Bank, or condemns, seizes, or expropriates all or substantially all of the properties of the Bank;

(e) any judgment, writ, warrant of attachment or execution, or similar process shall be issued or levied against all or substantially all of the Bank's assets and such judgment, writ, warrant, or similar process shall not be released, vacated, or fully bonded within thirty (30) calendar days after its issue or levy;

(f) it voluntarily suspends or ceases operations of a substantial portion of its business for a continuous period of thirty (30) calendar days, except in the case of strikes or lockouts when necessary to prevent business losses, or when due to fortuitous events or force majeure, and in each case, there is no Adverse Effect; or

(g) it becomes insolvent or is unable to pay its debts when due or commits or permits any act of bankruptcy, including: (i) filing of a petition in any bankruptcy, reorganization, winding-up, suspension of payment, liquidation, or other analogous proceeding; (ii) the appointment of a trustee or receiver over all or a substantial portion over its properties; (iii) making of an assignment for the benefit of its creditors over all or substantially all of its properties; (iv) admission in writing of its inability to pay its debts; or (v) entry of any order or judgment of any court, tribunal, or administrative


48

agency or body confirming the insolvency of the Bank, or approving any reorganization, winding-up, liquidation, or appointment of trustee or receiver of the Bank or a substantial portion of its property or assets.

13 Effects of Default

13.1 Declaration of Default: If any one or more of the Events of Default shall have occurred and be continuing after any applicable cure period shall have lapsed, any CD Holder by written notice to the Bank and the Registrar and the Paying Agent stating the Event of Default relied upon, may declare the Bank in default in respect of the LTNCDs held by such CD Holder and require the principal amount of the LTNCDs held by such holder, and all accrued interests (including any default interest specified in Condition 13.2 below) and other charges due thereon, to be immediately due and payable, and forthwith collect said outstanding principal, accrued interests (including any default interest specified in Condition 13.2 below) and other charges, without prejudice to any other remedies which such CD Holder or the other holders of the LTNCDs may be entitled.

13.2 Default Interest: In case of an Event of Default under Condition 12 (a), the Bank shall, in addition to the payment of the unpaid amount of principal and accrued interest, pay default interest at the rate of one percent (1%) per annum thereon, which shall accrue from the date the amounts payable under these Terms and Conditions became due until the same is fully paid.

13.3 Application of Payments: Any money delivered to the Paying Agent by the Bank pursuant to the demand for payment by a CD Holder under Condition 13.1 above shall be applied by the Paying Agent in the order of preference as follows: first, to the pro-rata payment to the Registrar and Paying Agent, Selling Agents, and PDEx, of the costs, expenses, fees, and other charges of collection, including reasonable compensation to them, their agents, attorneys, and all reasonable expenses and liabilities incurred or disbursements made by them, without gross negligence or bad faith; second, to the payment of the interest, including any default interest as specified in Condition 13.2 above, in the order of maturity of such interest; third, to the payment of the whole amount then due and unpaid on the LTNCDs for principal; and fourth, the remainder, if any shall be paid to the Bank, its successors, or assigns, or to whoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct; Provided, that in the event more than one (1) CD Holder makes a demand for payment under Condition 13.1 at or about the same time, any money delivered to the Paying Agent by the Bank pursuant to such demands by the CD Holders shall be applied by the Paying Agent to the pro rata payment of the amounts owing to such CD Holders and in the order of preference stated above.

13.4 Notice to CD Holders: The Registrar and Paying Agent shall promptly notify the Bank and the CD Holders of any notice received by it on the occurrence of any Event of Default as set forth in these Terms and Conditions according to a process agreed upon by the Registrar and Paying Agent and the Bank attached as Schedule 14 in the Registry and Paying Agency Agreement; Provided, that in case such notice (other than a notice of default under Condition 13.1 above) is received by the Registrar and Paying Agent from a CD Holder, the Registrar and Paying Agent, prior to notifying the remaining CD Holders, shall first advise the Bank of such notice and provide the Bank with an opportunity to refute such claim to the satisfaction of the party alleging the Event of Default within three (3) Business Days from its receipt of the advice from the Registrar and Paying Agent, failing which the Registrar and Paying Agent shall immediately notify the remaining CD Holders; Provided, further, that in case such notice consists of a notice of default under Condition 13.1 above, the Registrar and Paying Agent shall immediately, and in no case more than one (1) Business Day from its receipt of such notice, notify the remaining CD Holders.

14 Communications

14.1 Notices: Except for a notice to declare an Event of Default which must be personally delivered to the Bank and the Registrar and Paying Agent, all notices, instructions, and requests to the Bank and the Registrar and Paying Agent shall be in writing and shall be sent by personal delivery, courier, or registered mail with postage prepaid, confirmed facsimile to the Bank and Registrar and Paying Agent at its address, facsimile number, and secured electronic email address, and for the attention of the specified representative, as set forth below:

14.2 Any communication shall be given by letter, electronic mail (e-mail), fax or telephone, and shall be given, in the case of notices

to the Bank, to it at:


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PHILIPPINE BANK OF COMMUNICATIONS 6795 Ayala Avenue corner V.A. Rufino Street Makati City Telephone no.: (632) 662-8451 Fax no.: (632) 818-2606 E-mail: [email protected] Attention: Cherry Ann Vanessa B. Kimpo Vice President and Head – Asset Liability Management – Treasury Group and in the case of notices to the Registrar and Paying Agent, to it at: Philippine Depository & Trust Corp. 37th Floor Enterprise Centre Tower I Ayala Avenue, Makati City, Metro Manila Telephone no.: (632) /884-4425 Fax no.: (632) 7576025 E-mail: [email protected] Attention: Josephine Dela Cruz Director – Securities Services Telephone no.: (632) 884-4413 Fax no.: (632) 884-5097 E-mail: [email protected] Attention: Patricia Camille Garcia Registry Officer and in the case of notices to the CD Holders, through publication in two (2) newspapers of general circulation in Metro Manila (one of which shall be the Philippine Daily Inquirer) once a week for two (2) consecutive weeks; or any other address to or mode of service by which written notice has been given to the parties in accordance with this Condition.

14.1 Effectiveness: Such communications shall take effect, in the case of a letter, when delivered or, in the case of electronic mail (e-mail) or fax, on the date of transmission, or in case of notices to the CD Holders through publication, on the date of the last publication; Provided, that any communication by fax received after 5:00 p.m. or is otherwise received on a day which is not a Business Day shall take effect only at 10:00 a.m. of the immediately succeeding Business Day in the place of the recipient. 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.

15 Governing Law and Submission

15.1 Governing Law: These Terms and Conditions shall be governed by and construed in accordance with the laws of the Republic of the Philippines.

15.2 Jurisdiction: The courts of Makati City, to the exclusion of all other courts, are to have jurisdiction to settle any disputes which may arise out of or in connection with the LTNCDs and these Terms and Conditions and accordingly, any legal action or proceedings arising out of or in connection with the LTNCDs or these Terms and Conditions (“Proceedings”) may be brought in such courts. The Bank 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 CD 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).

mailto:[email protected]


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16 Amendment

Any amendment of these Terms and Conditions is subject to the BSP Rules.

17 Non-Waiver

The failure of any party at any time or times to require the performance by the other of any provision of the LTNCDs 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.

18 Ability to File Suit

Nothing herein shall be deemed to create a partnership or collective venture between the CD Holders. Each CD 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 necessary for the other CD Holders to be joined as a party in any judicial or other proceeding for such purpose.

19 Severability

If any provision hereunder becomes invalid, illegal or unenforceable under any law, the validity, legality and enforceability of

the remaining provisions of this Agreement 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.

20 Prescription

Any action upon the LTNCDs shall prescribe in ten (10) years from the time the right of action accrues.


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DESCRIPTION OF THE BANK Introduction Philippine Bank of Communications is a commercial bank based in the Philippines. PBCOM offers a broad suite of financial solutions, ranging from deposits products and cash management solutions, corporate and consumer loans, investment services, as well as trust and wealth management. PBCOM mostly caters to the middle market segment and small and medium-sized enterprises (“SMEs”). The Bank’s total assets stood at P97.50 billion, P95.11 billion (as restated), and P86.50 billion as of 30 June 2018, 31December 2017, 31 December 2016, respectively. Total equity was at P9.83 billion, P9.94 billion (as restated), and P10.78 billion as of 30 June 2018, 31 December 2017, 31 December 2016, respectively. As of 30 June 2018, the Bank has network of 117 branches (including BDI) across Luzon, Visayan and Mindanao. PBCOM also has 148 ATMs nationwide – 81 on-site and 67 in off-site locations. The Bank has been listed in the Philippine Stock Exchange (“PSE”) since 2015. As of 30 June 2018, the Bank has a market capitalization of P12.3 billion.

History The Philippine Bank of Communications started operations on September 4, 1939 at the Trade and Commerce Building on Juan Luna Street, Binondo, Manila. A branch of the Bank of Communications headquartered in Taiwan, it was one of the first non-American foreign commercial banks to operate in the Philippines. PBCOM came under Filipino ownership when Ralph Nubla and company purchased majority of the Bank’s outstanding capital stock on June 21, 1974. In February 1988, PBCOM was listed in the Makati and Manila Stocks Exchanges. In December 1995, in order to finance its Information Technology and Branch Expansion Program, the Bank offered 1 million of its common shares to the public for the first time. In 2000, PBCOM began to take bolder steps towards becoming a modern and competitive commercial bank. Major shareholders displayed their commitment to the Bank by pouring P2.6 billion in fresh equity, making PBCOM one of the biggest capitalized commercial banks. That year, PBCOM also acquired Consumer Savings Bank, a 19-branch thrift bank with a strong presence in retail market. In 2001, PBCOM transferred its Head Office from Binondo to the PBCOM Tower, then the country’s tallest building, located in the heart of Makati City. In 2011, ISM Communications Corporation (the “ISM Group”) signed on as a Strategic Third-Party investor to PBCOM. The ISM Group is a listed Philippine holding company with investments in the production and sale of media information systems for the hospitality industry and development of software and hardware internet solutions under its associate, Acentic Holdings Limited. ISM Group is led by its Chairman, Mr. Eric O. Recto. It is owned by Monfortino Holdings, Inc., Dennison Holdings Corporation, Accion Common Development Fund SPC and as well as other strategic partners. Eric Recto was elected as the Bank’s Chairman on 8 May 2012. In September 2014, the entry of Mr. Lucio Co as the Bank’s strategic investor placed PBCOM in a unique position for growth. The Bank is focused on building its capabilities in order to leverage the more than 3,000 suppliers and trade partners and 1.1 million loyal customers of Puregold Price Club Inc. and 600,000 active members of S&R. With Chairman Eric O. Recto and President and CEO Patricia May T. Siy at the helm, PBCOM embarks on the next phase of its growth and development as it strives to deliver world-class customer service, expand its distribution network to bring banking services, and introduce new products and services. The Bank is poised to expand its suite of financial solutions, which ranges from Deposits and Investment Services, to Cash Management Solutions, as well as Commercial and Personal Loans.


52

Awards and Citation 2017 BSP Pagtugon Award/Citations for Consumer Protection

Outstanding Partner in Conference on Gearing Up for External Competitiveness

- In recognition of the Bank’s contribution of resource persons and materials for hedging-related activities

Special Citation on Accessibility - In recognition of the Bank’s support and willingness to improve facilities and structures that meet

the needs of persons with disabilities Finalist for Pagtugon Award

- In recognition of the Bank’s efficiency in serving and protecting the interests of their clients, and in adhering to best practices in customer service

Strategic Initiatives The Bank’s vision is to be the most preferred and trusted financial partner through generations of nurturing relationships, realizing visions and enriching lives. To achieve this, the Bank aims to further build on its recent success by deepening client relation and creating new ones by leveraging on technology via the provision of superior financial solutions, competitive product packages and enhanced customer experience. To enhance its competitive advantage and increase market share, the Bank has made strategic changes in its business model to maximize the opportunities brought about by the changes in the business environment. The major initiatives introduced by the Bank in recent years are as follows: Expansion of Core Lending Business - The Bank aims to further increase interest income by expanding its loan portfolio on both corporate and consumer loans. Although the Bank’s loan portfolio is mostly composed of businesses from the middle market and SME sector, the Bank seeks to expand its consumer loan portfolio – especially salary loans – due to its higher interest margin potential. The Bank also seeks to maximize opportunities brought about by the entry of the Lucio Co Group, the Bank seeks to increase business not only from the Puregold and Cosco, but also by converting the suppliers of Puregold into PBCOM clients for deposits and for financing. Digital Banking Platform - In 2015, the Bank started to enhance its value delivery system via the development of Cash Management System (“CMS”) designed to enhance the capability of clients to manage their cash flows such as bills payments. In 2017, the Bank unveiled its digital banking platform – the PBCOM Online Platform or P.O.P. P.O.P. is a comprehensive and robust suite of digital services to serve the full spectrum of client needs ranging from cash management, fund transfer, bills payment, purchase of mobile load, and a branch locator. P.O.P. has 2 variants as follows:

P.O.P for Individual Customers – comes in both mobile and online platforms. The platform allows clients a full view and control of all their accounts, as well as enables them to transfer funds real-time to other banks via InstaPay. The platform is designed to enable clients a seamless in-app enrollment, which means that registration and activation in done online without the need to visit a PBCOM branch to submit documents.

P.O.P for Business and Corporate Clients – is an integrated suite of digital services to help business and corporate clients plan, monitor and manage their company’s liquidity and meet their payments, monitor receivables, accounts and information requirements. This platform addresses customer’s end-to-end collections and payment needs in real time via a fully secured web portal.

Expansion of Geographical Reach – The Bank is refocusing its branch expansion strategy into higher value markets. This involves adding new branches in new markets, relocating existing branches to higher potential areas, and establishment of Branch Lites (see Support Initiatives – Establishment of Branch-Lites below). The aim of the branch transformation roadmap is to provide more focus


53

on sales and business-building to enhance the Bank’s value to existing clients, as well as prospects. In addition, the synergies with the Lucio Co Group open the Bank to possibilities of opening a branch in Puregold and S&R stores nationwide. Prudent Capital Management – The Bank has a responsive credit policy and monitoring framework in place to ensure the quality of the loan and investment portfolio. Via a comprehensive risk scoring model, any credit and investment proposal undergoes a comprehensive review to determine the quality of the credit and acceptability of the risk.

Support Initiatives Technology Applications - The Banks aims to achieve a click-and-brick business model whereby a significant percentage of business is achieved via mobile and digital platforms (such as P.O.P.). Through continuous development of its cash management system and exploring other non-traditional channels, the Bank aims not only to service the ever-changing requirements of clients, but also reduce the cost-of-doing-business by reducing customer acquisition costs, as well as operational costs. Establishment of Branch-Lites - As part of the its branch transformation roadmap, the Banks seeks to expand the geographical reach of its distribution channels by supplementing traditional branch expansion with the establishment of smaller business centers called Branch Lite – a limited-service allowed by the BSP to perform activities and provide any of the products and services that a (regular) branch may perform or provide except those suited only to sophisticated clients with aggressive risk tolerance. The Branch Lite program allows the Bank a more cost-effective means of expanding its branch network. Branch Lites capitalizes in existing financial technology like web-based business contact and cash recycling machine to reduce manpower requirements. Another benefit is the exemption of Branch Lites from the minimum capitalization requirement of Banks. Human Resource Development - Together with the strengthening of its information and communication technology (“ICT”) capabilities, the Bank seeks to enhance the responsiveness of its human resource to the changing needs of the market by the equipping them with the right skill set, as well as the right mindset. The Bank has a comprehensive human resource enrichment program which begins with an on-boarding workshop under its PBCOM Orientation for New Employees (or “P ONE”) where the Bank communicates its vision, mission and core values, products and services, organizational structure, as well as foundational knowledge such as policies, procedures and regulations. After which, new hires and high potential employees become eligible for functional and specialized trainings specific to their field or business unit.

Business Activities The Bank’s business activities are divided as follows: Branch Banking Group, Corporate Banking, Treasury, Consumer Finance, and Trust and Wealth Management. Segment Report Contributions of the business segments to the Bank’s operating results for the six months ended 30 June 2018 and 30 June 2017 is as follows:

2018

Branch Banking Group

Corporate Banking Group

Treasury Segment

Consumer Finance

Segment

Trust and Wealth

Management Segment

Rentals and Headquarters Total

(amounts in Php thousands)

For the six months ended 30 June 2018 Statement of income Revenue Revenue, net of interest expense Third party (P=453,688) P=1,127,166 P=261,549 P=591,300 P=901 (P=6,220) P=1,521,008 Intersegment 1,076,895 (786,358) (156,232) (253,072) (1,414) 120,181 −

Net interest income (expense) 623,207 340,808 105,317 338,228 (513) 113,961 1,521,008


54

2018



Treasury Segment

Consumer Finance

Segment

Trust and Wealth

Management Segment



Rent income − − − 87 − 314,495 314,582 Service charges, fees, and commissions 39,274 99,560 1 35,710 − 1,272 175,817 Profit from assets sold − − − 54,061 − 2,018 56,079 Trading and securities gain - net − − 31,041 − − − 31,041 Foreign exchange gain – net 8,763 4,669 1,582 − − − 15,014 Income from trust operations − − − − 7,488 − 7,488 Gain on assets exchange - net − − − − − 7,286 7,286 Miscellaneous 10,314 4,473 (6,363) 12,904 − 38,610 59,938

Total operating income 681,558 449,510 131,578 440,990 6,975 477,642 2,188,253

Compensation and fringe benefits 144,788 39,899 20,441 118,659 4,104 254,726 582,617 Taxes and licenses 115,854 54,843 46,019 46,788 480 28,905 292,889 Depreciation and amortization 53,044 1,769 854 12,787 249 129,077 197,780 Provision for credit and impairment losses − 74,432 2,167 50,903 − − 127,502 Occupancy and other equipment-related costs 86,855 11,437 429 15,451 876 11,313 126,361 Other operating expenses 137,465 27,562 29,465 64,395 1,093 172,796 432,776

Total operating expenses 538,006 209,942 99,375 308,983 6,802 596,817 1,759,925

Income (loss) before share in net income of an associate

143,552 239,568 32,203 132,007 173 (119,175) 428,328

Share in net income of an associate − − − − − 104 104

Income (loss) before income tax 143,552 239,568 32,203 132,007 173 (119,071) 428,432 Provision for income tax − 3,811 67,957 6,688 − 37,530 115,986

Net income (loss) P=143,552 P=235,757 (P=35,754) P=125,319 P=173 (P=156,601) P=312,446

As of 30 June 2018

Statement of financial position Segment assets Property and equipment P=401,492 P=− P=− P=99,408 P=− P=557,548 P=1,058,448 Investment properties − − − 191,139 − 2,460,707 2,651,846 Other assets 10,815,358 40,035,935 24,646,968 15,028,600 70,403 3,190,740 93,788,004

Total segment assets P=11,216,850 P=40,035,935 P=24,646,968 P=15,319,147 P=70,403 P=6,208,995 P=97,498,298

Total segment liabilities P=64,259,968 P=2,661,296 P=17,328,306 P=2,030,341 P=− P=1,390,998 P=87,670,909

2017 (Restated)



Treasury Segment

Consumer Finance

Segment

Trust and Wealth

Management Segment



For the six months ended 30 June 2017 Statement of income Revenue Revenue, net of interest expense Third party (P=315,314) P=937,752 P=276,334 P=464,767 P=629 P=80,368 P=1,444,536 Intersegment 705,231 (527,786) (99,700) (142,987) (1,016) 66,258 −

Net interest income (expense) 389,917 409,966 176,634 321,780 (387) 146,626 1,444,536

Rent income − − − 131 − 279,004 279,135 Service charges, fees, and commissions 41,053 86,486 − 43,003 − 965 171,507 Foreign exchange gain – net 6,534 2,978 22,047 − − − 31,559 Profit from assets sold − − − 7,477 − 3,498 10,975 Trading and securities loss - net − − (10,316) − − − (10,316) Income from trust operations − − − − 7,839 − 7,839 Gain on assets exchange − − − − − 836 836 Miscellaneous 11,502 7,419 (3,651) 21,159 − 42,961 79,390

Total operating income 449,006 506,849 184,714 393,550 7,452 473,890 2,015,461

Compensation and fringe benefits 146,516 39,193 26,434 109,060 5,012 250,975 577,190


55

2017 (Restated)



Treasury Segment

Consumer Finance

Segment

Trust and Wealth

Management Segment



Taxes and licenses 64,329 56,184 28,815 45,558 1,084 27,893 223,863 Depreciation and amortization 60,146 2,434 769 14,152 412 126,814 204,727 Occupancy and other equipment-related costs 93,201 3,071 430 10,601 413 9,684 117,400 Provision for (reversal of) credit and impairment

losses − 44,363 − 37,105 − − 81,468

Other operating expenses 133,721 24,747 40,588 63,670 1,414 155,884 420,024

Total operating expenses 497,913 169,992 97,036 280,146 8,335 571,250 1,624,672

Income (loss) before share in net income of an

associate (48,907) 376,857 87,678 113,404 (883) (97,360) 390,789

Share in net income of an associate − − − − − 113 113

Income (loss) before income tax (48,907) 376,857 87,678 113,404 (883) (97,247) 390,902 Provision for income tax − 4,360 65,353 1,394 − 28,682 99,789

Net income (loss) (P=48,907) P=332,497 P=22,325 P=112,010 (P=883) (P=125,929) P=291,113

As of 31 December 2017 Statement of financial position Segment assets Property and equipment P=426,713 P=− P=− P=108,603 P=− P=573,553 P=1,108,869 Investment properties − − − 160,406 − 2,463,828 2,624,234 Unallocated assets 16,217,242 35,498,990 26,021,724 10,784,419 69,909 2,785,883 91,378,167

Total segment assets P=16,643,955 P=35,498,990 P=26,021,724 P=11,053,428 P=69,909 P=5,823,264 P=95,111,270

Total segment liabilities P=56,083,977 P=3,601,893 P=21,903,356 P=2,058,493 P=− P=1,520,382 P=85,168,101

Branch Banking - The Branch Banking Group primarily handles individual customers’ deposits, and provides overdraft and fund transfer facilities. Although the Bank’s focus is on fund generation, it also serves as the Bank’s distribution channel for commercial and consumer loans, investment products, remittance and other retail-oriented products and services. Part of the Bank’s mandate is to broaden its market reach where its branches are currently located, increasing both its deposit and loan clients. The following table sets out the Bank’s branches and ATM information in the Philippines:

Branch and ATM Network Growth/ Expansion

As of 31 December

As of 30 June

2015 2016 2017 2018

PBCom and subsidiary No. of Branches 100 108 112 117 Metro Manila 41 41 44 49 Rest of Luzon 28 28 28 26 Visayas 11 11 11 12 Mindanao 20 20 21 21 Number of OBO 19 8 8 9 ATMs 171 146 145 148 On-site 77 77 80 81 Off-site 94 69 65 67

Corporate and Commercial – The Corporate and Commercial Banking Group manages relationships with corporate and institutional clients of the Bank via the provision of loan and other credit facilities. The Bank is segmented into two (2) divisions: Corporate


56

Banking which caters to middle markets and large corporate clients, and Commercial Banking which caters to SMEs. The Banks clientele is largely from the middle market and SME segments. In addition to loans and other credit facilities, the Bank also cross-sells the Bank’s cash management solutions, foreign exchange and investment products. Treasury – Treasury Group manages the asset and liability position of the Bank to ensure adequate liquidity and funding to the Bank’s various credit business units. It also exercises prudent and strategic management in the deployment of funds used for proprietary trading operations and investment activities. Treasury also provides the Bank’s qualified clients access to financial products for investments and/or hedging foreign exchange risks. Consumer Finance – the Consumer Finance Group provides practical loan solutions that balance quality and affordability. The Bank provides retail clients auto loans, home loans, personal loans and salary loans. The Bank’s branch network serves as the main distribution channel of the Bank. The Bank also partners with auto dealers, property developers, as well as third-party agencies who caters to those markets. Trust and Wealth Management – the Trust & Wealth Management Group provides financial solutions to individual and institutional clients by understanding their unique investment objectives and risk tolerance. For clients who wish to take advantage of the expertise of professional fund managers, the Banks has several Unit Investment Trust Funds (“UITFs”) that investments in various financial instruments, such as money market securities, bonds and equities.

Customer/Clients Corporate clients are mostly enterprise belonging to the SME and middle market segment.

Competition The Bank faces stiff competition not only from peers in the commercial banking segment, but also from other segments of the banking industry. Due to the high potential business loans from the middle market and SME segment and the consumer credit space, the banking industry has seen significant investments from players aiming to tap this potential for growth. With the liberalization of the Philippine banking industry, the market is expected to accommodate more players from abroad. To compete effectively in this area, the Bank is leveraging not only on its experience and loyal customer base, but also on continuous human capital development and the use of technology to streamline operations and service delivery. As of 10 September 2018, the Philippine Banking System has a total of 44 commercial banks, 22 of which are foreign banks. Excluding commercial banks with universal banking, there are 23 players, 16 of which are foreign banks.


57

ASSETS AND LIABILITIES

The tables below and accompanying discussions provide selected financial highlights regarding the Bank’s assets and liabilities. The following information should be read together with the Bank’s Consolidated Financial Statements included in this FinaLOffering

Circular. Loan Portfolio The Bank offers a wide range of consumer and business loans. For consumer loans, these include: Auto Loans, Home Loans, Personal Loans and Salary Loans. For business loans, these include short-term credit facilities such as working capital loans and trade financing, and long-term loans such as real estate development, contract-to-sell financing and project finance.

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.

Consolidated

As of 31 December

As of 30 June (Unaudited)

2015 % 2016 % 2017 % 2018 %

(amounts in Php thousands, except percentages)

Wholesale and retail trade P=7,298,188 22.11 P=9,527,128 21.74 P=11,012,377 21.23 P=12,254,575 21.95 Manufacturing 5,838,384 17.69 7,828,090 17.86 8,795,298 16.95 8,327,369 14.92 Real estate, renting and business activities 5,119,028 15.51 6,766,110 15.44 8,634,774 16.64 9,968,191 17.86 Private households with employed persons

5,246,762

15.90 6,539,698 14.92 7,898,283 15.22 9,343,780

16.74

Financial intermediaries 3,024,956 9.16 4,809,601 10.98 4,022,210 7.75 3,604,110 6.46 Electric, gas and water supply 325,500 0.99 1,605,111 3.66 3,289,698 6.34 3,540,084 6.34 Construction 1,789,940 5.42 2,251,414 5.14 2,578,865 4.97 2,404,898 4.31 Transport, storage and communication 1,470,887 4.46 1,813,102 4.14 1,670,510 3.22 1,846,719 3.31 Agriculture, hunting and forestry 882,392 2.67 1,371,682 3.13 1,615,185 3.11 1,034,100 1.85 Human health and social work activities 32,890 0.10 533,505 1.22 615,214 1.19 603,716 1.08 Other service activities 183,830 0.56 232,139 0.53 420,891 0.81 345,426 0.62 Accommodation and food service activities 214,237 0.65 136,112 0.31 156,585 0.3 1,639,368 2.94 Education 50,716 0.15 53,071 0.12 52,957 0.1 46,381 0.08 Mining and quarrying 385,569 1.17 281,879 0.64 48,018 0.09 196,178 0.35 Others 1,144,788 3.47 70,530 0.17 1,066,528 2.08 663,723 1.19

P=33,008,067 100.00 P=43,819,172 100.00 P=51,877,393 100.00 P=55,819,302 100.00

The Bank employs the following exposure limits: single borrower limit, industry limits. The Risk Oversight Committee (“ROC”) 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.


58

The table below shows the Bank’s gross loans classified by type of product.

Consolidated

As of 31 December As of 30 June 2018

(Unaudited)

2015 % 2016 % 2017 % 2018 %


Consumer Loans P=3,910,338 11.81 P=5,613,053 12.78 P=7,780,988 14.95 P=9,984,959 17.84 Real Estate Loans 4,800,387 14.49 6,107,729 13.90 8,605,312 16.53 8,793,708 15.71 Commercial Loans 22,489,265 67.90 30,796,938 70.11 34,634,193 66.53 36,189,625 64.64 Personal Loans 1,922,673 5.80 1,409,125 3.21 1,039,547 2.00 1,016,521 1.82

P=33,122,662 100.00 P=43,926,844 100.00 P=52,060,040 100.00 P=55,984,813 100.00

Source: PBCOM

Historically, commercial loans comprise around 70% of the Group’s Total Loan Portfolio. As of 30 June 2018, the contribution of commercial loans amounted to P36.2 Billion with a share of 64.6%. The decrease in the share of commercial loans is due to the Group’s strategic direction in expanding its higher-margin consumer loans business. Year-to-date, the gross loans grew 7.5%, led by commercial loans and consumer loans which grew 4.5% and 28.3%, respectively. Maturity The table below shows the Bank’s gross loans by maturity.

Consolidated


(Unaudited)

2015 % 2016 % 2017 % 2018 %


Due within one (1) year P=20,387,723 61.55 P=25,489,484 58.03 P=26,193,169 50.31 P=28,328,654 50.60 Due within one (1) year to five (5) years 7,599,720 22.94 10,151,075 23.11 16,500,974 31.70 16,921,292 30.22 Due after five (5) years 5,135,218 15.50 8,286,285 18.86 9,365,897 17.99 10,734,867 19.17

P=33,122,662 100.00 P=43,926,844 100.00 P=52,060,040 100.00 P=55,984,813 100.00

Source: PBCOM

Loans due within the one year, one year to five year, and due after five years bucket consists of personal and commercial loans, auto and commercial loans and commercial and home loans, respectively.

As of 30 June 2018

Breakdown of Loans by Type and Maturity Due within one

(1) year % Due within 1-

5 Years % Due after 5

Years %


Auto P174,814 0.61 P5,426,670 32.81 P101,858 0.95 Commercial 26,226,670 91.35 8,246,974 49.86 6,486,721 60.43 Home Mortgage 285,122 0.99 357,345 2.16 3,709,176 34.55 Others 2,023,161 7.05 2,509,471 15.17 437,112 4.07

P28,709,766 100.00 P16,540,180 100.00 P10,734,867 100.00


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As of 31 December 2017

Breakdown of Loans by Type and Maturity Due within one

(1) year % Due within 1-

5 Years % Due after 5

Years %


Auto P147,374 0.56 P5,642,241 34.09 P207,566 2.22 Commercial 24,216,473 92.64 7,661,043 46.29 6,088,236 64.99 Home Mortgage 648,520 2.48 2,058,317 12.44 3,054,317 32.60 Others 1,128,465 4.32 1,189,374 7.19 18,115 0.19

P26,140,831 100.00 P16,550,975 100.00 P9,368,234 100.00

Source: PBCOM

Borrower The table below shows the Bank’s gross loans by type of borrower.

Consolidated

As of 31 December

As of 30 June Unaudited)

2015 % 2016 % 2017 % 2018 %


Consumer P=7,786,461 23.51 P=9,638,289 21.94 P=13,668,188 26.25 P=15,131,630 27.03 Corporate 25,336,201 76.49 34,288,555 78.06 38,391,852 73.75 40,853,183 72.97

P=33,122,662 100.00 P=43,926,844 100.00 P=52,060,040 100.00 P=55,984,813 100.00

Source: PBCOM

Size The table below shows the Bank’s gross loans by principal amount.

Consolidated


(Unaudited)

2015 % 2016 % 2017 % 2018 %


Less than 1,000,000 P=6,664,764 20.12 P=7,140,340 16.26 P=8,296,099 15.94 P=8,856,090 15.82 1,000,001 to 2,000,000 2,030,026 6.13 2,708,925 6.17 3,649,309 7.01 3,294,100 5.88 2,000,001 to 3,000,000 1,440,036 4.35 1,573,342 3.58 2,223,196 4.27 2,364,596 4.22 More than 3,000,000 22,987,837 69.40 32,504,237 74.00 37,891,437 72.78 41,470,027 74.07

P=33,122,662 100.00 P=43,926,844 100.00 P=52,060,040 100.00 P=55,984,813 100.00

Source: PBCOM

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 30 June 2018, the Bank has complied with the single borrower’s limit for all of its loans.


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Secured and Unsecured

The table below shows the Bank’s secured and unsecured loans according to type of collateral.

Consolidated


(Unaudited)

2015 % 2016 % 2017 % 2018 %

(amounts in Php thousands, except percentages) Loans secured by:

Chattel P=2,381,481 7.19 P=3,414,021 7.77 P=4,459,181 8.57 P=5,085,690 9.08 Real Estate 5,879,417 17.75 7,230,862 16.46 7,997,286 15.36 9,850,127 17.59 Deposit hold-out 623,896 1.88 859,978 1.96 890,530 1.71 928,660 1.66 Others 598,368 1.81 1,616,197 3.68 1,790,686 3.44 3,943,834 7.04

Secured 9,483,162 28.63 13,121,058 29.87 15,137,683 29.08 19,808,310 35.38 Unsecured 23,639,500 71.37 30,805,786 70.13 36,922,357 70.92 36,176,502 64.62

P=33,122,662 100.00 P=43,926,844 100.00 P=52,060,040 100.00 P=55,984,813 100.00

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 14, 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 Corporate and Commercial Banking Group. The credit risk policies and system infrastructure ensure that loans are monitored and managed at all times. The bank maintains credit records and documents on all borrowings and capture transaction details in its loan systems. Various credit portfolio analytics, including segmented customer delinquency trending, are tracked regularly to guide management strategy and decision making. This function is carried out by the Credit Review Unit under the Bank’s Enterprise Risk Management/ICAAP Group. The Bank employs industry limits, single borrower limit, Related Party Transaction (RPT) limit, and DOSRI limit in its exposures. The ROC oversees the system of limits to discretionary authority that the Board delegates to management and ensures that the system remains effective, that limits are observed, and that immediate corrective actions are taken whenever limits are breached. These limits are compliant with pertinent BSP regulations. The Bank also measures credit risk exposure in terms of regulatory capital requirement using the standardized approach. Under this method, credit exposures are risk-weighted to reflect third-party credit assessment of the individual exposure from acceptable external credit rating agencies and allow the use of eligible collaterals to mitigate credit risk. All documentation used in the collateralized transactions and for guarantees are binding on all parties and legally enforceable in the relevant jurisdiction. The management of the credit portfolio is subject to internal and regulatory limits which serve to control the magnitude of credit risk exposures and preserve the quality of the portfolio. ERMG also monitors large exposures and credit risk concentrations in accordance with BSP Circular 414.


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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 based on regulatory accounting principles (RAP).

Consolidated


(Unaudited)

2015 % 2016 % 2017 % 2018 %


Risk Classification

Especially mentioned P=424,315 1.27 P=451,468 1.03 P=429,490 0.83 P=375,833 0.68 Substandard (unsecured) 181,176 0.54 246,198 0.56 204,614 0.40 184,006 0.33 Substandard (secured) 175,693 0.53 151,443 0.34 369,347 0.71 488,236 0.88 Doubtful 195,460 0.59 221,945 0.51 156,574 0.30 192,083 0.35 Loss 1,417,311 4.26 1,531,837 3.49 1,464,150 2.83 1,443,810 2.60

Total Classified 2,393,955 7.19 2,602,891 5.93 2,624,175 5.07 2,683,969 4.83 Unclassified 28,498,506 85.62 38,712,277 88.15 46,523,916 89.86 50,209,552 90.34

33,286,416 100.00 43,918,060 100.00 51,772,267 100.00 55,577,490 100.00

Allowance for probable losses Specific 1,963,078 86.36 2,207,852 84.57 2,145,393 81.63 2,132,817 80.33

General 310,157 13.64 402,717 15.43 482,769 18.37 522,160 19.67

P=2,273,235 100.00 P=2,610,569 100.00 P=2,628,162 100.00 P=2,654,977 100.00

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.


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The following table shows the Bank’s non-performing loans, non-performing assets, allowances and restructured loans based on regulatory accounting principles (RAP).

Consolidated (RAP)

As of 31 December 30 June 2018 (Unaudited)

2015 2016 2017 2018


Gross NPLs P=2,441,607 P=2,692,302 P=2,628,913 P=2,788,604

Net NPLs 478,529 484,450 483,520 680,650

Gross Total Loan Portfolio (TLP) 33,160,537 43,858,001 51,649,925 56,276,647

Ratio of Gross NPLs to Gross 7.34% 6.14% 5.09% 4.96%

TLP (%) Ratio of Net NPLs to gross TLP (%) 1.44% 1.10% 0.94% 1.21%

Real and other properties acquired (ROPOA, net of impairment & accumulated depreciation) - based on BSP formula

533,699

560,392

600,494

702,233

Non-performing assets (NPA) - based on BSP formula 2,975,306 3,252,694 3,229,407 3,490,836

Total assets 77,133,663 86,277,279 98,132,383 100,680,971 NPA as a percentage of total assets (%) * using total assets reported in the BSP Published Balance She 0.69% 0.65% 0.61% 0.70% NPA as a percentage of Gross Total Loan Portfolio (TLP) (%) 8.97% 7.42% 6.25% 6.20% Allowance for probable loan losses (sum of general loan loss provision & specific allowance) 2,273,235 2,610,569 2,628,162 2,654,977

Allowance for probable losses (ROPA) 172,619 170,895 164,245 164,051 Allowance for probable loan losses as a percentage of total Gross NPL (%) 6.86% 5.95% 5.09% 4.72% Total Allowance for probable losses (sum of allowance for probable loan losses & allowance for probable losses-ROPA) as a percentage of NPA (%) 82.2% 85.5% 86.5% 80.8%

Total restructured loans (gross of allowance) 125,838 191,231 234,031 237,996

Restructured loans to gross total loan portfolio (TLP) 0.38% 0.44% 0.45% 0.42%

Loans-written-off 71,918 33,653 344,730 141,460

The following table sets forth, as at the dates indicated, the Bank’s gross NPLs by the respective borrowers’ industry or economic activity and as a percentage of the Bank’s gross NPLs based on regulatory accounting principles (RAP).

Consolidated

As of 31 December


2015 % 2016 % 2017 % 2018 %


Wholesale and retail trade P=661,060 27.07 P=712,665 26.47 P=718,631 27.34 P=949,230 34.04 Manufacturing 426,828 17.48 416,560 15.47 317,687 12.08 229,868 8.24 Real estate, renting and business activities 260,432 10.67 275,797 10.24 82,269 3.13 108,850 3.90 Private households with employed persons 443,395 18.16 690,411 25.64 848,823 32.29 1,101,246 39.49 Financial intermediaries 5,492 0.22 4,992 0.19 4,992 0.19 7,003 0.25 Construction 43,010 1.76 68,122 2.53 74,765 2.84 97,414 3.49


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Transport, storage and communication 115,609 4.73 99,604 3.70 99,956 3.80 111,695 4.01 Agriculture, hunting and forestry 286,312 11.73 295,408 10.97 293,557 11.17 58,214 2.09 Other service activities 36,640 1.50 15,286 0.57 18,983 0.72 27,733 0.99 Accommodation and food service activities 4,888 0.20 2,000 0.07 347 0.01 1,682 0.06 Mining and quarrying 11,785 0.48 885 0.03 0 0.00 0 0.00 Others 146,155 6.00 110,572 4.12 168,903 6.43 95,668 3.43

P=2,441,606 100.00 P=2,692,302 100.00 P=2,628,913 100.00 P=2,788,604 100.00

Deposit Liabilities The Bank offers a wide range of deposit products that primarily cater to consumer and retail customers. Deposit products include: Quick Cash Account, Regular Savings and Checking Account, Pensionado (SSS Pensioner), Value Check Account, IntegrALL Account, Regular Time Deposit, Passbook Time Deposit, Dollar Savings Account, Euro Savings Account, and Euro Time Deposit. Significant funding counterparties (those whose outstanding balance of Total deposits and deposit substitutes is 1% of the Bank’s total deposit and deposit substitutes) are being monitored by Treasury in close coordination with ERMG. The table below shows the breakdown of the Bank’s deposit liabilities.

Consolidated

As of 31 December


2015 % 2016 % 2017 % 2018 %


Demand 12,523,472 21.48 15,464,230 24.49 19,400,193 27.43 21,039,814 28.34 Savings 5,054,764 8.67 6,943,767 11.00 8,329,526 11.78 8,030,627 10.82 Time 40,724,117 69.85 40,737,984 64.51 43,006,098 60.80 45,179,054 60.85

TOTAL 58,302,353 100.00 63,145,981 100.00 70,735,817 100.00 74,249,495 100.00

Consolidated

As of 31 December


2015 % 2016 % 2017 % 2018 %


Demand 12,523,472 21.48 15,464,230 24.49 19,400,193 27.43 21,039,814 28.34 Peso 2,523,472 15,464,230 19,400,193 21,039,814 Foreign - - - - Savings 5,054,764 8.67 6,943,767 11.00 8,329,526 11.78 8,030,627 10.82 Peso 4,067,108 5,215,960 5,409,705 5,223,552 Foreign 987,656 1,727,807 2,919,821 2,807,075 Time 40,724,117 69.85 40,737,984 64.51 43,006,098 60.80 45,179,054 60.85 Peso 33,184,113

33,483,669 36,837,011 38,452,968

Foreign 7,540,004

7,254,315

6,169,087

6,726,086 TOTAL 58,302,353 100.00 63,145,981 100.00 70,735,817 100.00 74,249,495 100.00


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Capital Adequacy The following table shows the Group’s capital base by category.

Consolidated

As of 31 December As of June 30 (Unaudited)

2015 2016 2017 2018

(amounts in Php Millions) CET-1 Capital:

Paid-up common stock P10,676 P12,070 P12,016 P12,016 Additional paid-in capital 814 814 2,262 2,262 Retained earnings (3,966) (4,230) (4,159) (3,886) Undivided profits (252) 96 286 174 Net unrealized gains or losses on AFS-FVTOCI 24 26 34 (19) Cumulative foreign currency translation 23 8 (1) 3 OCI - (171) (93) (61) Minority interest in subsidiary banks (8) (10) (11) 0

7,311 8,603 10,334 10,489

Less: Regulatory Adjustments to CET-1

Outstanding unsecured loans, other credit accommodations

and guarantees granted to subsidiaries and affiliates - 1 - 1 Goodwill 255 256 256 256 Other intangible assets 676 741 719 708 Investments in equity of unconsolidated subsidiary banks and quasi-banks, and other financial allied undertakings

- -

Investments in equity of unconsolidated subsidiary securities dealers/brokers and insurance companies 15 15 14 13 Significant minority investments 12 12 13 13

958 1,025 1,002 991

Tier 2 Capital Additional Tier 1 Capital - - - -

Less: Regulatory Adjustments to AT-1 - - - -

- - - -

Total Tier 1 Capital 6,353 7,578 9,332 9,498

Appraisal increment reserve 1,580 1,596 1,611 1,618 General loan loss provision 310 403 483 522

1,890 1,999 2,094 2,140

Less: Regulatory Adjustments to Tier 2 Capital - - - -

Total Tier 2 Capital 1,890 1,999 2,094 2,140

Total Qualifying Capital P8,243 P9,577 P11,426 P11,638

As of 30 June 2018, total capital adequacy ratio was at 15.10% while its Tier 1 capital adequacy ratio was at 12.25%. As of 31 December 2015, 2016 and 2017, the Bank’s total capital adequacy ratio stood at 15.01%, 14.64%, 15.85% (as restated), respectively. As of 31 December 2015, 2016 and 2017, the Bank’s Tier 1 capital adequacy ratio stood at 11.49%, 11.51%, 12.88% (as restated), respectively.

Risk Management The Bank applies risk management across the entire organization — from the Board of Directors, Senior Management, Business Segments and Banks, Business Centers, support units, and to individual employees; as well as in specific functions, programs, projects and activities. Implementation of the Framework contributes to strengthening management practices, decision making and resource allocation, and increasing shareholder value; while protecting the interest of its clients, maintaining trust and confidence, and ensuring compliance with regulations.


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Enterprise risk management (ERM) is the framework of policies, processes and systems, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives. The Risk Oversight Committee (ROC) assists the Board of Directors in the effective discharge of its function in overseeing the enterprise risk management program of the Bank, its subsidiaries and its trust unit. Its responsibilities are to:

1. Oversee the risk management framework. The committee shall oversee the enterprise risk management framework and ensure that there is periodic review of the effectiveness of the risk management systems and recovery plans. It shall ensure that corrective actions are promptly implemented to address risk management concerns.

2. Oversee the adherence to risk appetite. The committee shall ensure that the current and emerging risk exposures are consistent with the Bank’s strategic direction and overall risk appetite. It shall assess the overall status of adherence to the risk appetite based on the quality of compliance with the limit structure, policies, and procedures relating to risk management and control, and performance of management, among others.

3. Oversee the risk management function. The committee shall be responsible for the appointment/selection, remuneration,

and dismissal of the Chief Risk Officer (CRO). It shall also ensure that the risk management function has adequate resources and effectively oversees the risk-taking activities of the Bank.

The Enterprise Risk Management/ICAAP Group is the ROC’s implementing arm in carrying out its functions. Enterprise Risk Management Control Framework Model The Bank built its enterprise risk management system based on the concepts of the COSO Enterprise Risk Management – Integrated Framework as its model. The ERM Framework and related policies, procedures and methods are further refined with regulatory guidelines to ensure compliance to external rules and regulations. The enterprise risk management framework for the Bank’s goals can be summarized as the Management setting the strategic objectives, selecting the strategy and laying down more specific objectives throughout PBCOM; guided by its mission and vision. The overall objectives can be categorized into:

Strategic – high-level goals, aligned with and supporting its mission

Operations – effective and efficient use of its resources

Reporting – reliability of reporting

Compliance – compliance with applicable laws and regulations.

Various Types of Risk Credit Risk Credit risk is the primary financial risk in the banking system and exists in all revenue generating activities. Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The risk arises any time when Bank’s funds are extended, committed, invested or exposed through actual or implied contractual agreements. Capital depletion through loan losses has been the ultimate cause of most institutions' failures. The Bank’s credit risk arises from its lending and trading of securities and foreign exchange activities. The Bank, in recognition of the importance of identifying and rating credit risk as the initial step towards its effective management, has put in place a comprehensive set of policies and established underwriting processes, as approved by the Board of Directors. Regular analysis of the ability of potential and existing borrowers to meet interest and capital repayment obligations is made, including amendment of lending limits when appropriate. The Bank is thus able to continually manage credit-related risks in its risk asset portfolio through objective assessments/evaluations of credit proposals prior to presentation to the appropriate approval


66

authority, ensuring the highest standards of credit due diligence and independence. The Bank’s approval matrix begins at carefully reviewed and selected individual limit delegations, working its way up to the Executive Committee (EXCOM) and the Board of Directors as appropriate. The Bank also employs and implements an Internal Credit Risk Rating System (ICRRS) that is consistent with global rating standards, compliant with Basel II requirements and appropriate to the Bank’s nature, complexity and scale of activities. Resulting ratings/scores together with experienced credit judgment serve as basis in proactively setting-up of loan loss provisions. Market Risk Market risk is the risk of loss to future earnings, fair values or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes. The Bank’s market risk originates from the Parent Company’s holdings of foreign exchange instruments, debt securities, and equity securities. To address extreme market conditions, the Bank performs stress testing on its trading position and on its accrual books. Stress testing is a technique used to determine the impact on earnings of above position/portfolios from conditions or scenarios deemed “extreme” but plausible. Stress testing is used to inform senior management as to where vulnerabilities in the Parent Company’s portfolio actually lie. The Market & Liquidity Risk Management Unit (“MLRMU”) performs the stress testing of traded securities using a uniform set of market stress shocks as prescribed by the BSP under their Uniform Stress Testing Program for Banks. The stress testing is conducted semi-annually and its results are reported to the ROC and BOD. To identify possible episodes of stress in the domestic financial market, the Enterprise Risk Management Group employs the Citi Early Warning Signal Risk Index – Philippines that measures stress in economic and financial variables with a view of predicting weakness in local currencies. A reading above 0.5 means that stress is above average and a reading below 0.5 means that stress is below average. The risk index level is reported monthly to ALCO and quarterly to ROC. Interest Rate Risk Interest rate risk arises from the possibility that changes in the interest rates will affect future cash flows or the fair value of financial instruments. The Bank follows a prudent policy on managing its assets and liabilities so as to ensure that the exposure to fluctuations in interest rates is kept within acceptable limits. A substantial proportion of the total loan portfolio is for a term of less than one year, and the majority of the balance of its medium-term portfolio is on a floating-rate basis. As of 31 December 2017, and 2016, 51.2and 63.8%, respectively, of the Bank’s total loan portfolio comprised floating rate loans which are repriced periodically by reference to the transfer pool rate that reflects the Bank’s internal cost of funds. As a result of these factors, the Bank’s exposure to interest rate fluctuations, and other market risks, is significantly reduced. Foreign Exchange Risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Foreign currency liabilities generally consist of foreign currency-deposits in the Parent Company’s FCDU account made in the Philippines or which are generated from remittances to the Philippines by Filipino expatriates and overseas Filipino workers who retain for their own benefit or for the benefit of a third party, foreign currency deposit accounts with the Parent Company and foreign currency-denominated borrowings appearing in the regular books of the Parent Company. The ERMG uses VaR, Foreign Exchange Sensitivity Testing, and Foreign Exchange Stress Testing to measure risk inherent to the Parent Company’s foreign currency net exposures. In assessing the foreign currency risk, the Parent Company employs a pre-defined key risk indicator under Market Risk Assessment Matrix to determine the level of risk (for example, Low Risk, Moderate Risk, High Risk) the results of which are reported to the ROC on a quarterly basis.


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The Parent Company’s policy is to maintain foreign currency exposure within acceptable limits and within existing regulatory guidelines. The Parent Company believes that its profile of foreign currency exposure on its assets and liabilities is within limits for a financial institution engaged in the type of business that it is engaged in.

Liquidity Risk In managing its liquidity position, the Bank ensures that it has more than adequate funds to meet its 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 anticipate how to manage a liquidity crisis under various stress scenarios. Liquidity limits for normal and stress conditions cap the projected outflows on a cumulative and per tenor basis. The Bank also uses the Liquidity Coverage Ratio (LCR) to ensure that is has sufficient High-Quality Liquid Assets to cover its net outflow within a 30-day period. ALCO is responsible for managing the liquidity of the Bank while the Risk Oversight Committee reviews and oversees the Bank’s overall liquidity risk management. The tables below set forth the Group’s structural liquidity gap position as of 30 June 2018 (the maturity profile of financial instruments and gross-settled derivatives based on contractual undiscounted cash flows). The analysis 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 asset will be realized on the earliest period in which the Bank can be required to pay its liabilities.

Consolidated

As of 30 June 2018

On

Demand Less than 3

months

More than 3 Months to 12 Months

More than 1 Year to but less than 2

years

Beyond 2 years

Total

(amounts in Php Millions) Assets

Due from other banks P629 P- P- P- P- P629 Interbank loans receivable 1,090 - - - - 1,090 Financial assets at FVTPL - - - - 293 293 Financial assets at FVOCI - - - - 3,449 3,449 Investment securities at amortized cost - 200 - 454 12,987 13,641 Loans and receivables 9,950 10,677 8,749 3,183 24,310 56,869

11,669 10,877 8,749 3,637 41,039 75,971

Liabilities Deposit liabilities 63,624 3,168 2,988 3,129 1,340 74,249

Bills payable 8,000 2,959 81 479 - 11,519

71,624 6,127 3,069 3,608 1,340 85,768

Asset-liability gap (P59,955) P4,750 P5,680 P29 P39,586 (P9,797)


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Consolidated


On

Demand Less than 3

months



years

Beyond 2 years

Total


Due from other banks P1,166 P- P- P- P- P1,166 Interbank loans receivable 535 - - - - 535 Financial assets at FVTPL 999 - - - 1,741 2,740 Investment securities at amortized cost - 5 403 203 14,806 15,417 Loans and receivables 6,458 11,036 7,086 2,804 25,969 53,353

9,158 11,041 7,489 3,007 42,516 73,211


Bills payable 11,340 1,172 55 - - 12,567

61,531 11,811 5,131 3,110 1,720 83,303

Asset-liability gap (P52,373) (P770) P2,358 (P103) P40,796 (P10,092)

Consolidated


On

Demand Less than 3

months



years

Beyond 2 years

Total


Due from other banks

P2,997 P- P- P- P- P2,997

Interbank loans receivable 260 - 50 - - 310 Financial assets at FVTPL - - - - 300 300 Investment securities at amortized cost - 20 49 412 12,654 13,135 Loans and receivables 9,115 9,101 8,114 1,337 18,422 46,089

12,372 9,121 8,213 1,749 31,376 62,831


Bills payable - 10,015 84 10,099

47,242 18,415 2,082 3,007 2,499 73,245

Asset-liability gap (P34,870) (P9,294) P6,131 (P1,258) P28,877 (P10,414)

Operational Risk Operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. It includes legal risk and people risk but excludes strategic and reputational risk. Operational risk is inherent in all activities, products and services and cuts across multiple activities and business lines within the Bank and across its subsidiaries and affiliates. The primary tool in controlling operational risk is an effective system of internal controls approved by the Board and participated by each employee of the Bank. In April 2017, Enterprise Risk Management/ICAAP Group (ERMG) updated the Bank’s Operational Risk Management Framework to comply with the requirements of BSP Circular 900 re: Guidelines on Operational Risk Management. The framework, which provides for a strengthened foundation and guidance on how PBCOM should effectively manage its operational risks, is periodically reviewed by the Board of Directors to ensure that operational risk management policies, processes and systems are implemented effectively at all decision levels.


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The Bank has implemented a robust operational risk identification, assessment, monitoring, control and reporting system in each operating unit of the Bank. The principal operational risk management tools include the Risk Control Self-Assessment (RCSA), Key Risk Indicators (KRI), Incident Reports, Corrective Action Plan and the Internal Operational Loss Database. Moreover, a system for reporting of operational crimes and losses, and policies on whistle-blowing and handling of administrative cases are in place. Other than the results of the risk monitoring activities through the above-cited risk management tools, periodic reports to the ROC on operational risk exposures include among others the Profile of Complaints, the Legal Case Profile and the Fraud Risk Report. The Bank’s Technology Risk Management Framework continues to provide strengthened foundation and guidance on how the Bank should effectively manage emerging technology risks. It incorporates the requirements under existing BSP regulations and which takes into account that strategic, operational, compliance and reputational risks are periodically reviewed and updated to ensure that all risks in the Bank’s technology-enabled products, services, delivery channels and processes are effectively managed and that any gaps are being regularly monitored and addressed. A comprehensive risk assessment and profiling methodology for both IT functions and application systems are in place. Risk identification and assessments over project management were enhanced from project initiation to implementation. Control validation process was incorporated in technology risk assessments to ensure effectiveness of established risk mitigation strategy. Corrective action plans are periodically monitored and reported to ensure risk issues are timely addressed and managed proactively. The Bank’s risk management team continues to play an active role in providing risk insights and assessments during the launch of new products, technology and services, development of risk management policies and imbibing a culture of a risk-aware organization through the conduct of trainings and seminars to Bank employees. The Bank has in place a Business Continuity Management Framework that provides guidance for continuous operations in the event of any disruptions, and proactive mechanisms designed to prevent interruptions to critical business functions and improved the Bank’s resiliency. It follows a robust business continuity planning process that involves the conduct of a business impact analysis/risk assessment, periodic review and updating of business continuity plans and conduct of BCP tests and tests evaluation. Both a Crisis Management and Emergency Preparedness Plan and a Pandemic Plan were established as well. These documents detail the step by step procedures to be taken to respond to the threat or impact of a crisis, and how the Bank will respond to emergencies to protect life, property and environment, in a timely manner. Information Security Management The Information Security framework of the Bank, namely: Operating Principles (Charter), Enterprise IS Policy, Programs and Minimum Baseline Security Standards (MBSS) are periodically reviewed and updated to conform with the minimum provisions prescribed by the regulatory authorities, government statutes and generally accepted standards. With the advent of cyber security attacks in the country, there is a compelling need to continuously enhance the safeguarding of the Bank’s information assets. Information Security plays a key role in ensuring protection of data, hence, preserving its confidentiality, integrity and availability, particularly during system migration, new products and services; and other initiatives involving third-party services. The enhanced Information Security Awareness Program sustains the employee security awareness and maturity by way of regular updating of critical information to all employees through PBCOM On- Boarding for New Employees (P-ONE), Data Privacy Management Privacy risk is defined as a potential loss of control over personal identifiable and/or sensitive personal information. With the emerging threats on data privacy, the Bank had instituted control measures to efficiently manage the risk to an acceptable level. PBCOM, through the designated Data Protection Officer (DPO), manages the risk related to data privacy by adhering to the five (5) pillars of compliance as mandated by the National Privacy Commission (“NPC”), at the minimum. The Bank’s compliance to data privacy is reported to the Board of Directors (BOD), through the Risk Oversight Committee (ROC), on a quarterly basis or as deemed necessary.


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Fraud Risk Management Fraud Risk is an integral part of the enterprise-wide operational risk management of the Bank. The integration of Fraud Risk Unit to the Enterprise Risk Management/ICAAP Bank on a single enterprise-wide platform has improved overall management capabilities in addressing fraud risk. To bring in a culture of constant vigilance, strong internal control and compliance, the Bank’s Enterprise Fraud Risk Unit conducts regular in-house seminars and trainings, with presentations focusing on Fraud Risk Awareness, Signature Verification and Counterfeit Detection, Credit Fraud and Risk Management, Identity Theft/Fraud and Check Fraud and KYC Training Sessions.

Technology Risk Technology risk is the risk to earnings or capital arising from deficiencies in systems design, implementation, maintenance of systems or equipment and the failure to establish adequate security measures, contingency plans, testing and auditing standards. To provide simpler, faster, more convenient and secured banking services to its growing clientele and to avail of an advanced management information system that enables the Bank to make fast and well-informed business decisions, it continually invests in Information Technology by venturing into core business process automations, key system enhancements, and information security solutions. Given this heavily automated operating environment, the Bank 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.

Legal Risk Legal risk is the potential loss due to nonexistent, incomplete, incorrect, and unenforceable documentation that the Bank uses to protect and enforce its rights under contracts and obligations. A legal review process, which its Legal Department performs, is the primary control mechanism for this type of risk to ensure that the Bank’s contracts and documentation adequately protects its interests and complies with applicable legal and regulatory requirements.

Regulatory Risk Regulatory Risk, also known as Compliance Risk, covers the potential loss from non-compliance with laws, rules and regulations, policies and procedures, and ethical standards. The Bank recognizes that compliance risk can diminish its reputation, reduce its franchise value, limit its business opportunities, and reduce its potential for expansion. Thus, the Bank, guided by its Compliance Office, continuously promotes a culture of compliance.

Strategic Risk Strategic risk is the current and prospective impact on earnings or capital arising from adverse business decisions, improper resolution of conflicts, and slow response to industry changes. Strategic risk can influence the Bank’s long-term goals, business strategies, and resources. Thus, the Bank utilizes both tangible and intangible resources to carry out its business strategies. These include communication channels, operating systems, delivery networks, and managerial capacities and capabilities.

Reputational Risk Reputational risk is the current and prospective impact on earnings or capital arising from negative public opinion. This affects the Bank’s ability to establish new relationships or services or manage existing relationships. The risk may expose the Bank to litigation, financial loss, or a decline in customer base.


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All employees are responsible for building the Bank’s reputation and exercising an abundance of caution when dealing with customers and communities.

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 relevant 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.

Corporate Governance The Bank has a strong commitment to excellence in corporate governance. The Bank continually strives for high standards and pursues new approaches that ensure greater transparency and integrity in what it does. Governance culture The Bank sees its compliance with applicable laws, rules and regulations as a minimum requirement. Going beyond such minimum is the true essence of good corporate governance. The Bank always aims to continually build the trust and confidence of its stakeholders by running its business in a prudent and sound manner, being fair and transparent in all its dealings, providing reliable and better service in response to the ever-growing expectations of its customers, and working with integrity and accountability. Core governance policies The policies and guidelines embodied in the Bank’s annually updated Corporate Governance Manual, as posted in its website, www.pbcom.com.ph for the guidance of all its stakeholders, primarily revolve around the following three basic values that the Bank observes. Fairness The Bank sees to it that all its dealings with counterparties and other stakeholders are fairly conducted. The Bank ensures that all such dealings, especially with its related parties, are made in the regular course of its business and upon terms not less favorable to us than those offered to others. It is for this particular reason that the Bank initiated the creation of its Board-level Related Party Transactions Committee (RPTC) to help ensure that its transactions with related parties are conducted at arm’s length and that its resources are not misappropriated, in accordance with its Board-approved Related Party Transactions (RPT) policy and its specific guidelines and handling procedures. The Bank also ensures that all its stockholders are treated equally and without discrimination by preserving all stockholders’ rights and protecting its minority stockholders’ interests including the latter’s right to nominate candidates to its Board of Directors.


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Integrity and Accountability The Bank upholds at all times the value of honesty as a best policy. The Bank believes that its reputation precedes it in the business of trust and confidence. The Bank continues to enhance a working culture of integrity, guided by a Code of Conduct that defines the standards that the Bank must follow in all its business dealings and relationships. Code of Conduct PBCom’s Code of Conduct includes provisions on:

Statement of principles;

Due process;

Infractions;

Disciplinary process;

General policies to establish a professional working environment and secure a favorable reputation for the Bank;

Corrective measures for unacceptable behavior or failure to comply with its rules, such as on Financial Consumer Protection and on Anti-Money Laundering/Terrorism Financing, policies and procedures;

Schedule of penalties for attendance and punctuality, attire requirements, conduct and behavior, dishonesty, health, safety and security, reporting of violations, and information security; and

Provisions on management of personal finances, conflict of interest, anti-sexual harassment, nondisclosure of information and insider information.

Insider Trading Under the Bank’s Policy Against Insider Trading, reporting insiders are required to disclose their and their associates’ initial beneficial ownership in PBCOM shares and any changes thereof within two trading days after their election/ appointment in office and from date of said changes, respectively. They are likewise prohibited from selling or buying PBCOM shares during “blackout periods,” i.e., upon obtaining material non-public information up to two trading days after such information is disclosed. The Bank did not have any trading transactions with its reporting insiders and/or their associates in 2017. Whistleblowing In addition, the Bank is bound by a “whistle-blowing” policy that requires all employees to immediately report to the Audit Committee any suspected impropriety or malpractice committed by co-employee/s. The Chairman of the Audit Committee shall contact the appropriate Bank unit to establish the necessary investigative team and procedures. The policy likewise requires the due protection of informants, i.e., employees reporting such incidents in good faith, from any form of harassment. Thus, it considers any attempt to determine their identities as a breach of confidentiality subject to disciplinary sanctions. Transparency and Open Communications The Bank abides by various disclosure requirements of the BSP, SEC, and PSE as a publicly-listed company. The Bank ensures that it is transparent to its shareholders by posting the latest public disclosures on the Investor Relations section of its website and in its press releases. In compliance with SEC Memorandum Circular No. 11 s2014, the Bank has also updated its website since 2014 to include all required disclosures in accordance with the SEC-prescribed web template for its stakeholders to readily check its corporate governance practices. The Bank also maintains an open communication line and uses feedback from its stakeholders to develop better policies, products and services. The Bank likewise accommodates requests for information pertaining to the management of the Bank, stockholder’s rights, or any other Bank-related matters, while remaining mindful of disclosure limitations under existing laws on bank deposits secrecy and data privacy. The Bank’s Corporate Governance Manual (CGM) serves as a valuable guide and reference in its


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implementation of corporate governance rules and regulations of both the BSP and the SEC. In April 2017, the Bank updated its CGM primarily to incorporate recent regulatory issuances relative to corporate governance. Board Oversight Board of Directors. The Board of Directors (the “Board”) is primarily responsible in defining the Bank’s vision and mission. The Board shall ensure the prudent steering of the Bank’s conduct of business through the implementation of policies and exercise of oversight authority over senior management to ensure the Bank’s adherence to best practices and compliance with relevant laws and regulations. The Board shall also have the following general responsibilities: establish a sound corporate governance framework, approve and oversee the implementation of a risk governance framework and the systems of checks and balances, and approve and oversee the implementation of strategies to achieve corporate objectives. The Board is composed of fifteen (15) members who are all qualified business professionals with the required expertise and experience in directing the Bank’s strategic path. They were elected at the annual stockholders meeting held on 6 June 2018 to hold office until the next succeeding meeting and until their respective successors have been qualified and elected. In compliance with SEC SRC Rule 38, and as a matter of practice, the Bank has adopted the following rules in the nomination and election of Directors:

a) All nominations for directors and independent directors shall be submitted to the Nominations Committee through any of the members of the Committee or the Corporate Secretary at any time before the submission of the Definitive Information Statement to the Securities and Exchange Commission (SEC), allowing the Nominations Committee sufficient time to pass upon the qualifications of the nominees.

b) All nominations shall be in writing duly signed by a stockholder and accepted and conformed to by the nominees likewise in writing indicating whether a particular nominee/s is/are intended to be an independent director or not. It must contain the nominee’s age, educational attainment, work and/or business experience and/or affiliation;

c) No individual shall be nominated as director or independent director unless he meets the minimum requirements/qualifications prescribed by the regulatory agencies and does not have any ground for disqualifications.

d) The Nominations Committee shall pre-screen the qualifications of the nominees and prepare a final list of candidates, including a summary of all relevant information about them.

e) The nomination and election process also includes the review and evaluation of the qualifications of all persons nominated to the Board, including whether candidates:

i. Possess the knowledge, skills, experience and particularly in the case of non-executive directors, independence of mind;

ii. Have a record of integrity and good repute; iii. Have sufficient time to carry out their responsibilities; and iv. Have the ability to promote a smooth interaction between board members.

Independent Director – The Bank has consistently maintained the presence of independent directors who provide independent judgment, outside experience and objectivity. Such type of director is independent of management and the controlling shareholder and is free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director. An independent director may only serve as such for a maximum cumulative term of nine (9) years. After which, the independent director shall be perpetually barred from serving as independent director in the same Bank but may continue to serve as regular director.

Lead Independent Director - The Board designated the Chairman of the Governance Committee to be the Lead Independent Director. Functions of the lead independent director include: leading the Independent Directors at Board meetings in raising queries and pursuing matters, leads the meeting of Independent Directors, without the presence of the Executive Director, serves as an intermediary between the Chairman and other directors when necessary, convenes and chairs meeting of the non-executive directors, and contributes to the performance evaluation of the Chairman, as required.


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Chairman of the Board – The Chairman of the Board (“Chairman” or “Chairperson”) leads the Board of Directors in achieving its mandate of setting the overall direction of the organization and representing the interests of shareholders. The Chairman provides leadership in the Board of Directors, ensuring that the board takes an informed decision, and sets the tone of good governance from the Top. The Chairperson of the board shall ensure effective functioning of the Board, including maintaining a relationship of trust with members of the Board. Board and Board Committee Meetings - Board Committee – A number of Board-level committees were created to aid the Board in its various tasks to ensure efficiency and provide greater focus. Four of these committees are in charge of governance oversight functions, as follows:

The Executive Committee (“ExCom”) shall have the power to provide business development and financial policy direction. The ExCom shall possess and exercise all the functions and powers of the Board in the management of the business and affairs of the Bank during intervals between the monthly meetings of the Board. The ExCom is composed of seven (7) members of the Board of Directors who shall be appointed or elected by the Board based on the recommendations of the Governance Committee. The Corporate Secretary shall act as the Secretary.

The Audit Committee assists the Board in fulfilling its statutory and regulatory responsibilities with respect to internal controls including financial reporting control and information technology security, accounting policies, and auditing and financial reporting practices. The Audit Committee is composed of three (3) members of the Board of Directors, who shall be all non-executive directors, two (2) of whom are independent directors, including the chairperson. The Chairman of the Audit Committee shall not be the Chairman of the Board of Directors or of any other board-level committee. The Committee meets every month.

The Corporate Governance Committee is primarily tasked to assist the Board of Directors in fulfilling its corporate governance responsibilities. It shall review and evaluate the qualifications of all persons nominated to the board as well as those nominated to other positions requiring appointment by the board of directors. They also assist the Board of Directors in its oversight of the Bank's compliance with legal and regulatory requirements, the Bank's Compliance Function and the performance of the Chief Compliance Officer and the Compliance Management Group. The Governance Committee is composed of five (5) members of the Board of Directors, who shall be all non-executive directors, three (3) of whom are independent directors, including the chairperson. The Committee meets every two (2) months, or whenever necessary to discuss, agree and prepare/consolidated reports on recommendations from its sub-committees.

The Risk Oversight Committee (“ROC”) has been established by the Board of Directors to assist it in the effective discharge of its function in overseeing the risk management program of the Bank, its subsidiaries and its trust unit. The Risk Oversight Committee shall possess a range of expertise and adequate knowledge on risk management issues and practices. It shall have access to independent experts to assist it in discharging its responsibilities. The Risk Oversight Committee is composed of five (5) members of the Board of Directors, three (3) of whom are independent directors, including the chairperson. The ROC’s chairperson shall not be the chairperson of the Board of Directors, or any other board-level committee. The Committee meets every month, and at such times it deems necessary.

The Related Party Transaction (“RPT”) Committee shall have the overall responsibility in ensuring that transactions with related parties are handled in a sound and prudent manner, with integrity, and in compliance with applicable laws and regulations to protect the interest of depositors, creditors and other Stakeholders. The RPT Committee is composed of four (4) members of the Board of Directors, three (3) of whom are independent directors, including the chairperson. The committee shall, at all times, be entirely composed of independent directors and


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non-executive directors, with independent directors comprising majority of the members. The Compliance Officer is the committee secretariat. The Compliance Officer or Internal Auditor may sit as a resource person.

The Trust Committee (“TrustCom”) the TrustCom acts within the authorities and powers delegated by the Board, and in compliance with the requirements under the BSP Manual of Regulations for Banks for the practices on Investment Management Activities, Trust and Other Fiduciary Business. The TrustCom shall be responsible for the oversight of all Trust activities. Further, the TrustCom also ensures that Trust policies and procedures remain relevant to ensure that proper risk management and internal controls are enforceable for the prudent administration and management of Trust Activities. The RPT Committee is composed of five (5) members of the Board of Directors, three (3) of whom are independent directors; the President and CEO; and the Trust Officer. The Committee meets every month, and at such times it deems necessary

Senior Management Oversight Senior Management. The Bank’s Senior Management Team, headed by its President as the Chief Executive Officer (CEO), consists of a core group of senior officers who manage its day-to-day operations and business affairs. They exercise good governance by ensuring that line managers under their respective areas of responsibility execute their activities in a manner consistent with Board-approved policies and procedures. These should be aligned with applicable laws, rules and regulations as well as standards of good practice. Management Committees. To achieve efficiency and provide greater focus for its Senior Management in overseeing key areas of banking operations, various Management-level committees were also created, as follows:

Assets and Liabilities Committee (ALCO) is tasked to manage the Bank’s assets and liabilities consistent with its liquidity, capital adequacy, growth, risk tolerance and appetite and profitability goals.

Credit Committee (CRECOM) is tasked to regularly review and approve credit proposals within the authority and limits provided by the Board.

Anti-Money Laundering Compliance Committee (AMLCC) is tasked to assist the Compliance Office in reviewing, managing and monitoring the effectiveness of the Bank’s Money Laundering and Terrorism Financing Prevention Program (MLTFFP) and related policies and procedures to ensure the Bank’s continuing compliance with the provisions of the Anti-Money Laundering Act (AMLA), as amended, the Bank’s Revised Implementing Rules & Regulations (RIRRs), and BSP Anti-Money Laundering regulations.

IT Steering Committee (ITSC) is tasked to cohesively monitor IT performance and institute appropriate actions to ensure achievement of desired results. It is accountable for designing and implementing its Board-approved Information Technology Risk Management System (ITRMS).

Asset Disposal and Special Accounts Committee (ADSAC) is composed of a Chairperson, Vice Chairperson and Committee members, all of whom are members of the Board of Directors. The Committee is responsible for evaluating and recommending strategies concerning non-performing loans and special accounts of the bank. The Committee is the venue for discussion of the past due accounts of the Commercial and Corporate Banking Group (CCBG) and the Consumer Finance Group (CFG). The Committee is likewise in charge of approving the sales offering ticket proposals of the Property Management Division (PMD), and the credit proposals for restructuring/repayment schemes and/or foreclosure of mortgaged properties of the Remedial Management Division (RMD).

Management Disciplinary Committee (MDC) is tasked to hear and decide administrative cases of employees involving

dishonesty, fraud, negligence, violation of any internal Bank policy, rule or procedure, or any act, which results to an actual or potential loss to the Bank and offenses where the sanction is dismissal, and to report to the Board of Directors through the Governance Committee the actions taken against the employees involved in the cases mentioned above.


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Retirement and Provident Committee (RPCOM) is exclusively tasked to administer its Provident and Retirement Benefit Plan.

Governance Vanguards The Bank’s compliance, risk management and internal audit functions are the forerunners in its relentless drive to promote and uphold the noblest tenets and highest standards of good corporate governance across all its business operations. Compliance The Bank’s compliance, risk management and internal audit functions are the forerunners in its relentless drive to promote and uphold the noblest tenets


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MANAGEMENT, EMPLOYEES, AND SHAREHOLDERS

Organizational Chart The Bank’s organizational chart as of 30 June 2018 is shown in page 81.

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 Eric O. Recto Chairman of the Board Leonardo B. Dayao Vice Chairman Patricia May T. Siy President and CEO Lucio L. Co Chairman of the Executive Committee Carmen G. Huang Executive Director Susan P. Co Director Bunsit Carlos G. Chung Director Levi B. Labra Director Ralph C. Nubla, Jr. Director Gregorio T. Yu Director David L. Balangue Independent Director Jesus S. Jalandoni, Jr. Independent Director Roberto Z. Lorayes Independent Director Emmanuel Y. Mendoza Independent Director Gilda E. Pico Independent Director

ERIC O. RECTO, Chairman of the Board and Director, Filipino, 54 years old, was elected Director and Vice Chairman of the Board on 26 July 2011, appointed Co-Chairman of the Board on 18 January 2012 and Chairman of the Board on 23 May 2012. He is the Chairman and CEO of ISM Communications Corporation, Chairman and President of Bedfordbury Development Corporation; Vice Chairman and President of Atok-Big Wedge Co., Inc., and President and Director of Q-Tech Alliance Holdings, Inc.; a Director of Petron Corporation and a member of the Board of Supervisors of Acentic GmbH. Prior to joining the Bank, Mr. Recto served as Undersecretary of Finance of the Republic of the Philippines from 2002 to 2005, in charge of handling both International Finance Group and the Privatization Office. Before his stint with the government, he was Chief Finance Officer of Alaska Milk Corporation and Belle Corporation. Mr. Recto has a degree in Industrial Engineering from the University of the Philippines as well as an MBA from the Johnson School, Cornell University, USA. LEONARDO B. DAYAO, Vice Chairman and Director, Filipino, 74 years old, was elected Director on 29 September 2014 and Co-Vice Chairman on 24 October 2014. Mr. Dayao currently holds the following positions in publicly listed companies: President of Cosco Capital, Inc. and Director of Puregold Price Club, Inc. He also holds various positions in the following privately-owned companies: Chairman of Cabadbaran-Magallanes Water Corporation, Catuiran Hydropower Corporation, Fertuna Holdings Corp., Grass Gold Renewable Energy (G2REC) Corporation, Kareila Management Corporation, League One Finance and Leasing Corporation, North Palawan Water Corporation, Pamana Holdings Incorporated, PSMT Philippines, Inc., PG Lawson Company, Inc., S&R Pizza (Harbor Point), Inc., S&R Pizza, Inc., Tacloban City Water Corporation; President of Alcorn Petroleum Minerals Corporation, NE Pacific Shopping Centers Corporation, Puregold Duty Free (Subic), Inc., Puregold Finance, Inc., San Jose City I Power Corp., Union Energy Corporation; Vice-President of Alerce Holdings Corp., Bellagio Holdings, Inc., KMC Realty Corporation, Puregold Properties, Inc., Union Equities, Inc., VFC Land Resources, Inc.; and Director of Canaria Holdings Corporation Entenso Equities Incorporated, Karayan Hydropower Corporation, Liquigaz Philippines Corp., and Puregold Realty Leasing & Management, Inc. He received a Bachelor of Science Degree in Commerce from the Far Eastern University. He is a Certified Public Accountant and has completed Basic Management Program at Asian Institute of Management and earned units in MBA from University of the Philippines-Cebu.


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PATRICIA MAY T. SIY, President and Chief Executive Officer, Director, Filipino, 57 years old, was elected Director, President and Chief Executive Officer on 1 June 2015. Immediately before joining PBCOM, she served as Chief Corporate Planning Officer of Travellers International Hotel Group from 2012 and as Chief Finance Officer of Rustan’s Supercenter Inc. from 2011 to 2012. Her banking experience spanned 31 years. She was with Security Bank Corporation where she held various positions from 2000 to 2011 in Middle Market Lending and Corporate Lending leading to the Executive Vice President post for the Commercial and Retail Banking Segment. She had a stint with Standard Chartered Bank from 1994 to 2000 in the fields of Regional and Philippine Consumer Credit, Group Special Asset Management, and Corporate Banking in Cebu and Head Office. Her first Bank was Private Development Corporation of the Philippines where she stayed from 1983 to 1994 as Project Analyst, Cebu Lending Head, Visayas Lending Head, and then Branch Lending Head. Ms. Siy graduated from De La Salle University with a Bachelor of Science degree in Industrial Management Engineering minor in Chemical Engineering. LUCIO L. CO, Chairman of the Executive Committee, Director, Filipino, 63 years old, was elected Director on 29 September 2014. Mr. Co currently holds the following positions in other publicly-listed companies: Director and Chairman of Puregold Price Club, Inc., Chairman of Cosco Capital, Inc. and Chairman and President of Da Vinci Capital Holdings, Inc. He is also the Chairman of the following privately-owned companies: Alcorn Petroleum & Minerals Corporation, Bellagio Holdings, Inc., Canaria Holdings Corporation, Ellimac Prime Holdings, Inc., Entenso Equities Incorporated, Invescap Incorporated, Liquigaz Philippines Corporation, NE Pacific Shopping Centers Corporation, P.G. Holdings, Inc., Puregold Duty Free (Subic), Inc., Puregold Duty Free, Inc., Puregold Finance, Inc., Puregold Properties, Inc., Puregold Realty Leasing & Management, Inc., Pure Petroleum Corp. San Jose City I Power Corp., Union Energy Corporation, and Union Equities, Inc., He is also a Director of the following privately-owned companies: Alphaland Makati Tower, Inc., Cabadbaran-Magallanes Water Corporation, Catuiran Hydropower Corporation, Grass Gold Renewable Energy (G2REC) Corporation, Karayan Hydropower Corporation, Kareila Management Corp., LCCK & Sons Realty Corporation, League One Finance and Leasing Corporation, Meritus Prime Distributions, Inc., Montosco, Inc., Nation Realty, Inc., North Palawan Water Corporation, Pamana Holdings Incorporated, PG Lawson Company, Inc., PPCI Subic, Inc., Patagonia Holdings Corp., Premier Wine & Spirits, Inc., S&R Pizza (Harbor Point), Inc., and S&R Pizza, Inc., Tacloban City Water Corporation. He is a member of the Board of Trustees of Adamson University and Luis Co Chi Kiat Foundation, Inc. Mr. Co has been an entrepreneur for the past 40 years. CARMEN G. HUANG, Executive Director, Filipino, 67 years old, was elected Executive Director on 29 April 2015. She obtained both her Bachelor of Arts in Mathematics and Bachelor of Science in Accountancy at St. Scholastica’s College Manila, and completed the academic requirements for Master in Business Administration at the Ateneo Professional School. In the past, she held various critical management positions in both government and private financial institutions. Ms. Huang is a Certified Public Accountant. SUSAN P. CO, Director, Filipino, 60 years old, was elected Director on 29 September 2014. She currently holds the positions of Vice-Chairman of Puregold Price Club, Inc. and Vice-Chairman and Treasurer of Cosco Capital, Inc., both publicly listed companies. Mrs. Co is the Chairman of Alphaland Makati Tower, Inc. and Director of the following privately-owned companies: Bellagio Holdings, Inc., Blue Ocean Holdings, Inc., Canaria Holdings Corporation, Ellimac Prime Holdings, Inc., Kareila Management Corp., KMC Realty Corp., Luis Co Chi Kiat Foundation, Inc., Meritus Prime Distributions, Inc., Montosco, Inc., Nation Realty, Inc., NE Pacific Shopping Center Corporation, P.G. Holdings, Inc., Patagonia Holdings Corp., PG Lawson Company, Inc., PPCI Subic Inc., Premier Wines and Spirits, Puregold Duty Free (Subic), Inc., Puregold Duty Free, Inc., Puregold Properties, Inc., Puregold Realty Leasing & Management, Inc., Pure Petroleum Corp., S&R Pizza (Harbor Point), Inc., S&R Pizza, Inc., San Jose City I Power Corp., Union Energy Corporation and Union Equities, Inc. Mrs. Co received a Bachelor of Science Degree in Commerce from the University of Santo Tomas. BUNSIT CARLOS G. CHUNG, Director, Filipino, 68 years old, was elected Director on June 17, 1997. He is President of Supima Holdings, Inc., and Director of La Suerte Cigar & Cigarette Factory, Century Container Corporation, Bicutan Container Corporation, Tosen Foods Corporation, PBCOM Finance Corporation, State Land, Inc., State Investment, Inc. and State Properties, Inc. He is an Advisory member of the Board of Trustees of Xavier School Inc., and a member of the Board of Trustees of Immaculate Conception Academy (Greenhills) Scholarship Foundation, Tiong Se Academy, Mother Ignacia National Social Apostolate Center, Seng Guan Temple and Kim Siu Ching Family Association. Mr. Chung has a degree in AB (Economics) & Business Administration from De La Salle University as well as an MBA from the University of Southern California.


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LEVI B. LABRA, Director, Filipino, 60 years old, was elected Director on 24 October 2014. He is also a Director of Cosco Capital, Inc., a publicly listed company. Mr. Labra obtained his Bachelor of Science degree in Business Administration (Cum Laude) at the University of San Carlos, Cebu City. RALPH C. NUBLA, JR., Director, Filipino, 67 years old, was elected Director on March 24, 1982. He is a Director of PBCOM Finance Corporation, Director and President of R. Nubla Securities, Echague Realty Corporation and RN Realty Corporation. He was an Executive Director of the Bank in 2004, Senior Vice President in 1982, Vice Chairman in 2000 and Chairman of the Board in 2010. He has more than 30 years of experience in banking. He was also President of CNC Investment Inc. He graduated from Ateneo de Manila University with a Bachelor of Science degree in Commerce. GREGORIO T. YU, Director, Filipino, 59 years old, was elected Director on 26 July 2011. At present, he is Chairman of the Board of Auto Nation Group Inc., CATS Automobile Corporation and American Motorcyles, Inc. and Vice Chairman of the Board and Chairman of the Executive Committee of Sterling Bank of Asia. Mr. Yu is also a Director of Philippine Airlines and PAL Holdings Inc., CATS Asian Cars, Inc., PhilEquity Management Inc., Vantage Equities Inc., Iremit Inc., Unistar Credit and Finance Corporation, ISM Corporation, Prople BPO Inc., Glyph Studios, Inc., WSI Corporation, Nexus Technologies, Jupiter Systems Corporation and Ebusiness Services Inc. Mr. Yu is also a Board Member of Ballet Philippines and The Manila Symphony Orchestra. In the past, he was President & CEO of Belle Corporation, Vice Chairman of APC Group and Philippine Global Communication. He was formerly a director of CATS Motors Inc., International Exchange Bank, Philequity Fund Inc., Philippine National Reinsurance Corporation, Filcredit Finance, Yehey Corporation, iRipple, RS Lim & Co., and a Director and Vice President at Chase Manhattan Asia Limited. Mr. Yu was formerly a member of the Board of Trustees of the Government Service Insurance System, Xavier School Inc., and Chairman, Ways and Means of Xavier School Educational and Trust Fund. He graduated summa cum laude with a degree of Bachelor of Arts in Economics from De La Salle University and holds a Master of Business Administration degree from the Wharton School of the University of Pennsylvania. DAVID L. BALANGUE, Independent Director, Filipino, 66 years old, was elected Independent Director on 7 April 2014. He is presently Director of Phinma Energy Corporation, Phinma Power Generation Corporation, Subic One Power Generation Corporation, Roxas Holdings, Inc., Holcim Philippines, Inc. Maybank ATR Kim Eng Capital Partners, Inc., ATR Asset Management, Inc., ATRAM Trust Corporation, Unistar Credit & Finance Corporation, Omnipay, Inc. and Broadband Everywhere Corporation. He is also Chairman and President of Makati Center Estate Association and Makati Parking Authority, Inc. In the past, he served as Chairman and Managing Partner of Sycip Gorres Velayo & Co. and Chairman of the Philippine Financial Reporting Standards Council, National Movement for Free Elections (NAMFREL), and the Philippine Center for Population and Development, Inc. He obtained his Bachelor of Science in Commerce Major in Accounting (Magna Cum Laude) at the Manuel L. Quezon University and his Master in Management (With Distinction) at the Kellogg School of Management, Northwestern University in Evanston, Illinois, USA. Mr. Balangue is a Certified Public Accountant, having placed 2nd in the 1972 CPA Board Examination. JESUS S. JALANDONI, JR., Independent Director, Filipino, 60 years old, was elected Independent Director on 28 January 2013. He is currently Director of Liberty Flour Mills, Personal Computer Specialists, Inc., as well as Chairman and President of Alegria Development Corporation. He is also the Executive Vice President and Treasurer of Nissan Car Lease Phils. Inc., President of LFM Properties Corporation, Valueline Realty & Development Corporation, Buendia Offices Condominium Corporation and The Second Mid-land Offices Condominium Corporation and now as the new Treasurer of JM & Co. Inc. He is the President of Kanlaon Development Corporation, Jayjay Realty Corporation and Kanlaon Farms, Inc. Mr. Jalandoni holds a Bachelor of Science degree in Business Management major in Economics at Simon Fraser University, Burnaby, British Columbia. ROBERTO Z. LORAYES, Independent Director, Filipino, 75 years old, was elected Independent Director on 24 October 2014. He is currently Chairman of the Board of PhilEquity Management, Inc., Director of Vantage Equities, Inc., E-biz Corporation, Strategic Equities Corporation and House with No Steps Foundation. Mr. Lorayes obtained his Bachelor of Science degree in both Commerce and Liberal Arts at De La Salle University and Masters in Business Management at the Ateneo De Manila University. EMMANUEL Y. MENDOZA, Independent Director, Filipino, 53 years old, was elected Independent Director on 19 December 2014. He is currently the Managing Partner of Mendoza Querido & Co., (a member firm of Moore Stephens International Limited), President of MQ Agri Unlimited Inc., Treasurer of Two Delta Holdings, Inc. and Pacific Harbour Investment Holding. He is Director of Crossgate Holdings, Pinoyfoods and Beverages Corporation, Leyte Export and Trading Corporation, F. Mendoza Realty Development


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Corporation. He obtained his Bachelor in Business Administration in Accountancy at the University of the Philippines and a Master in Management at the Asian Institute of Management. Mr. Mendoza is a Certified Public Accountant. GILDA E. PICO, Independent Director, Filipino, 71 years old, was elected Independent Director on 22 February 2017. She is currently Chairman of the Board of Producers Savings Bank where she was formerly a Director/Consultant. She also sits as Director of the following acquired banks of Producers Savings Bank while awaiting Bangko Sentral ng Pilipinas (“BSP”) approval for the merger: 1) Rural Bank of Bustos; 2) Rural Bank of Sto. Domingo; 3) Rural Bank of Pamplona; 4) Rural Bank of President Quirino; 5) Rural Bank of Pasacao; and, 6) Rural Bank of Magarao. Ms. Pico is also connected with Marinor Development Corporation as Director/Treasurer, Gilart Holdings Corporation as President and PayMaya Philippines as Independent Director. In the past, Ms. Pico was President and CEO of Land Bank of the Philippines from November 2006 to July 2016. She was Land Bank’s Acting President from July 2005 to November 2006 and Trustee of Land Bank Countryside Development Fund from 2005 to 2015. She also served as Director/Chairman in various government and private institutions engaged in leasing, realty, insurance, guarantees, microfinancing, rural and development banking from 1985 to 2016. Ms. Pico obtained her Bachelor of Science degree in Commerce in 1966 from College of the Holy Spirit where she graduated Magna Cum Laude and earned units in Masters in Business Administration from the University of the East. Ms. Pico is a Certified Public Accountant.


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PBCOM Organizational Chart


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Executive Officers The names, positions and educational attainment of the Bank’s executive officers follow. The Executive Officers are appointed by the Board at the organizational meeting following the stockholders’ meeting, each to hold office for a period of one year.

Name Position Patricia May T. Siy President and CEO Carmen G. Huang Executive Director Jaime Valentin L. Araneta Executive Vice President – Branch Banking Group Eriberto Luis S. Elizaga Executive Vice President – Corporate and Commercial Banking Group John Howard D. Medina Executive Vice President – Chief Operations Officer Delbert S. Ang It Senior Vice President – Branch Sales, Distribution and Services Division Alan E. Atienza Senior Vice President & Treasurer Arlene M. Datu Senior Vice President & Comptroller/Finance Head Expedito G. Garcia, Jr. Senior Vice President & Transaction Banking and Customer Contact Center Group Head Jane Lim-Laragan Senior Vice President & General Services Group head Daniel M. Yu Senior Vice President & Global Operations Group Head Jorge Alfonso C. Melo Senior Vice President & General Counsel Ricardo R. Mendoza Senior Vice President & Consumer Sales and Marketing Division Head Angelo Patrick F. Advincula Corporate Secretary Jeruel N. Lobien First Vice President & Consumer Sales and Marketing Division Head Mina F. Martinez First Vice President & Human Resources Group Head Evelyn D. Vinluan First Vice President & Enterprise Risk Management / ICAAP Head

JAIME VALENTIN L. ARANETA, Executive Vice President – Retail Business Group, Filipino, 62 years old, joined PBCOM as Head of Branch Banking Group in December 2016. He has extensive experience in Branch Operations, Loans Operations, Treasury Operations, Central Clearing and ATM Operations, Business Process and Methods, Compliance and Risk Management, Branch Banking and Sales and Auto and Personal Loans from various financial institutions. Prior to joining PBCOM, he was Executive Vice President & Chief Operating Officer of China Bank Savings for five years. He graduated from the Ateneo de Manila University with a degree of AB Philosophy and units in MBA and Law. ERIBERTO LUIS S. ELIZAGA, Executive Vice President – Corporate & Commercial Banking Group, Filipino, 54 years old, joined PBCOM in September 2015. He has 30 solid years of credit experience. Prior to joining the Bank, he was a former senior officer, with the last rank as Senior Vice President, in the Corporate Banking Group of Security Bank Corporation (March 2000 to August 2015). He has likewise handled Corporate, Commercial and Consumer lending from various financial institutions such as the former PCI Bank (1986 – 1993), Union Bank of the Philippines (1993 – 1996) and Standard Chartered Bank (1996 -2000). He graduated from the Ateneo de Manila University with a degree in AB Economics and has completed the academic requirements of Ateneo Graduate School of Business. ALAN E. ATIENZA, Treasurer and Senior Vice President, Filipino, 47 years old, joined PBCOM in January 2016. He has 25 years of banking experience in Operations and Treasury. He has been a recipient of numerous industry awards for Fixed Income Trading. Prior to joining PBCOM, Mr. Atienza was the Chief Dealer and First Vice President in East West Bank. He has also been a board member of the Money Market Association of the Philippines (MART). Mr. Atienza graduated with a Bachelor’s Degree in Economics from San Sebastian College Manila and holds a Master’s Degree in Business Administration from the same institution. JOHN HOWARD D. MEDINA, Chief Operations Officer and Executive Vice President, Filipino, 48 years old, joined PBCOM in April 2017. He has a proven executive management track record and over 25 years of experience driving innovation, change and transformation for financial services in different countries. Prior to joining PBCOM, he was the Head of Global Operations, Technology and Credit for the Philippine National Bank, where he worked for almost 15 years. He was also the Integration Director, who oversaw the merger of PNB with Allied Banking Corporation in 2013. He was a pioneer in the process and technology management practice in the nineties when he helped transform the Asian operations of one of the largest multinational banks. He subsequently established a private consulting firm in the United States, helping design new business initiatives for financial institutions and dot com startups. Mr. Medina also worked at Union Bank of the Philippines for 5 years where he conceptualized and


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implemented digital banking products and services. Mr. Medina has a Bachelor of Science in Industrial Engineering from the University of the Philippines and an MBA from the Shidler College of Business at the University of Hawai’i at Manoa. He was an East-West Center Degree Fellow and the recipient of a full scholarship while at the University of Hawai’i. He also received study grants to attend the Handelshøjskolen I Århus (The Aarhus School of Business), Pacific Asian Management Institute and the European Summer School for Advanced Management for additional graduate studies. ANGELO PATRICK F. ADVINCULA, Corporate Secretary, Filipino, 47 years old, was elected Corporate Secretary on 24 October 2014. He is currently a Partner of Zambrano Gruba Caganda and Advincula Law Offices, Director of Da Vinci Capital Holdings, Inc., and ZG Global Advisors Corporation. Mr. Advincula holds a Bachelor of Arts degree in Philosophy and a Bachelor of Laws both from the University of the Philippines. He is a Member of the Philippine Bar.

Involvement in Certain Legal Proceedings of Directors and Executive Officers None of the members of the Bank’s Board nor its executive officers have been convicted in any criminal, bankruptcy or insolvency investigations or proceedings for the past five years and up to the date of this Offering Circular.

Number of Employees Existing manpower complement is as follows:

PBCom and BDI As of

31 December 2017 As of

30 June 2018 Senior Officers 165 160 Junior Officers 662 663 Staff 708 724 Total 1,535 1,547

Staff Development Program In line with the Bank’s continuing commitment to develop its human resource, the Bank has been implementing the Staff Development Program to develop high potential staff level employees to prepare them in becoming effective Junior Officers of the Bank. The program offers an extensive curriculum on regulatory, core programs, professional, leadership and technical/functional programs that is facilitated by competent internal subject matter experts. Each candidate is expected to have a high level of product mastery, application of concepts and theories in the pursuit of daily operations, independent judgement, analytical skill, and more importantly, leadership skills. Collective Bargaining Agreement All rank and file employees of the Bank are covered by a collective bargaining agreement (CBA), negotiations for the most recent one having just been completed and signing scheduled for 21 September 2018.


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Shareholders The Bank’s Top 10 shareholders as of 30 June 2018 are as follows:

No. of Shares %

P.G. Holdings, Inc. 181,080,608 37.67%

PCD Nominee Corporation – Filipino 151,123,002 31.44%

- Filipino - 151,104,663 - Non-Filipino - 18,339

Recto, Eric O. 52,405,776 10.90%

Nubla, Jr., Ralph C. 46,519,036 9.68%

Langford Universal Finance Ltd. 15,263,964 3.18%

VFC Land Resources, Inc. 11,848,288 2.47%

ISM Communications Corporation 4,806,987 1.00%

TTC Development Corporation 4,181,665 0.87%

Roxas-Chua, Ray Anthony Go 3,070,724 0.64%

Cham, Edison Siy 1,790,853 0.37%

Others 8,554,260 1.78%

TOTAL 480,645,163 100.00%


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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 of the date of this Offering Circular and is subject to any changes in law occurring after such date, which could be changed retroactively. 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 LTNCDs. Prospective purchasers should consult their advisors as to the consequences of acquiring, holding and disposing of the LTNCDs.

Overview

As of 30 June 2018, the Philippine banking industry is worth P16.1 trillion. As of 10 September 2018, the industry is composed of

composed of 44 Universal and Commercial Banks (“UB/KBs”), 54 thrift banks and 477 rural and cooperative banks. Out of the total banking industry assets, 90.7% are from UBs and KBs. Thrift banks account for 7.7%, while rural and cooperative banks account for the remaining 1.6%. Year-on-year, the total assets of the banking system rose by 10.2% primarily driven by a growth in loans and deposits.

Philippine Commercial Banks As of 31 March 2018, the biggest commercial bank, both domestic and foreign, in terms of asset size is Citibank N.A. with a total

asset size of P295.0 Billion, while Bank of Commerce is the largest domestic commercial bank with an asset size of P127.6 Billion.

(source: BSP Published Balance Sheet/Statement of Condition – Universal/Commercial Bank)

(amount in millions)

Domestic Commercial Banks Asset Size Loans Deposits Stockholder’s Equity (SHE)

Bank of Commerce 127,615 62,461 108,483 15,422 Robinsons Bank Corporation 102,829 54,779 86,564 12,625 Philippine Bank of Communications 98,367 51,350 73,295 12,193 BDO Private Bank, Inc. 54,221 6,415 45,344 5,453 Philippine Veterans Bank 51,324 18,305 45,593 3,547 The chart below shows the top domestic commercial bank in terms of total asset size as of 31 March 2018.

- 50,000.00 100,000.00 150,000.00

Bank of Commerce

Robinsons Bank Corporation

Philippine Bank of Communications

BDO Private Bank, Inc.

Philippine Veterans Bank

Top Domestic Commercial Banks

SHE Deposits Loans Asset Size


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The chart below shows the top 10 commercial banks, both domestic and foreign, in terms of total asset size as of 31 March 2018.

- 100,000.00 200,000.00 300,000.00

Citibank, N.A.

Bank of Commerce

Maybank Philippines, Incorporated

Robinsons Bank Corporation

Philippine Bank of Communications

MUFG Bank, Ltd.

BDO Private Bank, Inc.

Philippine Veterans Bank

Sumitomo Mitsui Banking Corporation-Manila Branch

CTBC Bank (Philippines) Corp

Top 10 Commercial Banks (Domestic and Foreign)

SHE Deposits Loans Asset Size


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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 of 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 Banking Act of 1993 (Republic Act No. 7653) and 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, thrift banks (composed of savings and mortgage banks, stock savings and loan associations, and private development banks), rural banks, cooperative banks as well as branches and agencies of foreign banks in the Philippines. Entities performing quasi-banking functions, trust companies, building and loan associations, 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 of the BSP. The supervisory power of the BSP under the New Central Bank Act extends to the subsidiaries and affiliates of banks and quasi-banking institutions engaged in allied activities. A subsidiary is defined as a corporation with more than 50% of its voting stock owned by a bank or quasi-bank. An affiliate is defined as a corporation whose voting stock, to the extent of 50% or less is owned by a bank or quasi-bank or which is related or linked, or such other factors as determined by the Monetary Board. The power of supervision of the BSP under the General Banking Law includes the issuance of rules of conduct or standards of operation for uniform application, conduct examination to determine compliance with laws and regulations, to oversee compliance with such rules and regulations and inquire into the solvency and liquidity of the covered entities. Section 7 of the General Banking Law provides that the BSP in examining a bank shall have the authority to examine an enterprise which is owned or majority-owned or controlled by a bank. As a general rule, no restraining order or injunction may be issued by a court to enjoin the BSP from exercising its powers to examine any institution subject to its supervision. The BSP may compel any officer, owner, agent, manager or officer-in-charge of an institution subject to its supervision or examination to present books, documents, papers or records necessary in its judgment to ascertain the facts relative to the true condition of the institution as well as the books and records of persons and entities relative to or in connection with the operations, activities or transactions of the institution under examination, to the extent permitted by law. In addition to the general laws such as the General Banking Law and Republic Act No. 9160 or the Anti-Money Laundering Act of 2001, as amended, among others, banks must likewise comply with letters, circulars and memoranda issued by the BSP some of which are contained in the BSP’s Manual of Regulations for Banks (the “Manual”). The BSP’s Manual of Regulations for Banks (the “Manual”) is the principal source of BSP rules that must be complied with by banks in the Philippines. The Manual contains BSP rules applicable to universal banks, commercial banks, thrift banks, rural banks and non-bank financial intermediaries performing quasi-banking functions. These BSP rules include those relating to the organization, management and administration, deposit and borrowing operations, loans, investments and special financing programme, and trust and other fiduciary functions. Supplementing the Manual are BSP rules disseminated through various circulars, memoranda, circular letters and other directives issued by the Monetary Board of the BSP. The Manual and other BSP rules are principally implemented by the Supervision and Examination Sector (the “SES”) of the BSP. The SES is responsible for monitoring the observance of applicable laws and BSP rules by banking institutions operating in the Philippines (including Government banks and their subsidiaries and affiliates, non-bank financial intermediaries performing quasi-banking functions, non-bank financial intermediaries performing trust and other fiduciary activities under the General Banking Law, non-stock and savings loans associations under Republic Act No. 3779, and pawnshops under Presidential Decree No. 114).


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Permitted Activities A commercial 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: accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate.. It may also exercise or perform any or all of the following: (a) invest in the equities of allied enterprises; (b) purchase, hold and convey real estate; (c) receive in custody funds, documents and valuable objects; (d) act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities; (e) make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; (f) upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; (g) rent out safety deposit boxes; and (h) engage in quasi-banking functions. 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, and other activities declared by the Monetary Board as financial allied undertakings. Nonfinancial allied undertakings include, warehousing companies, storage companies, safe deposit box companies, companies engaged in the management of mutual funds, insurance agencies, among others. The total equity investments of a commercial bank in universal and/or commercial banks are generally not permitted to exceed 49.0% of the enterprise’s net worth. However, a publicly-listed commercial bank may own up to 100.0% of the voting stock of one (1) other universal or commercial bank. A commercial bank is allowed to have a total equity investment in thrift and/or rural banks of up to 100.0%. A commercial bank may also acquire up to 100.0% of the equity of non-financial allied undertakings.

Regulations The Manual of Regulations for Banks (MORB) of the BSP and various BSP regulations impose the following restrictions on commercial banks:

Minimum Capitalization Under the MORB, commercial banks with a Head Office in the National Capital Region (NCR) are required to have capital accounts of at least P2 billion (for Head Office only); P4 billion (for up to 10 branches); P10 billion (for 11 to 100 branches); and P15 billion (for more than 100 branches). 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 surplus and unimpaired, 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) total outstanding loan, other credit accommodations and guarantees granted to related parties that are not at arm’s length terms as determined by the appropriate supervising department of BSP (e) deferred income tax, (f) appraisal increment reserve (revaluation reserve) as a result of appreciation or increase in the book value of bank assets, (g) 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 (h) in the case of rural banks, the government counterpart equity, except those arising from conversion of arrears under BSP's Rehabilitation Program.


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Capital Adequacy Requirements The Basel III BSP rules include more stringent definitions of Tier 1 capital and Tier 2 capital instruments relating to their ability to absorb losses, the introduction of a leverage ratio, changes in the risk weighting of counterparty credit risk, a framework for counter-cyclical capital buffers, and short and medium-term quantitative liquidity ratios. These reforms aim to increase the minimum quantity and quality of capital which the Bank will be obliged to maintain. On 15 January 2013, the BSP published Circular No. 781, which prescribed the implementing guidelines on the risk-based capital adequacy framework particularly on the minimum capital and disclosure requirements for the Philippine banking system in accordance with the Basel III standards. The risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted assets, will be required to be not less than 10 percent. on an unconsolidated basis and consolidated basis. Banks will also be required to maintain a CET1 ratio and a Tier 1 capital ratio of 6.0 per cent and 7.5 per cent, respectively. A capital conversion buffer of 2.5 per cent comprised of CET1 capital shall also apply. The reforms were implemented beginning on 1 January 2014. On 29 October 2014, the BSP issued Circular No. 856, or the “Implementing Guidelines on the Framework for Dealing with Domestic Systemically Important Banks (“DSIBs”) under Basel III” to address systemic risk and interconnectedness by identifying banks which are deemed systemically important within the domestic banking industry. Banks that will be identified as DSIBs shall be required to have higher loss absorbency, on top of the minimum CET1 capital and capital conservation buffer. Compliance with this requirement shall be phased-in starting 1 January 2017, with full compliance on 1 January 2019. Furthermore, banks face new liquidity requirements under Basel III’s new liquidity framework, namely, the Liquidity Coverage Ratio (“LCR”) and the Net Stable Funding Ratio (“NSFR”). The LCR requires banks to hold sufficient level of high-quality liquid assets to enable them to withstand a 30 day-liquidity stress scenario. Beginning 1 January 2018, the LCR threshold that banks will be required to meet will be 90 percent which will then be increased to 100 percent beginning 1 January 2019. Meanwhile, the NSFR requires that banks’ assets and activities are structurally funded with long-term and more stable funding sources. BSP Circular No. 1007 issued on 23 May 2018 contains the implementing guidelines on the adoption of the Basel III Framework on Liquidity Standards – NSFR. The implementation of the minimum NSFR shall be phased in to help ensure that the covered banks/QBs can meet the standard. It shall undergo an observation period from July to December 2018 before the minimum 100% NSFR becomes a requirement in January 2019

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. Under BSP Circular No. 832 (2014), commercial banks (including the Bank) are required to maintain regular reserves of 18.0% against demand deposits, “NOW” accounts, savings deposits, time deposits, negotiable CTDs, long-term non-negotiable tax exempt CTDs, Peso deposits lodged under Due to foreign banks, Peso deposits lodged under Due to Head Office/Branches/Agencies Abroad (Philippine branch of a foreign bank), and deposit substitutes, 4.0% against long-term negotiable certificate of time deposits issued under BSP Circular No. 304 (2001), 7.0% against long-term negotiable certificate of time deposits issued under BSP Circular No. 824 (2014), 0% against deposit substitutes evidenced by repo agreements, and 6.0% against bonds.

Loan Limit to a Single Borrower

Under the General Banking Law and its implementing BSP rules, 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% of the net worth of such bank (or by an addition 10% 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 of the BSP from time to time.


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Trust Regulation The MORB contains the BSP rules governing the grant of authority to and the management, administration and conduct of trust, other fiduciary business and investment management activities of trust corporations and financial institutions allowed by law to perform such operations. Trust corporations, banks and investment houses may engage in trust and other fiduciary business after complying with the requirements imposed by the Manual. The Bank may, under its Articles, accept and manage trust funds and properties and carry on the business of a trust corporation.

Foreign Currency Deposit System A FCDU is a unit of a local bank or of a local branch of a foreign bank authorized by the BSP to engage in foreign currency-denominated transactions. Commercial banks which meet the net worth or combined capital accounts and profitability requirements prescribed by the Monetary Board of the BSP may be authorized to operate an expanded FCDU.

Commercial banks under the foreign currency deposit system are required to maintain a 100.0% cover for their foreign currency liabilities, except for US$ denominated repurchase agreements with the BSP. FCDUs of universal, commercial and thrift banks have the option to maintain foreign currency deposits with the BSP equivalent to 15.0% of their foreign currency deposit liabilities as a form of foreign exchange cover.

Loans to DOSRI The amount of individual outstanding loans, other credit accommodations and guarantees to DOSRI, of which at least 70.0% must be secured, should not exceed an amount equivalent to their unencumbered deposits and book value of their paid-in capital contribution 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 their outstanding loans, other credit accommodations and guarantees

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, 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, and insurance companies and/or institutions regulated by the Insurance Commission, are required to submit a “covered” transaction report involving a single transaction in cash or other equivalent monetary instruments in excess of P500,000.00 within one banking day. On 15 February 2013, Republic Act No. 10365, which took effect on 7 March 2013, expanded the Anti-Money Laundering Act covered institutions and crimes. The revised implementing rules and regulations were published on the 23

rd and 24

th of December

2016. Suspicious transactions are transactions with covered institutions such as a bank, regardless of the amount involved, where any of the following circumstances exists:

There is no underlying legal or trade obligation, purpose or economic justification;

The customer or client is not properly identified;

The amount involved is not commensurate with the business or financial capacity of the client;

The transaction is structured to avoid being the subject of reporting requirements under the AMLA;

There is a deviation from the client’s profile or past transaction;

The transaction is related to an unlawful activity or offence under the AMLA;

Similar or analogous transactions to the above.

Money laundering is also committed by any covered person who, knowing that a covered or suspicious transaction is required under this Act to be reported to the Anti-Money Laundering Council (AMLC), fails to do so.


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Recent developments have required the implementation of stricter measures to prevent money laundering. On 4 April 2012, the BSP issued Memorandum No. M2012-017 re: Anti- Money Laundering Risk Rating System (ARRS). which is an internal rating system used by the BSP to understand whether the risk management policies and practices as well as internal controls of banks and non-bank financial institutions to prevent money laundering and terrorist financing are in place, well disseminated and effectively implemented. The ARRS is an effective supervisory tool that undertakes to ensure that all covered institutions are assessed in a comprehensive and uniform manner, and that supervisory attention is appropriately focused on entities exhibiting inefficiencies in its board of directors and senior management, oversight and monitoring, inadequacies in their AML framework, weaknesses in internal controls and audit and defective implementation of internal policies and procedures. Republic Acts No. 10167 and 10168 were likewise created in order to strengthen the present anti-money laundering laws of the Philippines. R.A. No. 10167 gives power to the Court of Appeals to issue a freeze order effective immediately upon verified ex parte petition by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined by the AMLA. Moreover, the AMLC is given the power to inquire into or examine any particular deposit or investment, including related accounts, with any banking institution or non-bank financial institution upon order of any competent court based on an ex parte application in cases of violations of the AMLA, when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity. On the other hand, R.A. No. 10168 or the Terrorism Financing Prevention and Suppression Act of 2012 gives the AMLC, either upon its own initiative or at the request of the ATC, authority to investigate any property or funds that are in any way related to financing terrorism or acts of terrorism or property or funds of any person in relation to whom there is probable cause to believe that such person is committing or attempting or conspiring to commit or participating in or facilitating the financing of terrorism or acts of terrorism. The AMLC is also authorized to issue an ex parte freeze order of properties or funds that are related to acts of terrorism. On 15 February 2013, the President of the Philippines signed into law Republic Act No. 10365 (An Act Further Strengthening the Anti-Money Laundering Law, Amending for the Purpose Republic Act no. 9160 Otherwise Known as the “Anti-Money Laundering Act of 2001”, As Amended), which act expanded the AMLA covered institutions and crimes. Under R.A. No. 10365, jewelry dealers will now be required to report transactions in excess of ₱1,000,000.00. The law also required the Land Registration Authority to submit to the AMLC reports covering real estate purchases in excess of ₱500,000.00. On 21 September 2016, the AMLC approved the 2016 Revised Implementing Rules and Regulations of the AMLA. On 15 March 2017, the BSP issued BSP Circular No. 950 Series of 2017 amending Part Eight or the Anti-Money Laundering Regulations of the Manual of Regulations for Banks and Manual of Regulations for Non-Bank Financial Institutions. Under the said circular, all covered persons, which refer to banks, non-banks, QBs, trust entities, non-stock savings and loan associations, pawnshops, foreign exchange dealers, money changers, remittance and transfer companies, electronic money issuers and other financial institutions subject to BSP supervision and/or regulation, are required to develop sound risk management to ensure that risks associated with money laundering are avoided. For this reason, senior management is required to oversee the day-to-day management of the covered person and ensure effective implementation of AML policies set by the board. Furthermore, all covered persons shall adopt an AML monitoring system that is capable of generating timely, accurate and complete reports to lessen the likelihood of any reputational and compliance risks, and to regularly apprise the board of the directors and senior management of AML compliance. On 20 October 2017, the Casino Implementing Rules and Regulations of Republic Act No. 10927 was enacted, thereby designating Casinos as covered persons and included in the scope and coverage of AMLA. Consistent with the risk-based approach, covered persons are required to identify, understand and assess their money laundering risks, arising from customers, countries or geographic areas of operations and customers, products, services and transactions or delivery channels. In conducting customer due diligence, a risk-based approach shall be undertaken depending on the type of customer, business relationship or nature of the product, transaction or activity. Data Privacy Act On 15 August 2012, the Data Privacy Act was signed into law. The Data Privacy Act seeks to protect the confidentiality of “personal information”, which is defined under the act as “any information whether recorded in a material form or not, from which the identity of an individual is apparent or can be reasonably and directly ascertained by the entity holding the information, or when put


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together with other information would directly and certainly identify the individual.” The act mandates that personal information must be collected only for specified legitimate purposes determined and declared before, or as soon as reasonably practicable after collection, and later processed in a way compatible with such declared, specified and legitimate purpose only. The law also provides for the criteria for lawful processing of personal information, rights of the data subject and accountability for transfer of personal information, among others. To implement the provisions of the law, the National Privacy Commission was created to monitor and ensure compliance with the international standards set for data protection. On 24 August 2016, the National Privacy Commission issued the Implementing Rules and Regulations of the Data Privacy Act. Taxation for Banks

Banks are subject to regular corporate income tax, based on their taxable income at a tax rate of 30% Taxable net income refers to items of income specified under Section 32 (A) of Republic Act No. 8424 or the Tax Reform Act of 1997, as amended (the Tax Code) less the items of allowable deductions under Section 34 of the Tax Code or those allowed under special laws. A Minimum Corporate Income Tax (MCIT) equivalent to 2% of the gross income of a bank is payable beginning on the fourth year of operations of the bank only if the MCIT is greater than the regular corporate income tax. Any excess MCIT paid over the regular corporate income tax can be carried forward as tax credit for the three immediately succeeding years. For purposes of MCIT, the bank’s gross income means: (a) gross receipts less sales returns, allowances, discounts and cost of services, including interest expense; and (b) income derived from other businesses except income exempt from income tax and income subject to final tax. An Improperly Accumulated Earning Tax (IAET) equivalent to 10% of improperly accumulated taxable income of a corporation is not applicable to banks. Since banks are in the regular business of lending, interest income derived by banks which is generally considered passive income by non-banks, is considered ordinary income of banks subject to 30% corporate income tax. Banks may also claim interest expense as tax deduction if such expense complies with the requirements laid down in Revenue Regulations No. 13-00. The amount of interest expense which banks may claim as tax deduction shall be reduced by an amount equal to 33% of the banks’ interest income that is subject to final tax. The Tax Code does not allow banks to deduct interest expense or bad debts arising from transactions with the following:

An individual who directly or indirectly owns more than 50% in value of the outstanding capital stock of the bank;

A corporation, more than 50% in value of the outstanding capital stock of which is owned directly or indirectly, by or for the same individual in sub-paragraph (a), either as a personal holding company or a foreign personal holding company.

Pursuant to Revenue Regulations No. 05-99 (as amended by Revenue Regulations No. 25-02), in order for banks to claim bad debts as tax deductions, they must secure a certification from the BSP that the accounts are worthless and can be written off, subject to the final determination by the BIR that bad debts being claimed by the banks are worthless and uncollectible. The banks’ passive income such as interest income earned from bank deposits is subject to final withholding tax. Banks are subject to GRT, which is a tax levied on the gross receipts of banks and non-bank financial intermediaries. ROPA of banks are considered as ordinary assets. The income derived from their sale is subject to the regular corporate income tax. Moreover, the transaction is subject to a 6% creditable withholding tax based on the highest among the zonal value, value in the tax declaration or selling price, which shall be withheld by the buyer and can be used as a credit against the bank’s taxable income in the year that the gain is realized. The Tax Code provides for a final tax at fixed rates for the amount of interest, yield or benefit derived from deposit substitutes which shall be withheld and remitted by the payor of the said interest, yield or benefit. This rule does not apply to gains derived from


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trading, retirement or redemption of the debt instrument which is subject to regular income tax rates, except those instruments with maturity of more than five years. To be considered as a deposit substitute, the debt instrument must have been issued or endorsed to 20 or more individuals at any one time at the time of the original issuance in the primary market or at the issuance of each tranche in the case of instruments sold or issued in tranches. Interbank call loans with a maturity period of not more than five days and used to cover deficiency in reserves against deposit liabilities are not considered deposit substitutes. The interbank call loans are not subject to documentary stamp tax (DST) except if they have a maturity of more than seven days.


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TAXATION The following is a general description of certain Philippine tax aspects of the LTNCDs. 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 or regulation 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 tax considerations that may be relevant to a decision to purchase, own, or dispose of the LTNCDs. Prospective purchasers should consult their tax advisors as to the laws of other applicable jurisdictions and the specific tax consequences of acquiring, holding, and disposing of the LTNCDs. 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 The LTNCDs will be treated as deposit substitute instruments. Consequently, interest income earned by individual citizens, resident aliens, and non-resident aliens engaged in trade or business in the Philippines as holders of the unsecured subordinated notes will generally be subject to a 20.0% final withholding tax. However, the LTNCDs may qualify as long-term deposit or investment, in which case, pursuant to Revenue Regulations No. 14-2012 and Revenue Memorandum Circular No. 81- 2012, interest income derived by said individuals may be exempt from the said 20.0% final withholding tax provided the following characteristics or conditions are present:

1. The depositor or investor is an individual citizen (resident or non-resident) or resident alien or non-resident alien engaged in trade or business in the Philippines;

2. The long-term deposits or investment certificates should be under the name of the individual and not under the name of the corporation or the bank or the trust department/unit of the bank; The long-term deposits or investments must be in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the BSP;

3. The long-term deposits or investments must be issued by banks only and not by other financial institutions; 4. The long-term deposits or investments must have a maturity period of not less than five (5) years; 5. The long-term deposits or investments must be in denominations of Ten Thousand Pesos (P10,000) and other

denominations as may be prescribed by the BSP; 6. The long-term deposits or investments should not be terminated by the original investor before the fifth (5th)

year, otherwise they shall be subjected to the graduated rates of 5%, 12% or 20% on interest income earnings; and 7. Except those specifically exempted by law or BSP rules, any other income such as gains from trading, foreign

exchange gain, shall not be covered by income tax exemption. The exemption from interest income on long term investments is subject to full compliance with the above requisites. Nevertheless, should qualified investors of such instruments pre-terminate the deposit or investment before the fifth (5th) 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:

Four (4) years to less than five (5) years : 05.00%; Three (3) years to less than four (4) years : 12.00%; and Less than three (3) years : 20.00%.


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Interest Income received by domestic and resident foreign corporations shall be subject to the final withholding tax of 20.0%. Interest income received by non-resident aliens not engaged in trade or business in the Philippines shall generally be subject to a final withholding tax of 25.0%. The foregoing rates may be reduced under an applicable tax treaty. However, non-resident aliens not engaged in trade or business in the Philippines are Prohibited CD Holders and accordingly, not eligible to invest in the LTNCDs. No tax ruling has been issued by the BIR which clarifies the operation of Revenue Regulation No. 14- 2012 vis-a-vis unsecured subordinated debt issuances such as the LTNCDs. Under Rep. Act No. 9337 (amending the National Internal Revenue Code), interest income received by a non-resident foreign corporation shall generally be subject to the 30.0% final withholding tax. This rate may also be reduced under an applicable tax treaty. However, non-resident foreign corporations are Prohibited CD Holders and accordingly, not eligible to invest in theLTNCDs. The BIR has also issued Revenue Memorandum Circular No. 8-2014 (RMC 8-2014) which applies to exemptions from withholding tax in general. Under BIR RMC 8-2014, taxpayers claiming exemption from withholding taxes shall be required by the concerned withholding agent to submit a copy of a valid, current and subsisting tax exemption certificate or ruling, as per existing administrative issuances and any issuance that may be issued from time to time, before payment of related income. If the taxpayer fails to submit the said proof of tax exemption, he or she shall be subjected to the payment of appropriate withholding taxes due on the transaction. While the income from the LTNCDs may be considered tax exempt under BIR Revenue Regulation No. 14-2012 (RR 14-2012) (although no categorical ruling has been issued by the BIR to this effect), there is no assurance that the BIR will not issue clarificatory regulations making RMC 8-2014 applicable to long term deposit or investment certificates. In such an event, it may be difficult for qualified individual CD Holders to avail of the tax-exempt nature of the LTNCDs in accordance with RR 14-2012. In such an event, the Bank may be compelled to apply the prescribed rates of withholding tax and proceed withhold the necessary tax due on the LTNCDs based on current BSP rules. Documentary Stamp Taxes The issuance of the LTNCDs will be subject to documentary stamp tax at the rate of P1.50 for every P200.00 of the issue value of such notes. The Bank is liable for the payment of the documentary stamp tax on the original issuance of the LTNCDs. No documentary stamp tax is imposed on the secondary transfer of the LTNCDs. Taxation on Sale or Other Disposition of LTNCDs 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 the value of such holders interest in the Note. Under the Tax Code, any gain realized from the sale, exchange, or retirement of bonds, 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 bonds, debentures, or other certificates of indebtedness) is exempt from income tax. Since the LTNCDs have a maturity of more than five years from the date of issuance, any gains realized by a holder from the sale of the LTNCDs will be exempt from Philippine income tax. Value-Added Tax/Gross Receipts Tax The gross income from the sale or transfer of the LTNCDs in the Philippines by dealers in securities is subject to VAT at the rate of 12.0% of the gross income. Banks and non-bank financial intermediaries performing quasi-banking functions are subject to gross receipts tax as the following rates:

(a) 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 5 years or less : 5.0% Maturity period is more than 5 years : 1.0%


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(b) On dividends and equity shares and net income of subsidiaries — 0% (c) On royalties, rentals of property, real or personal, profits, from exchange and all other items treated as gross income under

the Tax Code — 7.0% (d) On net trading gains within the taxable year on foreign currency, debt securities, derivatives, and other similar financial

instruments — 7.0% Other nonbank financial intermediaries are subject to gross receipts tax at the following rates:

(a) On interest, commissions, discounts and all other items treated as gross income under the Tax Code– 5.0% (b) On interests, 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 5 years or less : 5.0% Maturity period is more than 5 years : 1.0%

Estate and Donor's Tax The transfer of LTNCDs as part of the estate of a deceased individual to his heirs, whether or not such individual was a resident of the Philippines at the time of his death, will be subject to an estate tax. Under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, which took effect on the first day of 2018, from a graduated tax rate of 5% to 20%, a flat tax rate of 6% will now be applied to the value of the net estate upon transfer of the decedent, whether the decedent is a resident or non-resident of the Philippines A holder of such LTNCTDs will be subject to donor's tax. The TRAIN Law also amended the taxation of donations by imposing a uniform tax rate of 6% based on the value of the total gift in excess of P=250,000 made during a calendar year, regardless of the relation of the donor to the donee. Previously, the donations were subjected to a graduated tax rate of 2% to 15% on donations to relatives, and 30% on donations to strangers. The estate tax as well as the donor's tax in respect of the LTNCDs 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.


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OFFER PROCEDURE Method of Distribution The LTNCDs are being issued pursuant to an approval by the BSP dated 26 July 2018 and subject to the terms and conditions of the Master CD, as well as BSP Circular Nos. 877 (2015), 834 (2014), 824 (2014), 810 (2013), 778 (2012) and 304 (2001) and Sections X233.9 of the Manual of Regulations for Banks, as may be amended. The LTNCDs are being issued by the Issuer with ING Bank N.V., Manila Branch and Development Bank of the Philippines as Joint Lead Arrangers and Selling Agents, (b) the Bank as Selling Agent, and (c) Philippine Depository & Trust Corp. as Registrar and Paying Agent. No action has been or will be taken by the Issuer or the Joint Lead Arrangers in any jurisdiction (other than the Philippines), that would permit a public offering of any of the LTNCDs, or possession or distribution of this Offering Circular, or any amendment or supplement thereto issued in connection with the offering of the LTNCDs, in any country or jurisdiction where action for that purpose is required. The Joint Lead Arrangers are required to comply with all laws, BSP rules and directives as may be applicable in the Philippines, including without limitation any BSP rules issued by the BSP, in connection with the offering and purchase of the LTNCDs and any distribution and intermediation activities, whether in the primary or secondary markets, carried out by or on behalf of the Joint Lead Arrangers in connection therewith. Each of the Joint Lead Arrangers is a third-party in relation to Bank, such that, (i) they have no subsidiary/affiliate relationship with Bank; (ii) they are not related in any manner to the Bank as would undermine the objective conduct of due diligence on the Bank. The Registrar and Paying Agent is likewise a third-party in relation to Bank, such that, (i) it has no subsidiary/affiliate relationship with Bank; (ii) it is not related in any manner to the Bank as would undermine its independence. Applications to Purchase the LTNCDs during the Offer Period Applicants may purchase the LTNCDs during the Offer Period by submitting fully and duly accomplished Applications to Purchase the LTNCDs, in quadruplicate together with all the required attachments and the corresponding payments to the Selling Agent from whom such application was obtained no later than 5:00 p.m. of the last day of the Offer Period. Applications received after said date or without the required attachments will be rejected. The Issuer and the Joint Lead Arrangers reserve the right to adjust the Offer Period as needed. If the Applicant is an individual, the following documents must also be submitted:

(a) A clear copy of at least one (1) valid photo-bearing identification document issued by an official authority in accordance with BSP Circular No. 608 (2008) as may be amended from time to time, and documents as may be required by to the Registrar and/or Selling Agent concerned;

(b) Two (2) fully executed signature cards in the form attached to the application; and (c) For aliens residing in the Philippines or non-residents engaged in trade or business in the Philippines, consularized proof of

tax domicile issued by the relevant tax authority of the Applicant. If the Applicant is a corporation, partnership, trust, association or institution, the following documents must also be submitted:

(a) SEC-certified or Corporate Secretary-certified true copy of the SEC Certificate of Registration, Articles of Incorporation and By-Laws or such other relevant organizational or charter documents;

(b) Original or Corporate Secretary-certified true copy of the duly notarized certificate confirming the resolution of the Board of Directors and/or committees or bodies authorizing the purchase of the LTNCDs and specifying the authorized signatories; and

(c) Two (2) fully executed signature cards duly authenticated by the Corporate Secretary, in the form attached to the application.

Corporate applicants who are claiming tax exemption must also submit the following:


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(a) Certified true copy of a tax exemption certificate, ruling or opinion issued by the Bureau of Internal Revenue no more than one year prior to the date of submission of the same to the Selling Agents;

(b) Unless waived by the Bank or an equivalent document acceptable to the Bank is submitted, original of the duly notarized undertaking, in the prescribed form, declaring and warranting its tax exempt status, undertaking to immediately notify the Issuer and the Registrar and Paying Agent of any suspension or revocation of its tax exempt status and agreeing to indemnify and hold the Issuer and the Registrar and Paying Agent free and harmless against any claims, actions, suits, and liabilities resulting from the non-withholding of the required tax; and

(c) Such other documentary requirements as may be required by the Registrar and Paying Agent as proof of the Applicant’s tax-exempt status.

Allocation and Issue of the LTNCDs Applications to Purchase the LTNCDs shall be subject to the availability of the LTNCDs and acceptance by the Issuer. The Joint Lead Arrangers, in consultation with the Issuer, reserves the right to accept, reject, scale down or reallocate any Application to purchase the LTNCDs applied for. In the event that payment supporting any Application is returned by the drawee bank for any reason whatsoever, the Application shall be automatically cancelled, and any prior acceptance of the Application shall be deemed revoked. If any Application is rejected or accepted in part only, the application money or the appropriate portion thereof will be returned without interest by the relevant Selling Agent. On the Issue Date, the Selling Agents shall, on behalf of the Issuer, accept the relevant Applications to Purchase. The acceptance of the Application to Purchase shall ipso facto convert such Application to Purchase into a purchase agreement between the Issuer and the relevant CD Holder. Upon confirmation by the Issuer of acceptance of the relevant Applications and the respective amount of LTNCDs, the Selling Agents shall issue the relevant purchase advice (the “Purchase Advice”) to successful applicants confirming the acceptance of their offer to purchase the LTNCDs and consequent ownership thereof and stating the pertinent details including the amount accepted, with copies to the Registrar. The Registrar shall be entitled to rely solely on the Final Sales Reports submitted by the Selling Agents to the Registrar. Where PDTC discovers, after Issue Date, any inconsistency between the Final Sales Report and the Application to Purchase submitted by the CD Holder, PDTC reserves the right to rely subsidiarily on the Applications to Purchase, to the extent that the information in the Final Sales Report is noted to be inconsistent with the Application to Purchase. Within seven (7) Banking Days from the Issue Date, the Registrar shall distribute the Registry Confirmations directly to the CD Holders in the mode elected by the CD Holder as indicated in the Application to Purchase. Transactions in the Secondary Market All secondary trading of the LTNCDs shall be coursed the trading facilities of PDEx, as applicable, subject to the payment by the CD Holder of fees to the connection with trading on PDEx, and the Registrar and Paying Agent. Transfers shall be subject to the procedures of the BSP, the Registrar and Paying Agent and PDEx, including but not limited to the guidelines on minimum trading lots, minimum holding denominations, and record dates. The Bank shall list the LTNCDs in PDEx for secondary market trading. Upon listing of the LTNCDs with PDEx, investors shall course their secondary market trades through the trading participants of PDEx for execution in the PDEx Trading Platform in accordance with the PDEx Trading Rules, Conventions and Guidelines, as these may be amended or supplemented from time to time, and must settle such trades on a Delivery versus Payment (DvP) basis in accordance with PDEx Settlement Rules and Guidelines. The secondary trading of the LTNCDs in PDEx may be subject to such fees and charges of PDEx, the trading participants of PDEx, and other providers necessary for the completion of such trades. Transactions on the LTNCDs on PDEx will be subject to the duly approved and relevant rules of the exchange, including guidelines on minimum trading lots and other guidelines for holding and trading of the LTNCDs as may be prescribed by the BSP. For the avoidance of doubt, the minimum denomination for the LTNCDs as prescribed by the BSP must be kept at all times. Consequently, no negotiation or secondary trading will be allowed if the result is that a remaining CD Holder of the LTNCDs will hold


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less than the minimum denomination as prescribed or approved by the BSP. No transfers will be effected for a period of two (2) Business Days preceding the due date for any payment of interest on the LTNCDs, or during the period of two (2) Business Days preceding the due date for the payment of the principal amount of the LTNCDs. The Registrar shall register any transfer of the LTNCDs upon presentation to it of the following documents in form and substance acceptable to it:

The relevant Trade- Related Transfer Form or Non-Trade Transfer Form as the case may be, duly accomplished by the transferor CD holder and endorsed by the PDEx Trading Participant;

the relevant Purchase Advice of the buyer/transferee (with the information provided therein duly set forth in typewritten form);

duly accomplished Investor Registration Form of the buyer/transferee as prescribed by the Registrar as well as all supporting documents described for the original issuance of the LTNCDs as described above (in case of a new holder);

proof of the qualified tax-exempt status of the transferee, if applicable, and the covering Affidavit of Undertaking;

the original duly endorsed signature cards of the buyer/transferee and such other original or certified true copies of other documents submitted by the buyer/transferee in support of the transfer or assignment of the LTNCDs in its favor;

the appropriate secretary’s certificate attesting to the board resolutions authorizing the transfers and acceptances as well as designating the authorized signatories, together with specimen signature cards duly signed by the parties, and duly authenticated by each party’s corporate secretary; and

such other documents that may be required by the Registrar, including those for Non-Trade Transactions. Transfers of the LTNCDs made in violation of the restrictions on transfer under the Terms and Conditions shall be null and void and shall not be registered by the Registrar. Interest and Principal Payment On the relevant Payment Date, the Registrar shall, upon receipt of the corresponding funds from the Issuer, make available to the CD Holders the amounts due under the LTNCDs, net of taxes and fees (if any), by way of credits to the bank accounts identified by the CD Holders in the Applications to Purchase.


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INDEX TO THE FINANCIAL STATEMENTS Unaudited interim consolidated financial statements as of 30 June 2018 and for the six months ended 30 June 2018 and 2017…….F-4 Audited Financial Statements as at and for the Year Ended 31 December 2017 and 2016………………………………………………………………F-52

Philippine Bank of Communicationsand Subsidiaries

Unaudited Interim Condensed ConsolidatedFinancial Statements as of June 30, 2018 andfor the Six Months Ended June 30, 2018 and2017

and

Report on Review of Interim CondensedConsolidated Financial Statements

F-1

*SGVFS031950*

REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

The Stockholders and the Board of DirectorsPhilippine Bank of Communications

Introduction

We have reviewed the accompanying interim consolidated statement of financial position of PhilippineBank of Communications and its subsidiaries (the Group) as at June 30, 2018, and the related interimconsolidated statements of income, interim consolidated statements of comprehensive income, interimconsolidated statements of changes in equity and interim consolidated statements of cash flows for the sixmonths ended June 30, 2018 and 2017, and explanatory notes. Management is responsible for thepreparation and presentation of these interim condensed consolidated financial statements in accordancewith Philippine Accounting Standards (PAS) 34, Interim Financial Reporting. Our responsibility is toexpress a conclusion on these interim condensed consolidated financial statements based on our review.

Scope of Review

We conducted our review in accordance with Philippine Standard on Review Engagements 2410, Reviewof Interim Financial Information Performed by the Independent Auditor of the Entity. A review ofinterim financial information consists of making inquiries, primarily of persons responsible for financialand accounting matters, and applying analytical and other review procedures. A review is substantiallyless in scope than an audit conducted in accordance with Philippine Standards on Auditing andconsequently does not enable us to obtain assurance that we would become aware of all significantmatters that might be identified in an audit. Accordingly, we do not express an audit opinion.

SyCip Gorres Velayo & Co.6760 Ayala Avenue1226 Makati CityPhilippines

Tel: (632) 891 0307Fax: (632) 819 0872ey.com/ph

BOA/PRC Reg. No. 0001, December 14, 2015, valid until December 31, 2018SEC Accreditation No. 0012-FR-4 (Group A), November 10, 2015, valid until November 9, 2018

A member firm of Ernst & Young Global Limited

F-2

*SGVFS031950*

- 2 -

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanyinginterim condensed consolidated financial statements are not prepared, in all material respects, inaccordance with PAS 34, Interim Financial Reporting.

SYCIP GORRES VELAYO & CO.

Josephine Adrienne A. AbarcaPartnerCPA Certificate No. 92126SEC Accreditation No. 0466-AR-3 (Group A), February 9, 2016, valid until February 8, 2019Tax Identification No. 163-257-145BIR Accreditation No. 08-001998-61-2018, February 26, 2018, valid until February 25, 2021PTR No. 6621219, January 9, 2018, Makati City

September 13, 2018


F-3

*SGVFS031950*

PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIESUNAUDITED INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITIONAS OF JUNE 30, 2018(With Comparative Restated Figures as of December 31, 2017)

June 30,2018

(Unaudited)

December 31,2017

(As restated -Note 2)

(Amounts in Thousands)ASSETSCash and Other Cash Items P=973,542 P=974,207Due from Bangko Sentral ng Pilipinas 15,003,245 15,340,711Due from Other Banks 629,203 1,166,063Interbank Loans Receivable 1,089,537 534,925Financial Assets at Fair Value through Profit or Loss (Note 7) 293,491 2,740,471Financial Assets at Fair Value through Other Comprehensive

Income (Note 7) 3,448,781 90,639Investment Securities at Amortized Cost (Note 7) 13,640,854 15,417,201Loans and Other Receivables (Note 8) 56,869,223 53,352,967Investment in an Associate 13,172 13,068Property and Equipment (Note 9) 1,058,448 1,108,869Investment Properties (Note 10)

Condominium units for lease 1,858,029 1,883,696Foreclosed properties 789,993 736,539Office units for lease 3,824 3,999

Goodwill (Note 12) 182,227 182,227Intangible Assets (Note 12) 724,693 744,179Deferred Tax Assets (Note 15) 104,291 123,566Other Assets 815,745 697,943TOTAL ASSETS P=97,498,298 P=95,111,270

LIABILITIES AND EQUITYLIABILITIESDeposit Liabilities (Note 13)Demand P=21,039,814 P=19,400,193Savings 8,030,627 8,329,526Time 45,179,054 43,006,098

74,249,495 70,735,817Bills Payable (Note 14) 11,518,569 12,567,399Outstanding Acceptances 54,376 64,085Manager’s Checks 371,902 427,405Accrued Interest, Taxes and Other Expenses 570,460 421,666Income Tax Payable 22,863 13,458Deferred Tax Liabilities (Note 15) 107,005 107,070Other Liabilities 776,239 831,201TOTAL LIABILITIES 87,670,909 85,168,101

(Forward)

F-4

*SGVFS031950*

- 2 -

June 30,2018

(Unaudited)

December 31,2017

(As restated -Note 2)

(Amounts in Thousands)EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE

PARENT COMPANYCommon stock (Note 18) P=12,016,129 P=12,016,129Additional paid-in capital 2,252,826 2,252,826Surplus reserves 105,824 105,824Deficit (Note 2) (4,302,158) (4,311,609)Unrealized gain (loss) on financial assets at fair value through other

comprehensive income (Note 7) (10,275) 64,104Cumulative translation adjustment (176,720) (122,263)Remeasurement losses on retirement liabilities (58,265) (61,868)

9,827,361 9,943,143NON-CONTROLLING INTERESTS 28 26TOTAL EQUITY 9,827,389 9,943,169TOTAL LIABILITIES AND EQUITY P=97,498,298 P=95,111,270

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

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PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIESUNAUDITED INTERIM CONSOLIDATED STATEMENTS OF INCOME

For the Six Months Ended June 30

2018

2017(As restated -

Note 2)(Amounts in Thousands, Except

Earnings per Share)

INTEREST INCOMELoans and other receivables (Note 8) P=1,844,288 P=1,523,616Investment securities (Note 7) 324,867 387,311Interbank loans receivable and securities purchased under resale agreements 26,415 22,012Deposits with other banks 5,110 8,412

2,200,680 1,941,351INTEREST AND FINANCE CHARGESDeposit liabilities (Note 13) 523,372 389,009Bills payable, borrowings and others (Note 14) 156,300 107,806

679,672 496,815NET INTEREST INCOME 1,521,008 1,444,536Rent income 314,582 279,135Service charges, fees and commissions 175,817 171,507Profit from assets sold 56,079 10,975Trading and securities gain (loss) - net (Note 7) 31,041 (10,316)Foreign exchange gain - net 15,014 31,559Income from trust operations 7,488 7,839Gain on assets exchange - net 7,286 836Miscellaneous 59,938 79,390TOTAL OPERATING INCOME 2,188,253 2,015,461OPERATING EXPENSESCompensation and fringe benefits 582,617 577,190Taxes and licenses 292,889 223,863Depreciation and amortization (Note 9) 197,780 204,727Provision for credit and impairment losses - net (Note 11) 127,502 81,468Occupancy and other equipment-related costs 126,361 117,400Insurance 70,511 66,198Security, clerical, messengerial and janitorial services 53,516 45,075Management and professional fees 52,984 58,744Entertainment, amusement and recreation 41,391 40,205Communications 27,868 28,046Miscellaneous 186,506 181,756TOTAL OPERATING EXPENSES 1,759,925 1,624,672INCOME BEFORE SHARE IN NET INCOME OF AN ASSOCIATE 428,328 390,789SHARE IN NET INCOME OF AN ASSOCIATE 104 113INCOME BEFORE INCOME TAX 428,432 390,902PROVISION FOR INCOME TAX (Note 15) 115,986 99,789NET INCOME P=312,446 P=291,113Attributable to:

Equity holders of the Parent Company P=312,439 P=290,993Non-controlling interests 7 120

P=312,446 P=291,113Basic/Diluted Earnings Per Share Attributable to Equity Holders of the

Parent Company (Note 18) P=0.65 P=0.61


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PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIESUNAUDITED INTERIM CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME

For the Six Months Ended June 302018 2017

(Amounts in Thousands)

NET INCOME FOR THE YEAR P=312,446 P=291,113OTHER COMPREHENSIVE INCOME (LOSS) FOR THE YEAR,

NET OF TAXItems that may be reclassified to profit or loss in subsequent periods:

Net movement in cumulative translation adjustment (54,457) (52,045)Unrealized loss on debt securities at fair value through other

comprehensive income (Note 7) (94,075) −(148,532) (52,045)

Items that may not be reclassified to profit or loss in subsequent periods:Unrealized gain on equity securities at fair value through other

comprehensive income (Note 7) 19,696 15,241Remeasurement of defined benefit liabilities 3,603 19,606

23,299 34,847(125,233) (17,198)

TOTAL OTHER COMPREHENSIVE INCOME P=187,213 P=273,915

Attributable to:Equity holders of the Parent Company P=187,206 P=273,795Non-controlling interests 7 120

TOTAL COMPREHENSIVE INCOME P=187,213 P=273,915


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PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIESUNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITYFOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

Equity Attributable to Equity Holders of the Parent Company

CommonStock

SubscribedCommon Stock -

netAdditional

Paid-in CapitalSurplus

ReservesDeficit

(Note 2)

Unrealized Gain(Loss)

on FinancialAssets at Fair

Value ThroughOther

Comprehensive Income(Note 7)

RevaluationIncrement

on Land,Office

Units andCondominium

Properties

CumulativeTranslationAdjustment

RemeasurementLosses on

RetirementLiabilities Total

Non-Controlling

Interests Total Equity(Amounts in Thousands)

Balances at December 31, 2017, as previously reported P=12,016,129 P=− P=2,252,826 P=105,824 (P=1,626,290) P=64,104 P=301,846 (P=122,263) (P=61,868) P=12,930,308 P=56 P=12,930,364Effect of change in accounting policy for investment

properties and land (Note 2) − − − − (2,685,319) − (301,846) − − (2,987,165) (30) (2,987,195)Balances at January 1, 2018, as restated 12,016,129 − 2,252,826 105,824 (4,311,609) 64,104 − (122,263) (61,868) 9,943,143 26 9,943,169Effect of the adoption of PFRS 9,

Financial Instruments (Note 2) − − − − (302,988) − − − − (302,988) (5) (302,993)Balances at January 1, 2018 12,016,129 − 2,252,826 105,824 (4,614,597) 64,104 − (122,263) (61,868) 9,640,155 21 9,640,176Total comprehensive income (loss) for the year − − − − 312,439 (74,379) − (54,457) 3,603 187,206 7 187,213Balances at June 30, 2018 (unaudited) P=12,016,129 P=− P=2,252,826 P=105,824 (P=4,302,158) (P=10,275) P=− (P=176,720) (P=58,265) P=9,827,361 P=28 P=9,827,389

Balances at January 1, 2017, as previously reported P=7,489,114 P=4,581,340 P=813,515 P=105,772 (P=2,345,243) P=33,621 P=280,228 (P=72,739) (P=95,679) P=10,789,929 (P=8,193) P=10,781,736Effect of change in accounting policy for investment

properties and land (Note 2) − − − − (2,331,388) − (280,228) − − (2,611,616) (30) (2,611,646)Balance at January 1, 2017, as restated 7,489,114 4,581,340 813,515 105,772 (4,676,631) 33,621 − (72,739) (95,679) 8,178,313 (8,223) 8,170,090Total comprehensive income (loss) for the year, as restated − − − − 290,993 15,241 − (52,045) 19,606 273,795 120 273,915Balances at June 30, 2017 (unaudited) P=7,489,114 P=4,581,340 P=813,515 P=105,772 (P=4,385,638) P=48,862 P=− (P=124,784) (P=76,073) P=8,452,108 (P=8,103) P=8,444,005See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

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PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIES

UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS


2018

2017

(As restated -

Note 2)

(Amounts in Thousands)

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax P=428,432 P=390,902

Adjustments to reconcile income before income tax to net cash generated

from (used in) operations:

Provision for credit and impairment losses (Note 11) 127,502 81,468

Depreciation and amortization (Note 9) 197,780 204,727

Profit from assets sold (56,079) (90,288)

Accretion of interest on unquoted debt securities (47,277) (10,975)

Gain on assets exchange (7,286) (836)

Unrealized (gain) loss on financial assets at fair value through profit

or loss (4,765) 9,499

Share in net income of an associate (104) (113)

Changes in operating assets and liabilities:

Decrease (increase) in the amounts of:

Loans and receivables (4,014,136) (1,322,581)

Financial assets at fair value through profit or loss 2,450,908 (3,654,634)

Other assets (143,360) (126,214)

Increase (decrease) in the amounts of:

Deposit liabilities 3,513,678 797,557

Accrued interest, taxes and other expenses 148,794 266,047

Manager’s checks (55,503) 61,801

Other liabilities (50,499) 123,098

Net cash generated from (used for) operations 2,488,085 (3,270,542)

Income taxes paid (106,630) (90,030)

Net cash provided by (used in) operating activities 2,381,455 (3,360,572)

CASH FLOWS FROM INVESTING ACTIVITIES

Placements in interbank loans receivable (4,263) (253,100)

Acquisitions of:

Debt financial assets at fair value through other comprehensive income (4,626,671) (1,475,734)

Investment properties − (50,920)

Property and equipment (58,682) (26,354)

Software costs (14,125) (19,419)

Proceeds from disposals of:

Debt financial assets at fair value through other comprehensive income

(Note 7) 2,834,753 −

Investment properties 66,751 12,356

Property and equipment 5,204 1,317

Proceeds from maturity of investment securities at amortized cost 205,000 1,508,469

Net cash used in investing activities (1,592,033) (303,385)

(Forward)

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2018

2017(As restated -

Note 2)(Amounts in Thousands)

CASH FLOWS FROM FINANCING ACTIVITIESAvailments of:

Bills payable P=79,682,564 P=75,642,951Outstanding acceptances 157,021 134,029Marginal deposits 715 1,545

Settlements of:Bills payable (80,731,394) (71,952,827)Outstanding acceptances (166,730) (109,386)Marginal deposits (738) (1,706)

Net cash provided by (used in) financing activities (1,058,562) 3,714,606EFFECT OF FOREIGN CURRENCY TRANSLATION

ADJUSTMENT (54,457) (52,045)NET DECREASE IN CASH AND CASH EQUIVALENTS (323,597) (1,396)CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIODCash and other cash items 974,207 1,042,611Due from Bangko Sentral ng Pilipinas 15,340,711 13,356,075Due from other banks 1,166,063 2,996,758Interbank loans receivable treated as cash equivalents 534,925 310,131

18,015,906 17,705,575

CASH AND CASH EQUIVALENTS AT THE END OF PERIODCash and other cash items 973,542 953,536Due from Bangko Sentral ng Pilipinas 15,003,245 14,522,005Due from other banks 629,203 1,752,933Interbank loans receivable treated as cash equivalents 1,086,319 475,705

P=17,692,309 P=17,704,179

OPERATIONAL CASH FLOWS FROM INTERESTInterest paid P=626,872 P=512,277Interest received 2,167,548 1,985,182


F-10

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PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIESNOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS

1. Corporate Information

Philippine Bank of Communications (the Parent Company) is a publicly listed domestic commercialbank organized in the Philippines, primarily to engage in commercial banking services such asdeposit products, loans and trade finance, domestic and foreign fund transfers, treasury, foreignexchange and trust services through a network of 89 local branches. The Parent Company’s principalplace of business is at the PBCom Tower, 6795 Ayala Avenue corner V. A. Rufino Street, MakatiCity.

The Parent Company’s original Certificate of Incorporation was issued by the Securities andExchange Commission (SEC) on August 23, 1939. On June 21, 1988, the Board of Directors (BOD)of the Parent Company approved the amendment of Article IV of its Amended Articles ofIncorporation to extend the corporate life of the Parent Company for another 50 years or up toAugust 23, 2039. The Amended Articles of Incorporation was approved by the SEC onNovember 23, 1988.

The Parent Company acquired a license to operate as an expanded commercial bank from the BangkoSentral ng Pilipinas (BSP) on December 24, 1993. On March 31, 2000, the BSP’s Monetary Boardapproved the amendment of the Parent Company’s license to a regular commercial banking.

The Parent Company’s subsidiaries and an associate are engaged in the following businesses:

Effective Percentageof Ownership Principal Place of

Business and Countryof IncorporationEntity

June 30,2018

December 31,2017 Line of Business

SubsidiariesPBCom Rural Bank, Inc. (formerly,

Banco Dipolog, Inc. A Rural Bank)(PRBI)

99.99% 99.99% Philippines Rural Bank

Rural Bank of Nagcarlan, Inc. (RBNI) – –* Philippines Rural BankPBCom Insurance Services Agency, Inc.

(PISAI)100.00% 100.00% Philippines Insurance Agent

AssociatePBCom Finance Corporation (PBCom

Finance)40.00% 40.00% Philippines Financing Company

* On December 11, 2017, the SEC approved the merger of Banco Dipolog, Inc. (BDI), RBNI and Rural Bank of Kabasalan, Inc. (RBKI),with BDI as the surviving entity.

On July 9, 2018, through the approval granted by the SEC, BDI officially changed its corporate nameto PBCom Rural Bank, Inc. On July 27, 2018, the BSP authorized the change in the corporate name.

On July 26, 2018, the Monetary Board of the BSP, in its Resolution No. 1220, approved the ParentCompany’s issuance of the Long Term Negotiable Certificates of Deposits (LTNCD) of up toP=5.00 billion in one or more tranches over the course of one year, with minimum tenor of 5 years and1 day to a maximum of 7 years. The purpose of the issuance is for general corporate funding,specifically long-term funding.

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The accompanying unaudited interim condensed consolidated financial statements of the Group wereapproved and authorized for issue by the Parent Company’s BOD on September 13, 2018.

2. Summary of Significant Accounting and Financial Reporting Policies

Basis of Presentation/Statement of ComplianceThe unaudited interim condensed consolidated financial statements of the Parent Company and itssubsidiaries (the Group) as of June 30, 2018 and for the six months ended June 30, 2018 and 2017have been prepared in accordance with Philippine Accounting Standards (PAS) 34, Interim FinancialReporting. The unaudited interim condensed consolidated financial statements do not include all theinformation and disclosures required in the annual financial statements, and should be read inconjunction with the Group’s annual audited consolidated financial statements as at and for the yearended December 31, 2017.

The unaudited interim condensed consolidated financial statements have been prepared on a historicalcost basis, except for financial assets at fair value through profit or loss (FVTPL) and financial assetsat fair value through other comprehensive income (FVTOCI) that are measured at fair value. Theinterim condensed financial statements are presented in Philippine peso (PHP or P=) and all values arerounded to the nearest thousand, unless otherwise stated.

The unaudited interim condensed consolidated financial statements of the Group include the accountsmaintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). Thefunctional currency of the RBU and the FCDU is the PHP and United States dollar (USD),respectively. For financial reporting purposes, FCDU accounts and foreign currency-denominatedaccounts in the RBU are translated into their equivalents in PHP, which is the Parent Company’spresentation currency. The financial statements individually prepared for these units are combinedafter eliminating inter-unit accounts and transactions.

Each entity in the Group determines its own functional currency and items included in the financialstatements of each entity are measured using that functional currency. The functional currency of theParent Company’s subsidiaries is the PHP.

The unaudited interim condensed consolidated financial statements have been prepared for inclusionin the offering circular prepared by the Group for its LTNCD offering.

Presentation of Financial StatementsThe Group presents its unaudited interim consolidated statement of financial position in order ofliquidity.

Basis of ConsolidationThe unaudited interim condensed consolidated financial statements comprise the unaudited interimfinancial statements of the Parent Company and its subsidiaries. The unaudited interim condensedconsolidated financial statements of the Group are prepared for the same reporting year as the ParentCompany using consistent accounting policies. Subsidiaries are consolidated from the date on whichcontrol is transferred to the Parent Company. The Parent Company controls an investee if, and onlyif, the Parent Company has:

∂ Power over the investee (that is, existing rights that give it the current ability to direct the relevantactivities of the investee);

∂ Exposure, or rights, to variable returns from its involvement with the investee; and

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∂ The ability to use its power over the investee to affect its returns.

The Parent Company re-assesses whether or not it controls an investee if facts and circumstancesindicate that there are changes to one or more of the three elements of control. Consolidation of asubsidiary begins when the Parent Company obtains control over the subsidiary and ceases when theParent Company loses control of the subsidiary. Assets, liabilities, income, expenses and othercomprehensive income of a subsidiary acquired or disposed of during the year are included in theconsolidated financial statements from the date the Parent Company gains control until the date theParent Company ceases to control the subsidiary.

When necessary, adjustments are made to the financial statements of subsidiaries to align theiraccounting policies with the Parent Company’s accounting policies. All intra-group assets, liabilities,equity, income, expenses and cash flows relating to transactions between entities in the Group areeliminated in full on consolidation.

Non-controlling InterestsNon-controlling interests represent the portion of profit or loss and net assets not owned, directly orindirectly, by the Parent Company.

Non-controlling interests are presented separately in the unaudited interim consolidated statement ofincome, unaudited interim consolidated statement of comprehensive income, and within equity in theunaudited interim consolidated statement of financial position, separately from equity attributable tothe equity holders of the Parent Company. Any losses applicable to the non-controlling interests areallocated against the interests of the non-controlling interests even if this results in the non-controllinginterests having a deficit balance.

Changes in Accounting Policies and DisclosuresThe accounting policies adopted in the preparation of the unaudited interim condensed consolidatedfinancial statements are consistent with those followed in the preparation of the audited annualconsolidated financial statements as of and for the year ended December 31, 2017, except for theadoption of new standards and amendments effective as of January 1, 2018, and the application of thecost method of accounting on investment properties and land effective January 1, 2018. Previously,the Group accounted for investment properties and land using the fair value model and therevaluation method, respectively. The Group did not early adopt any other standard, interpretation oramendment that has been issued but is not yet effective.

The Group applied PFRS 9 (2014), Financial Instruments, and PFRS 15, Revenue from Contractswith Customers effective January 1, 2018. As required by PAS 34, the nature and effect of thesechanges are disclosed below.

PFRS 9, Financial InstrumentsEffective January 1, 2018, PFRS 9 (2014) replaces PAS 39 Financial Instruments: Recognition andMeasurement. PFRS 9 (2014) also supersedes all earlier versions of PFRS 9, thereby bringingtogether all three aspects of the accounting for financial instruments: classification and measurement,impairment, and hedge accounting. In 2014, the Group early adopted the 2010 version of PFRS 9.The key changes introduced by PFRS (2014) from the version early adopted by the Group are asfollows:

∂ Limited amendments to the classification and measurement requirements for financial assets thatintroduced a FVTOCI category for eligible debt financial assets; and

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∂ Introduction of the expected credit loss (ECL) model in determining impairment of all financialassets that are not measured at FVTPL.

Debt financial assets classified under the FVTOCI category are both held in order to collectcontractual cash flows and to realize fair value gains by selling the instruments. Changes in the fairvalue of FVTOCI debt securities are recognized in other comprehensive income up untilderecognition, when the fair value change will be recognized in profit or loss. As a result of theadoption of PFRS 9 (2014), starting January 1, 2018, the Group adopted this new FVTOCI categoryfor debt financial assets, in addition to the existing categories of at Amortized Cost and at FVTPL(see Note 3).

Impairment of Financial AssetsPFRS 9 requires the Group to record ECL for all loans and other debt financial assets not classified asat FVTPL, together with loan commitments and financial guarantee contracts.

Incurred loss versus ECL methodologyThe application of ECL significantly changed the Group’s credit loss methodology and models.

ECL represent credit losses that reflect an unbiased and probability-weighted amount which isdetermined by evaluating a range of possible outcomes, the time value of money and reasonable andsupportable information about past events, current conditions and forecasts of future economicconditions. The allowance for credit losses is based on the ECLs associated with the probability ofdefault in the next 12 months unless there has been a significant increase in credit risk (SICR) sinceorigination or initial recognition. As a result, ECL allowances will be measured at amounts equal toeither (i) 12-month ECL or (ii) lifetime ECL for those financial instruments which have experienced aSICR since initial recognition. If the financial asset meets the definition of purchased or originatedcredit impaired, the allowance is based on the change in the ECLs over the life of the asset.

The 12-month ECL is the portion of lifetime ECL that results from default events on a financialinstrument that are possible within the 12 months after the reporting date. Lifetime ECL are creditlosses that result from all possible default events over the expected life of a financial instrument. Incomparison, the present incurred loss model recognizes lifetime credit losses only when there isobjective evidence of impairment.

Staging assessmentFor non-credit-impaired financial instruments:

∂ Stage 1 is comprised of all non-impaired financial instruments which have not experienced aSICR since initial recognition. The Group recognizes a 12-month ECL for Stage 1 financialinstruments.

∂ Stage 2 is comprised of all non-impaired financial instruments which have experienced a SICRsince initial recognition. The Group recognizes a lifetime ECL for Stage 2 financial instruments.

For credit-impaired financial instruments:

∂ Financial instruments are classified as Stage 3 when there is objective evidence of impairment asa result of one or more loss events that have occurred after initial recognition with a negativeimpact on the estimated future cash flows of a loan or a portfolio of loans. The ECL modelrequires that lifetime ECL be recognized for impaired financial instruments.

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Definition of “default” and “cure”The Group defines a financial instrument as in default, which is fully aligned with the definition ofcredit impaired, in all cases when the borrower becomes 91 days past due on its contractual payments.As a part of a qualitative assessment of whether a customer is in default, the Group also considers avariety of instances that may indicate unlikeliness to pay. When such events occur, the Groupcarefully considers whether the event should result in treating the customer as defaulted. Aninstrument is considered to be no longer in default (that is, to have cured) when it no longer meets anyof the default criteria and has exhibited a satisfactory track record for six consecutive paymentperiods.

Credit risk at initial recognitionThe Group uses internal credit assessment and approvals at various levels to determine the credit riskof exposures at initial recognition. Assessment can be quantitative or qualitative and depends on themateriality of the facility or the complexity of the portfolio to be assessed.

Significant increase in credit riskThe criteria for determining whether credit risk has increased significantly vary by portfolio andinclude quantitative changes in probabilities of default and qualitative factors, including a backstopbased on delinquency. The credit risk of a particular exposure is deemed to have increasedsignificantly since initial recognition if, based on the Group’s internal credit assessment, the borroweror counterparty is determined to require close monitoring or with well-defined credit weaknesses.For exposures without internal credit grades, if contractual payments are more than a specified dayspast due threshold, the credit risk is deemed to have increased significantly since initial recognition.Days past due are determined by counting the number of days since the earliest elapsed due date inrespect of which full payment has not been received. Due dates are determined without consideringany grace period that might be available to the borrower.

In subsequent reporting periods, if the credit risk of the financial instrument improves such that thereis no longer a SICR since initial recognition, the Group shall revert to recognizing a 12-month ECL:

∂ For corporate loans, an account under Stage 3 may be reverted back to Stage 2 if it showscollection history of up to 6 consecutive payments. If an account further improves to current, andother qualitative indicator representing substantial increase in credit risk has abated, the accountwill be further reverted back to Stage 1, thus, recognizing 12-month ECL.

∂ For consumer loans, an account under Stage 3 may be reverted back to Stage 2 if at least6 consecutive payments are received and days past due bucket improved to 31 to 90. If the statusof an account further improves to current, it will be reverted back to Stage 1, thus, recognizing12-month ECL.

∂ For treasury exposures, the transfer from Stage 3 to Stage 2 must be evident with payments ofinterest and/or principal for at least 6 months. The Group shall transfer credit exposures fromStage 2 to Stage 1 if there is a 5 rating upgrade within the investment grade bands or there is a5 rating upgrade and the resulting rating will fall under investment grade rating bands.

RestructuringIn certain circumstances, the Group modifies the original terms and conditions of a credit exposure toform a new loan agreement or payment schedule. The modifications can be given depending on theborrower’s or counterparty’s current or expected financial difficulty. The modifications may include,but are not limited to, change in interest rate and terms, principal amount, maturity date, date andamount of periodic payments and accrual of interest and charges. Distressed restructuring withindications of unlikeliness to pay are categorized as impaired accounts and are moved to Stage 3.

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ECL parameters and methodologiesECL is a function of the probability of default (PD), exposure at default (EAD) and loss given default(LGD), with the timing of the loss also considered, and is estimated by incorporating forward-lookingeconomic information and through the use of experienced credit judgment.

The PD represents the likelihood that a credit exposure will not be repaid and will go into default ineither a 12-month horizon for Stage 1 or lifetime horizon for Stage 2. The PD for each type of loanportfolio is modelled based on historical data and is estimated based on current market conditions andreasonable and supportable information about future economic conditions. The Group segmented itscredit exposures based on homogenous risk characteristics and developed a corresponding PDmethodology for each portfolio. The PD methodology for each relevant portfolio is determined basedon the underlying nature or characteristic of the portfolio, behavior of the accounts and materiality ofthe segment as compared to the total portfolio.

EAD is modelled on historical data and represents an estimate of the outstanding amount of creditexposure at the time a default may occur. LGD is the amount that may not be recovered in the eventof default and is modelled based on historical cash flow recovery and reasonable and supportableinformation about future economic conditions, where appropriate. LGD takes into consideration theamount and quality of any collateral held.

Economic overlaysThe Group incorporates economic overlays into both its assessment of whether the credit risk of aninstrument has increased significantly since its initial recognition and its measurement of ECL. Abroad range of economic overlays is considered as economic inputs, such as Gross Domestic Product(GDP) growth rates, inflation rates, unemployment rates, interest rates and BSP statistical indicators.The inputs and models used for calculating ECL may not always capture all characteristics of themarket at the date of the consolidated financial statements. To reflect this, qualitative adjustments oroverlays are occasionally made as temporary adjustments when such differences are significantlymaterial.

At January 1, 2018, the Group determined the amount of provision required under the ECL approach,in accordance with its existing governance framework relevant to the proper implementation ofPFRS 9. The Group continues to refine its processes to enhance its implementation of PFRS 9,subject to any further guidance to be provided by the BSP.

The Group chose not to restate comparative figures as permitted by the transitional provisions ofPFRS 9, thereby resulting in the following impact:

∂ Comparative information for prior period has not been restated. Accordingly, the informationpresented for 2017 does not reflect the requirements of PFRS 9.

∂ The difference between the previous carrying amount and the carrying amount at the beginning ofthe interim period that includes the date of initial application is recognized in the openingSurplus/Deficit or other component of equity, as appropriate.

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The effect of adopting the final version of PFRS 9, specifically impairment of financial assets, is asfollows (amounts in thousands):

As at January 1,2018

Increase(Decrease)

Interbank loans receivable (P=18)Investment securities

At amortized cost (2,136)At fair value through other comprehensive income (2,455)

Loans and other receivables (298,384)Total assets (P=302,993)

Deficit P=302,988Non-controlling interests (5)Total equity P=302,993

PFRS 15, Revenue from Contracts with CustomersPFRS 15 establishes a new five-step model that will apply to revenue arising from contracts withcustomers. Under PFRS 15, revenue is recognized at an amount that reflects the consideration towhich an entity expects to be entitled in exchange for transferring goods or services to a customer.The principles in PFRS 15 provide a more structured approach to measuring and recognizing revenue.PFRS 15 also apply to recognizing and measuring gains and losses on disposals of nonfinancial assets(such as items of property and equipment and intangible assets), when the disposal is not in theordinary course of business. The adoption of PFRS 15 did not impact the Group’s accounting ofrevenues from service charges, fees and commissions and gains or losses from sale of investmentproperties.

The adoption of the following pronouncements did not have any significant impact on the Group’sfinancial position or performance:

∂ Amendments to PFRS 4, Insurance Contracts, Applying PFRS 9, Financial Instruments, withPFRS 4

∂ Amendments to PAS 28, Measuring an Associate or Joint Venture at Fair Value (Part of AnnualImprovements to PFRSs 2014 - 2016 Cycle)

∂ Philippine Interpretation IFRIC-22, Foreign Currency Transactions and Advance Consideration

Application of Cost Method of Accounting for Investment Properties and LandPAS 40, Investment Property, allows the use of either fair value model or cost model in accountingfor investment property. However, the BSP requires the use of cost method for statutory andreporting purposes. Thus, in February 2016, the BSP, through its report on examination, directed theParent Company to change the method of accounting for investment properties from fair value modelto cost model and restate comparative information in its audited financial statements.

On July 17, 2017, the BSP in its Resolution no. 1189, approved the request of the Parent Company tocontinue using the fair value model for the 2017 audited financial statements, and to revert to the costmodel only in 2018.

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In April 2018, upon clarification with the BSP, it was confirmed that the directive issued in 2016 tochange the accounting treatment to cost model includes land accounted for under the revaluationmodel.

Accordingly, on January 1, 2018, the Parent Company changed its accounting policy on investmentproperties and land. Summarized below is the effect of the retrospective treatment of the change inaccounting policy on the Parent Company’s statements of financial position as at December 31, 2017and January 1, 2017 and the statement of income for the six months ended June 30, 2017:

December 31,2017

January 1,2017

Statements of financial positionIncrease (Decrease) in:

Investment properties (P=3,811,899) (P=3,314,846)Property and equipment (364,715) (356,267)Deferred tax liabilities (1,189,421) (1,059,497)Deficit 2,685,317 2,331,388Revaluation increment on land and investment properties (301,846) (280,228)

For the SixMonths Ended

June 30, 2017Statement of incomeIncrease (decrease) in:

Profit from assets sold P=2,712Depreciation and amortization 38,965Gain on assets exchange 836Provision for income tax (74)

Property and EquipmentProperty and equipment, are stated at cost less accumulated depreciation and amortization and anyimpairment in value, except land, which is carried at cost less impairment in value.

The initial cost of property and equipment consists of its purchase price, including import duties,taxes and any directly attributable costs of bringing the asset to its working condition and location forits intended use. Expenditures incurred after the property and equipment have been put intooperation, such as repairs and maintenance, are charged against profit or loss in the year in which thecosts are incurred. In situations where it can be clearly demonstrated that the expenditures haveresulted in an increase in the future economic benefits expected to be obtained from the use of an itemof property and equipment beyond its originally assessed standard of performance, the expendituresare capitalized as an additional cost of property and equipment.

Depreciation on property and equipment is computed using the straight-line method based on theestimated useful life (EUL) of the depreciable assets.

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The EULs of components of property and equipment are as follows:

YearsCondominium properties 50Buildings and improvements 25Furniture, fixtures and equipment 5

Leasehold improvements are amortized over the EUL of 2 to 10 years or the terms of the relatedleases, whichever is shorter.

The residual values, EULs and methods of depreciation and amortization of property and equipmentare reviewed at each reporting date and adjusted prospectively, if appropriate.

Fully depreciated property and equipment are retained in the accounts until these are no longer usedand no further depreciation and amortization is charged to profit or loss.

An item of property and equipment is derecognized upon disposal or when no future economicbenefits are expected from its use or disposal. Upon derecognition, the cost and the relatedaccumulated depreciation and amortization and any impairment in value of the asset are removedfrom the accounts, and any resulting gain or loss (calculated as the difference between the netdisposal proceeds and the carrying amount of the asset) is reflected as income or loss in profit or loss.

Investment PropertiesInvestment properties include condominium and office units for lease and foreclosed properties insettlement of loan receivables.

Condominium and office units for leaseCondominium and office units for lease are carried at cost, less accumulated depreciation andimpairment in value. All costs that are directly attributable to the acquisition and development ofproperty are capitalized, including borrowing costs incurred to finance the propertydevelopment. Depreciation is computed on a straight-line basis over 25 to 50 years.

Foreclosed propertiesForeclosed properties consist of land, building and improvements.

Land is carried at cost less impairment in value. Building and improvements are carried at cost,which is the fair value at acquisition date, less accumulated depreciation and impairment invalue. Transaction costs, which include nonrefundable capital gains tax and documentary stamp tax,incurred in connection with foreclosure are capitalized as part of the carrying values of the foreclosedproperties.

Foreclosed properties are recorded as ‘Investment properties’ upon:

a. Entry of judgment in case of judicial foreclosure;b. Execution of the Sheriff’s Certificate of Sale in case of extra-judicial foreclosure; orc. Notarization of the Deed of Dacion in case of dation in payment (dacion en pago).

The Group applies the cost model in accounting for foreclosed properties. Depreciation is computedon a straight-line basis over the EUL of 10 years for buildings and improvements.

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The EUL of investment properties and the depreciation method are reviewed periodically toensure that the period and the method of depreciation are consistent with the expected pattern ofeconomic benefits from items of investment properties.

The carrying values of the investment properties are reviewed for impairment when events orchanges in circumstances indicate that the carrying value may not be recoverable. If any suchindication exists and where the carrying values exceed the estimated recoverable amount, theinvestment property or cash-generating units (CGUs) it is related to are written down to theirrecoverable amounts.

Transfers are made to investment property when, and only when, there is a change in use, evidencedby ending of owner-occupation, commencement of an operating lease to another party or ending ofconstruction or development. Transfers are made from investment property when, and only when,there is a change in use, evidenced by commencement of owner-occupation or commencement ofdevelopment with a view to sell.

Investment properties are derecognized when they have either been disposed of or when they arepermanently withdrawn from use and no future benefit is expected from its disposal. Any gains orlosses on retirement or disposal of investment properties are recognized in profit or loss in the year ofretirement or disposal under ‘Profit from assets sold’.

3. Significant Accounting Judgments, Estimates and Assumptions

The preparation of the unaudited interim condensed consolidated financial statements in compliancewith PFRS requires the Group to make judgments, estimates and assumptions that affect the reportedamounts of assets, liabilities, income and expenses and disclosure of contingent assets and contingentliabilities. Future events may occur which will cause the assumptions used in arriving at theestimates to change. The effects of any change in estimates are reflected in the unaudited interimcondensed consolidated financial statements as these become reasonably determinable. Judgmentsand estimates are continuously evaluated and are based on historical experience and other factors,including expectations of future events that are believed to be reasonable under the circumstances.

JudgmentsIn the process of applying the Group’s accounting policies, management has made the followingjudgments, apart from those involving estimations, which have the most significant effect on theamounts recognized in the unaudited interim condensed consolidated financial statements:

Business model testThe Group’s business model can be to hold financial assets to collect contractual cash flows evenwhen sales of certain financial assets occur. PFRS 9, however, emphasizes that if more than aninfrequent number of sales are made out of a portfolio of financial assets carried at amortized cost, theentity should assess whether and how such sales are consistent with the objective of collectingcontractual cash flows. In making this judgment, the Group considers the following:

a. Sales or derecognition of debt instrument under any of the circumstances spelled out underparagraph 7, section 2 of BSP Circular No. 708, Series of 2011;

b. Sales made due to occurrence of events specific to the Group that severely curtails the Group’saccess to regular sources of liquidity other than the lending facilities of the BSP as lender of lastresort in order to forestall the Group’s having to default on obligations or entering into financialdistress;

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c. Sales made due to occurrence of systemic events affecting the industry that severely curtailsaccess to credit and funding other than the lending facilities of the BSP as lender of last resort inorder to forestall the need for the Group to draw on the emergency lending facilities;

d. Sales attributable to the corrective measures of Asset and Liability Committee (ALCO) to bringthe asset-liability structure within the Board’s risk appetite and targeted ratios;

e. Sales attributable to a significant decline in debt instruments liquidity characteristics to meet theminimum eligibility criteria of stock of High Quality Liquid Assets (HQLA); and

f. Sales attributable to systemic movements that have been generally accepted to negatively impacteconomic conditions, credit quality, and/or the liability profile of the Group.

In September 2017, the BSP granted the Parent Company an expanded FCDU (EFCDU) license,which will allow the Parent Company to grow its USD-denominated loans without restrictions as tomaturity and marketability. Under the regular FCDU license, commercial banks can only generateshort-term readily marketable foreign currency loans, which hinders the Parent Company fromgrowing its USD-denominated loans in the FCDU books. With the EFCDU license, the ParentCompany revisited its strategy for managing debt securities under the FCDU books. Accordingly, inDecember 2017, the Parent Company’s BOD approved the creation of a new business model with theobjective of using available funding to buy and sell debt securities to be able to collect accrualincome, profit from the sale, use the proceeds to support the operating liquidity requirements, andbridge the asset and liability growth of the Parent Company. Debt securities managed under thisbusiness model will be classified as financial assets at FVTOCI. The Parent Company then identifiedcertain debt securities that should be managed under this business model.

On January 1, 2018, the Bank reclassified the above debt securities with aggregate face amount ofP=1,623.47 million (US$27.508 million and P=250.00 million) from the hold-to-collect portfolio to theFVTOCI portfolio. The reclassification of these debt securities resulted in recognition of unrealizedgain of P=39.83 million, net of tax effect, in other comprehensive income (see Note 7).

Testing the cash flow characteristics of financial assets and continuing evaluation of the businessmodelIn determining the classification of financial assets under PFRS 9, the Group assesses whether thecontractual terms of the financial assets give rise on specified dates to cash flows that are SolelyPayment of Principal and Interest (SPPI) on the principal outstanding, with interest representing timevalue of money and credit risk associated with the principal amount outstanding. The assessment asto whether the cash flows meet the test is made in the currency in which the financial asset isdenominated. Any other contractual term that changes the timing or amount of cash flows (unless itis a variable interest rate that represents time value of money and credit risk) does not meet theamortized cost criteria. In cases where the relationship between the passage of time and the interestrate of the financial instrument may be imperfect, known as modified time value of money, the Groupassesses the modified time value of money feature to determine whether the financial instrument stillmeets the SPPI criterion. The objective of the assessment is to determine how different theundiscounted contractual cash flows could be from the undiscounted cash flows that would arise ifthe time value of money element was not modified (the benchmark cash flows). If the resultingdifference is significant, the SPPI criterion is not met. In doing this assessment, the Group considersthe effect of the modified time value of money element in each reporting period and cumulativelyover the life of the financial instrument.

EstimatesEstimation of impairment losses on loans and other receivables, investment securities at amortizedcost and debt financial assets at FVTOCIThe measurement of impairment losses both under PFRS 9 and PAS 39 across all categories offinancial assets requires judgment, in particular, the estimation of the amount and timing of future

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cash flows and collateral values when determining impairment losses and the assessment of a SICR.These estimates are driven by a number of factors, changes in which can result in different levels ofallowances.

The Group’s ECL calculations are outputs of complex models with a number of underlyingassumptions regarding the choice of variable inputs and their interdependencies.

Elements of the ECL models that are considered significant accounting judgments and estimatesinclude:

∂ The Group’s internal grading model, which impacts the PDs assigned to the exposures;∂ The Group’s criteria for assessing if there has been a SICR and so allowances for financial assets

should be measured on a lifetime ECL basis and the qualitative assessment;∂ The segmentation of financial assets when their ECL is assessed on a collective basis;∂ Development of ECL models, including the various formulas and the choice of inputs;∂ Determination of associations between macroeconomic scenarios and economic inputs, such as

GDP growth rates and unemployment levels, and the effect on PDs, EADs and LGDs; and∂ Definition of forward-looking macroeconomic scenario variables.

Realizibility of deferred tax assetsDeferred tax assets are recognized to the extent that it is probable that future taxable profit will beavailable against which the deductible temporary differences can be utilized. Significantmanagement judgment is required to determine the amount of deferred tax assets that can berecognized, based on assumptions that are affected by expected future market or economic conditionsand the expected performance of the Group.

Impairment of goodwill and intangible assetsThe Group determines whether goodwill and branch licenses are impaired at least on an annual basis.Goodwill and branch licenses are written down for impairment where the net present value of theforecasted future cash flows from the CGU is insufficient to support its carrying value.

For branch licenses, an impairment loss recognized in prior periods shall be reversed if, and only if,there has been a change in the estimates used to determine the branch license’s recoverable amountsince the last impairment loss was recognized. If this is the case, the carrying amount of the branchlicense shall be increased to its recoverable amount. That increase is a reversal of an impairment loss.

The recoverable amount of the CGU has been determined based on a value-in-use (VIU) calculationusing the CGU’s cash flow projections from a strategic plan approved by management covering afive-year period. Key assumptions in the VIU calculations are most sensitive to the followingassumptions:

∂ Discount rate, which is based on the cost of equity by reference to comparable entities using thecapital asset pricing model;

∂ Loan and deposit portfolios growth rates; and∂ Growth rate to project cash flows beyond the budget period.

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4. Fair Value Measurement

The following tables provide the fair value hierarchy of the Group’s assets and liabilities measured atfair value and those for which fair values should be disclosed:

June 30, 2018 (Unaudited)Fair Value

Carrying Value Total

Quoted Pricesin Active

Market(Level 1)

SignificantObservable

Inputs (Level 2)

SignificantUnobservable

Inputs(Level 3)

Assets measured at fair valueFinancial assetsFinancial assets at FVTPL: Government securities P=293,491 P=293,491 P=293,491 P=− P=−Financial assets at FVTOCI: Debt securities Government 1,955,182 1,955,182 1,955,182 − − Private bonds 1,381,075 1,382,189 1,382,189 − − Equity securities 112,524 112,524 − 49,045 63,479

3,742,272 3,743,386 3,630,862 49,045 63,479Assets for which fair values are disclosedInvestment securities at amortized cost: Government securities 13,640,854 11,216,106 9,053,284 2,162,822 −Loans and other receivables: Receivables from customers: Corporate loans 39,092,891 40,951,475 − − 40,951,475 Consumer loans 14,276,335 14,663,576 − − 14,663,576 Unquoted debt securities 2,682,199 2,997,029 − − 2,997,029Investment properties: Condominium units for lease 1,858,029 5,365,080 − − 5,365,080 Foreclosed properties 789,993 1,040,515 − − 1,040,515 Office units for lease 3,824 50,343 − − 50,343

72,344,125 76,284,124 9,053,284 2,162,822 65,068,018P=76,086,397 P=80,027,510 P=12,684,146 P=2,211,867 P=65,131,497

Liability measured at fair valueCurrency forwards* P=158 P=158 P=− P=158 P=−Liabilities for which fair values are disclosedFinancial liabilities at amortized cost: Time deposits 45,179,054 45,302,112 − − 45,302,112 Bills payable 11,518,569 11,519,557 − − 11,519,557

56,697,623 56,821,669 − − 56,821,669P=56,697,781 P=56,821,827 P=− P=158 P=56,821,669

Included under other liabilities

December 31, 2017 (Audited)Fair Value



Market(Level 1)


Inputs (Level 2)


Inputs(Level 3)

Assets measured at fair valueFinancial assetsFinancial assets at FVTPL: Government securities P=2,740,471 P=2,740,471 P=2,740,471 P=− P=−Equity securities at FVTOCI 90,639 90,639 − 49,045 41,594

2,831,110 2,831,110 2,740,471 49,045 41,594Assets for which fair values are disclosedInvestment securities at amortized cost: Government securities 13,789,737 12,341,454 10,158,721 2,182,733 − Private bonds 1,627,464 1,684,362 − 1,684,362 −Loans and other receivables: Receivables from customers: Corporate loans 36,948,575 36,808,563 − − 36,808,563 Consumer loans 12,786,693 12,824,748 − − 12,824,748

(Forward)

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December 31, 2017 (Audited)Fair Value



Market(Level 1)


Inputs (Level 2)


Inputs(Level 3)

Unquoted debt securities P=2,811,827 P=3,134,624 P=− P=− P=3,134,624Investment properties: Condominium units for lease 1,883,696 5,365,080 − − 5,365,080 Foreclosed properties 736,539 1,020,710 − − 1,020,710 Office units for lease 3,999 50,343 − − 50,343

70,588,530 73,229,884 10,158,721 3,867,095 59,204,068P=73,419,640 P=76,060,994 P=12,899,192 P=3,916,140 P=59,245,662

Liability measured at fair valueCurrency forwards* P=977 P=977 P=− P=977 P=−Liabilities for which fair values are disclosedFinancial liabilities at amortized cost: Time deposits 43,006,098 43,144,091 − − 43,144,091 Bills payable 12,567,399 12,569,067 − − 12,569,067

55,573,497 55,713,158 − − 55,713,158P=55,574,474 P=55,714,135 P=− P=977 P=55,713,158

* Included under other liabilities

Movements in the fair value measurement of ‘Equity securities at fair value through othercomprehensive income’ categorized within Level 3 pertain only to the changes in fair value ofunquoted equity securities. No additions and disposals were made in 2018 and 2017.

There were no transfers between Level 1 and Level 2 and no transfers out of Level 3 in the first halfof 2018 and in 2017.

The methods and assumptions used by the Group in estimating the fair value of its assets andliabilities are as follows:

Cash and other cash items, amounts due from BSP and other banks and interbank loans receivableCarrying amounts approximate fair values considering that these accounts consist mostly of overnightdeposits.

Debt securitiesFair values are generally based on quoted market prices. If the market prices are not readilyavailable, fair values are estimated using consensus prices obtained from Bloomberg.

Equity securities at FVTOCIFair values of club shares are based on prices published in GG&A Club Shares and G&W ClubShares. GG&A Club Shares and G&W Club Shares are involved in trading and leasing proprietaryand non-proprietary club shares.

Fair values of unquoted equity securities are estimated using the guideline publicly-traded companymethod, which utilizes publicly available information from publicly-traded comparable companiesthat are the same or similar to the unlisted company being valued.

Receivables from customersFair values of receivables from customers are estimated using the discounted cash flow methodologythat makes use of the Group’s current incremental lending rates for similar types of loans andreceivables.

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Unquoted debt securitiesFair values are estimated based on the discounted cash flow methodology that makes use ofinterpolated risk-free rates plus spread.

Accrued interest receivable and returned checks and other cash items (RCOCI)Carrying amounts approximate fair values due to the short-term nature of the accounts, with someitems that are due and demandable.

Accounts receivable, sales contracts receivable and refundable security depositsQuoted market prices are not available for these assets. These are not reported at fair value and arenot significant in relation to the Group’s total portfolio of financial assets.

Currency forwardsFair values are calculated by reference to the prevailing interest differential and spot exchange rate asof reporting date, taking into account the remaining term to maturity of the derivativeassets/liabilities.

Deposit liabilitiesFair values of time deposits are estimated based on the discounted cash flow methodology that makesuse of the current incremental borrowing rates for similar types of borrowings. The carrying amountof demand and savings deposit liabilities approximate fair value considering that these are due anddemandable.

Bills payableThe fair value is estimated using the discounted cash flow methodology that makes use of theGroup’s current incremental borrowing rates for similar borrowings with maturities consistent withthose remaining for the liability being valued. Where the instrument has a relatively short maturity,carrying amounts approximate fair values.

Outstanding acceptances, manager’s checks, accrued interest payable, accrued other expenses,accounts payable, refundable security deposits and due to the Treasurer of the PhilippinesCarrying amounts approximate fair values due to the short-term nature of these accounts, with someitems that are due and demandable.

5. Financial Risk Management Objectives and Policies

IntroductionRisk is inherent in the Group’s activities but is managed through a continuing and pro-active processof identification, measurement and monitoring, subject to risk limits and other controls. This processof risk management is critical to the Group’s continuing profitability and each individual within theGroup is accountable for the risk exposures relating to his or her responsibilities.

Compared with December 31, 2017, there have been no changes in the financial risk exposures thatmaterially affect the unaudited interim condensed consolidated financial statements of the Group asof June 30, 2018. The Group is exposed to the following risks from its financial instruments:

a. Credit riskb. Liquidity risk

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c. Market risk

i. Interest rate riskii. Foreign currency risk

iii. Equity price risk

Risk management structureThe Group’s risk management environment is characterized by a well-defined risk organizationalstructure, flow of risk information, risk-based audit coverage, and an established compliance system.

BODThe BOD is responsible for establishing and maintaining a sound risk management system and isultimately accountable for identifying and controlling risks; there are, however, separate independentbodies responsible for managing and monitoring risks.

Risk Oversight Committee (ROC)The ROC has the overall responsibility for the development of the risk strategy and implementingprinciples, frameworks, policies and limits.

Enterprise Risk Management Group (ERMG)The ERMG is an independent unit within the Parent Company that directly reports to the ROC. It isthe responsibility of the ERMG to identify, analyze and measure risks from the Parent Company’strading, lending, borrowing and other transactional activities. It also recommends control policiesand procedures to mitigate risk in identified risk areas in Treasury, Credit, Trust and other areas ofoperations.

Risk controlThe Risk Control function performs the important day-to-day monitoring of risk exposures of theParent Company against approved limits and reporting of such exposures, and implementation ofpolicies and control procedures.

Treasury segmentThe Treasury Segment is responsible for managing the Parent Company’s assets and liabilities. It isalso primarily responsible for the management of the funding and liquidity risks of the ParentCompany.

Internal Audit Group (IAG)Risk management processes throughout the Group are audited by the IAG which examines both theadequacy of the procedures and the Group’s compliance thereto. The IAG discusses the results of allassessments with management, and reports its findings and recommendations to the AuditCommittee.

Risk measurement and reporting systemsThe Group’s risks are measured using a method which reflects both the expected loss likely to arise innormal circumstances and unexpected losses, which are an estimate of the ultimate actual loss basedon statistical models. The models make use of probabilities derived from historical experience,adjusted to reflect the economic environment.

The Group also runs worse case scenarios that would arise in the event that extreme events which areunlikely to occur do, in fact, occur.

Monitoring and controlling risks are primarily performed based on limits established by the Group.

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These limits reflect both the business strategy and market environment of the Group, as well as thelevel of risk that the Group is willing to accept. In addition, the Group monitors and measures theoverall risk-bearing capacity in relation to the aggregate risk exposure across all risk types andactivities.

Information gathered from all the businesses are evaluated and processed in order to analyze, controland identify risks early. All significant information are presented to the BOD, the ROC, and the headof each business division. The report includes credit exposure to groups and industries, Value-at-Risk(VaR), liquidity ratios and risk profile changes. Senior management assesses the appropriateness ofthe allowance for credit losses on a monthly basis for prudential and financial reporting.

Credit RiskCredit risk is the risk that one party to a financial instrument will fail to discharge an obligation andcause the other party to incur a financial loss. The Group’s credit risk arises from its lending andtrading of securities and foreign exchange activities. The Group manages and controls credit risk bysetting limits on the amount of risk it is willing to accept for individual borrowers and groups ofborrowers, as well as limits on large lines and industry concentrations. The ERMG monitorsexposures in relation to these limits.

The Parent Company has an internal credit risk rating system (ICRRS) for the purpose of measuringcredit risk for every exposure in a consistent manner that is as accurate as possible and uses the riskinformation for business and financial decision making.

The Group also has a loan portfolio quality and credit process review in place that allows the Groupto continuously identify and assess the risks on credit exposures and take corrective actions. Thisfunction is carried out by the Group’s Credit Policy & Review Division.

Credit risk management was likewise strengthened with the implementation of ECL models.

Risk concentrations by industryConcentrations arise when a number of counterparties are engaged in similar business activities, oractivities in the same geographic region, or have similar economic features that would cause theirability to meet contractual obligations to be similarly affected by changes in economic, political orother conditions. Concentrations indicate the relative sensitivity of the Group’s performance todevelopments affecting a particular industry.

Group exposures and risk concentrations to industries are monitored and reported in accordance withthe Group’s policies on group lending/inter-corporate earmarking and managing large exposure andcredit risk concentrations.

Credit-related commitment risksThe Parent Company makes available to its customers guarantees that may require the ParentCompany to make payments on their behalf and enters into commitments to extend credit lines tosecure their liquidity needs. Letters of credit and guarantees (including standby letters of credit)commit the Parent Company to make payments on behalf of customers in the event of a specific act,generally related to the import or export of goods. Such commitments expose the Parent Company tosimilar risks to loans and are mitigated by the same control processes and policies.

Collateral and other credit enhancementsThe amount and type of collateral required depend on an assessment of the credit risk of thecounterparty. Guidelines are implemented regarding the acceptability of types of collateral andvaluation parameters.

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It is the Group’s policy to dispose repossessed properties in an orderly fashion. The proceeds areused to reduce or repay the outstanding claim. In general, the Group does not occupy repossessedproperties for business use.

The Group does not hold collateral on financial assets which it may sell or repledge in the absence ofdefault by the owner of the collateral.

Liquidity Risk and Funding ManagementLiquidity risk is the risk that the Group will be unable to meet its payment obligations when they falldue under normal and stress circumstances. To limit this risk, management has arranged diversifiedfunding sources in addition to its core deposit base, manages assets with liquidity in mind andmonitors future cash flows and liquidity on a daily basis.

This incorporates an assessment of expected cash flows and the availability of high grade collateralwhich could be used to secure additional funding, if required. In addition, the Group makes use of amonthly system generated Liquidity Gap Report in analyzing its liquidity position where thedifference between the Group’s maturing assets and liabilities is captured. A Maximum CumulativeOutflow limit is likewise established to control the liquidity gap for each currency. The ALCO meetstwice every month to discuss, among others, the liquidity state of the Group.

The Group maintains a portfolio of highly marketable and diverse assets that can be easily liquidatedin the event of an unforeseen interruption of cash flows. The Group also has committed lines ofcredit that it can access to meet liquidity needs. In addition, the Group maintains a statutory depositwith the BSP equal to 20.00% of customer deposits. The liquidity position is assessed and managedunder a variety of scenarios, giving due consideration to stress factors relating to both the market ingeneral and specifically to the Group.

In managing intraday liquidity, the Parent Company has an internal buffer fund called “SecondaryReserve” for Deposit Liabilities, Deposit Substitutes, and Repurchase Agreements. The buffer fundserves to manage potential substantial liability outflows and the demand and supply of funds for newloans. This will allow the Parent Company to readily support its new business strategies anddirection and management of liquidity risk. The daily movement of Secondary Reserve serves as aprimary indicator of liquidity condition of the Parent Company. In addition, the Parent Companymonitors the liquidity characteristics of its portfolio of assets that will provide necessary liquiditysupport during periods of liquidity stress as required by BSP Circular No. 905.

Market Risk ManagementMarket risk is the risk of loss to future earnings, fair values or future cash flows that may result fromchanges in the price of a financial instrument. The value of a financial instrument may change as aresult of changes in interest rates, foreign currency exchange rates, commodity prices, equity pricesand other market changes. The Group’s market risk originates from the Parent Company’s holdingsof foreign exchange instruments, debt securities, equity securities and derivatives.

Value-at-Risk (VaR)VaR is a statistical estimate of potential loss given prevailing market price trends, correlations andvolatilities. VaR estimates the potential decline in the value of a portfolio, under normal marketconditions, a given “confidence level” over a specified time horizon. VaR is used to alert seniormanagement whenever the potential for losses in the Parent Company’s portfolios exceeds the VaRlimit. This allows management to react quickly and adjust its portfolio strategies in different marketconditions in accordance with the Parent Company’s risk philosophy and appetite.

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The Parent Company uses Bloomberg’s Portfolio VaR (PORT) module in its VaR computation.Bloomberg’s PORT run on a Parametric VaR model whose data set contains one year of historicalprices and a daily update of its variance/covariance matrix. In accordance with the BSP standards,the Parent Company uses a 99.00% confidence level and a 10-day defeasance period. This means,that statistically, the Parent Company’s losses on trading operations will exceed VaR on at least 1 outof 100 trading business days.

The Market and Liquidity Risk Management Unit (MLRMU) runs VaR on a daily basis, monitors theVaR against the BOD approved VaR limit and submits Daily VaR Reports to concerneddivision/group/segment heads.

To verify the validity of the VaR model used, the Treasury Operations Division performs quarterlyback testing to examine how frequently actual daily losses exceeds the daily VaR. Backtesting resultsare reviewed by the head of Treasury Operations Division. Exceptions, if any, are reported to theROC and the BOD.

Stress testingSince VaR is designed to describe risk in normal market conditions (that is, 99.00% of the time), itmay not capture potential losses in the extreme that occur following movements outside theprevailing market trend. Stress testing is done to address extreme market conditions.

The Parent Company performs stress testing on its foreign currency trading position and on itsoutstanding investment portfolios. Stress testing is a technique used to determine the impact onearnings of above position/portfolios from conditions or scenarios deemed “extreme” but plausible.Stress testing is used to inform senior management as to where vulnerabilities in the ParentCompany’s portfolio actually lie.

This helps the Parent Company to evaluate its tolerance for risks and understand the combinations ofrisks that can produce large losses.

Unlike VaR, which reflects price behavior in everyday markets, stress tests simulate portfolioperformance during abnormal market periods. Accordingly, these provide information about risksfalling outside those typically captured by the VaR framework. Hence, losses resulting from stresstests are larger than the losses predicted by the VaR model.

The Parent Company’s Market & Liquidity Risk Manager performs the stress testing of tradedsecurities using uniform set of market stress shocks as prescribed by the BSP under their UniformStress Testing Program for Banks. The stress testing is conducted semi-annually and its results arereported to the ROC and BOD.

To identify possible episodes of stress in the domestic financial market, MLRMU employs the CitiEarly Warning Signal Risk Index – Philippines that measures stress in economic and financialvariables with a view of predicting weakness in local currencies. A reading above 0.5 means thatstress is above average and a reading below 0.5 means that stress is below average. The risk indexlevel is reported monthly to ALCO and quarterly to ROC.

Interest Rate Risk ManagementInterest rate risk arises from the possibility that changes in the interest rates will affect future cashflows or the fair value of financial instruments. The Group follows a prudent policy on managing itsassets and liabilities so as to ensure that the exposure to fluctuations in interest rates is kept withinacceptable limits.

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A substantial proportion of the total loan portfolio is for a term of less than one year, and the majorityof the balance of its medium-term portfolio is on a floating-rate basis. As a result of these factors, theGroup’s exposure to interest rate fluctuations, and other market risks, is significantly reduced.

The Group, in keeping with banking industry practice, aims to achieve stability and lengthen the termstructure of its deposit base, while providing adequate liquidity to cover transactional bankingrequirements of customers. Savings account rates are set by reference to prevailing market rates,while rates on time deposits and special savings accounts are usually priced by reference to ratesapplicable to prevailing rates on Philippine Treasury Bills and other money market instruments or, inthe case of foreign currency deposits, Singapore Interbank Offer Rate and other benchmark dollardeposit rates in the Asian and international money markets with similar maturities.

The Group also monitors its exposure to fluctuations in interest rates by measuring the impact ofinterest rate movements on its interest income. This is done by modeling the impact of variouschanges in interest rates to the Group’s interest-related income and expenses.

The method by which the Group measures the sensitivity of its assets and liabilities to interest ratefluctuations is by way of interest rate analysis. This analysis provides the Group with a measure ofthe impact of changes in interest rates on the actual portfolio, that is, the risk exposure of futureaccounting income. The repricing gap is calculated by distributing the financial assets and financialliabilities into tenor buckets according to the time remaining to maturity or next repricing date andthen obtaining the difference between the total of the repricing (interest rate sensitive) assets andrepricing (interest rate sensitive) liabilities.

Foreign Currency Risk ManagementCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes inforeign exchange rates. Foreign currency liabilities generally consist of foreign currency-deposits inthe Parent Company’s FCDU account made in the Philippines or which are generated fromremittances to the Philippines by Filipino expatriates and overseas Filipino workers who retain fortheir own benefit or for the benefit of a third party, foreign currency deposit accounts with the ParentCompany and foreign currency-denominated borrowings appearing in the regular books of the ParentCompany.

The Parent Company’s policy is to maintain foreign currency exposure within acceptable limits andwithin existing regulatory guidelines. The Parent Company believes that its profile of foreigncurrency exposure on its assets and liabilities is within limits for a financial institution engaged in thetype of business in which the Parent Company is engaged in.

The ERMG uses VaR, Foreign Exchange Sensitivity Testing, and Foreign Exchange Stress Testing tomeasure risk inherent to the Parent Company’s foreign currency net exposures. In assessing theforeign currency risk, the Parent Company employs a pre-defined key risk indicator under MarketRisk Assessment Matrix to determine the level of risk (for example, Low Risk, Moderate Risk, HighRisk) the results of which are reported to the ROC on a quarterly basis.

Equity Price Risk ManagementEquity price risk is the risk that the fair values of equities decrease as a result of changes in the levelsof equity indices and the value of individual stocks. The Parent Company holds a minimal amount ofequity securities, hence, any changes to equity prices are deemed to not significantly affect itsfinancial performance.

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6. Segment Information

The Group’s operating businesses are organized and managed separately according to the nature ofservices provided and the different markets served with each segment representing a strategicbusiness unit.

The following tables present income and profit and certain asset and liability information regardingthe Group’s operating segments as of June 30, 2018 and December 31, 2017, and for the six monthsended June 30, 2018 and 2017:

2018

BranchBanking

Group

CorporateBanking

GroupTreasurySegment

ConsumerFinanceSegment

Trust andWealth

ManagementSegment

Rentals andHeadquarters Total

For the six months ended June 30, 2018Statement of income

RevenueRevenue, net of interest expense Third party (P=453,688) P=1,127,166 P=261,549 P=591,300 P=901 (P=6,220) P=1,521,008 Intersegment 1,076,895 (786,358) (156,232) (253,072) (1,414) 120,181 −Net interest income (expense) 623,207 340,808 105,317 338,228 (513) 113,961 1,521,008Rent income − − − 87 − 314,495 314,582Service charges, fees, and commissions 39,274 99,560 1 35,710 − 1,272 175,817Profit from assets sold − − − 54,061 − 2,018 56,079Trading and securities gain - net − − 31,041 − − − 31,041Foreign exchange gain – net 8,763 4,669 1,582 − − − 15,014Income from trust operations − − − − 7,488 − 7,488Gain on assets exchange - net − − − − − 7,286 7,286Miscellaneous 10,314 4,473 (6,363) 12,904 − 38,610 59,938Total operating income 681,558 449,510 131,578 440,990 6,975 477,642 2,188,253Compensation and fringe benefits 144,788 39,899 20,441 118,659 4,104 254,726 582,617Taxes and licenses 115,854 54,843 46,019 46,788 480 28,905 292,889Depreciation and amortization 53,044 1,769 854 12,787 249 129,077 197,780Provision for credit and impairment losses − 74,432 2,167 50,903 − − 127,502Occupancy and other equipment-related costs 86,855 11,437 429 15,451 876 11,313 126,361Other operating expenses 137,465 27,562 29,465 64,395 1,093 172,796 432,776Total operating expenses 538,006 209,942 99,375 308,983 6,802 596,817 1,759,925

Income (loss) before share in net income of an associate 143,552 239,568 32,203 132,007 173 (119,175) 428,328Share in net income of an associate − − − − − 104 104Income (loss) before income tax 143,552 239,568 32,203 132,007 173 (119,071) 428,432Provision for income tax − 3,811 67,957 6,688 − 37,530 115,986Net income (loss) P=143,552 P=235,757 (P=35,754) P=125,319 P=173 (P=156,601) P=312,446

As of June 30, 2018Statement of financial position

Segment assetsProperty and equipment P=401,492 P=− P=− P=99,408 P=− P=557,548 P=1,058,448Investment properties − − − 191,139 − 2,460,707 2,651,846Other assets 10,815,358 40,035,935 24,646,968 15,028,600 70,403 3,190,740 93,788,004Total segment assets P=11,216,850 P=40,035,935 P=24,646,968 P=15,319,147 P=70,403 P=6,208,995 P=97,498,298Total segment liabilities P=64,259,968 P=2,661,296 P=17,328,306 P=2,030,341 P=− P=1,390,998 P=87,670,909

2017

BranchBanking

Group

CorporateBanking



Trust andWealth

ManagementSegment


For the six months ended June 30, 2017Statement of income

RevenueRevenue, net of interest expense Third party (P=315,314) P=937,752 P=276,334 P=464,767 P=629 P=80,368 P=1,444,536 Intersegment 705,231 (527,786) (99,700) (142,987) (1,016) 66,258 −Net interest income (expense) 389,917 409,966 176,634 321,780 (387) 146,626 1,444,536Rent income − − − 131 − 279,004 279,135Service charges, fees, and commissions 41,053 86,486 − 43,003 − 965 171,507Foreign exchange gain – net 6,534 2,978 22,047 − − − 31,559

(Forward)

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2017

BranchBanking

Group

CorporateBanking



Trust andWealth

ManagementSegment


Profit from assets sold P=− P=− P=− P=7,477 P=− P=3,498 P=10,975Trading and securities loss - net − − (10,316) − − − (10,316)Income from trust operations − − − − 7,839 − 7,839Gain on assets exchange − − − − − 836 836Miscellaneous 11,502 7,419 (3,651) 21,159 − 42,961 79,390Total operating income 449,006 506,849 184,714 393,550 7,452 473,890 2,015,461Compensation and fringe benefits 146,516 39,193 26,434 109,060 5,012 250,975 577,190Taxes and licenses 64,329 56,184 28,815 45,558 1,084 27,893 223,863Depreciation and amortization 60,146 2,434 769 14,152 412 126,814 204,727Occupancy and other equipment-related costs 93,201 3,071 430 10,601 413 9,684 117,400Provision for (reversal of) credit and impairment losses − 44,363 − 37,105 − − 81,468Other operating expenses 133,721 24,747 40,588 63,670 1,414 155,884 420,024Total operating expenses 497,913 169,992 97,036 280,146 8,335 571,250 1,624,672

Income (loss) before share in net income of an associate (48,907) 336,857 87,678 113,404 (883) (97,360) 390,789Share in net income of an associate − − − − − 113 113Income (loss) before income tax (48,907) 336,857 87,678 113,404 (883) (97,247) 390,902Provision for income tax − 4,360 65,353 1,394 − 28,682 99,789Net income (loss) (P=48,907) P=332,497 P=22,325 P=112,010 (P=883) (P=125,929) P=291,113

As of December 31, 2017Statement of financial position

Segment assetsProperty and equipment P=426,713 P=− P=− P=108,603 P=− P=573,553 P=1,108,869Investment properties − − − 160,406 − 2,463,828 2,624,234Unallocated assets 16,217,242 35,498,990 26,021,724 10,784,419 69,909 2,785,883 91,378,167Total segment assets P=16,643,955 P=35,498,990 P=26,021,724 P=11,053,428 P=69,909 P=5,823,264 P=95,111,270Total segment liabilities P=56,083,977 P=3,601,893 P=21,903,356 P=2,058,493 P=− P=1,520,382 P=85,168,101

Seasonality of OperationsSeasonality has no impact on the Group’s operations.

7. Investment Securities

Financial Assets at Fair Value Through Profit or LossFinancial assets at FVTPL of the Group consist of government securities amounting toP=293.49 million and P=2.74 billion as of June 30, 2018 and December 31, 2017, respectively.

As of June 30, 2018 and December 31, 2017, the financial assets at FVTPL include net unrealizedgain of P=3.93 million and net unrealized loss of P=4.44 million, respectively. For the six months endedJune 30, 2018 and 2017, the Group recognized net fair value loss on financial assets at FVTPLamounting to P=10.66 million and P=5.26 million, respectively, which is included in ‘Trading andsecurities gain (loss) - net’ in the unaudited interim consolidated statements of income.

Financial Assets at Fair Value Through Other Comprehensive IncomeFinancial assets at FVTOCI of the Group consist of the following:

June 30,2018

(Unaudited)

December 31,2017

(Audited)Debt securities:

Government P=1,955,182 P=–Private bonds 1,381,075 −

3,336,257 −

(Forward)

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June 30,2018

(Unaudited)

December 31,2017

(Audited)Equity securities:

Quoted equity securities P=70,930 P=49,045Unquoted equity securities 41,594 41,594

112,524 90,639P=3,448,781 P=90,639

The Parent Company has designated the above equity securities as at FVTOCI as they are held forlong-term strategic purpose rather than for trading.

The movements in net unrealized gain (loss) recognized in other comprehensive income follow:

June 30,2018

(Unaudited)

December 31,2017

(Audited)Balance at beginning of period P=64,104 P=33,621Fair value changes during the period (69,053) 30,483Gains taken to profit or loss upon sale of FVOCI (46,349) –Fair value gains as a result of reclassification (Note 3) 39,831 –Provision for credit losses (Note 11) 1,192 –Balance at end of period (P=10,275) P=64,104

Investment Securities at Amortized CostAs of June 30, 2018 and December 31, 2017, the Group’s investment securities at amortized costconsist of the following:

June 30,2018

(Unaudited)

December 31,2017

(Audited)Government securities P=13,643,079 P=13,789,737Private bonds – 1,627,464

13,643,079 15,417,201Less: allowance for credit losses (Note 11) (2,225) –

P=13,640,854 P=15,417,201

The Group’s interest income on investment securities follows:


(Unaudited)2017

(Unaudited)Investment securities at amortized cost P=263,902 P=255,991Financial assets at FVTOCI 51,456 –Financial assets at FVTPL 9,509 131,320

P=324,867 P=387,311

For the six months ended June 30, 2018 and 2017, the Parent Company’s peso-denominatedinvestment securities earned annual interest rates ranging from 2.20% to 8.13% and 2.13% to 8.00%,respectively, while dollar-denominated investment securities earned annual interest rates rangingfrom 4.20% to 10.63% and 1.87% to 10.63%, respectively.

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The Group’s trading and securities gain (loss) - net follows:


(Unaudited)2017

(Unaudited)Financial assets at FVTOCI P=40,859 P=–Financial assets at FVTPL (10,655) (5,259)Derivatives 837 (5,057)

P=31,041 (P=10,316)

8. Loans and Other Receivables

This account consist of:

June 30, 2018

(Unaudited)

December 31, 2017

(Audited)Receivables from customers:

Corporate loans P=40,853,183 P=38,391,852Consumer loans 15,131,630 13,668,188

55,984,813 52,060,040Unearned discounts and capitalized interest (165,511) (182,647)

55,819,302 51,877,393Unquoted debt securities 2,682,199 2,811,827Accrued interest receivable 829,543 814,596Accounts receivable 238,168 251,137Sales contracts receivable 191,271 168,093

59,760,483 55,923,046Less: allowance for credit losses (Note 11) (2,891,260) (2,570,079)

P=56,869,223 P=53,352,967

Interest income on loans and other receivables consist of interest income on:


(Unaudited)2017

(Unaudited)Receivables from customers:

Corporate P=1,225,516 P=994,414Consumer 488,510 388,823

Unquoted debt securities 122,327 133,096Others 7,935 7,283

P=1,844,288 P=1,523,616

For the six months ended June 30, 2018 and 2017, peso-denominated receivables from customersearned annual fixed interest rates ranging from 1.50% to 38.40% and 1.75% to 32.00%, respectively,while foreign currency-denominated receivables from customers earned annual fixed interest ratesranging from 3.50% to 9.82% and 3.33% to 9.82%, respectively.

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Unquoted debt securities have effective interest rates ranging from 4.21% to 6.52% and 5.47% to11.90%, for the six months ended 2018 and 2017, respectively. Sales contracts receivables bearinterest rates ranging from 7.00% to 14.50% in 2018 and 2017.

9. Property and Equipment

The composition of and movements in property and equipment follow:

June 30, 2018 (Unaudited)

LandCondominium

PropertiesBuildings andImprovements

Furniture,Fixtures and

EquipmentLeasehold

Improvements TotalCostBalance at beginning of period P=164,881 P=552,014 P=425,250 P=1,040,556 P=414,031 P=2,596,732Additions − − − 55,246 3,436 58,682Disposals − − − (21,033) − (21,033)Balance at end of period 164,881 552,014 425,250 1,074,769 417,467 2,634,381Accumulated depreciation and

amortizationBalance at beginning of period − 182,832 276,159 791,170 237,702 1,487,863Depreciation − 6,506 10,097 59,817 27,906 104,326Disposals − − − (16,256) − (16,256)Balance at end of period − 189,338 286,256 834,731 265,608 1,575,933Net book value P=164,881 P=362,676 P=138,994 P=240,038 P=151,859 P=1,058,448

December 31, 2017 (As restated)

LandCondominium

PropertiesBuildings andImprovements


EquipmentLeasehold

Improvements TotalCostBalance at beginning of period P=165,409 P=550,852 P=446,742 P=1,036,596 P=426,343 P=2,625,942Additions − 1,162 32,704 40,131 11,235 85,232Disposals (528) − (863) (64,613) (23,547) (89,551)Transfers − − (53,333) 28,442 − (24,891)Balance at end of period 164,881 552,014 425,250 1,040,556 414,031 2,596,732Accumulated depreciation and

amortizationBalance at beginning of period − 165,821 278,321 700,029 188,994 1,333,165Depreciation − 17,011 21,227 133,723 56,983 228,944Disposals − − (746) (54,733) (8,275) (63,754)Transfers − − (22,643) 12,151 − (10,492)Balance at end of period − 182,832 276,159 791,170 237,702 1,487,863Net book value P=164,881 P=369,182 P=149,091 P=249,386 P=176,329 P=1,108,869

Details of depreciation and amortization are as follows:


(Unaudited)2017

(As restated)Property and equipment P=104,326 P=121,046Investment properties (Note 10) 39,944 38,915Software cost (Note 12) 33,611 34,463Chattel mortgage 19,899 10,303

P=197,780 P=204,727

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10. Investment Properties

The composition of and movements in this account follow:

June 30, 2018 (Unaudited)Foreclosed Properties

Office unitsfor Lease

CondominiumUnits for LeaseLand

Building andImprovements Total

CostBalance at beginning of period P=565,055 P=486,680 P=1,051,735 P=4,130 P=2,561,178Additions 26,099 46,844 72,943 − 423Disposals (5,751) (316) (6,067) − −Balance at end of period 585,403 533,208 1,118,611 4,130 2,561,601Accumulated depreciation and amortizationBalance at beginning of period − 99,857 99,857 131 677,482Depreciation − 13,679 13,679 175 26,090Disposals − (79) (79) − −Balance at end of period − 113,457 113,457 306 703,572Accumulated impairmentBalance at beginning of period 114,793 100,546 215,339 − −Provisions 244 − 244 − −Disposals (422) − (422) − −Balance at end of period 114,615 100,546 215,161 − −Net book value P=470,788 P=319,205 P=789,993 P=3,824 P=1,858,029

December 31, 2017 (As restated)Foreclosed Properties

Office unitsfor Lease

CondominiumUnits for LeaseLand

Building andImprovements Total

CostBalance at beginning of period P=559,859 P=476,153 P=1,036,012 P=2,542 P=2,554,628Additions 28,237 19,465 47,702 − 6,550Disposals (23,041) (5,474) (28,515) − −Transfers − (3,464) (3,464) 1,588 −Balance at end of period 565,055 486,680 1,051,735 4,130 2,561,178Accumulated depreciation and amortizationBalance at beginning of period − 77,836 77,836 157 625,660Depreciation − 26,011 26,011 88 51,822Disposals − (2,837) (2,837) − −Transfers − (1,153) (1,153) (114) −Balance at end of period − 99,857 99,857 131 677,482Accumulated impairmentBalance at beginning of period 123,903 101,194 225,097 − −Reversals (1,173) – (1,173) − −Disposals (7,937) (648) (8,585) − −Balance at end of period 114,793 100,546 215,339 − −Net book value P=450,262 P=286,277 P=736,539 P=3,999 P=1,883,696

Condominium units for lease represents the contributed cost of developing the Parent Company’sAyala Avenue property, originally consisting of land and fully depreciated building, into a 52-storeybuilding (the PBCom Tower) under a joint development agreement with Filinvest Asia Corporation(Filinvest Asia).

The agreement provided for equal sharing of the cost of the project and, correspondingly, of the netusable area of the building, which was converted into a condominium property. Under the agreement,the Parent Company’s share in such cost included its land along Ayala Avenue, which was given anappraised value of P=900.00 million in 1995. The related appraisal increment was closed to surplus,net of applicable deferred tax liability, upon completion of the project in 2000 (see Note 15).

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11. Allowance for Credit and Impairment Losses

Movements in the allowance for credit and impairment losses:

June 30, 2018

(Six Months)(Unaudited)

December 31,2017

(One Year)(Audited)

Balance at beginning of period, as restatedLoans and other receivables P=2,570,079 P=2,608,168Investment properties 215,339 261,092Other assets 335,981 494,254

3,121,399 3,363,514Effect of adoption of PFRS 9 (Note 2) 302,993 −Balance at beginning of period, as restated 3,424,392 3,363,514Movements during the period:

Provision for credit and impairment losses 127,502 50,184Revaluation of FCDU loans 6,961 (564)Accounts written-off and others (109,410) (291,735)

25,053 (242,115)Balance at end of period:

Loans and other receivables 2,891,260 2,570,079Investment properties 215,161 215,339Other assets 336,107 335,981Interbank loans receivable 1,045 −Financial assets at FVTOCI 3,647 −Investment securities at amortized cost 2,225 −

P=3,449,445 P=3,121,399

With the foregoing level of allowance for credit and impairment losses, management believes that theGroup has sufficient allowance for any losses that the Group may incur from the non-collection ornon-realization of its receivables and other risk assets.

12. Goodwill and Intangible Assets

GoodwillGoodwill represents the excess of the acquisition costs over the fair value of the identifiable assetsand liabilities of the entities acquired by the Group.

Goodwill acquired through the acquisitions of RBNI, PRBI and RBKI aggregating toP=182.23 million has been allocated to PRBI as the surviving entity of the three-way merger(see Note 1). Based on management’s assessment, as of June 30, 2018 and December 31, 2017,goodwill is not impaired.

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Intangible AssetsThis account consists of:

June 30, 2018

(Unaudited)

December 31,2017

(Audited)Branch licenses P=365,300 P=365,300Software costs 359,393 378,879

P=724,693 P=744,179

Branch licensesBranch licenses of the Group arose from the acquisitions of Consumer Savings Bank (CSB), PRBIand RBNI. As of June 30, 2018 and December 31, 2017, the Parent Company’s impairmentassessment indicates no impairment.

Software costsSoftware costs of the Group are net of amortization expense for the six months ended June 30, 2018and 2017, amounting to P=33.61 million and P=34.46 million, respectively (see Note 9).

13. Deposit Liabilities

Interest expense on deposit liabilities consists of:


(Unaudited)2017

(Unaudited)Demand P=33,734 P=22,318Savings 5,906 5,086Time 483,732 361,605

P=523,372 P=389,009

Peso-denominated deposit liabilities earned annual fixed interest rates ranging from 0.13% to 4.13%and 0.10% and 3.50% for the six months ended June 30, 2018 and 2017, respectively, while foreigncurrency-denominated deposit liabilities earned annual fixed interest rates ranging from 0.63% to3.00% and 0.10% and 3.00% for the six months ended June 30, 2018 and 2017, respectively.

14. Bills Payable

Bills payable consists of borrowings from:

June 30,2018

(Unaudited)

December 31,2017

(Audited)Private firms and individuals P=10,785,050 P=7,802,790Banks and other financial institutions 733,519 4,764,609

P=11,518,569 P=12,567,399

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For the six months ended June 30, 2018 and 2017, interest expense on bills payable amounted toP=156.30 million and P=107.81 million, respectively.

Borrowings from private firms and individuals represent deposit substitutes with maturities of 1 to731 days bear annual interest rates ranging from 0.75% to 5.85% and 0.50% and 3.50% for the sixmonths ended June 30, 2018 and 2017, respectively.

15. Income Taxes

The components of the Group’s income tax expense are as follows:


(Unaudited)2017

(Unaudited)Reported in profit or loss

Regular Corporate Income Tax (RCIT) P=44,228 P=10,034Minimum Corporate Income Tax (MCIT) 47 28,635Final tax 71,760 69,980

116,035 108,649Deferred tax (49) (8,860)

P=115,986 P=99,789

Components of deferred tax assets (liabilities) follow:

June 30, 2018

(Unaudited)

December 31,2017

(As restated)Deferred tax assets on:

Allowance for credit and impairment losses P=515,750 P=515,750Unearned discounts and capitalized interest 22,062 22,062Excess of MCIT over RCIT 12,182 12,182Unamortized past service cost 902 902Accrued expenses 715 715Remeasurement losses on retirement liabilities 170 170

P=551,781 P=551,781

Deferred tax liabilities on:Fair value gains as a result of non-monetary

exchange closed to surplus free P=399,979 P=399,979Branch licenses acquired from business

combinations 78,870 78,870Excess of fair value over carrying value of the

net assets acquired from businesscombinations 24,352 28,216

Unrealized gain on financial assets carried atFVOCI 27,173 7,914

Unrealized foreign exchange gain 12,487 8,672Gain on foreclosure of properties 10,369 10,369Others 1,265 1,265

P=554,495 P=535,285

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Deferred tax assets and liabilities are presented in the unaudited interim condensed consolidatedstatements of financial position as follows:

June 30, 2018(Unaudited)

December 31,2017

(As restated)Deferred tax assets P=104,291 P=123,566Deferred tax liabilities 107,005 107,070

The realization of deferred tax assets is dependent on the generation of future taxable income. Inassessing the realizability of its deferred tax assets, the Group considers projected future taxableincome, reversal of temporary differences, and tax planning strategies.

The Group assessed that not all of its deferred tax assets may be realized in the future. Accordingly,the Group did not set up deferred tax assets on the following temporary differences, and excess ofMCIT over RCIT:

June 30, 2018(Unaudited)

December 31,2017

(As restated)Allowance for credit and impairment losses P=1,791,890 P=1,409,277Accrued expenses 56,997 38,508Unamortized past service cost 41,443 54,646Advance rental income 36,117 88,499Retirement liability 21,484 21,169Excess of MCIT over RCIT 4,192 3,769

P=1,952,123 P=1,615,868

16. Related Party Transactions

The Parent Company has business relationships with certain related parties. Transactions with suchparties are made in the ordinary course of business and on substantially same terms, including interestand collateral, as those prevailing at the time for comparable transactions with other parties. Thesetransactions also did not involve more than the normal risk of collectability or present otherunfavorable conditions.

Retirement PlansPost-employment benefit plans are considered as related parties. Income earned by the ParentCompany (presented as part of ‘Income from trust operations’ in the unaudited interim consolidatedstatements of income) from such services amounted to P=2.32 million and P=2.28 million for the sixmonths ended June 30, 2018 and 2017, respectively. Total deposits maintained by the related partyretirement plans with the Parent Company amounted to P=177.68 million and P=145.68 million as ofJune 30, 2018 and December 31, 2017, respectively.

Key Management PersonnelKey management personnel are those persons with authority and responsibility for planning, directingand controlling the activities of the Parent Company, directly or indirectly. The Parent Companyconsiders the members of the Senior Management Team to constitute key management personnel forpurposes of PAS 24.

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Total remunerations of key management personnel are as follows:


(Unaudited)2017

(Unaudited)Short-term benefits P=68,501 P=153,150Post-employment benefits 2,960 7,548

P=71,461 P=160,698

The amounts and the balances arising from the foregoing significant related party transactions of theGroup are as follows (amounts in thousands):

June 30, 2018 December 31, 2017(Unaudited) (Audited)

Category AmountOutstanding

Balances AmountOutstanding

BalancesTerms and

Conditions/NatureSignificant investors

Deposit liabilitiesOutstanding balance P=4,739,061 P=1,820,405 Savings and time

deposit accountswith annual interestrates ranging from0.1% to 2.375%

Net movements 2,918,656 (763,897)

AffiliateDeposit liabilitiesOutstanding balance 12,185 14,722 Demand, savings, and

time depositaccounts with annualinterest rates rangingfrom 0.1% to 1.50%

Net movements (2,537) (88)

Key management personnelDeposit liabilitiesOutstanding balance 13,976 12,631 Savings and time


Net movements 1,345 2,440

Provident fundDeposit liabilitiesOutstanding balance 50,342 57,290 Savings and time


Net movements (6,948) 19,435

Retirement fundDeposit liabilitiesOutstanding balance 127,341 88,393 Savings and time


F-41

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*SGVFS031950*


Category2018

(Unaudited)2017

(Unaudited) Terms and Conditions/NatureSignificant investors

Interest expense P=24,740 P=3,914 Savings and time deposit accountswith annual interest rates rangingfrom 0.1% to 2.375%.

Rent expense 15,468 10,259 Branch and office space leased forfive years ending in various years,with 5% annual escalation.

Rent income 1,562 860 Five-year lease of branches, subject topre-termination, with escalationrate of 5%.

Trust fee − 21 0.50% pa based on month-end valueof fund

AffiliateInterest expense 72 52 Demand, savings and time deposit

accounts with annual interest ratesranging from 0.1% to 1.50%.

Rent income 66 65 Five-year lease expiring in July 2018, with 5% annual escalation.

Key management personnelInterest expense 24 20 Savings and time deposit accounts

with annual interest rates ranging from 0.1% to 3.50%.

Trust fee − 4 0.50% pa based on month-end valueof fund

Provident fundInterest expense 1,629 2 Savings and time deposit accounts


Trust fee 1,175 1,189 A certain percentage of the monthly ending market value of the fund depending on agreement.

Retirement fundInterest expense 1,728 17 Savings and time deposit accounts


Trust fee 1,145 1,087 0.50% pa based on month-end value of fund

F-42

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*SGVFS031950*

Parent Company Related Party TransactionsIn addition to the transactions discussed above, the following are the transactions between the ParentCompany and its subsidiaries that are eliminated in the unaudited interim condensed consolidatedfinancial statements as of June 30, 2018 and for the six months ended June 30, 2018 and 2017(amounts in thousands):

June 30, 2018 December 31, 2017(Unaudited) (Audited)

Category AmountOutstanding

Balances AmountOutstanding

BalancesTerms and

Conditions/NatureSubsidiaries

Deposit liabilitiesOutstanding balance P=108,866 P=91,787 Demand and savings

deposit accounts withannual interest rates of0.1%

Net movements 17,079 27,677


Category2018

(Unaudited)2017

(Unaudited) Terms and Conditions/NatureSubsidiaries

Interest expense P=16 P=196 Demand and savings deposit accountswith annual interest rates of 0.1%.

Rent income 92 79 Three-year lease expiring in May 2020 with 7.5% and 10% annual escalation on second and third year, respectively.

Trust fee − 80 0.50% per annum based on month-end value of fund

17. Commitments and Contingent Liabilities

In the normal course of operations, the Group has various outstanding commitments and contingentliabilities such as guarantees, forward exchange contracts, and commitments to extend credit, whichare not presented in the accompanying unaudited interim condensed financial statements. The Groupdoes not anticipate any material losses as a result of these transactions.

The following is a summary of the Group’s commitments and contingent liabilities at their equivalentPeso contractual amounts:

June 30, 2018

(Unaudited)

December 31,2017

(Audited)Trust department accounts P=5,183,762 P=5,267,279Standby LC 968,515 2,074,784Spot exchange:

Bought 399,969 274,615Sold 1,040,049 574,195

Usance LC outstanding 38,705 86,900Outstanding shipping guarantees 1,094,173 944,839

(Forward)

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*SGVFS031950*

June 30, 2018

(Unaudited)

December 31,2017

(Audited)Sight LC outstanding P=1,448,059 P=401,085Deficiency claims receivable 27,498 27,498Outward bills for collection 12,027 26,772Currency forwards:

Bought 229,563 48,688Sold 229,721 49,665

Inward bills for collection 99,139 51,995Items held for safekeeping 151 157Items held as collateral 20 9Other contingencies 44,596 98,691

The Group has certain loan-related suits and claims that remain unsettled. It is not practicable toestimate the potential unaudited interim condensed financial statement impact of these contingencies.However, in the opinion of management, the suits and claims, if decided adversely, will not involvesums that would have a material effect on the financial statements.

The Group is a defendant in legal actions arising from its normal business activities. Managementbelieves that these actions are without merit or that the ultimate liability, if any, resulting from themwill not materially affect the unaudited interim condensed consolidated financial statements.

18. Basic Earnings Per Share

Basic EPS amounts are calculated by dividing the net income for the period by the weighted averagenumber of common shares outstanding during the period.

The following reflects the income and share data used in the basic and diluted earnings per sharecomputations:


(Unaudited)2017

(Unaudited)Net income attributable to equity holders of the Parent Company P=312,439 P=291,113Weighted average number of common shares outstanding 480,645 480,645Basic/diluted earnings per share P=0.65 P=0.61

There are no outstanding dilutive potential common shares as of June 30, 2018 andDecember 31, 2017.

F-44

Philippine Bank of Communicationsand Subsidiaries

Financial StatementsDecember 31, 2017 and 2016and Years Ended December 31, 2017, 2016and 2015

and

Independent Auditor’s Report

F-45

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INDEPENDENT AUDITOR’S REPORT

The Stockholders and the Board of DirectorsPhilippine Bank of Communications

Opinion

We have audited the consolidated financial statements of Philippine Bank of Communications and itssubsidiaries (the Group) and the parent company financial statements of Philippine Bank ofCommunications (the Parent Company), which comprise the consolidated and parent company statementsof financial position as at December 31, 2017 and 2016, and the consolidated and parent companystatements of income, consolidated and parent company statements of comprehensive income,consolidated and parent company statements of changes in equity and consolidated and parent companystatements of cash flows for each of the three years in the period ended December 31, 2017, and notes tothe consolidated and parent company financial statements, including a summary of significant accountingpolicies.

In our opinion, the accompanying consolidated and parent company financial statements present fairly, inall material respects, the financial position of the Group and the Parent Company as at December 31, 2017and 2016, and their financial performance and their cash flows for each of the three years in the periodended December 31, 2017, in accordance with Philippine Financial Reporting Standards (PFRSs).

Basis for Opinion

We conducted our audits in accordance with Philippine Standards on Auditing (PSAs). Ourresponsibilities under those standards are further described in the Auditor’s Responsibilities for the Auditof the Consolidated and Parent Company Financial Statements section of our report. We are independentof the Group and the Parent Company in accordance with the Code of Ethics for ProfessionalAccountants in the Philippines (the Code of Ethics) together with the ethical requirements that arerelevant to our audit of the consolidated and parent company financial statements in the Philippines, andwe have fulfilled our other ethical responsibilities in accordance with these requirements and the Code ofEthics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide abasis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in ouraudit of the consolidated and parent company financial statements of the current period. These matterswere addressed in the context of our audit of the consolidated and parent company financial statements asa whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.For each matter below, our description of how our audit addressed the matter is provided in that context.

SyCip Gorres Velayo & Co.6760 Ayala Avenue1226 Makati CityPhilippines

Tel: (632) 891 0307Fax: (632) 819 0872ey.com/ph

BOA/PRC Reg. No. 0001, December 14, 2015, valid until December 31, 2018SEC Accreditation No. 0012-FR-4 (Group A), November 10, 2015, valid until November 9, 2018


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We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of theConsolidated and Parent Company Financial Statements section of our report, including in relation tothese matters. Accordingly, our audit included the performance of procedures designed to respond to ourassessment of the risks of material misstatement of the consolidated and parent company financialstatements. The results of our audit procedures, including the procedures performed to address thematters below, provide the basis for our audit opinion on the accompanying consolidated and parentcompany financial statements.

Applicable to the Audit of the Consolidated and Parent Company Financial Statements

Adequacy of allowance for credit losses on loans and receivablesThe Group’s and the Parent Company’s loans and receivables consist of corporate and consumer loans.The appropriateness of the provision for credit losses on these loans and receivables is a key area ofjudgment for the management. The Group performs specific impairment testing on individuallysignificant corporate loans. The other loans are grouped based on credit risk characteristics and aresubjected to collective impairment testing. The identification of impairment and the determination of therecoverable amount involve various assumptions and factors. These include the financial condition of thecounterparty, estimated future cash flows and estimated net selling prices of the collateral. The use ofassumptions could produce significantly different estimates of provision for credit losses.

The disclosures relating to the impairment of loans and receivables are included in Notes 3, 5 and 17 tothe financial statements.

Audit responseFor loans and receivables subjected to specific impairment testing, we selected a sample of impairedloans and obtained an understanding of the borrower’s financial condition. We also tested theassumptions underlying the impairment identification and quantification of the provision for credit losses.This was done by assessing whether the forecasted cash flows are based on the borrower’s currentfinancial condition, checking the payment history of the borrower, including payments made subsequentto year-end, agreeing the value of the collateral to the appraisal reports, checking whether the discountrates used are based on the original effective interest rate or the last repriced rate, and re-performing theimpairment calculation.

For loans and receivables subjected to collective impairment testing, we tested the underlying models andthe inputs to those models, such as historical loss rates and net flow rates. This was done by agreeing thedetails of the loan information used in the calculation of loss rates and net flow rates to the Group’s andthe Parent Company’s records and subsidiary ledgers, validating the delinquency age buckets of the loansand loan groupings, and re-performing the calculation of provision for credit losses.

Valuation of investment propertiesThe Group accounts for its investment properties using the fair value model. Investment propertiesconsist of condominium and office units for lease and foreclosed properties. The determination of the fairvalues of these properties involves significant management judgment in the use of assumptions, such asvacancy and rental rates. The valuation also requires the assistance of external appraisers whosecalculations depend on certain assumptions, such as capitalization rates, and sales and listings ofcomparable properties registered within the vicinity and adjustments to sales price based on internal andexternal factors. Thus, we considered the valuation of investment properties as a key audit matter.


F-47

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The disclosures relating to investment properties are included in Notes 4 and 14 to the financialstatements.

Audit responseWe evaluated the competence, capabilities and qualifications of the external appraisers by consideringtheir qualifications, experience and reporting responsibilities. We involved our internal specialist in thereview of the methodology and assumptions used in the valuation of the investment properties. Weassessed the methodology adopted by referencing common valuation models. We evaluated the keyassumptions used, such as capitalization, vacancy and rental rates, by comparing the capitalization ratesagainst yield data for comparable properties within the area where the Group’s properties are located,vacancy rates against market data and historical vacancy rates for the Group’s properties, and rental ratesagainst rental contracts and agreements. We reviewed the relevant information supporting the sales andlistings of comparable properties and the adjustments made to the sales price. We also checked themathematical accuracy of the calculations.

Realizability of deferred tax assetsDeferred tax assets have been recognized to the extent that management has assessed that it is probablethat future taxable profit will be available against which the deductible temporary differences can beutilized. We considered the realizability of deferred tax assets as a key audit matter because theassessment process is complex and judgmental and is based on assumptions that are affected by expectedfuture market or economic conditions and the expected performance of the Group.

The disclosures relating to deferred tax assets are included in Note 30 to the financial statements.

Audit responseWe obtained an understanding of the Group’s deferred income tax calculation process, including theapplicable tax rules and regulations. We reviewed the management’s assessment on the availability offuture taxable profit in reference to financial forecast and tax strategies. We evaluated the management’sforecast by comparing the expected growth rates of the loan and deposit portfolios with that of theindustry and the historical performance of the Group. We also reviewed the timing of the reversal offuture taxable and deductible temporary differences.

Other Information

Management is responsible for the other information. The other information comprises theSEC Form 17-A for the year ended December 31, 2017 but does not include the consolidated and parentcompany financial statements and our auditor’s report thereon, which we obtained prior to the date of thisauditor’s report, and the SEC Form 20-IS (Definitive Information Statement) and Annual Report for theyear ended December 31, 2017, which are expected to be made available to us after that date.

Our opinion on the consolidated and parent company financial statements does not cover the otherinformation and we do not and will not express any form of assurance conclusion thereon.

In connection with our audits of the consolidated and parent company financial statements, ourresponsibility is to read the other information identified above and, in doing so, consider whether theother information is materially inconsistent with the consolidated and parent company financialstatements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.


F-48

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If, based on the work we have performed on the other information that we obtained prior to the date ofthis auditor’s report, we conclude that there is a material misstatement of this other information, we arerequired to report that fact. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Consolidated andParent Company Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated and parentcompany financial statements in accordance with PFRSs, and for such internal control as managementdetermines is necessary to enable the preparation of consolidated and parent company financialstatements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated and parent company financial statements, management is responsible forassessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, asapplicable, matters related to going concern and using the going concern basis of accounting unlessmanagement either intends to liquidate the Group and the Parent Company or to cease operations, or hasno realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s and the Parent Company’sfinancial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated and Parent Company FinancialStatements

Our objectives are to obtain reasonable assurance about whether the consolidated and parent companyfinancial statements as a whole are free from material misstatement, whether due to fraud or error, and toissue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, butis not a guarantee that an audit conducted in accordance with PSAs will always detect a materialmisstatement when it exists. Misstatements can arise from fraud or error and are considered material if,individually or in the aggregate, they could reasonably be expected to influence the economic decisions ofusers taken on the basis of these consolidated and parent company financial statements.

As part of an audit in accordance with PSAs, we exercise professional judgment and maintainprofessional skepticism throughout the audit. We also:

∂ Identify and assess the risks of material misstatement of the consolidated and parent company financialstatements, whether due to fraud or error, design and perform audit procedures responsive to thoserisks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.The risk of not detecting a material misstatement resulting from fraud is higher than for one resultingfrom error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or theoverride of internal control.

∂ Obtain an understanding of internal control relevant to the audit in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Group’s and the Parent Company’s internal control.


F-49

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- 5 -

∂ Evaluate the appropriateness of accounting policies used and the reasonableness of accountingestimates and related disclosures made by management.

∂ Conclude on the appropriateness of management’s use of the going concern basis of accounting and,based on the audit evidence obtained, whether a material uncertainty exists related to events orconditions that may cast significant doubt on the Group’s and the Parent Company’s ability to continueas a going concern. If we conclude that a material uncertainty exists, we are required to draw attentionin our auditor’s report to the related disclosures in the consolidated and parent company financialstatements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based onthe audit evidence obtained up to the date of our auditor’s report. However, future events orconditions may cause the Group and the Parent Company to cease to continue as a going concern.

∂ Evaluate the overall presentation, structure and content of the consolidated and parent companyfinancial statements, including the disclosures, and whether the consolidated and parent companyfinancial statements represent the underlying transactions and events in a manner that achieves fairpresentation.

∂ Obtain sufficient appropriate audit evidence regarding the financial information of the entities orbusiness activities within the Group to express an opinion on the consolidated financial statements.We are responsible for the direction, supervision and performance of the audit. We remain solelyresponsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scopeand timing of the audit and significant audit findings, including any significant deficiencies in internalcontrol that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevantethical requirements regarding independence, and to communicate with them all relationships and othermatters that may reasonably be thought to bear on our independence, and where applicable, relatedsafeguards.

From the matters communicated with those charged with governance, we determine those matters thatwere of most significance in the audit of the consolidated and parent company financial statements of thecurrent period and are therefore the key audit matters. We describe these matters in our auditor’s reportunless law or regulation precludes public disclosure about the matter or when, in extremely rarecircumstances, we determine that a matter should not be communicated in our report because the adverseconsequences of doing so would reasonably be expected to outweigh the public interest benefits of suchcommunication.


F-50

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- 6 -

Report on the Supplementary Information Required Under Revenue Regulations 15-2010

Our audits were conducted for the purpose of forming an opinion on the basic financial statements takenas a whole. The supplementary information required under Revenue Regulations 15-2010 in Note 36 tothe financial statements is presented for the purpose of filing with the Bureau of Internal Revenue and isnot a required part of the basic financial statements. Such information is the responsibility of themanagement of Philippine Bank of Communications. The information has been subjected to the auditingprocedures applied in our audit of the basic financial statements. In our opinion, the information is fairlystated, in all material respects, in relation to the basic financial statements taken as a whole.

The engagement partner on the audit resulting in this independent auditor’s report is Josephine AdrienneA. Abarca.

SYCIP GORRES VELAYO & CO.

Josephine Adrienne A. AbarcaPartnerCPA Certificate No. 92126SEC Accreditation No. 0466-AR-3 (Group A), February 9, 2016, valid until February 8, 2019Tax Identification No. 163-257-145BIR Accreditation No. 08-001998-61-2018, February 26, 2018, valid until February 25, 2021PTR No. 6621219, January 9, 2018, Makati City

April 4, 2018


F-51

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PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIESSTATEMENTS OF FINANCIAL POSITION

Consolidated Parent CompanyAs of December 31

2017 2016 2017 2016(Amounts in Thousands)

ASSETSCash and Other Cash Items P=974,207 P=1,042,611 P=941,823 P=1,011,756Due from Bangko Sentral ng Pilipinas

(Notes 18 and 19) 15,340,711 13,356,075 15,279,084 13,276,681Due from Other Banks 1,166,063 2,996,758 965,820 2,631,497Interbank Loans Receivable (Note 8) 534,925 310,131 534,925 310,131Financial Assets at Fair Value through Profit or Loss

(Note 9) 2,740,471 300,483 2,740,471 300,483Equity Securities at Fair Value through Other

Comprehensive Income (Note 10) 90,639 52,242 90,639 52,242Investment Securities at Amortized Cost

(Note 11) 15,417,201 13,135,494 15,417,201 13,135,494Loans and Receivables (Note 12) 53,352,967 46,089,437 51,619,999 44,303,654Investments in Subsidiaries and an Associate

(Note 7) 13,068 12,376 1,058,074 1,023,334Property and Equipment (Note 13) At cost 955,106 1,130,034 900,867 1,066,588 At appraised value 518,482 519,010 470,113 470,113Investment Properties (Note 14) Condominium units for lease 5,365,080 5,044,552 5,365,080 5,044,552 Foreclosed properties 1,020,710 957,000 761,207 721,780 Office units for lease 50,343 23,858 50,343 23,858Goodwill (Note 15) 182,227 178,456 − −Intangible Assets (Note 15) 744,179 781,166 480,433 516,008Deferred Tax Assets - net (Note 30) 55,928 59,717 − −Other Assets (Note 16) 697,943 509,333 683,599 493,863

TOTAL ASSETS P=99,220,250 P=86,498,733 P=97,359,678 P=84,382,034

LIABILITIES AND EQUITY

LIABILITIESDeposit Liabilities (Notes 18 and 31)Demand P=19,400,193 P=15,464,230 P=19,480,422 P=15,571,988Savings 8,329,526 6,943,767 7,790,785 6,400,070Time 43,006,098 40,737,984 41,773,807 39,227,043

70,735,817 63,145,981 69,045,014 61,199,101Bills Payable (Note 19) 12,567,399 10,099,384 12,567,399 10,099,384Outstanding Acceptances 64,085 34,357 64,085 34,357Manager’s Checks 427,405 300,385 427,405 300,385Accrued Interest, Taxes and Other Expenses

(Note 20) 421,666 414,575 391,771 382,452Income Tax Payable 13,458 240 14,945 182Deferred Tax Liabilities - net (Note 30) 1,228,855 1,105,523 1,100,902 974,865Other Liabilities (Note 21) 831,201 616,552 808,429 601,293

TOTAL LIABILITIES 86,289,886 75,716,997 84,419,950 73,592,019

(Forward)

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Consolidated Parent CompanyAs of December 31

2017 2016 2017 2016(Amounts in Thousands)

EQUITY ATTRIBUTABLE TO EQUITYHOLDERS OF THE PARENT COMPANY

Common stock (Note 23) P=12,016,129 P=7,489,114 P=12,016,129 P=7,489,114Subscribed common stock - net (Note 23) − 4,581,340 − 4,581,340Additional paid-in capital 2,252,826 813,515 2,262,246 813,601Surplus reserves (Note 23) 105,824 105,772 105,824 105,772Deficit (Note 23) (1,626,290) (2,345,243) (1,626,290) (2,345,243)Unrealized gain on equity securities carried at fair value

through other comprehensive income (Note 10) 64,104 33,621 64,104 33,621Revaluation increment on land, office units and

condominium properties (Notes 13 and 14) 301,846 280,228 301,846 280,228Cumulative translation adjustment (122,263) (72,739) (122,263) (72,739)Remeasurement losses on retirement liability

(Note 27) (61,868) (95,679) (61,868) (95,679)12,930,308 10,789,929 12,939,728 10,790,015

NON-CONTROLLING INTERESTS 56 (8,193) − −

TOTAL EQUITY 12,930,364 10,781,736 12,939,728 10,790,015

TOTAL LIABILITIES AND EQUITY P=99,220,250 P=86,498,733 P=97,359,678 P=84,382,034

See accompanying Notes to Financial Statements.

F-53

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PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIESSTATEMENTS OF INCOME

Consolidated Parent CompanyYears Ended December 31

2017 2016 2015 2017 2016 2015(Amounts in Thousands, Except Earnings per Share)

INTEREST INCOMELoans and receivables (Notes 12 and 31) P=3,215,921 P=2,902,068 P=2,597,337 P=2,921,310 P=2,539,901 P=2,299,675Investment securities (Note 26) 690,658 676,016 628,963 690,658 676,016 628,963Interbank loans receivable and securities purchased under resale

agreements (Note 8) 38,905 19,073 11,431 38,905 19,073 19,033Deposits with other banks 15,826 37,583 61,835 12,739 37,202 61,296

3,961,310 3,634,740 3,299,566 3,663,612 3,272,192 3,008,967INTEREST AND FINANCE CHARGESDeposit liabilities (Notes 18 and 31) 834,585 861,401 869,926 773,574 799,652 825,398Bills payable, borrowings and others (Note 19) 225,167 177,385 103,672 225,029 176,704 99,321

1,059,752 1,038,786 973,598 998,603 976,356 924,719NET INTEREST INCOME 2,901,558 2,595,954 2,325,968 2,665,009 2,295,836 2,084,248Rent income (Notes 14, 28 and 31) 563,259 474,213 404,072 563,245 474,105 403,948Service charges, fees and commissions 362,842 363,635 426,556 317,721 326,484 377,997Fair value gain from investment properties (Note 14) 353,992 286,404 941,728 336,859 252,095 929,751Foreign exchange gain - net 69,787 11,474 10,200 69,787 11,474 10,200Income from trust operations (Note 25) 15,404 16,864 18,300 15,404 16,864 18,300Trading and securities gain (loss) - net (Note 26) (13,243) 48,339 (40,465) (13,243) 48,339 (40,465)Profit (loss) from assets sold (Notes 13, 14 and 16) 11,953 (7,316) 5,335 3,464 (7,915) 4,608Gain (loss) on assets exchange - net (Note 14) 5,487 12,170 3,702 (81) 12,170 (215)Gain on reclassification of investment securities from

amortized cost to fair value through profit or loss (Note 11) ‒ 198,700 ‒ − 198,700 ‒Gain on disposal of investment securities at amortized cost (Note 11) − − 48,174 − − 48,174Miscellaneous 121,066 51,071 90,827 103,478 39,061 30,355TOTAL OPERATING INCOME 4,392,105 4,051,508 4,234,397 4,061,643 3,667,213 3,866,901

(Forward)

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2017 2016 2015 2017 2016 2015(Amounts in Thousands, Except Earnings per Share)

OPERATING EXPENSESCompensation and fringe benefits (Notes 14, 27 and 31) P=1,162,952 P=1,181,173 P=1,344,158 P=1,055,169 P=1,074,104 P=1,240,970Taxes and licenses (Notes 14 and 30) 457,442 406,471 435,777 427,136 377,609 409,648Provision for credit and impairment losses - net (Note 17) 338,495 477,968 443,802 288,811 396,223 391,493Depreciation and amortization (Note 13) 326,915 345,578 290,531 307,134 324,496 270,192Occupancy and other equipment-related costs (Notes 14, 28 and 31) 224,351 184,412 217,691 210,864 173,159 202,716Insurance 131,050 126,452 128,052 124,391 119,230 122,735Management and professional fees 108,090 150,628 162,627 103,161 147,839 158,643Security, clerical, messengerial and janitorial services 94,006 84,980 99,563 81,549 75,177 91,548Entertainment, amusement and recreation 82,364 77,515 62,879 81,981 77,198 62,715Communications 55,852 58,180 67,378 53,595 56,303 60,889Miscellaneous (Notes 14 and 29) 369,939 323,713 292,389 331,953 289,543 267,105

TOTAL OPERATING EXPENSES 3,351,456 3,417,070 3,544,847 3,065,744 3,110,881 3,278,654INCOME BEFORE SHARE IN NET INCOME OF SUBSIDIARIES

AND AN ASSOCIATE 1,040,649 634,438 689,550 995,899 556,332 588,247SHARE IN NET INCOME OF SUBSIDIARIES (Note 7) − − − 27,214 49,683 70,747SHARE IN NET INCOME OF AN ASSOCIATE (Note 7) 692 263 468 692 263 468INCOME BEFORE INCOME TAX 1,041,341 634,701 690,018 1,023,805 606,278 659,462PROVISION FOR INCOME TAX (Note 30) 322,639 234,821 486,336 305,106 206,226 456,161NET INCOME P=718,702 P=399,880 P=203,682 P=718,699 P=400,052 P=203,301

Attributable to: Equity holders of the Parent Company P=718,699 P=400,052 P=203,301 Non-controlling interests 3 (172) 381

P=718,702 P=399,880 P=203,682

Basic/Diluted Earnings Per Share Attributable to Equity Holders ofthe Parent Company (Note 32) P=2.00 P=1.34 P=0.68


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PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIESSTATEMENTS OF COMPREHENSIVE INCOME


2017 2016 2015 2017 2016 2015(Amounts in Thousands)

NET INCOME FOR THE YEAR P=718,702 P=399,880 P=203,682 P=718,699 P=400,052 P=203,301

OTHER COMPREHENSIVE INCOME (LOSS)FOR THE YEAR, NET OF TAXItem that may be reclassified to profit or loss in

subsequent periods:Net movement in cumulative translation

adjustment (49,524) (20,345) (25,002) (49,524) (20,345) (25,002)Items that may not be reclassified to profit or

loss in subsequent periods:Unrealized gain on equity securities carried

at fair value through othercomprehensive income (Note 10) 38,397 7,790 1,477 38,397 7,790 1,477

Change in remeasurement gains onretirement liability (Note 27) 34,587 76,561 98,235 31,424 77,695 99,780

Net movement in revaluation increment onland, office units and condominiumproperties (Notes 13 and 14) 31,320 – 46,450 31,320 – 45,285

Income tax relating to components of othercomprehensive income (18,086) 437 (13,619) (17,310) – (13,586)

86,218 84,788 132,543 83,831 85,485 132,956

36,694 64,443 107,541 34,307 65,140 107,954

TOTAL OTHER COMPREHENSIVE INCOMEBEFORE SHARE IN OTHERCOMPREHENSIVE INCOME OFSUBSIDIARIES 755,396 464,323 311,223 753,006 465,192 311,255

SHARE IN OTHER COMPREHENSIVEINCOME OF SUBSIDIARIESItems that may not be reclassified to profit or

loss in subsequent periods:Change in remeasurement losses (gains) on

retirement liability (Note 7) – – – 3,162 (1,146) (1,526)Net movement in revaluation increment on

land, office units and condominiumproperties (Note 7) – – – – – 1,123

Income tax relating to components of othercomprehensive income (Note 7) – – – (775) 437 (21)

TOTAL OTHER COMPREHENSIVE INCOME P=755,396 P=464,323 P=311,223 P=755,393 P=464,483 P=310,831

Attributable to:Equity holders of the Parent Company P=755,393 P=464,483 P=310,831Non-controlling interests 3 (160) 392

TOTAL COMPREHENSIVE INCOME,NET OF TAX P=755,396 P=464,323 P=311,223


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PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIESSTATEMENTS OF CHANGES IN EQUITY

ConsolidatedYears Ended December 31, 2017, 2016 and 2015

Equity Attributable to Equity Holders of the Parent Company

CommonStock

(Note 23)

SubscribedCommon Stock -

net(Note 23)

AdditionalPaid-in Capital

SurplusReserves(Note 23)

Deficit(Note 23)

Unrealized Gainon Equity

Securities at FairValue Through

OtherComprehensive

Income(Note 10)


on Land,Office

Units andCondominium

Properties(Notes 13

and 14)



RetirementLiability(Note 27) Total

Non-Controlling

Interests Total Equity(Amounts in Thousands)

Balances at January 1, 2017 P=7,489,114 P=4,581,340 P=813,515 P=105,772 (P=2,345,243) P=33,621 P=280,228 (P=72,739) (P=95,679) P=10,789,929 (P=8,193) P=10,781,736Collection of subscription receivable (Note 23) – 1,394,320 – – – – – – – 1,394,320 – 1,394,320Issuance of common stock (Note 23) 4,527,015 (5,975,660) 1,448,645 – – – – – – – – –Amortization of revaluation surplus (Note 13) – – – – 306 – (306) – – – – –Transfer to surplus reserves – – – 52 (52) – – – – – – –Total comprehensive income (loss) for the year – – – – 718,699 30,483 21,924 (49,524) 33,811 755,393 3 755,396Acquisition of non-controlling interests (Note 7) – – (9,334) – – – – – – (9,334) 8,246 (1,088)Balances at December 31, 2017 P=12,016,129 P=– P=2,252,826 P=105,824 (P=1,626,290) P=64,104 P=301,846 (P=122,263) (P=61,868) P=12,930,308 P=56 P=12,930,364

Balances at January 1, 2016 P=7,489,114 P=3,187,019 P=813,601 P=105,772 (P=2,745,295) P=25,831 P=280,228 (P=52,394) (P=172,665) P=8,931,211 (P=7,188) P=8,924,023Collection of subscription receivable (Note 23) – 1,394,321 – – – – – – – 1,394,321 – 1,394,321Total comprehensive income (loss) for the year – – – – 400,052 7,790 – (20,345) 76,986 464,483 (160) 464,323Acquisition of non-controlling interests (Note 7) – – (86) – – – – – – (86) (858) (944)Deposit for future stock subscription – – – – – – – – – – 13 13Balances at December 31, 2016 P=7,489,114 P=4,581,340 P=813,515 P=105,772 (P=2,345,243) P=33,621 P=280,228 (P=72,739) (P=95,679) P=10,789,929 (P=8,193) P=10,781,736

Balances at January 1, 2015 P=7,489,114 P=1,792,698 P=813,601 P=105,772 (P=2,948,596) P=24,354 P=247,743 (P=27,392) (P=271,235) P=7,226,059 (P=7,580) P=7,218,479Collection of subscription receivable (Note 23) – 1,394,321 – – – – – – – 1,394,321 – 1,394,321Total comprehensive income (loss) for the year – – – – 203,301 1,477 32,485 (25,002) 98,570 310,831 392 311,223Balances at December 31, 2015 P=7,489,114 P=3,187,019 P=813,601 P=105,772 (P=2,745,295) P=25,831 P=280,228 (P=52,394) (P=172,665) P=8,931,211 (P=7,188) P=8,924,023


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Parent CompanyYears Ended December 31, 2017, 2016 and 2015

CommonStock

(Note 23)

SubscribedCommon

Stock - net(Note 23)

AdditionalPaid-in Capital

SurplusReserves(Note 23)

Deficit(Note 23)

Unrealized Gainon Equity

Securities at FairValue Through

OtherComprehensive

Income(Note 10)


on Land, OfficeUnits and

CondominiumProperties

(Notes 13 and 14)



RetirementLiability (Note 27) Total Equity

(Amounts in Thousands)Balances at January 1, 2017 P=7,489,114 P=4,581,340 P=813,601 P=105,772 (P=2,345,243) P=33,621 P=280,228 (P=72,739) (P=95,679) P=10,790,015Collection of subscription receivable (Note 23) – 1,394,320 – – – – – – – 1,394,320Issuance of common stock (Note 23) 4,527,015 (5,975,660) 1,448,645 – – – – – – –Amortization of revaluation surplus (Note 13) – – – – 306 – (306) – – –Transfer of surplus reserves – – – 52 (52) – – – – –Total comprehensive income (loss) for the year – – – – 718,699 30,483 21,924 (49,524) 33,811 755,393Balances at December 31, 2017 P=12,016,129 P=– P=2,262,246 P=105,824 (P=1,626,290) P=64,104 P=301,846 (P=122,263) (P=61,868) P=12,939,728

Balances at January 1, 2016 P=7,489,114 P=3,187,019 P=813,601 P=105,772 (P=2,745,295) P=25,831 P=280,228 (P=52,394) (P=172,665) P=8,931,211Collection of subscription receivable (Note 23) – 1,394,321 – – – – – – – 1,394,321Total comprehensive income (loss) for the year – – – – 400,052 7,790 – (20,345) 76,986 464,483Balances at December 31, 2016 P=7,489,114 P=4,581,340 P=813,601 P=105,772 (P=2,345,243) P=33,621 P=280,228 (P=72,739) (P=95,679) P=10,790,015

Balances at January 1, 2015 P=7,489,114 P=1,792,698 P=813,601 P=105,772 (P=2,948,596) P=24,354 P=247,743 (P=27,392) (P=271,235) P=7,226,059Collection of subscription receivable (Note 23) – 1,394,321 – – – – – – – 1,394,321Total comprehensive income (loss) for the year – – – – 203,301 1,477 32,485 (25,002) 98,570 310,831Balances at December 31, 2015 P=7,489,114 P=3,187,019 P=813,601 P=105,772 (P=2,745,295) P=25,831 P=280,228 (P=52,394) (P=172,665) P=8,931,211


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PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIESSTATEMENTS OF CASH FLOWS



CASH FLOWS FROM OPERATINGACTIVITIES

Income before income tax P=1,041,341 P=634,701 P=690,018 P=1,023,805 P=606,278 P=659,462Adjustments to reconcile income before income

tax to net cash generated from (used for)operations:Fair value gain on investment properties

(Note 14) (353,992) (286,404) (941,728) (336,859) (252,095) (929,751)Provision for credit and impairment losses

(Note 17) 338,495 477,968 443,802 288,811 396,223 391,493Depreciation and amortization (Notes 13 and 15) 326,915 345,578 290,531 307,134 324,496 270,192Accretion of interest on unquoted debt

securities (Note 12) (93,478) (180,520) (182,628) (93,478) (180,520) (182,628)Loss (profit) from assets sold (Note 14) (11,953) 7,316 (5,335) (3,464) 7,915 (4,608)Unrealized loss (gain) on financial assets at

fair value through profit or loss (Note 26) 13,243 (48,339) 3,136 13,243 (48,339) 3,136Share in net income of subsidiaries and an

associate (Note 7) (692) (263) (468) (27,906) (49,946) (71,215)Loss (gain) on assets exchanged (Note 14) (5,487) (12,170) (3,702) 81 (12,170) 215Gain on reclassification of investment

securities from amortized cost tofair value through profit or loss (Note 11) – (198,700) – – (198,700) –

Gain from sale of investment securities atamortized cost (Note 11) – – (48,174) – – (48,174)

Changes in operating assets and liabilities:Decrease (increase) in the amounts of:

Loans and receivables (Note 33) (7,588,626) (9,969,993) (3,314,110) (7,779,135) (9,970,103) (2,608,543)Financial assets at fair value through

profit or loss (2,453,231) 341,813 285,825 (2,453,231) 341,813 285,825Other assets (269,860) 114,830 (14,474) (103,830) 118,625 (6,328)

Increase (decrease) in the amounts of:Deposit liabilities 7,565,179 4,843,628 (817,263) 7,845,913 4,643,587 (1,202,221)Manager’s checks 127,020 191,472 (102,216) 127,020 191,472 (102,216)Accrued interest, taxes and other

expenses 4,949 (124,610) 5,012 40,744 (118,962) (20,258)Other liabilities 247,450 79,219 77,854 207,384 73,911 105,389

Net cash used for operations (1,112,727) (3,784,474) (3,633,920) (943,768) (4,126,515) (3,460,230)Income taxes paid (197,870) (192,375) (207,496) (181,617) (152,818) (178,770)Net cash used in operating activities (1,310,597) (3,976,849) (3,841,416) (1,125,385) (4,279,333) (3,639,000)CASH FLOWS FROM INVESTING

ACTIVITIESDecrease (increase) in interbank loans

receivable (12,693) (49,720) 89,440 (12,693) (49,720) 89,440Acquisitions of:

Investment securities at amortized cost (2,351,707) (2,264,061) (2,009,366) (2,351,707) (2,264,061) (2,009,366)Property and equipment (Note 13) (53,644) (146,030) (146,276) (46,067) (136,227) (136,840)Software costs (Note 15) (30,358) (32,984) (56,435) (30,358) (32,140) (56,435)Investment properties (Notes 13 and 14) (6,743) (30,005) (8,632) (6,743) (30,005) (8,632)Subsidiaries (Note 7) 3,069 – – – – –

Additional investments in subsidiaries (Note 7) (1,088) – – – (45,942) –

(Forward)

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Proceeds from disposals of:Investment securities P=– P=– P=845,460 P=– P=– P=845,460Investment properties (Note 14) 47,896 48,837 25,184 43,103 50,323 19,064Property and equipment (Note 13) 15,861 24,272 49,402 11,102 24,272 49,399Chattel mortgage 85,349 11,839 16,076 85,349 11,839 16,076

Proceeds from maturity of investment securities 70,000 3,596,957 – 70,000 3,596,957 –Net cash provided by (used in) investing

activities (2,234,058) 1,159,105 (1,195,147) (2,238,014) 1,125,296 (1,191,834)CASH FLOWS FROM FINANCING

ACTIVITIESAvailments of:

Bills payable 190,375,643 103,725,503 39,069,117 190,375,643 103,725,500 38,783,769Outstanding acceptances 324,197 405,111 567,502 324,197 405,111 567,502Marginal deposits 3,410 37,683 37,913 3,410 37,683 37,913

Settlements of:Bills payable (187,907,410) (100,107,738) (36,012,924) (187,907,410) (99,922,984) (35,908,558)Outstanding acceptances (295,302) (412,820) (551,056) (295,302) (412,820) (551,056)Marginal deposits (3,040) (39,033) (36,401) (3,040) (39,033) (36,401)

Proceeds from shares subscription (Note 23) 1,394,320 1,394,321 1,394,321 1,394,320 1,394,321 1,394,321Net cash provided by (used in) financing

activities 3,891,818 5,003,027 4,468,472 3,891,818 5,187,778 4,287,490EFFECT OF FOREIGN CURRENCY

TRANSLATION ADJUSTMENT (49,524) (20,345) (25,002) (49,524) (20,345) (25,002)NET INCREASE (DECREASE) IN CASH

AND CASH EQUIVALENTS 297,639 2,164,938 (593,093) 478,895 2,013,396 (568,346)CASH AND CASH EQUIVALENTS AT

BEGINNING OF YEARCash and other cash items 1,042,611 1,343,340 1,181,592 1,011,756 1,311,615 1,153,418Due from Bangko Sentral ng Pilipinas 13,356,075 11,909,774 12,522,613 13,276,681 11,839,461 12,463,067Due from other banks 2,996,758 2,008,522 1,636,641 2,631,497 1,786,592 1,375,646Interbank loans receivable (Note 33) 260,411 229,281 743,164 260,411 229,281 743,164

17,655,855 15,490,917 16,084,010 17,180,345 15,166,949 15,735,295CASH AND CASH EQUIVALENTS AT

END OF YEARCash and other cash items 974,207 1,042,611 1,343,340 941,823 1,011,756 1,311,615Due from Bangko Sentral ng Pilipinas 15,340,711 13,356,075 11,909,774 15,279,084 13,276,681 11,839,461Due from other banks 1,166,063 2,996,758 2,008,522 965,820 2,631,497 1,786,592Interbank loans receivable (Note 33) 472,513 260,411 229,281 472,513 260,411 229,281

P=17,953,494 P=17,655,855 P=15,490,917 P=17,659,240 P=17,180,345 P=15,166,949

OPERATIONAL CASH FLOWS FROM INTERESTConsolidated Parent Company

Years Ended December 312017 2016 2015 2017 2016 2015

(Amounts in Thousands)Interest paid P=1,040,615 P=1,061,279 P=974,872 P=973,150 P=996,632 P=932,702Interest received 3,851,860 3,554,941 3,131,233 3,485,682 3,352,973 2,799,462


F-60

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PHILIPPINE BANK OF COMMUNICATIONS AND SUBSIDIARIESNOTES TO FINANCIAL STATEMENTS

1. Corporate Information

Philippine Bank of Communications (the Parent Company) is a publicly listed domestic commercialbank organized in the Philippines, primarily to engage in commercial banking services such asdeposit products, loans and trade finance, domestic and foreign fund transfers, treasury, foreignexchange and trust services through a network of 85 local branches. The Parent Company’s principalplace of business is at the PBCom Tower, 6795 Ayala Avenue corner V. A. Rufino Street, MakatiCity.

The Parent Company’s original Certificate of Incorporation was issued by the Securities andExchange Commission (SEC) on August 23, 1939. On June 21, 1988, the Board of Directors (BOD)of the Parent Company approved the amendment of Article IV of its Amended Articles ofIncorporation to extend the corporate life of the Parent Company for another 50 years or up toAugust 23, 2039. The Amended Articles of Incorporation was approved by the SEC onNovember 23, 1988.

The Parent Company acquired a license to operate as an expanded commercial bank from the BangkoSentral ng Pilipinas (BSP) on December 24, 1993. On March 31, 2000, the BSP’s Monetary Boardapproved the amendment of the Parent Company’s license to a regular commercial banking.

The Parent Company’s subsidiaries and an associate (collectively referred to as the Group) areengaged in the following businesses:

Effective Percentageof Ownership

Principal Place ofBusiness and Countryof IncorporationEntity 2017 2016 Line of Business

SubsidiariesBanco Dipolog, Inc. A Rural Bank (BDI) 99.99% 99.99% Philippines Rural BankRural Bank of Nagcarlan, Inc. (RBNI) –* 96.32% Philippines Rural BankPBCom Insurance Services Agency, Inc.

(PISAI)100.00% 100.00% Philippines Insurance Agent

AssociatePBCom Finance Corporation (PBCom

Finance)40.00% 40.00% Philippines Financing Company

* On December 11, 2017, the SEC approved the merger of BDI, RBNI and Rural Bank of Kabasalan, Inc. (RBKI), with BDI as thesurviving entity (see Note 7).

Rehabilitation PlanPursuant to the Financial Recovery and Rehabilitation Plan, which was approved by the BSP onMarch 25, 2004, the Parent Company implemented the Financial Assistance Agreement (FAA) itentered into with the Philippine Deposit Insurance Corporation (PDIC). Salient provisions includedwere: (a) fresh capital infusion from the existing major stockholders amounting to P=3.00 billion;(b) sale of nonperforming assets (NPAs) via special purpose vehicle (SPV); and (3) direct loan fromthe PDIC amounting to P=7.64 billion payable at the end of the 10th year with interest rate of 1.00%per annum, provided that any income in excess of 85% of actual loss shall inure in favor of PDIC.

Financial assistanceOn March 26, 2004, the major stockholders infused P=3.00 billion fresh capital to the Parent Companypending the SEC’s approval on the increase of authorized capital stock from P=14.50 billion toP=17.50 billion and the issuance of new preferred shares. The SEC approved the amendments onApril 1, 2006.

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The sale of nonperforming assets to the SPV resulted to an actual loss (SPV losses) of P=10.77 billion.The loss was the difference between the net book value of the NPAs and the proceeds of the sale.Availing the provisions of Republic Act (RA) No. 9128, The Special Purpose Vehicle Act of 2002,the Parent Company was allowed to defer or to amortize the SPV losses in the statement of incomeover ten years.

The proceeds from the P=7.64 billion PDIC loan were used to purchase government securities(GS Collateral). The GS Collateral was pledged to the PDIC to secure the loan obligation. The12.375% interest income, net of all taxes and the 1% interest expense on the loan, was PDIC’sincome support to the Parent Company. In 2011, the Parent Company requested the substitution ofthe GS Collateral with other obligation of the Republic of the Philippines and/or other acceptablerisk-free instruments. With the prevailing favorable market conditions then, the GS Collateralprovided a key opportunity for the Parent Company to counteract the income support deficiencyamidst the full recognition of the SPV losses. The substitution was approved on January 5, 2012 andthe substitution process was completed on December 31, 2013.

As of December 31, 2013, the total income support received by the Parent Company under theagreement was P=6.14 billion, which was below the 85.00% of the actual losses incurred from the saleof NPAs. On March 26, 2014, the Parent Company exited the ten-year FAA with the settlement ofthe P=7.64 billion matured PDIC loan.

Strategic third party investorsOn July 26, 2011, pursuant to the FAA, the major shareholders of the Parent Company, namely theChung, Luy, and Nubla Groups, signed a Memorandum of Agreement (MOA) with ISMCommunications Corporation (the ISM Group), for the sale of their entire stake in the ParentCompany to the ISM Group and the commitment of the Chung and Nubla groups to reinvest theproceeds of the sale of their respective shares with total amount of P=2.80 billion in the ParentCompany.

On October 31, 2011, the Monetary Board approved the ISM Group’s acquisition of the controllinginterest in the Parent Company.

On December 23, 2011, the ISM Group’s acquisition of the Parent Company was successfullycompleted through the Philippine Stock Exchange (PSE) via a special block sale.

On August 5, 2014, the Parent Company signed a subscription agreement with P.G. Holdings Inc.(PGH), for the latter’s subscription of the Parent Company’s 181,080,608 common shares valued atP=33.00 per share. These shares will be issued out of the unissued portion of the Parent Company’sauthorized capital stock. On August 6, 2014, in compliance with banking law and regulations, theParent Company and PGH submitted the Subscription Agreement to the BSP for its approval.

The subscription by PGH to the new shares of the Parent Company amounting to P=5.98 billion wasapproved by the BSP on September 23, 2014. The first installment of P=1.79 billion was paid by PGHon September 25, 2014. Subsequently, on October 1, 2014, VFC Land Resources Inc. (VFC) bought59.24 million shares at P=33.00 per share from the ISM Group. PGH and VFC are owned byMr. Lucio Co, bringing his total stake in the Parent Company to 49.99%.

On September 22, 2015, June 29, 2016 and September 11, 2017, the Parent Company received thesecond, third and final installment payments, respectively, each amounting to P=1.39 billion for thesubscribed shares of PGH (see Note 23).

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BSP ApprovalsThe BSP, in its Resolution No. 2088 dated December 14, 2012, approved the request of the ParentCompany to book P=1.92 billion revaluation increment resulting from the revaluation of PBComTower. This allowed the Parent Company to include the revaluation increment as part of unimpairedand qualifying capital in computing for net worth and capital adequacy ratio. Out of theP=1.92 billion, P=1.57 billion was included in the carrying value of condominium units for leaseincluded under ‘Investment properties’. Deferred tax liability recognized and charged to thestatement of income from the revaluation increment amounted to P=470.95 million. The remainingbalance of P=359.29 million on condominium units included under ‘Property and equipment’ was notrecognized in the financial statements because the Parent Company’s accounting policy for propertyand equipment, except land, is to carry these assets at cost.

2. Summary of Significant Accounting and Financial Reporting Policies

Basis of PresentationThe financial statements have been prepared on a historical cost basis, except for financial assets atfair value through profit or loss (FVTPL), equity securities at fair value through other comprehensiveincome (FVTOCI) and investment properties that are measured at fair value, and land classified as‘Property and equipment’ that is measured at appraised value. The financial statements are presentedin Philippine peso (PHP or P=) and all values are rounded to the nearest thousand, unless otherwisestated.

The financial statements of the Parent Company include the accounts maintained in the RegularBanking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The functional currency of theRBU and the FCDU is the PHP and United States dollar (USD), respectively. For financial reportingpurposes, FCDU accounts and foreign currency-denominated accounts in the RBU are translated intotheir equivalents in PHP, which is the Parent Company’s presentation currency (see accounting policyon Foreign Currency Translation). The financial statements individually prepared for these units arecombined after eliminating inter-unit accounts and transactions.

Each entity in the Group determines its own functional currency and items included in the financialstatements of each entity are measured using that functional currency. The functional currency of theParent Company’s subsidiaries is the PHP.

Statement of ComplianceThe financial statements have been prepared in accordance with Philippine Financial ReportingStandards (PFRS).

Presentation of Financial StatementsThe Group and the Parent Company present its statement of financial position in order of liquidity.An analysis regarding recovery or settlement within 12 months after the statement of financialposition date (current) and more than 12 months after the statement of financial position date (non-current) is presented in Note 22.

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Basis of ConsolidationThe consolidated financial statements comprise the financial statements of the Parent Company andits subsidiaries. The consolidated financial statements of the Group are prepared for the samereporting year as the Parent Company using consistent accounting policies. Subsidiaries areconsolidated from the date on which control is transferred to the Parent Company. The ParentCompany controls an investee if, and only if, the Parent Company has:

∂ Power over the investee (that is, existing rights that give it the current ability to direct the relevantactivities of the investee);

∂ Exposure, or rights, to variable returns from its involvement with the investee; and∂ The ability to use its power over the investee to affect its returns.

Generally, there is a presumption that a majority of voting rights result in control. To support thispresumption and when the Parent Company has less than a majority of the voting or similar rights ofan investee, the Parent Company considers all relevant facts and circumstances in assessing whetherit has power over an investee, including:

∂ The contractual arrangement with the other vote holders of the investee;∂ Rights arising from other contractual agreements; and∂ The Parent Company’s voting rights and potential voting rights.

The Parent Company re-assesses whether or not it controls an investee if facts and circumstancesindicate that there are changes to one or more of the three elements of control. Consolidation of asubsidiary begins when the Parent Company obtains control over the subsidiary and ceases when theParent Company loses control of the subsidiary. Assets, liabilities, income, expenses and othercomprehensive income (OCI) of a subsidiary acquired or disposed of during the year are included inthe consolidated financial statements from the date the Parent Company gains control until the datethe Parent Company ceases to control the subsidiary.

When necessary, adjustments are made to the financial statements of subsidiaries to align theiraccounting policies with the Parent Company’s accounting policies. All intra-group assets, liabilities,equity, income, expenses and cash flows relating to transactions between entities in the Group areeliminated in full on consolidation.

A change in ownership interest of a subsidiary, without a loss of control, is accounted for withinequity as reduction to ‘Additional paid-in capital’. In such circumstances, the carrying amounts ofthe controlling and non-controlling interests are adjusted by the Group to reflect the changes in itsrelative interests in the subsidiary. Any difference between the amount by which the non-controllinginterests are adjusted and the fair value of the consideration paid or received is recognized directly inequity and attributed to the owners of the Parent Company.

When a change in ownership interest in a subsidiary occurs, which results in loss of control over thesubsidiary, the Parent Company:

∂ Derecognizes the assets (including goodwill) and liabilities of the subsidiary;∂ Derecognizes the carrying amount of any non-controlling interest;∂ Derecognizes the related OCI recorded in equity and recycle the same to the statement of income

or surplus;∂ Recognizes the fair value of the consideration received;∂ Recognizes the fair value of any investment retained; and∂ Recognizes any surplus or deficit in the statement of income.

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Non-controlling InterestsNon-controlling interests represent the portion of profit or loss and net assets not owned, directly orindirectly, by the Parent Company.

Non-controlling interests are presented separately in the consolidated statement of income,consolidated statement of comprehensive income, and within equity in the consolidated statement offinancial position, separately from equity attributable to the equity holders of the Parent Company.Any losses applicable to the non-controlling interests are allocated against the interests of the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Changes in Accounting Policies and DisclosuresThe accounting policies adopted are consistent with those of the previous financial year, except thatthe Group has adopted the following new accounting pronouncements starting January 1, 2017. Theadoption of these pronouncements did not have any significant impact on the Group’s financialposition or performance, unless otherwise indicated.

∂ Amendments to PFRS 12, Disclosure of Interests in Other Entities, Clarification of the Scope ofthe Standard (Part of Annual Improvements to PFRSs 2014 - 2016 Cycle)

∂ Amendments to Philippine Accounting Standard (PAS) 7, Statement of Cash Flows, DisclosureInitiativeThe additional disclosure required by PAS 7 amendments is presented in Note 33. As allowedunder the transitional provisions of the standard, the Group and the Parent Company did notpresent comparative information for the years ended December 31, 2016 and 2015.

∂ Amendments to PAS 12, Income Taxes, Recognition of Deferred Tax Assets for UnrealizedLosses

Foreign Currency TranslationRBUAs of the statement of financial position date, foreign currency-denominated monetary assets andmonetary liabilities of the RBU are translated into PHP based on the Philippine DealingSystem (PDS) closing rate prevailing at end of the year and foreign currency-denominated incomeand expenses, based on the spot rate at date of transactions. Foreign exchange differences arisingfrom the restatement of foreign currency-denominated monetary assets and liabilities in the RBU arecredited to or charged against the statement of income 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 usingthe exchange rates as of the dates of the initial transactions. Non-monetary items measured at fairvalue in a foreign currency are translated using the exchange rates at the date when the fair value wasdetermined.

FCDUAs of the statement of financial position date, the FCDU’s assets and liabilities are translated intoPHP, the Parent Company’s presentation currency, at the PDS closing rate prevailing at the statementof financial position date, and income and expenses are translated at PDS weighted average rate forthe year. Exchange differences arising on translation are taken directly to the statement ofcomprehensive income as ‘Cumulative translation adjustment’. Upon actual remittance of FCDUprofits to RBU, the deferred cumulative amount recognized in the statement of comprehensiveincome is recognized in the statement of income.

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Fair Value MeasurementFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. The fair value measurement isbased on the presumption that the transaction to sell the asset or transfer the liability takes placeeither:

∂ In the principal market for the asset or liability; or∂ In the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible by the Group.

The fair value of an asset or a liability is measured using the assumptions that market participantswould use when pricing the asset or liability, assuming that market participants act in their economicbest interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability togenerate economic benefits by using the asset in its highest and best use or by selling it to anothermarket participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for whichsufficient data are available to measure fair value, maximizing the use of relevant observable inputsand minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements arecategorized within the fair value hierarchy, described as follows, based on the lowest level input thatis significant to the fair value measurement as a whole:

∂ Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities∂ Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value

measurement is directly or indirectly observable∂ Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value

measurement is unobservable

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Groupdetermines whether transfers have occurred between Levels in the hierarchy by re-assessingcategorization (based on the lowest level input that is significant to the fair value measurement as awhole) at the end of each statement of financial position date.

External valuers are involved for the valuation of investment properties. Selection criteria includemarket knowledge, reputation, independence, relevant accreditation, and whether professionalstandards are maintained.

For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities onthe basis of the nature, characteristics and risks of the asset and liability, and fair value hierarchy asexplained above.

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Cash and Cash EquivalentsFor 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 with original maturities ofthree months or less from dates of placements and that are subject to insignificant risks of changes invalue. Due from BSP includes the statutory reserves required by the BSP which the Group considersas cash equivalents since withdrawals can be made to meet the Group’s cash requirements as allowedby the BSP. The components of cash and cash equivalents are shown in the statement of cash flows.Cash and cash equivalents are carried at amortized cost in the statement of financial position.

Securities Purchased under Resale Agreements (SPURA)The Group enters into short-term purchases of securities under resale agreements of identicalsecurities with the BSP. Resale agreements are contracts under which a party purchases securitiesand resells such securities to the same selling party at a specified future date at a fixed price. Theamounts advanced under resale agreements are carried as SPURA in the statement of financialposition. SPURA are carried at cost. Interest earned on resale agreements is reported as ‘Interestincome’ in the statement of income.

Financial Instruments - Date of RecognitionThe Group recognizes financial instruments when, and only when, it becomes a party to thecontractual terms of the instrument. Purchases or sales of financial assets that require delivery ofassets within the time frame established by regulation or convention in the marketplace arerecognized on the settlement date. Settlement date accounting refers to:

a. The recognition of an asset on the day it is received by the Group; andb. The derecognition of an asset and recognition of any gain or loss on disposal on the day that such

asset is delivered by the Group.

Any change in fair value of unrecognized financial asset is recognized in the statement of income orin equity, depending on the classification of the financial asset. Loans and receivables are recognizedwhen cash is advanced to the borrowers while financial liabilities are recognized when cash isreceived by the Group.

Classification, Measurement and Reclassification of Financial AssetsClassification and measurement of financial assetsFor purposes of classifying financial assets, an instrument is an ‘equity instrument’ if it is a non-derivative and meets the definition of ‘equity’ for the issuer (under PAS 32, Financial Instruments:Presentation). All other non-derivative financial instruments are ‘debt instruments’.

a. Financial Assets at Amortized CostFinancial assets are measured at amortized cost if both of the following conditions are met:

∂ The asset is held within the Group’s business model whose objective is to hold assets in orderto collect contractual cash flows; and

∂ The contractual terms of the instrument give rise on specified dates to cash flows that aresolely payments of principal and interest on the principal amount outstanding.

Financial assets meeting these criteria are measured initially at fair value plus transaction costs.These are subsequently measured at amortized cost using the effective interest method, lessallowance for credit losses, with the interest calculated recognized as ‘Interest income’ in thestatement of income. Gains and losses are recognized in the statement of income when thefinancial assets are derecognized and impaired, as well as through the amortization process. Thelosses arising from impairment of such assets are recognized in the statement of income under

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‘Provision for credit and impairment losses - net’. The effects of restatement on foreigncurrency-denominated financial assets at amortized cost are recognized in the statement ofincome.

The Group classified ‘Cash and other cash items’, ‘Due from BSP’, ‘Due from other banks’,‘Interbank loans receivable’, ‘Loans and receivables’, ‘Investment securities at amortized cost’and certain assets under ‘Other assets’ as financial assets at amortized cost.

The Group may irrevocably elect at initial recognition to classify a financial asset that meets theamortized cost criteria above as at FVTPL if that designation eliminates or significantly reducesan accounting mismatch had the financial asset been measured at amortized cost. As ofDecember 31, 2017 and 2016, the Group has not made such designation.

b. Financial Assets at FVTOCIAt initial recognition, the Group can make an irrevocable election (on an instrument-by-instrument basis) to designate equity instruments at FVTOCI. Designation at FVTOCI is notpermitted if the investment in equity instrument is held for trading.

A financial asset is held for trading if:

∂ It has been acquired principally for the purpose of selling it in the near term; or∂ On initial recognition, it is part of a portfolio of identified financial instruments that the

Group manages together and has evidence of a recent actual pattern of short-term profit-taking; or

∂ It is a derivative that is not designated and effective as a hedging instrument or a financialguarantee.

Investments in equity instruments at FVTOCI are initially measured at fair value plus transactioncosts. Subsequently, these are measured at fair value, with no deduction for sale or disposalcosts. Gains and losses arising from changes in fair value are recognized in OCI and accumulatedin ‘Unrealized gain on equity securities carried at fair value through other comprehensiveincome’ in the statement of financial position. When the asset is disposed of, the cumulative gainor loss previously recognized in ‘Unrealized gain on equity securities carried at fair value throughother comprehensive income’ is not reclassified to statement of income, but is reclassified to‘Deficit’.

The Group has designated certain equity instruments that are not held for trading as at FVTOCIon initial application of PFRS 9 (see Note 10).

Dividends earned on these investments in equity instruments are recognized in the statement ofincome when the Group’s right to receive the dividends is established in accordance withPAS 18, Revenue, unless the dividends clearly represent recovery of a part of the cost of theinvestment. Dividends earned are recognized in the statement of income, under ‘Miscellaneousincome’.

c. Financial Assets at FVTPLDebt instruments that do not meet the amortized cost criteria, or that meet the criteria but theGroup has chosen to designate as at FVTPL at initial recognition, are measured at fair valuethrough profit or loss.

Investments in equity instruments are classified as at FVTPL, unless the Group designates anequity instrument that is not held for trading as at FVTOCI at initial recognition.

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The Group’s financial assets at FVTPL include government securities and private bonds held fortrading purposes.

As of December 31, 2017 and 2016, the Group has not designated any debt instrument that meetsthe amortized cost criteria as at FVTPL.

Financial assets at FVTPL are carried at fair value, and realized and unrealized gains and losseson these instruments are recognized as ‘Trading and securities gain (loss) - net’ in the statementof income. Interest earned on these investments is reported as ‘Interest income’ in the statementof income.

The fair value of financial assets denominated in a foreign currency is determined in that foreigncurrency and translated at the PDS closing rate at the statement of financial position date. Theforeign exchange component forms part of its fair value gain or loss. For financial assetsclassified as at FVTPL, the foreign exchange component is recognized in the statement ofincome. For financial assets designated as at FVTOCI, any foreign exchange component isrecognized in OCI.

d. Derivative InstrumentsDerivative instruments are initially recorded at fair value and carried as financial assets whentheir fair value is positive and as financial liabilities when their fair value is negative.

Any gains or losses arising from changes in fair value of derivative instruments that do notqualify for hedge accounting are taken directly to the statement of income.

Derivatives embedded in non-derivative host contracts that are not financial assets within thescope of PFRS 9 (for example, financial liabilities and non-financial host contracts) are treated asseparate derivatives when their risks and characteristics are not closely related to those of the hostcontracts and the host contracts are not measured at FVTPL. The Group assesses the existence ofan embedded derivative on the date it first becomes a party to the contract, and performs re-assessment only when there is a change to the contract that significantly modifies the contractualcash flows.

Reclassification of financial assetsThe Group can reclassify financial assets if the objective of its business model for managing thosefinancial assets changes. The Group is required to reclassify as follows:

∂ From amortized cost to FVTPL if the objective of the business model changes so that theamortized cost criteria are no longer met; and

∂ From FVTPL to amortized cost if the objective of the business model changes so that theamortized cost criteria start to be met and the instrument’s contractual cash flows are solelypayments of principal and interest on the principal outstanding.

Reclassification of financial assets designated as at FVTPL at initial recognition is not permitted.A change in the objective of the Group’s business model must be effected before the reclassificationdate. The reclassification date is the beginning of the next statement of financial position datefollowing the change in the business model.

Impairment of financial assetsThe Group assesses at each statement of financial position date whether there is any objectiveevidence that a financial asset or a group of financial assets measured at amortized cost is impaired.A financial asset or a group of financial assets is deemed to be impaired, if and only if, there is

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objective evidence as a result of one or more events that had occurred after the initial recognition ofthe asset and that loss event has an impact on the estimated future cash flows of the financial asset orthe group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the borrower or a group of borrowers isexperiencing significant financial difficulty, default or delinquency in interest or principal payments,the probability that they will enter bankruptcy or other financial reorganization and where observabledata indicate that there is a measurable decrease in the estimated future cash flows, such as changes inarrears or economic conditions that correlate with defaults.

Financial assets at amortized costThe Group first assesses whether objective evidence of impairment exists individually for financialassets that are individually significant, or collectively for financial assets that are not individuallysignificant.

For individually assessed financial assets, the amount of the loss is measured as the differencebetween the assets’ carrying amount and the present value of estimated future cash flows (excludingfuture credit losses that have not been incurred). The present value of the estimated future cash flowsis discounted at the financial asset’s original effective interest rate (EIR). If a loan has a variableinterest rate, the discount rate for measuring any impairment loss is the current EIR, adjusted for theoriginal credit risk premium. The calculation of the present value of the estimated future cash flowsof a collateralized financial asset reflects the cash flow that may result from foreclosure less costs forobtaining and selling the collateral, whether or not foreclosure is probable. If the Group determinesthat no objective evidence of impairment exists for an individually assessed financial asset, whethersignificant or not, the asset is included in a group of financial assets with similar credit riskcharacteristics and that group of financial assets is collectively assessed for impairment. Assets thatare individually assessed for impairment and for which an impairment loss is probable or continues tobe recognized are not included in a collective assessment of impairment.

In addition to impairment assessment against individually significant financial assets, the Group alsomakes a collective impairment assessment against exposures, which, although not specificallyidentified as requiring a specific allowance, have a greater risk of default than when originallyplanned. The assets are grouped based on credit risk characteristics and are subjected to collectiveimpairment assessment. Future cash flows on a group of financial assets that are collectivelyevaluated for impairment are estimated on the basis of historical loss experience which is adjusted onthe basis of current observable data to reflect the effects of current conditions on which the historicalloss experience is based and to remove the effects of conditions in the historical period that do notexist currently, for assets with credit risk characteristics similar to those in the group. Estimates ofchanges in future cash flows reflect, and are directionally consistent with, changes in relatedobservable data from year to year (such as changes in unemployment rates, property prices,commodity prices, payment status, or other factors that are indicative of incurred losses in the groupand their magnitude). The methodology and assumptions used for estimating future cash flows arereviewed regularly by the Group to reduce any differences between loss estimates and actual lossexperience.

The carrying amount of the financial asset at amortized cost is reduced by the impairment loss(included under ‘Provision for credit and impairment losses - net’ in the statement of income) directlyfor all financial assets at amortized cost with the exception of ‘Loans and receivables’, where thecarrying amount is reduced through the use of an allowance account. Loans and receivables, togetherwith the associated allowance accounts, are written off when there is no realistic prospect of futurerecovery and all collaterals have been realized. The amount of impairment loss is recognized under‘Provision for credit and impairment losses - net’ in the statement of income. Interest income

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continues to be recognized based on the original EIR of the asset. If, in a subsequent period, theamount of the impairment loss decreases and the decrease can be related objectively to an eventoccurring after the impairment was recognized, the previously recognized impairment loss is reversedthrough the statement of income to the extent that the carrying amount of the financial asset at thedate the impairment reversed does not exceed what the amortized cost would have been had theimpairment not been recognized.

Restructured loansWhere possible, the Group seeks to restructure loans rather than to take possession of collateral. Thismay involve extending the payment arrangements and the agreement of new loan conditions. Oncethe terms have been renegotiated, the loan is no longer considered as past due. Managementcontinuously reviews restructured loans to ensure that all criteria are met and that future payments arelikely to occur. The loan continues to be subject to an individual or collective impairmentassessment, calculated using the loan’s original EIR. The difference between the recorded value ofthe original loan and the present value of the restructured cash flows, discounted at the original EIR,is recognized in ‘Provision for credit and impairment losses - net’ in the statement of income.

Classification and Measurement of Financial LiabilitiesFinancial liabilities are classified, at initial recognition, either as financial liabilities at FVTPL orother financial liabilities at amortized cost.

Financial liabilities at amortized costThese liabilities are classified as such when the substance of the contractual arrangement results inthe Group having an obligation either to deliver cash or another financial asset to the holder, or tosatisfy the obligation other than by the exchange of a fixed amount of cash or another financial assetfor a fixed number of own equity shares. The components of issued financial instruments that containboth liability and equity elements are accounted for separately, with the equity component beingassigned the residual amount after deducting from the instrument as a whole the amount separatelydetermined as the fair value of the liability component on the date of issue.

These financial liabilities are measured initially at fair value, net of directly attributable transactioncosts. After initial measurement, these liabilities are subsequently measured at amortized cost usingthe effective interest method.

Amortized cost is calculated by taking into account any discount or premium on the issue and feesthat are an integral part of the EIR.

This accounting policy relates to the statement of financial position caption ‘Deposit liabilities’, ‘Billspayable’, ‘Outstanding acceptances’, ‘Manager’s checks’, and certain liabilities under ‘Accruedinterest, taxes and other expenses’ and ‘Other liabilities’ which are not designated at FVTPL.

Derecognition of Financial Assets and Financial LiabilitiesFinancial assetA financial asset (or, when applicable, a part of a financial asset or part of a group of financial assets)is derecognized (that is, removed from the statement of financial position) when:

∂ The rights to receive cash flows from the asset have expired;∂ The Group has transferred its rights to receive cash flows from the asset or has assumed an

obligation to pay the received cash flows in full without material delay to a third party under a‘pass-through’ arrangement, and either the Group:

a. Has transferred substantially all the risks and rewards of the asset; or

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b. Has neither transferred nor retained the risks and rewards of the asset, but has transferred thecontrol of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into apass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards ofownership. When it has neither transferred nor retained substantially all of the risks and rewards ofthe asset, nor transferred control of the asset, the Group continues to recognize the transferred asset tothe extent of its continuing involvement. In that case, the Group also recognizes an associatedliability. The transferred asset and the associated liability are measured on a basis that reflects therights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured atthe lower of the original carrying amount of the asset and the maximum amount of consideration thatthe Group could be required to pay.

Financial liabilityA financial liability is derecognized when the obligation under the liability is discharged or cancelledor expired. When an existing financial liability is replaced by another from the same lender onsubstantially different terms, or the terms of an existing liability are substantially modified, such anexchange or modification is treated as the derecognition of the original liability and the recognition ofa new liability. The difference between the carrying value of the original financial liability and theconsideration paid is recognized in the statement of income.

Repurchase and reverse repurchase agreementsSecurities sold under agreements to repurchase at a specified future date (‘repos’) are notderecognized from the statement of financial position. The corresponding cash received, includingaccrued interest, is recognized in the statement of financial position as a loan to the Group, reflectingthe economic substance of such transaction.

Offsetting of Financial InstrumentsFinancial assets and financial liabilities are offset and the net amount is reported in the statement offinancial position if there is a currently enforceable legal right to offset the recognized amounts andthere is intention to settle on a net basis, or to realize the asset and settle the liability simultaneously.The Group assesses that it has a currently enforceable right of offset if the right is not contingent on afuture event, and is legally enforceable in the normal course of business, event of default, and eventof insolvency or bankruptcy of the Group and all of the counterparties.

Investments in Subsidiaries and an Associate in the Parent Company Financial StatementsSubsidiariesA subsidiary is an entity in which the Parent Company holds more than half of the issued sharecapital or controls more than 50% of the voting power, or exercises control over the operations andmanagement of the subsidiary.

AssociateAn associate is an entity in which the Parent Company has significant influence. Significantinfluence is the power to participate in the financial and operating policy decisions of the investee,but is not control or joint control over those policies.

The Group’s and the Parent Company’s investments in its subsidiaries and an associate are accountedfor using the equity method. Under the equity method, the investments in subsidiaries and anassociate is initially recognized at cost. The carrying amount of the investments in subsidiaries andan associate is adjusted to recognize changes in the Group’s and the Parent Company’s net assets of

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the subsidiaries and an associate since the acquisition date. Goodwill relating to the subsidiaries andan associate is included in the carrying value of the investments and is not amortized.

The statement of income reflects the Group’s and the Parent Company’s share of the financialperformance of the subsidiaries and an associate. Any change in OCI of the investee is presented aspart of the Group’s and the Parent Company’s OCI. In addition, when there has been a changerecognized directly in the equity of the subsidiary and an associate, the Group and the ParentCompany recognize their share of any changes, when applicable, in the statement of changes inequity. Unrealized gains and losses resulting from transactions between the Group and thesubsidiaries and an associate are eliminated to the extent of the interest in the subsidiaries and anassociate. The aggregate of the Group’s share in net income (loss) of subsidiaries and an associate isshown on the income and represents profit or loss after tax.

The financial statements of the subsidiaries and an associate are prepared for the same reportingperiod as the Group. When necessary, adjustments are made to bring the accounting policies in linewith those of the Group.

Dividends received are treated as a reduction in the carrying amount of the investments.

Post-acquisition changes in the share of net assets of the subsidiaries include the share in the:

a. Income or losses;b. Remeasurement losses or gains on retirement liability; andc. Revaluation increment on land, office units and condominium properties.

Where there has been a change recognized directly in the equity of the subsidiary, the ParentCompany recognizes its share of any changes and thus, when applicable, discloses in the statement ofchanges in equity. If the Parent Company’s share of losses in a subsidiary equals or exceeds itsinterest in the subsidiary, the Parent Company discontinues recognizing its share in further losses.

Property and EquipmentProperty and equipment, except land, are stated at cost less accumulated depreciation andamortization and any impairment in value. Land is stated at appraised value. The appraisal valueswere determined by professionally qualified and independent appraisers. The revaluation incrementresulting from revaluation is credited to ‘Revaluation increment on land, office units andcondominium properties’ under OCI, net of deferred tax liability.

The initial cost of property and equipment consists of its purchase price, including import duties,taxes and any directly attributable costs of bringing the asset to its working condition and location forits intended use. Expenditures incurred after the property and equipment have been put intooperation, such as repairs and maintenance, are charged against statement of income in the year inwhich the costs are incurred. In situations where it can be clearly demonstrated that the expenditureshave resulted in an increase in the future economic benefits expected to be obtained from the use ofan item of property and equipment beyond its originally assessed standard of performance, theexpenditures are capitalized as an additional cost of property and equipment.

Construction in progress is stated at cost and includes cost of construction and other direct costs.Construction in progress is not depreciated until such time that the relevant asset is completed and putinto operational use.

Depreciation on property and equipment is computed using the straight-line method based on theestimated useful life (EUL) of the depreciable assets.

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The EULs of components of property and equipment are as follows:

YearsCondominium properties 50Buildings and improvements 25Furniture, fixtures and equipment 5

Leasehold improvements are amortized over the EUL of one to ten years or the terms of the relatedleases, whichever is shorter.

The residual values, EULs and methods of depreciation and amortization of property and equipmentare reviewed at each statement of financial position date and adjusted prospectively, if appropriate.

Fully depreciated property and equipment are retained in the accounts until these are no longer usedand no further depreciation and amortization is charged to the statement of income.

An item of property and equipment is derecognized upon disposal or when no future economicbenefits are expected from its use or disposal. Upon derecognition, the cost and the relatedaccumulated depreciation and amortization and any impairment in value of the asset are removedfrom the accounts, and any resulting gain or loss (calculated as the difference between the netdisposal proceeds and the carrying amount of the asset) is reflected as income or loss in the statementof income.

Investment PropertiesInvestment properties are measured initially at cost, including transaction costs. Transaction costsrepresent nonrefundable taxes such as capital gains tax and documentary stamp tax (DST) are for theaccount of the Group. An investment property acquired through an exchange transaction is measuredat fair value of the asset acquired unless:

a. The exchange transaction lacks commercial substance; orb. The fair value of neither the asset received nor the asset given up is reliably measurable, in which

case, the cost of the investment property is measured at the carrying amount of the asset given up.

Foreclosed properties are recorded as ‘Investment properties’ upon:

a. Entry of judgment in case of judicial foreclosure;b. Execution of the Sheriff’s Certificate of Sale in case of extra-judicial foreclosure; orc. Notarization of the Deed of Dacion in case of dation in payment (dacion en pago).

Subsequent to initial recognition, investment properties are stated at fair value, which reflects theprevailing market conditions at the statement of financial position date. Gains or losses resultingfrom changes in the fair values of investment properties are recognized in the statement of incomeunder ‘Fair value gain from investment properties’ in the period in which they arise.

Transfers are made to investment property when, and only when, there is a change in use, evidencedby ending of owner-occupation, commencement of an operating lease to another party or ending ofconstruction or development. Transfers are made from investment property when, and only when,there is a change in use, evidenced by commencement of owner-occupation or commencement ofdevelopment with a view to sell.

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For a transfer from investment property carried at fair value to owner-occupied property, the asset’sdeemed cost for subsequent accounting is its fair value at the date of change in use. For transfersfrom owner-occupied property to investment property under the fair value model, the relatedproperties are accounted for under property and equipment up to the time of change in use. At thatdate, any difference between the carrying amount of the property and the fair value is to be treated inthe same way as a revaluation and be recognized in OCI and accumulated in equity.

The revaluation surplus included in equity in respect of an item of investment property may betransferred directly to retained earnings when the asset is derecognized. This may involvetransferring the whole amount of the surplus when the asset is retired or disposed of. However, someof the surplus may be transferred as the asset is used by an entity. In such a case, the amount of thesurplus transferred would be the difference between depreciation based on the revalued carryingamount of the asset and depreciation based on the asset’s original cost. Transfers from revaluationsurplus to retained earnings are not made through the statement of income.

Investment properties are derecognized when they have either been disposed of or when they arepermanently withdrawn from use and no future benefit is expected from its disposal. Any gains orlosses on retirement or disposal of investment properties are recognized in the statement of income inthe year of retirement or disposal under ‘Profit (loss) from assets sold’.

Business CombinationsBusiness combinations are accounted for using the acquisition method. The cost of an acquisition ismeasured as the aggregate of the consideration transferred, measured at acquisition date fair value andthe amount of any non-controlling interest in the acquiree. For each business combination, theacquirer elects whether to measure the non-controlling interest in the acquiree at fair value or at theproportionate share of the acquiree’s identifiable net assets. Acquisition-related costs incurred areexpensed as incurred.

When the Group acquires a business, it assesses the financial assets and financial liabilities assumedfor appropriate classification and designation in accordance with the contractual terms, economiccircumstances and pertinent conditions as of the acquisition date. This includes the separation ofembedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, any previously held equity interest is remeasured atits acquisition date fair value and any resulting gain or loss is recognized in the statement of income.

Any contingent consideration to be transferred by the acquirer will be recognized at fair value at theacquisition date. Contingent consideration classified as an asset or liability that is a financialinstrument and within the scope of PFRS 9, is measured at fair value with changes in fair valuerecognized in the statement of income. If the contingent consideration is not within the scope ofPFRS 9, it is measured in accordance with the appropriate PFRS. Contingent consideration that isclassified as equity is not remeasured and subsequent settlement is accounted for within equity.

Goodwill is initially measured at cost, being the excess of the aggregate of the considerationtransferred and the amount recognized for non-controlling interests, and any previous interest held,over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assetsacquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it hascorrectly identified all of the assets acquired and all of the liabilities assumed and reviews theprocedures used to measure the amounts to be recognized at the acquisition date. If the re-assessmentstill results in an excess of the fair value of net assets acquired over the aggregate considerationtransferred, then the gain is recognized in the statement of income.

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Common Control Business CombinationsBusiness combinations involving entities or businesses under common control are businesscombinations in which all of the entities or businesses are ultimately controlled by the same party orparties both before and after the business combination, and that control is not transitory. Businesscombinations under common control are accounted for similar to pooling of interest method. Underthe pooling of interest method:

∂ The assets, liabilities and equity of the acquired companies are included in the consolidatedfinancial statements at their carrying amounts;

∂ No adjustments are made to reflect the fair values, or recognize any new assets or liabilities at thedate of the combination. The only adjustments would be to harmonize accounting policiesbetween the combining entities;

∂ No ‘new’ goodwill is recognized as a result of the business combination; and∂ The consolidated statement of income in the year of acquisition reflects the results of the

combining entities for the full year, irrespective of when the combination took place. Thecomparative financial information in the consolidated financial statements for periods prior to thecombination is restated only for the period that the entities were under common control.

Intangible AssetsIntangible assets consist of goodwill, branch licenses and software costs.

Goodwill and branch licensesGoodwill acquired in a business combination is initially measured at cost being the excess of the costof the business combination over the Group’s interest in the fair value of the acquiree’s identifiableassets, liabilities and contingent liabilities. The cost of branch licenses acquired in a businesscombination is its fair value at the date of acquisition.

Following initial recognition, goodwill and branch licenses are measured at cost less any accumulatedimpairment losses.

Branch licenses have an indefinite useful life as there is no foreseeable limit to the period over whichthese assets are expected to generate net cash inflows.

The assessment of indefinite life is reviewed annually to determine whether the indefinite lifecontinues to be supportable. If not, the change in useful life from indefinite to finite is made on aprospective basis.

Software costsSoftware costs, which are purchased by the Group separately for use in its operations, are measuredon initial recognition at cost. Following initial recognition, software costs are carried at cost lessaccumulated amortization and any accumulated impairment losses.

Software costs are amortized over the useful economic life of two to five years. The amortizationperiod and method for software costs are reviewed at least at each statement of financial positiondate. Changes in the expected useful life or the expected pattern of consumption of future economicbenefits embodied in this asset is accounted for by changing the amortization period or method, asappropriate, and treated as changes in accounting estimates. The amortization expense on softwarecosts is recognized in the statement of income.

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Gains or losses arising from the derecognition of an intangible asset are measured as the differencebetween the net disposal proceeds and the carrying amount of the asset and are recognized in thestatement of income when the asset is derecognized.

Impairment of Non-financial AssetsInvestments in subsidiaries and an associate, property and equipment, and software costsAt each statement of financial position date, the Group assesses whether there is any indication thatits non-financial assets may be impaired. When an indicator of impairment exists or when an annualimpairment testing for an asset is required, the Group makes a formal estimate of the recoverableamount.

Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use (VIU)and is determined for an individual asset, unless the asset does not generate cash inflows that arelargely independent from those other assets or groups of assets, in which case, the recoverableamount is assessed as part of the cash-generating unit (CGU) to which it belongs.

When the carrying amount of an asset exceeds its recoverable amount, the asset is consideredimpaired and is written down to its recoverable amount.

In assessing VIU, the estimated future cash flows are discounted to their present value using a pre-taxdiscount rate that reflects current market assessments of the time value of money and the risksspecific to the asset.

An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverableamount. An impairment loss is charged against the statement of income in the period in which itarises, unless the asset is carried at a revalued amount, in which case, the impairment loss is chargedagainst the revaluation increment of the said asset.

A previously recognized impairment loss is reversed only if there has been a change in the estimatesused to determine the recoverable amount of an asset, but not to an amount higher than the carryingamount that would have been determined (net of any depreciation and amortization) had noimpairment loss been recognized for the asset in prior years. A reversal of an impairment loss iscredited to the current statement of income, unless the asset is carried at a revalued amount, in whichcase, the reversal of the impairment loss is credited to the revaluation increment of the said asset.

Goodwill and branch licensesGoodwill and branch licenses are reviewed for impairment annually or more frequently if events orchanges in circumstances indicate that the carrying value may be impaired.

Impairment is determined for goodwill and branch licenses by assessing the recoverable amount ofthe CGU (or group of CGUs) to which the goodwill and branch licenses relate. When the recoverableamount of the CGU (or group of CGUs) is less than the carrying amount of the CGU (or group ofCGUs) to which goodwill and branch licenses have been allocated, an impairment loss is recognizedimmediately in the statement of income. Impairment losses relating to goodwill cannot be reversedfor subsequent increases in its recoverable amount in future periods. For branch licenses, apreviously recognized impairment loss is reversed only if there has been a change in the estimatesused to determine the recoverable amount of this asset, but not to an amount higher than the carryingamount that would have been determined had no impairment loss been recognized for this asset inprior years.

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Common Stock and Additional Paid-in CapitalCommon stocks are recorded at par. Proceeds in excess of par value are recognized under equity as‘Additional-paid-in capital’ in the statement of financial position. Incremental costs incurred whichare directly attributable to the issuance of new shares are shown in equity as a deduction fromproceeds, net of tax.

Subscribed Common StockSubscribed common stock is recognized at subscribed amount, net of subscription receivable. Thiswill be debited upon full payment of the subscription and issuance of the shares of stock.

Subscription ReceivableSubscription receivable refers to the total amount of subscription to be received. The ParentCompany accounted for the subscription receivable as a contra equity account.

Revenue RecognitionRevenue is recognized to the extent that it is probable that the economic benefits will flow to theGroup and the revenue can be reliably measured, regardless of when the payment is being made.Revenue is measured at the fair value of the consideration received or receivable, taking into accountcontractually defined terms of payment and excluding taxes or duty. The Group assesses its revenuearrangements against specific criteria in order to determine if it is acting as principal or agent. Thefollowing specific recognition criteria must also be met before revenue is recognized:

Interest incomeInterest on financial instruments is recognized based on the effective interest method of accounting.

The effective interest method is a method of calculating the amortized cost of a financial asset or afinancial liability and allocating the interest income or interest expense over the relevant period.

The EIR is the rate that exactly discounts estimated future cash payments or receipts through theexpected life of the financial instrument or, when appropriate, a shorter period to the net carryingamount of the financial asset or financial liability.

When calculating the EIR, the Group estimates cash flows considering all contractual terms of thefinancial instrument (for example, prepayment options) including any fees or incremental costs thatare directly attributable to the instrument and are an integral part of the EIR, but not futurecredit losses. Once a financial asset or a group of similar financial assets has been written down as aresult of an impairment loss, interest income is recognized thereafter using the rate of interest used todiscount the future cash flows for the purpose of measuring the impairment loss.

Service charges and penaltiesService charges and penalties are recognized only upon collection or accrued when there isreasonable degree of certainty as to its collectability.

Fees and commissionsLoan fees that are directly related to acquisition and origination of loans are included in the cost ofthe loan and are amortized using the effective interest method over the term of the loan. Loancommitment fees are recognized as earned over the term of the credit lines granted to each borrower.Loan syndication fees are recognized upon completion of all syndication activities and where theGroup does not have further obligation to perform under the syndication agreement.

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Trading and securities gain (loss) - netTrading and securities gain (loss) - net represents results arising from trading activities, includinggains and losses from changes in fair value of financial assets at FVTPL.

DividendsDividends are recognized when the Group’s right to receive the payments is established.

RentalRental income arising from leased premises is accounted for on a straight-line basis over the leaseterms of ongoing leases.

Expense RecognitionExpenses are recognized in the statement of income when decrease in future economic benefit relatedto a decrease in an asset or an increase in a liability has arisen that can be measured reliably.Expenses are recognized in the statement of income: ∂ On the basis of a direct association between the costs incurred and the earning of specific items of

income;∂ On the basis of systematic and rational allocation procedures when economic benefits are

expected to arise over several accounting periods and the association can only be broadly orindirectly determined; or

∂ Immediately when expenditure produces no future economic benefits or when, and to the extentthat, future economic benefits do not qualify or cease to qualify, for recognition in the statementof financial position as an asset.

Expenses in the statement of income are presented using the nature of expense method. General andadministrative expenses are cost attributable to administrative and other business activities of theGroup.

Interest ExpenseInterest expense for all interest-bearing financial liabilities are recognized in ‘Interest expense’ in thestatement of income using the EIR of the financial liabilities to which they relate to.

Retirement BenefitsDefined benefit plansThe Parent Company, BDI and RBNI maintain separate defined benefit plans covering all of theirrespective officers and regular employees.

The net retirement liability is the aggregate of the present value of defined benefit obligation at thestatement of financial position date reduced by the fair value of plan assets and adjusted for any effectof limiting a net retirement asset to the asset ceiling. The defined benefit obligation is calculatedannually by an independent actuary. The present value of defined benefit obligation is determined bydiscounting the estimated future cash outflows using interest rates on government bonds that haveterms to maturity approximating the terms of the related net retirement. The asset ceiling is thepresent value of any economic benefits available in the form of refunds from the plan or reductions infuture contributions to the plan. The cost of providing benefits under the defined benefit plans isactuarially determined using the projected unit credit method.

Retirement costs comprise of service costs and net interest on the net retirement liability.

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Service costs, which include current service costs, past service costs and gains or losses on non-routine settlements, are recognized as expense in the statement of income. Past service costs arerecognized when plan amendment or curtailment occurs.

Net interest on the net retirement liability is the change during the period in the net retirement liabilitythat arises from the passage of time, which is determined by applying the discount rate based ongovernment bonds to the net retirement liability. Net interest on the net retirement liability isrecognized as expense or income in the statement of income.

Remeasurements comprising actuarial gains and losses, return on plan assets and any change in theeffect of the asset ceiling (excluding net interest on retirement liability) are recognized immediately inOCI in the period in which they arise. Remeasurements are not reclassified to statement of income insubsequent periods.

Plan assets are assets that are held by a long-term employee benefit fund. Plan assets are notavailable to the creditors of the Group, nor can they be paid directly to the Group. The fair value ofplan assets is based on market price information. When no market price is available, the fair value ofplan assets is estimated by discounting expected future cash flows using a discount rate that reflectsboth the risks associated with the plan assets and the maturity or expected disposal date of thoseassets (or, if they have no maturity, the expected period until the settlement of the relatedobligations).

The Group’s right to be reimbursed of some or all of the expenditure required to settle a definedbenefit obligation is recognized as a separate asset at fair value when and only when reimbursement isvirtually certain.

Defined contribution plansThe Parent Company also contributes to its contributory, defined-contribution type staff providentplan based on a fixed percentage of the employees’ salaries as defined in the plan.

BDI also has another plan where it contributes an amount equal to 5.00% of the member’s plan salaryplus the contribution of the member as deducted from the member’s plan salary.

Payments to the defined contribution plans are recognized as expenses when employees haverendered service in exchange for these contributions.

LeasesThe determination of whether an arrangement is, or contains a lease is based on the substance of thearrangement and requires an assessment of whether the fulfillment of the arrangement is dependenton the use of a specific asset or assets and the arrangement conveys a right to use the asset. A re-assessment 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 the 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; ord. There is a substantial change to the asset.

Where a re-assessment is made, lease accounting shall commence or cease from the date when thechange in circumstances gave rise to the re-assessment for scenarios a, c or d above, and at the date ofrenewal or extension period for scenario b.

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Group as lesseeLeases where the lessor retains substantially all the risks and benefits of ownership of the asset areclassified as operating leases. Operating lease payments are recognized as an expense in thestatement of income on a straight-line basis over the lease term.

Group as lessorLeases where the Group does not transfer substantially all the risks and benefits of ownership of theassets are classified as operating leases.

Initial direct costs incurred in negotiating operating leases are added to the carrying amount of theleased asset and recognized over the lease term on the same basis as the rental income. Contingentrents are recognized as revenue in the period in which they are earned.

Income TaxesCurrent taxCurrent tax assets and current tax liabilities are measured at the amount expected to be recoveredfrom or paid to the tax authority. The tax rates and tax laws used to compute the amount are thosethat are enacted or substantively enacted at the statement of financial position date.

Management periodically evaluates positions taken in the tax returns with respect to situations inwhich applicable tax regulations are subject to interpretation and establishes provisions whereappropriate.

Deferred taxDeferred tax is provided, using the balance sheet liability method, on all temporary differences at thestatement of financial position date between the tax bases of assets and liabilities and their carryingamounts for financial reporting purposes.

Deferred tax assets are recognized for all deductible temporary differences, carryforward of unusedtax credits from the excess of Minimum Corporate Income Tax (MCIT) over the Regular CorporateIncome Tax (RCIT) and unused Net Operating Loss Carryover (NOLCO), to the extent that it isprobable that taxable profit will be available against which the deductible temporary differences andthe carryforward of unused tax credits from excess MCIT over RCIT and unused NOLCO can beutilized. Deferred tax, however, is not recognized on temporary differences that arise from the initialrecognition of an asset or liability in a transaction that is not a business combination and, at the timeof the transaction, affects neither the accounting income nor taxable income or loss.

The carrying amount of deferred tax assets is reviewed at each statement of financial position dateand reduced to the extent that it is no longer probable that sufficient taxable profit will be available toallow all or part of the deferred tax assets to be utilized.

Deferred tax liabilities are recognized for all taxable temporary differences, with certain exceptions.

Deferred tax assets and deferred tax liabilities are measured at the tax rates that are applicable to theperiod when the asset is realized or the liability is settled, based on tax rates (and tax laws) that havebeen enacted or substantively enacted at the statement of financial position date.

Current tax and deferred tax relating to items recognized directly in equity is recognized in OCI andnot in the statement of income.

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ProvisionsProvisions are recognized when an obligation (legal or constructive) is incurred as a result of a pastevent and when it is probable that an outflow of assets embodying economic benefits will be requiredto settle the obligation and a reliable estimate can be made of the amount of the obligation.

When the Group expects some of a or all provisions to be reimbursed, for example, under aninsurance contract, the reimbursement is recognized as a separate asset but only when thereimbursement is virtually certain. The expense relating to any provision is presented in thestatement of income, net of any reimbursement.

If the effect of the time value of money is material, provisions are determined by discounting theexpected future cash flows at a pre-tax rate that reflects current market assessments of the time valueof money and, where appropriate, the risks specific to the liability. When discounting is used, theincrease in the provision due to the passage of time is recognized as an ‘Interest expense’ in thestatement of income.

Contingent Assets and Contingent LiabilitiesContingent assets are not recognized but are disclosed in the notes to financial statements when aninflow of economic benefits is probable. Contingent liabilities are not recognized in the financialstatements but are disclosed in the notes to financial statements, unless the possibility of an outflowof assets embodying economic benefits is remote.

Earnings Per Share (EPS)Basic EPS is computed by dividing the net income for the year by the weighted average number ofcommon shares outstanding during the year after giving retroactive effect to stock dividends declaredand stock rights exercised during the year, if any.

Diluted EPS is calculated by dividing the net income attributable to common shareholders by theweighted average number of common shares outstanding during the year adjusted for the effects ofany dilutive potential common shares.

Dividends on Common SharesDividends on common shares are recognized as a liability and deducted from equity when approvedby the BOD of the Parent Company. Dividends for the year that are approved after the statement offinancial position date are dealt with as an event after the statement of financial position date.

Segment ReportingThe Group’s operating businesses are organized and managed separately according to the nature ofthe products and services provided, with each segment representing a strategic business unit thatoffers different products and serves different markets. Financial information on business segmentsare presented in Note 6. No geographical segment information is presented as all of the Group’soperations are in the Philippines.

Fiduciary ActivitiesAssets and income arising from fiduciary activities, together with related undertakings to return suchassets to customers, are excluded from the financial statements where the Parent Company acts in afiduciary capacity such as nominee, trustee or agent.

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Events after the Statement of Financial Position DatePost year-end events that provide additional information about the Group’s financial position at thestatement of financial position date (adjusting events) are reflected in the financial statements. Postyear-end events that are not adjusting events are disclosed in the notes to financial statements whenmaterial to the financial statements.

3. Significant Accounting Judgments, Estimates and Assumptions

The preparation of the financial statements in compliance with PFRS requires the Group to makejudgments, estimates and assumptions that affect the reported amounts of assets, liabilities, incomeand expenses and disclosure of contingent assets and contingent liabilities. Future events may occurwhich will cause the assumptions used in arriving at the estimates to change. The effects of anychange in estimates are reflected in the financial statements as these become reasonably determinable.

Judgments and estimates are continuously evaluated and are based on historical experience and otherfactors, including expectations of future events that are believed to be reasonable under thecircumstances.

JudgmentsIn the process of applying the Group’s accounting policies, management has made the followingjudgments, apart from those involving estimations, which have the most significant effect on theamounts recognized in the financial statements:

Business model testThe Group’s business model can be to hold financial assets to collect contractual cash flows evenwhen sales of certain financial assets occur. PFRS 9, however, emphasizes that if more than aninfrequent number of sales are made out of a portfolio of financial assets carried at amortized cost, theentity should assess whether and how such sales are consistent with the objective of collectingcontractual cash flows. In making this judgment, the Group considers the following:

a. Sales or derecognition of debt instrument under any of the circumstances spelled out underparagraph 7, section 2 of BSP Circular No. 708, Series of 2011;

b. Sales made due to occurrence of events specific to the Group that severely curtails the Group’saccess to regular sources of liquidity other than the lending facilities of the BSP as lender of lastresort in order to forestall the Group’s having to default on obligations or entering into financialdistress;

c. Sales made due to occurrence of systemic events affecting the industry that severely curtailsaccess to credit and funding other than the lending facilities of the BSP as lender of last resort inorder to forestall the need for the Group to draw on the emergency lending facilities;

d. Sales attributable to the corrective measures of Asset and Liability Committee (ALCO) to bringthe asset-liability structure within the Board’s risk appetite and targeted ratios;

e. Sales attributable to a significant decline in debt instruments liquidity characteristics to meet theminimum eligibility criteria of stock of High Quality Liquid Assets (HQLA); and

f. Sales attributable to systemic movements that have been generally accepted to negatively impacteconomic conditions, credit quality, and/or the liability profile of the Group.

In 2015, the Parent Company disposed of various securities under its hold-to-collect (HTC) portfolioto realign the composition of Secondary Reserves as provided for under the Parent Company’sLiquidity Contingency Plan (see Note 5 for the discussion on Liquidity Risk and FundingManagement). The Parent Company assessed whether such sales are consistent with the objective ofthe business model to collect contractual cash flows and concluded that despite these disposals, there

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is no change in its objective in managing the HTC portfolio. The disposals were made for specificreasons and do not constitute a change in the Parent Company’s business model for the affectedportfolio. Thus, the remaining securities in the affected portfolio continue to be measured atamortized cost (see Note 11).

In September 2016, the Parent Company changed its business model for managing its investments indebt securities to reflect the changes in its strategic priorities and to address the requirements ofBSP Circular No. 905, Implementation of Basel III Framework on Liquidity Standards – LiquidityCoverage Ratio and Disclosure Standards, issued on March 10, 2016. The Parent Company’s newstrategic priorities aim to give focus to the small business segment to realize synergies between theretail network of the new strategic investor. The Parent Company assessed that these events changedthe primary objective of the business model for managing its investment in debt securities, that is,from realization of accrual income to investing in high-quality liquid debt securities as a costeffective way of keeping an ample reserve of liquidity ready for a stress-scenario within theframework provided by BSP Circular No. 905.

On October 1, 2016, the first day of the accounting period following the change in business model formanaging its investments in debt securities, the Parent Company reclassified debt securities withaggregate face amount of US$59.15 million (P=2,875.00 million) from the hold-to-collect portfolio tothe trading portfolio and recognized a gain on reclassification of US$4.10 million (P=198.70 million)presented under ‘Gain on reclassification of investment securities from amortized cost to fair valuethrough profit or loss’ in the statements of income (see Note 11).

In December 2017, the Parent Company created a business model with the objective of usingavailable funding to buy and sell debt securities to be able to collect accrual income, profit from thesale, use the proceeds to support the operating liquidity requirements, and bridge the asset andliability growth of the Parent Company. Debt securities managed under this business model will beclassified as financial assets at FVTOCI, in anticipation of the implementation of the final version ofPFRS 9 on January 1, 2018. As a result of the creation of the FVTOCI debt securities portfolio, theParent Company will reclassify certain debt securities with an aggregate face amount ofP=1,623.47 million (US$27.508 million and P=250.00 million) from the HTC portfolio to the FVTOCIportfolio effective January 1, 2018. The reclassification of these debt securities will result inrecognition of unrealized gain of P=56.89 million in OCI upon the implementation of the final versionof PFRS 9 on January 1, 2018. (see Note 35).

Cash flow characteristics testWhen the financial assets are held within a business model to collect its contractual cash flows, theGroup assesses whether the contractual terms of these financial assets give rise on specified dates tocash flows that are solely payments of principal and interest on the principal outstanding, with interestrepresenting time value of money and credit risk associated with the principal amount outstanding.The assessment as to whether the cash flows meet the test is made in the currency in which thefinancial asset is denominated. Any other contractual term that changes the timing or amount of cashflows (unless it is a variable interest rate that represents time value of money and credit risk) does notmeet the amortized cost criteria.

Fair value of financial instrumentsWhere the fair values of financial instruments cannot be derived from active markets, they aredetermined using valuation techniques. The inputs to these valuation models are taken fromobservable markets where possible, but where this is not feasible, a degree of judgment is required inestablishing fair values.

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The carrying values and corresponding fair values of financial instruments, as well as the manner inwhich fair values were determined, are discussed in more detail in Note 4.

ContingenciesThe Group is currently involved in various legal proceedings. The estimate of the probable costs forthe resolution of these claims has been developed in consultation with outside counsels handling theGroup’s defense in these matters and is based upon an analysis of potential results. The Groupcurrently does not believe that these proceedings will have a material adverse effect onits financial position. It is possible, however, that future financial performance could be materiallyaffected by changes in the estimates or in the effectiveness of the strategies relating to theseproceedings (see Note 24).

Change in use of assetsPAS 40, Investment Property, requires management to use its judgment to determine whether aproperty qualifies as an investment property. The Group has developed criteria so it can exercise itsjudgment consistently. A property that is held to earn rentals or for capital appreciation or both andwhich generates cash flows largely independently of the other assets held by the Group is accountedfor as investment properties. On the other hand, a property that is used for operations or in theprocess of providing services or for administrative purposes and which do not directly generate cashflows as a stand-alone asset are accounted for as property and equipment. The Group assesses on anannual basis the accounting classification of its properties taking into consideration the current use ofsuch properties.

Reclassifications from and to investment properties are discussed in Notes 13 and 14.

Estimates and AssumptionsAdequacy of allowance for credit losses on loans and receivablesThe Group reviews its loans and receivables, which mainly consist of corporate and consumer loans,at each statement of financial position date, to assess whether an allowance for credit losses should berecorded in the statement of income. The Group provides specific allowance on individuallysignificant corporate loans. The other loans are grouped based on credit risk characteristics and areprovided with collective allowance.

The identification of impairment and the determination of the recoverable amount involve variousassumptions and factors. These include the financial condition of the counterparty, estimated futurecash flows and estimated selling prices of the collateral.

The carrying value of loans and receivables and allowance for credit losses on loans and receivablesare disclosed in Notes 12 and 17, respectively.

Valuation of investment propertiesThe Group accounts for its investment properties using the fair value model. The investmentproperties consist of condominium and office units for lease and foreclosed properties.

The determination of the fair values of investment properties involves significant managementjudgment in the use of assumptions, such as vacancy and rental rates. The valuation also requires theassistance of external appraisers whose calculations depend on certain assumptions, such ascapitalization rates, and sales and listings of comparable properties registered within the vicinity andadjustments to sales price based on internal and external factors.

The key assumptions used to determine the fair value of investment properties and the compositionand movements in ‘Investment properties’ are disclosed in Notes 4 and 14, respectively.

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Realizability of deferred tax assetsDeferred tax assets are recognized to the extent that it is probable that future taxable profit will beavailable against which the deductible temporary differences can be utilized. Significantmanagement judgment is required to determine the amount of deferred tax assets that can berecognized, based on assumptions that are affected by expected future market or economic conditionsand the expected performance of the Group.

The recognized and unrecognized deferred tax assets are disclosed in Note 30.

Impairment of goodwill and intangible assetsThe Group determines whether goodwill and branch licenses are impaired at least on an annual basis.Goodwill and branch licenses are written down for impairment where the net present value of theforecasted future cash flows from the CGU is insufficient to support its carrying value.

For branch licenses, an impairment loss recognized in prior periods shall be reversed if, and only if,there has been a change in the estimates used to determine the branch license’s recoverable amountsince the last impairment loss was recognized. If this is the case, the carrying amount of the branchlicense shall be increased to its recoverable amount. That increase is a reversal of an impairment loss.

The recoverable amount of the CGU has been determined based on a VIU calculation using theCGU’s cash flow projections from a strategic plan approved by management covering a five-yearperiod. Key assumptions in the VIU calculations are most sensitive to the following assumptions:

∂ Discount rate, which is based on the cost of equity by reference to comparable entities using thecapital asset pricing model;

∂ Loan and deposit portfolios growth rates; and∂ Growth rate to project cash flows beyond the budget period.

The carrying values of goodwill and branch licenses are disclosed in Note 15.

Present value of defined benefit obligationThe cost of defined benefit plans, as well as the present value of defined benefit obligation, isdetermined using an actuarial valuation. The actuarial valuation involves making variousassumptions. These include the determination of the discount rates, salary increase rates, mortalityrates and employee turnover rates. Due to the complexity of the actuarial valuation, the underlyingassumptions and its long-term nature, defined benefit obligations are highly sensitive to changes inthese assumptions. All assumptions are reviewed at each statement of financial position date.

In determining the appropriate discount rate, management considers the present value of cash flows(expected benefit payments) as of valuation date, which is determined using the rates from thederived zero yield curve. The discount rate used is the single-weighted uniform discount rate, whichwhen applied to the same cash flows, results in the same present value as of the valuation date.

Salary increase rates are based on expected future inflation rates, historical annual merit, market andpromotional increases.

Other assumptions, such as mortality rates and employee turnover rates, are based on publiclyavailable mortality tables and management’s historical experience.

The retirement asset and liability as of December 31, 2017 and 2016 are disclosed in Note 27.

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Revaluation of landThe Group measures its land at revalued amounts with changes in appraised value being recognizedin OCI. The fair value of the Group’s land at revalued amount was based on third party appraisalsusing market sales comparison approach. The fair value of land classified under ‘Property andequipment’ is most sensitive to price per square meter, which is disclosed in Note 4.

The revalued amount of land included under ‘Property and equipment’ in the statements of financialposition is disclosed in Note 13.

4. Fair Value Measurement

The following tables provide the fair value hierarchy of the Group’s and the Parent Company’s assetsand liabilities measured at fair value and those for which fair values should be disclosed:

Consolidated2017

Fair Value



Market(Level 1)


Inputs (Level 2)


Inputs(Level 3)


2,831,110 2,831,110 2,740,471 49,045 41,594Non-financial assetsInvestment properties: Condominium units for lease 5,365,080 5,365,080 − − 5,365,080 Foreclosed properties: Land 593,295 593,295 − − 593,295 Buildings and improvements 427,415 427,415 − − 427,415 Office units for lease 50,343 50,343 − − 50,343Land classified under Property and equipment 518,482 518,482 − − 518,482

6,954,615 6,954,615 − − 6,954,615Assets for which fair values are disclosedInvestment securities at amortized cost: Government securities 13,789,737 12,341,454 10,158,721 2,182,733 − Private bonds 1,627,464 1,684,362 − 1,684,362 −Loans and receivables: Receivables from customers: Corporate loans 36,948,575 36,808,563 − − 36,808,563 Consumer loans 12,786,693 12,824,748 − − 12,824,748 Unquoted debt securities 2,811,827 3,134,624 − − 3,134,624

67,964,296 66,793,751 10,158,721 3,867,095 52,767,935P=77,750,021 P=76,579,476 P=12,899,192 P=3,916,140 P=59,764,144

Liability measured at fair valueCurrency forwards P=977 P=977 P=− P=977 P=−Liabilities for which fair value is disclosedFinancial liabilities at amortized cost: Time deposits 43,006,098 43,144,091 − − 43,144,091 Bills payable 12,567,399 12,569,067 − − 12,569,067

55,573,497 55,713,158 − − 55,713,158P=55,574,474 P=55,714,135 P=− P=977 P=55,713,158

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Consolidated2016

Fair Value



Market(Level 1)


Inputs (Level 2)


Inputs(Level 3)

Assets measured at fair valueFinancial assetsFinancial assets at FVTPL: Government securities P=188,014 P=188,014 P=188,014 P=− P=− Private bonds 112,469 112,469 − 112,469 −Equity securities at FVTOCI 52,242 52,242 − 40,935 11,307Currency forwards 2,136 2,136 − 2,136 −

354,861 354,861 188,014 155,540 11,307Non-financial assetsInvestment properties: Condominium units for lease 5,044,552 5,044,552 − − 5,044,552 Foreclosed properties: Land 520,617 520,617 − − 520,617 Buildings and improvements 436,383 436,383 − − 436,383 Office units for lease 23,858 23,858 − − 23,858Land classified under Property and equipment 519,010 519,010 − − 519,010


57,989,038 63,600,543 6,952,813 5,098,851 51,548,879P=64,888,319 P=70,499,824 P=7,140,827 P=5,254,391 P=58,104,606

Liability for which fair value is disclosedFinancial liability at amortized cost: Time deposits P=40,737,984 P=40,789,963 P=− P=− P=40,789,963

Parent Company2017

Fair Value



Market(Level 1)


Inputs (Level 2)


Inputs(Level 3)


2,831,110 2,831,110 2,740,471 49,045 41,594Non-financial assetsInvestment properties: Condominium units for lease 5,365,080 5,365,080 − − 5,365,080 Foreclosed properties: Land 371,669 371,669 − − 371,669 Buildings and improvements 389,538 389,538 − − 389,538 Office units for lease 50,343 50,343 − − 50,343Land classified under Property and equipment 470,113 470,113 − − 470,113

6,646,743 6,646,743 − − 6,646,743Assets for which fair values are disclosedInvestment securities at amortized cost: Government securities 13,789,737 12,341,454 10,158,721 2,182,733 − Private bonds 1,627,464 1,684,362 − 1,684,362 −

(Forward)

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Parent Company2017

Fair Value



Market(Level 1)


Inputs (Level 2)


Inputs(Level 3)

Loans and receivables: Receivables from customers: Corporate loans P=36,948,575 P=38,328,543 P=− P=− P=38,328,543 Consumer loans 11,113,269 12,979,939 − − 12,979,939 Unquoted debt securities 2,811,827 3,134,624 − − 3,134,624

66,290,872 68,468,922 10,158,721 3,867,095 54,443,106P=75,768,725 P=77,946,775 P=12,899,192 P=3,916,140 P=61,131,443

Liability measured at fair valueCurrency forwards P=977 P=977 P=− P=977 P=−Liabilities for which fair value is disclosedFinancial liabilities at amortized cost: Time deposits 41,773,807 41,892,526 − − P=41,892,526 Bills payable 12,567,399 12,569,067 − − 12,569,067

54,341,206 54,461,593 − − 54,461,593P=54,342,183 P=54,462,570 P=− P=977 P=54,461,593

Parent Company2016

Fair Value



Market(Level 1)


Inputs (Level 2)


Inputs(Level 3)

Assets measured at fair valueFinancial assetsFinancial assets at FVTPL: Government securities P=188,014 P=188,014 P=188,014 P=− P=− Private bonds 112,469 112,469 − 112,469 −Equity securities at FVTOCI 52,242 52,242 − 40,935 11,307Currency forwards 2,136 2,136 − 2,136 −

354,861 354,861 188,014 155,540 11,307Non-financial assetsInvestment properties: Condominium units for lease 5,044,552 5,044,552 − − 5,044,552 Foreclosed properties: Land 324,053 324,053 − − 324,053 Buildings and improvements 397,727 397,727 − − 397,727 Office units for lease 23,858 23,858 − − 23,858Land classified under Property and equipment 470,113 470,113 − − 470,113


56,265,060 61,775,987 1,532,603 10,519,061 49,724,323P=62,880,224 P=68,391,151 P=1,720,617 P=10,674,601 P=55,995,933

Liability for which fair value is disclosedFinancial liability at amortized cost: Time deposits P=39,227,043 P=39,245,247 P=− P=− P=39,245,247

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Movements in the fair value measurement of ‘Equity securities at fair value through othercomprehensive income’ categorized within Level 3 pertain only to the changes in fair value ofunquoted equity securities. No additions and disposals were made in 2017 and 2016.

Movements in the fair value measurement of assets categorized within Level 3 are discussed inNote 13 for Land classified under ‘Property and equipment’ and Note 14 for ‘Investment properties’.

There were no transfers between Level 1 and Level 2 fair value measurements and no transfers out ofLevel 3 fair value measurements in 2017 and 2016.

The methods and assumptions used by the Group in estimating the fair value of its assets andliabilities are as follows:

Investment SecuritiesDebt securitiesFair values are generally based on quoted market prices. If the market prices are not readilyavailable, fair values are estimated using consensus prices obtained from Bloomberg.

Quoted equity securitiesFair values of club shares are based on prices published in GG&A Club Shares and G&W ClubShares. GG&A Club Shares and G&W Club Shares are involved in trading and leasing proprietaryand non-proprietary club shares.

Unquoted equity securitiesFair values of unquoted equity securities are estimated using the guideline publicly-traded companymethod, which utilizes publicly available information from publicly-traded comparable companiesthat are the same or similar to the unlisted company being valued.

Loans and ReceivablesCash and other cash items, amounts due from BSP and other banks and interbank loans receivableCarrying amounts approximate fair values considering that these accounts consist mostly of overnightdeposits.

Receivables from customersFair values of receivables from customers are estimated using the discounted cash flow methodologythat makes use of the Group’s current incremental lending rates for similar types of loans andreceivables.

Unquoted debt securitiesFair values are estimated based on the discounted cash flow methodology that makes use ofinterpolated risk-free rates plus spread.

Accrued interest receivable and returned checks and other cash items (RCOCI)Carrying amounts approximate fair values due to the short-term nature of the accounts, with someitems that are due and demandable.

Accounts receivable, sales contracts receivable and refundable security depositsQuoted market prices are not available for these assets. These are not reported at fair value and arenot significant in relation to the Group’s total portfolio of financial instruments.

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Derivative Assets/LiabilitiesCurrency forwardsFair values are calculated by reference to the prevailing interest differential and spot exchange rate asof the statement of financial position date, taking into account the remaining term to maturity of thederivative assets/liabilities.

Non-financial AssetsLand, office units, condominium units and buildings and improvementsFair values are based on appraised values determined by professionally qualified and independentappraisers.

Financial Liabilities at Amortized CostDeposit liabilitiesFair values of time deposits are estimated based on the discounted cash flow methodology that makesuse of the current incremental borrowing rates for similar types of borrowings. The carrying amountof demand and savings deposit liabilities approximate fair value considering that these are due anddemandable.

Bills payableThe fair value is estimated using the discounted cash flow methodology that makes use of theGroup’s current incremental borrowing rates for similar borrowings with maturities consistent withthose remaining for the liability being valued. Where the instrument has a relatively short maturity,carrying amounts approximate fair values.

Outstanding acceptances, manager’s checks, accrued interest payable, accrued other expenses,accounts payable, refundable security deposits and due to the Treasurer of the PhilippinesCarrying amounts approximate fair values due to the short-term nature of these accounts, with someitems that are due and demandable.

Significant Unobservable InputsQuantitative information about the Group’s and the Parent Company’s fair value measurements usingsignificant unobservable inputs (Level 3) follows:

Unquoted equity securities

YearFair Value atDecember 31

ValuationTechnique(s)

UnobservableInput(s) Range

ReasonablyPossible

AlternativeAssumption

Sensitivity of the FairValue to the Input

2017 P=41,594 Guideline publicly-traded company

method

Price to book ratio 0.89 – 1.25 +0.10-0.10

P=4,035(4,035)

Discount for lack ofmarketability

30% +10%-10%

(5,533)5,533

2016 11,307 Guideline publicly-traded company

method

Price to book ratio 0.56 – 1.25 +0.10-0.10

P=1,410(1,410)

Discount for lack ofmarketability

30% +10%-10%

(1,615)1,615

The Parent Company estimates the fair value of the unquoted equity securities using the ‘benchmarkmultiples’ of comparable publicly-traded companies. The identification of comparable companiesconsiders the similarities between the subject company being valued and the guideline companies interms of industry, market, product line or service type, growth, etc. The Parent Company alsodetermines an appropriate discount adjustment for the lack of marketability of these unquoted equitysecurities based on empirical evidence gathered from available public market research.

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The use of reasonably possible alternative assumptions in the significant unobservable inputs willaffect the fair value of the unquoted equity securities and the OCI (before tax) as presented above.

Investment properties and land classified under ‘Property and equipment’

Consolidated

DescriptionFair Value at

December 31, 2017Valuation

Technique(s)Unobservable

Input(s)Range

(in Nearest Peso)Investment properties (Note 14)

Condominium units for lease P=5,365,080Income capitalization

approach Capitalization rate 9.80%Vacancy rate 10.00%

Rental rates P=973 - P=2,632

Foreclosed properties:

Land 593,295Market sales

comparison approach Price per square meter P=35 - P=359,020

Buildings and improvements 427,415Market sales

comparison approach Price per square meter P=1,695 - P=116,500

Office units for lease 50,343Income capitalization


Rental rates P=249 - P=261

Land classified under Property andequipment (Note 13) 518,482

Market salescomparison approach Price per square meter P=9,583 - P=110,000

Consolidated




Input(s)Range















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Parent Company




Input(s)Range









comparison approach Price per square meter P=1,695 - P=116,500






Parent Company




Input(s)Range















Investment properties are stated at fair value and land classified under ‘Property and equipment’ arestated at appraised value, which has been determined based on valuations made by professionallyqualified appraisers accredited by the BSP and SEC. The fair values of foreclosed assets werederived based on market sales comparison approach. Under this approach, recent transactions forsimilar properties in the same areas as the investment properties were considered, taking into accountthe economic conditions prevailing at the time the valuation were made. Prices of recent transactionsare adjusted to account for differences in a property’s size, shape, location, marketability andbargaining allowances. For depreciable properties, other inputs considered in the valuations willinclude the age and remaining life of the buildings. The fair values of land and foreclosed propertiesare expected to increase (decrease) as price per square meter, in isolation, increases (decreases).

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On the other hand, the fair value of the condominium and office units for lease was determined usingthe income capitalization approach model. The income capitalization approach model is used sincethe properties generate revenue from rental income. Income capitalization approach is a method usedto convert an estimate of a single year’s income expectancy into an indication of value in one directstep – either by dividing the income estimate by an appropriate income rate or by multiplying theincome estimate by an appropriate income factor. The rate of interest calculated represents therelationship between income and value observed in the market and is derived through comparablesales analysis. The income from a property, usually the annual net operating income or pre-tax cashflow, is divided by its sale or equity price to obtain the income rate. The fair values of condominiumand office units for lease are expected to increase (decrease) as rental rates, in isolation, increase(decrease), but expected to decrease (increase) as the capitalization and vacancy rates, in isolation,increase (decrease).

The valuation, therefore, is based on the following critical assumptions:

∂ Rental rates are based on contracted rental rates as of December 31, 2017 and 2016. All otherincome and expenses are based on actual amounts earned/incurred in 2017 and 2016.

∂ Capitalization rate (income rate) is based on market rent for similar properties which ranges from5.89% to 9.93% in 2017 and from 6.57% to 9.84% in 2016.

∂ Vacancy rates are based on vacancy rates for comparable properties within the area where theGroup’s properties are located, which is 10% in 2017 and ranges from 10% to 20% in 2016.

∂ The floor areas used in the valuation are the total leasable area.

There has been no change in the valuation techniques used from 2016 to 2017.

5. Financial Risk Management Objectives and Policies

IntroductionRisk is inherent in the Group’s activities but is managed through a continuing and pro-active processof identification, measurement and monitoring, subject to risk limits and other controls. This processof risk management is critical to the Group’s continuing profitability and each individual within theGroup is accountable for the risk exposures relating to his or her responsibilities.

The Group is exposed to the following risks from its financial instruments:

a. Credit riskb. Liquidity riskc. Market risk

i. Interest rate riskii. Foreign currency risk

iii. Equity price risk

Risk management structureThe Group’s risk management environment is characterized by a well-defined risk organizationalstructure, flow of risk information, risk-based audit coverage, and an established compliance system.

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BODThe BOD is responsible for establishing and maintaining a sound risk management system and isultimately accountable for identifying and controlling risks; there are, however, separate independentbodies responsible for managing and monitoring risks.

Risk Oversight Committee (ROC)The ROC has the overall responsibility for the development of the risk strategy and implementingprinciples, frameworks, policies and limits.

Enterprise Risk Management Group (ERMG)The ERMG is an independent unit within the Parent Company that directly reports to the ROC. It isthe responsibility of the ERMG to identify, analyze and measure risks from the Parent Company’strading, lending, borrowing and other transactional activities. It also recommends control policiesand procedures to mitigate risk in identified risk areas in Treasury, Credit, Trust and other areas ofoperations.

Risk controlThe Risk Control function performs the important day-to-day monitoring of risk exposures of theParent Company against approved limits and reporting of such exposures, and implementation ofpolicies and control procedures.

Treasury segmentThe Treasury Segment is responsible for managing the Parent Company’s assets and liabilities. It isalso primarily responsible for the management of the funding and liquidity risks of the ParentCompany.

Internal Audit Group (IAG)Risk management processes throughout the Group are audited by the IAG which examines both theadequacy of the procedures and the Group’s compliance thereto. The IAG discusses the results of allassessments with management, and reports its findings and recommendations to the AuditCommittee.

Risk measurement and reporting systemsThe Group’s risks are measured using a method which reflects both the expected loss likely to arise innormal circumstances and unexpected losses, which are an estimate of the ultimate actual loss basedon statistical models. The models make use of probabilities derived from historical experience,adjusted to reflect the economic environment.

The Group also runs worse case scenarios that would arise in the event that extreme events which areunlikely to occur do, in fact, occur.

Monitoring and controlling risks are primarily performed based on limits established by the Group.These limits reflect both the business strategy and market environment of the Group, as well as thelevel of risk that the Group is willing to accept. In addition, the Group monitors and measures theoverall risk-bearing capacity in relation to the aggregate risk exposure across all risk types andactivities.

Information gathered from all the businesses is evaluated and processed in order to analyze, controland identify risks early. All significant information is presented to the BOD, the ROC, and the headof each business division. The report includes credit exposure to groups and industries, Value-at-Risk(VaR), liquidity ratios and risk profile changes. Senior management assesses the appropriateness ofthe allowance for credit losses on a monthly basis for prudential and financial reporting.

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Credit Risk and Concentration of Assets and Liabilities and Off-Balance Sheet ItemsCredit risk is the risk that one party to a financial instrument will fail to discharge an obligation andcause the other party to incur a financial loss. The Group’s credit risk arises from its lending andtrading of securities and foreign exchange activities. The Group manages and controls credit risk bysetting limits on the amount of risk it is willing to accept for individual borrowers and groups ofborrowers, as well as limits on large lines and industry concentrations. The ERMG monitorsexposures in relation to these limits.

The Group obtains security where appropriate, enters into collateral arrangements withcounterparties, and limits the duration of exposures. The Group’s credit risk management process isguided by policies and procedures established by Corporate & Commercial Banking Group (CCBG),Consumer Finance Group and ERMG and approved by the BOD.

The Parent Company has an internal credit risk rating system (ICRRS) for the purpose of measuringcredit risk for every exposure in a consistent manner that is as accurate as possible and uses the riskinformation for business and financial decision making. The system covers companies with asset sizeof more than P=15.00 million and with financial statements audited by SEC-accredited auditorsstarting reporting year 2005. The Parent Company adopted the Bankers Association of thePhilippines model which has been approved by the BSP under BSP Circular No. 439 as a minimumstandard for an ICRRS. The system has two components, namely: (a) Borrower Risk Rating Systemwhich provides an assessment of credit risk without considering the security arrangements, and(b) Facility Risk Factor which is an account rating taking into account the collateral and other creditrisk mitigants. The rating scale consists of 14 grades, ten of which fall under unclassified accountsand the remaining four are classified accounts according to regulatory provisioning guidelines. TheParent Company also adopts a separate scoring system for its consumer loan portfolio as part of itscredit undertaking. Risks are mitigated by focusing on the accounts with a low probability of defaultwhile exercising prudent judgement on accounts whose risks are higher than normal but remainswithin the Parent Company’s risk appetite.

The Group has a loan portfolio quality and credit process review in place that allows the Group tocontinuously identify and assess the risks on credit exposures and take corrective actions. Thisfunction is carried out by the Group’s Credit Review Unit under the ERMG.

Maximum exposure to credit riskThe tables below provide the analysis of the maximum exposure of the Group’s and the ParentCompany’s financial instruments to credit risk, excluding those where the carrying values as reflectedin the statements of financial position and related notes already represent the financial instrument’smaximum exposure to credit risk, before and after taking into account collateral held or other creditenhancements:

Consolidated2017 2016

GrossMaximumExposure Net Exposure

Financial Effectof Collateral or

CreditEnhancement



CreditEnhancement

Receivables from customers: Corporate loans P=36,948,575 P=30,321,835 P=6,626,740 P=32,725,104 P=26,214,633 P=6,510,471 Consumer loans 12,786,693 5,818,145 6,968,548 8,971,067 3,206,228 5,764,839

Total Credit exposure P=49,735,268 P=36,139,980 P=13,595,288 P=41,696,171 P=29,420,861 P=12,275,310

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Parent Company2017 2016



CreditEnhancement



CreditEnhancement

Receivables from customers: Corporate loans P=36,948,575 P=30,321,835 P=6,626,740 P=32,725,104 P=26,214,633 P=6,510,471 Consumer loans 11,113,269 4,249,071 6,864,198 7,247,089 1,573,013 5,674,076

Total Credit exposure P=48,061,844 P=34,570,906 P=13,490,938 P=39,972,193 P=27,787,646 P=12,184,547

For sales contracts receivable, the fair value of collaterals and their corresponding financial effect oncredit exposure are no longer disclosed since the system does not regularly monitor such information.The carrying value of these sales contracts receivable are disclosed in Note 12.

Risk concentrations by industryConcentrations arise when a number of counterparties are engaged in similar business activities, oractivities in the same geographic region, or have similar economic features that would cause theirability to meet contractual obligations to be similarly affected by changes in economic, political orother conditions. Concentrations indicate the relative sensitivity of the Group’s performance todevelopments affecting a particular industry.

Group exposures and risk concentrations to industries are monitored and reported in accordance withthe Group’s policies on group lending/inter-corporate earmarking and managing large exposure andcredit risk concentrations.

Credit-related commitment risksThe Parent Company makes available to its customers guarantees that may require the ParentCompany to make payments on their behalf and enters into commitments to extend credit lines tosecure their liquidity needs. Letters of credit and guarantees (including standby letters of credit)commit the Parent Company to make payments on behalf of customers in the event of a specific act,generally related to the import or export of goods. Such commitments expose the Parent Company tosimilar risks to loans and are mitigated by the same control processes and policies.

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The industry sector analysis of the maximum exposure of the Group to credit risk concentration follows (amounts in millions):


Loans andReceivables

Loans andAdvances to

Banks*Investment

Securities Others** TotalLoans and

Receivables


Banks*Investment

Securities Others** TotalGovernment P=1,540 P=15,341 P=16,530 P=– P=33,411 P=2,092 P=13,356 P=11,699 P=– P=27,147Wholesale and retail trade 11,039 – – 2,129 13,168 9,552 – – 2,099 11,651Construction and real estate 11,281 – 250 130 11,661 8,548 – 250 414 9,212Manufacturing 8,854 – – 1,205 10,059 7,875 – – 1,253 9,128Banks and financial institutions 4,264 1,701 – – 5,965 5,183 3,307 – – 8,490Transportation, storage, communication 1,677 – – – 1,677 1,825 – 112 – 1,937Electricity, gas and water supply 4,561 – – – 4,561 2,941 – – 3 2,944Agriculture, hunting and forestry 1,619 – – 1 1,620 1,125 – – 40 1,165Mining and quarrying 48 – – 19 67 282 – – 15 297Others 11,040 – 1,378 61 12,479 9,274 – 1,375 120 10,769

55,923 17,042 18,158 3,545 94,668 48,697 16,663 13,436 3,944 82,740Less allowance for credit and impairment losses 2,570 – – – 2,570 2,608 – – – 2,608

P=53,353 P=17,042 P=18,158 P=3,545 P=92,098 P=46,089 P=16,663 P=13,436 P=3,944 P=80,132* Consist of due from BSP, due from other banks, and interbank loans receivable** Consist of RCOCI, refundable deposits, and commitments and contingencies


Loans andReceivables


Banks*Investment

Securities Others** TotalLoans and

Receivables


Banks*Investment

Securities Others** TotalGovernment P=1,540 P=15,279 P=16,530 P=− P=33,349 P=2,092 P=13,277 P=11,699 P=– P=27,068Wholesale and retail trade 10,974 − − 2,129 13,103 9,486 – – 2,099 11,585Construction and real estate 11,281 − 250 130 11,661 8,454 – 250 414 9,118Manufacturing 8,854 − − 1,205 10,059 7,875 – – 1,253 9,128Banks and financial institutions 4,264 1,501 − − 5,765 5,183 2,941 – – 8,124Transportation, storage, communication 1,677 − − − 1,677 1,825 – 112 – 1,937Electricity, gas and water supply 4,561 − − − 4,561 2,941 – – 3 2,944Agriculture, hunting and forestry 1,318 − − 1 1,319 808 – – 40 848Mining and quarrying 48 − − 19 67 282 – – 15 297Others 9,664 − 1,378 59 11,101 7,984 – 1,375 118 9,477

54,181 16,780 18,158 3,543 92,662 46,930 16,218 13,436 3,942 80,526Less allowance for credit and impairment losses 2,561 − − − 2,561 2,626 – – – 2,626

P=51,620 P=16,780 P=18,158 P=3,543 P=90,101 P=44,304 P=16,218 P=13,436 P=3,942 P=77,900* Consist of due from BSP, due from other banks, and interbank loans receivable** Consist of RCOCI, refundable deposits, and commitments and contingencies

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Collateral and other credit enhancementsThe amount and type of collateral required depend on an assessment of the credit risk of thecounterparty. Guidelines are implemented regarding the acceptability of types of collateral andvaluation parameters.

The main types of collateral obtained are as follows:

∂ For securities lending and reverse repurchase transactions: cash or securities∂ For commercial lending: deposit hold-out, mortgages over real estate properties, machineries,

inventory and trade receivables∂ For retail lending: mortgages over residential properties and motor vehicles

It is the Group’s policy to dispose repossessed properties in an orderly fashion. The proceeds areused to reduce or repay the outstanding claim. In general, the Group does not occupy repossessedproperties for business use.

Collaterals obtained by the Group and the Parent Company from settlement of loans and receivablesin 2017 and 2016 and which remain outstanding as of December 31, 2017 and 2016 amounted toP=47.70 million and P=87.85 million, respectively (see Note 14).

The Group does not hold collateral on financial assets which it may sell or repledge in the absence ofdefault by the owner of the collateral.

Credit quality per class of financial assetsLoans and receivablesThe description and definition of the loan grades or Internal Credit Risk Rating used by the Group forcorporate loans follow:

Borrower’s RiskRating

(BRR) Grade Description Definition1 Excellent An obligor rated 1 has an excellent capacity to meet its financial

commitments with minimal credit risk.

2 Strong An obligor rated 2 has a strong capacity to meet its financialcommitments with very low credit risk.

3 Good An obligor rated 3 has a good capacity to meet its financialcommitments with low credit risk.

4 Fairly Good An obligor rated 4 differs from rated 3 obligor only to a smalldegree and has a fairly good capacity to meet its financialcommitments with low credit risk.

5 Satisfactory An obligor rated 5 has a satisfactory capacity to meet itsfinancial commitments with moderate credit risk.

6 Fairly Satisfactory An obligor rated 6 has a fairly satisfactory capacity to meet itsfinancial commitments with moderate credit risk.

7 Acceptable An obligor rated 7 has an acceptable capacity to meet itsfinancial commitments with substantial credit risk.

(Forward)

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Borrower’s RiskRating

(BRR) Grade Description Definition8 Acceptable with Care A credit, though acceptable, needs care in granting facilities.

However, the borrower is still creditworthy.

9 Acceptable with Caution A credit, though acceptable, needs significant caution to beexercised while granting facilities to the borrower. Theborrower is still creditworthy but has problems that need to beaddressed.

10 Watch List Below standard. An obligor rated 10 is judged to be of poorcredit standing and is subject to high default risk.

11 Loans EspeciallyMentioned

These are loans that have unlocated collateral folders anddocuments, not supported by board resolutions authorizing theborrowings, without credit investigation report or not supportedby documents required under Subsection 4312Q.1 of the Manualof Regulations for Banks.

12 Substandard Loans which involve a substantial and unreasonable degree ofrisk to the institution because of unfavorable record orunsatisfactory characteristics.

13 Doubtful Loans which have existing facts, conditions, and values thatmake collection or liquidation in full highly improbable and inwhich substantial loss is probable.

14 Loss Loans which are considered uncollectible or worthless and ofsuch little value that their continuance as bankable assets is notwarranted.

The credit quality of the Group’s loans and receivables from customers, which is based on the ICRRSgrade, is grouped as follows:

High Grade (BRR 1 to 7)Under this category, the borrower has the apparent ability to satisfy its obligations in full andtherefore, no loss in ultimate collection is anticipated. These loans or portions thereof are secured byhold-outs on deposits/deposit substitute, margin deposits or government-supported securities, otherreadily marketable collateral or are supported by sufficient credit and financial information offavorable nature to assure repayment as agreed.

Standard Grade (BRR 8 to 10)Under this category are accounts not considered adversely classified but require closesupervision/monitoring due to some warning signals such as start-up business, substantial changes inthe business affecting operation or management, three continuous years of substantial decline inincome (exclusive of extraordinary income/losses).

Substandard Grade or Past-Due (BRR 11 to 14)Under this category are loans which exhibit unfavorable record or unsatisfactory characteristics, orwhere existing facts, conditions and values, make collection or liquidation in full improbable.Positive and vigorous management action is required to avert or minimize loss.

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The description of the loan grades or Internal Credit Risk Rating used by the Group for consumerloans follow:

Risk Grade Score Range DescriptionAssessment of CreditQuality

AA 840-900 Very low risk High gradeBB 830-839 Low risk High gradeCC 810-829 Low risk High gradeDD 790-809 Medium risk Standard gradeEE 770-789 Medium risk Standard gradeFF 750-769 Medium risk Standard gradeGG 730-749 Medium risk Standard gradeHH 700-729 High risk Substandard gradeII 640-699 High risk Substandard gradeJJ 300-639 Very high risk Substandard grade

Due from banks, interbank receivables, government securities and corporate investmentsThe Group follows an internally developed risk rating system for local banks and external risk ratings[that is, Standard and Poor’s (S&P)] for foreign banks, government securities and corporateinvestments.

A description of the rating systems for local banks follows:

High Grade (Tier 1)Tier 1 - Banks categorized under this tier are capable of withstanding very difficult market conditionsfor 2-3 years without deteriorating to a substandard credit classification by virtue of their size,reputation and ranking in the industry.

Standard Grade (Tier 2 to Tier 3)These are accounts that have potential weaknesses that deserve management’s close attention. Thesepotential weaknesses, if left uncorrected, may affect the repayment of the financial instrument, thus,increase credit risk to the Group.

Tier 2 - Banks categorized under this tier may deteriorate to substandard within 1-2 years under verydifficult market conditions.

Tier 3 - Banks categorized under this tier may deteriorate to substandard within one year under verydifficult market conditions. These are banks, which fall short relative to size, in view of perceivedconcern of uncertainty about their portfolio, earnings, or market condition. Banks with total networth of P=3.00 billion to less than P=4.50 billion and net income of P=200.00 million to less thanP=400.00 million are included in this category.

Substandard Grade (Tier 4)Tier 4 - These are banks, which fall short relative to size, in view of perceived concern of uncertaintyabout their portfolio, earnings, or market condition. Banks with total net worth of P=1.50 billion toless than P=3.00 billion and net income of P=70.00 million to less than P=200.00 million are included inthis category.

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The following is the credit rating scale applicable for foreign banks, government securities, andcorporate investment outlets (aligned with S&P ratings):

AAA - Obligor’s capacity to meet its financial commitment is extremely strong.

AA - Obligor’s capacity to meet its financial commitment is very strong. It differs from the highest-rated obligors at a minimal degree.

A - Obligor has strong capacity to meet its financial commitments but is somewhat more susceptibleto the adverse effects of changes in circumstances and economic conditions than obligors rated inhigher-rated categories.

BBB and below:

BBB - Obligation rated ‘BBB’ has adequate protection parameters. However, adverse economicconditions or changing circumstances are more likely to lead to a weakened capacity of the obligor tomeet its financial commitment on the obligation.

BB - Obligation is less vulnerable to nonpayment than other speculative issues. However, it facesmajor ongoing uncertainties or exposure to adverse business, financial, or economic conditions whichcould lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

B - Obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated ‘BB’, but theobligor currently has the capacity to meet its financial commitment on the obligation.Adverse business, financial, or economic conditions will likely impair the obligor’s capacity orwillingness to meet its financial commitment on the obligation.

CCC - Obligation is currently vulnerable to nonpayment, and is dependent upon favorable business,financial, and economic conditions for the obligor to meet its financial commitment on the obligation.In the event of adverse business, financial, or economic conditions, the obligor is not likely to havethe capacity to meet its financial commitment on the obligation.

CC - Obligation is currently highly vulnerable to nonpayment.

C - Obligation is currently highly vulnerable to nonpayment, payment arrearages allowed by theterms of the documents, and subject of a bankruptcy petition or similar action which have notexperienced a payment default.

Among others, the ‘C’ rating may be assigned to subordinated debt, preferred stock or otherobligations on which cash payments have been suspended in accordance with the instrument’s termsor when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issueis either repurchased for an amount of cash or replaced by other instruments having a total value thatis less than par.

D - Obligation is in payment default. Payments on an obligation are not made on the due date even ifthe applicable grace period has not expired. The ‘D’ rating also will be used upon the filing of abankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. Anobligation’s rating is lowered to ‘D’ upon completion of a distressed exchange offer, whereby someor all of the issue is either repurchased for an amount of cash or replaced by other instruments havinga total value that is less than par.

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The tables below show the credit quality by class of financial assets based on the credit rating systemof the Group and the Parent Company:

Consolidated2017

Neither Past Due nor Impaired

High GradeStandard

GradeSubstandard

Grade UnratedPast Due ButNot Impaired

Past Due andImpaired Total

Due from BSP P=15,340,711 P=− P=− P=− P=− P=− P=15,340,711Due from other banks 372,650 202,196 − 86,369 − − 661,215

15,713,361 202,196 − 86,369 − − 16,001,926Loans and receivables:

Receivables from customers*: Corporate 34,585,237 2,119,749 4,968 − 426,375 1,197,733 38,334,062 Consumer 11,588,636 13,429 295,187 − 1,609,137 36,942 13,543,331 Unquoted debt securities 1,406,267 − − 1,405,560 − − 2,811,827 Accrued interest receivable 264,611 20,525 9,200 128,370 54,473 337,417 814,596 Accounts receivable 219 216,813 19,702 − − 14,403 251,137 Sales contracts receivable − 129,596 − − 30,129 8,368 168,093 RCOCI − − 10,400 − − − 10,400 Refundable security deposits − − 29,414 − − − 29,414

47,844,970 2,500,112 368,871 1,533,930 2,120,114 1,594,863 55,962,860Total P=63,558,331 P=2,702,308 P=368,871 P=1,620,299 P=2,120,114 P=1,594,863 P=71,964,786*At gross amount but net of unearned discounts and capitalized interest

AA A BBB and Below TotalDue from other banks P=320,871 P=176,864 P=7,113 P=504,848Interbank loans receivable 62,413 472,512 – 534,925Financial assets at FVTPL: Government securities 998,542 – 1,741,929 2,740,471Investment securities at amortized cost: Government securities – – 13,789,737 13,789,737 Private bonds – 1,377,466 249,998 1,627,464

P=1,381,826 P=2,026,842 P=15,788,777 P=19,197,445

Consolidated2016


High GradeStandard

GradeSubstandard



Due from BSP P=13,356,075 P=– P=– P=– P=– P=– P=13,356,075Due from other banks 343,647 33,712 262,425 13,051 – – 652,835

13,699,722 33,712 262,425 13,051 – – 14,008,910Loans and receivables:

Receivables from customers*: Corporate 29,837,461 2,737,701 8,274 – 511,660 1,156,648 34,251,744 Consumer 8,149,510 231,746 43,095 – 1,104,873 38,204 9,567,428 Unquoted debt securities 1,606,323 – – 1,551,050 – – 3,157,373 Accrued interest receivable 232,058 16,074 73 113,773 14,342 403,801 780,121 Accounts receivable 1,508 192,045 99,856 425,678 – 42,264 761,351 Sales contracts receivable – 142,614 9,255 – 17,145 10,574 179,588 RCOCI – – 2,406 – – – 2,406 Refundable security deposits – 1,604 28,449 – – – 30,053


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AA A BBB and Below TotalDue from other banks P=446,386 P=683,771 P=1,213,766 P=2,343,923Interbank loans receivable 49,720 260,411 – 310,131Financial assets at FVTPL: Government securities – – 188,014 188,014 Private bonds – – 112,469 112,469Investment securities at amortized cost: Government securities – – 11,510,454 11,510,454 Private bonds – – 1,625,040 1,625,040

P=496,106 P=944,182 P=14,649,743 P=16,090,031

Parent Company2017


High GradeStandard

GradeSubstandard



Due from BSP P=15,279,084 P=− P=− P=− P=− P=− P=15,279,084Due from other banks 172,407 202,196 − 86,369 − − 460,972

15,451,491 202,196 − 86,369 − − 15,740,056Loans and receivables:

Receivables from customers*: Corporate 34,585,237 2,119,749 4,968 − 426,375 1,197,733 38,334,062 Consumer 10,365,551 − 275,845 − 1,222,214 − 11,863,610 Unquoted debt securities 1,406,267 − − 1,405,560 − − 2,811,827 Accrued interest receivable 208,738 20,525 9,200 128,370 54,473 360,188 781,494 Accounts receivable − 214,955 19,702 − − − 234,657 Sales contracts receivable − 129,569 − − 25,764 − 155,333 RCOCI − − 10,400 − − − 10,400 Refundable security deposits − − 27,810 − − − 27,810


AA A BBB and Below TotalDue from other banks P=320,871 P=176,864 P=7,113 P=504,848Interbank loans receivable 62,413 472,512 – 534,925Financial assets at FVTPL: Government securities 998,542 – 1,741,929 2,740,471Investment securities at amortized cost: Government securities – – 13,789,737 13,789,737 Private bonds – 1,377,466 249,998 1,627,464

P=1,381,826 P=2,026,842 P=15,788,777 P=19,197,445

Parent Company2016


High GradeStandard

GradeSubstandard



Due from BSP P=13,276,681 P=– P=– P=– P=– P=– P=13,276,681Due from other banks 20,837 4,312 262,425 – – – 287,574

13,297,518 4,312 262,425 – – – 13,564,255Loans and receivables:

Receivables from customers*: Corporate 29,837,461 2,737,701 8,274 – 511,660 1,156,648 34,251,744 Consumer 6,664,113 206,788 – – 980,203 – 7,851,104 Unquoted debt securities 1,606,323 – – 1,551,050 – – 3,157,373 Accrued interest receivable 147,480 15,913 73 113,773 14,342 456,639 748,220 Accounts receivable – 228,281 99,856 425,678 – – 753,815 Sales contracts receivable – 142,597 9,255 – 15,556 – 167,408 RCOCI – – 2,406 – – – 2,406 Refundable security deposits – – 28,449 – – – 28,449


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AA A BBB and Below TotalDue from other banks P=446,386 P=683,771 P=1,213,766 P=2,343,923Interbank loans receivable 49,720 260,411 – 310,131Financial assets at FVTPL: Government securities – – 188,014 188,014 Private bonds – – 112,469 112,469Investment securities at amortized cost: Government securities – – 11,510,454 11,510,454 Private bonds – – 1,625,040 1,625,040

P=496,106 P=944,182 P=14,649,743 P=16,090,031

As of December 31, 2017 and 2016, restructured loans by the Group which are neither past due norimpaired are as follow:

Consolidated Parent Company2017 2016 2017 2016

Receivables from customers:Corporate P=55,229 P=95,886 P=55,229 P=95,886Consumer 33,941 15,003 35,211 10,777

Impairment AssessmentThe main considerations for the loan impairment assessment include whether any payments ofprincipal or interest are overdue by more than 90 days, or if there are any known difficulties in thecash flows of counterparties, credit rating downgrades, or infringement of the original terms of thecontract. The Group addresses impairment assessment in two areas: specific or individually assessedallowances and collectively assessed allowances.

Specific impairment testingAccounts that are subjected to specific impairment are those individually significant and withobjective evidence of impairment. Indicators of impairment include the following conditions/events: account is equivalent to the Parent Company’s internal credit risk rating of 11 to 14, with pastdue interest and/or principal payments and adverse changes in industry conditions that affect theborrower.

Net recoverable amount is the total cash inflows to be collected over the entire term of the loan,which may be based on an agreed restructuring agreement, rehabilitation plan or expected proceedsfrom the foreclosing and sale of the collateral. Upon determining the forecast of expected net cashflows, the present value of the net expected cash flows from the asset is determined using the originalEIR.

Collective impairment testingAccounts that are not individually significant and have no objective evidence of impairment aregrouped based on similar credit risk characteristics and are collectively assessed for impairment.

a. Collective impairment - corporate accountsFor the purpose of collective impairment assessment, corporate accounts are grouped on the basisof the economic activity of the borrower. Impairment loss is derived by multiplying theoutstanding loan balance against a loss rate. The loss rate, which estimates the incurred loss fromthe credit exposure, is the product of the Probability of Default Rate (PD) and the Loss GivenDefault Rate (LGD). PD is estimated based on the three-year historical average defaultexperience of the Parent Company, while LGD is estimated based on loss experience for the samereference period.

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b. Collective impairment - consumer accountsReceivables from consumer loans are assessed for impairment collectively because thesereceivables are not individually significant. Accounts are grouped by type of product - personalloans, home loans and auto loans. The allowance for credit losses is determined based on the netflow rate methodology. This methodology relies on the historical data of net flow tables toestablish a percentage (‘net flow rate’) of receivables that are current or in any state ofdelinquency (that is, 30, 60, 90, 120, 150 and 180 days past due) as of the statement of financialposition date. The gross provision is then computed based on the outstanding balances of thesereceivables from consumer loans as of the statement of financial position date and the net flowrates determined for the current and each delinquency bucket. These rates are based on theGroup’s historical experience, which covers a minimum of three-year cycle.

Aging analysis of past due but not impaired loans per class of financial assetsAging analysis of past due but not impaired financial assets are shown below:

Consolidated2017

Up to 1 Month1 to 3

Months3 to 6

Months6 to 12

MonthsGreater

than 1 Year TotalReceivables from

customers:Corporate loans P=40,226 P=21,524 P=7,942 P=27,490 P=329,193 P=426,375Consumer loans 442,501 – 127,612 479,941 559,083 1,609,137

Accrued interestreceivable 6,322 64 4,395 5,564 38,128 54,473

Sales contracts receivable – 10,823 391 6,180 12,735 30,129P=489,049 P=32,411 P=140,340 P=519,175 P=939,139 P=2,120,114

Consolidated2016

Up to 1 Month1 to 3

Months3 to 6

Months6 to 12

MonthsGreater


customers:Corporate loans P=6,163 P=6,316 P=2,484 P=38,718 P=457,979 P=511,660Consumer loans 359,355 122,675 132,959 153,889 335,995 1,104,873

Accrued interestreceivable 5,674 7,891 1 776 – 14,342

Sales contracts receivable 1,589 163 2,404 256 12,733 17,145P=372,781 P=137,045 P=137,848 P=193,639 P=806,707 P=1,648,020

Parent Company2017

Up to 1 Month1 to 3

Months3 to 6

Months6 to 12

MonthsGreater


customers:Corporate loans P=40,226 P=21,524 P=7,942 P=27,490 P=329,193 P=426,375Consumer loans 442,501 – 102,333 118,297 559,083 1,222,214

Accrued interestreceivable 6,322 64 4,395 5,564 38,128 54,473

Sales contracts receivable – 10,823 72 2,134 12,735 25,764P=489,049 P=32,411 P=114,742 P=153,485 P=939,139 P=1,728,826

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Parent Company2016

Up to 1 Month1 to 3

Months3 to 6

Months6 to 12

MonthsGreater


customers:Corporate loans P=6,163 P=6,316 P=2,484 P=38,718 P=457,979 P=511,660Consumer loans 353,898 122,675 71,601 96,034 335,995 980,203

Accrued interestreceivable 5,674 7,891 1 776 – 14,342

Sales contracts receivable – 162 2,404 256 12,734 15,556P=365,735 P=137,044 P=76,490 P=135,784 P=806,708 P=1,521,761

Total credit risk exposureThe tables below show the different credit risk exposures of the Group and of the Parent Company byrisk weight applied in accordance with BSP Circular No. 538 as reported to the BSP:

Consolidated2017

Net Risk Weights(b)

Exposures(a) 0% 20% 50% 75% 100% 150%On-balance sheet assets(c) P=93,403 P=28,422 P=870 P=5,350 P=54 P=57,654 P=1,053Credit risk weighted on- balance sheet assets

(d = b x c) 62,124 – 174 2,675 41 57,654 1,580Off-balance sheet assets(e) 9,919 6,392 1,455 – – 2,072 –Credit risk weighted off- balance sheet assets

(f = b x e) 2,363 – 291 – – 2,072 –Banking Book(g) 535 – – – – 535 –Counter party risk-weighted assets in Banking Books (h = b x g) 535 – – – – 535 –Total Credit Risk Weighted Assets(d + f + h) P=65,022 P=– P=465 P=2,675 P=41 P=60,261 P=1,580

(a) Net of specific provisions

Consolidated2016

Net Risk Weights(b)

Exposures(a) 0% 20% 50% 75% 100% 150%On-balance sheet assets(c) P=83,757 P=24,727 P=774 P=5,632 P=65 P=51,604 P=955Credit risk weighted on- balance sheet assets

(d = b x c) 56,057 – 155 2,816 49 51,604 1,433Off-balance sheet assets(e) 11,105 7,245 1,637 – – 2,223 –Credit risk weighted off- balance sheet assets

(f = b x e) 2,550 – 327 – – 2,223 –Banking Book(g) 592 – – – – 592 –Counter party risk-weighted assets in Banking Books (h = b x g) 592 – – – – 592 –Total Credit Risk Weighted Assets(d + f + h) P=59,199 P=– P=482 P=2,816 P=49 P=54,419 P=1,433(a) Net of specific provisions

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Parent Company2017

Net Risk Weights(b)

Exposures(a) 0% 20% 50% 75% 100% 150%On-balance sheet assets(c) P=91,273 P=28,332 P=865 P=5,350 P=– P=55,780 P=946Credit risk weighted on- balance sheet assets

(d = b x c) 60,047 – 173 2,675 – 55,780 1,419Off-balance sheet assets(e) 9,919 6,392 1,455 – – 2,072 –Credit risk weighted off- balance sheet assets

(f = b x e) 2,363 – 291 – – 2,072 –Banking Book(g) 535 – – – – 535 –Counter party risk-weighted assets in Banking Books (h = b x g) 535 – – – – 535 –Total Credit Risk Weighted Assets(d + f + h) P=62,945 P=– P=464 P=2,675 P=– P=58,387 P=1,419(a) Net of specific provisions

Parent Company2016

Net Risk Weights(b)

Exposures(a) 0% 20% 50% 75% 100% 150%On-balance sheet assets(c) P=81,376 P=24,625 P=766 P=5,632 P=– P=49,494 P=859Credit risk weighted on- balance sheet assets

(d = b x c) 53,752 – 153 2,816 – 49,494 1,289Off-balance sheet assets(e) 11,105 7,245 1,637 – – 2,223 –Credit risk weighted off- balance sheet assets

(f = b x e) 2,550 – 327 – – 2,223 –Banking Book(g) 593 – – – – 593 –Counter party risk-weighted assets in Banking Books (h = b x g) 593 – – – – 593 –Total Credit Risk Weighted Assets(d + f + h) P=56,895 P=– P=480 P=2,816 P=– P=52,310 P=1,289(a) Net of specific provisions

Liquidity Risk and Funding ManagementLiquidity risk is the risk that the Group will be unable to meet its payment obligations when they falldue under normal and stress circumstances. To limit this risk, management has arranged diversifiedfunding sources in addition to its core deposit base, manages assets with liquidity in mind andmonitors future cash flows and liquidity on a daily basis.

This incorporates an assessment of expected cash flows and the availability of high grade collateralwhich could be used to secure additional funding, if required. In addition, the Group makes use of amonthly system generated Liquidity Gap Report in analyzing its liquidity position where thedifference between the Group’s maturing assets and liabilities is captured. A Maximum CumulativeOutflow limit is likewise established to control the liquidity gap for each currency. The ALCO meetstwice every month to discuss, among others, the liquidity state of the Group.

The Group maintains a portfolio of highly marketable and diverse assets that can be easily liquidatedin the event of an unforeseen interruption of cash flows. The Group also has committed lines ofcredit that it can access to meet liquidity needs. In addition, the Group maintains a statutory depositwith the BSP equal to 20.00% of customer deposits. The liquidity position is assessed and managed

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under a variety of scenarios, giving due consideration to stress factors relating to both the market ingeneral and specifically to the Group.

In managing intraday liquidity, the Parent Company has an internal buffer fund called “SecondaryReserve” for Deposit Liabilities, Deposit Substitutes, and Repurchase Agreements. The buffer fundserves to manage potential substantial liability outflows and the demand and supply of funds for newloans. This will allow the Parent Company to readily support its new business strategies anddirection and management of liquidity risk. The daily movement of Secondary Reserve serves as aprimary indicator of liquidity condition of the Parent Company. In addition, the Parent Companymonitors the liquidity characteristics of its portfolio of assets that will provide necessary liquiditysupport during periods of liquidity stress as required by BSP Circular No. 905.

Analysis of financial instruments by remaining contractual maturitiesThe tables below summarize the maturity profile of the Group’s and the Parent Company’s financialinstruments as of December 31, 2017 and 2016, based on undiscounted contractual payments, exceptfor financial assets at FVTPL. Repayments which are subject to notice are treated as if notices are tobe given immediately. However, the Group and the Parent Company expect that many customerswill not request repayment on the earliest date the Group and the Parent Company could be requiredto pay and the tables do not reflect the expected cash flows indicated by the Group’s and the ParentCompany’s deposit retention history (amounts in millions):

Consolidated2017

On DemandLess than3 Months

3-12Months 1-2 Years

Beyond2 Years* Total

Financial assetsFinancial assets at FVTPL P=– P=2,740 P=– P=– P=– P=2,740Investment securities at

amortized cost:Government securities – 204 892 880 18,241 20,217Private bonds – 19 64 83 1,822 1,988

Loans and receivables:Due from BSP 15,341 – – – – 15,341Due from other banks 170 996 – – – 1,166Interbank loans receivable – 485 50 – – 535

Receivables from customers:Corporate 1,463 17,359 6,843 2,037 15,914 43,616Consumer 1,743 532 2,453 3,707 15,128 23,563

P=18,717 P=22,335 P=10,302 P=6,707 P=51,105 P=109,166Financial liabilitiesDeposit liabilities:

Demand P=19,400 P=– P=– P=– P=– P=19,400Savings 8,328 2 – – – 8,330Time 8 33,228 5,226 3,469 1,604 43,535

Bills payable:Private firms and individuals – 7,759 55 – – 7,814Banks and other financial

institutions – 4,765 – – – 4,765Outstanding acceptances 64 – – – – 64Manager’s checks 427 – – – – 427Accrued interest payable 4 83 5 3 – 95Accrued other expenses 12 268 – – – 280Other liabilities:

Accounts payable 317 – – – – 317Refundable security deposits – – 51 1 115 167Due to the Treasurer of the

Philippines 1 31 – – – 32P=28,561 P=46,136 P=5,337 P=3,473 P=1,719 P=85,226

*Including non-performing loans and receivables

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Consolidated2016




Financial assetsFinancial assets at FVTPL P=– P=300 P=– P=– P=– P=300Investment securities at

amortized cost:Government securities – 214 434 1,153 16,169 17,970Private bonds – 23 51 65 1,921 2,060

Loans and receivables:Due from BSP 13,356 – – – – 13,356Due from other banks 90 2,906 1 – – 2,997Interbank loans receivable – 260 50 – – 310



Demand P=15,464 P=– P=– P=– P=– P=15,464Savings 6,944 – – – – 6,944Time 20 33,303 2,130 3,747 2,077 41,277


institutions – – 8 – – 8Outstanding acceptances 34 – – – – 34Manager’s checks 300 – – – – 300Accrued interest payable 18 54 3 – – 75Accrued other expenses 16 245 – – – 261Other liabilities:

Accounts payable 196 – – – – 196Refundable security deposits – – 29 – 111 140Due to the Treasurer of the

Philippines – 24 – – – 24P=22,992 P=43,652 P=2,255 P=3,747 P=2,188 P=74,834


Parent Company2017




Financial assetsFinancial assets at FVTPL P=– P=2,740 P=– P=– P=– P=2,740Investment securities at

amortized cost:Government securities – 204 892 880 18,241 20,217Private bonds – 19 64 83 1,822 1,988

Loans and receivables:Due from BSP 15,279 – – – – 15,279Due from other banks – 966 – – – 966Interbank loans receivable – 485 50 – – 535



Demand P=19,480 P=– P=– P=– P=– P=19,480Savings 7,791 – – – 7,791Time 1 32,656 5,063 2,881 1,604 42,205

(Forward)

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Parent Company2017




Bills payable:Private firms and individuals P=– P=7,759 P=55 P=– P=– P=7,814Banks and other financial

institutions – 4,765 – – – 4,765Outstanding acceptances 64 – – – – 64Manager’s checks 427 – – – – 427Accrued interest payable – 79 4 – – 83Accrued other expenses – 269 – – – 269Other liabilities:

Accounts payable 303 – – – – 303Refundable security deposits – – 51 1 115 167Due to the Treasurer of the



Parent Company2016




Financial assetsFinancial assets at FVTPL P=– P=300 P=– P=– P=– P=300Investment securities at

amortized cost:Government securities – 214 434 1,153 16,169 17,970Private bonds – 23 51 65 1,921 2,060

Loans and receivables:Due from BSP 13,277 – – – – 13,277Due from other banks – 2,631 – – – 2,631Interbank loans receivable – 260 50 – – 310

Receivables from customers:Corporate 1,544 15,351 8,460 1,021 11,334 37,710Consumer 1,248 255 946 1,542 7,666 11,657


Demand P=15,572 P=– P=– P=– P=– P=15,572Savings 6,400 – – – – 6,400Time 2 32,534 1,904 3,149 2,077 39,666


institutions – – 8 – – 8Outstanding acceptances 34 – – – – 34Manager’s checks 300 – – – – 300Accrued interest payable – 50 2 3 3 58Accrued other expenses – 256 – – – 256Other liabilities:

Accounts payable 182 – – – – 182Refundable security deposits – – 29 – 111 140Due to the Treasurer of the



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The tables below show the contractual expiry of the Group’s and the Parent Company’s commitmentsand contingent liabilities as of December 31, 2017 and 2016 (amounts in millions):

2017

On DemandLess than 3

Months3 to 12

MonthsBeyond1 Year Total

Unused Commercial LC: Standby LC P=1,034 P=957 P=− P=84 P=2,075 Sight LC outstanding 401 − − − 401 Usance LC outstanding 40 47 − − 87Outstanding shipping guarantees 945 − − − 945

P=2,420 P=1,004 P=0 P=84 P=3,508

2016

On DemandLess than 3

Months3 to 12

MonthsBeyond1 Year Total

Unused Commercial LC: Standby LC P=1,596 P=170 P=457 P=– P=2,223 Sight LC outstanding 269 9 – – 278 Usance LC outstanding 16 96 5 – 117Outstanding shipping guarantees 1,241 – – – 1,241

P=3,122 P=275 P=462 P=– P=3,859

Market Risk ManagementMarket risk is the risk of loss to future earnings, fair values or future cash flows that may result fromchanges in the price of a financial instrument. The value of a financial instrument may change as aresult of changes in interest rates, foreign currency exchange rates, commodity prices, equity pricesand other market changes. The Group’s market risk originates from the Parent Company’s holdingsof foreign exchange instruments, debt securities, equity securities and derivatives.

Value-at-Risk (VaR)VaR is a statistical estimate of potential loss given prevailing market price trends, correlations andvolatilities. VaR estimates the potential decline in the value of a portfolio, under normal marketconditions, a given “confidence level” over a specified time horizon. VaR is used to alert seniormanagement whenever the potential for losses in the Parent Company’s portfolios exceeds the VaRlimit. This allows management to react quickly and adjust its portfolio strategies in different marketconditions in accordance with the Parent Company’s risk philosophy and appetite.

In April 2014, the Parent Company commenced using Bloomberg’s Portfolio VaR (PORT) module inits VaR computation. Bloomberg’s PORT run on a Parametric VaR model whose data set containsone year of historical prices and a daily update of its variance/covariance matrix. In accordance withthe BSP standards, the Parent Company uses a 99.00% confidence level and a 10-day defeasanceperiod. This means, that statistically, the Parent Company’s losses on trading operations will exceedVaR on at least 1 out of 100 trading business days.

The Market and Liquidity Risk Management Unit (MLRMU) runs VaR on a daily basis, monitors theVaR against the BOD approved VaR limit and submits Daily VaR Reports to concerneddivision/group/segment heads.

To verify the validity of the VaR model used, the Treasury Operations Division performs quarterlyback testing to examine how frequently actual daily losses exceeds the daily VaR. Backtesting resultsare reviewed by the head of Treasury Operations Division. Exceptions, if any, are reported to theROC and the BOD.

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Starting February 2015, changes were made in the VaR computation for USD ROPs to take intoaccount foreign currency risk between US dollar and Peso.

A summary of the VaR position of USD fixed income exposures of the Parent Company to changesin market conditions is as follows:

Interest Rate and Foreign ExchangeUSD Bonds from January to

December 2017(in P= millions)

USD Bonds from January toDecember 2016(in P= millions)

31 December 20.74 4.11Average Daily 14.58 62.87Highest 46.77 284.65Lowest 1.11 4.05

A summary of the VaR position of Peso fixed income exposures of the Parent Company to changes inmarket conditions is as follows:

Interest RatePeso Bonds 2017

(in P= millions)Peso Bonds 2016

(in P= millions)31 December 35.66 11.91Average Daily 36.08 60.73Highest 116.85 201.77Lowest 0.00 2.55

Stress testingSince VaR is designed to describe risk in normal market conditions (that is, 99.00% of the time), itmay not capture potential losses in the extreme that occur following movements outside theprevailing market trend. Stress testing is done to address extreme market conditions.

The Parent Company performs stress testing on its foreign currency trading position and on itsoutstanding investment portfolios. Stress testing is a technique used to determine the impact onearnings of above position/portfolios from conditions or scenarios deemed “extreme” but plausible.Stress testing is used to inform senior management as to where vulnerabilities in the ParentCompany’s portfolio actually lie.

This helps the Parent Company to evaluate its tolerance for risks and understand the combinations ofrisks that can produce large losses.

Unlike VaR, which reflects price behavior in everyday markets, stress tests simulate portfolioperformance during abnormal market periods. Accordingly, these provide information about risksfalling outside those typically captured by the VaR framework. Hence, losses resulting from stresstests are larger than the losses predicted by the VaR model.

The Parent Company’s Market & Liquidity Risk Manager performs the stress testing of tradedsecurities using uniform set of market stress shocks as prescribed by the BSP under their UniformStress Testing Program for Banks. The stress testing is conducted semi-annually and its results arereported to the ROC and BOD.

To identify possible episodes of stress in the domestic financial market, MLRMU employs the CitiEarly Warning Signal Risk Index – Philippines that measures stress in economic and financialvariables with a view of predicting weakness in local currencies. A reading above 0.5 means that

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stress is above average and a reading below 0.5 means that stress is below average. The risk indexlevel is reported monthly to ALCO and quarterly to ROC.

Interest Rate Risk ManagementInterest rate risk arises from the possibility that changes in the interest rates will affect future cashflows or the fair value of financial instruments. The Group follows a prudent policy on managing itsassets and liabilities so as to ensure that the exposure to fluctuations in interest rates is kept withinacceptable limits.

A substantial proportion of the total loan portfolio is for a term of less than one year, and the majorityof the balance of its medium-term portfolio is on a floating-rate basis. As of December 31, 2017 and2016, 51.27% and 63.75%, respectively, of the Group’s total loan portfolio comprised floating rateloans which are repriced periodically by reference to the transfer pool rate that reflects the Group’sinternal cost of funds. As a result of these factors, the Group’s exposure to interest rate fluctuations,and other market risks, is significantly reduced.

The Group, in keeping with banking industry practice, aims to achieve stability and lengthen the termstructure of its deposit base, while providing adequate liquidity to cover transactional bankingrequirements of customers. Interest is paid on substantial portion of demand accounts whichconstituted 28.21% and 25.44%, respectively, of total deposits of the Group as of December 31, 2017and 2016, respectively, and pays a variable interest rate of 0.10% to 0.50% and fixed rate of 0.10%.Rates on savings accounts and time deposit accounts, which constituted 11.78% and 60.80%,respectively, of total deposits as of December 31, 2017 and 11.00% and 64.51%, respectively, of totaldeposits as of December 31, 2016, are set by different criteria. Savings account rates are set byreference to prevailing market rates, while rates on time deposits and special savings accounts areusually priced by reference to rates applicable to prevailing rates on Philippine Treasury Bills andother money market instruments or, in the case of foreign currency deposits, Singapore InterbankOffer Rate and other benchmark dollar deposit rates in the Asian and international money marketswith similar maturities.

The following tables provide for the average EIR by period of maturity or repricing of the Group andthe Parent Company as of December 31, 2017 and 2016:


Less than3 Months

3 Monthsto 1 Year

Greaterthan

1 YearLess than3 Months

3 Monthsto 1 Year

Greaterthan

1 YearPeso-denominated assetsDue from banks 0.69% – – 1.15% – –Interbank loans 0.65% 0.60% – 0.88% – –Loans and receivables 19.41% 22.93% 17.19% 20.12% 21.17% 17.89%Peso-denominated liabilitiesDeposit liabilities 0.61% 2.28% 4.78% 1.12% 1.68% 5.46%Bills payable 2.10% 2.24% – 1.91% 1.74% –Foreign currency-denominated assetsDue from banks 0.22% – – 0.18% – –Interbank loans 0.70% – – 0.40% – –Loans and receivables 3.55% 5.94% 5.27% 5.64% 5.68% 4.49%Foreign currency-denominated liabilityDeposit liabilities 0.65% 1.29% 2.38% 0.87% 1.46% 2.37%

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Less than3 Months

Less than3 Months

Less than3 Months

Less than3 Months

3 Monthsto 1 Year

Greaterthan

1 YearPeso-denominated assetsDue from banks 0.12% – – 0.38% – –Interbank loans 0.65% 0.60% – 0.88% – –Loans and receivables 18.86% 20.54% 19.21% 13.75% 25.12% 21.75%Peso-denominated liabilitiesDeposit liabilities 0.25% 2.46% 3.28% 0.80% 0.87% 3.41%Bills payable 2.14% 2.33% – 1.91% 1.74% –Foreign currency-denominated assetsDue from banks 0.22% – – 0.18% – –Interbank loans 0.70% – – 0.40% – –Loans and receivables 3.55% 5.94% 5.27% 5.64% 5.68% 4.49%Foreign currency-denominated liabilityDeposit liabilities 0.65% 1.29% 2.38% 0.87% 1.46% 2.37%

The Group also monitors its exposure to fluctuations in interest rates by measuring the impact ofinterest rate movements on its interest income. This is done by modeling the impact of variouschanges in interest rates to the Group’s interest-related income and expenses.

The method by which the Group measures the sensitivity of its assets and liabilities to interest ratefluctuations is by way of interest rate analysis. This analysis provides the Group with a measure ofthe impact of changes in interest rates on the actual portfolio, that is, the risk exposure of futureaccounting income. The repricing gap is calculated by distributing the financial assets and financialliabilities into tenor buckets according to the time remaining to maturity or next repricing date andthen obtaining the difference between the total of the repricing (interest rate sensitive) assets andrepricing (interest rate sensitive) liabilities.

A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amountof interest rate sensitive assets. A gap is considered positive when the amount of interest ratesensitive assets exceeds the amount of interest rate sensitive liabilities. Accordingly, during a periodof rising interest rates, a bank with a positive gap would be better positioned than one with a negativegap to invest in or hold higher yielding assets more quickly than it would need to refinance itsinterest-bearing liabilities. During a period of falling interest rates, a bank with a positive gap wouldtend to see its assets repricing at a faster rate than one with a negative gap, which may restrain thegrowth of its net income or result in a decline in net interest income.

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The following tables set forth the asset-liability gap position of the Group and the Parent Company asof December 31, 2017 and 2016 (amounts in millions):

Consolidated2017

Up to1 Month

More than1 Month to

3 Months

Morethan 3 to

12 Months

More than1 Year

but lessthan

2 YearsBeyond2 Years Total

AssetsDue from other banks P=1,166 P=− P=− P=− P=− P=1,166Interbank loans receivable 535 − − − − 535Financial assets at FVTPL 999 − − − 1,741 2,740Investment securities at

amortized cost − 5 403 203 14,806 15,417Loans and receivables 6,458 11,036 7,086 2,804 25,969 53,353

9,158 11,041 7,489 3,007 42,516 73,211LiabilitiesDeposit liabilities 50,191 10,639 5,076 3,110 1,720 70,736Bills payable 11,340 1,172 55 − − 12,567

61,531 11,811 5,131 3,110 1,720 83,303Asset-liability gap (P=52,373) (P=770) P=2,358 (P=103) P=40,796 (P=10,092)

Consolidated2016

Up to1 Month

More than1 Month to

3 Months

Morethan 3 to

12 Months

More than1 Year

but less than2 Years

Beyond2 Years Total

AssetsDue from other banks P=2,997 P=– P=– P=– P=– P=2,997Interbank loans receivable 260 – 50 – – 310Financial assets at FVTPL – – – – 300 300Investment securities at

amortized cost – 20 49 412 12,654 13,135Loans and receivables 9,115 9,101 8,114 1,337 18,422 46,089

12,372 9,121 8,213 1,749 31,376 62,831LiabilitiesDeposit liabilities 47,242 8,400 1,998 3,007 2,499 63,146Bills payable – 10,015 84 – – 10,099

47,242 18,415 2,082 3,007 2,499 73,245Asset-liability gap (P=34,870) (P=9,294) P=6,131 (P=1,258) P=28,877 (P=10,414)

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Parent Company2017

Up to1 Month

More than1 Month to

3 Months

Morethan 3 to

12 Months

More than1 Year

but lessthan

2 YearsBeyond2 Years Total

AssetsDue from other banks P=966 P=− P=− P=− P=− P=966Interbank loans receivable 535 − − − − 535Financial assets at FVTPL 999 − − − 1,741 2,740Investment securities at

amortized cost − 5 403 203 14,806 15,417Loans and receivables 6,441 11,035 7,059 2,685 24,400 51,620

8,941 11,040 7,462 2,888 40,947 71,278LiabilitiesDeposit liabilities 49,345 10,458 4,915 2,789 1,538 69,045Bills payable 11,340 1,172 55 − − 12,567

60,685 11,630 4,970 2,789 1,538 81,612Asset-liability gap (P=51,744) (P=590) P=2,492 P=99 P=39,409 (P=10,334)

Parent Company2016

Up to1 Month

More than1 Month to

3 Months

Morethan 3 to

12 Months

More than1 Year

but less than2 Years

Beyond2 Years Total

AssetsDue from other banks P=2,631 P=– P=– P=– P=– P=2,631Interbank loans receivable 260 – 50 – – 310Financial assets at FVTPL – – – – 300 300Investment securities at

amortized cost – 20 49 412 12,654 13,135Loans and receivables 8,714 9,093 7,952 1,223 17,322 44,304

11,605 9,113 8,051 1,635 30,276 60,680LiabilitiesDeposit liabilities 46,383 8,061 1,771 2,967 2,017 61,199Bills payable – 10,015 84 – – 10,099

46,383 18,076 1,855 2,967 2,017 71,298Asset-liability gap (P=34,778) (P=8,963) P=6,196 (P=1,332) P=28,259 (P=10,618)

The following tables demonstrate the sensitivity of the cumulative net position of risk-sensitive assetsand risk-sensitive liabilities to a reasonable change in interest rates, with all other variables heldconstant (amounts in millions):

2017Changes in Interest Rates (in Basis Points)

Changes in interest rates (in basis points) +50 -50 +100 -100Change in annualized net interest income (P=66.46) P=66.46 (P=132.93) P=132.93

2016Changes in Interest Rates (in Basis Points)

Changes in interest rates (in basis points) +50 -50 +100 -100Change in annualized net interest income (P=114.44) P=114.44 (P=228.87) P=228.87

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The table below shows the Group’s and the Parent Company’s different market risk-weighted assetsusing the standardized approach in accordance with BSP Circular No. 538:

Type of Market Risk Exposure 2017 2016Interest rate exposures P=663,226 P=248,411Foreign exchange exposures 104,679 296,862

P=767,905 P=545,273

Foreign Currency Risk ManagementCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes inforeign exchange rates. Foreign currency liabilities generally consist of foreign currency-deposits inthe Parent Company’s FCDU account made in the Philippines or which are generated fromremittances to the Philippines by Filipino expatriates and overseas Filipino workers who retain fortheir own benefit or for the benefit of a third party, foreign currency deposit accounts with the ParentCompany and foreign currency-denominated borrowings appearing in the regular books of the ParentCompany.

Foreign currency deposits are generally used to fund the Parent Company’s foreign currency-denominated loan and investment portfolio in the FCDU. Banks are required by the BSP to match theforeign currency assets with the foreign currency liabilities held through FCDUs. In addition, theBSP requires a 30.00% liquidity reserve on all foreign currency liabilities held through FCDUs.

The Parent Company’s policy is to maintain foreign currency exposure within acceptable limits andwithin existing regulatory guidelines. The Parent Company believes that its profile of foreigncurrency exposure on its assets and liabilities is within limits for a financial institution engaged in thetype of business in which the Parent Company is engaged in.

The ERMG uses VaR, Foreign Exchange Sensitivity Testing, and Foreign Exchange Stress Testing tomeasure risk inherent to the Parent Company’s foreign currency net exposures. In assessing theforeign currency risk, the Parent Company employs a pre-defined key risk indicator under MarketRisk Assessment Matrix to determine the level of risk (for example, Low Risk, Moderate Risk, HighRisk) the results of which are reported to the ROC on a quarterly basis.

The table summarizes the Group’s and Parent Company’s exposure to foreign exchange risk as ofDecember 31, 2017 and 2016. Included in the table are the Group’s and the Parent Company’s assetsand liabilities at carrying amounts, categorized by currency (amounts in Peso equivalent):

2017 2016USD Others* Total USD Others* Total

AssetsCash on hand P=2,415 P=175 P=2,590 P=2,415 P=175 P=2,590Due from other banks 74,248 63,682 137,930 4,770 39,202 43,972Interbank loans receivable 62,413 − 62,413 49,720 – 49,720Financial assets at amortized cost – 240,063 240,063 – 206,984 206,984Loans and receivables:

Corporate loans 213,091 16,584 229,675 148,659 4,430 153,089Accrued interest receivable 263 3,519 3,782 471 3,004 3,475

Other assets 76 129 205 2,885 112 2,997352,506 324,152 676,658 208,920 253,907 462,827

LiabilitiesDeposit – 235,638 235,638 - 10,895 10,895Outstanding acceptances 56,417 7,669 64,086 29,926 4,430 34,356Other liabilities:

Others 2,499 1 2,500 71 – 7158,916 243,308 302,224 29,997 15,325 45,322

Net exposure P=293,590 P=80,844 P=374,434 P=178,923 P=238,582 P=417,505*Includes Euro, Australian Dollar, Japanese Yen, Swiss Franc, Canadian Dollar, Singapore Dollar

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The tables below indicate the exposure of the Group (excluding the Parent Company’s FCDU) toUSD on its non-trading monetary assets and liabilities. The analysis calculates the effect of areasonably possible movement of the base currency rate against the USD, with all other variables heldconstant, on the statement of income and statement of comprehensive income. A negative amount inthe tables reflects a potential net reduction in income or OCI, while a positive amount reflects apotential net increase. The Group’s exposure in currencies other than USD is minimal.

2017Changes in Foreign Exchange Rates

Changes in foreign exchange rates +3.00% -3.00% +4.00% -4.00%Change in annualized net income P=8,808 (P=8,808) P=11,744 (P=11,744)

2016Changes in Foreign Exchange Rates

Changes in foreign exchange rates +3.00% -3.00% +4.00% -4.00%Change in annualized net income P=5,368 (P=5,368) P=7,157 (P=7,157)

As of December 31, 2017 and 2016, there is no impact on the Group’s OCI other than those alreadyaffecting profit or loss.

Equity Price Risk ManagementEquity price risk is the risk that the fair values of equities decrease as a result of changes in the levelsof equity indices and the value of individual stocks. The Parent Company holds a minimal amount ofequity securities, hence, any changes to equity prices are deemed to not significantly affect itsfinancial performance.

Operational RiskThe Group uses the Basic Indicator Approach in computing Operational Risk in accordance withBSP Circular No. 538 (amounts in millions) as reported to the BSP:


Average Gross Income (Previous 3 Years) P=3,354 P=2,957 P=3,121 P=2,835Capital Charge (Average Gross Income times 18.75%(a)) 629 554 585 532Risk Weighted Asset (Capital Charge times 10) P=6,289 P=5,544 P=5,851 P=5,316(a) Equivalent to adjusted capital charge of 15% of 125% to be consistent with required minimum Capital Adequacy Ratio of 10%

6. Segment Information

The Group’s operating businesses are organized and managed separately according to the nature ofservices provided and the different markets served with each segment representing a strategicbusiness unit. The Group’s business segments are as follow:

Branch Banking Group (formerly Prosperity Banking Segment) – handles the individual customers’deposits, and provides overdrafts and fund transfer facilities;

Corporate Banking Group (formerly Enterprise Banking) – manages the relationship with thecorporate and institutional clients of the Group with loans and credit facilities as the primary product;

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Treasury Segment – is responsible for the management of the Group’s balance sheet and liquidityposition. It also handles the Group’s investments in securities, both local and abroad, as well asplacements and acceptances with other banks;

Consumer Finance Segment (formerly Convenience Banking Segment) – provides the retail client’scredit requirements for the purchase of auto, home and personal loan requirements; and

Trust and Wealth Management Segment (formerly Trust Group) – is the segment that functions as theTrustee or Investment Manager for both individual and corporate accounts.

Segment’s resources, both assets and liabilities, are those operating resources that are employed by asegment in its operating activities and that either directly attributable to the segment or can beallocated to the segment on a reasonable basis.

Interest income is reported net of interest expense as management primarily relies on net interestrevenue as a performance measure, not the gross interest income and expense.

No revenue from transactions with a single external customer or counterparty amounted to 10.00% ormore of the Group’s total revenue for 2017, 2016 and 2015.

The Group’s revenue-producing assets are located in one geographical location, which is thePhilippines, therefore, geographical segment information is no longer presented.

For management purposes, business segment information provided to the BOD is based onRegulatory Accounting Principles (RAP) submitted to the BSP in compliance with the reportorialrequirements under the Financial Reporting Package (FRP) for banks, which differ from PFRS.

The following tables present income and profit and certain asset and liability information regardingthe Group’s operating segments as of and for the years ended December 31, 2017, 2016 and 2015:

Consolidated2017

BranchBanking

Group

CorporateBanking



Trust andWealth

ManagementSegment Unallocated RAP

RAP-PFRSAdjustments/

Others TotalRevenueRevenue, net of interest expense Third party (P=543,621) P=2,087,067 P=330,591 P=1,150,309 P=1,508 P=110,672 P=3,136,526 P=114,631 P=3,251,157 Intersegment 1,424,346 (1,084,348) (154,667) (335,374) (2,144) 152,187 − − −Other operating income 38,826 14,638 35,042 39,980 15,511 663,685 807,682 333,958 1,141,640Total operating income 919,551 1,017,357 210,966 854,915 14,875 926,544 3,944,208 448,589 4,392,797Compensation and fringe

benefits 290,771 80,755 50,773 223,730 10,028 508,209 1,164,266 (1,314) 1,162,952Taxes and licenses 168,858 93,996 54,958 84,515 1,076 54,136 457,539 (97) 457,442Occupancy and other

equipment-related costs 159,610 21,920 816 28,522 1,772 11,739 224,379 (28) 224,351Depreciation and amortization 114,424 3,552 1,912 26,723 694 313,424 460,729 (133,814) 326,915Provision for (reversal of) credit

and impairment losses (7,629) 164,017 − 214,962 − (69,372) 301,978 36,517 338,495Other operating expenses 264,884 52,206 80,766 134,285 2,781 305,986 840,908 393 841,301Net operating income (loss)

before income tax (P=71,367) P=600,911 P=21,741 P=142,178 (P=1,476) (P=197,578) P=494,409 P=546,932 P=1,041,341Segment resultsNet interest income (loss) P=798,532 P=826,189 P=190,484 P=733,401 (P=636) P=260,365 P=2,808,335 P=93,223 P=2,901,558Trading and securities

gain (loss) - net − − (14,569) − − − (14,569) 1,326 (13,243)Rent income − − − − − 563,245 563,245 14 563,259Service charges, fees, and

commissions 82,193 176,530 9 81,534 − 2,494 342,760 20,082 362,842Foreign exchange gain - net 22,106 7,215 40,465 − − − 69,786 1 69,787Profit (loss) from assets sold − − − 6,604 − 15,935 22,539 (10,586) 11,953Income from trust operations − − − − 15,404 − 15,404 − 15,404

(Forward)

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Consolidated2017

BranchBanking

Group

CorporateBanking



Trust andWealth



Others TotalFair value gain from investment

properties P=− P=− P=− P=− P=− P=− P=− P=353,992 P=353,992Gain on assets exchange − − − − − − − 5,487 5,487Miscellaneous 16,720 7,423 (5,423) 33,376 107 84,505 136,708 (14,950) 121,758Total operating income 919,551 1,017,357 210,966 854,915 14,875 926,544 3,944,208 448,589 4,392,797Compensation and fringe

benefits 290,771 80,755 50,773 223,730 10,028 508,209 1,164,266 (1,314) 1,162,952Taxes and licenses 168,858 93,996 54,958 84,515 1,076 54,136 457,539 (97) 457,442Occupancy and other

equipment-related costs 159,610 21,920 816 28,522 1,772 11,739 224,379 (28) 224,351Depreciation and amortization 114,424 3,552 1,912 26,723 694 313,424 460,729 (133,814) 326,915Provision for (reversal of) credit

and impairment losses (7,629) 164,017 − 214,962 − (69,372) 301,978 36,517 338,495Other operating expenses 264,884 52,206 80,766 134,285 2,781 305,986 840,908 393 841,301Total operating expenses 990,918 416,446 189,225 712,737 16,351 1,124,122 3,449,799 (98,343) 3,351,456Segment profit (loss) (71,367) 600,911 21,741 142,178 (1,476) (197,578) 494,409 546,932 1,041,341Provision for income tax − (8,918) (130,098) (11,945) − (57,673) (208,634) (114,005) (322,639)Non-controlling interests in net

income of subsidiaries − − − (558) − − (558) 555 (3)Net income (loss) (P=71,367) P=591,993 (P=108,357) P=129,675 (P=1,476) (P=255,251) P=285,217 P=433,482 P=718,699Segment assetsProperty and equipment P=445,005 P=− P=− P=62,725 P=− P=1,220,945 P=1,728,675 (P=255,087) P=1,473,588Investment properties − − − 72,857 − 3,175,210 3,248,067 3,188,066 6,436,133Unallocated assets 11,505,907 39,065,373 25,621,908 13,816,110 70,712 4,089,296 94,169,306 (2,858,777) 91,310,529Total segment assets P=11,950,912 P=39,065,373 P=25,621,908 P=13,951,692 P=70,712 P=8,485,451 P=99,146,048 P=74,202 P=99,220,250Total segment liabilities P=60,927,417 P=4,108,878 P=16,782,805 P=1,870,225 P=− P=2,461,322 P=86,150,647 P=139,239 P=86,289,886

Consolidated2016

BranchBanking

Group

CorporateBanking



Trust andWealth



Others TotalRevenueRevenue, net of interest expense Third party (P=508,091) P=1,783,189 P=452,916 P=1,202,743 P=1,363 P=234,329 P=3,166,449 P=40,179 P=3,206,628 Intersegment 1,152,228 (900,695) (169,670) (194,566) (2,155) 114,858 − − −Other operating income 14,345 6,316 5,178 24,933 16,987 530,855 598,614 246,529 845,143Total operating income 658,482 888,810 288,424 1,033,110 16,195 880,042 3,765,063 286,708 4,051,771Compensation and fringe

benefits 295,514 77,682 50,776 216,894 11,368 505,531 1,157,765 23,408 1,181,173Taxes and licenses 150,135 93,955 60,114 82,259 1,462 18,693 406,618 (147) 406,471Occupancy and other

equipment-related costs 174,420 8,439 835 25,768 1,108 (23,917) 186,653 (2,241) 184,412Depreciation and amortization 134,990 3,102 2,154 45,003 1,347 275,905 462,501 (116,923) 345,578Provision for credit and

impairment losses − 112,639 − 215,583 − 2,159 330,381 147,587 477,968Other operating expenses 235,477 51,862 82,246 180,720 2,710 353,681 906,696 (85,228) 821,468Net operating income (loss)

before income tax (P=332,054) P=541,131 P=92,299 P=266,883 (P=1,800) (P=252,010) P=314,449 P=320,252 P=634,701Segment resultsNet interest income (loss) P=588,254 P=686,340 P=238,384 P=877,532 (P=792) P=128,207 P=2,517,925 P=78,029 P=2,595,954Trading and securities

gain (loss) - net − − 44,774 − − 201,571 246,345 (198,006) 48,339Rent income − − − 1,866 − 474,105 475,971 (1,758) 474,213Service charges, fees, and

commissions 55,883 196,154 88 130,645 − 19,409 402,179 (38,544) 363,635Foreign exchange gain - net − − 11,474 − − − 11,474 − 11,474Profit (loss) from assets sold − − − 1,765 − 25,982 27,747 (35,063) (7,316)Income from trust operations − − − − 16,864 − 16,864 − 16,864Fair value gain from investment

properties − − − − − − − 286,404 286,404Gain on reclassification of

investment securities fromamortized cost to FVTPL − − − − − − − 198,700 198,700

Gain on assets exchange − − − − − − − 12,170 12,170Miscellaneous 14,345 6,316 (6,296) 21,302 123 30,768 66,558 (15,224) 51,334Total operating income 658,482 888,810 288,424 1,033,110 16,195 880,042 3,765,063 286,708 4,051,771Compensation and fringe

benefits 295,514 77,682 50,776 216,894 11,368 505,531 1,157,765 23,408 1,181,173Taxes and licenses 150,135 93,955 60,114 82,259 1,462 18,693 406,618 (147) 406,471Occupancy and other

equipment-related costs 174,420 8,439 835 25,768 1,108 (23,917) 186,653 (2,241) 184,412Depreciation and amortization 134,990 3,102 2,154 45,003 1,347 275,905 462,501 (116,923) 345,578

(Forward)

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Consolidated2016

BranchBanking

Group

CorporateBanking



Trust andWealth



Others TotalProvision for credit and

impairment losses P=− P=112,639 P=− P=215,583 P=− P=2,159 P=330,381 P=147,587 P=477,968Other operating expenses 235,477 51,862 82,246 180,720 2,710 353,681 906,696 (85,228) 821,468Total operating expenses 990,536 347,679 196,125 766,227 17,995 1,132,052 3,450,614 (33,544) 3,417,070Segment profit (loss) (332,054) 541,131 92,299 266,883 (1,800) (252,010) 314,449 320,252 634,701Provision for income tax − (1,479) (139,681) (32,107) − (45,075) (218,342) (16,479) (234,821)Non-controlling interests in net

income of subsidiaries − − − 161 − − 161 11 172Net income (loss) (P=332,054) P=539,652 (P=47,382) P=234,937 (P=1,800) (P=297,085) P=96,268 P=303,784 P=400,052Segment assetsProperty and equipment P=542,402 P=− P=− P=113,287 P=− P=1,314,184 P=1,969,873 (P=320,829) P=1,649,044Investment properties − − − 64,255 − 3,707,050 3,771,305 2,254,105 6,025,410Unallocated assets 10,723,618 34,323,086 22,905,776 9,347,353 69,413 3,089,160 80,458,406 (1,634,127) 78,824,279Total segment assets P=11,266,020 P=34,323,086 P=22,905,776 P=9,524,895 P=69,413 P=8,110,394 P=86,199,584 P=299,149 P=86,498,733Total segment liabilities P=50,140,014 P=34,518 P=21,569,914 P=− P=− P=2,174,145 P=73,918,591 P=1,798,406 P=75,716,997

Consolidated2015

BranchBanking

Group

CorporateBanking


ConsumerFinance

Segment

Trust andWealth



Others TotalRevenueRevenue, net of interest expense Third party P=2,003,627 (P=470,838) P=9,212 P=736,644 P=7,914 P=45,968 P=2,332,527 (P=6,559) P=2,325,968 Intersegment 1,301,985 (880,451) (217,788) (230,896) 4,166 22,984 − − −Other operating income (1,188,320) 1,146,093 246,533 382,623 5,283 393,886 986,098 922,799 1,908,897Total operating income 2,117,292 (205,196) 37,957 888,371 17,363 462,838 3,318,625 916,240 4,234,865Compensation and fringe

benefits 399,162 89,388 29,309 243,233 25,431 556,563 1,343,086 1,072 1,344,158Taxes and licenses 174,228 75,720 58,745 60,963 1,461 47,411 418,528 17,249 435,777Occupancy and other

equipment-related costs 159,338 2,303 1,048 20,965 903 31,155 215,712 1,979 217,691Depreciation and amortization 106,057 5,258 2,203 37,819 2,188 242,132 395,657 (105,126) 290,531Provision for (reversal of) credit

and impairment losses − 62,737 − 125,216 − (135,014) 52,939 390,863 443,802Other operating expenses 262,020 39,918 51,676 288,415 4,686 303,989 950,704 (137,816) 812,888Net operating income (loss)

before income tax P=1,016,487 (P=480,520) (P=105,024) P=111,760 (P=17,306) (P=583,398) (P=58,001) P=748,019 P=690,018Segment resultsNet interest income (loss) P=2,003,627 (P=470,838) P=9,212 P=736,644 P=7,914 P=45,968 P=2,332,527 (P=6,559) P=2,325,968Trading and securities

loss - net − − (13,552) − − − (13,552) (26,913) (40,465)Rent income − − − 300 − 403,948 404,248 (176) 404,072Service charges, fees, and

commissions 94,609 245,551 25 116,307 − 1 456,493 (29,937) 426,556Foreign exchange gain

(loss) - net 5,786 13,197 (8,029) 45 (19) − 10,980 (780) 10,200Profit (loss) from assets sold − − − 854 − 6,314 7,168 (1,833) 5,335Income from trust operations 5,344 1,410 2,079 − 9,468 − 18,301 (1) 18,300Fair value gain from investment

properties − − − − − − − 941,728 941,728Gain on disposal of investment

securities at amortized cost − − 48,174 − − − 48,174 − 48,174Gain on assets exchange − − − − − − − 3,702 3,702Miscellaneous 7,926 5,484 48 34,221 − 6,607 54,286 37,009 91,295Total operating income 2,117,292 (205,196) 37,957 888,371 17,363 462,838 3,318,625 916,240 4,234,865Compensation and fringe

benefits 399,162 89,388 29,309 243,233 25,431 556,563 1,343,086 1,072 1,344,158Taxes and licenses 174,228 75,720 58,745 60,963 1,461 47,411 418,528 17,249 435,777Occupancy and other

equipment-related costs 159,338 2,303 1,048 20,965 903 31,155 215,712 1,979 217,691Depreciation and amortization 106,057 5,258 2,203 37,819 2,188 242,132 395,657 (105,126) 290,531Provision for (reversal of) credit

and impairment losses − 62,737 − 125,216 − (135,014) 52,939 390,863 443,802Other operating expenses 262,020 39,918 51,676 288,415 4,686 303,989 950,704 (137,816) 812,888Total operating expenses 1,100,805 275,324 142,981 776,611 34,669 1,046,236 3,376,626 168,221 3,544,847Segment profit (loss) 1,016,487 (480,520) (105,024) 111,760 (17,306) (583,398) (58,001) 748,019 690,018Provision for income tax (29) (1,502) (138,142) (15,819) − (39,920) (195,412) (290,924) (486,336)Non-controlling interest in net

income of subsidiaries − − − − − 1,816 1,816 (2,197) (381)Net income (loss) P=1,016,458 (P=482,022) (P=243,166) P=95,941 (P=17,306) (P=621,502) (P=251,597) P=454,898 P=203,301Segment assetsProperty and equipment P=586,891 P=− P=− P=115,436 P=− P=1,396,578 P=2,098,905 (P=308,103) P=1,790,802Investment properties − − − 67,844 − 3,766,739 3,834,583 1,864,428 5,699,011Unallocated assets 10,612,987 26,175,773 22,879,852 7,277,161 72,269 4,546,759 71,564,801 (2,978,298) 68,586,503Total segment assets P=11,199,878 P=26,175,773 P=22,879,852 P=7,460,441 P=72,269 P=9,710,076 P=77,498,289 (P=1,421,973) P=76,076,316Total segment liabilities P=49,447,498 P=43,578 P=14,001,994 P=2,080,091 P=100,000 P=2,934,254 P=68,607,415 (P=1,455,122) P=67,152,293

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Net operating gain (loss) after tax reported to the BOD, which is based on RAP, amounted toP=286.34 million, P=96.27 million and (P=251.60 million) in 2017, 2016 and 2015, respectively. The‘RAP-PFRS adjustments/others’ pertain to differences in the accounting treatment for investmentproperties and related transactions and other adjustments.

The Group’s share in net income of an associate amounting to P=0.69 million in 2017, P=0.26 million in2016 and P=0.47 million in 2015 are included under ‘RAP-PFRS adjustments/others’.

7. Investments in Subsidiaries and an Associate

This account consists of investments in:

% of Ownership Consolidated Parent Company2017 2016 2015 2017 2016 2015 2017 2016 2015

Subsidiaries:Cost:

BDI 99.99 99.99 99.80 P=− P=− P=− P=918,296 P=520,552 P=494,544RBNI (merged with BDI in 2017) − 96.32 96.32 − − − − 393,297 348,297PISAI 100.00 100.00 100.00 − − − 10,000 10,000 10,000

− − − 928,296 923,849 852,841Accumulated share in net incomeBalance at January 1 − − − 114,117 64,434 (6,313)Share in net income − − − 27,214 49,683 70,747Balance at December 31 − − − 141,331 114,117 64,434Accumulated share in OCIBalance at January 1 − − − (1,941) (1,232) (808)Share in change in remeasurement losses on

defined benefit liability, net of tax − − − 2,387 (709) (1,210)Share in change in revaluation increment in

land, office units and condominiumproperties, net of tax − − − − − 786

Balance at December 31 − − − 446 (1,941) (1,232)Accumulated dividends receivedBalance at January 1 − − − (25,067) − −Payment of dividends − − − − (25,067) −Balance at December 31 − − − (25,067) (25,067) −

− − − 1,045,006 1,010,958 916,043

Associate - PBCom FinanceAcquisition cost 2,000 2,000 2,000 2,000 2,000 2,000Accumulated equity in net incomeBalance at January 1 10,376 10,113 9,645 10,376 10,113 9,645Share in net income 692 263 468 692 263 468Balance at December 31 11,068 10,376 10,113 11,068 10,376 10,113

13,068 12,376 12,113 13,068 12,376 12,113P=13,068 P=12,376 P=12,113 P=1,058,074 P=1,023,334 P=928,156

The movements in the cost of investments in subsidiaries are as follows:

BDI RBNI RBKI PISAI2017 2016 2017 2016 2017 2016 2017 2016

Balance at January 1 P=520,552 P=494,544 P=393,297 P=348,297 P=− P=− P=10,000 P=10,000Acquisition of a subsidiary − − − − 4,447 − − −Effect of three-way merger 397,744 − (393,297) − (4,447) − − −Additional investment − 26,008 − 45,000 − − − −Balance at December 31 P=918,296 P=520,552 P=− P=393,297 P=− P=− P=10,000 P=10,000

Acquisition of RBKIPrior to the acquisition of BDI by the Parent Company, BDI was in the process of consolidatingRBKI, a bank that was owned by the then majority owners of BDI. As BDI was pushing for anearlier approval of the Parent Company’s buy-out, on August 7, 2014, BDI informed the BSP aboutits intention to withdraw its application for consolidation with RBKI and to just submit an applicationfor merger with RBKI after the buy-out. On September 2, 2014, the Parent Company also informedthe BSP about its commitment to undertake the merger of BDI and RBKI upon receipt of the BSP

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approval for its acquisition of BDI. On January 30, 2015, the former shareholders of BDI confirmedin writing that the consideration from the Parent Company covered both the payment for its shares inBDI and RBKI. Thus, the final purchase price of P=498.99 million shall be allocated between BDI andRBKI based on the relative fair values of their net assets. The consideration paid pertaining to RBKIof P=4.45 million, which is recorded under ‘Miscellaneous assets’, is treated as deposit for futureacquisition until regulatory approvals for the acquisition of RBKI are obtained, which will besimultaneously received with the approvals for the three-way merger application.

In 2015, the Parent Company’s BOD in its regular meeting authorized the three-way merger of BDI,RBNI and RBKI, with BDI as the surviving entity, and the three rural banks entered into a Plan ofMerger agreement.

On March 30 and December 11, 2017, the Monetary Board of the BSP and the SEC, respectively,approved the three-way merger.

On December 11, 2017, simultaneous with the SEC’s approval on the three-way merger, the ParentCompany acquired 100% shares of RBKI for P=4.45 million. The acquisition provides the ParentCompany the opportunity to expand its branch network and increase its presence in the consumer andsmall-medium entities sector.

The following table summarizes the final fair values of the assets acquired and liabilities assumed asof the acquisition date:

AssetsCash and other cash items P=238Due from BSP 800Due from other banks 2,031Loans and receivables 22,220Property and equipment 272Investment properties 1,305Deferred tax assets 1,740Other assets 124

28,730LiabilitiesDeposit liabilities 24,657Bills payable and other borrowings 907Accrued interest, taxes and other expenses 2,142Other liabilities 347

28,053Net assets acquired P=677

Goodwill from acquisition is computed as follows (see Note 15):

Consideration transferred* P=4,447Less: Fair value of net assets acquired 677

P=3,770* Part of the final purchase price for the acquisition of BDI in 2014, included in ‘Miscellaneous assets’

The goodwill arising from the acquisition can be attributed mainly to expected synergies and increasein geographical presence and customer base.

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BDIThe investment cost amounting to P=918.30 million includes the consideration for the acquisition in2014 of P=494.54 million, additional investment of P=25.07 million in 2016 in the form of re-investeddividends, acquisition of non-controlling interests of P=0.94 million in 2016 and reclassification in2017 of investments in RBNI and RBKI aggregating to P=397.74 million as a result of the merger ofBDI, RBNI and RBKI, with BDI as the surviving entity, as discussed below.

Three-way merger of BDI, RBNI and RBKIOn October 28, 2015, the Parent Company’s BOD in its regular meeting authorized the three-waymerger of BDI, RBNI and RBKI, with BDI as the surviving entity.

On December 15, 2015, the three rural banks entered into a Plan of Merger agreement. Under theagreement, RBNI and RBKI will be merged to BDI upon the approval of the BSP, PDIC and SECand upon the issuance by the SEC of a Certificate of Merger.

On December 28, 2015, an application for the three-way merger was submitted to the PDIC and BSP.On the same date, management withdrew the application for increase of RBNI’s authorized capitalstock to give way to the three-way merger.

On March 9, 2016, the application for the amendment of BDI’s Articles of Incorporation and By-lawsto increase its authorized capital stock was filed with the BSP.

In a letter dated August 5, 2016, pursuant to the Board Resolution No. 2016-07-131, PDIC informedthe three rural banks that the consent to the proposed merger was granted.

On March 30 and December 11, 2017, the Monetary Board of the BSP and the SEC, respectively,approved the three-way merger.

As a result of the SEC’s approval on the three-way merger on December 11, 2017, RBNI reacquiredits own shares held by a minority shareholder for P=1.09 million, which was treated as an equitytransaction, and BDI, as the surviving entity, received all the assets and assumed all the liabilities ofRBNI and RBKI. No shares of stock were issued by BDI for the aforementioned merger.

RBNIThe investment cost as of December 31, 2016 amounting to P=393.30 million includes theconsideration for the acquisition in 2014 of P=48.30 million, the capital infusion of P=300.00 millionmade by the Parent Company in 2014 as required by the BSP, and additional capital infusion ofP=45.00 million made in December 2016.

PISAIThe investment cost of P=10.00 million represents the initial equity investment as approved by the BSPon May 2, 2014.

8. Interbank Loans Receivable and Securities Purchased under Resale Agreements (SPURA)

Interbank loans receivable of the Group and the Parent Company is comprised of USD-denominatedloans of P=534.93 million ($10.7 million) and P=310.13 million ($6.24 million) as of December 31,2017 and 2016, respectively.

As of December 31, 2017 and 2016, there is no outstanding SPURA.

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Interest income on the Group’s and the Parent Company’s interbank loans receivable and SPURAfollows:

Consolidated Parent Company2017 2016 2015 2017 2016 2015

SPURA P=34,479 P=14,441 P=7,330 P=34,479 P=14,441 P=7,330Interbank loans receivable 4,426 4,632 4,101 4,426 4,632 11,703

P=38,905 P=19,073 P=11,431 P=38,905 P=19,073 P=19,033

Interbank loans receivable bears nominal annual interest rates ranging from 0.60% to 3.31% in 2017,0.40% to 2.56% in 2016, and 2.56% to 6.25% in 2015 while SPURA bears nominal annual interestrates ranging from 3.00% to 3.15% in 2017, 3.00% to 4.00% in 2016, and 4.00% in 2015.

The Parent Company is not permitted to sell or repledge the related collateral on SPURA in theabsence of default by the counterparty.

9. Financial Assets at Fair Value Through Profit or Loss (FVTPL)

Financial assets at FVTPL of the Group and the Parent Company consist of:

2017 2016Government securities P=2,740,471 P=188,014Private bonds − 112,469

P=2,740,471 P=300,483

As of December 31, 2017 and 2016, financial assets at FVTPL include net unrealized loss amountingto P=5.74 million and P=2.35 million, respectively. Net fair value gain or loss on financial assets atFVTPL is included in ‘Trading and securities gain (loss) - net’ in the statements of income(see Note 26).

10. Equity Securities at Fair Value through Other Comprehensive Income (FVTOCI)

As of December 31, 2017 and 2016, the Group’s and the Parent Company’s equity securities carriedat FVTOCI consists of the following:

2017 2016Quoted equity securities P=49,045 P=40,935Unquoted equity securities 41,594 11,307

P=90,639 P=52,242

The Parent Company has designated the above equity investments as at FVTOCI as these are held forlong-term strategic purpose rather than for trading.

In 2017 and 2016, no dividends were declared on these equity investments and no cumulative gain orloss was transferred within equity.

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The movements in net unrealized gain on equity securities recognized in OCI follow:

2017 2016Balance at January 1 P=33,621 P=25,831Unrealized gains for the year 30,483 7,790Balance at December 31 P=64,104 P=33,621

11. Investment Securities at Amortized Cost

As of December 31, 2017 and 2016, the Group’s and the Parent Company’s investment securities atamortized cost consist of the following:

2017 2016Government securities P=13,789,737 P=11,510,454Private bonds 1,627,464 1,625,040

P=15,417,201 P=13,135,494

As of December 31, 2017, investment securities at amortized cost are comprised of the ParentCompany’s investment in Peso-denominated securities amounting to P=11.88 billion and investment inforeign currency-denominated securities amounting to P=3.54 billion ($65.98 million and€3.99 million).

As of December 31, 2016, investment securities at amortized cost is comprised of the ParentCompany’s investment in Peso-denominated securities amounting to P=10.11 billion and investment inforeign currency-denominated securities amounting to P=3.03 billion ($56.69 million and€3.98 million).

On October 1, 2016, the first day of the accounting period following the change in its business modelfor managing investments in debt securities (see Note 3), the Parent Company reclassified debtsecurities with aggregate face amount of US$59.15 million (P=2,875.00 million) from the hold-to-collect portfolio to the trading portfolio and recognized a gain on reclassification of P=198.70 million(US$4.10 million) presented under ‘Gain on reclassification of investment securities from amortizedcost to fair value through profit or loss’ in the statements of income. The change in business modelwas made to reflect the changes in the Group’s strategic priorities and to address the requirements ofBSP Circular No. 905.

In 2015, the Parent Company disposed Peso-denominated government securities carried at amortizedcost with aggregate face amount of P=600.00 million, which resulted in a gain of P=48.17 million. Thegain is presented as ‘Gain on disposal of investment securities at amortized cost’ in the statements ofincome. The disposal was made to realign the composition of Secondary Reserves as provided forunder the Parent Company’s Liquidity Contingency Plan.

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12. Loans and Receivables

This account consists of:


Receivables from customers:Corporate loans P=38,391,852 P=34,288,555 P=38,391,852 P=34,288,555Consumer loans 13,668,188 9,638,289 11,913,665 7,851,104

52,060,040 43,926,844 50,305,517 42,139,659Unearned discounts and capitalized

interest (182,647) (107,672) (107,845) (36,811)51,877,393 43,819,172 50,197,672 42,102,848

Unquoted debt securities 2,811,827 3,157,373 2,811,827 3,157,373Accrued interest receivable 814,596 780,121 781,494 748,220Accounts receivable 251,137 761,351 234,657 753,815Sales contracts receivable 168,093 179,588 155,333 167,408

55,923,046 48,697,605 54,180,983 46,929,664Less allowance for credit losses (Note 17) (2,570,079) (2,608,168) (2,560,984) (2,626,010)

P=53,352,967 P=46,089,437 P=51,619,999 P=44,303,654

BSP ReportingThe information on the concentration of credit as to industry before taking into account the allowancefor credit losses follows:


Amount % Amount % Amount % Amount %Wholesale and retail trade P=11,012,377 21.23 P=9,527,128 21.74 P=10,947,069 21.81 P=9,460,541 22.47Manufacturing 8,795,298 16.95 7,828,090 17.86 8,795,298 17.52 7,828,090 18.59Real estate, renting and business

activities 8,634,774 16.64 6,766,110 15.44 8,634,774 17.20 6,766,110 16.07Private households with employed

persons 7,898,283 15.22 6,539,698 14.92 6,675,688 13.30 5,368,000 12.75Financial intermediaries 4,022,210 7.75 4,809,601 10.98 4,022,210 8.01 4,809,601 11.42Electric, gas and water supply 3,289,698 6.34 1,605,111 3.66 3,289,698 6.55 1,605,111 3.81Construction 2,578,865 4.97 2,251,414 5.14 2,578,865 5.14 2,251,414 5.35Transport, storage and communication 1,670,510 3.22 1,813,102 4.14 1,670,510 3.33 1,813,102 4.31Agriculture, hunting and forestry 1,615,185 3.11 1,371,682 3.13 1,314,536 2.62 1,054,631 2.50Human health and social work

activities 615,214 1.19 533,505 1.22 615,214 1.23 533,505 1.27Other service activities 420,891 0.81 232,139 0.53 340,954 0.68 137,546 0.33Accommodation and food service

activities 156,585 0.30 136,112 0.31 156,585 0.31 136,112 0.32Education 52,957 0.10 53,071 0.12 48,004 0.10 53,071 0.13Mining and quarrying 48,018 0.09 281,879 0.64 48,018 0.10 281,879 0.67Others 1,066,528 2.08 70,530 0.17 1,060,249 2.10 4,135 0.01

P=51,877,393 100.00 P=43,819,172 100.00 P=50,197,672 100.00 P=42,102,848 100.00

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The information (gross of unearned discounts and capitalized interest) relating to receivables fromcustomers as to secured and unsecured and as to collateral follows:


Amount % Amount % Amount % Amount %Loans secured by:

Real estate P=7,997,286 15.36 P=7,230,862 16.46 P=7,871,633 15.65 P=7,082,333 16.80Chattel 4,459,181 8.57 3,414,021 7.77 4,458,933 8.86 3,414,021 8.10Deposit hold-out 890,530 1.71 859,978 1.87 855,758 1.70 820,524 1.95Securities and others 1,790,686 3.44 1,616,197 3.68 1,790,686 3.56 1,616,197 3.84

Secured 15,137,683 29.08 13,121,058 29.78 14,977,010 29.77 12,933,075 30.69Unsecured loans 36,922,357 70.92 30,805,786 70.22 35,328,507 70.23 29,206,584 69.31

P=52,060,040 100.00 P=43,926,844 100.00 P=50,305,517 100.00 P=42,139,659 100.00

Non-performing Loans (NPLs) classified as secured and unsecured as reported to the BSP follows:


Secured P=625,473 P=660,080 P=337,970 P=363,666Unsecured 2,003,440 2,032,222 1,850,930 1,895,349

P=2,628,913 P=2,692,302 P=2,188,900 P=2,259,015

Generally, NPLs refer to loans whose principal and/or interest is unpaid for 30 days or more after duedate or after they have become past due in accordance with existing BSP rules and regulations. Thisshall apply to loans payable in lump sum and loans payable in quarterly, semi-annual, or annualinstallments, in which case, the total outstanding balance thereof shall be considered nonperforming.

In the case of loans that are payable in monthly installments, the total outstanding balance thereofshall be considered nonperforming when three or more installments are in arrears.

In the case of loans that are payable in daily, weekly, or semi-monthly installments, the totaloutstanding balance thereof shall be considered nonperforming at the same time that they becomepast due in accordance with existing BSP regulations, that is, the entire outstanding balance of thereceivable shall be considered as past due when the total amount of arrearages reaches 10.00% of thetotal loan balance.

Loans are classified as nonperforming in accordance with BSP regulations, or when, in the opinion ofmanagement, collection of interest or principal is doubtful. Loans are not reclassified as performinguntil interest and principal payments are brought current or the loans are restructured in accordancewith existing BSP regulations, and future payments appear assured.

Loans which do not meet the requirements to be treated as performing loans shall also be consideredas NPLs. Effective January 1, 2013, the exclusion of NPLs classified as loss but are fully covered byallowance was removed by the BSP through BSP Circular No. 772. Previous banking regulationsallow banks that have no unbooked valuation reserves and capital adjustments to exclude fromnonperforming classification those loans classified as Loss in the latest examination of the BSP whichare fully covered by allowance for credit losses, provided that interest on said receivables shall not beaccrued.

As of December 31, 2017 and 2016, based on the revised definition of NPLs under BSP CircularNo. 772, NPLs of P=483.52 million for 2017 and P=484.45 million for 2016, which the Group reportedto the BSP are net of specific allowance amounting to P=2.14 billion and P=2.21 billion, respectively.Gross and net NPL ratios of the Group are 5.09% and 0.94% for 2017, respectively, and 6.14% and

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1.10% for 2016, respectively.

As of December 31, 2017 and 2016, based on the revised definition of NPLs under BSP CircularNo. 772, NPLs of P=489.98 million for 2017 and P=486.10 million for 2016, which the Parent Companyreported to the BSP are net of specific allowance amounting to P=1.70 billion and P=1.77 billion,respectively. Gross and net NPL ratios of the Parent Company are 4.42% and 0.99% for 2017,respectively, and 5.42% and 1.17% for 2016, respectively.

Unquoted Debt SecuritiesAs of December 31, 2017 and 2016, unquoted debt securities of the Group and the Parent Companyconsist of the following:

2017 2016Investments in:

Fixed-Rate Corporate Notes P=1,398,514 P=1,606,323Metro Rail Transit (MRT) bonds 1,413,313 1,551,050

P=2,811,827 P=3,157,373

As of December 31, 2017 and 2016, unquoted debt instruments include corporate notes with parvalue of P=1.41 billion and P=1.61 billion, respectively, which contain embedded prepayment optionsthat allow the issuers to redeem these notes prior to the notes’ respective maturities. The notes haveoriginal maturities ranging from 7 to 10 years. The Parent Company assessed that these options areclearly and closely related to the host note instruments, since redemption price approximates theamortized cost on redemption dates. Accordingly, these prepayment options were not accounted forseparately from the host note instruments.

The accretion of interest on unquoted debt securities amounted to P=93.48 million, P=180.52 millionand P=182.63 million in 2017, 2016 and 2015, respectively.

Accounts ReceivableIncluded in Accounts receivable is the tax withheld by the Bureau of Treasury (BTr) from the facevalue of the Parent Company’s investment in Poverty Eradication and Alleviation Certificates(PEACe) bonds upon their maturity amounting to P=425.67 million. The allowance for credit lossesprovided for the receivable as of December 31, 2015 is P=53.39 million, which has been fully reversedin 2016 as a result of the final decision of the Supreme Court (SC) on the case, as discussed below.

The Parent Company’s investment in PEACe bonds with aggregate face value of P=3.00 billionmatured on October 18, 2011. Upon investing and until the PEACe bonds matured, the ParentCompany treated these PEACe bonds as tax-exempt investments in accordance with Bureau ofInternal Revenue (BIR) Ruling 020-2001, which the BIR has issued in 2001 to address the taxation ofinterest income from such bonds. Under BIR Ruling 020-2001, PEACe bonds were not considered tobe a “public” borrowing having been issued to less than 20 investors, thus, the bonds are notconsidered as “deposit substitutes” by virtue of Section 22Y of the 1997 Tax Code. Accordingly,interest income realized from the issuance of PEACe bonds was not subjected to the 20.00% finalwithholding tax (FWT).

However, on October 7, 2011, the BIR issued BIR Ruling No. 370-2011 citing that the PEACe bondsare in the nature of deposit substitutes, thus, the interest income on such bonds is subject to the20.00% FWT. The decision under BIR Ruling No. 370-2011 was based on Rulings DelegatedAuthority-491-04 and BIR Ruling No. 008-05 which the BIR issued on September 13, 2004 andJuly 28, 2005, respectively.

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Due to BIR Ruling No. 370-2011, which imposes the withholding of the 20.00% FWT, the ParentCompany and seven other investor banks filed a case against the Government, the BIR, the BIRCommissioner, the Department of Finance, the Secretary of Finance, the BTr and the NationalTreasurer (collectively the Respondents) with the following prayers:

a. Annul BIR Ruling No. 370-2011 and related BIR rulings of the same tenor and import, for beingunconstitutional; and

b. Prohibit the Respondents from imposing the 20.00% FWT or collecting it from the investor banksand/or the Respondents, particularly the BTr, to pay the full amount of the PEACe bonds in fullupon maturity.

On October 18, 2011, the SC issued a temporary restraining order (TRO) in favor of the investorbanks which ordered the following:

a. The Government to remit the full payment for the PEACe bonds to the banks; andb. The banks to deposit in an escrow account an amount equivalent to the 20.00% FWT.

However, the BTr did not observe the TRO claiming that it was received only a day after withholdingof the FWT was made. On November 8, 2011, the investor banks filed a Manifestation with UrgentEx Parte Motion to the SC to direct the Government to comply with the TRO.

On November 2, 2011, the BIR filed its comments on the petition filed by the investor banks to theSC. On December 1, 2011, the investor banks filed its replies in response to the BIR comments. Thebanks filed a Manifestation with Urgent Reiterative Motion to Direct Respondents to comply with theTRO dated November 27, 2012, to which the Public Respondents filed their Comment dated April 11,2013. On June 5, 2013, the banks filed a Motion for Leave to File and Admit Attached Reply.

On January 13, 2015, the SC ordered the BTr to return to the holders of the PEACe bonds the 20.00%percent final withholding tax. The SC states that the PEACe bonds are not deposit substitutes subjectto the 20.00% final tax, therefore, the BTr should immediately return to the investors the 20.00% finaltax it withheld and deducted from the redemption value of the bond when it matured in 2011.

The SC anchored its decision on the fact that, upon origination, the bond was issued to only onebuyer/lender, the CODE-NGO, and not to 20 or more lenders (the 20-lender rule) which is arequirement for a debt instrument to become a public borrowing making the instrument a depositsubstitute subject to the 20.00% final tax.

On March 13, 2015, the Respondents filed their Motion for Reconsideration to the SC decision whichwas denied in a resolution dated August 16, 2016. In the said Resolution, the SC ordered the BTr toimmediately release and pay the bondholders the amount of P=4.97 billion, representing 20% finalwithholding tax on the PEACe bonds, with legal interest of 6% per annum from October 19, 2011until full payment.

On November 22, 2016, the SC issued a Resolution which denied for lack of merit, the Motion forLeave (i) to File Motion for Partial Reconsideration; and (ii) to Admit Motion for PartialReconsideration (of the Resolution dated August 16, 2016), dated October 19, 2016 filed by theOffice of Solicitor General for the respondents, considering that a second motion for reconsiderationis a prohibited pleading. With no further pleadings or motions to be entertained, the SC ordered theentry of the judgment to be made in due course. However, the BIR filed a Second Motion forReconsideration that the legal interest be imposed only from decision date (that is, 2015) rather thanmaturity date (that is, 2017).

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On January 19, 2017, the SC denied the BIR’s Second Motion for Reconsideration.

On April 11, 2017, the BTr issued Retail Treasury Bonds amounting to P=518.97 million representingthe full payment of the receivable from BTr amounting to P=425.67 million and interest earned fromOctober 2011 to April 2017 amounting to P=93.30 million, which is included under ‘Interest income -Investment securities’ in the statements of income.

Interest IncomeInterest income on loans and receivables consists of interest income on:


Receivables from customers: Corporate P=1,834,314 P=1,487,781 P=1,122,165 P=1,834,314 P=1,487,781 P=1,122,165 Consumer 1,114,204 1,118,359 1,114,972 820,211 757,627 818,201Unquoted debt securities 253,390 280,009 349,550 253,390 280,009 349,550Others 14,013 15,919 10,650 13,395 14,484 9,759

P=3,215,921 P=2,902,068 P=2,597,337 P=2,921,310 P=2,539,901 P=2,299,675

Of the total receivables from customers of the Group as of December 31, 2017, 2016 and 2015,51.27%, 63.75% and 65.53%, respectively, are subject to periodic interest repricing. The remainingpeso-denominated receivables from customers earn annual fixed interest rates ranging from 1.50% to38.40% in 2017 and 2016, and 1.75% to 38.40% in 2015, while foreign currency-denominatedreceivables from customers earn annual fixed interest rates ranging from 3.33% to 9.82% in 2017,4.49% to 9.82% in 2016, and 5.75% to 9.82% in 2015.

Unquoted debt securities have EIRs ranging from 5.47 % to 11.90% in 2017 and 2016, and 5.00% to11.90% in 2015. Sales contracts receivable bears interest rates ranging from 7.00% to 14.50% in2017, 6.00% to 14.50% in 2016, and 5.55% to 14.50% in 2015.

13. Property and Equipment

The composition of and movements in property and equipment of the Group and the Parent Companycarried at cost follow:

Consolidated2017


(Note 14)Buildings and

Improvements


EquipmentLeasehold

ImprovementsConstruction in

Progress TotalCostBalance at January 1 P=550,852 P=446,742 P=1,036,596 P=426,343 P=− P=2,460,533Additions 1,162 32,704 40,135 11,235 − 85,236Disposals − (863) (64,613) (23,547) − (89,023)Transfers (Note 14) − (44,354) 28,442 − − (15,912)Balance at December 31 552,014 434,229 1,040,560 414,031 − 2,440,834Accumulated depreciation and

amortizationBalance at January 1 162,998 278,478 700,029 188,994 − 1,330,499Depreciation and amortization 17,011 21,873 133,723 56,983 − 229,590Disposals − (746) (54,733) (8,275) − (63,754)Transfers (Note 14) − (22,758) 12,151 − − (10,607)Balance at December 31 180,009 276,847 791,170 237,702 − 1,485,728Net book value P=372,005 P=157,382 P=249,390 P=176,329 P=− P=955,106

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Consolidated2016


(Note 14)Buildings andImprovements


EquipmentLeasehold


Progress TotalCostBalance at January 1 P=549,738 P=431,571 P=1,094,665 P=331,033 P=35,617 P=2,442,624Additions 1,114 15,171 45,497 81,421 3,589 146,792Disposals − – (112,636) (18,512) − (131,148)Transfers − – 9,070 32,401 (39,206) 2,265Balance at December 31 550,852 446,742 1,036,596 426,343 − 2,460,533Accumulated depreciation and

amortizationBalance at January 1 145,901 256,038 647,891 121,002 − 1,170,832Depreciation and amortization 17,097 22,440 138,738 78,175 − 256,450Disposals − – (88,910) (10,183) − (99,093)Transfers − – 2,310 – − 2,310Balance at December 31 162,998 278,478 700,029 188,994 − 1,330,499Net book value P=387,854 P=168,264 P=336,567 P=237,349 P=− P=1,130,034

Parent Company2017


(Note 14)Buildings and

Improvements


EquipmentLeasehold


Progress TotalCostBalance at January 1 P=550,852 P=400,092 P=997,431 P=405,949 P=− P=2,354,324Additions 1,162 32,379 32,942 10,904 − 77,387Disposals − − (63,644) (23,547) − (87,191)Transfers (Note 14) − (46,619) 28,442 − − (18,177)Balance at December 31 552,014 385,852 995,171 393,306 − 2,326,343Accumulated depreciation and

amortizationBalance at January 1 162,998 267,465 681,299 175,974 − 1,287,736Depreciation and amortization 17,011 17,370 122,937 53,990 − 211,308Disposals − − (54,686) (8,275) − (62,961)Transfers (Note 14) − (22,758) 12,151 − − (10,607)Balance at December 31 180,009 262,077 761,701 221,689 − 1,425,476Net book value P=372,005 P=123,775 P=233,470 P=171,617 P=− P=900,867

Parent Company2016


(Note 14)Buildings andImprovements


EquipmentLeasehold


Progress TotalCostBalance at January 1 P=549,738 P=385,504 P=1,062,778 P=312,581 P=35,617 P=2,346,218Additions 1,114 14,588 41,046 79,479 − 136,227Disposals − – (112,636) (18,512) − (131,148)Transfers − – 6,243 32,401 (35,617) 3,027Balance at December 31 550,852 400,092 997,431 405,949 − 2,354,324Accumulated depreciation and

amortizationBalance at January 1 145,901 249,581 639,387 111,846 − 1,146,715Depreciation and amortization 17,097 17,884 128,512 74,311 − 237,804Disposals − − (88,910) (10,183) − (99,093)Transfers − − 2,310 − − 2,310Balance at December 31 162,998 267,465 681,299 175,974 − 1,287,736Net book value P=387,854 P=132,627 P=316,132 P=229,975 P=– P=1,066,588

In February 2015, management decided to lease out the entire 3rd and 4th floors of the ParentCompany’s Binondo building which were previously used as bank premises. Upon transfer, the fairvalue of the property amounting to P=18.70 million was recognized in ‘Investment properties’. Thedifference of P=16.48 million between the fair value amounting to P=18.70 million and the net carryingamount of the property amounting to P=2.22 million was recognized as a revaluation increment, net oftax.

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In February 2017, the 3rd floor was converted from office units for lease to Bank premises due to aneed for storage area and additional operating space. Upon transfer, the fair value and the newcarrying amount of the property at the date of transfer amounting to P=9.85 million was recognized asbuildings and improvements under ‘Property and equipment’ (see Note 14).

The revaluation increment, which was recognized in 2015 as a result of the change in use of the3rd floor, will be amortized over the remaining useful life of this property and will be transferreddirectly to ‘Deficit’. For the year ended December 31, 2017, the amortization of revaluation surplusamounted to P=0.31 million.

In August 2017, management decided to lease out the 5th and 6th floors of the Parent Company’sBinondo building which were previously used as bank premises. Upon transfer, the fair value of theproperty amounting to P=33.71 million was recognized in ‘Investment properties’ (see Note 14). Thedifference of P=31.32 million between the fair value amounting to P=33.71 million and the net carryingamount of the property amounting to P=2.39 million was recognized as revaluation increment, net oftax.

In December 2017, the operating lease on one of BDI’s buildings expired. BDI decided to use thebuilding to house its new data server. Consequently, this property was converted from investmentproperty to Bank premises. Upon transfer, the fair value and the new carrying amount of the propertyat the date of transfer amounting to P=2.27 was recognized as buildings and improvements under‘Property and equipment’ (see Note 14).

The Group recognized gain (loss) on disposal of furniture, fixtures, and equipment, which is includedunder ‘Profit (loss) from assets sold’ in the statements of income, amounting to (P=9.94 million),(P=7.78 million) and P=0.96 million in 2017, 2016 and 2015, respectively. The Parent Companyrecognized gain (loss) on disposal of furniture, fixtures, and equipment amounting to(P=13.13 million), (P=7.78 million) and P=0.12 million in 2017, 2016 and 2015, respectively.

As of December 31, 2017 and 2016, details of the land carried at appraised value are as follows:


CostBalance at January 1 P=165,410 P=165,410 P=117,678 P=117,678Disposal (528) − − −Balance at December 31 164,882 165,410 117,678 117,678Appraisal incrementBalance at January 1 and

December 31 353,600 353,600 352,435 352,435P=518,482 P=519,010 P=470,113 P=470,113

Depreciation and AmortizationDetails of this account are as follows:


Property and equipment P=229,590 P=256,450 P=226,400 P=211,308 P=237,804 P=207,962Software costs (Note 15) 67,345 76,634 55,011 65,933 74,198 53,111Chattel mortgage 29,980 12,494 9,120 29,893 12,494 9,119

P=326,915 P=345,578 P=290,531 P=307,134 P=324,496 P=270,192

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As of December 31, 2017 and 2016, the cost of fully depreciated furniture, fixtures and equipmentstill in use by the Group amounted to P=479.54 million and P=364.72 million, respectively.

As of December 31, 2017 and 2016, the cost of fully depreciated furniture, fixtures and equipmentstill in use by the Parent Company amounted to P=419.43 million and P=318.07 million, respectively.

14. Investment Properties

The composition of and movements in this account follow:

Consolidated2017

Foreclosed Properties

LandBuildings and

Improvements TotalOffice Units

for LeaseCondominium

Units for LeaseBalance at January 1 P=520,617 P=436,383 P=957,000 P=23,858 P=5,044,552Additions 28,238 19,463 47,701 192 6,551Transfers (Note 13) − (2,265) (2,265) 23,861 −Disposals (15,310) (3,999) (19,309) − −Net gain from fair value

adjustments 59,750 (22,167) 37,583 2,432 313,977Balance at December 31 P=593,295 P=427,415 P=1,020,710 P=50,343 P=5,365,080

Consolidated2016


LandBuildings andImprovements Total

Office Unitsfor Lease

CondominiumUnits for Lease

Balance at January 1 P=506,702 P=373,532 P=880,234 P=19,142 P=4,799,635Additions 26,357 61,492 87,849 − 1,515Disposals (26,964) (22,405) (49,369) − −Net gain from fair value

adjustments 14,522 23,764 38,286 4,716 243,402Balance at December 31 P=520,617 P=436,383 P=957,000 P=23,858 P=5,044,552

Parent Company2017


LandBuildings and

Improvements TotalOffice Units

for LeaseCondominium

Units for LeaseBalance at January 1 P=324,053 P=397,727 P=721,780 P=23,858 P=5,044,552Additions 19,326 19,463 38,789 192 6,551Transfers (Note 13) − − − 23,861 −Disposals (16,376) (3,436) (19,812) − −Net gain from fair value

adjustments 44,666 (24,216) 20,450 2,432 313,977Balance at December 31 P=371,669 P=389,538 P=761,207 P=50,343 P=5,365,080

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Parent Company2016


LandBuildings andImprovements Total

Office Unitsfor Lease

CondominiumUnits for Lease

Balance at January 1 P=330,744 P=350,664 P=681,408 P=19,142 P=4,799,635Additions 26,357 61,492 87,849 − 1,515Disposals (16,276) (35,178) (51,454) − −Net gain from fair value

adjustments (16,772) 20,749 3,977 4,716 243,402Balance at December 31 P=324,053 P=397,727 P=721,780 P=23,858 P=5,044,552

Condominium units for lease represents the contributed cost of developing the Parent Company’sAyala Avenue property, originally consisting of land and fully depreciated building, into a 52-storeybuilding (the PBCom Tower) under a joint development agreement with Filinvest Asia Corporation(Filinvest Asia).

The agreement provided for equal sharing of the cost of the project and, correspondingly, of the netusable area of the building, which was converted into a condominium property. Under the agreement,the Parent Company’s share in such cost included its land along Ayala Avenue, which was given anappraised value of P=900.00 million in 1995. The related appraisal increment was closed to surplus,net of applicable deferred tax liability, upon completion of the project in 2000.

In November 2007, by virtue of condominiumization, various condominium certificate of titles underthe name of the Parent Company were derived from transfer certificate of title (TCT) No. 134599where the declaration of restrictions and scope of coverage were annotated on October 23, 2007.

In November 2012, management, for administrative purposes and operational efficiencies, decided touse half of the 15th floor and the entire 18th floor of PBCom Tower to house the Parent Company’semployees working in the Binondo and Makati Offices. In June 2013, management decided to usethe other half of the 15th floor for the same purpose. Accordingly, the carrying values of these unitshave been reclassified to ‘Property and equipment’ at cost as of December 31, 2013. InSeptember 2014, management decided to use the entire 15th and 18th floors as areas available forlease of tenants. In October 2014, the units were reclassified to ‘Investment properties’ at their fairvalues.

In February 2015, management decided to lease out the entire 3rd and 4th floors of the ParentCompany’s Binondo building which were previously used as bank premises. Upon transfer, the fairvalue of the property amounting to P=18.70 million was recognized as office units for lease under‘Investment properties’.

In February 2017, the 3rd floor was converted from office units for lease to Bank premises due to aneed for storage area and additional operating space. Upon transfer, the fair value of the property atthe date of transfer amounting to P=9.85 million was recognized as buildings and improvements under‘Property and equipment’ (see Note 13).

In August 2017, management decided to lease out the 5th and 6th floors of the Parent Company’sBinondo building which were previously used as bank premises. Upon transfer, the fair value of theproperty amounting to P=33.71 million was recognized as office units for lease under ‘Investmentproperties’ (see Note 13).

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In December 2017, the operating lease on one of BDI’s buildings expired. BDI decided to use thebuilding to house its new data server. Consequently, this property was converted from investmentproperty to Bank premises. Upon transfer, the fair value of the property at the date of transferamounting to P=2.27 million was recognized as buildings and improvements under ‘Property andequipment’ (see Note 13).

As of December 31, 2017 and 2016, about 84.47% of the usable area that the Parent Companyacquired from the PBCom Tower project is held for lease, with the balance used for the ParentCompany’s operations. Accordingly, the cost allocable to the areas available for lease is carried asinvestment properties, while the remaining balance is carried as condominium properties and includedin ‘Property and equipment’ at cost (see Note 13).

The Parent Company recognized rental income (included under ‘Rent income’ in the statements ofincome) amounting to P=545.50 million, P=452.80 million and P=382.18 million in 2017, 2016 and 2015,respectively, on condominium properties leased out under operating leases. In 2017, 2016 and 2015,the Parent Company also recognized rental income from office units for lease amounting toP=3.26 million, P=1.69 million and P=1.97 million, respectively.

The Group recorded gain (loss) from foreclosure of loan collaterals amounting to P=5.49 million,P=12.17 million and P=3.70 million in 2017, 2016, and 2015, respectively. The Parent Companyrecognized gain (loss) from foreclosure of loan collaterals amounting to (P=0.08 million),P=12.17 million and (P=0.22 million) in 2017, 2016, and 2015, respectively. This is presented as ‘Gain(loss) on assets exchange - net’ in the statements of income.

The Group recorded gain (loss) on disposal of certain foreclosed properties amounting toP=28.59 million, (P=0.53 million) and P=5.33 million in 2017, 2016, and 2015, respectively. The ParentCompany recognized gain (loss) from the disposal of certain foreclosed properties amounting toP=23.29 million, (P=1.13 million) and P=5.44 million in 2017, 2016, and 2015, respectively. This isincluded under ‘Profit (loss) from assets sold’ in the statements of income.

Direct operating expenses (included under ‘Compensation and fringe benefits’, ‘Occupancy and otherequipment-related costs’, ‘Taxes and licenses’ and ‘Miscellaneous’) arising from investmentproperties that generated rental income amounted to P=37.74 million, P=89.69 million andP=103.90 million in 2017, 2016, and 2015, respectively.

Direct operating expenses (included under ‘Compensation and fringe benefits’, ‘Occupancy and otherequipment-related costs’, ‘Taxes and licenses’ and ‘Miscellaneous’) arising from investmentproperties that did not generate rental income amounted to P=1.54 million, P=1.14 million andP=19.54 million in 2017, 2016, and 2015, respectively.

As disclosed in Note 23, the BSP has directed the Parent Company to change its accounting treatmentfor investment properties from the fair value model to the cost model starting in 2018. Consequently,when the Parent Company prepares its 2018 financial statements, comparative information for 2017and 2018 will be restated. Had the investment properties been accounted for using the cost model,the Group’s investment properties as of December 31, 2017 and 2016 would have been P=2.68 billionand P=2.66 billion, respectively. Consolidated net income in 2017, 2016 and 2015 would havedecreased by P=282.07 million, P=266.56 million and P=644.42 million, respectively. Consequently, thiswould have resulted in a consolidated net income (loss) of P=436.64 million, P=133.32 million and(P=440.74 million) in 2017, 2016 and 2015, respectively.

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Had the investment properties been accounted for using the cost model, the Parent Company’sinvestment properties as of December 31, 2017 and 2016 would have been P=2.44 billion. Parentcompany net income in 2017, 2016 and 2015 would have decreased by P=269.85 million,P=244.29 million and P=635.83 million, respectively. Consequently, this would have resulted in aparent company net income (loss) of P=448.85 million, P=155.76 million and (P=432.52 million) in 2017,2016 and 2015, respectively.

15. Goodwill and Intangible Assets

GoodwillGoodwill represents the excess of the acquisition costs over the fair value of the identifiable assetsand liabilities of the entities acquired by the Group.

Since the three-way merger has already been committed as of December 31, 2016 (see Note 7),goodwill acquired through the acquisitions of RBNI and BDI aggregating to P=178.46 million hasbeen allocated to the merged operations of RBNI and BDI, which was considered as a single CGU forpurposes of impairment testing.

As of December 31, 2017, BDI as the surviving entity from the three-way merger is the identifiedCGU for purposes of impairment testing of the goodwill from the acquisitions of RBNI, BDI andRBKI aggregating to P=182.23 million.

Management assessed that no impairment losses shall be recognized in 2017, 2016 and 2015.

Key assumptions used in the VIU calculationThe recoverable amount of the CGU has been determined based on a VIU calculation using cash flowprojections from the five-year strategic plan for BDI (for the December 31, 2017 impairment testing)and BDI and RBNI (for the December 31, 2016 impairment testing), as approved by their BOD andthe Parent Company. The significant assumptions used in computing for the recoverable amount ofthe CGU follow:

Significant Assumptions 2017 2016Growth rates:

Loans 18.10% - 27.00% 18.10% - 27.00%Deposits 5.85% - 23.76% 5.85% - 23.76%

Discount rate 12.17% 11.18%Terminal value growth rate 5.00% 5.00%

Sensitivity to changes in assumptionsManagement believes that no reasonably possible change in any of the above key assumptions wouldcause the carrying value of the goodwill to materially exceed its recoverable amount.

Intangible AssetsThis account consists of:


Branch licenses P=365,300 P=365,300 P=102,100 P=102,100Software costs 378,879 415,866 378,333 413,908

P=744,179 P=781,166 P=480,433 P=516,008

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Branch licensesBranch licenses of the Group arose from the acquisitions of Consumer Savings Bank (CSB), BDI andRBNI. As of December 31, 2017 and 2016, details of branch licenses follow:

Consolidated Parent CompanyBranch licenses from the acquisitions of:

RBNI P=262,900 P=−CSB 102,100 102,100BDI 300 −

P=365,300 P=102,100

As of December 31, 2017 and 2016, the individual branches were identified as the CGU for purposesof impairment testing on the branch licenses.

In 2017, 2016 and 2015, the Parent Company’s impairment assessment indicates no impairment. Therecoverable amount was based on VIU calculations that use Level 3 inputs as described below.

Key assumptions used in the VIU calculationsAs of December 31, 2017 and 2016, the recoverable amounts of the CGUs have been determinedbased on a VIU calculation using cash flow projections based on financial budgets approved bymanagement covering a five-year period. The significant assumptions used in computing for therecoverable amount of the CGU follow:

Significant Assumptions 2017 2016Deposit growth rates 20.94% - 20.51% 21.57% - 23.10%Discount rate 12.39% 12.64%Terminal value growth rate 5.00% 5.00%

Sensitivity to changes in assumptionsManagement believes that no reasonably possible change in any of the above key assumptions wouldcause the carrying value of the CGU to exceed its recoverable amount.

SoftwareThe movements of software costs follow:


Balance at January 1 P=415,866 P=459,516 P=413,908 P=455,966Additions during the year 30,358 32,984 30,358 32,140

446,224 492,500 444,266 488,106Amortization during the year (Note 13) (67,345) (76,634) (65,933) (74,198)Balance at December 31 P=378,879 P=415,866 P=378,333 P=413,908

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16. Other Assets

Other assets consist of:


Receivable from BIR P=181,684 P=283,811 P=181,684 P=283,811Tax credits 328,927 250,558 328,927 249,554Nostro floats 206,414 206,414 206,414 206,414Prepaid expenses 92,732 76,597 89,881 77,710Chattel mortgage 73,615 40,395 73,615 40,395RCOCI 10,400 2,406 10,400 2,406Retirement asset (Note 27) – 1,336 – –Miscellaneous 140,152 142,070 128,659 127,827

1,033,924 1,003,587 1,019,580 988,117Less allowance for impairment

losses (Note 17) (335,981) (494,254) (335,981) (494,254)P=697,943 P=509,333 P=683,599 P=493,863

Receivable from BIRAs of December 31, 2016, this account includes creditable withholding tax and various tax creditsaggregating to P=283.81 million, which has been fully provided with allowance for impairment lossesin prior years.

In 2017, the Parent Company wrote-off receivables from the BIR amounting to P=96.88 million as aresult of the SC’s disallowance on these claims. Also, in 2017, the Parent Company reversed theallowance for impairment losses amounting to P=61.39 million (see Note 17) as a result of either:(1) the decision of the SC granting a certain portion of the Parent Company’s claim for refund fortaxable years 2004, 2007 and 2008; or (2) the decision of the Court of Tax Appeals granting a certainportion of the Parent Company’s claim for refund for taxable years 2003, 2006 and 2009, whichdecisions have been elevated to the SC and currently pending therein. As of December 31, 2017, thebalance of receivable from BIR amounted to P=181.68 million.

Nostro FloatsAs of December 31, 2017 and 2016, Nostro floats are fully provided with allowance for impairmentlosses.

Chattel MortgageIn 2017, 2016 and 2015, gain (loss) recognized by the Group and the Parent Company from thedisposal of certain chattel mortgage amounted to (P=6.70 million), P=0.99 million and (P=0.95 million),respectively. This is included under ‘Profit (loss) from assets sold’ in the statements of income.

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MiscellaneousAs of December 31, 2017 and 2016, the Group’s and the Parent Company’s miscellaneous otherassets consist of the following:


Refundable security deposits P=29,414 P=30,053 P=27,810 P=28,449DST 45,288 21,145 45,288 21,145Advance rentals 12,582 11,773 12,582 11,773Stationery and supplies 8,545 8,472 5,286 4,327Others 44,323 70,627 37,693 62,133

P=140,152 P=142,070 P=128,659 P=127,827

17. Allowance for Credit and Impairment Losses

Changes in the allowance for credit and impairment losses of the Group and the Parent Companyfollow:


Balance at January 1:Loans and receivables (Note 12) P=2,608,168 P=2,168,007 P=2,626,010 P=2,233,940Other assets (Note 16) 494,254 494,156 494,254 494,156

3,102,422 2,662,163 3,120,264 2,728,096Provision for credit and impairment

losses 338,495 477,968 288,811 396,223Revaluation of FCDU loans (564) 3,044 (564) 3,044Accounts written off and others (534,293) (40,753) (511,546) (7,099)

(196,362) 440,259 (223,299) 392,168Balance at December 31:

Loans and receivables (Note 12) 2,570,079 2,608,168 2,560,984 2,626,010Other assets (Note 16) 335,981 494,254 335,981 494,254

P=2,906,060 P=3,102,422 P=2,896,965 P=3,120,264

Below is the breakdown of provisions for (reversals of) credit and impairment losses:


Loans and receivables P=399,885 P=477,968 P=434,022 P=350,201 P=396,223 P=381,713Other assets (Note 16) (61,390) – 9,780 (61,390) – 9,780

P=338,495 P=477,968 P=443,802 P=288,811 P=396,223 P=391,493

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With the foregoing level of allowance for credit and impairment losses, management believes that theGroup has sufficient allowance to take care of any losses that the Group may incur from thenoncollection or nonrealization of its receivables and other risk assets. A reconciliation of theallowance for credit losses by class of loans and receivables follows:

Consolidated2017

Corporate Consumer Others* TotalBalance at January 1 P=1,526,640 P=596,361 P=485,167 P=2,608,168Provisions during the year 170,139 221,911 7,835 399,885Revaluation (573) – 2 (571)Others** (310,719) (61,634) (65,050) (437,403)Balance at December 31 P=1,385,487 P=756,638 P=427,954 P=2,570,079Individual impairment P=1,097,109 P=25,540 P=360,188 P=1,482,837Collective impairment 288,378 731,098 67,766 1,087,242

P=1,385,487 P=756,638 P=427,954 P=2,570,079Gross amount of loans individually determined to be impaired (Note 5) P=1,197,733 P=36,942 P=360,188 P=1,594,863* This includes allowance for credit losses on accrued interest receivable, accounts receivable and sales contracts receivables.** This includes transfers and write-offs.

Consolidated2016

Corporate Consumer Others* TotalBalance at January 1 P=1,343,829 P=314,455 P=509,723 P=2,168,007Provisions (reversals) during the year 183,302 319,011 (24,345) 477,968Revaluation 2,922 – 24 2,946Others** (3,413) (37,105) (235) (40,753)Balance at December 31 P=1,526,640 P=596,361 P=485,167 P=2,608,168Individual impairment P=1,111,870 P=29,529 P=456,639 P=1,598,038Collective impairment 414,770 566,832 28,528 1,010,130

P=1,526,640 P=596,361 P=485,167 P=2,608,168Gross amount of loans individually determined to be impaired (Note 5) P=1,156,648 P=38,204 P=456,639 P=1,651,491* This includes allowance for credit losses on accrued interest receivable, accounts receivable and sales contracts receivables.** This includes transfers and write-offs.

Parent Company2017

Corporate Consumer Others* TotalBalance at January 1 P=1,526,640 P=604,015 P=495,355 P=2,626,010Provisions (reversals) during the year 170,139 184,851 (4,789) 350,201Revaluation (573) – 2 (571)Others** (310,719) (38,525) (65,412) (414,656)Balance at December 31 P=1,385,487 P=750,341 P=425,156 P=2,560,984Individual impairment P=1,097,109 P=– P=360,188 P=1,457,297Collective impairment 288,378 750,341 64,968 1,103,687

P=1,385,487 P=750,341 P=425,156 P=2,560,984Gross amount of loans individually determined to be impaired (Note 5) P=1,197,733 P=– P=360,188 P=1,557,921* This includes allowance for credit losses on accrued interest receivable, accounts receivable and sales contracts receivables.** This includes transfers and write-offs.

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Parent Company2016

Corporate Consumer Others* TotalBalance at January 1 P=1,343,829 P=377,112 P=512,999 P=2,233,940Provisions (reversals) during the year 183,302 230,520 (17,599) 396,223Revaluation 2,922 − 24 2,946Others** (3,413) (3,617) (69) (7,099)Balance at December 31 P=1,526,640 P=604,015 P=495,355 P=2,626,010Individual impairment P=1,111,870 P=− P=456,639 P=1,568,509Collective impairment 414,770 604,015 38,716 1,057,501

P=1,526,640 P=604,015 P=495,355 P=2,626,010Gross amount of loans individually determined to be impaired (Note 5) P=1,156,648 P=– P=456,639 P=1,613,287* This includes allowance for credit losses on accrued interest receivable, accounts receivable and sales contracts receivables.** This includes transfers and write-offs.

18. Deposit Liabilities

On March 27 and May 8, 2014, the Monetary Board of the BSP issued BSP Circular No. 830 andBSP Circular No. 832, respectively, increasing the statutory and liquidity reserve requirement from18% to 20%. As of December 31, 2017 and 2016, the Group is in compliance with the aboveregulations.

As of December 31, 2017 and 2016, Due from BSP amounting to P=11.78 billion and P=10.17 billion,respectively, were set aside as reserves for deposit liabilities.

Interest expense on deposit liabilities consists of:


Demand P=47,023 P=36,531 P=36,798 P=47,023 P=36,873 P=36,798Savings 11,402 6,987 13,575 7,841 5,545 7,717Time 776,160 817,883 819,553 718,710 757,234 780,883

P=834,585 P=861,401 P=869,926 P=773,574 P=799,652 P=825,398

Peso-denominated deposit liabilities earn annual fixed interest rates ranging from 0.10% to 3.50% in2017, 2016 and 2015 while foreign currency-denominated deposit liabilities earn annual fixed interestrates ranging from 0.13% to 3.00%, 0.10% to 3.00%, and 0.10% to 1.48% in 2017, 2016 and 2015,respectively.

19. Bills Payable

This account consists of the Group’s and the Parent Company’s borrowings from:

2017 2016Private firms and individuals P=7,802,790 P=10,091,388Banks and other financial institutions 4,764,609 7,996

P=12,567,399 P=10,099,384

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Interest expense on bills payable and other borrowings consists of:


Borrowed funds P=223,618 P=170,735 P=92,423 P=222,078 P=170,101 P=88,316Net interest cost on retirement

liability (Note 27) 1,549 6,650 11,249 2,951 6,603 11,005P=225,167 P=177,385 P=103,672 P=225,029 P=176,704 P=99,321

The Group has no dollar interbank borrowings as of December 31, 2017 and 2016.

The Parent Company did not avail of peso and dollar rediscounting facilities in 2017 and 2016.

Borrowings from private firms and individuals represent deposit substitutes with maturities of1 to 216 days and bear annual interest rates ranging from 0.50% to 3.50%, 0.41% to 2.90%, and1.00% to 2.63%, in 2017, 2016 and 2015, respectively.

As of December 31, 2017 and 2016, Due from BSP amounting to P=1.60 billion and P=808.30 million,respectively, were set aside as reserves for deposit substitutes.

20. Accrued Interest, Taxes and Other Expenses



Financial liabilitiesAccrued interest payable P=94,553 P=75,416 P=83,285 P=57,832Accrued other expenses 280,357 261,403 268,886 255,754

374,910 336,819 352,171 313,586Non-financial liabilitiesRetirement liability (Note 27) 21,169 56,311 20,354 51,779Accrued taxes and licenses 25,587 21,445 19,246 17,087

46,756 77,756 39,600 68,866P=421,666 P=414,575 P=391,771 P=382,452

21. Other Liabilities



Financial liabilitiesAccounts payable P=317,211 P=195,711 P=303,284 P=182,302Refundable security deposits 167,355 140,349 167,355 140,159Due to the Treasurer of the Philippines 31,616 24,049 30,926 23,672

516,182 360,109 501,565 346,133Non-financial liabilitiesDeferred credits 167,305 166,221 167,305 166,221Withholding taxes payable 38,812 31,674 36,817 29,542Miscellaneous 108,902 58,548 102,742 59,397

315,019 256,443 306,864 255,160P=831,201 P=616,552 P=808,429 P=601,293

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Miscellaneous liabilities of the Group and the Parent Company include marginal deposits, cash lettersof credit, and deposit liabilities classified as dormant.

22. Maturity Analysis of Assets and Liabilities

The tables below show an analysis of assets and liabilities analyzed according to when they areexpected to be recovered or settled:


Due WithinOne Year

Due BeyondOne Year Total

Due WithinOne Year


Financial assets - at grossCash and other cash items P=974,207 P=– P=974,207 P=1,042,611 P=– P=1,042,611Due from BSP 15,340,711 – 15,340,711 13,356,075 – 13,356,075Due from other banks 1,166,063 – 1,166,063 2,996,758 – 2,996,758Interbank loans receivable (Note 8) 534,925 – 534,925 310,131 – 310,131Financial assets at FVTPL

(Note 9) 2,740,471 – 2,740,471 300,483 – 300,483Equity securities at FVTOCI

(Note 10) – 90,639 90,639 52,242 – 52,242Investment securities at amortized cost (Note 11) 407,852 15,009,349 15,417,201 481,771 12,653,723 13,135,494Loans and receivables (Note 12): Receivables from customers 26,548,914 25,511,126 52,060,040 27,728,796 16,198,048 43,926,844 Unquoted debt securities – 2,811,827 2,811,827 – 3,157,373 3,157,373 Accrued interest

receivable 435,476 379,120 814,596 501,515 278,606 780,121 Accounts receivable 236,835 14,302 251,137 615,942 145,409 761,351 Sales contracts receivable 157,863 10,230 168,093 38,889 140,699 179,588Other assets (Note 16): Refundable security

deposits 1,604 27,810 29,414 – 30,053 30,053 RCOCI 10,400 – 10,400 2,406 – 2,406

48,555,321 43,854,403 92,409,724 47,427,619 32,603,911 80,031,530Non-financial assets - at grossInvestments in subsidiaries and an associate (Note 7) – 13,068 13,068 – 12,376 12,376Property and equipment (Note 13) – 2,959,316 2,959,316 – 2,979,543 2,979,543Investment properties (Note 14): Condominium units for lease – 5,365,080 5,365,080 – 5,044,552 5,044,552 Foreclosed properties – 1,020,710 1,020,710 – 957,000 957,000 Office units for lease – 50,343 50,343 – 23,858 23,858Goodwill (Note 15) – 182,227 182,227 – 178,456 178,456Intangible assets (Note 15) – 744,179 744,179 – 781,166 781,166Deferred tax assets (Note 30) – 55,928 55,928 – 59,717 59,717Other assets (Note 16) 179,185 814,925 994,110 109,561 861,567 971,128

179,185 11,205,776 11,384,961 109,561 10,898,235 11,007,796P=48,734,506 P=55,060,179 103,794,685 P=47,537,180 P=43,502,146 91,039,326

Less:Unearned interest and discounts (Note 12) (182,647) (107,672)Accumulated depreciation and amortization (Note 13) (1,485,728) (1,330,499)Allowance for credit and impairment losses (Notes 12, 16 and 17) (2,906,060) (3,102,422)Total P=99,220,250 P=86,498,733

(Forward)

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Due WithinOne Year


Due WithinOne Year


Financial liabilitiesDeposit liabilities: Demand P=19,400,193 P=– P=19,400,193 P=15,464,230 P=– P=15,464,230 Savings 8,329,526 – 8,329,526 6,943,767 – 6,943,767 Time 38,153,187 4,852,911 43,006,098 35,251,411 5,486,573 40,737,984Bills payable (Note 19) 12,567,399 – 12,567,399 10,099,384 – 10,099,384Outstanding acceptances 64,085 – 64,085 34,357 – 34,357Manager’s checks 427,405 – 427,405 300,385 – 300,385Accrued interest payable (Note 20) 94,553 – 94,553 75,416 – 75,416Accrued other expenses (Note 20) 271,910 8,447 280,357 261,403 – 261,403Other liabilities (Note 21): Accounts payable 317,211 – 317,211 195,711 – 195,711 Refundable security deposits 51,218 116,137 167,355 29,029 111,320 140,349 Due to the Treasurer of the Philippines 31,616 – 31,616 24,049 – 24,049

79,708,303 4,977,495 84,685,798 68,679,142 5,597,893 74,277,035Non-financial liabilitiesDeferred tax liabilities (Note 30) – 1,228,855 1,228,855 – 1,105,523 1,105,523Retirement liability (Notes 20 and 27) – 21,169 21,169 – 56,311 56,311Accrued taxes and licenses (Note 20) 25,587 – 25,587 21,445 – 21,445Income tax payable 13,458 – 13,458 240 – 240Other liabilities (Note 21): Deferred credits 86,050 81,255 167,305 – 166,221 166,221 Withholding taxes payable 38,812 – 38,812 2,132 29,542 31,674 Miscellaneous 47,804 61,098 108,902 6,521 52,027 58,548

211,711 1,392,377 1,604,088 30,338 1,409,624 1,439,962P=79,920,014 P=6,369,872 P=86,289,886 P=68,709,480 P=7,007,517 P=75,716,997


Due WithinOne Year


Due WithinOne Year


Financial assets - at grossCash and other cash items P=941,823 P=– P=941,823 P=1,011,756 P=– P=1,011,756Due from BSP 15,279,084 – 15,279,084 13,276,681 – 13,276,681Due from other banks 965,820 – 965,820 2,631,497 – 2,631,497Interbank loans receivable (Note 8) 534,925 – 534,925 310,131 – 310,131Financial assets at FVTPL (Note 9) 2,740,471 – 2,740,471 300,483 – 300,483Equity securities at FVTOCI

(Note 10) – 90,639 90,639 52,242 – 52,242Investment securities at amortized cost (Note 11) 407,852 15,009,349 15,417,201 481,771 12,653,723 13,135,494Loans and receivables (Note 12): Receivables from customers 26,031,671 24,273,846 50,305,517 27,485,151 14,654,508 42,139,659 Unquoted debt securities – 2,811,827 2,811,827 – 3,157,373 3,157,373 Accrued interest

receivable 435,035 346,459 781,494 469,614 278,606 748,220 Accounts receivable 234,657 – 234,657 608,407 145,408 753,815 Sales contracts receivable 33,107 122,226 155,333 38,844 128,564 167,408Other assets (Note 16): Refundable security

deposits – 27,810 27,810 – 28,449 28,449 RCOCI 10,400 – 10,400 2,406 – 2,406

47,614,845 42,682,156 90,297,001 46,668,983 31,046,631 77,715,614

(Forward)

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Due WithinOne Year


Due WithinOne Year


Non-financial assets - atgross

Investments in subsidiaries and an associate (Note 7) P=– P=1,058,074 P=1,058,074 P=– P=1,023,334 P=1,023,334Property and equipment (Note 13) – 2,796,456 2,796,456 – 2,824,437 2,824,437Investment properties (Note 14): Condominium units for lease – 5,365,080 5,365,080 – 5,044,552 5,044,552 Foreclosed assets – 761,207 761,207 – 721,780 721,780 Office units for lease – 50,343 50,343 – 23,858 23,858Intangible assets (Note 15) – 480,433 480,433 – 516,008 516,008Other assets (Note 16) 173,184 808,186 981,370 99,349 857,913 957,262

173,184 11,319,779 11,492,963 99,349 11,011,882 11,111,231P=47,788,029 P=54,001,935 101,789,964 P=46,768,332 P=42,058,513 88,826,845

Less:Unearned interest and discounts (Note 12) (107,845) (36,811)Accumulated depreciation and amortization (Note 13) (1,425,476) (1,287,736)Allowance for credit and impairment losses (Notes 12, 16 and 17) (2,896,965) (3,120,264)Total P=97,359,678 P=84,382,034

Financial liabilitiesDeposit liabilities: Demand P=19,480,422 P=– P=19,480,422 P=15,571,988 P=– P=15,571,988 Savings 7,790,785 – 7,790,785 6,400,070 – 6,400,070 Time 37,460,353 4,313,454 41,773,807 34,242,621 4,984,422 39,227,043Bills payable (Note 19) 12,567,399 – 12,567,399 10,099,384 – 10,099,384Outstanding acceptances 64,085 – 64,085 34,357 – 34,357Manager’s checks 427,405 – 427,405 300,385 – 300,385Accrued interest payable (Note 20) 83,285 – 83,285 57,832 – 57,832Accrued other expenses (Note 20) 268,886 – 268,886 255,754 – 255,754Other liabilities (Note 21): Accounts payable 303,284 – 303,284 182,302 – 182,302 Refundable security deposits 52,284 115,071 167,355 29,029 111,130 140,159 Due to the Treasurer of the Philippines 30,926 – 30,926 23,672 – 23,672

78,529,114 4,428,525 82,957,639 67,197,394 5,095,552 72,292,946Non-financial liabilitiesDeferred tax liabilities (Note 30) – 1,100,902 1,100,902 – 974,865 974,865Retirement liability (Notes 20 and 27) – 20,354 20,354 – 51,779 51,779Accrued taxes and licenses (Note 20) 19,246 – 19,246 17,087 – 17,087Income tax payable 14,945 – 14,945 182 – 182Other liabilities (Note 21): Deferred credits 86,049 81,256 167,305 – 166,221 166,221 Withholding taxes payable 36,817 – 36,817 – 29,542 29,542

Miscellaneous 42,269 60,473 102,742 7,369 52,028 59,397199,326 1,262,985 1,462,311 24,638 1,274,435 1,299,073

P=78,728,440 P=5,691,510 P=84,419,950 P=67,222,032 P=6,369,987 P=73,592,019

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23. Equity

Common StockDetails and movements of common stock follow:

Shares Amount2017 2016 2017 2016

Common - P=25 par valueAuthorized 760,000 760,000Issued and outstanding

Balance at January 1 299,565 299,565 P=7,489,114 P=7,489,114Issuance during the year (Note 1) 181,080 − 4,527,015 −Balance at December 31 480,645 299,565 P=12,016,129 P=7,489,114

The Parent Company became listed in the PSE on May 12, 1988. After its listing in the PSE, therewas no succeeding offer/selling to the public of the Parent Company’s shares.

The summarized information on the Parent Company’s registration of securities under the SecuritiesRegulation Code follows:

Date of SEC Approval Type/Class Authorized Shares Par ValueNovember 23, 1988 Common Class A 7,000,000 100

Common Class B 3,000,000 100June 3, 1993 Common Class A 14,000,000 100

Common Class B 6,000,000 100September 11, 1997 Common 65,000,000 100April 6, 2001 Common 145,000,000 100March 31, 2006 Common 145,000,000 100

Preferred 120,000,000 25March 11, 2013 Common 760,000,000 25

As reported by the Parent Company’s transfer agent, AB Stock Transfers Corporation, the totalnumber of shareholders is 398 and 460 as of December 31, 2017 and 2016, respectively.

Subscribed Common StockThis pertains to the subscription of PGH to 181,080,608 new shares of the Parent Company in 2014(see Note 1). Details of the account follow:

2017 2016Subscribed common stockBalance at January 1 P=5,975,660 P=5,975,660Issuance of common stock (Note 1) (5,975,660) −

− 5,975,660Less: Subscription receivable

Balance at January 1 1,394,320 2,788,641Collections during the year (1,394,320) (1,394,321)

− 1,394,320Balance at December 31 P=− P=4,581,340

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Quasi-reorganizationOn January 18, 2012, the BOD in its regular meeting approved the quasi-reorganization and increasein authorized capital stock of the Parent Company. The quasi-reorganization will reduce the parvalue of the Parent Company’s 145.00 million authorized common shares from P=100.00 toP=25.00 and that the 120.00 million authorized preferred shares with par value of P=25.00 will bereclassified and converted to common shares with par value of P=25.00. Further, the authorized capitalstock will be increased to P=19.00 billion divided into 760.00 million shares with par value ofP=25.00.

On March 28, 2012, the shareholders of the Parent Company representing at least two thirds (2/3) ofthe outstanding capital stock ratified the said quasi-reorganization and increase in authorized capitalstock.

On December 19, 2012, the Parent Company applied for the said quasi-reorganization and increase inauthorized capital stock with the BSP and SEC, respectively. On February 8, 2013, the BSP issued aCerticate of Authority to enable the Parent Company to register its Amended Articles ofIncorporation and Amended By-Laws with the SEC.

On March 8, 2013, the Parent Company obtained the SEC’s approval for the increase in its authorizedcapital stock.

The Parent Company incurred costs of P=40.87 million for the approval/registration of the increase inits authorized capital stock with the SEC and DST for issuance of new shares.

On December 3, 2013, the Parent Company received the “No Objection” Notice from the BSPrelative to its application with the SEC for equity restructuring.

On December 11, 2013, the Parent Company received from the SEC the Certificate of Approval ofEquity Restructuring which allowed the Parent Company to effect the partial wipe out of Deficit as ofDecember 31, 2012 of P=8.66 billion against additional paid-in capital of P=3.94 billion. However, anyremaining additional paid-in capital balance shall not be used to wipe out losses that may be incurredin the future without prior approval of the SEC.

Surplus ReservesAs of December 31, 2017 and 2016, surplus reserves consist of reserve for trust business, andself-insurance amounting to P=105.82 million and P=105.77 million, respectively.

In compliance with BSP regulations and RA No. 337, The General Banking Act, 10.00% of the ParentCompany’s profit from trust business is appropriated to surplus reserves. This annual appropriation isrequired until the surplus reserves for trust business equals 20.00% of the Parent Company’sauthorized capital stock. Surplus reserve for self-insurance represents the amount set aside to coverfor losses due to fire, defalcation by and other unlawful acts of the Parent Company’s personnel orthird parties.

DeficitAs of December 31, 2017 and 2016, deficit in the statements of financial position includes fair valuegain on investment properties amounting to P=2.68 billion and P=2.41 billion, respectively, which arenot available for dividend declaration. The fair value gain on investment properties will form part ofretained earnings available for dividend declaration when the properties are sold and the gain isrealized.

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The computation of surplus available for dividend declaration in accordance with SEC MemorandumCircular No. 11 differs to a certain extent from the computation following BSP Guidelines.

In the consolidated financial statements, a portion of the Group’s deficit corresponding to the netearnings of the subsidiaries and an associate amounting to P=127.33 million and P=99.43 million as ofDecember 31, 2017 and 2016, respectively, is not available for dividend declaration. Theaccumulated equity in net earnings becomes available for dividends upon declaration and receipt ofcash dividends from the investees.

Capital ManagementThe primary objectives of the Parent Company’s capital management are to ensure that the ParentCompany complies with regulatory capital requirements and that the Parent Company maintainsstrong credit ratings and healthy capital ratios in order to support its business and to maximizeshareholders’ value.

The Parent Company manages its capital structure and makes adjustments to it in light of changes ineconomic conditions and the risk characteristics of its activities. In order to maintain or adjust thecapital structure, the Parent Company may adjust the amount of dividend payment to shareholders,return capital to shareholders or issue capital securities. No changes were made in the objectives,policies and processes from the previous years.

The Parent Company maintains an actively managed capital base to cover risks inherent in thebusiness. The adequacy of the Parent Company’s capital is monitored using, among other measures,the rules and ratios established by the Basel Committee on Banking Supervision (“Bank forInternational Settlements rules/ratios”) and adopted by the BSP in supervising the Group. The ParentCompany had complied in full with all its regulatory capital requirements.

As discussed in Note 1, the BSP approved the request of the Parent Company to book P=1.92 billionrevaluation increment resulting from the revaluation of PBCom Tower. Out of the P=1.92 billion,P=1.57 billion was included in the carrying value of condominium units for lease included under‘Investment properties’ and was considered as part of the unimpaired capital and qualifying capital inthe computation of net worth and capital adequacy ratio.

In February 2016, the BSP, through its Report on Examination, directed PBCom to change itsaccounting treatment for investment properties from the fair value model to the cost model andrestating its audited financial statements. On July 17, 2017, the BSP, in its Resolution No. 1189 datedJuly 13, 2017, approved the request of the Parent Company to continue using the fair value model forthe 2017 audited financial statements, and to revert to the cost model only in 2018. The impact of thechange in accounting policy for investment properties is disclosed in Note 14. For purposes ofregulatory qualifying capital, as approved by the BSP, the Parent Company will be able to continue toinclude the above P=1.57 billion revaluation increment in its computation of net worth and capitaladequacy ratio.

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Regulatory Qualifying CapitalUnder existing BSP regulations, the determination of the Parent Company’s compliance withregulatory requirements and ratios is based on the amount of the Group’s “qualifying capital”(regulatory net worth) as reported to the BSP, which is determined on the basis of regulatoryaccounting policies which may differ from PFRS in some respects (for example, measurement ofinvestment properties).

The BSP, under BSP Circular No. 538 dated August 4, 2006, issued the prescribed guidelinesimplementing the revised risk-based capital adequacy framework for the Philippine banking system toconform to Basel II recommendations. The new BSP guidelines took effect on July 1, 2007.

Below is a summary of risk weights and selected exposure types:

Risk Weight Exposure/Asset Type*0.00% Cash on hand; claims collateralized by securities issued by the national

government, BSP; loans covered by the Trade and Investment DevelopmentCorporation of the Philippines; real estate mortgages covered by the HomeGuarantee Corporation

20.00% Cash and other cash items, claims guaranteed by Philippine incorporatedbanks/quasi-banks with the highest credit quality; claims guaranteed byforeign incorporated banks with the highest credit quality; loans to exportersto the extent guaranteed by Small Business Guarantee and FinanceCorporation

50.00% Housing loans fully secured by first mortgage on residential property;Local Government Unit (LGU) bonds which are covered by Deed ofAssignment of Internal Revenue allotment of the LGU and guaranteed bythe LGU Guarantee Corporation

75.00% Direct loans of defined Small Medium Enterprise and microfinance loansportfolio; non-performing housing loans fully secured by first mortgage

100.00% All other assets (for example, real estate assets) excluding those deductedfrom capital (for example, deferred income tax)

150.00% All non-performing loans (except non-performing housing loans fullysecured by first mortgage) and all non-performing debt securities

*Not all inclusive

On January 15, 2013, the BSP issued Circular No. 781 on Basel III Implementing Guidelines onMinimum Capital Requirements, which provided that the implementing guidelines on the revisedrisk-based capital adequacy framework particularly on the minimum capital and disclosurerequirements for universal banks and commercial banks, as well as their subsidiary banks and quasi-banks, in accordance with the Basel III standards. The Circular went into effect on January 1, 2014.

The Circular defines in greater detail, the quality capital a bank must maintain to cover its risks.These include:

∂ Tier One capital - comprises the Group’s and the Parent Company’s core capital resources thatare immediately available to sustain the financial stability of the group. Components of tier onecapital include:

- Core-Equity Tier One or CET-1 includes paid-in shares of common stock, retained earningsand accumulated OCI. CET-1 must be the predominant form of Tier One Capital.CET-1 absorbs all deductions to capital mandated by regulation. These deductions includecapital invested in affiliates, net deferred tax assets, intangible assets and goodwill items.

- Alternative Tier One or AT-1 includes other equity type claims on a bank’s statement offinancial position that are sufficiently subordinate to the claims of depositors and senior

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creditors and whose cash flow distributions are not committed and cancellable at the optionof the bank.

∂ Tier Two capital - includes auxiliary items, such as the general loan loss provision and appraisalincrement reserves on investment property, that supplement Tier One Capital in sustaining thefinancial stability of the bank.

Banks must maintain CET-1 capital equivalent to 6.00%, Total Tier One capital equivalent to7.5% and Total capital equivalent to 10% of regulatory risk weighted assets at all times.

At the end of 2017 and 2016, the Group and the Parent Company reported ratios in excess of theregulatory requirements.

Presented below are the composition of qualifying capital and the related disclosures as reported tothe BSP (amounts in millions):


CET-1 Capital P=10,334 P=8,603 P=10,413 P=8,659Less: Regulatory Adjustments to CET-1 (1,002) (1,025) (1,452) (1,439)

9,332 7,578 8,961 7,220Additional Tier 1 Capital − − − −Less: Regulatory Adjustments to AT-1 − − − −

− − − −Total Tier 1 Capital 9,332 7,578 8,961 7,220Tier 2 Capital 2,094 1,999 2,062 1,969Less: Regulatory Adjustments to Tier 2 Capital − − − −Total Tier 2 Capital 2,094 1,999 2,062 1,969Total Qualifying Capital P=11,426 P=9,577 P=11,023 P=9,189

The Group’s and the Parent Company’s RBCAR as reported to the BSP as of December 31, 2017 and2016 are shown in the table below (amounts in millions):


CET-1 Capital:Paid-up common stock P=12,016 P=12,070 P=12,016 P=12,070Additional paid-in capital 2,262 814 2,262 814Retained earnings (4,159) (4,230) (4,091) (4,184)Undivided profits 286 96 286 96Net unrealized gains or losses on AFS-FVTOCI 34 26 34 26Cumulative foreign currency translation (1) 8 (1) 8OCI (93) (171) (93) (171)Minority interest in subsidiary banks (11) (10) – –

10,334 8,603 10,413 8,659Less: Regulatory Adjustments to CET-1

Outstanding unsecured loans, other creditaccommodations and guarantees granted tosubsidiaries and affiliates – 1 2 2

Goodwill 256 256 102 102Other intangible assets 719 741 353 374Investments in equity of unconsolidated subsidiary

banks and quasi-banks, and other financial alliedundertakings – – 968 934

(Forward)

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Investments in equity of unconsolidated subsidiarysecurities dealers/brokers and insurancecompanies P=14 P=15 P=14 P=15

Significant minority investments 13 12 13 121,002 1,025 1,452 1,439

Tier 2 CapitalAdditional Tier 1 Capital – – – –Less: Regulatory Adjustments to AT-1 – – – –

– – – –Total Tier 1 Capital 9,332 7,578 8,961 7,220Appraisal increment reserve 1,611 1,596 1,597 1,582General loan loss provision 483 403 465 387

2,094 1,999 2,062 1,969Less: Regulatory Adjustments to Tier 2 Capital – – – –Total Tier 2 Capital 2,094 1,999 2,062 1,969Total Qualifying Capital P=11,426 P=9,577 P=11,023 P=9,189

Credit risk-weighted assets P=65,022 P=59,199 P=62,945 P=56,895Market risk-weighted assets 768 545 768 545Operational risk-weighted assets 6,289 5,544 5,851 5,315Total Risk Weighted Assets P=72,079 P=65,288 P=69,564 P=62,755

CET 1 Capital Ratio 12.95% 11.61% 12.88% 11.51%Tier 1 Capital Ratio 12.95% 11.61% 12.88% 11.51%Total Capital Ratio 15.85% 14.67% 15.85% 14.64%

Internal Capital Adequacy Assessment Process (ICAAP)The ICAAP methodology of the Parent Company was based on the minimum regulatory capitalrequirement under BSP Circular No. 639 which involved, first, an assessment of whether the riskscovered by the Framework are fully captured; and second, an assessment of other risks the ParentCompany is exposed to which are not fully captured and covered under the Framework, and anassessment of whether and how much capital to allocate against these other risks. The ICAAPdocument is to be submitted by the Parent Company on April 4, 2018.

The ICAAP, which included the discussion on the 2017 Holistic Risk Appetite and Components, aswell as the ranges of capital that the Parent Company, should sustain to support the three-yearBusiness Plan under going-concern and stress scenarios, was deliberated upon by the ICAAP SteeringCommittee, ROC and endorsed to the BOD for approval.

Salient points of the 2018 ICAAP include:

∂ The Parent Company’s total Qualifying Capital for December 31, 2017 fully covers the capitalrequirement for risks under BSP Circular Nos. 538 ad 639 (Pillar 1 and Pillar 2 risks).

∂ The Parent Company’s resulting operating environment and risk requirements from 2018 to 2020will be guided by the Capital Development & Sustainability Plan to ensure appropriate capitalcoverages not only to meet the regulatory and internal capital adequacy requirements but also toensure execution of the three-year strategic growth within the Board’s desired appetite for capitaladequacy.

∂ The Parent Company’s statement for Materiality of Risk refers to any factors that couldsignificantly affect the on-going viability of the Parent Company. It is considered the overridingconcern of the organization after the capital assessment of the eight risks under the ICAAP asapproved by the ICAAP Steering Committee, ROC, and the BOD.

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24. Commitments and Contingent Liabilities

In the normal course of operations, the Group has various outstanding commitments and contingentliabilities such as guarantees, forward exchange contracts, and commitments to extend credit, whichare not presented in the accompanying financial statements. The Group does not anticipate anymaterial losses as a result of these transactions.

The following is a summary of the Group’s and the Parent Company’s commitments and contingentliabilities at their equivalent Peso contractual amounts:

2017 2016Trust department accounts (Note 25) P=5,267,279 P=5,683,734Standby LC 2,074,784 2,222,648Spot exchange:

Bought 274,615 422,620Sold 574,195 234,497

Usance LC outstanding 86,900 117,196Outstanding shipping guarantees 944,839 1,241,238Sight LC outstanding 401,085 277,937Deficiency claims receivable 27,498 27,498Outward bills for collection 26,772 24,890Currency forwards:

Bought 48,688 236,463Sold 49,665 484,239

Inward bills for collection 51,995 75,654Items held for safekeeping 157 100Items held as collateral 9 6Other contingencies 98,691 56,592

The Group has certain loan-related suits and claims that remain unsettled. It is not practicable toestimate the potential financial statement impact of these contingencies. However, in the opinion ofmanagement, the suits and claims, if decided adversely, will not involve sums that would have amaterial effect on the financial statements.

The Group is a defendant in legal actions arising from its normal business activities. Managementbelieves that these actions are without merit or that the ultimate liability, if any, resulting from themwill not materially affect the consolidated and parent company financial statements.

Derivative Financial InstrumentsAs of December 31, 2017, the Parent Company has outstanding buy US dollar currency forwardswith aggregate notional amount of US$0.98 million, terms ranging from 8 to 33 days, and weightedaverage forward rate of P=49.93.

As of December 31, 2016, the Parent Company has outstanding buy US dollar currency forwardswith aggregate notional amount of US$4.76 million, terms ranging from 31 to 36 days, and weightedaverage forward rate of P=49.72.

In 2017, 2016 and 2015, total gain (loss) on currency forwards included under ‘Trading and securitiesgain (loss) - others’ in the statements of income amounted to (P=3.23 million), P=7.68 million, andP=3.25 million, respectively (see Note 26).

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25. Trust Operations

Securities and other properties (other than deposits) held by the Parent Company for its customers inits fiduciary or agency capacity are not included in the statements of financial position since these arenot assets of the Parent Company. Total assets held by the Parent Company’s trust departmentamounted to P=5.27 billion and P=5.68 billion as of December 31, 2017 and 2016, respectively(see Note 24).

As of December 31, 2017 and 2016, government securities (included under ‘Investment securities atamortized cost’) owned by the Parent Company with total face value of P=70.00 million are depositedwith the BSP in compliance with the requirements of RA No. 337 relative to the Parent Company’strust functions.

Income from the Group’s and the Parent Company’s trust operations shown under ‘Income from trustoperations’ in the statements of income amounted to P=15.40 million, P=16.86 million, andP=18.30 million in 2017, 2016 and 2015, respectively.

26. Income on Investment Securities

Interest income on investment securities follows:

2017 2016 2015Investment securities at amortized cost P=536,988 P=593,571 P=580,657Financial assets at FVTPL 153,670 82,445 48,306

P=690,658 P=676,016 P=628,963

In 2017, 2016 and 2015, the Parent Company’s peso-denominated investment securities earnedannual interest rates ranging from 2.13% to 8.00%, 2.13% to 8.13%, and 1.63% to 9.13%,respectively, while dollar-denominated investment securities earned annual interest rates rangingfrom 1.87% to 10.63%, 2.63% to 10.63%, and 3.95% to 9.50%, respectively.

The Group’s and the Parent Company’s trading and securities gain (loss) - net follows:

2017 2016 2015Financial assets at FVTPL (P=10,014) P=40,656 (P=43,718)Derivatives (Note 24) (3,229) 7,683 3,253

(P=13,243) P=48,339 (P=40,465)

27. Employee Benefits

The existing regulatory framework, RA No. 7641, The Retirement Pay Law, requires companies withat least ten employees to pay retirement benefits to qualified private sector employees in the absenceof any retirement plan in the entity, provided however, that the employee’s retirement benefits underany collective bargaining and other agreements shall not be less than those provided under the law.The law does not require minimum funding of the plan.

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Defined Benefit PlansParent CompanyThe Parent Company has a funded, noncontributory defined benefit retirement plan coveringsubstantially all of its officers and regular employees. The Parent Company’s annual contribution tothe retirement plan consists of a payment covering the current service cost and unfunded actuarialaccrued liability. The retirement plan provides a retirement benefit based on applicable percentage ofsalary (100% - 150%) depending on the number of years of service (minimum of five years), afraction of a month being considered as one whole month. The Parent Company’s retirement plan isin the form of a trust administered by the Parent Company’s Trust and Wealth Management Group(TWMG) under the supervision of the Retirement Board.

BDIBDI has three funded, noncontributory defined benefit retirement plans that were created in 1990,2009 and 2012. The 1990 and 2009 retirement plans cover employees who have rendered full-timeservice for at least ten years and provide benefits that are based only on years of service and finalcompensation. The 2012 plan covers substantially all of BDI’s officers and regular employees andprovides benefits that are based on employee age, years of service and final compensation. BDI’sretirement plans provide retirement benefits equal to 100% of the final regular monthly salary forevery year of service.

BDI’s retirement plans are administered by the Parent Company’s TWMG under the supervision ofBDI’s Retirement and Provident Fund Committee.

RBNIRBNI has a funded, noncontributory defined benefit retirement plan covering substantially all of itsregular employees. The benefits are based on employee age, years of service and final compensation.The retirement plan provides retirement benefits equal to 50% of the final monthly salary for everyyear of service. RBNI’s retirement plan is in the form of a trust administered by a local bank.

The latest actuarial valuation studies of the defined benefit retirement plans of the Group were madeas of December 31, 2017.

The following table shows the actuarial valuation results for the Group and the Parent Company as ofDecember 31, 2017 and 2016:

2017 2016Fair Value of

Plan AssetsPresent Valueof Obligation

Fair Value ofPlan Assets

Present Value ofObligation

Parent Company P=457,674 P=478,028 P=401,148 P=452,927BDI 21,251 22,066 14,948 13,612RBNI − − 7,415 11,947

P=478,925 P=500,094 P=423,511 P=478,486

The amounts relating to the defined benefit retirement plans are presented in the statements offinancial position as follows:


Retirement asset* (Note 16) P=− P=1,336 P=− P=−Retirement liability** (Note 20) 21,169 56,311 20,354 51,779Net retirement liability P=21,169 P=54,975 P=20,354 P=51,779* Included in ‘Other assets’** Included in ‘Accrued interest, taxes and other expenses’

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Changes in the present value of the defined benefit obligations as of December 31, 2017 and 2016 areas follows:


Balance at January 1 P=478,486 P=525,933 P=452,927 P=503,577Current service cost 68,081 78,320 64,837 75,524Interest cost 27,015 26,728 25,816 25,682Remeasurement gains:

Actuarial gains arising fromdeviations of experiencefrom assumptions (26,373) (61,615) (25,087) (62,723)

Actuarial gains arising fromchanges in financialassumptions (7,502) (31,891) (5,252) (32,118)

Benefits paid (39,613) (58,989) (35,213) (57,015)Balance at December 31 P=500,094 P=478,486 P=478,028 P=452,927

Changes in the fair value of the plan assets as of December 31, 2017 and 2016 are as follows:


Balance at January 1 P=423,511 P=394,842 P=401,148 P=374,103Contributions 68,849 84,525 67,789 82,127Interest income 25,466 20,078 22,865 19,079Return on plan assets (excluding

interest income) 712 (16,945) 1,085 (17,146)Benefits paid (39,613) (58,989) (35,213) (57,015)Balance at December 31 P=478,925 P=423,511 P=457,674 P=401,148

The fair values of plan assets by class as of December 31, 2017 and 2016 are as follows:


Cash and cash equivalents P=91,390 P=222,354 P=88,567 P=219,048Debt instruments:

Philippine government 236,920 57,844 229,257 53,180Real estate 19,211 19,431 18,690 18,910Power, electricity and water

distribution 13,938 14,341 13,938 14,341Holding firms 8,595 8,644 8,081 8,130Financial intermediaries − 19,916 − 19,916

Equity instruments:Real estate 30,192 23,281 29,425 22,171Holding firms 27,927 23,118 23,065 15,395Transportation, storage and

communication 12,412 8,910 12,412 8,046Financial intermediaries 12,243 4,552 12,243 4,552Wholesale and retail trade 7,520 5,448 7,520 5,448Power, electricity and water

distribution 7,446 3,981 7,446 3,981Manufacturing 1,580 1,784 − −Others 9,178 3,428 5,908 541

Other assets and liabilities 373 6,479 1,122 7,489P=478,925 P=423,511 P=457,674 P=401,148

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The Group’s plan assets are carried at fair value. All equity and debt instruments have quoted pricesin an active market. The fair values of other assets and liabilities, which include amounts due fromother banks, accrued interest and other receivables and trust fee payables, approximate their carryingamount due to the short-term nature of these accounts.

The plan assets are diversified investments and are not exposed to concentration risk.

The Group and the Parent Company expect to contribute P=101.50 million and P=99.55 million,respectively, to the defined retirement benefit plans in 2018.

The cost of defined benefit retirement plans, as well as the present value of the benefit obligations,are determined using actuarial valuations, which involve making various assumptions. The principalassumptions used are shown below:

Parent Company BDI RBNI2017 2016 2017 2016 2017 2016

Discount rate: At January 1 5.70% 5.10% 4.82% 5.13% − 4.24% At December 31 5.80% 5.70% 5.60% 4.87% − 4.78%Salary increase rate 7.00% 7.00% 5.00% 5.00% − 5.00%Average remaining working life 13 13 13.5 15 − 12

The sensitivity analysis below has been determined based on reasonably possible changes of eachsignificant assumption as of December 31, 2017 and 2016, assuming all other assumptions were heldconstant. The sensitivity analysis may not be representative of an actual change in the defined benefitobligation as it is unlikely that changes in assumptions would occur in isolation from one another.

Increase (Decrease) in Defined Benefit ObligationConsolidated Parent Company

2017 2016 2017 2016Increase in discount rate of 0.50% (P=26,278) (P=25,875) (P=24,963) (P=24,330)Decrease in discount rate of 0.50% 28,638 28,274 27,184 26,528Increase in salary increase rate of 0.50% 26,659 25,824 25,283 24,239Decrease in salary increase rate of 0.50% (24,746) (23,938) (23,489) (22,490)

The amounts of defined benefit cost included in the statements of other comprehensive income as‘Remeasurement of retirement liability’, gross of tax, follow:


Actuarial gains on benefit obligation P=33,875 P=93,506 P=93,768 P=30,339 P=94,841 P=97,034Return on plan assets (excluding

interest income) 712 (16,945) 4,467 1,085 (17,146) 2,746Remeasurement gains in OCI P=34,587 P=76,561 P=98,235 P=31,424 P=77,695 P=99,780

The amounts of retirement cost included in the statements of income follow:


Current service cost* P=68,081 P=78,320 P=85,171 P=64,837 P=75,524 P=83,147Net interest expense (Note 19) 1,549 6,650 11,249 2,951 6,603 11,005Retirement cost P=69,630 P=84,970 P=96,420 P=67,788 P=82,127 P=94,152*Included under ‘Compensation and fringe benefits’ in the statements of income

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Shown below is the maturity profile of the undiscounted benefit payments of the Group and theParent Company as of December 31, 2017 and 2016:

ConsolidatedPlan Year 2017 2016Less than five years P=198,520 P=182,112More than five to ten years 297,732 296,452Ten years and above 3,747,020 3,852,293

P=4,243,272 P=4,330,857

Parent CompanyPlan Year 2017 2016Less than five years P=192,722 P=176,165More than five to ten years 288,965 287,341Ten years and above 3,513,718 3,624,599

P=3,995,405 P=4,088,105

Collective Bargaining Agreement (CBA)All of the Parent Company’s rank and file employees are covered by a CBA, the most recentnegotiation having been signed on June 10, 2016, with an effectivity date until December 31,2017. Negotiations for a new five-year CBA are ongoing and, once signed, will take effect for theperiod from January 1, 2018 until December 31, 2022. There had been neither dispute noroccurrence of employees’ strike for the past years.

Defined Contribution PlansParent CompanyThe Parent Company employs a provident fund scheme where the Parent Company and its coveredemployees shall contribute 11% and 5% of the employees’ basic monthly salary, respectively.Contributions are maintained under the Provident Fund account administered by the ParentCompany’s TWMG under the supervision of the Retirement/Provident Fund Board. As approved bythe Parent Company’s BOD on November 27, 2013, new officers hired after December 31, 2013,except those whose terms of employment have been negotiated prior to December 1, 2013, are nolonger eligible for inclusion in the Parent Company’s provident fund. The Parent Company’s BOD,in its meeting held on January 27, 2016, approved a change in vesting for the retirement fund from5 to 10 years effective for all new hires who sign up starting February 1, 2016.

Contributions paid and accrued by the Parent Company for both the Staff Provident Fund and theRetirement Fund are recognized under ‘Compensation and fringe benefits’ in the statements ofincome amounted to P=103.88 million, P=124.66 million, and P=141.87 million in 2017, 2016 and 2015,respectively.

BDIIn addition to its defined benefit plans, BDI also employs three contributory funds where BDI and itscovered employees shall both contribute 5% of the employees’ regular monthly salary.

Contributions paid and accrued by BDI to the funds recognized in the statements of income under‘Compensation and fringe benefits’ amounted to P=1.20 million, P=2.45 million and P=1.75 million in2017, 2016 and 2015, respectively.

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28. Long-term Leases

The Group leases the premises occupied by most of its branches. The lease contracts are for periodsranging from 1 to 4 years and renewable at the Group’s option under certain terms and conditions.Various lease contracts include escalation clauses, most of which bear annual rent increase of5.00% - 10.00%.

The Group’s rent expense included under ‘Occupancy and other equipment-related costs’ in thestatements of income amounted to P=174.35 million, P=170.28 million, and P=175.2 million in 2017,2016 and 2015, respectively. The Parent Company’s rent expense included under ‘Occupancy andother equipment-related costs’ in the statements of income amounted to P=167.35 million,P=170.28 million, and P=169.41 million in 2017, 2016 and 2015, respectively.

Future minimum rentals payable under noncancellable operating leases are as follows:


Within one year P=140,092 P=124,721 P=134,769 P=119,560Beyond one year but not more than

five years 141,987 184,433 128,558 177,514Beyond five years − 2,304 − −

P=282,079 P=311,458 P=263,327 P=297,074

The Parent Company has also entered into commercial property leases on its investment properties.These noncancellable leases have remaining noncancellable lease terms of between one to five years.The Parent Company recognized rent income, included under ‘Rent income’ in the statements ofincome, amounting to P=548.76 million, P=454.49 million, and P=384.15 million, in 2017, 2016 and2015, respectively.

Future minimum rentals receivable under noncancellable operating leases follow:


Within one year P=467,338 P=531,278 P=467,338 P=531,278Beyond one year but not more than

five years 1,011,464 1,142,701 1,011,464 1,142,701Beyond five years − − − −

P=1,478,802 P=1,673,979 P=1,478,802 P=1,673,979

29. Miscellaneous Expenses



Information technology P=81,238 P=85,433 P=90,619 P=73,194 P=78,954 P=84,139Transaction dues 35,737 34,682 34,570 35,129 34,108 34,137Fines, penalties and other charges 31,251 32,549 41,388 31,099 32,487 41,341Litigation and assets acquired - related

expenses 29,731 13,781 11,553 25,021 12,845 10,482Brokerage fees 19,790 20,638 4,889 19,790 20,638 4,889

(Forward)

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Fuel and lubricants P=16,354 P=15,893 P=19,445 P=14,080 P=13,863 P=16,716Stationery and supplies 16,289 20,217 21,456 12,697 17,027 18,417Travel 12,602 11,375 12,827 5,330 6,127 6,670Freight 7,604 4,167 4,277 7,589 4,139 4,220Advertising 7,170 8,977 4,340 5,744 7,467 2,600Others 112,173 76,001 47,025 102,280 61,888 43,494

P=369,939 P=323,713 P=292,389 P=331,953 P=289,543 P=267,105

Others include account maintenance charges, contractual services, and Philippine Dealing ExchangeCorp. transaction fees.

30. Income and Other Taxes

Under Philippine tax laws, the RBU of the Parent Company and its subsidiaries are subject topercentage and other taxes (presented as ‘Taxes and licenses’ in the statements of income), as well asincome taxes. Percentage and other taxes paid consist principally of gross receipts tax (GRT) andDST. Income taxes include corporate income tax, as discussed below, and final taxes paid, whichrepresents final withholding tax on gross interest income from government securities and otherdeposit substitutes and income from FCDU transactions. These income taxes, as well as the deferredtax benefits and provisions, are presented as ‘Provision for income tax’ in the statements of income.

RA No. 9397, An Act Amending National Internal Revenue Code, provides that the RCIT rate shall be30.00% and the interest expense allowed as a deductible expense shall be reduced by 33.00% ofinterest income subjected to final tax.

An MCIT of 2.00% of modified gross income is computed and compared with the RCIT. Any excessof MCIT over the RCIT is deferred and can be used as a tax credit against future income tax liabilityfor the next three years. In addition, NOLCO is allowed as a deduction from taxable income in thenext three years from the period of incurrence.

FCDU offshore income (income from non-residents) is tax-exempt while gross onshore income(income from residents) is generally subject to 10.00% gross income tax. In addition, interest incomeon deposit placements with other FCDUs and offshore banking units is subject to a 7.50% final tax.RA No. 9294, An Act Restoring the Tax Exemption of Offshore Banking Units (OBUs) and FCDUs,provides that 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 interestincome on foreign currency loans from residents other than OBUs or other depository banks underthe expanded system is subject to 10.00% income tax.

In 2011, the BIR issued Revenue Regulations (RR) 14-2011, which prescribes the proper allocationof costs and expenses among the income earnings of financial institutions for income tax reporting.Only costs and expenses attributable to the operations of the RBU can be claimed as deduction toarrive at the taxable income of the RBU subject to the RCIT. All costs and expenses pertaining to theFCDU/EFCDU are excluded from the RBU’s taxable income. Within the RBU, common costs andexpenses should be allocated among taxable income, tax-paid income and tax-exempt income usingthe specific identification or the allocation method.

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Provision for income tax consists of:


Current:Final P=139,589 P=142,951 P=141,202 P=139,090 P=142,443 P=140,719MCIT 56,758 – 39,573 56,758 – 39,522RCIT 15,536 101,070 31,237 531 69,412 –

211,883 244,021 212,012 196,379 211,855 180,241Deferred 110,756 (9,200) 274,324 108,727 (5,629) 275,920

P=322,639 P=234,821 P=486,336 P=305,106 P=206,226 P=456,161

Components of deferred tax assets and liabilities follow:


Deferred tax assets:Allowance for credit and impairment losses P=515,750 P=510,401 P=472,457 P=472,457Unearned discounts and capitalized interest 22,062 21,258 – –Excess of MCIT over RCIT 12,182 12,163 12,163 12,163Unamortized past service cost 902 1,031 – –Accrued expenses 715 – – –Remeasurement losses on retirement liability 170 981 – –Accumulated depreciation on foreclosed properties – 41 – –Accumulated impairment loss on foreclosed assets – 38 – –

P=551,781 P=545,913 P=484,620 P=484,620Deferred tax liabilities:Fair value gain on investment properties P=1,059,472 P=953,137 P=1,039,383 P=938,325Revaluation increment credited to surplus free 399,979 399,979 399,979 399,979Revaluation increment on land 129,507 120,111 129,157 119,761Branch licenses acquired from business combinations 78,870 78,870 – –Excess of fair value over carrying value of the net assets acquired from business combinations 28,216 28,323 – –Unrealized foreign exchange gain 9,089 1,420 9,089 1,420Gain on disposal of foreclosed of properties 8,303 8,303 – –Unrealized gain on equity securities carried at FVOCI 7,914 – 7,914 –Gain on foreclosure of properties 2,093 1,175 – –Others 1,265 401 – –

P=1,724,708 P=1,591,719 P=1,585,522 P=1,459,485

Deferred tax assets and liabilities are presented in the statements of financial position as follows:


Deferred tax assets P=55,928 P=59,717 P=– P=–Deferred tax liabilities 1,228,855 1,105,523 1,100,902 974,865

The ultimate realization of deferred tax assets is dependent on the generation of future taxableincome. In assessing the realizability of its deferred tax assets, the Group considers projected futuretaxable income, reversal of temporary differences, and tax planning strategies.

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The Group assessed that not all of its deferred tax assets may be realized in the future. Accordingly,the Group did not set up deferred tax assets on the following temporary differences, NOLCO andexcess of MCIT over RCIT:


Allowance for credit andimpairment losses P=1,409,277 P=1,436,514 P=1,098,291 P=1,128,795

Advance rental income 88,499 87,415 88,499 87,415Unamortized past service cost 54,646 58,270 54,646 58,270Accrued expenses 38,508 – 38,508 –Retirement liability 21,169 56,311 20,354 51,779Excess of MCIT over RCIT 3,769 144 3,769 –NOLCO – 48,026 – –

P=1,615,868 P=1,686,680 P=1,304,067 P=1,326,259

Details of the Group’s NOLCO are as follows:

InceptionYear Amount

UsedAmount

ExpiredAmount Balance Expiry Year

2014 P=18,256 P=18,256 P=– P=– 20172015 18,226 18,226 – – 20182016 11,544 11,544 – – 2019

P=48,026 P=48,026 P=– P=–

Details of the Group’s MCIT are as follows:


Used Amount


2014 P=36 P=36 P=– P=– 20172015 12,185 89 – 12,096 20182016 86 – – 86 20192017 3,769 – – 3,769 2020

P=16,076 P=125 P=– P=15,951

Details of the Parent Company’s MCIT are as follow:


Used Amount


2015 P=39,439 P=27,276 P=– P=12,163 20182017 3,769 – – 3,769 2020

P=43,208 P=27,276 P=– P=15,932

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A reconciliation between the statutory income tax and the effective income tax follows:


Statutory income tax P=312,402 P=190,410 P=207,005 P=307,142 P=181,883 P=197,839Tax effects of:

Nondeductible expenses andothers 110,412 264,336 329,504 96,651 247,818 253,446

FCDU income before income tax (49,987) (108,893) (44,460) (49,987) (108,893) (44,439)Interest income subjected to final

tax (27,418) (23,480) (28,272) (27,601) (23,100) (28,031)Nontaxable income (16,113) (26,301) (70,406) (14,442) (35,443) (18,999)Changes on unrecognized deferred

tax assets (6,657) (61,251) 36,729 (6,657) (56,039) 40,109Expired NOLCO – – 56,236 – – 56,236

Effective income tax P=322,639 P=234,821 P=486,336 P=305,106 P=206,226 P=456,161

31. Related Party Transactions

Parties are considered to be related if one party has the ability, directly or indirectly, to control theother party or exercise significant influence over the other party in making financial and operatingdecisions. The Parent Company’s related parties include key management personnel, close familymembers of key management personnel, affiliates (that is, entities which are controlled, significantlyinfluenced by or for which significant voting power is held by the Parent Company or keymanagement personnel or their close family members and retirement plan for the benefit of theGroup’s employees).

The Parent Company has business relationships with certain related parties. Transactions with suchparties are made in the ordinary course of business and on substantially same terms, including interestand collateral, as those prevailing at the time for comparable transactions with other parties. Thesetransactions also did not involve more than the normal risk of collectability or present otherunfavorable conditions.

Retirement PlansUnder PFRS, certain post-employment benefit plans are considered as related parties. The ParentCompany has a business relationship with its defined benefit and contribution plans, which itprovides trust and management services to the plans. Any investments made in the retirement plansare approved by the Parent Company’s Retirement Board. The Parent Company’s Retirement Boardis comprised of senior officers of the Parent Company. Income earned by the Parent Company(presented as part of ‘Income from trust operations’ in the statements of income) from such servicesamounted to P=4.55 million in 2017, P=4.46 million in 2016, and P=4.89 million in 2015. Total depositsmaintained by the related party retirement plans with the Parent Company amounted toP=145.68 million and P=97.87 million as of December 31, 2017 and 2016, respectively.

Key Management PersonnelKey management personnel are those persons with authority and responsibility for planning, directingand controlling the activities of the Parent Company, directly or indirectly. The Parent Companyconsiders the members of the Senior Management Team to constitute key management personnel forpurposes of PAS 24.

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Total remunerations of key management personnel are as follows:

2017 2016 2015Short-term benefits P=153,150 P=151,599 P=120,812Post-employment benefits 7,548 8,058 8,223

P=160,698 P=159,657 P=129,035

Details on significant related party transactions of the Parent Company follow:

2017

Category VolumeOutstanding

Balance Nature, Terms and ConditionsSignificant investors:

Deposit liabilities (P=763,897) P=1,820,405 Savings and time deposit accounts with annualinterest rates ranging from 0.1% to 2.375%.Interest expense 7,827 −

Rent expense 21,922 − Branch and office space leased for five yearsending in various years, with 5% annualescalation.

Rent income 3,567 − Five-year lease of branches, subject to pre-termination, with escalation rate of 5%.

Affiliate:Deposit liabilities (88) 14,722 Demand, savings and time deposit accounts with

annual interest rates ranging from 0.1% to1.50%.

Interest expense 115 −

Rent income 133 − Five-year lease expiring in July 2018, with 5%annual escalation.

Subsidiaries:Deposit liabilities (27,677) 91,787 Demand and savings deposit accounts with annual

interest rates ranging of 0.1%.Interest expense 304 −Rent income 168 − Three-year lease expiring in May 2020 with

7.5% and 10% annual escalation on secondand third year, respectively.

Key management personnel:Deposit liabilities 2,440 12,631 Savings and time deposit accounts with annual

interest rates ranging from 0.1% to 3.50%.Interest expense 15 −Provident fund:

Deposit liabilities 19,436 57,290 Savings and time deposit accounts with annualinterest rates ranging from 0.1% to 2.00%.Interest expense 460 −

Trust fee 2,379 − A certain percentage of the monthly endingmarket value of the fund depending onagreement.

Retirement fund:Deposit liabilities 28,382 88,393 Savings and time deposit accounts with annual

interest rates ranging from 0.1% to 2.00%.Interest expense 709 −Trust fee 2,175 − A certain percentage of the monthly ending

market value of the fund depending onagreement.

2016



Deposit liabilities P=2,580,919 P=2,584,302 Savings and time deposit accounts with annualinterest rates ranging from 0.13% to 3.50%.Interest expense 8,304 −


Rent income 1,822 − Five-year lease of branches, subject to pre-termination, with escalation rate of 5%.

(Forward)

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2016


Balance Nature, Terms and ConditionsAffiliate:

Deposit liabilities P=6,743 P=14,810 Demand, savings and time deposit accounts withannual interest rates ranging from 0.13% to1.50%.



Subsidiaries:Deposit liabilities 18,055 119,464 Demand and savings deposit accounts with annual

interest rates ranging from 0.13% to 0.50%.Interest expense 2,855 −Rent income 126 − One and half year lease expiring in

December 2016, fixed rental rate during theentire term of the contract.

Key management personnel:Deposit liabilities (53,605) 10,191 Savings and time deposit accounts with annual

interest rates ranging from 0.13% to 3.50%.Interest expense 16 −Provident fund:



Retirement fund:Deposit liabilities 7,035 60,011 Savings and time deposit accounts with annual

interest rates ranging from 0.13% to 3.25%.Interest expense 739 −Trust fee 1,983 − A certain percentage of the monthly ending

market value of the fund depending onagreement.

2015



Deposit liabilities (P=1,981,394) P=3,483 Savings and time deposit accounts with annualinterest rates ranging from 0.13% to 3.50%.Interest expense 12,522 −


Rent income 2,839 − Five-year lease of branches, subject to pre-termination, with escalation rate of 5%

Affiliate:Deposit liabilities (3,696) 8,067 Demand, savings and time deposit accounts with

annual interest rates ranging from 0.13% to1.50%.



Subsidiaries:Deposit liabilities (170,574) 101,409 Demand and savings deposit accounts with annual

interest rates ranging from 0.13% to 0.50%.Interest expense 2,450 −Interbank loans receivable 617,000 – Interbank term loans with subsidiary with annual

interest rates ranging from 5.25% to 6.25% andterms of 18 to 91 days.

Interest income (7,602) −

Rent income 126 − One and half year lease expiring inDecember 2015, fixed rental rate during theentire term of the contract.

Key management personnel:Deposit liabilities 22,872 63,796 Savings and time deposit accounts with annual

interest rates ranging from 0.13% to 3.50%.Interest expense 603 −Receivable from customers (28) 376 Personal loans with average interest rate of 7.00%

and average term of three years.Interest income (39) −Provident fund:



(Forward)

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2015


Balance Nature, Terms and ConditionsRetirement fund:

Deposit liabilities P=52,953 P=52,976 Savings and time deposit accounts with annualinterest rates ranging from 0.13% to 3.25%.Interest expense 537 −


Other Terms and Conditions of Transactions with Related PartiesOutstanding balances at year-end are unsecured and settlement occurs in cash. The Parent Companyhas not recorded any impairment losses relating to amounts owed by related parties.

Regulatory ReportingAs required by the BSP, the Parent Company discloses loan transactions with its associates, affiliatesand with certain directors, officers, stockholders and related interests (DOSRI). Existing bankingregulations limit the amount of individual loans to DOSRI, 70.00% of which must be secured, to thetotal of their respective deposits and book value of their respective investments in the ParentCompany. In the aggregate, loans to DOSRI generally should not exceed total equity or 15.00% oftotal loan portfolio, whichever is lower.

BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts. Thefollowing table shows information relating to the loans, other credit accommodations and guaranteesclassified as DOSRI accounts under regulations existing prior to BSP Circular No. 423, and newDOSRI loans, other credit accommodations and guarantees granted under said Circular:


Total outstanding DOSRI loans P=25,631 P=22,017 P=16,951 P=16,291Total outstanding DOSRI loans granted under

regulations existing prior to BSP Circular No. 423 25,631 22,017 16,951 16,291New DOSRI loans granted under BSP Circular No. 423 − − − −Total outstanding non-DOSRI loans prior to

BSP Circular No. 423 51,561,881 43,786,263 49,465,240 41,639,810Percent of DOSRI loans to total loans 0.05% 0.05% 0.03% 0.04%Percent of unsecured DOSRI loans to total DOSRI

loans 75.20% 45.70% 62.50% 61.76%Percent of past due DOSRI loans to total DOSRI

loans 0.04% 26.38% 0.06% 0.51%Percent of nonperforming DOSRI loans to total

DOSRI loans 0.04% 26.38% 0.06% 0.51%

The amounts of loans and receivables disclosed for related parties above differ with the amountsdisclosed for key management personnel since the composition of DOSRI is more expansive than thatof key management personnel.

BSP Circular No. 560 provides that the total outstanding loans, other credit accommodation andguarantees to each of the bank’s/quasi-bank’s subsidiaries and affiliates shall not exceed 10.00% ofthe net worth of the lending bank/quasi-bank, provided that the unsecured portion of which shall notexceed 5.00% of such net worth. Further, the total outstanding loans, other credit accommodationsand guarantees to all subsidiaries and affiliates shall not exceed 20.00% of the net worth of thelending bank/quasi-bank; and the subsidiaries and affiliates of the lending bank/quasi-bank are notrelated interest of any director, officer and/or stockholder of the lending institution, except wheresuch director, officer or stockholder sits in the BOD or is appointed officer of such corporation as

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representative of the bank/quasi-bank. As of December 31, 2017 and 2016, the Parent Company is incompliance with these requirements.

Any violation of the provisions of BSP Circular No. 423 is subject to regulatory sanctions. However,loans, other credit accommodations and guarantees, as well as availments of previously approvedloans and committed credit lines that are not considered DOSRI (non-DOSRI) accounts prior to theissuance of BSP Circular No. 423 are not covered by such sanctions for a transition period oftwo years from the effectivity of this Circular or until said loan, other credit accommodations andguarantees become past due, or are extended, renewed or restructured, whichever comes later.

32. Financial Performance

Basic EPS amounts are calculated by dividing the net income for the year by the weighted averagenumber of common shares outstanding during the year.

The following reflects the income and share data used in the basic and diluted earnings per sharecomputations:

2017 2016 2015Net income attributable to equity holders of the Parent Company P=718,699 P=400,052 P=203,301Weighted average number of common

shares outstanding 359,925 299,565 299,565Basic/diluted earnings per share P=2.00 P=1.34 P=0.68

As of December 31, 2017, 2016 and 2015, there are no outstanding dilutive potential common shares.

The following basic ratios measure the financial performance of the Group and of the ParentCompany:


Return on average equity 6.06% 4.06% 2.52% 6.06% 4.06% 1.63%Return on average assets 0.77% 0.49% 0.28% 0.79% 0.51% 0.18%Net interest margin 4.26% 4.42% 4.32% 4.03% 4.05% 3.87%

33. Notes to Statements of Cash Flows

The amounts of interbank loans receivable and SPURA considered as cash and cash equivalents as ofDecember 31, 2017, 2016 and 2015 follow:


Interbank loans receivable and SPURAshown under statements of cashflows P=472,513 P=260,411 P=229,281 P=472,513 P=260,411 P=229,281

Interbank loans receivable and SPURAnot considered as cash and cashequivalents 62,412 49,720 – 62,412 49,720 –

P=534,925 P=310,131 P=229,281 P=534,925 P=310,131 P=229,281

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The following is a summary of noncash activities:


Noncash operating activities:Additions to investment properties

from settlement of loans (Note 14) P=40,909 P=75,679 P=34,836 P=38,870 P=75,679 P=31,703Additions to chattel mortgage from

settlement of loans 167,196 28,325 45,471 167,196 28,325 45,471Amortization of revaluation surplus

(Note 13) 306 – – 306 – –Noncash investing activities:

Transfer to property and equipmentfrom investment properties

(Notes 13 and 14) 33,711 – 18,702 33,711 – 18,702Transfer to investment properties

from property and equipment(Notes 13 and 14) (9,850) – – (9,850) – –

Increase in land due to revaluation(Note 13) – – 29,971 – – 28,806

Additional investments in subsidiaryin the form of reinvested dividend(Note 7) – – – – 25,067 –

The changes in liabilities arising from the Group’s and the Parent Company’s financing activities in2017 are as follows:

January 1,2017

Cash Flows

Foreign ExchangeMovement

December 31, 2017

Bills payable (Note 19) P=10,099,384 P=2,468,233 (P=218) P=12,567,399Outstanding acceptances 34,357 28,895 833 64,085Marginal deposits 162 370 – 532Total liabilities from financing

activities P=10,133,903 P=2,497,498 P=615 P=12,632,016

34. Approval for Release of the Financial Statements

The financial statements were authorized for issue by the BOD of the Parent Company on April 4,2018.

35. Standards Issued but not yet Effective

The standards and interpretation that are issued but not yet effective, up to the date of issuance of theGroup’s financial statements are disclosed below. Unless otherwise stated, the Group does not expectthe adoption of these new and amended standards and interpretations to have significant impact onthe Group’s financial statements.

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Effective beginning on or after January 1, 2018∂ Amendments to PFRS 2, Share-based Payment, Classification and Measurement of Share-based

Payment Transactions

∂ PFRS 9, Financial InstrumentsPFRS 9 reflects all phases of the financial instruments project and replaces PAS 39, FinancialInstruments: Recognition and Measurement, and all previous versions of PFRS 9. The standardintroduces new requirements for classification and measurement, impairment, and hedgeaccounting. Retrospective application is required but providing comparative information is notcompulsory. For hedge accounting, the requirements are generally applied prospectively, withsome limited exceptions.

The Parent Company has already adopted the 2010 version of PFRS 9 in 2014. The Group willadopt the final version of the standard on the mandatory effective date and will not restatecomparative information. In 2017, the Group has performed an assessment of the impact of allthree phases of PFRS 9 to its population of financial instruments. This assessment is based oncurrently available information and may be subject to changes arising from further reasonableinformation becoming available to the Group when it adopts the final version of PFRS 9 in 2018.

(a) Classification and measurementThe final version of PFRS 9 introduced a new FVTOCI classification for debt financial assetswhere the objective of the business model is achieved by both collecting contractual cashflows and selling financial assets. In line with the Parent Company’s new business modelthat meet the FVTOCI classification (see Note 3), certain debt securities currently held underthe HTC business model are expected to be reclassified to FVTOCI while the rest of the debtsecurities currently held as HTC will remain to be classified as HTC. Unrealized gains orlosses of P=56.89 million pertaining to the debt securities to be reclassified will be recognizedin other comprehensive income upon adoption of the final version of PFRS 9. Debt securitiescurrently held as at FVTPL will remain to be classified as at FVTPL. Loans and receivableswill remain to be managed under HTC business model and thus measured at amortized cost.

As the classification for equity securities remain to be irrevocable, equity shares currentlyheld as at FVOCI without recycling to profit or loss will remain to be classified as such uponadoption of the final version of PFRS 9.

(b) ImpairmentPer PFRS 9, the Group is required to record expected credit losses (ECL) on all debt-typeassets that are not measured at fair value through profit or loss. The new ECL model willresult in the earlier recognition of losses enabled through the introduction of a three-stageprocess to recognize changes in credit quality from the time of initial recognition. Thisinvolves measuring 12-month ECL for financial instruments with no significant increase incredit risk since initial recognition and measuring lifetime ECL for instruments withsignificant increase in credit risk.

Credit life cycle stages∂ Stage 1 is comprised of unimpaired financial instruments that have no significant increase

in credit risk since initial recognition or where significant increase in credit risk hasabated and is not foreseen to recur in the near future (12-month ECL). 12-month ECLare estimated based on the results from default events that are possible within 12 monthsafter the statement of financial position date.

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∂ Stage 2 is comprised of financial instruments experiencing a significant increase in creditrisk since initial recognition (Lifetime ECL). Lifetime ECL are credit losses that resultsfrom all possible default events over the expected life of a financial instrument.

∂ Stage 3 is comprised of financial instrument with incidence of loss events occurring afterinitial recognition that is having a significant negative impact on estimated future cashflows. The ECL estimation for Stage 3 financial instruments is based on a lifetimehorizon. Considering that there is already an actual loss event, interest income will berecognized based on the net carrying amount of the impaired financial instruments.

The Group underwent a review of its existing credit practices and available credit informationto serve as a basis for developing a new “Expected Credit Loss” framework which wouldhelp the Group in properly managing credit risk while at the same time adhering to therequirements of the new standard.

The adoption of the final version of PFRS 9 is expected to result in significant changes to theinternal credit loss methodology of the Group.

Credit risk at initial recognitionThe Group employs a risk rating and scoring system and requires strict adherence toestablished multi-level approval authority levels in the initial assessment process andrecognition of financial instruments. The risk rating system assesses the creditworthiness of aborrower based on factors such as stability, access to financial markets, ability to serviceoutstanding debts, balance sheet strength, and external rating by agencies if applicable. Thesystem also considers the amount and type of facility and security arrangements and issubject to an annual review of its internal processes and controls.

Significant increase in credit riskSignificant increase in credit risk varies by portfolio or product but is generally determinedvia manifestation of well-defined credit weaknesses that if left uncorrected may affectrepayment, necessitating close monitoring

ECL parameters and methodologiesECL is a probability-weighted amount based on likelihood of whether borrowers will defaulton their obligations in the future (Probability of Default or PD), estimated loss from afinancial instrument given a default occurs (Loss Given Default or LGD), and estimatedexposure at a future default date (Exposure at Default or EAD), while incorporating forward-looking economic variables using statistical correlation and experienced credit judgement.

The PD is an estimate of the likelihood of default over a 12-month or lifetime horizon. ThePD model is based on historical data correlated to historical, current, and futuremacroeconomic conditions based on reputable sources. Specific PD methodologies aredetermined and applied on a per product portfolio basis predicated on common characteristicsand behavior.

The LGD is an estimation of the loss from a transaction given a default occurs. It considersthe collateral component of an account from acquisition to realization via resale.The EAD is an estimate of the exposure at a future default date, taking into account expectedchanges in the exposure after the report date.

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Forward-looking informationDeveloping models using average historical information may not capture the various possiblemarket outlooks in the future. To recognize and include these possibilities, an overlaycomputation is applied as an adjustment to include forward-looking information critical to thetimely and more accurate recognition of ECL. In considering forward-looking information, acomprehensive collection of macroeconomic factors/variables are selected using experiencedcredit judgement while considering accessibility of reliable information from officialreputable sources. Factors are then narrowed down through statistical correlation beforeapplication as overlays.

In its review of existing credit practices, the Group ascertained that the new requirements inaccounting for expected credit losses in PFRS 9 will have an effect on the 2018 consolidatedfinancial statements.

(c) Hedge accountingThe new hedge accounting model under PFRS 9 aims to simplify hedge accounting, align theaccounting for hedge relationships more closely with an entity’s risk management activitiesand permit hedge accounting to be applied more broadly to a greater variety of hedginginstruments and risks eligible for hedge accounting. The Group assessed that the adoption ofthese new standard will not have any impact to the 2018 consolidated financial statements asthe Group has no existing hedges.

∂ Amendments to PFRS 4, Insurance Contracts, Applying PFRS 9, Financial Instruments, withPFRS 4

∂ PFRS 15, Revenue from Contracts with CustomersPFRS 15 establishes a new five-step model that will apply to revenue arising from contracts withcustomers. Under PFRS 15, revenue is recognized at an amount that reflects the consideration towhich an entity expects to be entitled in exchange for transferring goods or services to acustomer. The principles in PFRS 15 provide a more structured approach to measuring andrecognizing revenue.

The new revenue standard is applicable to all entities and will supersede all current revenuerecognition requirements under PFRSs. Either a full retrospective application or a modifiedretrospective application is required for annual periods beginning on or after January 1, 2018.

The Group is currently assessing the impact of PFRS 15 and plans to adopt the new standard onthe required effectivity date.

∂ Amendments to PAS 28, Measuring an Associate or Joint Venture at Fair Value (Part of AnnualImprovements to PFRSs 2014 - 2016 Cycle)

∂ Amendments to PAS 40, Investment Property, Transfers of Investment Property

∂ Philippine Interpretation IFRIC-22, Foreign Currency Transactions and Advance Consideration

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Effective beginning on or after January 1, 2019∂ Amendments to PFRS 9, Prepayment Features with Negative Compensation

∂ PFRS 16, LeasesPFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure ofleases and requires lessees to account for all leases under a single on-balance sheet model similarto the accounting for finance leases under PAS 17, Leases. The standard includes tworecognition exemptions for lessees – leases of ’low-value’ assets (for example, personalcomputers) and short-term leases (that is, leases with a lease term of 12 months or less). At thecommencement date of a lease, a lessee will recognize a liability to make lease payments(that is, the lease liability) and an asset representing the right to use the underlying asset duringthe lease term (that is, the right-of-use asset). Lessees will be required to separately recognize theinterest expense on the lease liability and the depreciation expense on the right-of-use asset.

Lessees will be also required to remeasure the lease liability upon the occurrence of certain events(for example, a change in the lease term, a change in future lease payments resulting from achange in an index or rate used to determine those payments). The lessee will generallyrecognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.

Lessor accounting under PFRS 16 is substantially unchanged from today’s accounting underPAS 17. Lessors will continue to classify all leases using the same classification principle as inPAS 17 and distinguish between two types of leases: operating and finance leases.

PFRS 16 also requires lessees and lessors to make more extensive disclosures than under PAS 17.

Early application is permitted, but not before an entity applies PFRS 15. A lessee can choose toapply the standard using either a full retrospective or a modified retrospective approach. Thestandard’s transition provisions permit certain reliefs.

The Group is currently assessing the impact of adopting PFRS 16.

∂ Amendments to PAS 28, Long-term Interests in Associates and Joint Ventures

∂ Philippine Interpretation IFRIC-23, Uncertainty over Income Tax Treatments

Deferred Effectivity∂ Amendments to PFRS 10 and PAS 28, Sale or Contribution of Assets between an Investor and its

Associate or Joint Venture

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36. Supplementary Information Under Revenue Regulations 15-2010

In compliance with the requirements set forth by RR 15-2010 hereunder are the details of percentageand other taxes paid or accrued by the Parent Company in 2017:

GRT P=234,869DST 168,366Local taxes 19,398Fringe benefit taxes 3,682Others 821

P=427,136

Withholding TaxesDetails of total remittances in 2017 and outstanding balance of withholding taxes as ofDecember 31, 2017 follow:

TotalRemittances

Balance as ofDecember 31

Final withholding taxes P=174,889 P=18,018Withholding taxes on compensation and benefits 174,487 12,246Expanded withholding taxes 89,722 6,553

P=439,098 P=36,817

Tax Assessments and CasesAs of December 31, 2017, the Parent Company has outstanding cases filed in courts for variousclaims for tax refund amounting to P=181.68 million reported under ‘Other assets’ in the statement offinancial position.

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