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FINANCIAL HIGHLIGHTS For the year (in million pesos, except per share amounts) At year-end (in million pesos) 2 0 0 4 A N N U A L R E P O RT 1 TO OUR STOCKHOLDERS organization for the new challenges and opportunities, and strengthen our capability to thrive wherever we are in the economic cycle. At the close of the past year and on the eve of the new, we could see definitive progress in realizing our vision of our company as a bank preferred by customers across the board because of products and services that help them realize their financial goals, a bank that delivers exemplary standards of service to customers every day, and a bank that produces strong, consistent financial returns for its shareholders. Remarkable Financial Performance The financial results in 2004 provide a vivid yardstick of the progress we are making. During the year, we increased net income by 39% over the previous year to a record —1.8 billion, as operating income P grew 20% to —16.4 billion. Return on P average equity (without appraisal and goodwill) improved to 9.18% from 7.33% in 2003, while return on average assets (without appraisal and goodwill) climbed to 0.82% from 0.69%. On per share basis, earnings reached —2.79 from —2.01 P P WE COULD SEE DEFINITIVE PROGRESS IN REALIZING the previous year. We exceeded our goals OUR VISION OF OUR in key financial categories, including COMPANY AS A BANK A Year of Growth and Transformation earnings per share, net income, revenue PREFERRED BY CUSTOMERS In a year that saw the Philippine economy and asset quality. ACROSS THE BOARD An expansion in earning assets, a rebound with over six percent GDP growth, Equitable PCI Bank performed better portfolio mix and an improved Antonio L. Go Chairman of the Board above expectations on all fronts and took funding cost structure contributed to major strides in its reorganization program the 72% surge in net interest income to for sustained growth. —8.2 billion. This resulted in a wider net P This remarkable financial and interest margin of 3.86% in 2004 from operating performance was the result of 2.49% in 2003. We also saw dedicated and extraordinary effort by our improvement in the major components management and staff to meet key of non-interest income such as service objectives of improving products, services charges and commissions, corporate and distribution network, and maintaining finance fees, asset management and financial discipline to ensure financial trust fees, asset disposal gains and rental health and profitability. At the same time, income. These cushioned the impact of it vindicated our continuing program of volatile Treasury and forex-related transformation to reshape the income during the year. 2 EQUITABLE PCI BANK We ended the year with —310 billion P in total resources, —194 billion in deposits, P and —138 billion in loans. Deposits were P up 4% while loans grew by 14%. Loans to top-tier corporations continued to account for the bulk of loans, but lending to midsize and small enterprises as well as consumers is increasingly becoming a major source of loan growth. Consumer loans performed well. Mortgages grew 13%, while auto loans registered a 24% increase in number of units financed and 23% increase in outstanding portfolio. Our formidable franchise in credit cards continued to post hefty gains, registering a 22% increase in gross billings and 16% rise in cardholder base. Towards the end of last year and early 2005, we seized the opportunity to avail of accounting and tax benefits under the Special Purpose Vehicle (SPV) law. We offloaded a substantial portion of our non- performing asset (NPA) portfolio by executing the bulk sale of approximately —15.8 billion in aggregate non-performing P loans (NPL) and foreclosed assets to several SPV entities. This move brought our NPL ratio down to single-digit level. It enhanced our cost management and financial flexibility. We now have more OUR STRATEGIC VISION AND SOLID FINANCIAL room to use our balance sheet to PERFORMANCE HAVE BEEN reposition our core businesses for higher compared to the Phisix's 16% rise from REWARDED IN THE growth in their respective markets. We 2001 to 2004, Equitable PCI Bank has MARKETPLACE WITH SHARE complemented this and similar moves to been a solid investment. PRICE GAINS THAT HAVE BEEN increase the quality of our assets by raising BETTER THAN THOSE OF THE Strong profit growth also enabled us OVERALL MARKET. the NPL reserve cover to 73%, higher than to declare cash dividends of —436 million, P industry average. resuming a practice of returning excess capital to shareholders. With total capital Rene J. Buenaventura President Share Price Gains and Dividends at a healthy —41.4 billion, our capital P & Chief Executive Officer Our strategic vision and solid financial adequacy ratio settled at 14.3% which is performance have been rewarded in the comfortably above the regulatory marketplace with share price gains that minimum of 10%. have been better than those of the overall market. The bank's share price had nearly Organizational Change doubled to —48 over the three years since P Our strategic reorganization program is we embarked on our strategic bearing fruit in terms of a more cohesive transformation plan. With a compounded and motivated organization and closer annual return to shareholders of 25% relations with customers. 2 0 0 4 A N N U A L R E P O RT 3 TO OUR STOCKHOLDERS ACROSS THE BOARD, OUR shifting political and economic currents. Our Commercial Banking group set BANKERS ARE WORKING We enhanced our infrastructure and up more business units, particularly in MORE EFFECTIVELY WITHIN capabilities during the year. We worked to Luzon, to extend its already dominant THEIR RESPECTIVE BUSINESS create a strong sales and service culture coverage in the middle market and UNITS TO FORGE PROFITABLE PARTNERSHIPS WITH PEOPLE, among staff and develop the soft skills and entrepreneurial segment. It worked more COMMUNITIES AND ENTERPRISES. information capital needed by our new effectively with our branch heads to tap relationship bankers and customer-focused new markets, resulting in a strong 20% sales teams in order to compete effectively increase in acquisition of new clients. It Organizational reforms to improve in the market. We also strengthened our launched a new product that was well systems, procedures and operations, marketing programs, putting up more received in the market, especially in the combined with efforts to motivate our effective sales promotions and initiatives distribution business. Amid fierce employees to perform more effectively and joining in more marketing events. competition, the group achieved healthy have contributed greatly to our improved growth in loan portfolio, deposits, performance. Sectoral Growth placements and trade. One key part of the strategic Sector by sector, business by business, our Our Corporate Banking Group reorganization was to ensure that our operations have expanded and our produced double-digit growth in loan employees find their work meaningful so financial performance improved. portfolio and a near-doubling in net they feel personally committed to To make the bank more accessible to interest margin as it implemented new achieving the bank's mission. We are customers than ever before, we strategic initiatives aimed at better happy to report that our entire staff have intensified our efforts to enhance our managing risk, making more strategic use fully bought into our service first Electronic Banking channels to of capital by improving credit quality and philosophy, doing what is best for complement the expansion of our refining its customer relationship focus. customers even at the height of major traditional branch network. With our Our Consumer Banking business had transition in the organization. We ATM network expanding by 10%, the another exceptional year, registering a reinforced employee commitment and active cardholder base expanded by 17% growth in total loan portfolio. dedication through our benefits, training, 180,000 new accounts and client Besides healthy increases in new housing and development programs, and by transaction volume rose by 5%. Our pace loans and auto loans, it nearly doubled fostering an inclusive environment where of growth in electronic banking was wholesale loan bookings. Our credit card the best and brightest minds are heady, with outsize increases in either subsidiary maintained a brisk pace in its encouraged to perform at their very best. enrollment or volume for all our acquisition campaigns to achieve 16% Across the board, our bankers are electronic services, including e-payments, increase in cardholder base and 22% in working more effectively within their online banking, phone banking, SMS billings. respective business units to forge profitable transactions and call center operations. Meanwhile in Trust Banking, we partnerships with people, communities Strong focus on the remittance business continued to strengthen our leadership and enterprises. They have learned in recent years continued to pay off with position in the asset management teamwork in delivering full value and a 16% increase in pure OFW industry as we grew total assets under service to every customer, regardless of remittances, the second year in a row of management to over P100 billion, or who "owns" the customer. This is above industry growth. more than double the level three years important because loyal customers stay Amid a major transition, Retail Banking ago. Our Bank cemented its reputation longer, buy more products and services, clearly performed impressively in 2004. It as an exceptional investment create good word-of-mouth referrals, and recorded above industry growth of 16% in management group with stellar results reduce costs to acquire and keep business. core low-cost deposits, allowing us to keep for its Equity Portfolio Fund, which Most of our business thrived in 2004, a tight rein on funding cost. In addition to outperformed the benchmark Phisix and not just because we achieved greater better deposit generation, in-branch sales its rival funds in the industry with a operating efficiencies but also because we of everything from credit cards, home 37.1% year-on-year return on continued to invest in organic growth to equity loans, investments to insurance investment. This track record is build them up amid an overall credit products have increased dramatically underscored by EPCIBank's topping of market that remained susceptible to through more effective cross selling efforts. the 2004 performance survey conducted 4 EQUITABLE PCI BANK by global consulting firm Watson Wyatt. managing risk across the business. A Digest as a Gold SuperBrand in the The Bank ranked No. 1 among fund culture that encourages every employee 2005 Philippines SuperBrand Survey, a managers handling at least five funds to understand, anticipate and manage genuine consumer poll done by the with full discretion and was shown to the full range of potential risks and popular monthly magazine to determine have provided the best returns to rewards in their area. Achieving financial and measure consumers' brand retirement funds. discipline of this kind is the foundation preferences. upon which we will build a great None of this has happened by Building a Great Company company, which will prevail through both chance or as the sole achievement of a While most of our businesses are already good economic times and bad. few. This is the achievement rather of in leading positions, our experience in At the same time, we must not the Board, the Management, and all the recent years suggest there is room to forget that a great company gives back people who constitute our institution. grow in all of them. We intend to to the community it serves. Equitable PCI We take this opportunity to thank each continue investing and building up our Bank has a long tradition of active and every member of the team for their business to achieve growth. But we are community involvement. That tradition unwavering dedication and not interested in growth for its own continues today with the bank's performance. sake. Rather we seek good growth, programs of lending to build and rebuild Upon this rock of solidarity and meaning, services and products that best communities, philanthropic giving, and dedication, we will build an even meet customer needs and can be employee volunteerism. brighter future. profitable over a sustained period. We With our excellent 2004 results and will not pursue short-term revenue with our strategic priorities in place, we growth at the cost of long-term are in a position to realize this bolder profitability. and grander vision of our institution. Our recent performance is no accident but is the result of several years Facing the Future of hard work during which our The financial services industry in the ANTONIO L. GO employees all concentrated their efforts Philippines continues to face significant Chairman on learning to provide the best service challenges and opportunities. We believe experience for our customers. With this Equitable PCI Bank is well-positioned to service structure in place, we now set remain a major pillar of the industry our sights higher and aim not only to because we started investing to build this ensure customer satisfaction but to win business model for the future many years customer loyalty. This is important ago and we have attained at this point because loyal customers stay longer, buy the diversity, reach, brand, and RENE J. BUENAVENTURA more products and services, create momentum to thrive in this more President favorable word-of-mouth referrals, and competitive environment. But we cannot reduce costs to acquire and keep afford to be complacent. The steps we business. take going forward are all-important. Financial discipline is indispensable to We have progressed tremendously the continued growth and vitality of our since we launched our program of enterprise. It means striving for a balance transformation three years ago, and the sheet of unquestioned strength. This in year 2004 has crowned our efforts with turn requires effective management of record results and successes. This is our assets and liabilities, conservative and attested by citations the Bank has appropriate accounting, sound asset received from international bodies, such quality, and thorough grasp of what as the Best Domestic Bank Award in the drives profitability and growth. Financial Philippines from The Asset, a regional discipline requires that we have a financial publication, in its 2004 Triple A rigorous process and culture of Awards, and recognition by the Reader's 2 0 0 4 A N N U A L R E P O RT 5 Equitable PCI Bank Posts 23% "Your Bank" Campaign Launched PCI Leasing gets Top Credit Rating Remittance Growth The latest institutional campaign, "Your Bank," on Solid Asset Base Equitable PCI Bank's Express Padala posted a has surged on with its print ad series, catchy Publicly quoted PCI Leasing and Finance, Inc. 23% growth in OFW remittance volume for radio ads and jingle, as well as strategically officially received Securities and Exchange 2003, or 3.5x over the industry's average by installed billboards nationwide to increase Commission approval to sell a –—500 million P aggressively expanding operations to meet the awareness and media mileage, establishing short-term commercial paper (STCP) issue that constant demand for money transfer services strong market presence. has been assigned the highest credit rating by from migrant Filipino workers. Philratings. Equitable PCI Bank posts rapid growth Bank and PhilamLife Form PELAC in Remittances on Expansion EPCIBank Annual Report is Finalist The Bank and PhilamLife held a ceremonial Equitable PCI Bank's remittance business in Design Competition signing to formalize their alliance to form the continues to experience strong growth posting The 2003 Annual Report of the Bank was Philam Equitable Life Insurance Company 21% volume growth in the first four months of recently named one of the top three finalists in (PELAC). With this strategic alliance, PELAC will the year, as it rapidly expands in international the Communications Design Competition be the bancassurance company that will cross-sell markets and reaches more Filipinos abroad with a organized by the CommDesign Center. life insurance products through the Bank's vast better means of sending money to the distribution network. Philippines. Equitable PCI Bank Makes Bond Investing Easy, Attractive Equitable PCI is Top Grosser Awardee Equitable PCI Bank links FASTNet The Bank has spruced up its dollar-denominated The Bank received the 2003 Top Grosser Award with BIR to Allow Online Tax Payment bond investment product Maxihedge, a first in (based on total tax payments) from the Bureau of Equitable PCI Bank has integrated its FASTNet local banking, and making it widely available Internal Revenue. The Bank belongs to the top 20 internet facility to the BIR's Electronic Filing and through its branches. Maxihedge offers investors corporations that posted the highest payment of Payment System to give customers the ease and the opportunity to participate in high-yield all internal revenue taxes in CY 2003. BIR cited convenience of paying taxes online and bolster Philippine corporate or sovereign bonds. It the Bank as instrumental to the Large Taxpayers the bureau's efforts to modernize and collect presents a convenient investment opportunity in Service's achievement of its collection taxes more efficiently. a foreign country. The investment in these longer performance, and the attainment of the Bureau's term bonds provides steady coupon income every overall internal revenue goal. Equitable PCI Bank in Key Alliance with six months, and offers higher yields than ordinary Travelex; Opens new Remittance Service in bank time deposits. Equitable PCI ties up with Xoom.com France The Bank has teamed up with US based Xoom A key alliance was forged to create a new EPCIBank named Reader's Digest Corp. to provide the newest and fastest web foreign remittance service targeting Europe. 'SuperBrand' fund transfer service available in the market, Initially opening the door of opportunities in Equitable PCI Bank was named a Gold SuperBrand allowing non-resident Filipinos worldwide to send France, Equitable PCI Bank's Express Padala in the 2005 Philippines SuperBrand Survey, a their money home instantly and securely via the teamed up with Banque Travelex, the French unit genuine consumer poll done by the popular website of the San Francisco, California company of UK-based Travelex Financial Group. monthly magazine, Reader's Digest, to determine – www.xoom.com. and measure consumers' brand preferences. Bank Posts Strong Profit Growth The Bank performed outstandingly well in both The Bank reported strong profit growth for qualitative and quantitative results, scoring higher January-September, driven by higher gross than most other homegrown brands in its interest income and fee-based income. category. Only four of the Philippines' 41 commercial banks qualified as SuperBrands. Your choice. Our commitment. PCI Leasing & Finance Posts Bank turns 54 Equitable PCI Bank wins Accolade Higher Assets and Revenues Since its inception in 1950, your Bank has always in The Asset Triple A Country Awards PCI Leasing & Finance Inc. marked significant been one of the leading financial institutions in Equitable PCI Bank won the top domestic bank expansion in assets and revenues in 2003, the country. To date it is the third largest banking award for the Philippines in the 2004 Triple A maintaining its position as the dominant leasing group in the country with assets of –— 310 billion, P Country Awards by The Asset, a leading regional and finance company in the country. The publicly enjoying leadership in corporate and commercial financial publication. listed subsidiary of Equitable PCI Bank ended 2003 banking, credit and payment cards, remittances, with assets of –—5.13 billion, 22% higher than P leasing and investment banking. EPCIBank Among Five Best year-before levels, the company announced at its Dealers of Government Securities annual shareholders meeting. Gross income rose Equitable Card Launches the Equitable PCI Bank has been cited by the Bureau 35% to –— 778 million reflecting a higher level of P New Equitable Gold American Express of Treasury among the best performing financing activities. PCILF continues to be the In the new Equitable Gold American Express Government Securities Eligible Dealers (GSEDs) most profitable leasing company with a net Credit Card, the latest and most innovative for 2004 for its exemplary performance in the income of –P258.17million. offering from the two leading institutions in the primary market for all government securities. industry that is set to elevate the standards of the Equitable PCI Bank Nets –—270 Million P credit card industry to a new level.Consumers Big Wins in Asset Management in First Quarter of 2004 wanting to explore their buying power may soon for Equitable PCI Bank Equitable PCI Bank saw a 27% rise in interest find their most reliable partner. EPCIBank topped the 2004 performance survey income to –— 3.62 billion. The Bank said first P conducted by global consulting firm Watson quarter profits came in at –—270.3 million, higher P MTV Credit Card Launched Wyatt. The Bank ranked No. 1 among fund than the year ago figure of –—264.3 million, while P Equitable CardNetwork, Inc., the country's largest managers handling at least five funds with full at the core operating level, pre-provisioning profit credit card network figured in a pioneering discretion and was shown to have provided the was up 80% at –— 681 million. P endeavor as it marked a new milestone in credit best returns to retirement funds. card innovation. As part of its continuous drive to Equitable PCI Bank President & CEO Urges provide the youth a total lifestyle experience the Strong Push to Deepen Capital Market MTV way, ECN brings the MTV credit card. Equitable PCI Bank President & CEO told the Asia Pacific Congress that a true credit culture still Bank in Deal to Unload –—10.5B in Idle Assets P needs to further take root in the Philippines and The Bank reached an initial agreement with must be fostered if the market for corporate debt Lehman Brothers, Inc. for the sale of –— 10.5 P securities is to grow vibrant enough to help propel billion in idle assets in a deal that it expects to economic growth. The Asia Pacific Congress is a close before tax perks under the SPAV law expires gathering of top investment bankers and and which promises to greatly strengthen its government officials. balance sheet and boost earnings prospects. 6 EQUITABLE PCI BANK 2 0 0 4 A N N U A L R E P O RT 7 R E V I E W O F O P E R AT I O N S EQUITABLE PCI BANK ESTABLISHES KEY ALLIANCES WITH DIVERSIFIED FINANCIAL SERVICES GROUPS WITH THE AIM OF PROVIDING RELIABLE REMITTANCE SERVICES TO FILIPINOS ABROAD. 8 EQUITABLE PCI BANK Retail Banking Group competitors among the sales force. and Branch Upkeep Programs, in addition The Retail Banking Group marked in In continuously enhancing customer to the traditional Audit Rating and 2004 its first full year under a transformed relationships, several events were Performance Monitoring Reports. These set-up designed towards solidly organized to help build loyalty and programs allowed for the objective positioning the Group into a sales and strengthen the bond with the customer. measurement of service delivery and service oriented, customer-centric The year saw the Retail Bank participate in organizational performance in branches. organization. This should enable the various marketing events to create Proactive Management for Transaction Retail Bank to sustain the business growth awareness and identify leads for new Banking was also launched for Banking achieved in the recent years in the retail business. The Group was involved in Center Heads. Fifteen runs were financial services market as it focused on 3 various sponsorships for Amkor Anam, completed for 273 Banking Center Heads customer segments - the affluent, the Quezon City Medical Society, Maxicare and the program likewise achieved 100% emerging affluent, and the mass market. Primary Care Center, CEMEX, Children customer satisfaction rating. Internal As the structure had been set-up and Heart Foundation, Allied Suppliers Credit bulletins such as Employee Alert and duly manned, organizational development Association of the Philippines (ASCAP) and Customer Loyalty Builder were launched focused on creating the culture and in a joint Bank forum with the Ateneo. to improve awareness about service developing the soft skills - the human as Retail Banking likewise sponsored standards in branches. well as the information capital, necessary "Broadway to a Tee", held at the Manila In keeping with service standards, in competing effectively in the market. Polo Club, launched Deals on Wheels 3 in merchandising efforts were accomplished There was a need for cultivating the San Fernando Pampanga, and participated via the installation of a merchandising organizational value discipline of customer in the Business Opportunities 2005 event display system to enhance the image of intimacy or knowledge of the customer held at the Philippine Trade & Training the bank towards creating a "customer among the sales and marketing units Center and the Basic Education Congress experience". In the area of the branch catering to the affluent and emerging in Cebu City. network, initiatives were made to expand affluent customers, and the value Aside from these sales and marketing reach by relocating certain branches to discipline of operational excellence in the initiatives, Retail Banking was involved in better points of presence. support and distribution units, which are the design and implementation of core Continuing efforts were made for the largely positioned to serve the mass training and development programs for Bank to be more accessible to clients via market customers. Personal Bankers and Elite Bankers such as alternative modes. The Bank's ATM Part of the sales initiatives in pursuit Breakthrough Selling for Personal Banking network increased by 10%, active of developing the desired culture, was the and the Financial Planning & Consulting cardholder base grew by 180,000 new formation of sales teams in order to Program. The Group completed 12 runs of accounts, and client transaction volume create a sales-oriented culture and to the Breakthrough Selling Program for 218 grew by 5%. In the area of internet maintain a competitive spirit among Personal Bankers, with the program banking, our enrollment base for FASTNet divisions. Various sales promotion achieving a 100% customer satisfaction E-Payment grew from 28 to 1,005. For campaigns such as bancassurance's Power rating. Two runs of the Financial Planning FASTNet Online Banking, enrollment base of 2, Sure Money To The Max, CASA Idol & Consulting Program were likewise grew by 47% while transaction volume and Consumer Finance Division's Otso- completed in partnership with one of the grew by 64%. In the area of Otso were initiated to support the sales respected training institutes in the country. phonebanking, FASTPhone enrollment efforts of the branches. Internal bulletins In line with the goal of improving base grew by 23% while transaction such as Drumbeater and Inside Scoop customer experience, various service volume increased by 10%. For FASTPhone were put in place to enhance the initiatives were continued such as the SMS, transaction volume grew by 343% knowledge of bank products and its Mystery Shopper, Telephone Monitoring which was brought about by the re- 2 0 0 4 A N N U A L R E P O RT 9 R E V I E W O F O P E R AT I O N S launch in September. Transaction volume life insurance, total bookings measured management system will be continuously for the Call Center grew by 35% while in production credits reached a total of improved, particularly the timeliness of remittance authorization done via the Call —101M, an achievement considering the P performance monitoring reports, not only Center grew by 54%. Bank was only in its first year of its joint at the business unit level, but also at the Aside from improving the alternative venture with Philam Equitable Life product, channel and customer level. channels, Retail Banking was intent in Assurance Company. The OFW remittance Most importantly, Retail Banking shall understanding customer needs vis-a-vis market continued to grow with 17%, endeavor to improve the strategic product offerings via market research. The another year of double digit, above- business management skills of division Group took part in Project Geneva: a industry growth rate, further solidifying management and the implementation or Customer Satisfaction Survey, Project the Bank's number two position. Overall, execution of skills across all levels of the Check: A Focus Group Discussion amongst Retail Banking was successful in producing organization. Bank Clients and Personal Banking results amidst a major transition in the The accomplishment of these goals Managers for Product Concept Testing, organization. will be the foundation in building a Project Big Foot: Overall Brand Health Looking forward, the Group will stronger and better organization that is Check of Bank Products, and Project continue to pursue its strategic directions anchored on service, organizational and Anchor: A Focus Group Discussion among in improving revenue-generating financial excellence. Seafarers on Brand Health Check of performance by providing customer Express Padala. Research was conducted interfacing personnel with access to total Corporate Banking Group among internal customers such as Branch customer information in order to enhance The Corporate Banking Group (Corbank) Personnel via Project Bumblebee: a Focus cross-selling and up-selling capabilities. continued to be a major business segment Group Discussion amongst Bank Officers Retail Banking will also populate and of the Bank offering working capital and of Transformed Branches. update continuously the customer project finance loans, trade facilities and Equal attention was given on datamart and make extensive use thereof cash management solutions to the Top developing the information capital to launch customer-focused marketing 1000 Corporations in 2004. through Single Customer View Project, campaigns. Market and customer events As the primary bank for most of its Design of Income and Cost Allocation will be actively pursued for purposes of clients, Corbank was able to achieve Models, Personal and Transaction Banking customer acquisition, retention and double digit growth in its loan portfolio Monthly Scorecards and the Sales Portal. loyalty. There will be continuous while maintaining a healthy credit quality. The year ended with remarkable implementation of sales promotions for Corbank likewise achieved an impressive business and operational results for Retail CASA, as well as referrals for consumer increase in its net interest margin with the Banking. The Group was able to sustain a loans, credit cards, and bancassurance adoption of a new approach to growing double digit growth rate of 16% in peso products. Efforts will be pursued to shift the business. The traditional focus on low cost deposits. The Group also transactor business to self-service volume-driven growth was replaced by achieved a 19% year-on-year growth in terminals and free up branch resources to net income growth objectives. Renewed service charges as a result of Project be able to differentiate the service emphasis on profitability on a per product Abacus, a TEP project which focused on experience for emerging affluent and basis was undertaken. Cost structures ways to improve revenue generation in affluent customers. Branch formats may were reviewed covering both funds-based branches. In cross-selling, referrals for be modified as needed to suit customer sources and processing. Utilization of each consumer finance increased by 11% and and transaction profiles. Retail Banking clients' credit facilities focused on credit card referrals increased by 84%. In intends to pursue alliances on both the products that yielded better returns. The bancassurance, EBC Insurance Brokerage, acquisition and distribution side to expand optimum product utilization mix would Inc. posted a growth of P 72M while for market reach. The performance differ for each client resulting to specific 10 E Q U I T A B L E P C I B A N K CONTINUALLY ON THE RISE, EQUITABLE PCI BANK CONSTANTLY INTRODUCES NEW FOCUS AND IDEAS IN PURSUIT OF SUPPORTING THE NATION'S ECONOMIC GROWTH. MAXIHEDGE, A FIRST IN LOCAL BANKING, MAKES DOLLAR- DENOMINATED BOND INVESTING EASY. A LONG-TERM INVESTMENT OPPORTUNITY THAT FEATURES HIGH YIELDS, IT IS AN ATTRACTIVE OPTION TO SPUR PROGRESS IN THE COUNTRY'S FINANCES AND THEREBY A DEFINITIVE ACTION TO SHAPE THE RISING FUTURE. 2 0 0 4 A N N U A L R E P O RT 11 R E V I E W O F O P E R AT I O N S account strategies tailor-fitted for each Own-A-Car loan program and close to client's needs. CONSUMER 1,000 residential properties were financed To underscore the new focus, FINANCE under Own-A-Home loan program. The Corbank held a group wide competition for the Best Account Officer and Best ADOPTED MORE wholesale loans under the Contract to Sell Receivables Financing more than doubled Division Head with net income growth as STREAMLINED by yearend making a significant contribution the major criteria. PROCESSES to the total loan portfolio of Consumer During the year, various productivity enhancement and risk management SUCH AS Finance. Portfolio quality remains notably good with a delinquency ratio kept well systems were put in place. A new and AUTOMATED within acceptable industry standards. upgraded risk assessment program was CREDIT SCORING Many successful initiatives were purchased and implemented. Furthermore various new technology IN ADDRESSING undertaken in 2004. The annual marketing run of the Own-A-Car assisted productivity programs like the TURNAROUND financing under the "Deals On Wheels" Integrated Loan Approval Memorandum (LAM) workflow and the Account TIME. promotion in Pampanga showed encouraging results. This prompted Profitability systems were initiated for Consumer Finance to replicate this effort delivery within the year. nationwide in 2005. Late in 2004, a new By staying focused on optimizing variant of the housing loan program, returns and maintaining a healthy under Own-A-Home Stretch was portfolio quality, Corbank aims to introduced, which likewise stirred heavy continue generating a major share of the interest among loan borrowers. Aggressive Bank's total loan portfolio and to tie-ups with valued corporate clients of contribute a larger net income in the the Bank were forged to tap employees years to come. for personal loans via salary deduction. Recognizing the stiff competition and Cash Management the continued appetite of the market for Cash Management Division went full both housing and car loans, Consumer speed with the introduction of the new Finance adopted more streamlined FastWrite product with more clients processes such as automated Credit signing up to avail of this cash Scoring in addressing turnaround time. disbursement facility. Increased volume Consumer Finance looks forward to more growth was attained in the FastCollect dynamic product offerings in the coming and FastPay collection products as various year. Sales incentives and financing tie-ups tie ups with clients were inked. from regular sources shall sustain growth in consumer loan portfolio, while new Consumer Finance channels in loan generation shall be Consumer Finance experienced a banner developed to expand market reach and year in 2004 with total loan portfolio spur growth in the business. growing by 26%. Backed by aggressive Continuing growth momentum in loan referrals from branches, more than 2005 is expected as the Bank optimizes 3,500 units were financed under the business from an internal customer base, 12 E Q U I T A B L E P C I B A N K and continues tie-ups with business network of the Bank, the Group closely Commercial Banking's performance in partners to provide attractive new worked with Retail Banking branch heads 2004, as in the previous years, will products in the market. to capture still untapped market. The underscore its continuing efforts to efforts paid off as the Group recorded a achieve goals set for the coming years. Small Business Division 20% growth rate in terms of acquisition The Small Business Division (SBD) of new clients. Treasury continued to address the financing needs Commercial Banking's customer base The Treasury Group has been striving for of the country's small and medium-sized form a wide spectrum of individuals, market leadership across all businesses by enterprises (SME) in the year 2004, in groups, and corporations with varied continuously focusing on client support of the government's thrust of needs. Benefiting from the Bank's satisfaction and product diversification in making credit more accessible to this comprehensive range of products and key areas and correct market positioning. sector. As a result, the Division achieved services, which are made available The Group was able to capitalize on the respectable growth in its SME loan through other groups and affiliates such robust Philippine economic growth in portfolio, and contributed significantly to as leasing, insurance, consumer finance, 2004 at the 15-year high of 6.1%, from the growth of the Bank's CASA accounts trust, and cash management, the Group the previous year's 4.7%. The Treasury via a double-digit increase over its 2003 was able to provide not only the group expanded market reach and derived YTD figures. traditional banking product requirements, greater non-proprietary income. To further fuel the growth of the SME but also other financing options and Consequently, it was again able to sector, and to sustain its momentum in services. In 2004, a new product launched significantly contribute to the overall this market segment, the Division will to further capture trade transactions was income of Equitable PCI Bank in 2004. focus on its banner product, Credit On well received by customers, in particular The Treasury Marketing Division Hand. It will likewise leverage the Bank's those in the distribution business. maintained its focus on the expansion of various distribution channels to expand its By the end of the year, amidst strong client base, product offering, and market reach, and will continue to enhance its competition from local peer banks, reach. It intensified sales of investment operational capabilities to position itself as Commercial Banking continued to exhibit and hedging products to clients through the "Bank of Choice" among the growth in all aspects, particularly: loan the support of the Bank's distribution country's small and medium enterprises. portfolio; deposits; placements; and trade. network. It continued to widen its Even as the Group aimed for better presence in chosen markets through the Commercial Banking market coverage, to ensure loan portfolio operation of Treasury Desk Offices located Commercial Banking in 2004 continued to quality and to maintain low loan in strategic areas aimed at bringing pursue programs to enhance its foothold delinquency ratio, it constantly Treasury closer to its customers. Treasury in the middle market and entrepreneurial endeavored to take on a selective lending Marketing likewise continued to pursue segment. With dedicated business centers stance. Marginal accounts in terms of the development of high-level professional in key areas in Metro Manila as well as in credit worthiness were phased out, and competence and technical skills in selling Luzon, Visayas and Mindanao, the Group's smaller accounts were transferred to Fixed Income, Currency and Derivative geographical dispersion enabled it to Small Business Division, in keeping with products. better address the needs of clients within the Bank's overall strategy. Providing The Trading division which has been stratified demographics. the groundwork for such undertakings, spun off into three major divisions, As part of its continuing efforts to the Group continued to implement namely, Domestic Fixed Income Trading, reach out to customers, it established training programs designed to address Foreign Fixed Income Trading and Foreign additional business units in Luzon in 2004. technical, product knowledge, and Exchange Trading focused on key markets Capitalizing on the extensive branch managerial skills. for multi-currency fixed income, foreign 2 0 0 4 A N N U A L R E P O RT 13 R E V I E W O F O P E R AT I O N S THERE IS ALWAYS ROOM FOR GROWTH AT EQUITABLE PCI BANK. THE SURGE IN CONSUMER LOANS ALLOWED THE BANK TO ACHIEVE ITS HIGHEST PROFIT POSTING IN FOUR YEARS. DRIVEN BY STRONG RETAIL BANKING GROWTH AND HIGHER FEES, PROFITS WENT UP BY 39% SHOWING GREAT PERFORMANCE IMPROVEMENT WHILE REFLECTING THE BANK'S SUCCESS IN RESPONDING TO CLIENTS' LOAN REQUIREMENTS AND PROVIDING THEM WITH EASY AND ACCESSIBLE SOLUTIONS. 14 E Q U I T A B L E P C I B A N K exchange and derivatives. The Foreign rate and foreign exchange risks. It Trust Banking Fixed Income Trading desk was able to efficiently took advantage of the As the needs of Filipino investors evolve significantly improve interest differential Unibank's various licenses to enable to a more sophisticated state, people have income from the excess FCDU liquidity of it to reduce intermediation costs. grown to rely on professional fund the Unibank, amid relatively low demand The Product, Technology and management to preserve their assets and for FCDU loans. Furthermore, it utilized Information Division enhanced straight- explore investment possibilities. Equitable yield-enhancing outlets, credit through processing for Treasury PCI Bank has undoubtedly become a diversification instruments, and other transactions, including improvements preferred wealth building partner of innovative global investment products. on the foreign exchange transaction individual as well as institutional investors. The Trading Divisions continued to be process. Significant cost savings were This became even more evident when the dominant players in their respective fields. realized for the Group, especially on Trust Banking Group surpassed the 100 Constantly vigilant of market recurring expenses. The OPICS Treasury billion peso mark in total assets. developments and trends, these divisions system was upgraded to the most Asserting its strength and carried out strategies and took advantage current version and made more formidability in the industry, the Trust of market opportunities. As a compliant to the rest of the Unibank's Banking Group grew its Personal Trust manifestation to their remarkable systems. Market analysis/forecasts and business by 25% in volume. Corporate performance, several citations were other market-moving information Trust ended the year with a 22% increase received during the year. The Bureau of that identified opportunities in the in managed assets. Income from Stock Treasury again named the Bank as one of financial markets were constantly Transfer and Settlements swelled 38% the top 5 best performing Government made available and responsive to from 2003. Securities Eligible Dealers (GSEDs) for the requirements of the Unibank Beyond the growing fund sizes, the 2004, a distinction that the Bank has and clients. asset managers of Equitable PCI Bank enjoyed for the past several years. It has The Correspondent Banking Division maintain steady focus on market likewise been consistently included in the pushed the development of business opportunities to increase the value of the Bangko Sentral ng Pilipinas' (BSP) list of relationships with various counterparty investments they manage. Their the most active banks in the Philippine banks and has been instrumental in exemplary fund management ability was Dealing System (PDS). In addition, in a generating additional trade and non-trade confirmed as the Equity Portfolio Fund survey conducted among foreign currency lines for the bank. posted a year-on-year return of 37.1% in bond dealers by the Asset, a well- Well positioned to take advantage of 2004, beating the benchmark Philippine regarded Asian finance magazine, one of market opportunities in the coming year, Stock Exchange index of 26.4%. It the Group's senior dealers was cited for the Treasury group will continue to be a marked number one in terms of returns, the second consecutive year as one of the significant contributor to the income of and surpassed all other rival funds in its most astute global bond investors. Equitable PCI Bank through increasing class in the trust and mutual fund industry The Unibank Fund Management presence in strategic markets, tapping in 2004. Division concentrated on sound global markets for proprietary and non- Trust's banner product, Prime Life asset/liability management covering the proprietary Treasury products, greater Investment, gave medium term clients bank and all its subsidiaries. Through the harnessing of electronic delivery channels, good premium over the bellwether 91- ALCO process, it spearheaded initiatives maximizing the use of international day treasury bills. Long-term investors in aimed at generating liquidity for the licenses and capabilities, improving risk the Epic, Coral and Jade Funds benefited Unibank, minimizing cost of funding, management capabilities, and continue to from higher returns and periodic liquidity, maximizing returns on excess funds and upgrade human resource knowledge and on top of the tax privileges under the managing exposures to liquidity, interest skills. Comprehensive Tax Reform Law. 2 0 0 4 A N N U A L R E P O RT 15 R E V I E W O F O P E R AT I O N S The diversified portfolios of employee Treasury Support & Operations of Credits (LC) for select clients, with benefit trusts outperformed market Department implemented the Delivery convenient benefits of a template, ability benchmarks, proving worthiness of Versus Payment Facility. This new facility to store data of applications, eliminate Watson Wyatt's 2004 survey result which connected the Bureau of Treasury's need of requesting for forms and manual showed Equitable PCI Bank as the best Registry of Scripless GS Securities with the typing, and prompt dispatch of LC details fund manager with the highest returns for Bangko Sentral's Philippine Payments and via email for the Bank's immediate full discretion retirement funds in the Settlement System via Real Time Gross receipt, while hard copy is submitted country in 2004. Settlement System to achieve a real time, soon after. Trust Banking welcomes 2005 with final and irrevocable Delivery Versus Tests & Cables Department greater vitality. Recognizing the immense Payment (DVP) settlement for government implemented the required SWIFT opportunity in the latest regulatory securities traded in the secondary market. communications systems upgrades for its policies on collective investments, the This facility enhanced the bank's servers ensuring compliance with Group launched its Unit Investment Funds. settlement risk by providing a more secure mandated changes. Deposit Accounts It aggressively seeks new collateral and efficient settlement of government Reconciliation Department in 2004 was trusteeship and transfer agency business securities transactions. cited by the Bank management for its of corporate accounts to take advantage Clearing and Settlement successful use of information technology of a more active debt and capital market. Department continued to improve its in its "paperless" reconciliation resulting Asset management products will be backroom support for the Retail Banking to substantial cost savings and faster turn reinvented to meet demands of the Group and other Head Office units. It around times. changing times. The market can look successfully integrated the local clearing The Information Technology forward to simple and efficient ways of of seven (7) key regions (i.e., Cebu, Group's (IT) major focus in 2004 was investing their hard-earned money. In the Dagupan, Bacolod, Iloilo, Davao, Cagayan mainly on the automation projects related coming year, Trust Banking is certain to De Oro & Zamboanga) into the Electronic to strengthening the Bank's knowledge of work smarter to be Your Bank of Choice. Check Clearing System operations of the its relationship with existing clients in Philippine Clearing House Corporation. terms of portfolio and product availments. Operations The move facilitated the availability of The Customer Focused Intelligence The Operations Group provides information funds and clearing of checks in these Datamart and Customer Segmentation technology, business systems, transaction areas from 7 to 3 days, and allowed the initiative of the Retail Banking Group backoffice production, and facilities Bank to further maximize the benefits of allowed for statistical matching of management support to the Bank. centralized operations in the areas of customers, operational validation, In the Transaction Processing inward check processing, check customer segmentation, and predictive Division, Cash Operations verification and bank statement rendition. analysis. The Client Profitability Department's Grace Park Cash Hub was In the Loans & Discounts Analysis Report, on the other hand, opened in June 2004 to service Branches Department, major work focused on showed the profitability of its client and deposit pick up for clients. In the providing the backroom support for the relationship by providing information Visayas and Mindanao, Cashiering bank's growing loan portfolio. Improved relating to the client's assets, liabilities, Services Center expanded its FASTWrite manpower productivity enabled the and net interest margin. service coverage in Gen. Santos, Davao department to handle a 32% increase in Automation efforts directly benefiting and Bacolod. Offering this check cutting loan transaction volume. clients were implemented under the service in these areas created the In the Trade Services Department, Megalink Inter-Bank Fund Transfer opportunity to deliver this product to major enhancements to improve service facility, which allows account holders to more high profile corporate clients. delivery allowed the use of Master Letter transfer funds to other banks within the 16 E Q U I T A B L E P C I B A N K EQUITABLE PCI BANK STRENGTHENS CONNECTIONS. THE BANK'S RECENT TIE UP WITH XOOM CORP., A POPULAR DOT COM COMPANY BASED IN THE U.S., MAKES IT POSSIBLE FOR THE BANK TO PROVIDE THE NEWEST AND FASTEST WEB FUND TRANSFER SERVICE AVAILABLE IN THE MARKET. WITH THIS COMBINATION OF SPEED AND SECURITY, CUSTOMERS ARE NOW CAPABLE OF SENDING HOME MONEY INSTANTLY, KEEPING CONNECTIONS, FINANCIAL OR OTHERWISE, ALIVE ACROSS THE SEAS. 2 0 0 4 A N N U A L R E P O RT 17 R E V I E W O F O P E R AT I O N S Megalink consortium. Similarly, it implementing the Online Bidding of recording transactions/movements delivered the Pay Anywhere system that System, an electronic bidding system for within the Branch. Central Administration allows beneficiaries to claim their service providers of bank items, the Fax Division, together with IT & BSD, remittances from any Equitable PCI Bank Server Project which allows branches and developed and launched the Onsite branch. head office units to send fax messages via eBidding System in June 2004. The To assist evaluation of a client's credit Lotus Notes, the messaging facility of the implementation of the system is used in rating, IT implemented the Moody's Risk Bank. And the Control-D Web Access bidding out purchases of various Advisor and the Consumer Finance Facility which lets users view mainframe stationeries and office supplies, and other Credit Scoring projects. The Moody's Risk reports remotely, using an available services. Aside from heightened Advisor is a knowledge base system which browser in desktops at an improved effectiveness in ensuring a fair and processes the subjective and objective response time. transparent bidding process, Bank information that provides an overall Business Systems Division (BSD) suppliers welcomed its use and became evaluation of the borrower's operating focused on providing critical support for more competitive. Central Administration condition and financial strength while the the various initiatives of the Bank's continued to provide the necessary Consumer Finance Credit Scoring System Transformation Express Program. It support in the planning and relocation of evaluates the credit performance of clients spearheaded major projects on the 15 branches nationwide. with automobile and mortgage loans. operations review of bank marketing and Another of the most significant Significant improvements in the support units and select subsidiaries, projects implemented by the Operations processing of Equitable Card Network business process outsourcing studies for Group in 2004, in line with the (ECN) transactions were likewise realized non-core banking functions, and the Transformation Program of the Bank, was with the implementation of ECN Batch MIS/RM project of the Bank. Benefits of the outsourcing of non-core functions Processing Streamlining, Control D- such projects were realized in the form of presently handled by Central Print on Demand, and ECLink Auto- improved productivity and operational Administration. Initial coverage included Debit Facility. The first two allowed for efficiency leading to an improved the armored car servicing and the service faster completion of reports needed by customer service as a result of reduced vehicles. These two outsourcing projects ECN on a daily basis, while the latter turnaround time, cost savings, translated to substantial capital introduced an online posting facility for identification of additional revenue expenditure avoidance and additional faster debit on client accounts. Facilities opportunities, and improved control and cash flows. that provide services to employees were decision support systems. similarly enhanced with the availability of The Central Administration Credit, Products And Subsidiaries the Loan Balances Module and Division, which provides facilities Group Provident Fund Contribution and management support for the Bank, In 2004, Credit, Products and Subsidiaries Earnings in the web-based Employee continued in 2004 its various energy Group achieved several milestones as the Self-Service System. These reduced the conservation program. The Building business units under it namely: Special manual handling of voluminous inquiries, Administration Department implemented Lending Department, Credit Policy thus enabling the supporting unit to the delamping program for the Bank's Supervision, and other subsidiaries and divert efforts in more pertinent functions. Tower II building. With the change to a affiliates such as EBC Insurance While dynamically supporting the more efficient lighting system, the Brokerage, Inc. and Maxicare surpassed technical requirements of the Bank's program is expected to generate their business goals and objectives and business operations and management substantial savings. The CCTV Project, posted double-digit growth. initiatives, IT actively pursued the paper piloted in 2003 and fully implemented in Special Lending marked the year reduction initiative of the Bank, 2004, provided the added security benefit with an impressive performance as it 18 E Q U I T A B L E P C I B A N K exceeded its loan bookings target by more than 25% and bested its peer banks SPECIAL shipping and services. It will continue to provide wide array if financial services to when it garnered six (6) citations from LENDING clients to finance their working capital as various institutions for its exemplary achievement in supporting investment MARKED THE well as medium and long-term capital enterprises in the countryside and in YEAR WITH AN requirements. The Bank will also sustain its active role in the delivery of credit and in assisting the growth of industries, IMPRESSIVE creating opportunities for investments in community and the economy. The Bank succeeded in winning three PERFORMANCE the countryside. awards including the overall category AS IT EXCEEDED Maxicare Health Corp, (Maxicare) sustained its position as one of the from the Land Bank of the Philippines ITS LOAN country's premier HMOs with more than (LBP) which was considered a sweep. For two consecutive years, LBP cited the Bank BOOKINGS 278,000 members covered and having the as The Most Outstanding Countryside TARGET BY most extensive network of doctors, specialists, hospitals and clinics Partner under the Commercial Banks and MORE THAN nationwide. Government Financial Institutions Category and The Most Outstanding 25% AND AS IT In 2004, Maxicare focused its Countryside Partner for Agri-Agra BESTED ITS PEER marketing strategy in the acquisition of new customers and organic Financing. The Bank bagged the third BANKS. growth of existing clientele base. award when it was named as The Most This brought in new business and Active Countryside Partner for further improved revenues. Total Countryside Loan Fund and Agricultural membership grew by a record high of Loan Fund. 38%. Likewise, revenues from existing In the same year, the Development premium-based business grew more than Bank of the Philippines also named the 20% while income from Administrative Bank as The Most Outstanding Services Only (ASO) business almost Participating Financial Institution under doubled during the year. As a result of the Japan Bank for International improved performance, net income in Cooperation Facilities for Environmental 2004 grew by 15%. Projects. Likewise, the Small Business In its effort to further enhance Guarantee and Finance Corporation customer service and health care delivery cited the Bank as one of the 2004 system, Maxicare successfully launched a Distinguished Partners under the new web-based information system called Financing Facilities for Small and Flexiclaims. This is an automated system Medium Enterprises. The Social Security that provided improvement in business System also recognized the Bank as the processes such as customer service, 2004 SSS Balikat ng Bayan Best underwriting, and processing of medical Participating Financial Institution for services, billings and claims. The new School Financing. system also allowed the company to The Bank has supported various better manage its database and operation industries such as agro-processing, and consequently reduce cost of doing manufacturing, telecommunications, business. 2 0 0 4 A N N U A L R E P O RT 19 R E V I E W O F O P E R AT I O N S WITH A FINGER ON THE PULSE OF THE MODERN MARKET, EQUITABLE PCI BANK IS KEEPING UP WITH TODAY'S VIBE. LAUNCHING THE MTV CREDIT CARD, BILLED AS "THE MOST WANTED CARD IN TOWN", THE BANK CONTINUALLY PROVES THAT ITS INNOVATIONS AND FRESH PRODUCT OFFERINGS STILL STEERS IN LINE WITH THE SENSIBILITIES, STYLINGS AND STANDARDS OF CURRENT MARKET SEGMENTS. 20 E Q U I T A B L E P C I B A N K Maxicare has also established a The Credit Policy and Support service, the Division recently launched the Primary Care Clinic (PCC) in the New Division (CPSD) provides credit support Credit Investigation System to further Medical City in October 2004 to better in the form of credit investigation and strengthen its capability in fulfilling its service its customers. Another PCC was appraisal services to the Bank's various mandate in the area of credit opened at the Medical Plaza Building in lending units. The Division is also investigation. Expected to be fully January 2005. For 2005, it will open a responsible for credit risk management operational in 2005, this system is PCC in Cebu. which it performs through the formulation another significant step towards the On the other hand, EBC Insurance of effective credit policies, and the complete realization of the automation Brokerage Inc. (EIBI) is one of the top conduct of credit risk reviews. Given these blueprint for the whole credit support ten insurance brokers in the country in functions, CPSD was given the mandate services of CPSD. terms of market share and number six in to lead the drive towards Basel II The Bank's Credit Appraisal System has terms of profitability. EIBI is responsible compliance on credit risk. realized the principle of maximizing existing for servicing the insurance requirements Appraisal and Credit Investigation technology to improve work and cost of the Bank and its clients. It offers a The drastic reforms that CPS instituted efficiency. It has become an industry leader complete range of insurance products in its support services particularly in the in this regard as no other major local bank and services including risk/exposure area of collateral appraisal enhanced its is believed to possess this infrastructure. assessment, insurance packaging, claims operational capabilities and established a Credit Risk Review, Reports & negotiation and settlement. long-term support infrastructure for future Policies In 2004, EIBI intensified its sales growth in the lending portfolio. One of the many challenges campaign by using the Bank's branch The efficient use of technology confronting banks today is the pending network to bring in new business. It including digital imaging equipment implementation of Basel II which launched Project i2, a continuing incentive complemented the Credit Appraisal advocates a wide array of principles on referral sales program involving the Bank's System which produced significant cost risk management with the view of making Retail Banking Group (RBG). Premium and savings for the bank, improved banks more prepared in meeting the risks commission incomes from the Project i2 turnaround time and increased capacity by inherent to its business. Recognizing risk more than doubled during the year from eliminating inefficiencies caused by management as a tool for creating previous year's level as a result of extensive manual work, geographical distance and shareholder value, the Division started branch referrals nationwide. The Car-a- lack of monitoring system. The system setting the foundation for a BASEL II- Sure and Home-a-Sure were the products enabled an effective monitoring of compliant credit risk management offered under this incentive program. appraisal workload thus allowing optimal environment consistent with the overall For 2005, EIBI will continue the use of resources while similarly providing goal of setting an enterprise-wide risk successful Project i2 incentive program to an objective measurement of performance management infrastructure. The Moody's tap the retail clients of the Bank for for all appraisers and appraisal units. Risk Advisor system was implemented insurance products. It will also launch the Added to this, property data produced in alongside a revised internal borrower risk Power of 2 incentive program in electronic format by the system facilitated rating policy. The conversion to the new collaboration with RBG to sell both life regulatory reporting as well as greater rating system that considers both the and non-life insurance products through connectivity to other vital electronic borrowers' creditworthiness as well as the Bank's branch network. EIBI will also infrastructures largely involving systems facility structure is consistent with the new strengthen its Open Market Unit to used to manage the various risk assets of BSP circular mandating the use of a risk expand market share on non-bank the Bank. rating system. referred and open-market type of In its continuing journey towards As effective risk management requires accounts. greater efficiency and improved customer credit risk measurements using metrics 2 0 0 4 A N N U A L R E P O RT 21 R E V I E W O F O P E R AT I O N S and models, CPS designed and will Performing Assets (NPA). Although joint venture undertakings, public implement the new Central Liability managing distressed credits continued to auctions, wholesale asset disposition System by the third quarter of 2005. The be the main thrust last year, the Group As the economy's overall performance system is envisioned to provide the data vigorously worked with a Special Task remained challenging in 2004, the Group gathering and storage facility required to Force to dispose of approximately PHP15.8 once more exceeded its ambitious targets store historical data in support of future billion of the Bank and its savings bank in reducing losses, contributing profits, initiatives relevant to BASEL II compliance NPAs to SPV companies, of which —10.5P and shrinking the Bank's non-performing such as risk rating system validation or billion was negotiated late 2004, and an loan (NPL) portfolio to below industry back-testing, development of models on additional —5.3 billion for early 2005. P norms. In addition to the —15.8 billion P Probability of Default, Loss-Given Default The Group sustained its reputation as sale of NPAs, the Bank also disposed of and Exposure-at-Default with the objective a major force in resuscitating ailing —1.0 billion of acquired assets through P of quantifying expected and unexpected industries while churning profits direct marketing and a series of successful losses, and risk rating migration tracking. generated from new business. public auctions. These early initiatives are congruent with The synergy that the Group's The Bank sees 2005 as the year in the overall medium to long-term credit constituents have in achieving its targets which it will transform viable but still risk management plan of the Division can be better appreciated by looking at its distressed credits back into manageable which is to enable the estimation of risk- well-defined mandates and primary risks while dealing less promising accounts adjusted return on capital (RAROC) or responsibilities, which include: with Asset Management Companies profitability of transactions or relationships • Special Projects and Asset Advisory under the auspices of the SPV Law. It is factoring in expected loss, cost of capital Division: debt work-outs; debt for asset anticipated that the Bank's NPL ratio will and risk capital requirements among swaps, corporate rehabilitation; corporate be reduced to single digit levels by the others. finance in the area of export credits end of this year with incremental business Moving forward, the Division shall accessible from OECD countries for project to be generated by the Group's marketing continue to focus its efforts in developing finance; syndications. team contributing to the bottomline. the necessary skills and systems that will Equitable PCI Bank remains one of the allow it to provide timely and quality country's local banks with a focused team Human Resources credit support services on a sustained in the Structured Finance area able to Equitable PCI Bank employees continue as basis. It shall put greater priority to directly access long-term project funding the Bank's significant partners for growth. attaining Basel II compliance and in from Export Credit Agencies in North Through the EPCIBank-Human Resources transitioning to global best practices in America, Western Europe and Southeast Division (HRD), programs of culture credit risk management - all these in the Asia, including Japan. building, personnel development and pursuit of the Bank's institutional objective • Project Development and Joint employee self-service bolstered employees' of being the Bank of Choice. Ventures Team: the first ever to be focus on their core functions and established in the industry, charged with a competencies. Noteworthy contributions Special Projects, Asset Management & mandate to maximize gains and optimize to the institution in 2004 include the Legal Group the use for profit of Bank's acquired strengthened employee Rewards and 2004 was a year of transition as the resources arising from loan to asset swaps. Recognition programs, as well as the banking industry focused on taking • Legal Services Division: documentary Internal Customer Satisfaction survey. advantage of benefits granted by the audit, crafting of documentation, legal More importantly, with the successful Special Purpose Vehicle Act of 2002 (SPV recoveries, advisory signing of the Collective Bargaining Law) which introduced tax incentives on • Asset Management and Disposal Agreement for the 2004-2005 period in sales and disposals of qualified Non- Division: direct and indirect asset sales; May 17, 2004, the Bank further sustained 22 E Q U I T A B L E P C I B A N K EQUITABLE PCI BANK HELPS ENTREPRENEURS TAKE A STEP IN THE RIGHT DIRECTION TOWARDS SUCCESS. IN RESPONSE TO THE SMALL AND MEDIUM-SCALE ENTERPRISES' NEEDS FOR FINANCIAL SOLUTIONS, THE BANK FOCUSED ON PROVIDING CREDIT ON HAND, FURTHER IMPROVING CREDIT DISTRIBUTION TO ITS CLIENTS AND ONCE AGAIN MAINTAINING ITS STANDING AS THE SECTOR'S "BANK OF CHOICE" 2 0 0 4 A N N UA L R E P O R T 23 R E V I E W O F O P E R AT I O N S its commitment to its employees by maintaining harmonious relations THE GROUP IS Equitable Card pursued various marketing strategies throughout 2004. between Management and the Union. NOW The Card Sales & Marketing - Retail HR Service delivery significantly MANDATED TO Department, responsible for the card widened its reach with the expansion of the Employee Self-Service facility via HARNESS ITS issuing business of credit card accounts of Equitable Card and other specialty cards the intranet, with additions of an CREDIT AND under the following brands -Visa, expanded timesheet printing feature, MARKETING MasterCard, JCB, and American Express, the employee loan balances and provident fund contribution inquiry RESOURCES BY likewise handled conceptualization and implementation of marketing programs to facilities, as well as the implementation MARKETING boost card usages and loyalty from of the Travel and Advance Liquidation NEW BUSINESS cardholders. Among the usage programs electronic form. Human Resources Division likewise THROUGH THE are the internal E-Pay, Balance Transfer and Cash in a Flash. maintained internal efforts to improve its PROMOTION OF Despite a very challenging year, operations by undergoing a review on NON- credit card base increased in 2004 by processes and procedures. Year 2004 saw HRD upholding endeavors in Job TRADITIONAL 16%. Branch solicitation efforts resulted to an 84% increase. And Equitable Evaluation, Teambuilding, Officership BANKING Card introduced two (2) new products - Training and Systems Training across the organization. These programs PRODUCTS the MasterCard Travel Card and EasyPay JCB. emphasized the Bank's approach in Last year's major installment unifying visionary teams, nurturing job campaign, namely, Cash-in-a-Flash and performance and reinforcing Balance Transfer E-Pay contributed management potential. significantly to the gross income. More so with the launching of MasterCard Travel Equitable CardNetwork, Inc. Card, volume for the brand considerably Equitable CardNetwork, Inc. in 2004 increase by 70%. Meanwhile the strategic maintained its leadership position in the repositioning of the JCB brand as the country as the foremost payment card "people's card" resulted to a 285% issuer. increase in issuing sales. With offerings of well-established In 2005, Equitable CardNetwork, Inc. payment and card products, including plans to launch more aggressive card Visa, Visa Electron, MasterCard, JCB and acquisition programs and promotions, American Express and aggressive increase E-Pay and retail volume, and marketing, Equitable Card enjoyed pursue further ventures to deliver continued patronage from its broad and innovative card products and enhance growing cardholder base. customer service. 24 E Q U I T A B L E P C I B A N K PCI Capital Corporation Assets and Return on Equity both from the Philippine Rating Services PCI Capital Corporation is the investment registered at 9% for the year. Corporation (PhilRatings) . This banking arm of the Equitable PCI Bank In the coming year, PCI Capital will represents the "Best Grade" and the Group which focuses on providing continue its thrusts into the equities and strongest capability for the timely clients with a wide array of capital fixed income markets-a thriving market payment of the STCP issue for both market products such as equity and segment amidst political and economic principal and interest. debt underwriting, dollar and peso loan uncertainties-to ensure its customer base a PCI Leasing's Operating Units, in their syndication, project finance, private steady stream of optimal financing effort to ensure optimum quality services equity, trading and brokering of structures and quality investment to its customers, further intensified financial assets, and financial advisory opportunities. efforts to maximize productivity, heighten services. efficiency, and beef up work systems. In 2004, PCI Capital continued to PCI Leasing & Finance, Inc. Foremost of its initiatives include the show its market prowess in the midst of In 2004, PCI Leasing continued to constant system upgrades and weak economic and political conditions. manifest strength and resiliency. It enhancements to be at par with It has led or participated in the achieved an exceptional growth of 37% in technology standards. Initiatives to consummation of major financial net income and 45% in loan portfolio - develop the working environment were transactions last year involving over —11.4 P fortifying its leadership in the industry, also given priority. billion in debt, quasi-equity, and advisory considerably far from its competitors. The Productivity Improvement transactions. PCI Leasing achieved a defined Committee, consistent with its objective PCI Capital acted as: Issue Manager market focus and increased market of continuous involvement in various and Lead Underwriter for the —2.0 billion P presence, as it posted robust increase in cost rationalization projects, again 2-tranche preferred share issue of JG loan portfolio. The growth in loan managed to implement various Summit Holdings; Lead Underwriter for portfolio focused on high credit quality productivity-related procedures which the —500 million Pasay Kaunlaran, —315 P P risk assets with emphasis on strong resulted to a savings of 7% in operating million Onward Tacloban, and —150 P markets and diversification of portfolio expenses. million Carmona municipal bond offers; into higher margin-income generating These achievements in 2004, wherein Joint Issue Manager for the —3.0 billion P opportunities, thus maximizing earnings each unit performed and took action in corporate note of Unilever Philippines and potential at far lesser risk. Aggressive meeting specific targets, has further —2.0 billion fixed bond offer of Ayala P efforts and strategies at product equipped PCI Leasing for 2005 in Corporation; Arranger of the —470 million P innovation also capped milestone continuously improving its customer corporate note issue of Rockwell Land; developments - maintaining its market orientation, which will allow the company Co-Lead Underwriter for the —1.8 billion P dominance. to maintain its leadership in the industry. preferred share issue of Aboitiz Equity Through prudent management, PCI Ventures; Selling Agent to the —365 P Leasing continued to have the largest . million Ayala Land bond offer; and approved ceiling for short-term Financial Advisor to a major telecom commercial papers (STCP) in the company. financing industry. It received the highest In 2004, PCI Capital's Return on rating of PRS 1 for its 500 million STCP 2 0 0 4 A N N UA L R E P O R T 25 C O R P O R AT E S O C I A L R E S P O N S I B I L I T Y E quitable PCI Bank continues to adhere to its long standing commitment to corporate citizenship and national The Bank's Corporate Communi- cations Division likewise sustains a year- long round of projects and tie-ups • Philippine Business for Social Progress. Equitable PCI Bank is member of PBSP, a private and non-profit development. involving donations, charity work, and foundation dedicated to promoting the In 2004, the Bank continued to community relations. Among these in business sector's commitment to social demonstrate this corporate responsibility 2004 were: development. Established in 1970, PBSP by embarking and supporting various • Tulong Para Sa Luzon. An internal has since grown to become the nation's socio-civic programs as well as donation drive to help raise funds for largest business-led social development environmental and educational projects. the victims of the severe flooding of foundation. Through the Equitable Bank Central Luzon. The drive yielded • Habitat for Humanity. Equitable Foundation, Inc., which was established sacks of rice, noodles, sardines, PCI Bank was a partner of Habitat for in 1974 by founder Go Kim Pah, the Bank canned meat, sugar, coffee, milk, Humanity Philippines Foundation Inc. in has provided scholarships to more than blankets, mats, crackers, detergent, building houses at BASECO, a depressed four hundred students who exemplified clothings, and other items which were community near the piers of Manila. leadership qualities and outstanding distributed by employees of the Bank in • Philippine Chinese Charitable academic aptitude. The Go Kim Pah the affected areas. Tulong Para Sa Luzon Association. Upholds socio-civic scholarship program has allowed many has embarked on four relief missions, responsibilities through aid relief and deserving Filipino youths to attend the twice each in the provinces of Pampanga medical missions in times of calamities. country's top-tier universities and and Nueva Ecija and the fifth will be Equitable PCI Bank is one of the vocational schools; enabling them to the province of Quezon as the next Association's various sponsors. finish undergraduate, non-degree, mission. • Hope for the Handicapped of the vocational and graduate studies. • Ten Outstanding Young Men Philippines Inc. A non-profit organization However, the graduate studies program is (TOYM). TOYM is a landmark program of that was created to assist our less only open to all Equitable PCI Bank the Philippine Jaycees. The Bank has fortunate brothers who have suffered employees, both officers and staff, who supported this worthwhile project which from stroke, have cerebral palsy and other wish to pursue post-graduate studies at recognizes outstanding achievements of deformities. any of the Foundation's accredited individuals in their chosen field of • Gift Giving Sa Makati. A yearly schools. expertise. Christmas gift giving effort of the Bank to And on the occasion of Go Kim Pah's • Children's Hour. A global fund the less-fortunate sector of Makati City. 21st death anniversary, the Foundation raising campaign calling on individuals Pails of assorted goods are given away to launched the Go Kim Pah High School and companies to donate an hour of hundreds of residents every year since Scholarship Program last October for their earnings to help fund programs 1997. academically deserving but economically committed to the welfare and deprived high school freshmen students development of children and youth. In commencing School Year 2005-2006 until 2004, Equitable PCI Bank launched an the grantees finished their high school. internal campaign which raised money The accredited schools are St. Jude for Children's Hour Philippines. Catholic School, Chiang Kai Shek College, • Namfrel-Bantay Ng Bayan UNO High School, Manila Patriotic High Foundation. Financial assistance to School, Philippine Cultural High School Namfrel in support of the advocacy for and Philippine Tiong Se Academy. clean, honest, and orderly elections. 26 E Q U I T A B L E P C I B A N K PHILIPPINE ECONOMIC PERFORMANCE 2004 T he Philippine economy expanded at its fastest rate in 15 years in 2004 with real gross domestic product (GDP) The industrial sector grew 5.2% last year from 3.8% in 2003, on the back of the strong recovery in construction East Asia after Indonesia, but ahead of Singapore and Japan. Political stability following the May elections, the BSP's growing by 6.1% from 4.7% in 2003; (+7.4%) and the growth in neutral monetary stance, and increased gross national product (GNP) was up by manufacturing (+5.1%), the latter economic activity upheld the positive 6.2% from 5.6%. Robust private gaining from a brisk global trading market sentiment. Telecommunications, consumption and export gains propelled environment. Meanwhile, generally banks, property, and mining sectors led the economy last year. Election spending favorable weather conditions and the market's bullish performance. and the continual rise in overseas Filipino government support enabled the farm In 2004, the country hurdled its workers (OFW) remittances drove sector to grow by 5.1% last year from biggest challenge of achieving political household spending to a record 5.8%. 3.8% in 2003. stability with the assumption of Gloria OFW remittances last year grew by 12% Higher global crude oil prices and M. Arroyo as President of the Philippines. to $8.5 billion. The faster global pace supply shortages due to the strong This brought back confidence into the (led by US and China) and the rebound typhoons that hit the country in the economy, abetted by the Supreme in the technology sector buttressed the latter part of the year pushed up the Court's favorable decision on the mining 14.1% expansion in exports, while average inflation rate to 6.1% from law and the passage of the sin tax and increased economic activity pushed 3.5% in 2003. Rising inflation and the lateral attrition laws late last year. imports up by almost 6.0%. concerns over a "fiscal crisis" drove the These positive developments created a A more broad-based expansion of benchmark 91-day Treasury Bill rate favorable environment going into 2005, the production sectors was noted last higher, averaging at 7.34% for the year with the government's efforts at fiscal year. The services sector remained the from 6.0% in 2003. Heightened political consolidation (Expanded VAT law, power major growth driver on the output side, uncertainties leading to the May sector reforms, etc.) seen to bring in with a record high 7.1% increase in 2004 elections, increased import requirements gains over the long-term, despite some from 5.8% the year-before. The steady on account of rising economic activity, short-run adjustments. Despite high growth of call centers and stable demand and higher oil prices pushed the peso inflation and US interest rate hikes, for wireless communication services lower versus the dollar to —56.18 by P monetary authorities have been prudent continued to fuel the communications end-2004. The average peso-dollar rate in raising its key interest rates (by 25 services (+15.6%), even as the real estate for the year was —56.0 from —54.20 in P P basis points in April this year), taking and property sector benefited from the 2003. note of the existing slack in the robust demand for office spaces/buildings The government beat general economy. While an expected global from business process outsourcing (BPO) expectations by posting a budget deficit economic slowdown and a more difficult activities. The residential property sector lower than the —198 billion target as P operating environment are seen limiting also got a boost from increased migrant well as the —200 billion deficit in 2003. P growth prospects in 2005, the country's remittances, as spending spilled over into The actual deficit last year stood at resiliency, supported by structural reform higher value items, notably medium-cost —187 billion, or 3.8% of GDP, also the P measures in vital areas such as banking, housing. Retail trade and private services lowest in five years. fiscal, trade and investments, capital gained from election-related spending Meanwhile, the Philippine composite markets, and corporate governance, and remittance inflows, while broadened index ended the year at 1,822.80, or should enable it to withstand these economic activity supported the growth 26.4% (380.40 points) higher than the temporary shocks. in the finance sector (which includes 2003 level. The Philippines emerged as banks). the second best performing market in 2 0 0 4 A N N UA L R E P O R T 27 BOARD OF DIRECTORS ANTONIO L. GO JOHN C.B. GO MA. CORAZON S. DE LA PAZ FERDINAND MARTIN G. Chairman Vice Chairman Vice Chairperson ROMUALDEZ Vice Chairman RENE J. BUENAVENTURA PETER GO PAILIAN ANTONIO I. BASILIO AMB. CESAR B. BAUTISTA President & Director Director & Chairman Emeritus Director Director ANTHONY F. CONWAY FULGENCIO S. FACTORAN, JR. MA. LUZ C. GENEROSO GENEVIEVE W.J. GO Director Director Director Director 28 E Q U I T A B L E P C I B A N K ADVISORY BOARD RAMON J. JABAR REYNALDO P. PALMIERY Director Director ANDRES L. SORIANO III TEODORO P. REGINO Member Member RICARDO C. LEONG MIGUEL E. ROCA, JR Member Member ROBERTO R. ROMULO GILBERT P. LORENZO Director GSIS Representative FRANK L. GO JONATHAN C.B. GO Member Member NILO T. DIVINA Corporate Secretary 2 0 0 4 A N N UA L R E P O R T 29 MANAGEMENT COMMITTEE RENE J. BUENAVENTURA President & CEO WALTER C. WASSMER GERARD LEE B. CO ANTONIO N. COTOCO BIENVENIDO M. JUAT, JR. EDUARDO J. KATIGBAK, JR. Senior Exec. Vice President Executive Vice President Executive Vice President Executive Vice President Executive Vice President RICARDO V. MARTIN SERGIO LL. NARANJILLA, JR. DENNIS B. VELASQUEZ ARISTOTLE L. VILLARAZA MARVIN V. FAUSTO Executive Vice President Executive Vice President Executive Vice President Executive Vice President Senior Vice President JONATHAN C.B. GO REBECCA S. TORRES MA. ROSANNA L. TESTA Senior Vice President Senior Vice President Vice President SENIOR OFFICERS CHAIRMAN Virgilio C. Pamatmat Joy T. Yap Francisco Vicente O. Hilario Antonio L. Go Jose Alfredo G. Pascual Antonio C. Yniguez Agnes F. Jamias Raul Martin A. Pedro Aimee A. Yu Marietta M. Jamilla PRESIDENT & CEO Domingo A. Ramos Jr. Alice C. Yu Armando P. Jardeleza Rene J. Buenaventura Ma. Theresa S. Simbul Margaret L. Yu Tomas K. Javier Virginia N. Sy Simeon S. Jumaquio SENIOR EXECUTIVE VICE Edwin R. Tajanlangit ASSISTANT VICE PRESIDENTS Rafael Martin C. Lara PRESIDENT Kara Q. Abrogar Michelette S. Legaspi Walter C. Wassmer VICE PRESIDENTS Jose Emilio M. Alcalde Lilian Leslie T. Lim Belinda C. Abad Melissa A. Alcantara Alberto V. Lizares EXECUTIVE VICE PRESIDENTS Jocelyn D. Agas Rogelio C. Alcantara Vicente T. Lopez Gerard Lee B. Co Regina Flor V. Alba Edgardo L. Alcaraz Gertrudes J. Lumain Antonio N. Cotoco Mary Jane V. Ang Ma. Milagros R. Alindogan Nelia R. Lumanog Nilo T. Divina, General Counsel Pedro C. Bautista Jr. Susan G. Almendral Joseph Gerard E. Mabilog Bienvenido M. Juat, Jr., Treasurer Jose Luis F. Bautista Apollo R. Alquiza Vivian D. Malonjao Eduardo J. Katigbak, Jr. Bernard M. Carague Leticia L. Ang Ley Rebecca C. Marcelo Ricardo V. Martin, Chief Financial Aurora M. Castro Elpidio R. Angeles, Jr. Ariel T. Melo Controller Leticia T. Chua Ma. Ophelia R. Angeles Maria Socorro P. Meñez Dennis B. Velasquez Milagros K. Chua Maria Carina S. Antonio Vicente L. Miciano, Jr. Aristotle L. Villaraza Peter D. Clemente Apolinario E. Aquino Dalisay S. Molas Elizabeth E. Coronel Ma. Crizelda T. Arambulo Mary Ann R. Munar SENIOR VICE PRESIDENTS Edna Christine P. Cruz Ronald C. Arceo Ma. Christina T. Nakanishi Ursula A. Alano, Deputy Treasurer Noel D. Dizon Aldamuel S. Armonio Pacifico A. Nieva, Jr. Shirley S. Ang George R. Dosado Susan Marie J. Atienza Josefa P. Ortiz Manolo C. Arzadon Lamberto B. Del Fonso Jr. Jerome I. Austria Rebecca C. Paguia Ramon S. David Alexander G. Francisco Chona M. Azucena Arnaldo Emerito E. Palad Marvin V. Fausto, Trust Officer Patrick Warren D. Go Janet B. Bagnes Susan D. Pastor Jonathan C.B. Go Genevieve W.J. Go Regina Anne S. Basilio Jocelyn T. Paz Jeanette S. Javellana Judy L. Go Francisco D. Bacierto Jr. Cyrus M. Polloso Annie H. Ngo Francisco Javier E. Jose Gerardo I. Banzon Donald E. Quintana Jose Pastor Z. Puno David Kan Tat Yan Marites A. Bautista Hernando T. Rasco Ricardo V. Reynoso, Jr. Jennie F. Lansang Rodora V. Bautista Edmund A. Reyes Arsenio L. Severino Cesar F. Lazo Edgardo F. Blanco Evangeline P. Reyes Richard Benedict S. So Estela L. Lim Evangeline G. Borja Joseph Nestor T. Reyes Grace A. Sumalpong Maurice D. Lim Ramon B. Borja Roberto H. Reyes Robert W. Sy Roy Allan V. Magturo Maria Eleanor B. Briones Antonio D. Rona Rebecca S. Torres, Chief of Staff Angelita C. Manulat Carlos L. Buenaventura Ronald C. Rosales Edward G. Wenceslao Cecilia C. Maravilla Julius O. Buendia Maria Rosario L. Salazar Ma. Susana L. Yap Felix A. Martin Benilda G. Cabardo Emily D. Samoy Jessie A. Matibag Victor Geronimo S. Calo Arsenia S. Santos FIRST VICE PRESIDENTS Ergilio S. Ong Cheryl A. Capili Maria Lourdes T. Santos Gerard M. Aguirre Neliza Ma. R. Oñate Ma. Corazon N. Casanova Joel Jovencio E. Sarreal Maritess B. Antonio Ma. Bella C. Paguiligan Veronica T. Chan Go Ma. Corazon D. Simbulan Victor C. Arboleda Ma. Aurora G. Panopio Mary Assumpta Gail S. Ronaldo D. Soriano Onofre D. Avellanosa Grace Socorro V. Peczon Chanyungco Grace C. Tan Marcelo E. Ayes Flor Melissa Po-Artillaga Christine T. Chow Marites L. Tan Rita V. Buendia Romeo J. Pulido, Jr. Maria Clara D. Chua Marilyn G. Tin Ma. Evangeline A. Buhay Victorina S. Ros Riasa A. Chua Ma. Rosita J. Tinio Antonina M. Cabuyadao William U. Rosario Salva Fe S. Cirilos Margarita M. Tobias Marilou L. Cesario Ma. Reymunda Carmen B. Joselito B. Cobarrubias Lourdes S. Turno Susie S. Cham Sadang Raul B. Cruz Blandina Uvyhilda B. Vicente Rolando D. Esguerra Cerwina Elenore A. Santos Rosanna F. De Vera Glicerio C. Vicente Paul A. Evora III Rolando S. Santos Salustiano B. Dela Cruz Luzviminda M. Vidal Belinda C. Fernandez Gregorio C. Severino Rolando L. Dillague Raul B. Vivas Lesmes L. Garate Celia D. Sotto Zosimo C. Dimacuha Adora A. Yanga Renato S. Gongora Alejandro R. Sumayao Albert G. Dizon Noel Z. Yuseco Myrianne Joan D. Gonzales Antonio U. Tan Ma. Lirio E. Du Paulino L. Yusi Nenita C. Indiongco Divina N. Tan Ma. Fe H. Dy Ma. Elena L. Jao Richard R. Tan Joel M. Escala EXECUTIVE LEGAL ADVISER Ma. Cecilia G. Lantin Ma. Rosanna L. Testa Samuel C. Esguerra Manuel D. Curato Lilia E. Lising Soledad S. Tolentino Elizabeth G. Estrada Emerenciana H. Luistro Don Elecci B. Torno Joel Rizaldy G. Flor EXECUTIVE ADVISER FOR Alan David L. Matutina Benjamin B. Turno Madelyn V. Fontanilla CORPORATE PLANNING Merceditas P. Montesclaros Gary A. Vargas Dominador J. Francisco Clarissa Emerita G. Ocampo Jose G. Nuguid Francisco B. Vista, Jr. Marcelita I. Geollegue Maria Rhoda B. Orsolino Rosola A. Vivas Rommel S. Gomez 2 0 0 4 A N N UA L R E P O R T 31 S E N I O R O F F I C E R S S U B S I D I A R I E S & A F F I L I AT E S EQUITABLE CARDNETWORK, INC. EQUITABLE EXCHANGE, INC. PCI LEASING AND FINANCE, INC. President Chairman President & CEO ANTONIO L. GO BIENVENIDO M. JUAT, JR. MANOLO C. ARZADON Office of the President Directors First Vice Presidents ANTHONY F. CONWAY URSULA A. ALANO ROBERTO E. LAPID BELINDA C. FERNANDEZ VICENTE C. RALLOS Senior Executive Vice President EUGENIO K. HERNANDO Treasurer Vice Presidents RENATO G. OÑATE MARLO R. CRUZ Senior Vice President & Treasurer CONSTANTE C. LAPUZ NELIA V. CARLOS EXPRESS PADALA INTERNATIONAL, INC. RENATO G. OÑATE President First Vice Presidents Assistant Vice Presidents RENE J. BUENAVENTURA TERESITA T. TANBONLIONG ROSARIO C. CRISOSTOMO MARILI M. TIOSECO BEATRIZ ALICIA T. SANCHEZ MAXICARE HEALTHCARE MA. THERESA M. SORIANO CORPORATION Vice Presidents ALPHA GRACE V. AQUINO PHILAM EQUITABLE LIFE ASSURANCE President & CEO RICARDO M. CELESTINO COMPANY, INC. SERGIO LL. NARANJILLA, JR. HARRISON C. GUE President & CEO ANNIE ROSE C. PARAAN PCIB SECURITIES, INC. CARL S. GUSTINI FULGENCIO C. RANA, JR. President & CEO Vice President Assistant Vice Presidents ERLASTER C. SOTTO ROMULO F. ALAJOR ANA MARIE R. ACUÑA ROBERTO P. ANG Senior Vice President & General Manager Senior Assistant Vice President JOSEPHINE Y. CHAN GABRIEL U. LIM JESSELYN V. VILLANUEVA MARC ANDRE P. HERNANDO TERESITA M. SILBOR Assistant Vice Presidents Assistant Vice Presidents PHILIP L. SO NILO C. SAMPAYO BLESILDA S. BESABE MA. CAROLINA T. SANTANA CHRIS A. CABOGNASON EBC INSURANCE BROKERAGE, INC. IMELDA L. FORTUGALEZA President PCI CAPITAL CORPORATION DINAH P. OGATIS SERGIO LL. NARANJILLA, JR. President & CEO ERLASTER C. SOTTO First Vice President & General Manager LEONEL M. MERCADO Senior Vice President & Managing Director GABRIEL U. LIM EBC MANAGEMENT, INC. President First Vice Presidents SERGIO LL. NARANJILLA, JR. ELEANOR M. HILADO ARNOLD E. OLIVA EBC STRATEGIC HOLDINGS CORPORATION Vice Presidents MICHAEL K. PASTORES President NOEMI T. VILLANUEVA SERGIO LL. NARANJILLA, JR. 32 E Q U I T A B L E P C I B A N K F I N A N C I A L S TAT E M E N T Statement of Management's Responsibility 34 Report of Independent Auditors Statements of Condition 35 Statements of Income 36 Statements of Changes in Capital Funds 37 Statements of Cash Flows 38 Notes to Financial Statements 40 2 0 0 4 A N N U A L R E P O RT 33 S TAT E M E N T O F M A N A G E M E N T ' S R E S P O N S I B I L I T Y SECURITIES AND EXCHANGE COMMISSION SEC Building, EDSA Greenhills San Juan, Metro Manila The management of Equitable PCI Bank, Inc. is responsible for all information and representations contained in the financial statements as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004. The financial statements have been prepared in conformity with accounting principles generally accepted in the Philippines and reflect amounts that are based on the best estimates and informed judgement of management with an appropriate consideration to materiality. In this regard, management maintains a system of accounting and reporting which provides for the necessary inter- nal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unau- thorized use or disposition and liabilities are recognized. The management likewise disclosed to the Bank's audit committee and to its external auditor: (i) all significant deficiencies in the design or operation of internal controls that could adversely affect its ability to record, process and report financial data; (ii) material weaknesses in the internal controls; and (iii) any fraud that involves management or other employees who exercise significant role in internal con- trols. The Board of Directors reviews the financial statements before such statements are approved and submitted to the Stockholders of Equitable PCI Bank, Inc. Sycip, Gorres, Velayo & Co., independent auditors and appointed by the stockholders, has examined the financial statements of Equitable PCI Bank, Inc. in accordance with generally accepted auditing standards and has expressed its opinion on the fairness of presentation upon completion of such examination, in its report to the Board of Directors and Stockholders. ANTONIO L. GO RENE J. BUENAVENTURA RICARDO V. MARTIN Chairman of the Board President & Chief Executive Officers Senior Vice President & Chief Financial Officers REPORT OF INDEPENDENT AUDITORS The Stockholders and the Board of Directors Equitable PCI Bank, Inc. We have audited the accompanying statements of condition of Equitable PCI Bank, Inc. and Subsidiaries (the Group) and statements of condition of Equitable PCI Bank, Inc. (the Parent Company) as of December 31, 2004 and 2003, and the related statements of income, changes in capital funds and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Group's management. Our respon- sibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Philippines. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Group and of the Parent Company as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the Philippines. Renato J. Galve Partner CPA Certificate No. 37759 SEC Accreditation No. 0081-A Tax Identification No. 102-087-055 PTR No. 9404006, January 3, 2005, Makati City March 31, 2005 34 E Q U I T A B L E P C I B A N K S TAT E M E N T S O F C O N D I T I O N (Amounts in Thousands) Group Parent Company December 31 2003 2003 (As restated - (As restated - 2004 Note 2) 2004 Note 2) RESOURCES Cash and Other Cash Items (Note 11) —7,545,361 P —7,512,608 P —7,295,483 P —7,350,209 P Due from Bangko Sentral ng Pilipinas (Notes 11 and 15) 2,316,093 5,305,743 2,059,639 5,129,645 Due from Other Banks (Note 15) 7,701,330 8,592,021 6,114,500 7,136,031 Interbank Loans Receivable and Securities Purchased Under Resale Agreements (Notes 3, 15 and 27) 17,364,767 22,978,937 19,858,767 23,397,444 Trading Account Securities, at fair value (Notes 3 and 15) 2,982,531 3,285,658 2,798,127 2,845,824 Available-for-Sale Securities, at fair value (Notes 3 and 15) 5,564,330 16,714 5,533,558 721 Investments in Bonds and Other Debt Instruments, at amortized cost (Notes 3, 11, 15 and 22) 52,058,189 47,035,423 50,388,865 45,443,431 Receivables from Customers - net (Notes 4, 15 and 25) 137,825,503 120,974,184 121,222,365 106,849,913 Property and Equipment At cost - net (Note 5) 8,030,649 8,219,119 7,421,915 7,624,271 At appraised value (Note 5) 5,333,324 5,373,121 5,199,348 5,238,711 Equity Investments - net (Note 6) 2,281,688 2,513,157 11,261,651 11,958,564 Real and Other Properties Owned or Acquired - net (Notes 7, 27 and 28) 15,646,793 16,836,710 14,210,188 15,588,301 Goodwill - net (Note 8) 15,240,494 15,680,124 15,240,494 15,680,124 Other Resources - net (Notes 9 and 25) 30,083,036 26,427,813 26,106,222 24,166,838 —309,974,088 P —290,751,332 P —294,711,122 —278,410,027 P P LIABILITIES AND CAPITAL FUNDS Liabilities Deposit Liabilities (Notes 11, 15 and 25) —193,520,339 P —186,044,202 P —189,573,098 —183,305,312 P P Bills Payable (Notes 12 and 15) 23,999,856 29,559,796 22,424,463 27,372,778 Due to Bangko Sentral ng Pilipinas (Note 15) 131,400 114,190 128,027 109,316 Outstanding Acceptances (Note 15) 7,602,316 1,183,372 7,602,316 1,183,372 Margin Deposits (Note 15) 152,578 188,104 152,578 188,104 Manager's Checks and Demand Drafts Outstanding (Note 15) 882,145 943,299 862,072 902,849 Accrued Interest Payable (Note 15) 552,409 958,948 428,931 929,534 Accrued Taxes and Other Expenses (Note 15) 1,414,808 1,145,100 817,258 765,589 Subordinated Debt (Notes 13 and 15) 11,243,700 11,087,357 11,243,700 11,087,357 Other Liabilities (Note 14) 28,131,941 19,143,600 20,120,457 13,038,850 267,631,492 250,367,968 253,352,900 238,883,061 Minority Interest in Equity of Consolidated Subsidiaries 984,374 856,398 – – Capital Funds Common Stock (Note 16) 7,270,033 7,270,033 7,270,033 7,270,033 Capital Paid in Excess of Par Value 37,395,672 37,395,672 37,395,672 37,395,672 Surplus Reserve (Note 22) 510,356 451,977 510,356 451,977 Surplus (Notes 16 and 22) 2,374,702 606,381 2,374,702 606,381 Parent Company Shares Held by a Subsidiary (Note 16) (7,466,950) (7,467,336) (7,466,950) (7,467,336) Net Unrealized Loss on Available-for-Sale Securities (Note 3) (5,979) (980) (5,979) (980) Equity in Net Unrealized Loss on Available-for- Sale Securities of a Subsidiary (Notes 3 and 6) (48,581) (63,374) (48,581) (63,374) Equity in Revaluation Increment on Land of a Subsidiary (Note 6) 17,914 13,450 17,914 13,450 Revaluation Increment on Property - net (Note 5) 1,311,055 1,321,143 1,311,055 1,321,143 41,358,222 39,526,966 41,358,222 39,526,966 —309,974,088 P —290,751,332 P —294,711,122 —278,410,027 P P See accompanying Notes to Financial Statements. 2 0 0 4 A N N U A L R E P O RT 35 S TAT E M E N T S O F I N C O M E (Amounts In Thousands except Earnings Per Share) Group Parent Company Years Ended December 31 2003 2002 2003 2002 2004 (As restated - Note 2) 2004 (As restated - Note 2) INTEREST INCOME Receivables from customers (Notes 4 and 25) —9,421,813 P —8,249,655 —7,778,645 P P —8,455,505 —7,329,559 —6,925,066 P P P Trading and investment securities 4,409,653 3,207,046 2,326,735 4,258,945 2,986,579 2,066,669 Interbank loans receivable and securities purchased under resale agreements 1,097,891 894,600 604,697 1,107,502 936,571 556,489 Deposits with other banks and others 988,590 367,778 560,288 400,315 449,123 525,904 15,917,947 12,719,079 11,270,365 14,222,267 11,701,832 10,074,128 INTEREST AND FINANCE CHARGES Deposit liabilities (Note 25) 5,005,618 5,071,829 5,168,844 4,780,818 4,944,756 5,122,430 Bills payable, borrowings and others 2,722,002 2,879,612 2,206,796 2,660,761 2,758,135 2,108,040 7,727,620 7,951,441 7,375,640 7,441,579 7,702,891 7,230,470 NET INTEREST INCOME 8,190,327 4,767,638 3,894,725 6,780,688 3,998,941 2,843,658 PROVISION FOR PROBABLE LOSSES (Note 10) 4,139,985 2,232,850 1,296,201 3,314,160 1,501,957 593,064 NET INTEREST INCOME AFTER PROVISION FOR PROBABLE LOSSES 4,050,342 2,534,788 2,598,524 3,466,528 2,496,984 2,250,594 OTHER INCOME Service charges, fees and commissions 5,206,817 4,387,474 3,513,685 2,399,632 2,028,374 1,728,877 Trading gains - net 348,493 1,579,766 1,767,392 324,637 1,543,509 1,738,914 Foreign exchange profits - net 308,617 603,011 1,072,969 213,083 428,953 930,000 Equity in net earnings (losses) of subsidiaries and associates (Note 6) (21,748) (29,679) (35,529) 855,279 1,008,060 758,851 Miscellaneous (Note 19) 2,365,101 2,349,467 1,649,041 1,735,688 1,596,018 1,006,142 8,207,280 8,890,039 7,967,558 5,528,319 6,604,914 6,162,784 OTHER EXPENSES Compensation and fringe benefits (Note 17) 3,317,859 3,153,943 3,106,109 2,757,480 2,680,864 2,666,442 Occupancy and other equipment- related expenses (Note 18) 1,612,101 1,686,570 1,996,213 1,402,259 1,516,909 1,862,219 Depreciation and amortization (Note 5) 1,212,392 1,146,432 1,012,350 952,145 774,946 789,474 Taxes and licenses (Note 21) 1,149,867 427,486 841,864 877,771 338,831 637,514 Miscellaneous (Note 20) 4,132,800 3,090,895 3,091,026 2,752,615 2,322,230 2,354,648 11,425,019 9,505,326 10,047,562 8,742,270 7,633,780 8,310,297 INCOME BEFORE INCOME TAX 832,603 1,919,501 518,520 252,577 1,468,118 103,081 PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 21) (1,081,628) 526,275 (367,964) (1,557,869) 166,565 (687,624) INCOME BEFORE MINORITY INTEREST IN NET INCOME 1,914,231 1,393,226 886,484 1,810,446 1,301,553 790,705 MINORITY INTEREST IN NET INCOME (103,785) (91,673) (95,779) – – – NET INCOME —1,810,446 P —1,301,553 P —790,705 P —1,810,446 —1,301,553 P P —790,705 P Earnings Per Share (Note 26) —2.79 P —2.01 P —1.22 P —2.79 P —2.01 P —1.22 P See accompanying Notes to Financial Statements. 36 E Q U I T A B L E P C I B A N K S TAT E M E N T S O F C H A N G E S I N C A P I TA L F U N D S (Amounts in Thousands) Years Ended December 31 2003 2002 2004 (As restated - Note 2) COMMON STOCK - —10 par value (Note 16) P —7,270,033 P —7,270,033 P —7,270,033 P CAPITAL PAID IN EXCESS OF PAR VALUE 37,395,672 37,395,672 37,395,672 SURPLUS RESERVE (Note 22) Balance at beginning of year 451,977 398,641 365,735 Transfer from surplus 58,379 53,336 32,906 Balance at end of year 510,356 451,977 398,641 SURPLUS (Note 16) Balance at beginning of year, as previously reported 2,720,837 1,609,263 999,646 Effect of change in accounting for: Leases (Note 2) (206,558) (177,409) (158,866) Income taxes (Note 2) (1,907,898) (2,073,690) (2,240,415) Balance at beginning of year, as restated 606,381 (641,836) (1,399,635) Net income (Note 26) 1,810,446 1,301,553 790,705 Transfer from revaluation increment 11,053 – – Deferred tax liability on revaluation increment 5,201 – – Transfer to surplus reserves (Note 22) (58,379) (53,336) (32,906) Balance at end of year 2,374,702 606,381 (641,836) PARENT COMPANY SHARES HELD BY A SUBSIDIARY (Note 16) (7,466,950) (7,467,336) (7,467,336) NET UNREALIZED LOSS ON AVAILABLE-FOR-SALE SECURITIES (Note 3) Balance at beginning of year (980) (6,957) (44,785) Net unrealized (loss) gain during the year (4,999) 5,977 37,828 Balance at end of year (5,979) (980) (6,957) EQUITY IN NET UNREALIZED LOSS ON AVAILABLE-FOR-SALE SECURITIES OF A SUBSIDIARY (Notes 3 and 6) Balance at beginning of year (63,374) (71,416) (90,712) Net unrealized gain during the year 14,793 8,042 19,296 Balance at end of year (48,581) (63,374) (71,416) EQUITY IN REVALUATION INCREMENT ON LAND OF A SUBSIDIARY (Note 6) Balance at beginning of year, as previously reported 19,779 18,719 4,116 Effect of change in accounting for income taxes (6,329) (5,990) (1,317) Balance at beginning of year, as restated 13,450 12,729 2,799 Additional revaluation increment 4,464 721 9,930 Balance at end of year 17,914 13,450 12,729 REVALUATION INCREMENT ON PROPERTY (Note 5) Balance at beginning of year, as previously reported 1,942,858 1,942,858 1,921,472 Effect of change in accounting for income taxes (Note 2) (621,715) (621,715) (614,871) Balance at beginning of year, as restated 1,321,143 1,321,143 1,306,601 Additional revaluation increment on land 965 – 188,957 Transfer to surplus (11,053) – – Reversal of revaluation increment on building – – (174,415) Balance at end of year 1,311,055 1,321,143 1,321,143 — 41,358,222 P —39,526,966 P —38,210,673 P See accompanying Notes to Financial Statements. 2 0 0 4 A N N U A L R E P O RT 37 S TAT E M E N T S O F C A S H F L O W S (Amounts in Thousands) Group Parent Company Years Ended December 31 2003 2002 2003 2002 2004 (As restated - Note 2) 2004 (As restated - Note 2) CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax —832,603 P —1,919,501 P —518,520 P —252,577 —1,468,118 P P —103,081 P Adjustments for: Provision for probable losses (Note 10) 4,139,985 2,232,850 1,296,201 3,314,160 1,501,957 593,064 Depreciation and amortization (Note 5) 1,212,392 1,146,432 1,012,350 952,145 774,946 789,474 Amortization of goodwill (Note 8) 439,630 439,630 439,630 439,630 439,630 439,630 Gain on disposal of property and equipment (36,867 ) (41,153) (7,791) (26,947) (25,536) (45,739) Equity in net losses (earnings) of subsidiaries and associates (Note 6) 21,748 29,679 35,529 (855,279) (1,008,060) (758,851) Gain on disposal of ROPOA (Note 19) (182,069 ) (161,647) (167,962) (181,811) (159,057) (177,726) Changes in operating resources and liabilities: Decrease (increase) in amounts of: Interbank loans receivable and securities purchased under resale agreements (3,113,205 ) (2,542,848) (6,271,455) (3,113,205) (2,542,848) (6,397,882) Trading account securities 303,127 6,293,407 (168,359) 47,697 5,098,989 (1,185,124) Receivables from customers (17,024,615 ) (12,684,903) (10,389,144) (15,297,663) (10,051,801) (5,324,036) Other resources (4,990,344 ) (610,763) (1,126,513) (787,247) 1,412,707 2,266,991 Increase (decrease) in amounts of: Deposit liabilities 7,476,137 25,301,366 19,664,388 6,267,786 23,987,166 18,139,401 Due to BSP 17,210 10,472 10,148 18,711 8,722 10,148 Accrued taxes and other expenses (206,754 ) (1,913,261) 877,482 (469,810) (1,762,691) 669,672 Manager's checks and demand drafts outstanding (61,154 ) (810,567) (750,538) (40,777) (827,456) (761,204) Other liabilities 8,988,341 867,724 518,835 7,081,607 (490,236) (389,184) Net cash generated from (used in) operations (2,183,835 ) 19,475,919 5,491,321 (2,398,426) 17,824,550 7,971,715 Income taxes paid (698,836 ) (612,758) (720,336) (345,648) (316,621) (439,715) Net cash provided by (used in) operating activities (2,882,671 ) 18,863,161 4,770,985 (2,744,074) 17,507,929 7,532,000 CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in amounts of: Available-for-sale securities (5,537,822 ) 5,954 322,262 (5,537,836) 5,954 337,776 Investments in bonds and other debt instruments (4,886,175 ) (22,800,409) (3,361,543) (5,272,516) (22,711,982) (2,532,973) Dividends received (Note 6) - - - 1,194,837 165,321 179,729 Additions to property and equipment (Note 5) (2,478,775 ) (1,588,878) (1,315,278) (1,989,159) (1,237,719) (548,214) Proceeds from disposal of property and equipment 1,491,720 711,899 1,518,708 1,266,317 568,263 218,168 Disposals of (additions to) equity investments 714,748 (524,391) 199,568 692,840 63,753 (199,890) Net cash used in investing activities (10,696,304 ) (24,195,825) (2,636,283) (9,645,517) (23,146,410) (2,545,404) (Forward) 38 E Q U I T A B L E P C I B A N K Group Parent Company Years Ended December 31 2003 2002 2003 2002 2004 (As restated - Note 2) 2004 (As restated - Note 2) CASH FLOWS FROM FINANCING ACTIVITIES Decrease in minority interest in equity of consolidated subsidiaries —24,191 P — (P 159,527) — (P 13,377) —– P —– P —– P Increase (decrease) in amounts of: Bills payable (5,559,940) (2,419,377) 4,899,581 (4,948,315 ) (2,528,178) 3,258,802 Outstanding acceptances 6,418,944 (462,751) (3,269,370) 6,418,944 (462,751) (3,269,370) Margin deposits (35,526) 15,737 (3,854,432) (35,526 ) 15,737 (3,854,432) Subordinated debt 156,343 11,087,357 – 156,343 11,087,357 – Net cash provided by (used in) financing activities 1,004,012 8,061,439 (2,237,598) 1,591,446 8,112,165 (3,865,000) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,574,963) 2,728,775 (102,896) (10,798,145 ) 2,473,684 1,121,596 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and other cash items 7,512,608 7,159,776 6,809,728 7,350,209 6,767,704 6,653,818 Due from Bangko Sentral ng Pilipinas 5,305,743 3,539,760 2,918,114 5,129,645 3,446,921 2,859,982 Due from other banks 8,592,021 6,077,859 11,444,893 7,136,031 5,471,881 9,669,453 Interbank loans receivable and securities purchased under resale agreements (Note 27) 14,038,207 15,942,409 11,649,965 14,456,714 15,912,409 11,294,066 35,448,579 32,719,804 32,822,700 34,072,599 31,598,915 30,477,319 CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and other cash items 7,545,361 7,512,608 7,159,776 7,295,483 7,350,209 6,767,704 Due from Bangko Sentral ng Pilipinas 2,316,093 5,305,743 3,539,760 2,059,639 5,129,645 3,446,921 Due from other banks 7,701,330 8,592,021 6,077,859 6,114,500 7,136,031 5,471,881 Interbank loans receivable and securities purchased under resale agreements (Note 27) 5,310,832 14,038,207 15,942,409 7,804,832 14,456,714 15,912,409 —22,873,616 —35,448,579 —32,719,804 —23,274,454 —34,072,599 —31,598,915 P P P P P P See accompanying Notes to Financial Statements. 2 0 0 4 A N N U A L R E P O RT 39 N O T E S T O F I N A N C I A L S TAT E M E N T S 1. General Information The effect of adopting this standard will result in either a transition liability or an asset with a corresponding adjustment to surplus as of January 1, 2005. Equitable PCI Bank, Inc. (the Parent Company) is a universal bank incorporated The Group will engage the services of professionally qualified actuary to in the Philippines, with registered office address at Equitable PCI Bank Tower I, determine the quantitative impact of adopting this standard in 2005. Makati Avenue corner H.V. de la Costa Street, Makati City. The Parent Company and its subsidiaries (the Group) are engaged in the business of banking, financ- • PAS 21, The Effects of Changes in Foreign Exchange Rates, prohibits the cap- ing, leasing, real estate, insurance and stock brokering and other related serv- italization of foreign exchange losses. The standard also addresses the ices to personal, commercial, corporate and institutional clients through a accounting for transactions in foreign currency and translating the financial network of 459 and 420 local and international branches, offices and agencies statements of foreign operations that are included in those of the reporting in 2004 and 2003, respectively. The Group's products and services include enterprise by consolidation, proportionate consolidation and equity method. deposit-taking, lending and related services, treasury and capital market oper- The adoption of this standard will have no material impact on the financial ations, trade services, payments and cash management, and trust services. statements. The average number of employees of the Group in 2004 and 2003 follows: • PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, provides for the required disclosure and presentation in respect 2004 2003 of the accounts of banks and similar financial institutions. It also provides Parent Company 6,509 6,348 that provision for general banking risk is treated as appropriation of surplus Subsidiaries 800 846 and should not be included in the determination of net income for the peri- 7,309 7,194 od. The Group has yet to determine the effect of this standard in the context of the need to reallocate the general reserve to cover any increase in specif- The Bank's Audit Committee reviewed and approved the accompanying ic loan loss reserves required under PAS 39 (see discussion on PAS 39 below). comparative financial statements on March 31, 2005 for release and for The required new disclosures will be included in the financial statements subsequent confirmation by the board of directors (BOD) in their regular upon adoption of this new standard in 2005. meeting on April 19, 2005. • PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclo- sure and presentation of all financial instruments. The standard requires 2. Summary of Significant Accounting Policies more comprehensive disclosures about the Group's financial instruments, whether recognized or unrecognized in the financial statements. New dis- Basis of Financial Statements Preparation and Presentation closure requirements include terms and conditions of financial instruments The Group's financial statements have been prepared in accordance with account- used by the Group, types of risks associated with both recognized and unrec- ing principles generally accepted in the Philippines (Philippine GAAP) for the ognized financial instruments (market risk, price risk, credit risk, liquidity risk, banking industry. These financial statements are prepared under the historical and cash flow risk), fair value information of both recognized and unrecog- cost convention modified for the measurement at fair value of certain derivatives, nized financial assets and financial liabilities, and the Group's financial risk trading account securities (TAS) and available for-sale securities (ASS) and for the management policies and objectives. The standard also requires financial revaluation of land. The accompanying financial statements of the Parent instruments to be classified as liabilities or equity in accordance with its sub- Company reflect the accounts maintained in the Regular Banking Unit (RBU) and stance and not its legal form. The adoption of this standard will have no Foreign Currency Deposit Unit (FCDU). The financial statements individually pre- material impact on the financial statements. pared for these units are combined after eliminating inter-unit accounts. • PAS 39, Financial Instruments: Recognition and Measurement, establishes the The books of accounts of the RBU are maintained in Philippine pesos, while accounting and reporting standards for recognizing and measuring the Group's those of the FCDU are maintained in United States (US) dollars. For financial financial assets and financial liabilities. The standard requires a financial asset reporting purposes, the accounts of the FCDU are translated into their equiva- or financial liability to be recognized initially at fair value. Subsequent to initial lents in Philippine pesos based on the Philippine Dealing System weighted aver- recognition, the Group should continue to measure financial assets at their fair age rate (PDSWAR) prevailing at end of the year (for resources and liabilities) values, except for loans and receivables and held-to-maturity investments, and at the average PDSWAR for the year (for income and expenses). which are measured at cost or amortized cost using the effective interest rate method. Financial liabilities are subsequently measured at cost or amortized The preparation of financial statements in accordance with Philippine GAAP cost, except for liabilities classified as "at fair value through profit and loss" and requires the Group to make estimates and assumptions that affect the report- derivatives, which are subsequently measured at fair value. ed amounts of resources, liabilities, income and expenses, and disclosures of contingent resources and contingent liabilities. Future events may occur which PAS 39 also covers the accounting for derivative instruments. This standard can cause the assumptions used in arriving at the estimates to change. The has expanded the definition of a derivative instrument to include derivatives effects of any changes in estimates are reflected in the financial statements as (and derivative-like provisions) embedded in non-derivative contracts. Under they become reasonably determinable. the standard, every derivative instrument is recorded in the balance sheet as either an asset or liability measured at its fair value. Derivatives that do not Changes in Accounting Policies qualify as hedges are adjusted to fair value through income. If a derivative On January 1, 2004, the following new accounting standards became effective is designated and qualify as a hedge, depending on the nature of the hedg- and were adopted by the Group: ing relationship, changes in the fair value of the derivative are either offset against the changes in fair value of the hedged assets, liabilities, and firm • Statement of Financial Accounting Standards (SFAS) 12/International commitments through earnings, or recognized in capital funds until the Accounting Standard (IAS) 12, Income Taxes, requires deferred income taxes hedged item is recognized in earnings. The Group must formally document, to be determined using the balance sheet liability method. The adoption of designate and assess the hedge effectiveness of derivative transactions that this standard resulted in a retroactive downward adjustment to surplus as of receive hedge accounting treatment. December 31, 2003, 2002 and 2001 amounting to —1.9 billion, —2.1 billion P P and —2.2 billion, respectively. Net income increased by —165.8 million in P P The Group has established a task force that will implement the provisions of 2003 and —166.7 million in 2002. P PAS 32 and PAS 39 and assess the implications of these standards to the Group's financial statements. The Group has not yet determined the impact In accordance with this new standard, deferred income tax liability is provid- to the financial statements due to the following reasons: ed on revaluation increment of property, plant and equipment on a retroac- tive basis, which decreased capital funds by —628.0 million, —627.7 million P P • The Group is still in the process of establishing policies, procedures and and —616.2 million as of December 31, 2003, 2002 and 2001, respectively. P necessary systems related to the adoption of these standards. • SFAS 17/IAS 17, Leases, prescribes the accounting policies and disclosures • The system which will incorporate the requirements of PAS 32 and PAS 39 applicable to finance and operating leases. The adoption of the standard has not yet been implemented. The Bangko Sentral ng Pilipinas (BSP), resulted in the recognition of lease income and expense under operating through its Monetary Board (MB) Resolution No. 1869 dated December leases on a straight-line basis. Previously, all leases were recognized in the 23, 2004, has given the banks and financial institutions until December 31, statements of income on the basis of the terms of the lease agreements. The 2005 to ready their infrastructures to be PAS 32 and PAS 39 compliant. adoption of this accounting standard resulted in a retroactive downward Interim reports that will be submitted to the BSP for 2005 need not be in adjustment to surplus as of December 31, 2003, 2002 and 2001 amounting to compliance with the provisions of the said standards. —206.6 million, —177.4 million and —158.9 million, respectively. Net income P P P decreased by —29.1 million in 2003 and —18.5 million in 2002. P P With respect to account classification and related measurement, the Group has already submitted to the BSP the proposed reclassification of its trading and Additional disclosures required by the new standards have been included in the investment securities portfolio. The effect of the reclassification will likely result financial statements, where applicable. in a retroactive downward adjustment to surplus as of December 31, 2004. The impact of the reclassification will only be quantified after the detailed PAS 39 New accounting standards based on IAS and International Financial Reporting implementation has been substantially completed. Standards, referred to as Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS), respectively, will become effective in The effect of adopting the effective interest rate method in measuring amor- 2005. The Group will adopt the following new accounting standards approved tized cost for loans and ASS has not yet been quantified since the existing sys- by the Accounting Standards Council, to the extent that they are applicable, tems of the Group have not yet been reconfigured to adopt effective interest effective January 1, 2005: rate method of amortization. Due to the volume of transactions, it is impracti- cable to compute for the financial impact manually. The Group will report the • PAS 19, Employee Benefits, provides for the accounting for long-term and other financial implications as soon as the information becomes available. employee benefits. The standard requires the projected unit credit method in determining the retirement benefits of the employees and a change in the man- PAS 39 requires that if there is objective evidence that an impairment on ner of computing benefit expense relating to past service cost and actuarial loans and other financial assets carried at amortized cost are incurred, the gains and losses. It requires the Group to determine the present value of amount of loss is measured as the difference between the assets' carrying defined benefit obligations and the fair value of any plan assets with sufficient amount and the present value of future cash flows. The effect of adopting regularity that the amounts recognized in the financial statements do not dif- this provision may be material to the financial assets and liabilities of the fer materially from the amounts that would be determined at the statement of Group, particularly for the impairment of loans and other receivables. condition date. 40 E Q U I T A B L E P C I B A N K Currently, the adequacy of allowance for probable losses on loans and other financial statements. This standard also requires strict compliance withadop- receivables is determined based on management criteria and BSP require- tion of uniform accounting policies and requires the parent to make appro- ments. The existing systems of the Group have not yet been programmed to priate adjustments to the subsidiary's financial statements to conform them adopt the discounted cash flow method. Due to the volume of transactions, it to the parent's accounting policies for reporting like transactions and other is impracticable to compute for the financial impact manually. The Group will events in similar circumstances. report the financial implications as soon as the information becomes available. • PAS 28, Investments in Associates, reduces alternatives in accounting for asso- In 2005, the Group will perform additional procedures to identify any deriv- ciates in consolidated financial statements and in accounting for investments ative embedded in both financial and non-financial contracts that are in the separate financial statements of an investor. Investments in associates required to be separately accounted for at fair value under PAS 39. will be accounted for either at cost or in accordance with PAS 39 in the sep- arate financial statements. Equity method of accounting will no longer be In general, the effect of adopting these standards will not result in a allowed in the separate financial statements. This standard also requires restatement of prior years financial statements as allowed by the Securities strict compliance with adoption of uniform accounting policies and requires and Exchange Commission (SEC). Any cumulative effect of adopting the stan- the investor to make appropriate adjustments to the associate's financial dards, however, will be charged against beginning surplus (January 1, 2005). statements to conform them to the investor's accounting policies for report- ing like transactions and other events in similar circumstances. • PAS 40, Investment Property, prescribes the accounting treatment for invest- ment property and related disclosure requirements. This standard permits The cost method in accounting for its investments in subsidiaries, associates the company to choose either the fair value model or cost model in account- and joint ventures in the separate (parent company) financial statements is ing for investment property. Fair value model requires an investment prop- expected to decrease both the carrying amounts of these investments and erty to be measured at fair value with fair value changes recognized directly total capital funds by —3.4 billion equivalent to the undistributed retained P in the statements of income. Cost model requires that an investment prop- earnings of the investees net of accumulated equity earnings of subsidiaries erty should be measured at depreciated cost less any accumulated impair- acquired prior to the Parent Company's merger with Philippine Commercial ment losses. The Group is still in the process of identifying real and other International Bank (PCIBank), and other equity adjustments. properties owned or acquired (ROPOA) accounts that will be accounted for under PAS 40 and PFRS 5 (see significant provisions of PFRS 5 below), and • PAS 31, Interests in Joint Ventures, reduces the alternatives in accounting for which valuation model to be used under PAS 40. Regardless of valuation interests in joint ventures in consolidated financial statements and in model (either cost or fair value), the adoption of PAS 40 may result in an adjust- accounting for investments in the separate financial statements of a ventur- ment of prior years' financial statements. The Group has not yet quantified the er. Interests in joint ventures will be accounted for either at cost or in accor- implication of PAS 40 since the system that will support the accounting of dance with PAS 39 in the separate financial statements. Equity method of ROPOA under PAS 40 has not yet been established. Due to the volume of accounting will no longer be allowed in the separate financial statements. transactions, it is impracticable to compute for the financial impact manually. The Group will report the financial implications of PAS 40 as soon as the infor- • PAS 33, Earnings Per Share, prescribes principals for the determination and mation becomes available. presentation of earnings per share for entities with publicly traded shares, enti- ties in the process of issuing ordinary shares to the public, and any entity that • PFRS 3, Business Combination, which will result in the cessation of the amorti- calculate and disclose earnings per share. The standard also provides addition- zation of goodwill and a requirement for an annual test for goodwill impair- al guidance in computing earnings per share including the effect of mandatory ment. Any resulting negative goodwill after performing reassessment will be convertible instruments and contingently issuable shares, among others. credited to income. Moreover, pooling of interests in accounting for business combination will no longer be permitted. The effect of adopting this standard • PAS 36, Impairment of Assets, requires annual impairment test of intangible will not result in retroactive adjustment of prior years' consolidated financial asset with an indefinite useful life, which includes goodwill acquired in a busi- statements but will affect prospective consolidated financial statements as a ness combination, whether or not there is an indication of impairment. result of nonamortization of goodwill. • PAS 38, Intangible Assets, requires discontinuance of amortization of intan- • PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, spec- gible asset with an indefinite useful life. The effect of adopting this standard ifies the accounting for assets held for sale and the presentation and disclo- will not result in retroactive adjustment of prior year's financial statements sure of discontinued operations. It requires assets that meet the criteria to but will effect prospective financial statements as a result of nonamortiza- be classified as held for sale to be measured at the lower of carrying amount tion of goodwill. and fair value less costs to sell, and the depreciation on such assets to cease. Furthermore, assets that meet the criteria to be classified as held for sale The Group does not expect any significant impact of the adoption of the fore- should be presented separately on the face of the statements of condition going revised standards except for the effects of PAS 27, PAS 28 and PAS 38 as and the results of discontinued operations to be presented separately in the discussed above. The disclosures required by these revised PAS will be reflected statements of income. Pending the identification of ROPOA accounts to be in the financial statements, where applicable, upon their adoption in 2005. accounted for under PFRS 5, as discussed under PAS 40 above, the effect of adoption of PFRS 5 with respect to the assets to be accounted for under this Basis of Consolidation standard will not be material to the financial statements. The Group financial statements reflect the consolidated accounts of the Parent Company and of the following wholly and majority owned subsidiaries: The Group will also adopt in 2005 the following revised standards: Effective Percentage Country of • PAS 1, Presentation of Financial Statements, provides a framework within Subsidiary of Ownership Incorporation which an entity assesses how to present fairly the effects of transactions and Financial Markets: other events; provides the base criteria for classifying liabilities as current or EBC Investments, Inc. (EBCII) 100 Philippines noncurrent; prohibits the presentation of income from operating activities Equitable PCI Bank Cayman and extraordinary items as separate line items in statements of income; and Limited (EPCI Cayman) 100 Cayman Island specifies the disclosures about key sources of estimation uncertainty and Equitable Savings Bank, Inc. (ESB) 100 Philippines judgments that management has made in the process of applying the Express Padala (HK) Ltd. (EPHK) 100 Hong Kong Group's accounting policies. Jardine Equitable Finance Corp. (JEFC) 100 Philippines PCI Capital Corporation (PCI Capital) • PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, and Subsidiaries 100 Philippines removes the concept of fundamental error and the allowed alternative to PCIB Europe S.p.A. (PCIB S.p.A) 100 Italy retrospective application of voluntary changes in accounting policies and ret- PCI Express Padala (HK) Limited rospective restatement to correct prior period errors. It defines material (Express Padala HK) 100 Hong Kong omissions or misstatements, and describes how to apply the concept of mate- PCI Express Padala - L.A. riality when applying accounting policies and correcting errors. (Express Padala L.A.) 100 United States of America • PAS 10, Events After the Balance Sheet Date, provides a limited clarification of PCI Express Padala Frankfurt 100 Germany the accounting for dividends declared after the statement of condition date. PCI Express Padala (Rotterdam) B.V. 100 Netherlands Equitable Card Network, Inc. (ECN) • PAS 16, Property, Plant and Equipment, provides additional guidance and and Subsidiaries 90 Philippines clarification on recognition and measurement of items of property, plant and PCI Leasing and Finance, Inc. equipment. It also provides that each part of an item of property, plant and (PCI Leasing) 85 Philippines equipment with a cost that is significant in relation to the total cost of the Insurance/Insurance Brokerage: item shall be depreciated separately. EBC Insurance Brokerage, Inc. (EIBI) 100 Philippines PCI Insurance Brokers, Inc. • PAS 17, Leases, provides a limited revision to clarify the classification of a (PCI Insurance) 100 Philippines lease of land and buildings and prohibits expensing of initial direct costs in Securities Brokerage: the financial statements of lessors. PCIB Securities, Inc. (PCIB Securities) 100 Philippines Real Estate: • PAS 24, Related Party Disclosures, provides additional guidance and clarity in PCIB Properties, Inc. (PCIB Properties) 100 Philippines the scope of the standard, the definitions and the disclosures for related par- Equimark-NFC Development ties. It also requires disclosure of the total compensation of key management Corporation (Equimark) 60 Philippines personnel and by benefit types. Others: EBC Strategic Holdings Corp. (ESHC) • PAS 27, Consolidated and Separate Financial Statements, reduces alternatives and Subsidiaries 100 Philippines in accounting for subsidiaries in consolidated financial statements and in Equitable Data Center, Inc. (EDCI) 100 Philippines accounting for investments in the separate financial statements of a parent, PCI Automation Center, Inc. venturer or investor. Investments in subsidiaries will be accounted for either (PCI Automation) 100 Philippines at cost or in accordance with PAS 39 in the separate financial statements. Equitable Venture Capital Corporation 60 Philippines Equity method of accounting will no longer be allowed in the separate Maxicare 60 Philippines 2 0 0 4 A N N U A L R E P O RT 41 N O T E S T O F I N A N C I A L S TAT E M E N T S Subsidiaries are consolidated when control is transferred to the Group or Parent end of the lease term, the residual value of the leased asset is generally applied Company. Consolidation of subsidiaries ceases when control is transferred out against the guaranty deposit of the lessee. of the Group or Parent Company. The results of operations of a subsidiary dis- posed of are included in the statements of income until the date of disposal Receivables from Special Purpose Vehicle when the Group or Parent Company ceases to have control of the subsidiary Receivables from SPV is stated at the face value of the related note reduced by (Note 6). allowance for probable losses. Allowance for probable losses is determined based on the difference between the outstanding principal amount and the Under Standing Interpretations Committee No. 12, Consolidation of Special recoverable amount which is the present value of the future cash flow expect- Purpose Entity (SPE), control over an entity may exist even in cases when an ed to be received in payment of the receivable. enterprise owns little or none of SPE's equity, such as when an enterprise retains majority of the residual risks related to the SPE or its assets in order to obtain Allowance for Probable Losses benefits from its activities. In accordance with these standards, the Group The allowance for probable losses is the estimated amount of probable losses in financial statements include the accounts of Philippine Investment One (PIO) the Group's loan portfolio based on management's evaluation of the collectibili- and Philippine Investment Two (PIT), special purpose vehicles (SPV), in which the ty of the loans, after consideration of prevailing and anticipated economic condi- Group does not have equity interest (Note 28). PIO and PIT bought certain tions, collection and credit experience with specific accounts, fair market value of assets of the Parent Company under a transaction that qualified as a true sale collateral, financial capabilities of guarantors, present value of estimated future as approved by the BSP (Note 28). cash collections and on evaluations made by the BSP. The BSP observes certain cri- teria and guidelines based largely on the classification of receivables in establish- All significant intercompany balances and transactions have been eliminated in ing specific loan loss reserves. consolidation. Receivables arising from transactions with credit cardholders are provided with The Group financial statements were prepared using uniform accounting poli- allowance for probable losses based on the review and evaluation of the status of cies for like transactions and other events in similar circumstances. the receivables from cardholders and guidelines issued by the BSP. The MB, through BSP Circular 398 issued on August 21, 2003, provides general guidelines Resale Agreements governing credit card operations, including the set up of loss on the basis of the Resale agreements are contracts wherein the Group or the Parent Company aging/classification of the credit card receivables. purchases securities and simultaneously agrees to resell the same securities at a specified future date at a fixed price. Securities purchased under resale agree- The allowance for probable losses is established through provisions for proba- ments (SPURA) are considered loans to the counterparty rather than as invest- ble losses charged to current operations. Receivables are written off against the ment in securities. SPURA are carried at cost. The corresponding interest allowance when management believes that the collectibility of the principal is income is accrued when earned. unlikely. Trading and Investment Securities Property and Equipment Trading Account Securities Property and equipment other than land are stated at cost, less any impairment TAS, consisting of government and private debt and equity securities, are pur- in value. Land is stated at appraised value. The appraisal values are determined chased and held principally with the intention of selling them in the near term. by qualified, independent appraisers. The revaluation increment resulting from These securities are carried at fair market value; realized and unrealized gains revaluation is credited to Revaluation Increment on Property under capital and losses on these instruments are recognized as Trading Gains - net in the funds. statements of income. Interest earned on debt instruments is reported as Interest Income. Quoted market prices, when available, are used to determine Depreciable properties including buildings, leasehold improvements, and furni- the fair value of trading instruments. If quoted market prices are not available, ture, fixture and equipment are stated at cost less accumulated depreciation their fair values are estimated based on prices obtained from the BSP, Bureau of and amortization, and any impairment in value. Treasury, Reuters, Telerates, Bloomberg and investment bankers. The initial cost of property and equipment comprises its purchase price and any When a security is transferred to TAS, the unrealized holding gain or loss at the directly attributable costs of bringing the asset to its working condition and date of transfer is recognized in the statements of income immediately. location for its intended use. Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance, are Available-for-Sale Securities charged against current operations. In situations where it can be clearly Securities are classified as ASS when purchased and held indefinitely, i.e. neither demonstrated that the expenditures have resulted in an increase in the future held to maturity nor for trading purposes, where the Group anticipates to sell economic benefits expected to be obtained from the use of an item of proper- in response to liquidity requirements or in anticipation of changes in interest ty and equipment beyond its originally assessed standard of performance, the rates or other factors. ASS are carried at fair market value; unrealized holding expenditures are capitalized as an additional cost of property and equipment. gains and losses are reported as a separate component of capital funds. When assets are retired or otherwise disposed of, the cost and the related accu- mulated depreciation and amortization and any resulting gain or loss is credit- When a debt security is transferred to ASS from investment in bonds and other ed to or charged against current operations. debt instruments (IBODI), the unrealized holding gain or loss on the date of transfer is excluded from reported earnings and reported as a separate compo- Depreciation is calculated on the straight-line method over the estimated use- nent of capital funds until realized. ful life of the depreciable assets. The estimated useful lives of the depreciable assets are as follows: Investments in Bonds and Other Debt Instruments IBODI are debt securities where the Group has the positive intent and ability to Buildings 50 years hold to maturity. These securities are carried at amortized cost; realized gains Furniture, fixtures and equipment 3-5 years and losses are included in Trading Gains - net in the statements of income. The allowance for probable losses is established by a charge against income to Leasehold improvements are amortized over their estimated useful life of 3-5 reflect other-than-temporary impairment in value. Under current bank regula- years or the terms of the related leases, whichever is shorter. tions, IBODI shall not exceed 50% of adjusted statutory net worth plus 40% of total deposit liabilities. The depreciation and amortization method and useful life are reviewed peri- odically to ensure that the method and period of depreciation and amortiza- When a debt security is transferred to IBODI from ASS, the unrealized holding tion are consistent with the expected pattern of economic benefits from items gain or loss at the date of transfer is maintained as a separate component of of property and equipment. capital funds and amortized over the remaining life of the security as an adjust- ment of yield in a manner consistent with the amortization of premium or dis- The carrying values of the property and equipment are reviewed for impair- count. ment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values Receivables from Customers exceed the estimated recoverable amount, an impairment loss is recognized in Receivables from customers are stated at the outstanding balance, reduced by the statements of income (see accounting policy on Impairment of Assets). unearned discounts and capitalized interest on restructured loans and allowance for probable losses. Equity Investments Investments in Associates Receivables from customers include receivables arising from transactions on cred- Investments in associates are accounted for under the equity method of it cards issued directly by ECN and by other banks which have tie-up arrangements accounting. An associate is an enterprise in which the Group or the Parent with ECN. Collection of receivables from credit cardholders of other banks is Company exercises significant influence (presumed to exist if an entity holds guaranteed by those banks with tie-up arrangements with ECN. 20% to 50% of the voting power) and which is neither a subsidiary nor a joint venture of the Group or the Parent Company. Investments in associates are car- Receivables from customers also include the aggregate rental on finance lease ried in the statements of condition at cost plus post-acquisition changes in the transactions. Unearned income on finance lease transactions is shown as a Group's share of net assets of the associate, less any impairment in value. Post- deduction from Receivables from Customers (included in Unearned Discount acquisition changes in share of net assets of the associate include the share in and Capitalized Interest). the associate's: (a) income or losses, and (b) unrealized gain or loss on invest- ment securities. Dividends received are treated as a reduction in the carrying Receivables are classified as nonperforming in accordance with existing BSP reg- values of the investments. Equity in unrealized gain or loss on investment secu- ulations, or when, in the opinion of management, collection of interest or prin- rities of associates is shown as a separate component of capital funds in the cipal is doubtful. Receivables are not reclassified as performing until interest statements of condition. Unrealized gain arising from transactions with an and principal payments are brought current or the receivable is restructured in associate is eliminated to the extent of the Group's interest in the associate, accordance with existing BSP regulations, and future payments appear assured. against the investment in the associate. Unrealized loss is eliminated similarly but only to the extent that there is no evidence of impairment of the asset Residual Value of Leased Assets and Deposits on Finance Leases transferred. The Group's investments in associates account include goodwill The residual value of leased assets, which approximates the amount of guaran- (net of accumulated amortization) on acquisition, which is treated in accor- ty deposit paid by the lessee at the inception of the lease, is the estimated pro- dance with the accounting policy for goodwill stated below. ceeds from the disposal of the leased asset at the end of the lease term. At the 42 E Q U I T A B L E P C I B A N K Investments in Subsidiaries Investments in Real Estate Investments in subsidiaries in the Parent Company financial statements are Investments in real estate (included under Other Resources) are real properties accounted for similarly as investments in associates under the equity method. A owned by certain subsidiaries which are for sale or for lease to others. These subsidiary is an enterprise that is controlled by the Parent Company and whose are carried at cost less any accumulated depreciation and any impairment in accounts are included in the Group financial statements. value. Interest in Joint Venture Impairment of Assets The Group's interest in its joint venture is accounted for under the equity An assessment is made at each statement of condition date as to whether there method of accounting. The interest in joint venture is carried in the consolidat- is any indication of impairment of any asset, or whether there is any indication ed statements of condition at cost plus post-acquisition changes in the Group's that an impairment loss previously recognized for an asset in prior years may no share of net assets of the joint venture, less any impairment in value. The Group longer exist or may have decreased. If any such indication exists, the asset's recov- statements of income reflect the Group's share of the results of operations of erable amount is estimated. An asset's recoverable amount is calculated at the the joint venture. higher of the asset's value in use or its net selling price. Other Investments An impairment loss is recognized by a charge against current operations for the Other equity investments where the Group has no significant influence (other excess of the carrying amount of an asset over its recoverable amount, unless than trading and investment securities, as discussed above) are carried at cost the asset is carried at a revalued amount, in which case the impairment loss is less allowance for decline in value, if any. The allowance for decline in value is charged to the revaluation increment of the said asset. An impairment loss is set up by a charge to current operations. charged to operations or to revaluation increment, appropriate, in the year in which it arises. Real and Other Properties Owned or Acquired Real and other properties owned or acquired (ROPOA) are stated at the lower of A previously recognized impairment loss is reversed by a credit to current oper- total outstanding exposure at the time of foreclosure or bid price, less allowance ations, unless the asset is carried at a revalued amount in which case the rever- for probable losses. Nonrefundable capital gains tax and documentary stamp tax sal of the impairment loss is credited to the revaluation increment of the same incurred in connection with foreclosures are capitalized as part of the carrying val- asset, to the extent that it does not restate the asset to a carrying amount in ues of the foreclosed properties, provided that such carrying values do not exceed excess of what would have been determined (net of any accumulated depreci- net realizable values (NRV). NRV represents the fair market value (determined by ation and amortization) had no impairment loss been recognized for the asset an independent firm of appraisers on foreclosed assets valued at —5 million and P in prior years. above and by internal appraiser on those valued below —5 million) less direct costs P to sell. Allowance for probable losses is set up when the carrying value of the Provisions and Contingencies ROPOA exceeds its NRV and with consideration of the BSP allowance provisioning Provisions are recognized when an obligation (legal or constructive) is incurred requirements. Other costs incurred subsequent to foreclosure, such as security, as a result of a past event and where it is probable that an outflow of resources maintenance and other holding costs are charged against current operations. embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of Goodwill the time value of money is material, provisions are determined by discounting Goodwill represents the excess of the cost of the acquisition of former PCI Bank, the expected future cash flows at a pre-tax rate that reflects current market which was merged with the Parent Company in 1999, over the fair value of its assessments of the time value of money and, where appropriate, the risks spe- identifiable net assets at the date of acquisition. Goodwill is amortized on a cific to the liability. Where discounting is used, the increase in the provision due straight-line basis over its useful economic life of 40 years based on the best esti- to the passage of time is recognized as an Interest Expense. mate made by the Parent Company's management (Note 8). Contingent liabilities are not recognized in the financial statements but are dis- Goodwill is amortized over the best estimate of its useful life with a rebuttable closed unless the possibility of an outflow of resources embodying economic bene- presumption that the useful life is 20 years or less. Where goodwill is amortized fits is remote. Contingent assets are not recognized but are disclosed in the over 20 years, regardless of whether there is an indication of impairment or not, financial statements when an inflow of economic benefits is probable. goodwill is assessed annually for any impairment in its value. Effective January 1, 2005, as provided under PFRS 3, goodwill will no longer be amortized but will Income Recognition remain subject to impairment test on a regular basis. Income is recognized to the extent that it is probable that economic benefits will flow to the Group and the income can be reliably measured. The following spe- The Parent Company's management conducts an annual review for any impair- cific recognition criteria must also be met before income is recognized: ment in value of the goodwill. The impairment on the goodwill is determined by comparing (a) the carrying value of goodwill plus the net tangible assets of Interest income the business acquired and (b) the present value of the annual projected cash Interest income on receivables from customers is accrued monthly as earned, flows for five years and the present value of the terminal value of the business except in the case of nonperforming receivables where interest income on these acquired from PCIBank computed under the discounted cash flow method. receivables is recognized only to the extent of cash collections received. Among the assumptions used are: (1) the benchmark yield of the 5-year bonds Unearned discount is recognized as income over the terms of the receivables of the Republic of the Philippines, the risk premium for and the Beta of the using the effective interest method. Parent Company's stock as of statement of condition date as shown in Bloomberg in determining its cost of equity; (2) the debt and equity profile of Capitalized interest income on restructured loans is deferred and shown as the Parent Company as of balance sheet date; and (3) the average net interest deduction from Receivables from Customers. spread and non-interest income growth over the 5-year projection period and a perpetuity growth rate per year. Loan fees and service charges Loan commitment fees are recognized as income over the terms of the related Based on the results of the impairment test undertaken by the Parent credit lines granted to each borrower. Loan syndication fees are recognized upon Company's management with consideration of the current and projected levels completion of all syndication activities and where the Group does not have fur- of business to be generated from the former PCIBank Group, goodwill will con- ther obligations to perform under the syndication agreement. tinue to be amortized over management's best estimate of its economic life of 40 years which was approved by the BSP. Service charges and penalties are recognized only upon collection or accrued where there is reasonable degree of certainty as to its collectibility. Income Taxes Deferred income tax is provided, using the balance sheet liability method, on all Discounts earned on credit cards temporary differences at the statement of condition date between the tax bases of Commissions earned by ECN are taken up as income upon receipt from member assets and liabilities and their carrying amounts for financial reporting purposes. establishments of charges arising from credit availments by credit cardholders. These commissions are computed based on certain agreed rates and are deducted Deferred income tax liabilities are recognized for all taxable temporary differ- from amounts remittable to member establishments. ences, including asset revaluations. Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits from Purchases by the credit cardholders, collectible on installments basis, are recorded excess minimum corporate income tax (MCIT) and unused net operating loss car- at the cost of the items purchased plus certain percentage of cost. The excess over ryover (NOLCO), to the extent that it is probable that taxable profit will be avail- cost is credited to unearned discount account and is shown as a deduction from the able against which the deductible temporary differences and carryforward of Receivables from Customers in the Group's statements of condition. The unearned unused tax credits from MCIT and unused NOLCO can be utilized. Deferred income discount is taken up to income over the installment terms and is computed using tax, however, is not recognized when it arises from the initial recognition of an the effective interest method. asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. Income on direct financing leases and receivables financed Income of PCI Leasing on loans and receivables financed with short-term matu- Deferred tax liabilities are not provided on non-taxable temporary differences rities is recognized using the effective interest method. associated with investments in domestic subsidiaries, associates and interests in joint ventures. With respect to investments in foreign subsidiaries, associates and Interest and finance fees on finance leases and loans and receivables financed interests in joint ventures, deferred tax liabilities are recognized except where the with long-term maturities and the excess of the aggregate lease rentals plus the timing of the reversal of the temporary difference can be controlled and it is estimated residual value of the leased equipment over its cost are credited to probable that the temporary difference will not reverse in the foreseeable future. unearned discount and amortized over the term of the note or lease using the effective interest method. Unearned income ceases to be amortized when The carrying amount of deferred income tax assets is reviewed at each statement receivables become past due. of condition date and reduced to the extent that it is no longer probable that suf- ficient taxable profit will be available to allow all or part of the deferred income Retirement Cost tax asset to be utilized. The Group is covered by a noncontributory defined benefit retirement plan. Deferred income tax assets and liabilities are measured at the tax rates that are The retirement cost of the Parent Company and its subsidiaries namely ECN, applicable to the period when the asset is realized or the liability is settled, EBCII, ESB, EDCI, PCI Capital, EIBI, PCI Leasing, PCIB Securities and PCI based on tax rates (and tax laws) that have been enacted or substantively enact- Automation is determined using the projected unit credit method. Under this ed at the statement of condition date. method, the current service cost is the present value of retirement benefits 2 0 0 4 A N N U A L R E P O RT 43 N O T E S T O F I N A N C I A L S TAT E M E N T S payable in the future with respect to services rendered in the current period. IBODI consists of the following: The accrued actuarial liability is the present value of benefits payable in the future with respect to services rendered to date. Unfunded past service costs, Group Parent Company experience adjustments and actuarial gains or losses are amortized over the 2004 2003 2004 2003 average remaining working life of employees. Retirement cost includes current (In Thousands) service cost, amortization of past service costs, experience adjustments and Government bonds —30,994,603 P —31,944,573 —30,694,106 —30,665,988 P P P actuarial gains and losses, if any. BSP treasury bills 12,213,130 9,437,973 12,021,968 9,422,657 Private bonds 5,012,494 4,859,933 4,717,602 4,587,692 Most of the officers and staff of EPHK, ESHC, JEFC and PCIB Properties are sec- Treasury notes 1,375,181 696,448 1,130,283 696,448 onded from the Parent Company. Accordingly, the retirement benefits of these Others 2,480,477 250,782 1,840,551 195,291 officers and employees are determined and provided for by the Parent 52,075,885 47,189,709 50,404,510 45,568,076 Company and are charged against current operations. Less allowance for probable losses Foreign Currency Transactions and Translation (Note 10) 17,696 154,286 15,645 124,645 Foreign currency denominated resources and liabilities are translated using the —52,058,189 —47,035,423 P P —50,388,865 —45,443,431 P P PDSWAR prevailing at the end of the year; income and expenses are translated based on the average PDSWAR during the year. IBODI includes US dollar-denominated bonds amounting to US$630 million ( —35.5 billion) and US$590 million ( —33.2 billion) as of December 31, 2004 and P P Financial statements of consolidated foreign subsidiaries that are integral to the 2003, respectively. operations of the Group are translated as if the transactions of the foreign sub- sidiaries had been those of the Parent Company. At each statement of condition As of December 31, 2004 and 2003, the market values of the IBODI are as follows: date, foreign currency monetary items are translated using the PDSWAR; non- monetary items which are carried at historical cost are translated using the histor- Group Parent Company ical rate prevailing as of the date of acquisition; non-monetary items which are 2004 2003 2004 2003 carried at fair value are translated using the exchange rate prevailing when the (In Thousands) values were determined and; income and expense items are translated at the Government bonds —30,249,012 P —31,087,940 —29,948,515 —29,809,354 P P P exchange rates prevailing on transaction dates. Resulting exchange differences BSP treasury bills 12,129,635 9,399,057 11,938,472 9,383,742 are credited to or charged against current operations. Private bonds 4,769,569 4,714,558 4,474,677 4,442,318 Treasury notes 1,353,814 576,664 1,108,916 698,297 Leases Others 2,480,477 921,781 1,840,552 866,289 Finance leases, which transfer to the Group substantially all the risks and bene- —50,982,507 P —46,700,000 —49,311,132 —45,200,000 P P P fits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present Peso-denominated IBODI bear nominal annual interest rates ranging from 4.0% value of the minimum lease payments. Lease payments are apportioned to 11.0% in 2004 and from 4.0% to 14.0% in 2003; for foreign currency- between the finance charges and reduction of the lease liability so as to achieve denominated IBODI, annual interest rate range from 1.5% to 14.0% in 2004 and a constant rate of interest on the remaining balance of the liability. Finance from 1.5% to 12.3% in 2003. charges are charged directly against income. As of December 31, 2004, the subordinated notes (included under Private Capitalized leased assets are depreciated over the shorter of the estimated use- bonds) represent investments in Global Ispat Holdings, Inc. (GIHI) and Global ful lives of the assets or the respective lease terms. Steelworks International, Inc. (GSII) which assumed the liabilities of National Steel Corporation (NSC). Leases where the lessor retains substantially all the risks and benefits of own- ership of the asset are classified as operating leases. Operating lease payments On October 15, 2004, GIHI and GSII (SPV companies), and the NSC Creditors are recognized as an expense in the statements of income on a straight-line entered into an agreement which sets forth the terms and conditions upon basis over the lease term. which the NSC Creditors have agreed to accept zero interest coupon notes in the aggregate amount of —12.3 billion to be issued by SPV companies in set- P Derivative Instruments tlement of the liabilities of NSC. The Parent Company and some of its subsidiaries are counterparties to derivative contracts entered into as a service to customers and as a means of reducing or The zero-interest coupon notes were issued in two tranches, namely, (a) Tranche managing their respective foreign exchange and interest rate exposures. A Note in the principal amount of —2.0 billion and (b) Tranche B Note in the P principal amount of —10.3 billion, which notes are secured by a first ranking P For foreign exchange forward contracts that are designated and qualify as mortgage and security interest over the NSC plant assets and stand-by letters of hedges, the difference between the contracted forward rate and the spot rate credit by the SPV companies in accordance with the schedule in the agreement. at contract date is deferred and recognized as income or expense over the life of the hedged instrument while gain or loss in the revaluation of the forward On October 15, 2004, the Parent Company received Tranche A Note at principal contract is recognized currently in the statements of income. For forward con- amount of —78.3 million and Tranche B Note at principal amount of P tracts not designated as hedges, the changes in mark to market values are rec- —328.2 million in exchange of the outstanding receivable from NSC of P ognized currently in the statements of income. —549.5 million. The Parent Company carried the subordinated notes at dis- P counted values using a discount rate of 13.2%. The differentials paid or received under interest rate swap agreements are accrued and recognized over the life of the agreements as swap cost or income. In the case of an early termination of an interest rate swap, gains or losses 4. Receivables from Customers resulting from the early termination are deferred and amortized as an adjust- ment of the yield of the related debt instrument over the remaining period This account consists of: originally covered by the terminated swap. Group Parent Company Earnings Per Share 2004 2003 2004 2003 Basic earnings per share is computed by dividing net income for the year by the (In Thousands) weighted average number of shares outstanding during the year after giving Loans and lease receivables —102,555,828 —107,280,727 —89,656,356 —97,040,132 P P P P retroactive effect to stock dividends declared during the year, if any. Customers' liabilities Cash and Cash Equivalents on acceptances, For purposes of reporting cash flows, cash and cash equivalents include cash letters of credit and other cash items, amounts due from BSP and other banks and interbank and trust receipts 25,849,323 18,410,203 25,849,323 18,404,657 loans receivable and securities purchased under resale agreements (Note 27) Receivables from with maturities of three months or less from dates of placements and that are cardholders 7,509,421 5,809,307 – – subject to insignificant risk of changes in value. Bills purchased 16,276,848 9,074,928 16,253,638 9,074,928 152,191,420 140,575,165 131,759,317 124,519,717 Fiduciary Activities Receivable from SPV Assets and income arising thereon together with related undertakings to return (Note 28) – – 2,424,742 – such assets to customers are excluded from these financial statements where 152,191,420 140,575,165 134,184,059 124,519,717 the Bank acts in a fiduciary capacity such as nominee, trustee or agent. Unearned discount and capitalized Subsequent Events interest (2,869,023) (2,594,954) (1,698,607) (1,875,063) Any post year-end event that provides additional information about the Group's Allowance for position at the statement of condition date (adjusting event) is reflected in the probable losses financial statements. Post year-end events that are not adjusting events, if any, are (Note 10) (11,496,894) (17,006,027) (11,263,087) (15,794,741) —137,825,503 —120,974,184 —121,222,365 —106,849,913 P P P P disclosed when material to the financial statements. 3. Trading and Investment Securities The Parent Company's receivables from customers amounting to —1.6 billion and P —1.0 billion as of December 31, 2004 and 2003, respectively, were pledged as col- P TAS includes net unrealized loss amounting to —20.8 million and net unreal- P laterals with the BSP to secure borrowings under rediscounting privileges. In ized gain of —12.8 million for the Group, of which net unrealized loss of —17.9 P P addition, receivables from customers amounting to —5.0 billion and —4.1 billion P P million and net unrealized gain of —4.6 million pertain to the Parent Company P as of December 31, 2004 and 2003, respectively, have been rediscounted under in 2004 and 2003, respectively. the Development Bank of the Philippines (DBP), Land Bank of the Philippines (LBP) and Social Security System (SSS) rediscounting facilities (Note 12). ASS is net of accumulated unrealized loss of —54.5 million in 2004 and —64.4 P P million in 2003 for the Group, and —6.0 million in 2004 and —1.0 million in P P Current bank regulations allow banks with no unbooked valuation reserves and 2003 for the Parent Company. capital adjustments required by the BSP to exclude from nonperforming classi- 44 E Q U I T A B L E P C I B A N K fication those loans that are fully provided with allowance for probable losses, Information on the concentration of credit as to economic activity and industry provided that interest on said loans shall not be accrued. Accordingly, NPLs not sub-sectors follow: fully covered by allowance for probable losses as of December 31, 2004 and Group 2003 follow: 2004 2003 Amount Amount Group Parent Company (In Thousands) % (In Thousands) % 2004 2003 2004 2003 Manufacturing: (In Thousands) —16,852,470 11.07 —16,393,676 11.66 —15,656,540 —23,016,270 —14,003,755 —21,617,074 Consumer goods P P NPLs P P P P Capital goods 15,191,418 9.98 14,574,487 10.37 Less NPLs fully Intermediate goods 14,931,115 9.81 14,553,215 10.35 provided with Wholesale and retail 34,284,153 22.53 29,528,148 21.01 allowance for Other community, social probable losses 3,832,818 7,759,682 3,270,645 7,201,116 —11,823,722 —15,256,588 —10,733,110 —14,415,958 and personal services 22,424,236 14.73 19,635,194 13.97 P P P P Financial intermediation, renting and business activities 12,855,524 8.45 13,143,805 9.35 Restructured loans of the Parent Company as of December 31, 2004 and 2003 Transport, storage and amounted to —14.0 billion and —16.1 billion, respectively. P P communications 10,900,386 7.16 12,561,208 8.94 Real estate 8,897,722 5.85 8,557,109 6.09 The Parent Company's loan portfolio includes non-risk loans, as defined under Electricity, gas and water 7,258,136 4.77 3,427,855 2.44 BSP regulations, totaling —14.7 billion and —16.0 billion as of December 31, P P Agriculture, hunting and forestry 2,182,157 1.43 2,464,843 1.75 2004 and 2003, respectively. Mining and quarrying 1,946,447 1.28 989,420 0.70 Construction 1,683,147 1.11 2,095,220 1.49 As of December 31, 2004 and 2003, 64.5% and 77.0% of the total loans of the Others 2,784,509 1.83 2,650,985 1.88 Group are subject to periodic interest repricing, respectively. Remaining loans —152,191,420 100.00 —140,575,165 100.00 P P earn annual fixed interest rates ranging from 5.2% to 49.9% for peso loans and from 2.3% to 11.0% for foreign currency loans in 2004 and from 4.1% to 26.4% Parent Company for peso loans and from 2.0% to 10.6% for foreign currency loans in 2003. 2004 2003 Amount Amount The following table shows information relating to receivables from customers (In Thousands) % (In Thousands) % by collateral: Manufacturing: Consumer goods —16,735,133 12.70 —16,254,525 13.05 P P Group Intermediate goods 14,472,086 10.98 13,961,635 11.21 2004 2003 Capital goods 14,066,089 10.68 13,901,589 11.16 Amount Amount Wholesale and retail 33,103,337 25.12 28,224,651 22.67 (In Thousands) % (In Thousands) % Financial intermediation, Secured by: —36,246,185 —37,031,181 renting and business activities 14,055,066 10.67 14,498,877 11.65 Real estate P 23.82 P 26.34 Transport, storage and Trust receipts 18,026,136 11.84 16,604,349 11.81 communications 9,557,224 7.25 11,261,460 9.04 Chattel 10,642,637 6.99 9,213,874 6.56 Real estate 8,366,555 6.35 7,900,873 6.35 Mortgage trust indenture 8,614,739 5.66 9,064,568 6.45 Electricity, gas and water 7,057,083 5.36 3,169,573 2.55 Bank deposits 5,879,478 3.86 4,392,043 3.12 Other community, social Shares of stock 2,915,307 1.92 6,776,851 4.82 and personal services 6,622,684 5.03 7,651,584 6.15 Warehouse receipts 16,847 0.01 184,616 0.13 Mining and quarrying 1,938,217 1.47 987,552 0.79 Others 4,438,686 2.92 3,762,726 2.68 Agriculture, hunting and forestry 1,925,701 1.46 2,268,916 1.82 86,780,015 57.02 87,030,208 61.91 Construction 1,287,505 0.98 1,937,715 1.56 Unsecured 65,411,405 42.98 53,544,957 38.09 —152,191,420 —140,575,165 Others 2,572,637 1.95 2,500,767 2.00 P 100.00 P 100.00 —131,759,317 100.00 —124,519,717 100.00 P P Parent Company The BSP considers that credit concentration risk exists when the total loan expo- 2004 2003 sure to a particular industry or economic sector exceeds 30% of the total loan Amount Amount portfolio. (In Thousands) % (In Thousands) % Secured by: —31,642,076 —32,594,965 Receivable from SPV represents the amount due from the sale of certain nonper- Real estate P 24.02 P 26.18 forming assets (NPAs) of the Parent Company to an SPV in 2004 (Note 28). The sale Trust receipts 18,026,136 13.68 16,604,349 13.33 and purchase agreement was formalized in November 2004 and approved in prin- Mortgage trust indenture 8,531,406 6.47 9,064,568 7.28 ciple by the BSP in December 2004 having qualified as a true sale. Bank deposits 5,783,172 4.39 4,319,648 3.47 Chattel 3,507,859 2.66 3,924,156 3.15 The more significant terms of the sale are as follows: Shares of stock 2,892,961 2.20 6,772,934 5.44 Warehouse receipts 15,086 0.01 67,922 0.05 a. Certain NPAs of the Parent Company were purchased by the SPV for a total Others 1,877,054 1.42 3,570,990 2.87 consideration of —3.3 billion. P 72,275,750 54.85 76,919,532 61.77 Unsecured 59,483,567 45.15 47,600,185 38.23 b. The agreed purchase price of the NPAs was and shall be paid as follows: —131,759,317 P 100.00 —124,519,717 P 100.00 i. An initial amount of —0.5 billion, booked as part of Accounts Receivable P under Other Assets; and ii. The balance of P—2.8 billion, through issuance of SPV Notes (the Notes), which shall be paid based on a cashflow waterfall arrangement and inter- est rate of 20% per annum. 5. Property and Equipment The composition of and movements in this account in 2004 follow: Group At Appraised Value At Cost Furniture, Leasehold Fixtures and Land Buildings Improvements - net Equipment Total (In Thousands) Cost/Appraised Value Balance, January 1, 2004 —5,373,121 P —6,511,442 P —526,360 P —7,837,063 P —14,874,865 P Additions 60,682 155,337 74,314 2,249,124 2,478,775 Disposals (100,479) (270,227) (151,898) (415,710) (837,835) Balance, December 31, 2004 5,333,324 6,396,552 448,776 9,670,477 16,515,805 Accumulated Depreciation and Amortization Balance, January 1, 2004 – 1,265,255 – 5,390,491 6,655,746 Depreciation and amortization – 197,519 119,318 895,555 1,212,392 Disposal – 40,943 (7,640) 583,715 617,018 Balance, December 31, 2004 – 1,503,717 111,678 6,869,761 8,485,156 Net Book Value, December 31, 2004 —5,333,324 P —4,892,835 P —337,098 P —2,800,716 P —8,030,649 P Net Book Value, December 31, 2003 —5,373,121 P —5,246,187 P —526,360 P —2,446,572 P —8,219,119 P 2 0 0 4 A N N U A L R E P O RT 45 N O T E S T O F I N A N C I A L S TAT E M E N T S Parent Company At Appraised Value At Cost Furniture, Leasehold Fixtures and Land Buildings Improvements - net Equipment Total (In Thousands) Cost/Appraised Value Balance, January 1, 2004 —5,238,711 P —6,401,944 P —464,954 P —6,157,467 P —13,024,365 P Additions 33,995 155,337 71,179 1,762,643 1,989,159 Disposal (73,358 ) (57,728) (42,582 ) (293,250) (393,560) Balance, December 31, 2004 5,199,348 6,499,553 493,551 7,626,860 14,619,964 Accumulated Depreciation and Amortization Balance, January 1, 2004 – 1,112,869 – 4,287,225 5,400,094 Depreciation and amortization – 170,047 108,088 674,010 952,145 Disposal – 48,776 (7,640) 804,674 845,810 Balance, December 31, 2004 – 1,331,692 100,448 5,765,909 7,198,049 Net Book Value, December 31, 2004 —5,199,348 P —5,167,861 P —393,103 P —1,860,951 P —7,421,915 P Net Book Value, December 31, 2003 —5,238,711 P —5,289,075 P —464,954 P —1,870,242 P —7,624,271 P Effective January 1, 2002, the Group carries its land used for its banking premises at appraised value. The Group had such land reappraised in 2002 and 2004, in accor- dance with Philippine GAAP. The additional appraisal increment resulting from this accounting change resulted in an increase in Property and Equipment by —300.7P million (including Revaluation Increment in Land of ECN and ESB amounting to —14.6 million and —6.6 million, respectively) and an increase in Revaluation Increment P P in Property amounting to —292.5 million (shown as part of capital funds). The cost of land of the Parent Company, ECN and ESB amounts to —3.3 billion, —76.1 mil- P P P lion and —9.0 million, respectively. In addition, the Group opted to revert to cost (from appraisal value) method of accounting for buildings. Such accounting change P decreased Property and Equipment and Revaluation Increment by —263.2 million. This accounting change also resulted to a reduction in depreciation (relating to P appraisal increment) by —46.9 million in 2002 and the reversal of —111.2 million in depreciation in prior years relating to the appraisal increment. The reversal of P P depreciation on appraisal increment in prior years was applied retroactively. 6. Equity Investments This account consists of investments in: Group Parent Company 2003 2003 2004 (As restated) 2004 (As restated) (In Thousands) At equity: Acquisition cost of: Wholly and majority owned (Note 2) PCI Leasing —– P —– P —1,854,073 P —1,854,073 P PCI Capital – – 1,719,483 1,719,483 ESHC – – 1,000,000 1,000,000 ECN – – 736,250 736,250 EBCII – – 500,000 500,000 PCIB Properties – – 375,128 375,128 ESB – – 300,000 300,000 PCI Express HK – – 215,282 215,282 Maxicare – – 88,593 88,593 JEFC – – 50,000 50,000 Equimark – – 44,997 44,997 EDCI – – 40,000 40,000 PCIB Securities – – 39,177 39,177 EPCI Cayman – – 38,399 38,399 PCIB S.p.A. – – 32,921 32,921 PCI Realty – – 33,510 33,510 Express Padala L.A. – – 26,494 26,494 Express Padala H.K. – – 27,956 27,956 PCI Insurance – – 7,800 7,800 PCI Automation – – 7,443 7,443 Others – – 6,320 6,320 Significantly owned: Jardine Land, Inc. (JLI) (20%) 232,000 232,000 232,000 232,000 Taal Land, Inc. (33%) 170,000 170,000 170,382 170,382 Maxicare – 119,510 – – Securities Clearing Corporation of the Philippines (SCCP) (22%) – 11,000 – 11,000 Medilink Network, Inc. (40%) 10,000 10,000 – – PCI Travel Corporation (35%) 4,424 4,424 – – Unicorn First Properties (UFP) (35%) 3,500 3,500 3,500 3,500 Cameron Granville Asset Management (25%) 31,250 – 31,250 – 451,174 550,434 7,580,958 7,560,708 Accumulated equity in net earnings (losses): Balance at beginning of year (179,182) (149,503) 6,842,623 5,918,170 Equity in net earnings (losses) (21,748) (29,679) 855,279 1,008,060 Disposal 77,834 – 7,110 81,714 Dividends received – – (1,194,837) (165,321) Accumulated equity in net earnings at the time of merger – – (3,038,303) (3,038,303) Balance at end of year (123,096) (179,182) 3,471,872 3,804,320 Equity in net unrealized loss on ASS of a subsidiary – – (48,581) (63,374) Equity in revaluation increment on land of subsidiary – – 17,914 13,450 328,078 371,252 11,022,163 11,315,104 At cost - other investments 3,099,966 2,804,982 936,035 966,070 Less allowance for probable losses (Note 10) 1,146,356 663,077 696,547 322,610 1,953,610 2,141,905 239,488 643,460 —2,281,688 P —2,513,157 P —11,261,651 P —11,958,564 P Under the BSP regulations, the use of the equity method of accounting for investment in shares of stock is allowable only when ownership is more than 50%. The use of the equity method of accounting for equity interests of 20% to 50% is being made for financial reporting purposes only to comply with the Philippine GAAP and is not intended for BSP reporting purposes. The costs of equity investments in subsidiaries have been retroactively adjusted to reflect the new cost basis at the time of acquisition by the Parent Company. On August 1997, CIGNA and the Parent Company entered into a joint venture agreement to each acquire 30% of Maxicare in consideration for the amount of —119.5 million each. On 2004, CIGNA conveyed to the Parent Company its entire shareholdings in Maxicare (totaling 30%) for a nominal sum of —1. No other P P consideration, in cash or property, will be paid or delivered by Parent Company to CIGNA in exchange for CIGNA's shares. With the increase of the Parent Company's share from 30% to 60%, the accounts have been included into the Group financial statements. 46 E Q U I T A B L E P C I B A N K On December 20, 2004, the BSP approved the capital infusion of the Parent On October 20, 2004, the BSP approved the request of the Parent Company to Company to Mindanao Development Bank (MDB) pursuant to the plan of merg- write off long-outstanding float items with a net credit balance of er between ESB and MDB. On November 23, 2004, the BOD of the Parent —129.3 million subject to certain conditions. P Company approved the conversion of its interbank placements and advances to MDB amounting to —2.1 billion into common shares in accordance with the P Assets held by SPV consists mainly of certain loans and ROPOA as of December merger incentives approved by the BSP. 31, 2004. On October 24, 2003, a deed of assignment was made and executed with the On October 17, 2002, the BSP approved the Parent Company's request to write Philippine American Life and General Insurance Company covering the sale of off long-outstanding interoffice float items. Accordingly, the Parent Company the Parent Company's 95% share in Equitable PCI Life Insurance Corporation wrote off against the allowance for probable losses long-outstanding interof- (EPCI Life), a formerly wholly owned subsidiary. The estimated gain arising from fice floats - net debit balance amounting to —340.4 million. P this transaction amounting to —1.0 million is temporarily included in Other P Liabilities in the statements of condition pending final arrangements depend- As of December 31, 2004 and 2003, interoffice float items outstanding for more ing on the due diligence review being undertaken on EPCI Life. The Parent than 60 days amounted to —179.0 million and —214.0 million (net debit bal- P P Company's remaining equity in EPCI Life of 5% as of December 31, 2003 is ance), respectively, for which a full provision has been established. accounted for at cost. Management believes that no material unreserved losses will be incurred by the Parent Company on interoffice float items. The Parent Company's equity in net earnings of EPCI Life through the date of disposal amounting to —1.3 million was included in the statements of income. P Other investments include the Group's investments in Bank of Commerce with net carrying value of —151.3 million as of December 31, 2004 and 2003. P 7. Real and Other Properties Owned or Acquired The BODs of ESB and MDB approved the Plan of Merger of ESB and MDB (with ESB as the surviving corporation) on November 23, 2004 and November 18, Details of this account follow: 2004, respectively. Thereafter, the shareholders of MDB and ESB approved such Plan of Merger on December 6, 2004 and November 23, 2004, respectively. Group Parent Company Under, the Plan of Merger, owing to the capital deficiency of MDB, ESB will not 2004 2003 2004 2003 issue any shares of stock to the shareholders of MDB. (In Thousands) ROPOA —16,709,795 P —17,630,800 —15,133,538 —16,287,019 P P P On December 28, 2004, the BSP approved the merger between ESB and MDB Less allowance for subject to certain administrative conditions, which include, among others, sub- probable losses mission to the BSP of the Philippine Deposit Insurance Corporation's (PDIC's) (Note 10) 1,063,002 794,090 923,350 698,718 written consent to the merger. Among others, the incentives approved by the —15,646,793 P —16,836,710 —14,210,188 —15,588,301 P P P BSP follow: a. Conversion of the MDB Head Office and the 13 MDB branches closed in 2004 into ESB branches and their relocation within a period of one year from date 8. Goodwill of merger; Details of this account follow: b. Transfer of all rights, privileges, immunities, permits, licenses, franchises and 2004 2003 powers of MDB to ESB except for (a) the FCDU license, which has been (In Thousands) revoked by BSP effective March 7, 2004 and (b) the trust license provided Goodwill, gross —17,585,186 P —17,585,186 P that the merged bank should comply first with all the prerequisites under Accumulated amortization: Circular No. 348 dated August 20, 2002; Balance at beginning of year 1,905,062 1,465,432 Amortization 439,630 439,630 c. ESB will retain MDB's trust license with the required trust duties of at least Balance at end of year 2,344,692 1,905,062 —500,000 in MDB's name on deposit with BSP to be transferred to ESB; P —15,240,494 P —15,680,124 P d. Amortization of all merger costs, including retrenchment costs for a period The annual goodwill amortization amounting to —439.6 million is included in P not exceeding five years; Miscellaneous Expenses in the statements of income (Note 20). The goodwill's remaining life as of December 31, 2004 and 2003 is 34.7 years and 35.7 years, e. Capital infusion by the Parent Company of —1 billion into ESB; P respectively. f. Conversion of the Parent Company's outstanding interbank call loans and advances granted to MDB into ESB common shares subject to compliance 9. Other Resources with the procedural requirements and various bank regulatory ceilings and subject to the SEC approval; This account consists of: g. Temporary relief for six months from the compliance with the prescribed Group Parent Company capital adequacy ratio and the 20% ceiling on the nonperforming loan to 2004 2003 2004 2003 total loans ratio if such ratios are not complied with as a result of the merg- (In Thousands) er; Deferred tax assets - net (Note 21) —7,391,834 P —5,541,447 P —6,983,005 P —5,058,612 P h. Revaluation of bank premises, improvements and bank equipment, with the Investments in real appraisal increment forming part of capital provided that the merged bank estate 5,231,924 4,441,453 – – will meet the existing capital requirement after all the adjustments are taken Advances to subsidiaries, up in the books of accounts of the merged bank but before considering associates and other appraisal increments; related parties (Notes 15 and 25) 4,660,552 2,550,988 8,173,852 8,043,679 i. Access to rediscounting window up to a ceiling of 150% of adjusted capital Assets held by SPV accounts for a period of one year, reckoned from the date of merger, pro- (Note 28) 2,811,315 – – – vided the merged bank meets the required net worth to risk assets ratio and Accrued interest all of the other requirements for rediscounting; receivable (AIR) (Notes 15 and 25) 2,523,572 2,541,617 2,392,516 2,417,963 j. Any right or privilege granted to MDB under its Rehabilitation Plan previ- Interoffice float items - ously approved by the MB or under any special authority granted by the MB net (Note 15) 2,387,584 2,015,236 2,247,062 1,688,727 shall continue to be in effect. Accounts receivable (Notes 15, 25 and 28) 1,575,339 3,656,898 2,892,415 2,368,357 On December 29, 2004, the SEC approved the Articles and Plan of Merger of Foreign currency notes MDB and ESB. and coins on hand 1,176,079 1,160,987 1,176,015 1,159,684 Sales contracts On January 19, 2005, the PDIC gave consent to the merger of ESB and MDB sub- receivable (Note 15) 1,113,519 1,236,754 1,097,950 1,186,674 ject to the following conditions: Other investments 1,090,515 953,949 641,293 930,035 Prepayments 408,660 473,909 226,752 264,708 a. MDB shall submit a certification to PDIC within 30 days from PDIC notifica- Returned checks and tion of its consent to the merger, that its depositors and creditors have been other cash items given notice of the i) merger proposal; ii) full implications of ESB's absorp- (Note 15) 291,073 983,135 282,468 968,385 tion of MDB's deposits liabilities; iii) depositors' option to either withdraw Miscellaneous checks their deposits from MDB or maintain their accounts with ESB as surviving and other cash items 268,271 518,915 265,455 518,915 entity; and Miscellaneous 3,597,722 2,549,433 1,615,224 1,042,857 34,527,959 28,624,721 27,994,007 25,648,596 Less allowance for b. Letter of Guaranty from the Parent Company, which wholly owns ESB, that probable losses part of the committed fresh capital infusion in the amount of —1.0 billion P (Note 10) 4,444,923 2,196,908 1,887,785 1,481,758 would be immediately infused into ESB to assure funding for any withdraw- —30,083,036 P —26,427,813 P —26,106,222 —24,166,838 P P al of MDB deposits and payment of MDB's other liabilities as they fall due. As of December 31, 2004 and 2003, the appraised value of the Group's invest- Pursuant to the Plan of Merger, the effective date of merger was December 29, ments in real estate amounted to —4.9 billion and —4.6 billion, respectively. P P 2004, the date the SEC approved the Articles and Plan of Merger. The merger 2 0 0 4 A N N U A L R E P O RT 47 N O T E S T O F I N A N C I A L S TAT E M E N T S constituted a tax-free reorganization and has been accounted for under the The total liquidity and statutory reserves set aside are as follows: pooling of interest method. Accordingly, the amounts reflected in the financial statements of ESB as of December 31, 2004 were combined on a line-by-line Group Parent Company basis with MDB's 2004 accounts (net of material intercompany balances and 2004 2003 2004 2003 transactions between ESB and MDB). For comparative purposes, ESB's financial (In Thousands) statements as of December 31, 2003 were restated to include the amounts Cash —7,369,125 P —7,221,979 —7,285,405 —7,124,666 P P P reflected in the financial statements of MDB as of December 31, 2003 (net of Due from BSP 2,007,833 5,286,693 1,751,379 5,129,645 material intercompany balances and transactions between ESB and MDB). IBODI 14,318,939 12,287,492 14,200,310 12,205,795 —23,695,897 P —24,796,164 —23,237,094 —24,460,106 P P P In October 2002, ESHC signed a share purchase and sale agreement with another local commercial bank for the sale of Ecology at a base purchase price that approx- imates the carrying value of the ESHC's investment in Ecology. The deed of sale 12. Bills Payable was executed by ESHC in January 2003 to evidence the consummation of the sale transaction. The investment carried an adequate provision and, accordingly, no This account consists of borrowings from: further loss was recognized at the time of sale. Group Parent Company Miscellaneous assets include the amount of —504.4 million as of December 31, P 2004 2003 2004 2003 2003 consisting of input value-added tax (VAT), debt issuance costs, revaluation (In Thousands) of forward contracts and sundry debits which pertain to unposted deposit with- Foreign banks —15,843,383 P —16,964,029 —15,843,383 —22,177,285 P P P drawals. BSP 1,810,298 1,292,738 1,604,861 1,042,832 Local banks 1,189,740 1,876,560 – – The Group's management believes that adequate allowance for probable loss- Others 5,156,435 9,426,469 4,976,219 4,152,661 es has been made on Other Resources and does not anticipate any material —23,999,856 P —29,559,796 —22,424,463 —27,372,778 P P P adverse effect on the Group's financial statements upon the realization of these resources. Interbank borrowings with foreign and local banks are mainly short-term bor- rowings. Peso borrowing are subject to annual fixed interest rates ranging from 1.1% to 3.2% in 2004 and from 1.2% to 2.6% in 2003; for foreign denom- 10. Allowance for Probable Losses inated borrowings, annual fixed interest rates range from 5.2% to 7.9% in 2004 and from 4.2% to 6.4% in 2003. Changes in the allowance for probable losses follow: Bills payable - BSP mainly represent term borrowings availed through normal Group Parent Company open market transactions with the BSP. These are collateralized by eligible 2004 2003 2004 2003 receivables from customers. Bills payable - others mainly represent funds (In Thousands) obtained from DBP, LBP and SSS, which the Parent Company relends to bor- Balance at beginning of year —154,286 —153,200 —124,645 —119,592 rowers availing of certain financing programs of these institutions (Note 4). IBODI P P P P Receivables from customers 17,006,027 15,626,493 15,794,741 14,510,139 Equity investments 663,077 612,767 322,610 322,610 13. Subordinated Debt ROPOA 794,090 802,390 698,718 679,061 Other resources 2,196,908 2,578,680 1,481,758 1,663,905 On October 15, 2002, the Parent Company's BOD approved the raising of Lower 20,814,388 19,773,530 18,422,472 17,295,307 Tier 2 capital through the issuance in the international capital market of subordi- Provisions 4,139,985 2,232,850 3,314,160 1,501,957 nated bonds maturing in 10 years but with a call option exercisable after 5 years Accounts written off (331,295) (377,285) – (1,753) subject to the provisions of BSP Circular No. 280. The bonds bear a coupon rate Reversals and other of 9.4% per annum with provision for step-up after 5 years. adjustments (6,454,207) (814,707) (6,950,218) (373,039) Balance at end of year The issuance of the foregoing subordinated bonds under the terms approved by IBODI 17,696 154,286 15,645 124,645 the BOD was approved by the BSP under MB Resolution No. 1660 dated November Receivables from 12, 2002, as amended by MB Resolution No. 753 dated May 29, 2003. customers 11,496,894 17,006,027 11,263,087 15,794,741 Equity investments 1,146,356 663,077 696,547 322,610 Relative to this, on May 16, 2003 and June 5, 2003, the Parent Company issued ROPOA 1,063,002 794,090 923,350 698,718 US$130 million and US$70 million, respectively, 9.4% Subordinated Notes due Other resources 4,444,923 2,196,908 1,887,785 1,481,758 2013 (the Notes). Among the significant terms and conditions of the issuance of —18,168,871 P —20,814,388 —14,786,414 —18,422,472 P P P the Notes are: 1. Issue price at 98.7% and 101.5% of their principal amount; With the foregoing level of allowance for probable losses, management believes that the Group has sufficient allowance to take care of any losses that 2. The Notes bear interest at the rate of 9.4% per annum from and including the Group may incur from the noncollection or nonrealization of its receivables May 23, 2003 to but excluding July 1, 2008. Unless the call option is exercised, from customers and other risk assets. the interest rate from and including July 1, 2008 to but excluding July 1, 2013 will be reset at the U.S. Treasury rate plus 10.8% per annum. Interest will be payable semi-annually in arrears on January 1 and July 1 of each year, com- 11. Deposit Liabilities mencing July 1, 2003; This account consists of: 3. The Notes will constitute direct, unconditional, unsecured and subordinated obligations of the Parent Company and will at all times rank pari passu and Group Parent Company without any preference among themselves but in priority to the rights and 2004 2003 2004 2003 claims of holders of all classes of equity securities of the Parent Company (In Thousands) including holders of preference shares (if any); Demand —10,783,280 P —11,218,012 —10,689,996 —11,141,717 P P P Savings 128,852,508 125,476,797 126,053,940 123,427,244 4. The Parent Company may redeem the Notes in whole but not in part at redemp- Time 53,884,551 49,349,393 52,829,162 48,736,351 tion price equal to 100% of the principal amount of the Notes together with —193,520,339 P —186,044,202 —189,573,098 —183,305,312 P P P accrued and unpaid interest on July 1, 2008, subject to the prior consent of the BSP and the compliance by the Parent Company with the prevailing require- Of the total deposit liabilities of the Group as of December 31, 2004 and 2003, ments for the granting by the BSP of its consent therefor; 51.8% and 55.0%, respectively, are subject to periodic interest repricing. Remaining deposit liabilities earn annual fixed interest rates ranging from 0.5% 5. Each Noteholder by accepting a 2013 Note will irrevocably agree and acknowl- to 4.5% in 2004 and 2003, respectively. edge that (i) it may not exercise or claim any right of set-off in respect of any amount owed to it by the Parent Company arising under or in connection with Under existing BSP regulations, non-FCDU deposit liabilities of the Parent the Notes and (ii) it shall, to the fullest extent permitted by applicable law, waive Company are subject to liquidity reserve equivalent to 8% which increased to and be deemed to have waived all such rights of set-off; and 10% starting February 5, 2004 and statutory reserve equivalent to 9%. In addi- tion, ESB, a thrift bank, is subject to liquidity and statutory reserves equivalent 6. The Notes are not deposits of the Parent Company and are not guaranteed to 2% and 6%, respectively, on its deposit liabilities. As of December 31, 2004 or insured by the Parent Company or any party related to the Parent and 2003, the Parent Company and ESB are in compliance with such Company or the PDIC and they may not be used as collateral for any loan regulations. made by the Parent Company or any of its subsidiaries or affiliates. Also, the Notes may not be redeemed at the option of the Noteholders. As of December 31, 2004 and 2003, the Parent Company was in compliance with the terms and conditions upon which the Notes have been issued. 48 E Q U I T A B L E P C I B A N K 14. Other Liabilities This account consists of: Group Parent Company 2004 2003 2004 2003 (In Thousands) Bills purchased - contra (Note 15) —15,893,118 P —8,340,746 P —15,893,118 P —8,340,746 P Liability to tie-up banks (Note 15) 4,687,599 3,955,971 – – Accounts payable (Note 15) 2,899,637 2,446,401 1,667,862 1,506,158 Deposits on lease contracts (Note 15) 998,925 615,603 – – Payment order payable (Note 15) 967,874 695,192 967,874 695,192 Unearned income and other deferred credits (Note 15) 594,530 620,059 473,353 527,386 Liabilities of SPV 386,573 – – – Sundry and other credits (Note 15) 318,860 857,819 312,707 782,421 Withholding tax payable (Note 15) 150,923 135,760 101,524 97,477 Miscellaneous 1,233,902 1,476,049 704,019 1,089,470 —28,131,941 P —19,143,600 P —20,120,457 P —13,038,850 P Liabilities of SPV consist mainly of the principal balance of senior notes amounting to —387.0 million as of December 31, 2004. P 15. Maturity Profile of Financial Resources and Financial Liabilities The following tables present the financial resources and financial liabilities by contractual maturity and settlement dates as of December 31, 2004 and 2003: Group 2004 2003 Due Within Due Beyond Due Within Due Beyond One Year One Year Total One Year One Year Total (In Thousands) Financial Resources Due from BSP —2,316,093 P —– P —2,316,093 P —5,305,743 P —– P —5,305,743 P Due from other banks 7,701,330 – 7,701,330 8,592,021 – 8,592,021 Interbank loans receivable and securities purchased under resale agreements 5,310,832 12,053,935 17,364,767 14,038,207 8,940,730 22,978,937 TAS, at fair value 898,479 2,084,052 2,982,531 2,923,255 362,403 3,285,658 ASS, at fair value 30,772 5,533,558 5,564,330 15,993 721 16,714 IBODI - gross 13,262,892 38,812,993 52,075,885 10,310,889 36,878,820 47,189,709 Receivables from customers - gross 88,247,235 63,944,185 152,191,420 78,861,389 61,713,776 140,575,165 Other resources: Advances to subsidiaries, associates and other related parties (Note 25) 4,166,304 494,248 4,660,552 2,550,988 – 2,550,988 Assets held by SPV – 2,811,315 2,811,315 – – – AIR 2,523,572 – 2,523,572 2,541,617 – 2,541,617 Interoffice float items - net 2,387,584 – 2,387,584 2,015,236 – 2,015,236 Accounts receivable (Note 25) 1,575,339 – 1,575,339 3,656,898 – 3,656,898 Returned checks and other cash items 291,073 – 291,073 983,135 – 983,135 Sales contracts receivable 15,687 1,097,832 1,113,519 197,153 1,039,601 1,236,754 —128,727,192 P —126,832,118 P —255,559,310 P —131,992,524 P —108,936,051 P —240,928,575 P Financial Liabilities Deposit liabilities —182,350,260 P —11,170,079 P —193,520,339 P —177,722,801 P —8,321,401 P —186,044,202 P Bills payable 19,036,954 4,962,902 23,999,856 23,361,449 6,198,347 29,559,796 Due to BSP 131,400 – 131,400 114,190 – 114,190 Outstanding acceptances 7,602,316 – 7,602,316 1,128,696 54,676 1,183,372 Margin deposits 152,578 – 152,578 188,104 – 188,104 Manager's checks and demand drafts outstanding 882,145 – 882,145 943,299 – 943,299 Accrued interest payable 552,409 – 552,409 958,948 – 958,948 Accrued taxes and other expenses 1,414,808 – 1,414,808 1,145,100 – 1,145,100 Subordinated debt – 11,243,700 11,243,700 – 11,087,357 11,087,357 Other liabilities: Bills purchased - contra 15,893,118 – 15,893,118 8,340,746 – 8,340,746 Liability to tie-up banks 4,687,599 – 4,687,599 3,955,971 – 3,955,971 Accounts payable 2,894,876 4,761 2,899,637 2,446,401 – 2,446,401 Payment order payable 967,874 – 967,874 695,192 – 695,192 Deposits on lease contract – 998,925 998,925 – 615,603 615,603 Unearned income and other deferred credits 163,894 430,636 594,530 620,059 – 620,059 Liabilities of SPV – 386,573 386,573 – – – Sundry and other credits 318,753 107 318,860 857,819 – 857,819 Withholding tax payable 150,923 – 150,923 135,760 – 135,760 —237,199,907 P —29,197,683 P —266,397,590 P —222,614,535 P —26,277,384 P —248,891,919 P Parent Company 2004 2003 Due Within Due Beyond Due Within Due Beyond One Year One Year Total One Year One Year Total (In Thousands) Financial Resources Due from BSP —2,059,639 P —– P —2,059,639 P —5,129,645 P —– P —5,129,645 P Due from other banks 6,114,500 – 6,114,500 7,136,031 – 7,136,031 Interbank loans receivable and securities purchased under resale agreements 7,804,832 12,053,935 19,858,767 14,456,714 8,940,730 23,397,444 TAS 714,075 2,084,052 2,798,127 2,483,421 362,403 2,845,824 ASS – 5,533,558 5,533,558 – 721 721 IBODI - gross 12,453,025 37,951,485 50,404,510 9,757,052 35,811,024 45,568,076 Receivables from customers - gross 80,062,856 51,696,461 131,759,317 68,285,143 56,234,574 124,519,717 Other resources: Advances to subsidiaries, associates and other related parties (Note 25) 8,173,852 – 8,173,852 8,043,679 – 8,043,679 Accounts receivable (Note 25) 2,892,415 – 2,892,415 2,368,357 – 2,368,357 AIR 2,392,516 – 2,392,516 2,417,963 – 2,417,963 Interoffice float items - net 2,247,062 – 2,247,062 1,688,727 – 1,688,727 Sales contracts receivable 8,074 1,089,876 1,097,950 147,073 1,039,601 1,186,674 Returned checks and other cash items 282,468 – 282,468 968,385 – 968,385 —125,205,314 P —110,409,367 P —235,614,681 P —122,882,190 P —102,389,053 P —225,271,243 P 2 0 0 4 A N N U A L R E P O RT 49 N O T E S T O F I N A N C I A L S TAT E M E N T S Parent Company 2004 2003 Due Within Due Beyond Due Within Due Beyond One Year One Year Total One Year One Year Total (In Thousands) Financial Liabilities Deposit liabilities —179,913,385 P —9,659,713 P —189,573,098 P —175,806,561 P —7,498,751 P —183,305,312 P Bills payable 17,742,267 4,682,196 22,424,463 21,604,979 5,767,799 27,372,778 Due to BSP 128,027 – 128,027 109,316 – 109,316 Outstanding acceptances 7,602,316 – 7,602,316 1,128,696 54,676 1,183,372 Margin deposits 152,578 – 152,578 188,104 – 188,104 Manager's checks and demand drafts outstanding 862,072 – 862,072 902,849 – 902,849 Accrued interest payable 428,931 – 428,931 929,534 – 929,534 Accrued taxes and other expenses 817,258 – 817,258 765,589 – 765,589 Subordinated debt – 11,243,700 11,243,700 – 11,087,357 11,087,357 Other liabilities: Bills purchased - contra 15,893,118 – 15,893,118 8,340,746 – 8,340,746 Accounts payable 1,667,862 – 1,667,862 1,506,158 – 1,506,158 Payment order payable 967,874 – 967,874 695,192 – 695,192 Unearned income and other deferred credits 473,353 – 473,353 527,386 – 527,386 Sundry and other credits 312,707 – 312,707 782,421 – 782,421 Withholding tax payable 101,524 – 101,524 97,477 – 97,477 —227,063,272 P —25,585,609 P —252,648,881 P —213,385,008 P —24,408,583 P —237,793,591 P 16. Capital Funds increases of 8% to 11% and 5% to 10% per annum, respectively. The latest actuarial valuation studies of the retirement plans were made on various dates The Parent Company's capital stock consists of: in 2004. Based on such studies, the aggregate unfunded past service liabilities of the Group amounted to —494.8 million and —726.0 million as of December P P 2004 2003 2002 31, 2004 and 2003, respectively, net of plan assets at fair value amounting to (In Thousands) —850.6 million and —593.0 million as of December 31, 2004 and 2003, respec- P P Common stock - —10 par value P tively. Total retirement expense charged against operations in 2004 and 2003 Authorized - 1,000,000,000 shares consisting of the normal cost, interest cost on unfunded past service liability Issued - 727,003,345 shares —7,270,033 P —7,270,033 P —7,270,033 P and amortization of transition liability and actuarial gains or losses amounted to —221.1 million and —303.5 million, respectively. P P The Parent Company shares are listed in the Philippine Stock Exchange. Parent Company shares held by a subsidiary represent 78,807,098 shares pur- 18. Lease Contracts chased by its investment house subsidiary and are available for future sale. These are accounted for as treasury shares in the Group financial statements and The Parent Company leases the premises occupied by some of its branches, are carried at acquisition cost. including those of its subsidiaries. The lease contracts are for periods ranging from 1 to 20 years and are renewable at the Group's option under certain terms In addition, a portion of the Parent Company's surplus corresponding to the and conditions. Various lease agreements include escalation clauses, most of undistributed accumulated equity in net earnings of subsidiaries and associates which bear an annual rent increase of 5% to 10%. As of December 31, 2004, amounting to —3.5 billion and —3.8 billion as of December 31, 2004 and 2003, P P the Group had no contingent rent payable. respectively, is not available for dividend declaration until realized by the Parent Company through distribution of cash dividends by the subsidiaries and associ- Total rent expense incurred by the Group (included under Occupancy and other ates. equipment-related expenses) amounted to —602.6 million in 2004, —470.4 P P million (as restated) in 2003 and —525.0 million (as restated) in 2002 of which P The determination of the Parent Company's compliance with regulatory —499.7 million in 2004, —395.4 million (as restated) in 2003 and —456.0 million P P P requirements and ratios is based on the amount of the Parent Company's unim- (as restated) in 2002 was incurred by the Parent Company. paired capital (regulatory capital) as reported to the BSP, which is determined on the basis of regulatory accounting practices which differ from Philippine Future minimum lease rentals payable under non-cancelable operating leases fol- GAAP in some respects. low: Specifically, under existing banking regulations, the combined capital accounts of Group Parent Company each commercial bank should not be less than an amount equal to ten percent 2004 2003 2004 2003 (10%) of its risk assets. Risk assets is defined as total assets less cash on hand, due (In Thousands) from BSP, loans covered by hold-out on or assignment of deposits, loans or accept- Within one year —365,254 P —384,548 P —327,289 P —349,684 P ances under letters of credit to the extent covered by margin deposits and other After one year but not non-risk items determined by the MB of the BSP. more than five years 1,067,939 1,289,686 947,652 1,155,393 After more than Under BSP Circular No. 360, effective July 1, 2003, the capital-to-risk assets ratio five years 501,694 657,764 352,221 487,508 (CAR) is to be inclusive of a market risk change. Using this formula, the CAR of —1,934,887 P —2,331,998 P —1,627,162 P —1,992,585 P the Group was 14% and 17% (as restated) as of December 31, 2004 and 2003, respectively, while that of the Parent Company is 13% and 15% (as restated), The Group has entered into commercial property leases on the Group's surplus respectively. offices. These non-cancelable leases have remaining non-cancelable lease terms of between 1 and 15 years. Under the previous computation provided for under BSP Circular No. 280, which BSP Circular No. 360 above amended, the CAR of the Group as of December 31, 2004 Future minimum rentals receivable under non-cancelable operating leases are and 2003 was 14% and 17% (as restated), respectively, while that of the Parent as follows: Company was 13% and 15% (as restated), respectively. Group Parent Company 2004 2003 2004 2003 17. Retirement Plans (In Thousands) Within one year —116,883 P —148,763 P —116,633 P —148,525 P The Group has separate funded noncontributory defined benefit retirement After one year but plans covering substantially all its officers and regular employees. Under these not more than retirement plans, all covered officers and employees are entitled to cash bene- five years 134,131 245,448 133,743 244,810 fits after satisfying certain age and service requirements. The principal actuari- After more than al assumptions used to determine retirement benefits consist of: (1) retirement five years 11,190 15,579 11,190 15,579 age of 60 and 65 years and average remaining working life of covered officers —262,204 P —409,790 P —261,566 P —408,914 P and employees of 12 to 15 years; and (2) investment yield and projected salary 50 E Q U I T A B L E P C I B A N K 19. Miscellaneous Income This account consists of: Group Parent Company 2003 2002 2003 2002 2004 (As restated - Note 2) 2004 (As restated - Note 2) (In Thousands) Trust fees —724,335 P —654,598 P —421,009 P —724,335 P —654,598 P —421,009 P Recovery from assets written off 112,728 185,319 16,169 57 17 2,319 Gain on disposal of ROPOA 182,069 161,647 167,962 181,811 159,057 177,726 Rent of bank premises and equipment 152,952 120,059 122,535 137,996 119,445 112,515 Income from assets sold/exchanged 36,867 41,153 7,791 26,947 25,536 45,739 Rent from safety deposit boxes 19,831 19,565 20,333 19,831 19,147 19,990 Others 1,136,319 1,167,126 893,242 644,711 618,218 226,844 —2,365,101 P —2,349,467 P —1,649,041 P —1,735,688 P —1,596,018 P —1,006,142 P 20. Miscellaneous Expenses This account consists of: Group Parent Company 2003 2002 2003 2002 2004 (As restated - Note 2) 2004 (As restated - Note 2) (In Thousands) Amortization of goodwill and other deferred charges (Note 8) —440,593 P —447,853 P —458,533 P —439,771 P —444,866 P —452,638 P Insurance - PDIC 376,991 318,181 281,411 354,417 312,876 277,304 Litigation and assets acquired expenses 360,752 296,206 334,656 297,357 286,757 332,430 Communication expenses 348,808 297,009 326,380 261,824 257,305 254,097 Professional fees 276,930 228,930 249,620 152,071 134,332 159,385 Advertising expenses 481,711 220,816 114,121 52,979 30,169 70,325 Entertainment, amusement and recreation (EAR) (Note 21) 163,620 156,812 254,341 148,876 132,604 228,389 Transaction dues 178,079 135,188 23,214 174,561 131,689 19,118 Travelling expenses 183,007 136,068 58,985 120,153 99,513 41,129 Others 1,322,309 853,832 989,765 750,606 492,119 519,833 —4,132,800 P —3,090,895 P —3,091,026 P —2,752,615 P —2,322,230 P —2,354,648 P 21. Income and Other Taxes Components of the net deferred tax assets (included in Other Resources) follow: Under Philippine tax laws, the RBU of the Parent Company and its domestic sub- sidiaries are subject to percentage and other taxes (presented as Taxes and Licenses in the statements of income) as well as income taxes. Percentage and Group Parent Company other taxes paid consist principally of gross receipts tax or GRT (GRT was in 2003 2003 effect until 2002) and documentary stamp taxes. Effective January 1, 2003, the ( As restated - As restated - Parent Company and all subsidiaries in the financial intermediation business 2004 Note 2) 2004 Note 2) were subject to the value-added tax instead of GRT. However, Republic Act No. (In Thousands) 9238 reimposed GRT on banks and financial intermediaries effective January 1, Credited to operations 2004. Tax effects of: Allowance for Income taxes include the corporate income tax, as discussed below, and final probable losses —7,047,753 —5,212,453 —6,687,998 —4,889,168 P P P P taxes paid at the rate of 20%, which is a final withholding tax on gross interest NOLCO 745,839 785,016 623,788 593,538 income from government securities and other deposit substitutes. Unamortized past service costs 218,348 207,715 214,390 200,173 Under current tax regulations, the regular corporate income tax rate is 32%. Capitalized interest (106,641) (113,957) (111,424) (113,957) Interest allowed as a deductible expense is reduced by an amount equivalent to Lease income/ 38% of interest income subjected to final tax. In addition, current tax regula- expense differential (8,732) 42,360 84,143 83,711 tions provide for the ceiling on the amount of entertainment, amusement and Foreign exchange recreation (EAR) expenses that can be claimed as a deduction against taxable profits (5,921) (1,290) – – income. Under the regulation, EAR expenses allowed as deductible expense for Others 16,442 6,057 – – a service company like the Parent Company is limited to the actual EAR paid or MCIT 109,914 31,694 101,078 27,694 incurred but not to exceed 1% of net revenue. The regulations also provide for 8,017,002 6,170,048 7,599,973 5,680,327 MCIT of 2% on modified gross income and allow a NOLCO. The MCIT and Charged against equity NOLCO may be applied against the Group's income tax liability and taxable Revaluation increment income, respectively, over a three-year period from the year of inception. in property (625,168) (628,601) (616,968) (621,715) —7,391,834 —5,541,447 —6,983,005 —5,058,612 P P P P FCDU offshore income (income from non-residents) is tax-exempt while gross onshore income (income from residents) is subject to 10% income tax. In The Parent Company and certain subsidiaries did not recognize deferred tax addition, interest income on deposit placements with other FCDUs and offshore assets on the following temporary differences: banking units (OBUs) is taxed at 7.5%. Republic Act No. 9294, which became effective in May 2004, provides that the income derived by the FCDU from for- Group Parent Company eign currency transactions with non-residents, OBUs, local commercial banks 2004 2003 2004 2003 including branches of foreign banks is tax-exempt while interest income on for- (In Thousands) eign currency loans from residents other than OBUs or other depository banks Allowance for under the expanded system is subject to 10% income tax. probable losses —252 P —3,484,644 P —– —3,019,618 P P NOLCO 2,619,173 7,219,227 2,585,899 6,809,727 Provision for (benefit from) income tax consists of: MCIT 18,905 21,166 14,672 18,630 Others 9,763 – – – —2,648,093 P —10,725,037 P —2,600,571 —9,847,975 P P Group Parent Company 2003 2002 2003 2002 Management believes that it is not likely that these temporary differences will (As restated - (As restated - be realized in the future. 2004 Note 2) 2004 Note 2) (In Thousands) Current* —768,759 —612,623 —699,952 P P P —366,524 —334,906 —412,541 P P P Deferred (1,850,387) (86,348) (1,067,916) (1,924,393) (168,341) (1,100,165) — — — — (P 1,081,628) —526,275 (P 367,964) (P 1,557,869) —166,565 (P 687,624) P P * Includes income taxes of foreign subsidiaries and branches 2 0 0 4 A N N U A L R E P O RT 51 N O T E S T O F I N A N C I A L S TAT E M E N T S A reconciliation between the statutory income tax to provision for (benefit 22. Trust Operations from) income tax follows: Securities and other properties (other than deposits) held by the Parent Group Parent Company Company in fiduciary or agency capacities for clients (and beneficiaries) are not 2003 2002 2003 2002 included in the accompanying statements of condition since these are not (As restated - (As restated - resources of the Parent Company (Note 24). 2004 Note 2) 2004 Note 2) (In Thousands) Government securities with total face value of —1,017.1 million and —838.2 P P Statutory million as of December 31, 2004 and 2003, respectively, are deposited with the income tax BSP in compliance with existing banking regulations relative to the trust func- at 32% —266,433 P —614,240 —165,926 P P —80,825 —469,798 P P —32,986 P tions of the Parent Company. The carrying values of the government securities Tax effects of: with the BSP amounted to —1,026.8 million and —839.7 million as of December P P FCDU income (746,448) (739,514) (510,398) (746,448) (739,514) (510,398) 31, 2004 and 2003. Tax-exempt and tax-paid Additionally, a certain percentage of the Parent Company's trust income is income (468,103) (668,591) (386,887) (378,628) (499,881) (250,992) transferred to surplus reserve until such reserve for trust functions amounts to Nondeductible 20% of the Parent Company's authorized capital stock. No part of such surplus expenses 404,470 553,435 221,042 360,221 405,656 141,414 reserve shall at any time be paid out as dividends. Equity in net losses (earnings) Also, in accordance with BSP regulations, the common trust funds managed by of subsidiaries the Parent Company's trust department maintain reserve deposit account with and associates (6,959) (9,497) 11,369 (273,689) (322,579) (242,832) the BSP and government securities to meet the reserve requirement on peso- Nondeductible denominated common trust funds and other similarly managed funds. As of interest expense 111,812 94,704 116,523 110,801 90,254 95,226 December 31, 2004 and 2003, the balance of the BSP reserve deposit account Others - net 304,154 (113,492) (45,996) 259,285 (4,087) 26,327 amounted to —2.4 billion and —2.1 billion, respectively, while government P P Unrecognized securities amounted to —3.9 billion and —2.7 billion, respectively. P P deferred tax asset (946,987) 794,990 60,457 (970,236) 766,918 20,645 Provision for 23. Segment Information (benefit from) income tax — (P 1,081,628) — — —526,275 (P 367,964) (P 1,557,869) —166,565 (P 687,624) P P — The Group's operating businesses are organized and managed separately according to the nature of services provided and the different markets served with a segment representing a strategic business unit. The Group's business EAR expenses of the Parent Company amounted to —148.9 million and —132.6 P P segments are as follows: million (included in Miscellaneous Expenses in the statements of income) in 2004 and 2003, respectively. EAR expenses for the period September 1 to Consumer and Retail Banking - principally handling individual customers' December 31, 2002 amounted to —40.1 million. P deposits, and providing consumer type loans, overdrafts, credit card facilities and fund transfer facilities; The details of the Parent Company's NOLCO and MCIT follow: Commercial Banking - principally handling commercial customers' deposits, and Inception Year Amount Used/Expired Balance Expiry Year providing products and services to its commercial middle market customers, (In Thousands) mainly small-medium-sized enterprises; NOLCO 2001 —4,223,828 P —4,223,828 P —– P 2004 Corporate Banking - principally handling loans and other credit facilities and 2002 3,257,899 – 3,257,899 2005 deposit and current accounts for corporate and institutional customers; 2003 1,182,806 – 1,182,806 2006 2004 94,530 – 94,530 2007 Investment Banking - principally arranging structured financing, and providing serv- —8,759,063 P —4,223,828 P —4,535,235 P ices relating to privatizations, initial public offerings, mergers and acquisitions; and MCIT 2001 —3,959 P —3,959 P —– P 2004 Treasury - principally providing money market, trading and treasury services, as 2002 14,671 – 14,671 2005 well as the management of the Parent Company's funding operations by use of 2003 27,694 – 27,694 2006 treasury bills, government securities and placements and acceptances with 2004 73,385 – 73,385 2007 other banks, through treasury and wholesale banking. —119,709 P —3,959 P —115,750 P These segments are the basis on which the Group reports its primary segment information. Other operations of the Group comprise the operations and financial control groups. Transactions between segments are conducted at estimated mar- ket rates on an arm's length basis. Interest is charged or credited to business seg- ments based on a pool rate, which approximates the marginal cost of funds. Segment information for the year ended December 31, 2004 follows: Consumer and Commercial Corporate Investment Retail Banking Banking Banking Banking Treasury Others Total Gross income —7,922,418 P —4,895,093 P —2,923,139 P —500,796 P —4,552,659 P —3,331,122 P —24,125,227 P Segment result —1,737,527 P —1,152,074 P —557,852 P —262,597 P —1,598,324 P —1,139,043 P —6,447,417 P Unallocated costs 5,593,065 Profit from operations 854,352 Equity in net losses of associates (21,748) Income before tax 832,604 Benefit from income tax 1,081,627 Minority interest (103,785) Net profit for the year —1,810,446 P Other Information Segment assets —52,813,190 P —58,585,980 P —56,602,288 P —1,798,903 P —74,226,071 P —33,985,504 P 278,011,936 Intra-segment assets 2,387,584 Investments in associates 4,660,552 Unallocated assets 24,914,016 Total assets —309,974,088 P Segment liabilities —50,947,836 P —55,207,016 P —45,866,038 P —1,747,288 P —81,342,695 P —32,520,619 P 267,631,492 Unallocated liabilities – Total liabilities —267,631,492 P Other Segment Information Depreciation —571,570 P —12,533 P —6,966 P —5,212 P —57,748 P —558,363 P —1,212,392 P 52 E Q U I T A B L E P C I B A N K 24. Commitments and Contingent Liabilities lations existing prior to said circular, and new DOSRI loans, other credit accom- modations granted under said circular (amounts in thousands) as of December In the normal course of business, the Group enters into various commitments 31, 2004 and 2003: and incurs contingent liabilities that are not presented in the accompanying financial statements. The Group does not anticipate any material losses as a Group Parent Company result of these commitments and contingent liabilities. 2004 2003 2004 2003 The following is a summary of the commitments and contingent liabilities at Total outstanding their equivalent peso contractual amounts as of December 31, 2004 and 2003: DOSRI accounts —1,126,878 P —822,212 P —1,126,779 P —821,531 P Percent of DOSRI accounts Group Parent Company granted prior to effectivity 2004 2003 2004 2003 of BSP Circular No. 423 to (In Thousands) total loans 0.71% 0.63% 0.75% 0.66% Trust department Percent of DOSRI accounts accounts (Note 22) —103,526,072 —83,564,831 —103,507,352 —83,564,831 P P P P granted after effectivity of Forward exchange BSP Circular No. 423 to bought 22,522,337 24,213,952 22,149,064 24,213,952 total loans 0.06% 0.00% 0.06% 0.00% Unused commercial Percent of DOSRI accounts letters of credit 11,557,196 13,206,849 11,544,496 13,206,849 to total loans 0.77% 0.63% 0.81% 0.66% Forward exchange sold 6,689,461 9,577,882 6,620,082 9,577,882 Percent of unsecured DOSRI Spot exchange sold 2,531,777 946,254 2,531,329 946,254 accounts to total DOSRI Inward bills for collection 1,431,372 3,159,781 1,431,372 3,159,781 accounts 27.68% 11.44% 27.67% 11.36% Spot exchange bought 983,875 389,706 984,422 389,706 Percent of past due DOSRI Outward bills for collection 950,339 835,550 950,339 835,374 accounts to total DOSRI Late deposits/payments accounts 0.00% 0.00% 0.00% 0.00% received 738,573 542,342 738,573 542,342 Percent of nonaccruing DOSRI Guarantees issued 449,184 1,114,775 449,184 1,114,775 accounts to total DOSRI Interest rate swap receivable 305,000 775,000 305,000 775,000 accounts 14.52% 0.00% 14.52% 0.00% Interest rate swap payable 305,000 775,000 305,000 775,000 Traveller's check unsold 157,852 155,694 157,852 155,694 The following table shows information relating to the loans, other credit Confirmed export letters accommodations and guarantees, as well as availments of previously approved of credit 29,788 19,104 29,788 19,104 loans and committed credit lines not considered DOSRI accounts prior to the Currency swap payables – 349,969 – 349,969 issuance of said circular but are allowed a transition period of two years from Currency swap receivables – 288,074 – 288,074 the effectivity of said circular or until said loan, other credit accommodations Others 555,287 508,295 547,808 503,979 and guarantees become past due, or are extended, renewed or restructured, whichever comes later, (amounts in thousands) as of December 31, 2004: The Group has pending claims and/or is a defendant in legal actions arising Parent from normal business activities including sale of a subsidiary. Management and Group Company its legal counsel believe that these actions are without merit or that the ulti- Total outstanding non-DOSRI accounts mate liability, if any, resulting from such actions will not materially affect the granted prior to BSP Circular No. 423 —15,546,362 P —15,546,362 P Group's financial position. Percent of unsecured non-DOSRI accounts granted prior to BSP Circular No. 423 The Parent Company has received tax assessments from the Bureau of Internal to total loans 11.16% 11.16% Revenue on two industry issues. In addition, the Parent Company has pending Percent of past due non-DOSRI accounts tax assessments from the BIR on FCDU taxation, which is also an industry issue. granted prior to BSP Circular No. 423 The Parent Company, through its tax counsels, is contesting these assessments to total loans 0.00% 0.00% and preassessments on the ground that the factual situations were not consid- Percent of nonaccruing non-DOSRI ered which, if considered, will not give rise to material tax deficiencies. accounts granted prior to BSP Circular Accordingly, no provision has been made in the accompanying financial state- No. 423 to total loans 9.42% 9.42% ments for these contingencies. Other related party transactions entered into under the normal course of busi- ness include the availment of computer services, securities and currency trading, 25. Related Party Transactions insurance brokerage and management contract services rendered by certain member companies of the Group. In the ordinary course of business, the Group has loans transactions with investees and with certain directors, officers, stockholders and related interests The significant intercompany transactions and outstanding balances of the (DOSRI). Existing banking regulations limit the amount of individual loans to Group were eliminated in consolidation. DOSRI, 70% of which must be secured, to the total of their respective deposits and book value of their respective investments in the Group. In the aggregate, Deposit liabilities include those associates and other related parties amounted loans to DOSRI generally should not exceed the respective total regulatory cap- to —31.9 million and —76.9 million as of December 31, 2004 and 2003, respec- P P ital or 15% of total loan portfolio, whichever is lower. tively. Related interest expense amounted to —0.1 million in 2004, —7.4 million P P in 2003 and P —0.4 million in 2002. BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts. The retirement fund of the Parent Company's employees amounting to —850.6 million and —593.0 million as of December 31, 2004 and 2003, respec- P P The following table shows information relating to the loans, other credit tively, is being managed by the Parent Company's Trust Banking Group. accommodations and new guarantees classified as DOSRI accounts under regu- The following table shows the related party transactions included in the Group's financial statements: Elements of Transactions Balance Sheet Amount Income Statement Amount Related Party Relationship Nature of Transaction 2004 2003 2004 2003 (In Thousands) Philex Mining Associate Loans receivable —526,040 P —535,343 P —- P —- P Other resources 51 199,447 - - Gratuity Fund Retirement Fund Advances to subsidiaries, associates and related parties 307,594 451,576 - - Filsyn Corporation Associate Loans receivable 59,487 59,487 - - Other resources 3,894 3,894 - - JLI Associate Loans receivable 36,204 36,204 - - AIR 434 570 - - Interest income - - 5,446 6,842 2 0 0 4 A N N U A L R E P O RT 53 N O T E S T O F I N A N C I A L S TAT E M E N T S 26. Financial Performance Earnings per share (EPS) amounts were computed as follows: 2003 2002 2004 (As restated) (In Thousands, Except Earnings Per Share) a. Net income —1,810,446 P —1,301,553 P —790,705 P b. Weighted average number of outstanding common shares 648,196 648,192 648,192 c. EPS (a/b) —2.79 P —2.01 P —1.22 P The following basic ratios measure the financial performance of the Group: 2003 2002 2004 (As restated) Where average equity and average asset include revaluation increment and goodwill, respectively Return on average equity (ROE) 4.39% 3.13% 1.92% Return on average assets (ROA) 0.62% 0.48% 0.32% Where average equity and average asset exclude revaluation increment and goodwill, respectively ROE 9.18% 7.33% 5.37% ROA 0.82% 0.69% 0.54% Net interest margin on average earning assets 3.86% 2.49% 2.26% For purposes of computing ROE and ROA, average of month-end balances of capital funds and assets, respectively, were used. 27. Notes to Cash Flows Statements On March 15, 2005 and March 28, 2005, the Closing Certificate was signed between the Parent Company and PIO and the Parent Company and PIT, The following is a summary of certain non-cash activities that relate to the respectively, to implement and make effective the SPA on loans and ROPOA analysis of the statements of cash flows: as of November 26, 2004 and December 15, 2004, respectively. Accordingly, the Parent Company received SPV Notes amounting to —2.4 billion for loans P 2004 2003 2002 from PIO and for ROPOA from PIT. Total loans transferred to PIO amounted Investing activity: to —7.5 billion. ROPOA transferred to PIT amounted to —1.8 billion. The P P Unrealized loss on ASS —54,560 P —64,354 P —78,373 P balance of the consideration received from PIO and PIT amounting to —90.1 P Additions to (disposals of) ROPOA - net million and P—296.5 million, respectively, is recorded in Accounts Receivable Group (748,692) 3,660,292 2,761,909 as of December 31, 2004. Parent Company (1,864,888) 3,655,317 2,730,195 2. On November 23, 2004, the Parent Company's BOD approved the issuance of The amount of Interbank Loans Receivable and Securities Purchased under senior bonds. Relative to this, on February 18, 2005 the Parent Company Resale Agreements considered as cash and cash equivalents follows: issued US$100 million, 6.5% Subordinated Notes due 2008 (the Notes). The issuance of the bonds under the terms approved by the BOD was approved Group by the BSP on January 31, 2005. 2004 2003 2002 (As restated - Among the significant terms and conditions of the issuance of the Notes are: Note 2) (In Thousands) a. Issue price at 99.3% of the principal amount; Interbank Loans Receivable and b. The Notes bear interest at the rate of 6.5% per annum from and includ- Securities Purchased ing February 18, 2005 to but excluding February 19, 2008. Interest will be under Resale Agreements —17,364,767 P —22,978,937 P —22,340,291 P payable semi-annually in arrears on February 19 and August 19 of each Interbank Loans Receivable year, commencing August 19, 2005, except that the first payment of inter- and Securities Purchased est will be in respect of the period from and including February 18, 2005 under Resale Agreements but excluding August 19, 2005; not considered as Cash and Cash Equivalents 12,053,935 8,940,730 6,397,882 c. The Notes will constitute direct, senior, unconditional, and unsecured —5,310,832 P —14,038,207 P —15,942,409 P obligations of the Parent Company and claims in respect of the notes shall at all times rank pari passu and without any preference among them- Parent Company selves; 2004 2003 2002 (As restated - d. The Parent Company may redeem the Notes in whole but not in part at Note 2) redemption price equal to 100% of the principal amount of the Notes (In Thousands) together with accrued and unpaid interest to the date fixed for redemp- Interbank Loans tion upon the occurrence of certain changes affecting taxation in the Receivable and Philippines, as more particularly specified in the covering offering circu- Securities Purchased lar; under Resale Agreements —19,858,767 P —23,397,444 P —22,310,291 P Interbank Loans Receivable e. The 2008 Notes are not guaranteed or insured by the PDIC and are not and Securities Purchased deposit liabilities of the Parent Company. under Resale Agreements not considered as Cash and 3. On January 18, 2005, the Parent Company's BOD approved the declaration of Cash Equivalents 12,053,935 8,940,730 6,397,882 cash dividends at the rate of sixty centavos ( —0.6) per share or —436.2 mil- P P —7,804,832 P —14,456,714 P —15,912,409 P lion. Such declaration was approved by BSP on April 1, 2005. On January 18, 2005, the BOD of PCI Leasing approved the declaration of 28. Other Matters cash dividends at —0.2 per share or —196.6 million in favor of stockholders P P of record as of February 1, 2005 and stock dividends in the aggregate 1. The Parent Company entered into sale and purchase agreements (SPA) under amount of —1.2 billion in favor of stockholders of record as of March 23, P the provisions of Republic Act No. 9182, "The Special Purpose Vehicle (SPV) 2005. Such declaration was approved by SEC on March 10, 2005. Act of 2002," for the sale of its loans to PIO amounting to —8.3 billion on November 26, 2004 and ROPOA to PIT amounting to —2.2 P P On January 18, 2005, the BOD of PCI Capital approved the declaration of billion on December 15, 2004. In exchange for the loans and ROPOA, the stock dividends amounting to —200.0 million. Such declaration was P Parent Company received SPV Notes and cash of P —1.0 billion and —100.0 mil- P approved by BSP on March 10, 2005. lion, respectively, for loans and —1.8 billion and —350.0 million, respective- P P ly, for ROPOA. The SPV Notes are payable over ten years in accordance with On January 24, 2005, the BOD of ECN declared stock dividends amounting to —475.0 million and cash dividends of —20 per share or —300.0 million to all P P P the accounts arrangement included in the SPA. The probable loss incurred from this transaction has been fully provided as of December 31, 2004. stockholders of record as of February 1, 2005. 54 E Q U I T A B L E P C I B A N K
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