IMPORTANT: You must read the following disclaimer before continuing. The following disclaimer

applies to the attached offering circular. You are therefore advised to read this disclaimer carefully before

reading, accessing or making any other use of the attached offering circular. In accessing the attached

offering circular, you agree to be bound by the following terms and conditions, including any modifications

to them from time to time, each time you receive any information from us.

Confirmation of your representation: You have accessed the attached document on the basis that you have

confirmed to Union Bank of the Philippines (the Bank), The Hongkong and Shanghai Banking Corporation

Limited (HSBC) ING Bank N.V., Manila Branch (ING) (the Lead Arrangers) that (1) you are not a

resident in a country where delivery of this document by electronic transmission may not be lawfully

delivered in accordance with the laws of the jurisdiction in which you are located, AND (2) that you consent

to delivery of this document by electronic transmission.

This document has been made available to you in electronic form. You are reminded that documents

transmitted via this medium may be altered or changed during the process of transmission and consequently

none of the Issuer, the Lead Arrangers and their respective affiliates accept no liability or responsibility

whatsoever in respect of any difference between the document distributed to you in electronic format and the

hard copy version.

You understand that: The information in the offering circular has been provided by Union Bank of the

Philippines (the Bank) for its P39,000,000,000 Bonds Program (the Bonds Program). The Lead Arrangers

have not independently verified all the information contained in the offering circular. The Lead Arrangers (1)

accept no liability or responsibility for (a) the contents of this offering circular or for any other statement,

made or purported to be made by the Lead Arrangers or on its behalf in connection with the Issuer, (b) the

accuracy or completeness of the information contained in the offering circular or on which the offering

circular is based, or (c) the issue and offering of the Bonds, (2) nor make any representation or warranty,

express or implied, with respect to the information contained in the offering circular or on which the offering

circular is based. The Lead Arrangers accordingly disclaims all and any liability whether arising in tort or

contract or otherwise which it might otherwise have in respect of this offering circular or any such statement.

This offering circular should not be considered as a recommendation by the Lead Arrangers or any of their

affiliates to any recipient of the offering circular in relation to the Bonds Program. Each person to whom the

offering circular is made available by the Lead Arrangers must make its own independent assessment of the

Bonds Program after making such investigation as it deems necessary.

If you have gained access to this transmission contrary to the foregoing restrictions, you will be unable to

purchase any of the securities described herein.

You are reminded that you have accessed the attached offering circular on the basis that you are a person into

whose possession this offering circular may be lawfully delivered in accordance with the laws of the

jurisdiction in which you are located. THE FOLLOWING OFFERING CIRCULAR MAY NOT BE

FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN

ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF

THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORIZED.

You are responsible for protecting against viruses and other destructive items. Your use of this electronic

document is at your own risk and it is your responsibility to take precautions to ensure that it is free from

viruses and other items of a destructive nature.

Union Bank of the Philippines

(incorporated with limited liability in the Republic of the Philippines)

P39,000,000,000.00

BONDS PROGRAM

OFFER PRICE 100.0% OF FACE VALUE

Under this P39,000,000,000 Bonds Program, Union Bank of the Philippines (the Bank) may offer, from time to time, in

one or more series or tranches, Senior Fixed Rate Bonds (the Bonds), pursuant to BSP Circular No. 1010 (Series of

2018), and any other circulars and regulations as may be relevant for the transaction, as amended from time to time.

The Bonds, when issued, shall constitute direct, unconditional, unsecured, and unsubordinated peso-denominated

obligations of the Bank, enforceable according to the Terms and Conditions of the Bonds, and shall at all times rank

pari passu and ratably without any preference or priority amongst themselves, and at least pari passu with all other

present and future direct, unconditional, unsecured, and unsubordinated peso-denominated obligations of the Bank,

except for any obligation enjoying a statutory preference or priority established under Philippine laws.

The Bonds will be issued in scripless form in denominations as stated in the Form of Pricing Supplement to be issued

for every Series or Tranche of Bonds, thereafter, and will be registered and lodged with the Registrar through the

Registry in the name of the Bondholders, subject to the payment by the Bondholder of applicable fees to the Registrar.

Each Tranche of the Bonds issued under the Bonds Program will be represented by a Master Certificate of Indebtedness

deposited with the Registrar. The electronic registry book of the Registrar (the Registry) shall serve as the best

evidence of ownership with respect to the Bonds. However, a written advice will be issued by the Registrar to the

Bondholders to confirm the registration of Bonds in their name in the Registry including the amount and summary

terms and conditions of the Bonds (the Registry Confirmations).

The Bonds will not be rated. The Bank has a rating of Baa2 from Moody’s. A rating is not a recommendation to buy,

sell, or hold securities and may be subject to revision, suspension, or withdrawal at any time by the assigning rating

organization.

The Bonds will be listed and enrolled by the Bank in the Philippine Dealing and Exchange Corp. (PDEx). Once

registered and lodged, the Bonds will be eligible for transfer through the trading participants of the PDEx upon listing

of the Bonds in PDEx by electronic book-entry transfers in the Registry, and issuance of Registry Confirmations in

favor of transferee Bondholders.

Lead Arrangers and Bookrunners

Selling Agents

The date of this Offering Circular is April 26, 2019.

ii

Unless the context indicates otherwise, any reference to the “Bank” refers to Union Bank of the Philippines. The

information contained in this Offering Circular relating to the Bank, its operations and those of its subsidiaries

(collectively, the Group) has been supplied by the Bank, unless otherwise stated herein.

The Bonds will be issued pursuant to BSP Circular No. 1010 (Series of 2018) and other related circulars and issuances

of the BSP (the BSP Rules). The issuance of the Bonds is exempt from the registration requirement under the Securities

Regulation Code pursuant to Section 9.1(e) of the said law.

This Offering Circular has been prepared by the Bank solely for the information of persons to whom it is transmitted.

This Offering Circular shall not be reproduced in any form, in whole or in part, for any purpose whatsoever nor shall it

be transmitted to any other person.

The Bank confirms that this Offering Circular contains all information relating to the Group and the Bonds which is

material in the context of the issue and offering of the Bonds, that the information contained herein is true and accurate

in all material respects and is not misleading, that the opinions and intentions expressed herein are honestly held and

have been reached after considering all relevant circumstances and are based on reasonable assumptions, and that there

are other facts, omission of which would make any statement in this Offering Circular misleading in any material

respect and that all reasonable enquiries have been made by the Bank to verify the accuracy of such information. The

Bank hereby accepts full and sole responsibility accordingly.

The Lead Arrangers have not independently verified all of the information contained or incorporated by reference

herein. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or

liability is accepted by the Lead Arrangers as to the accuracy or completeness of the information contained or

incorporated by reference in this Offering Circular or any other information provided by the Bank in connection with

the offering of the Bonds. To the fullest extent permitted by law, the Lead Arrangers assume no liability in relation to

the information contained or incorporated by reference in this Offering Circular or any other information provided by

the Bank or any statement made or purported to be made by the Lead Arrangers or any of their respective affiliates or

advisors, in connection with the offering of the Bonds.

No person is or has been authorized by the Bank or the Lead Arrangers to give any information or to make any

representation not contained in or not consistent with this Offering Circular or any other information supplied in

connection with the offering of the Bonds and, if given or made, such information or representation must not be relied

upon as having been authorized by the Bank or the Lead Arrangers. Neither this Offering Circular nor any other

information supplied in connection with the offering of the Bonds (a) is intended to provide the basis of any credit or

other evaluations or (b) should be considered as a recommendation by the Bank or the Lead Arrangers that any recipient

of this Offering Circular, or any other information supplied in connection with the offering of the Bonds, should

purchase any Bonds. Each investor contemplating to purchase any Bonds should rely on its own examination of the

Bank and the terms of the offering of the Bonds, including the merits and risks involved. By receiving this Offering

Circular, the prospective Bondholder acknowledges that (i) it has not relied on the Lead Arrangers or any person

affiliated with them in connection with its investigation of the accuracy of any information in this Offering Circular or

its investment decision, and (ii) no person has been authorized to give any information or to make any representation

concerning the Bank, the Group or the Bonds other than as contained in this Offering Circular and, if given or made,

any such other information or representation should not be relied upon as having been authorized by the Bank or the

Lead Arrangers.

Neither the Bank nor the Lead Arrangers or any of their respective affiliates or representatives is making any

representation to any Bondholder regarding the legality of an investment by such Bondholder under applicable laws. In

addition, the Bondholder should not construe the contents of this Offering Circular as legal, business or tax advice. The

Bondholder should be aware that it may be required to bear the financial risks of an investment in the Bonds for an

indefinite period. The Bondholder should consult with its own advisers as to the legal, tax, business, financial and

related aspects of a purchase of the Bonds.

Neither the delivery of this Offering Circular nor the offering, sale or delivery of any Bonds shall in any circumstances

imply that the information contained herein concerning the Bank is correct at any time subsequent to the date hereof or

that any other information supplied in connection with the offering of the Bonds is correct as at any time subsequent to

the date indicated in the document containing the same. The Lead Arrangers expressly do not undertake to review the

financial condition or affairs of the Bank during the life of the Bonds or to advise any investor in the Bonds of any

information coming to their attention.

iii

This Offering Circular does not constitute an offer to sell, or an invitation by or on behalf of the Bank, the Lead

Arrangers and other Selling Agents or any of their respective affiliates or representatives to purchase any of the Bonds,

and may not be used for the purpose of an offer to, or a solicitation by, anyone, in each case, in any jurisdiction or in

any circumstances in which such offer or solicitation is not authorized or is unlawful. Recipients of this Offering

Circular are required to inform themselves about and observe any applicable restrictions.

Each Bondholder must comply with all applicable laws and regulations in force in each jurisdiction in which it

purchases, offers or sells such Bonds or possesses or distributes this Offering Circular and must obtain any consent,

approval or permission required by it for the purchase, offer or sale by it of such Bonds under the laws and regulations

in force in any jurisdictions to which it is subject or in which it makes such purchases, offers or sales and the Bank or

the Lead Arrangers shall have no responsibility therefor.

The Bank’s audited financial statements as of and for the years ended December 31, 2016, 2017 and 2018 which will be

considered an integral part hereof, have been prepared in compliance with Philippine Financial Reporting Standards

(PFRS). The Bank’s financial statements as of and for the years ended December 31, 2016, and 2017 were audited by

Punongbayan & Araullo. The Bank’s financial statements as of and for the year ended December 31, 2018 were audited

by Sycip Gorres Velayo & Co.

CONVENTIONS WHICH APPLY TO THIS OFFERING CIRCULAR

In this Offering Circular, unless otherwise specified or the context otherwise requires, all references to the “Philippines”

In this Offering Circular, unless otherwise specified or the context otherwise requires, all references to the “Philippines”

are references to the Republic of the Philippines. All references to the “Government” herein are references to the

Government of the Philippines. All references to “United States” or “U.S.” herein are to the United States of America.

Unless otherwise specified or the context otherwise requires, references herein to “U.S. dollars” and “U.S.$” are to the

lawful currency of the United States of America and references herein to “Pesos” and “P” are to the lawful currency of

the Republic of the Philippines. Certain monetary amounts and currency translations included in this document have

been subject to rounding adjustments; accordingly, figures shown as totals in certain tables may not be an arithmetic

aggregation of the figures, which precede them. References in this document to ownership interests are, save as

otherwise disclosed, as at the date of this document.

For convenience only, certain peso amounts in this Offering Circular have been translated into U.S. dollar amounts,

based on the exchange rate on December 31, 2018 of P52.58 = U.S.$1.00 and on December 31, 2017 of P49.93=

U.S.$1.00, being the closing rate for that date for the purchase of U.S. dollars with Pesos under the Philippine Dealing

System (the PDS) and published in the Reference Exchange Rate Bulletin by the BSP (the BSP Rate). Other Peso

amounts in this Offering Circular, where translated into U.S. dollars, have been converted at the applicable rates

specified. No representation is made that the Peso or U.S. dollar amounts referred to herein could have been or could be

converted into U.S. dollars or Peso, as the case may be, at any particular rate, or at all.

Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

FORWARD-LOOKING STATEMENTS

Certain statements in this Offering Circular constitute “forward-looking statements”, including statements regarding the

Bank’s expectations and projections for future operating performance and business prospects. The words “believe”,

“expect”, “anticipate”, “estimate”, “project”, “will”, “aim”, “will likely result”, “will continue”, “intend”, “plan”,

“contemplate”, “seek to”, “future”, “objective”, “goal”, “should”, “will pursue” and similar expressions or variations of

these expressions identify forward-looking statements. In addition, all statements other than statements of historical

facts included in this Offering Circular, including, without limitation, those regarding the Bank’s financial position and

results, business strategy, plans and objectives of management for future operations, including development plans and

objectives relating to the Bank’s products and services, are forward-looking statements.

Such forward-looking statements and any other projections contained in this Offering Circular (whether made by the

Bank or any third party) involve known and unknown risks, uncertainties and other factors which may cause the actual

results, performance or achievements to be materially different from the future results, performance or achievements

expressed or implied by forward-looking statements. Such forward-looking statements are based on current beliefs,

assumptions, expectations, estimates and projections regarding the Bank’s present and future business strategies and the

environment in which the Bank will operate in the future. Among the important factors that could cause some or all of

those assumptions not to occur or cause the Bank’s actual results, performance or achievements to differ materially from

those in the forward-looking statements include, among other things, the Bank’s ability to successfully implement its

iv

business strategy, the condition of and changes in the Philippine, Asian or global economies, future levels of non-

performing loans, the Bank’s growth and expansion, including whether the Bank succeeds in its business strategy,

changes in interest rates and changes in government regulation and licensing of its businesses in the Philippines and in

other jurisdictions where the Bank may operate, and competition in the banking and financial services industry.

Additional factors that could cause the Bank’s actual results, performance or achievements to differ materially include,

but are not limited to, those discussed under “Investment Considerations”.

Any forward-looking statements contained in this Offering Circular speak only as at the date of this Offering Circular.

Each of the Bank and the Lead Arrangers expressly disclaims any obligation or undertaking to release, publicly or

otherwise, any updates or revisions to any forward-looking statement contained herein to reflect any change in the

Bank’s expectations with regard thereto or any change in events, conditions, assumptions or circumstances on which

any such statement was based.

INDUSTRY AND MARKET DATA

Unless otherwise indicated, all industry and market data with respect to the Philippine banking and financial services

industries was derived from information compiled and made available by the BSP or other public sources. While the

Bank has ensured that such information has been extracted accurately and is believed by the Bank to be reasonable and

presented in its proper context, the Bank has not independently verified any of the data from third-party sources or

ascertained the correctness of the underlying economic assumptions relied upon therein.

FORM OF PRICING SUPPLEMENT

For each issuance of Bonds under the Bank’s Bonds Program, the Bank shall distribute the Form of Pricing Supplement

which shall be disclosed to the public through the filing with the PSE and made available for download from the

website of the Bank specifically, in https://www.unionbankph.com/.

The Form of Pricing Supplement shall contain the following information:

a. name of the Issuer;

b. description of the issue;

c. description of the specified currency or currencies;

d. description of the offer size of the specific offering;

e. description of the manner of distribution;

f. description of the issue price;

g. description of the form and denomination of the Bonds;

h. description of timetable and offer period;

i. description of the applicable interest rate and the mode of settlement of the offering;

j. description of the interest payable;

k. description of the provisions relating to redemption;

l. distribution;

m. investment considerations;

n. parties to the distribution;

o. name of the relevant payment account; and

p. additional information or changes or updates to the Offering Circular.

v

TABLE OF CONTENTS

GLOSSARY OF TERMS ................................................................................................................................ 6

FORM OF PRICING SUPPLEMENT ......................................................................................................... 12

INVESTMENT CONSIDERATIONS .......................................................................................................... 16

TERMS AND CONDITIONS OF THE BONDS ......................................................................................... 46

USE OF PROCEEDS ..................................................................................................................................... 75

CAPITALISATION AND INDEBTEDNESS OF THE BANK ................................................................. 76

SELECTED CONSOLIDATED FINANCIAL INFORMATION ............................................................. 77

DESCRIPTION OF THE BANK .................................................................................................................. 81

RISK MANAGEMENT ............................................................................................................................... 105

DESCRIPTION OF THE BANK’S ASSETS AND LIABILITIES ......................................................... 114

MANAGEMENT .......................................................................................................................................... 125

RELATED PARTY TRANSACTIONS ..................................................................................................... 132

THE PHILIPPINE BANKING INDUSTRY ............................................................................................. 134

BANKING REGULATION AND SUPERVISION ................................................................................... 142

PHILIPPINE TAXATION .......................................................................................................................... 173

DISTRIBUTION AND SALE...................................................................................................................... 179

INDEX TO FINANCIAL STATEMENTS ................................................................................................. 184

6

GLOSSARY OF TERMS

“AMLA” means the Anti-Money Laundering Act of the Philippines (Republic Act No. 9160), as amended

by Republic Act No. 9194 and Republic Act No. 10167, and BSP Circular Nos. 251, 253, 279, 527, 564,

608, 612 and 706, and all other amendatory and implementing law, regulation, jurisprudence, notice or order

of any Philippine governmental body relating thereto.

“Application to Purchase” or “ATP” means the application form to be accomplished and submitted by an

applicant for the purchase of a specified amount of the bonds to be issued pursuant to the Bond Program,

together with all the other requirements set forth in such application form attached thereto.

“Bank” means Union Bank of the Philippines, a corporation duly organized and existing under the laws of

the Philippines, and duly authorized to operate as a universal bank.

“BIR” means the Philippines Bureau of Internal Revenue.

“Bond Agreements” means the Program Agreement dated 26 April 2019, Trust Indenture Agreement dated

26 April 2019, the Registry and Paying Agency Agreement dated 26 April 2019, the Terms and Conditions,

including amendments thereto, the Master Certificate of Indebtedness and Pricing Supplement to be issued

for each Series or Tranche of Bonds to be issued under the Bond Program.

“Bondholder” means a Person who, at any relevant time, appears in the Registry as the registered owner of

a Series or Tranche of Bonds issued under the Bond Program.

“Bond Program” means the ₱39 Billion bond program of the Bank established by, or otherwise

contemplated in, this Offering Circular.

“Bonds” means a bond issued pursuant to the Bond Program which has such maturity and interest rate as

may be agreed upon between the Bank and the relevant Lead Arranger/s and evidenced by a Master

Certificate of Indebtedness.

“BSP” means the Bangko Sentral ng Pilipinas.

“BSP Rules” means the General Banking Law of 2000 (Republic Act No. 8791), the Manual of Regulations

for Banks, BSP Circular Nos. 975 and 1010 and other related circulars and issuances, as may be amended

from time to time.

“Business Day” means any day other than one on which commercial banks and foreign exchange markets in

Pasig City and Makati City, Philippines are not required or authorized to be open for business.

“Cash Settlement Bank” means a bank licensed and authorized under the laws of the Republic of the

Philippines and designated by the Bondholder as the bank with which the Bondholder's Cash Settlement

Account is maintained, such designation to be made in accordance with the procedures of the Paying Agent.

“Closed Period” means the periods during which the Registrar shall not register any transfer or assignment

of the Bonds, specifically: (a) the period of two (2) Business Days preceding any Interest Payment Date or

the due date for any payment of the principal amount of the Bonds; or (b) the period when any Bonds have

been previously called for redemption.

“Early Redemption Amount” means the amount equal to the aggregate issue price of the Bonds, plus

accrued but unpaid interest thereon as of the Early Redemption Date in accordance with Clause 6 of the

Terms and Conditions.

7

“Early Redemption Date” means the next Interest Payment Date following compliance by the Bank with

the pre-termination requirements under Clause 6 of the Terms and Conditions.

“Early Redemption Option” means the Issuer’s option to redeem all but not less than all of the Bonds on

any Interest Payment Date in accordance with Clause 6 of the Terms and Conditions.

“Eligible Bondholder” means all prospective purchasers of the Bonds other than those identified as

Prohibited Bondholders.

“Event of Default” means an event specified as such in the Terms and Conditions.

“Exchange” means a fixed-income exchange duly accredited by the BSP (such as but not limited to PDEx)

on which the Bonds are listed.

“FATCA” means the Foreign Account Tax Compliance Act of the United States of America, as may be

amended from time to time.

“Final Sales Report” means the report from each Lead Arrangers detailing the Applications to Purchase

covering the Bonds approved and accepted for purchase during the Offer Period.

“Interest” means for any Interest Period, the interest payable on such Bonds at such rate set out in the

applicable relevant Pricing Supplement.

“Interest Commencement Date” means the first Interest Payment Date, in respect of a particular Series or

Tranche of Bonds.

“Interest Payment Date” means, either:

(a) The date which falls the number of months or other period specified at the “Interest Period”

in the applicable Pricing Supplement after the preceding Interest Payment Date or the

Interest Commencement Date (in the case of the first Interest Payment Date); or

(b) Such date or dates as are indicated in the applicable Pricing Supplement.

“Interest Period” means in respect of any Series or Tranche of Bond, the period commencing on the

relevant Issue Date and having a duration of [three (3), six (6) or twelve (12)] months and, thereafter, each

successive [three (3), six (6) or twelve (12)]-month period commencing on the last day of the immediately

preceding Interest Period up to, but excluding the first day of the immediately succeeding Interest Period, but

in the case of the last Interest Period, it will be the period from and including the last day of the immediately

preceding Interest Period up to, but excluding, the Maturity Date.

“Interest Rate” means the rate of interest as specified in the Master Certificate of Indebtedness as the

interest rate corresponding to the Series or Tranche of the Bonds.

“Issue” means the issuance of a Series or Tranche of Bonds by the Bank pursuant to the Terms and

Conditions and the applicable Pricing Supplement.

“Issue Date” means, in respect of any Series or Tranche of Bond, the date of issuance of such Series or

Tranche of the Bond pursuant to and in accordance with the Bond Program as set out in the applicable

Pricing Supplement or any other agreement between the Bank and the relevant Lead Arrangers.

“Issue Price” means one hundred percent (100%) of the aggregate nominal principal amount of the Bonds.

8

“Lead Arranger/s” means with respect to each Series or Tranche of Bonds, the entity/ies which the Bank

may appoint as lead arranger/s and bookrunners for such particular Series or Tranche of Bonds as specified

in the Placement Agreement and the applicable Pricing Supplement, and “Lead Arranger” means any

one of them.

“Market Maker” means Metropolitan Bank & Trust Company and such other entity that may be appointed

by the Bank and as reflected in the relevant Pricing Supplement, provided that such entity is qualified to act

as such by PDEx.

“Master Certificate of Indebtedness” means the certificate to be issued by the Bank to the Trustee

evidencing and covering such amounts corresponding to a Series or Tranche of Bonds issued on the relevant

Issue Date.

“Maturity Date” means the date at which a Series or Tranche of Bonds shall be redeemed by the Bank by

paying the principal amount thereof as specifically provided in the applicable Pricing Supplement and the

Master Certificate of Indebtedness. Unless previously redeemed or cancelled, the Bond Maturity Date shall

be on the date specified in the applicable Pricing Supplement and the Master Certificate of Indebtedness, or

the next Business Day if such date is not a Business Day. However, the Maturity Date of the Bonds, for the

purpose of the Bank effecting repayment of the principal amount thereof, is subject to the following Business

Day convention. Thus, if the Maturity Date is not a Business Day, principal repayment shall be made by the

Bank on the next succeeding Business Day, without adjustment to the amount of interest to be paid.

“Non-Trade Transactions” means transactions relating to the Bonds under the following instances:

a. Nomination or change of nominated custodian by the beneficial owner of the Bonds;

b. Succession, provided that the heirs and successors-in-interest present a court order of partition or

deed of extrajudicial settlement together with the proper documentation evidencing the payment of

applicable taxes and a certificate from the BIR authorizing the transfer of the Bonds;

c. Donation, provided that the donor presents a valid deed of donation and documents to evidence the

payment of applicable taxes and a certificate authorizing the transfer of the Bonds from the BIR;

d. Request for recording or annotation of interests or liens on the Bonds of any party arising from

transactions such as, but not limited to, pledge or escrow, provided that the pledgor or the

beneficiary of the escrow shall present a proper contract of pledge or escrow agreement; and

e. Such other transactions that may be deemed valid and “free of payment” transactions by PDTC;

provided such transfer is not in violation of any law or regulation or made in circumvention thereof;

provided, further that, the burden of proving the validity of a “free of payment” transaction rests

with the transferor of the Bonds.

“Offer” means an offer of a Series or Tranche of the Bonds to the public for subscription under the Bond

Program at Issue Price.

“Offer Period” means the period when a Series or Tranche of Bonds are offered for sale by the Bank to the

public, through the Selling Agents, on such date and time as may be determined by the Bank and the Lead

Arrangers.

“Offering Circular” means the offering circular to be issued in connection with the Bank’s Bond Program

dated 26 April 2019.

9

“Paying Agent” means Philippine Depository & Trust Corp. or such successor or substitute paying agent to

be appointed by the Bank subject to written notification to the BSP within ten (10) calendar days from the

date of such change or appointment.

“Payment Account” means, in respect of a Series or Tranche of Bonds issued pursuant to the Bond

Program, the account to be opened and maintained by the Paying Agent with such Payment Bank designated

by the Bank and solely managed by the Paying Agent, in trust and for the irrevocable benefit of the relevant

Bondholders, into which the Bank shall deposit the amount of the interest and/or principal payments due on

the relevant outstanding Bonds on a relevant Payment Date and exclusively used for such purpose, the

beneficial ownership of which shall always remain with the Bondholders.

“Payment Account Bank” means a duly-licensed bank designated by the Bank (using the form attached to

the Registry and Paying Agency Agreement as Schedule 3), where the relevant PDTC Payment Account will

be opened, maintained, and managed by the Paying Agent for and on behalf of the Bank, into which the

Bank shall deposit, in good cleared funds, the amount of the relevant interest and principal payments due

each Bondholder on each relevant Payment Date.

“Payment Date” means each date on which payment for interest and/or principal in respect of the relevant

Series or Tranche of the Bonds become due.

“PDEx” means the Philippine Dealing & Exchange Corp., a domestic corporation duly registered with the

SEC to operate an exchange and trading market for fixed income securities and a member of the Philippine

Dealing System Group.

“PDEx Rules” mean the PDEx Rules for the Fixed Income Securities Market, as amended, and as the same

may be revised from time to time, as well as other related rules, guidelines, and procedures that may be

issued by PDEx.

“PDEx Trading Participant” means a trading participant of the PDEx, as defined under its rules.

“PDS Group” means the group of companies comprised of the Philippine Dealing System Holdings

Corporation, which is the parent company of the group, and its operating subsidiaries, which are affiliates of

PDTC, namely, PDEx, and the Philippine Securities Settlement Corp.

“PDTC” means the Philippine Depository & Trust Corp.

“Person” means an individual or an entity such as a corporation, partnership, joint venture, trust,

unincorporated organization, political subdivision, agency, or instrumentality (whether or not having separate

legal personality), and its permitted successor and assigns.

“Pesos” or the symbol P means the lawful and official currency of the Republic of the Philippines.

“Placement Agreement” means the agreement executed in relation to each Series or Tranche of Bonds and

sets out the terms on which the Bank shall engage the Lead Arranger/s and Selling Agent/s for that particular

Series or Tranche of Bonds.

“Pricing Supplement” means the pricing supplement issued in relation to each Series or Tranche of Bonds

and giving details of that Series or Tranche and, in relation to any particular Series or Tranche of Bonds,

“applicable Pricing Supplement” means the Pricing Supplement applicable to that Series or Tranche.

“Program Agreement” means the Program Agreement dated 26 April 2019 by and among the Bank, and

the Lead Arrangers and Selling Agents named in it, amended and/or supplemented and/or restated from time

to time, concerning the issuance of a Series or Tranche of Bonds to be issued pursuant to the Bond Program

together with any accession letters and/or as may be modified, amended, or supplemented as applicable from

time to time.

10

“Prohibited Bondholders” mean Persons which are (1) prohibited from holding the Bonds pursuant to the

BSP Rules, specifically: (a) the Bank; and (b) the subsidiaries and affiliates of the Bank; and (c) wholly or

majority-owned or controlled entities of the subsidiaries and affiliates of the Bank, except for its trust

departments or related trust entities; (2) US Persons under the FATCA including: a U.S. citizen (including a

dual citizen); a U.S. resident alien for U.S. tax purposes; a U.S. partnership; a U.S. corporation; any U.S.

estate; any U.S. trust if: (a) a court within the United States is able to exercise primary supervision over the

administration of the trust; or (b) one or more U.S. persons have the authority to control all substantial

decisions of the trust; and any other person that is not considered a non-US person under the FATCA. A

“subsidiary” means, at any particular time, a company which is then directly controlled, or more than fifty

percent (50%) of whose issued voting equity share capital (or equivalent) is then beneficially owned, by the

Bank and/or one or more of its subsidiaries or affiliates. An “affiliate” means, at any particular time, a

company at least twenty percent (20%) but not more than fifty percent (50%) of whose issued voting equity

share capital is then owned by the Bank. For a company to be “controlled” by another means that the other

(whether directly or indirectly and whether by the ownership of share capital, the possession of voting

power, contract or otherwise) has the power to appoint and/or remove all or the majority of the members of

the board of directors or other governing body of that company or otherwise controls or has the power to

control the affairs and policies of that company.

“Record Date” as used with respect to any Payment Date means two (2) Business Days immediately

preceding such relevant Payment Date, which shall be the cut-off date in determining the existing

Bondholders entitled to receive interest, principal, and other payments due, or such other date duly notified

by the Bank

“Registrar” means Philippine Depository and Trust Corp. pursuant to the Registry and Paying Agency

Agreement.

“Registry” means the electronic book of the Registrar containing the official information on the

Bondholders and the amount of Bonds they respectively hold, including all transfers and assignments thereof

or any liens or encumbrances thereon.

“Registry and Paying Agency Agreement” means the Registry and Paying Agency Agreement by and

between the Bank and the Registrar and Paying Agent dated 26 April 2019, as supplemented, amended

and/or restated from time to time.

“Registry Confirmation” means, in relation to any Series or Tranche of Bonds, the written advice sent by

the Registrar to the relevant Bondholders, confirming the registration in the name of such Bondholder in the

Registry of the specified amount of the Bonds issued to or purchased by a Bondholder, in the Registry.

“Sanctions” means the economic sanctions laws, regulations, embargoes or restrictive measures

administered, enacted or enforced by: (i) the Republic of the Philippines; (ii) the United States government;

(iii) the United Nations; (iv) the European Union (v) the United Kingdom; (vi) the respective governmental

institutions and agencies of any of the foregoing, including, without limitation, the Office of Foreign Assets

Control of the US Department of Treasury (OFAC), the United States Department of State, and Her

Majesty's Treasury (HMT) or (vi) any other relevant sanctions authorities; (together "the Sanctions

Authorities").

“SEC” means the Securities and Exchange Commission of the Philippines and its successor agency/ies.

“Selling Agent/s” means with respect to each Series or Tranche of Bonds, each of the entity/ies which the

Bank may appoint as selling agent of such Series or Tranche of Bonds as specified in the Placement

Agreement and applicable Pricing Supplement, and “Selling Agent” means any one of them.

11

“Series or Tranche” means an issuance of Bonds pursuant to the Bond Program under the same Terms and

Conditions as specified under the Trust Agreement and this Agreement, except for their respective Issue

Dates, Interest Rates, Maturity Dates, Interest Commencement Date, Tenor and such other terms and

conditions as may be specifically provided in the Pricing Supplement to be issued for such particular

issuance.

“Tax Exempt/Treaty Documents” means the following documentary requirements to be submitted by

Bondholders claiming exemption from any applicable tax as proof of its tax-exempt status to the Registrar:

a. A current and valid/revalidated BIR-certified true copies of the tax exemption certificate,

ruling or opinion addressed to the relevant applicant or Bondholder confirming its

exemption from taxation of interest on fixed income securities, as required under BIR

Revenue Memorandum Circular No. 8-2014 including any clarification, supplement or

amendment thereto;

b. A duly notarized declaration (in the form attached to the Registry and Paying Agency

Agreement as Schedule 4) executed by (1) the Corporate Secretary or any authorized

representative of such applicant or Bondholder, who has personal knowledge of the

exemption based on his official functions, if the applicant purchases, or the Bondholder

holds, the Bonds for its account, or (2) the Trust Officer, if the Applicant is a universal bank

authorized under Philippine law to perform trust and fiduciary functions and purchase the

Bonds pursuant to its management of tax-exempt entities (i.e. Employee Retirement Fund,

etc.), declaring and warranting such entities’ tax exempt status or preferential rate

entitlement, undertaking to immediately notify the Bank and the Registrar and Paying Agent

of any suspension or revocation of the tax exemption certificates or preferential rate

entitlement, and agreeing to indemnify and hold the Bank and the Registrar and Paying

Agent free and harmless against any claims, actions, suits, and liabilities arising from the

non-withholding or reduced withholding of the required tax;

c. For those who are claiming benefits under tax treaties, duly accomplished Certificate of

Residence for Tax Treaty Relief (CORTT) Form (Part I and Part II) or the prescribed

certificate of residency of the country of their residence with the CORTT Form Part I (A, B

and C) and Part II in accordance with the relevant BIR regulations; and

d. If applicable, such other documentary requirements as may be reasonably required by the

Bank or the Registrar or Paying Agent, or under applicable regulations of the relevant taxing

or other authorities.

“Terms and Conditions” means, in relation to any Series or Tranche of the Bonds, the terms and conditions

endorsed on or incorporated by reference into the Master Certificate of Indebtedness constituting each Series

or Tranche, such terms and conditions being in or substantially in the form set forth in Schedule 1 of the

Registry and Paying Agency Agreement, as such terms and conditions may be amended with respect to any

subsequent tranche of the Bonds.

“Trade Related Transactions” means transactions on the Bonds other than Non-Trade Related

Transactions executed through the PDEx (upon listing of the Bonds).

“Trust Agreement” means the Trust Indenture Agreement between the Bank and the Trustee dated 26 April

2019, as supplemented, amended and/or restated from time to time.

“Trustee” means the Development Bank of the Philippines through its Trust Banking Group, the entity

appointed by the Bank which shall act as the legal title holder of all Series or Tranche of Bonds and shall

monitor compliance and observance of all covenants of and performance by the Bank of its obligations under

the the relevant Series or Tranche of Bonds issued under the Bond Program and enforce all possible

remedies pursuant to such mandate, or any of its successors.

12

FORM OF PRICING SUPPLEMENT

Set out below is the form of Pricing Supplement which will be completed for each Tranche of Notes issued

under the Bonds Programme.

Union Bank of the Philippines (A corporation duly organized and existing under Philippine laws)

PRICING SUPPLEMENT

dated [●]

Offer of up to [P●] Senior Fixed Rate Bonds

under its P39,000,000,000 Bond Program

consisting of

[●]% p.a. Series [●] Bonds due [●]

at an Offer Price of 100% of Face Value

to be listed and traded through

the Philippine Dealing and Exchange Corporation

Lead Arrangers and Bookrunners

[Logo] [Logo]

Selling Agents

[Logo] [Logo]

13

OFFER OF SERIES [] BONDS

This document constitutes the Pricing Supplement relating to the Series [] Bonds being offered and

described herein (the “Offer”). Terms used herein shall be deemed to be defined as such for the purposes of

the terms and conditions (the “Terms and Conditions”) set forth in the offering circular dated April 26, 2019

(the “Offering Circular”). This Pricing Supplement contains the final terms of this Offer and the Series []

Bonds and must be read in conjunction with the Offering Circular. Full information on the Bank and the

Offer is only available on the basis of the combination of this Pricing Supplement and the Offering Circular.

All information contained in the Offering Circular are deemed incorporated by reference in this Pricing

Supplement.

Issuer Union Bank of the Philippines (the “Bank”)

Issue Senior fixed rate bonds constituting the direct,

unconditional, unsecured and unsubordinated obligations of

the Bank

Specified Currency or

Currencies

Philippine Peso

The Offer Size [₱]

Manner of Distribution [Syndicated/Public offering / Non-syndicated/Private placement]

Issue Price At par (or 100% of face value)

Form and Denomination of

the Bonds

The Series [●] Bonds shall be issued in scripless form in minimum

denominations of [₱] each, and in multiples of [₱] thereafter, and

traded in denominations of [₱] in the secondary market

Offer Period The offer of the Bonds shall commence at 9:00 am on [●] and end at

12:00 pm on [●]

Issue Date [●]

Interest Commencement

Date [●]

Interest Payment Date (s) [●],[●],[●] and [●] of each year

Interest Rate [●]% per annum

Day Count Fraction 30/360 day count basis

Maturity Date [●] (●) years from Issue Date or [] 20__

14

Redemption/Payment

Basis

Redemption at Par

Bond Rating The Series [●] Bonds are not rated

PROVISIONS RELATING TO REDEMEPTION

Notice period for early

redemption

Minimum period:

Maximum period:

Issuer Redemption Option []

Final Redemption Amount []

Early Redemption Date []

Early Redemption Amount []

PARTIES/DISTRIBUTION

Trustee Development Bank of the Philippines

Registrar & Paying Agent Philippine Depository & Trust Corp.

Lead Arrangers []

[]

Selling Agents [] []

[]

Market Maker []

Ranking The Series [●] Bonds constitute direct, unconditional, unsecured, and

unsubordinated obligations of the Bank, enforceable according to the

Terms and Conditions, and shall at all times rank pari passu and

without any preference or priority among themselves and at least pari

passu with all other present and future direct, unconditional,

unsecured, and unsubordinated obligations of the Bank, except for

any obligation enjoying a statutory preference or priority established

under Philippine laws

Listing The Series [●] Bonds are intended to be listed at the Philippine

Dealing & Exchange Corp., or such other securities exchange

licensed as such by the Securities and Exchange Commission

Governing Law Philippine Law

15

ADDITIONAL INFORMATION

Changes to the Offering Circular

[Changes or updates necessary to make the statements in the Offering Circular true and correct should be

reflected here.]

RESPONSIBILITY

The Bank accepts responsibility for the information contained in this Pricing Supplement.

UNION BANK OF THE PHILIPPINES

(the Bank)

By:

_____________________________

[●]

[●]

16

INVESTMENT CONSIDERATIONS

An investment in the Bonds involves a number of investment considerations. Prospective investors should

carefully consider all the information contained in this Offering Circular including the investment

considerations described below, before any decision is made to invest in the Bonds. The Bank’s business,

cash flows, financial condition, results of operations, and prospects could be materially and adversely

affected by any of these investment considerations. The market price of the Bonds could decline due to any

one of these risks, and all or part of an investment in the Bonds could be lost.

In making an investment decision, each investor must rely on its own examination of the Bank and the terms

of the offering of any Bonds. The following discussion is not intended to be a comprehensive description of

the risks and other factors and is not in any way meant to be exhaustive as the risks which the Bank faces

relate to events and depend on circumstances that may or may not occur in the future. In addition, some

risks may be unknown to the Bank and other risks, currently believed to be immaterial, could turn out to be

material. Prospective investors are encouraged to make their own independent legal, tax, financial, and

business examination of the Bank, the Bonds, and the market. Neither the Bank nor the Lead Arrangers make

any warranty or representation on the marketability or price on any investment in the Bonds.

The investment considerations discussed in this section are of equal importance and are separated into

categories for ease of reference only.

1. RISKS RELATING TO THE BANK

1.1 The Bank may not be successful in implementing its strategies or entering new markets.

The Bank’s ten-year strategic roadmap, FOCUS 2020, is principally about leveraging - leveraging its capital,

branch network, corporate relationships, processes, partnerships, relationship with City Savings and access to

the mass market, enterprise architecture, data science, and ability to provide unique customer experience. See

“Description of the Bank— Business Strategies.” The Bank aims to achieve, among others, above-industry

volume growth rate, balanced revenue from its loan portfolios, and increased market share as part of its

objective to become one of the top three universal banks in the Philippines “by building a bank of enduring

greatness” in terms of financial value as measured by the return on equity and return on assets ratios, and

operational excellence as measured by the cost-to-income ratio. Expansion of the Bank’s business activities

exposes it to a number of risks and challenges such as unstable markets, increased competition, inability of

the Bank to execute in a timely manner or at all, and less growth or profit potential than the Bank anticipates.

In addition, new business endeavours may require knowledge and expertise which differ from those used in

the current business operations of the Bank, including different management skills, risk management

procedures, guidelines and systems, credit appraisal, monitoring, and recovery systems. The Bank may not

be successful in developing such knowledge and expertise. Furthermore, managing such growth and

expansion requires significant managerial and operational resources, which the Bank may not be able to

procure on a timely basis or at all.

The Bank’s competitors may have substantially greater experience and resources for the new and expanded

business activities and thus the Bank may not be able to attract customers from its competitors. The Bank

may also fail to identify and offer attractive new products and services in a timely manner or at all, putting it

at a disadvantage to its competitors. The Bank’s inability to implement its business strategies could have a

material adverse effect on its business, financial condition and results of operations.

1.2 The Bank may not be able to integrate its acquisitions to its existing business.

The Bank’s growth strategy contemplates, among other things, organic growth and growth through

acquisitions. As part of its acquisition strategy, the Bank regularly evaluates potential acquisition targets, and

may in the future seek to acquire other businesses to expand its operations.

17

In March 2013, the Bank acquired City Savings Bank, Inc. (City Savings or CSB), a thrift bank that

specialises in granting teachers’ loans under the Department of Education’s (DepEd) Automatic Payroll

Deduction System (APDS). In May 2013, the Bank’s subsidiary, Union Properties, Inc. (UPI), completed

the acquisition of First Union Insurance and Financial Agencies, Inc. (FUIFAI), a company organised to

primarily engage in the business of a general agent for life and non-life insurance, and other allied financial

services. In December 2016, the Monetary Board approved the acquisition by the Bank’s subsidiaries, City

Savings and UPI, of a majority stake in First-Agro Industrial Rural Bank (Fair Bank), a rural bank that

provides banking and microfinance services and loan products to micro, small and medium enterprises, and

micro housing institutions. In December 2017, City Savings signed a Share Purchase Agreement with the

ROPALI Group to acquire 100% of the common shares of Philippine Resources Savings Bank (PR

Savings). In January 2018, City Savings and UPI executed a Share Purchase Agreement with the majority

shareholders of Progressive Bank, Inc. (PBI) for the acquisition of a 75% equity interest in PBI through a

combination of subscription and purchase of common shares. In February 2018, City Savings and UPI

signed a share purchase agreement with AEV to purchase 51% of the common shares of PETNET, Inc. BSP

Acquisitions of PBI is subject to closing conditions and regulatory approvals. See “Description of the

Bank— Recent Developments— Acquisitions.”

There can be no assurance that the Bank will not experience difficulties integrating acquired businesses,

retaining and integrating key employees of acquired companies, or addressing new business risks not

currently faced by the Bank. If general economic and regulatory conditions or market and competitive

conditions change, or if the Bank’s operations do not generate sufficient funds or other unexpected events

occur, the Bank may decide to delay, modify or forego some aspects of its growth strategies. This could have

an adverse effect on the Bank’s financial condition and results of operations as well as its future growth

prospects.

In addition, completing acquisitions could require use of a significant amount of the Bank’s available capital.

Acquisitions and investments may also have negative effects on the Bank’s reported results of operations due

to acquisition related charges, amortisation of acquired technology and other intangibles, and/or actual or

potential liabilities, known and unknown, associated with the acquired businesses or joint ventures. Any of

these acquisition related risks or costs could adversely affect the Bank’s business, financial condition and

results of operations.

1.3 The business of lending carries the risk of default by borrowers and the Bank may face

increasing levels of non-performing loans (NPLs) and provisions for impairment losses on

loans.

Any lending activity is exposed to credit risk arising from the risk of default by borrowers. The Bank’s

results of operations may potentially be negatively affected by the level of its NPLs. For the years

ended December 31, 2016, 2017, and 2018, the Bank’s impairment expense amounted to ₱1.6 billion,

₱875.6 million and ₱856.0 million, respectively, representing 8.7%, 4.2% and 4.3%, respectively, of net

interest income for these periods. A number of factors affect the Bank’s ability to control and reduce its

NPLs, such as the economic conditions in the Philippines, which can affect the Bank and its customers and

significantly increase the Bank’s exposure to credit risk. These and other factors could impact the number of

NPLs in the future and may require the Bank to book additional provisions for impairment on loans. While

the Bank regularly monitors its NPL levels and has strict credit processes in place, there can be no assurance

that the Bank will be successful in reducing its NPL levels or that the percentage of NPLs that the Bank will

be able to recover will be similar to the Bank’s historical recovery rates or that the overall quality of its loan

portfolio will not deteriorate in the future. If the Bank is not able to control and reduce its NPLs or if there is

a significant increase in its provisions for loan losses, the Bank’s business, financial condition, results of

operations and capital adequacy could be adversely affected.

18

1.4 The Bank’s provisioning policies which are based on PFRS9 expected credit loss standards

which require significant subjective determinations and are based on Philippine regulations

which may be less stringent than those in other countries.

Regulations of the BSP require that Philippine banks classify loans that have a greater-than-normal risk into

several categories corresponding to various levels of credit risk as follows: pass, loans especially mentioned,

substandard, doubtful and loss. Generally, the classification of loans depends on a combination of a number

of qualitative and quantitative factors, such as the number of months that payment is in arrears and

recoverability of collateral. Periodic examination by the BSP of these classifications in the future may also

result in changes being made by the Bank to such classifications and to the factors relevant thereto.

Furthermore, the level of loan loss provisions which the Bank recognises may increase significantly in the

future due to the introduction of a new accounting standard. See “— Risks Relating to the Philippine Banking

Industry — Any future changes in PFRS may affect the financial reporting of the Bank’s business.”

Significant subjective determinations may increase the variation of application of such policies and affect the

Bank’s results of operations.

In addition, the BSP requirements in certain circumstances may be less stringent than those applicable to

banks in other countries and may result in particular loans being classified as non-performing later than

would be required in such countries or being classified in a category reflecting a lower degree of risk. As a

result, the amount of the Bank’s NPLs as well as reserves may be lower than what would be required if the

Bank were located in such countries. Further, if the Bank changes its provisioning policies to become more

in line with international standards or practices or otherwise, the Bank’s results of operations may be

adversely affected.

1.5 Increased exposure to consumer debt could result in increased delinquencies in the Bank’s

loan portfolios.

The Bank has expanded and plans to continue to expand its consumer loan operations. Such expansions

increase the Bank’s exposure to consumer debt and changes in general economic conditions affecting

Philippine consumers. Accordingly, economic difficulties in the Philippines that have a significant adverse

effect on Philippine consumers could result in reduced growth and deterioration in the credit quality of the

Bank’s consumer loan portfolios. For example, a rise in unemployment or an increase in interest rates could

have an adverse impact on the ability of borrowers to make payments and increase the likelihood of potential

defaults, while reducing demand for consumer loans. In addition, the number of loan accounts may be

negatively affected by declines in household income, public concerns about unemployment or other negative

macroeconomic factors. There can be no assurance that the Bank will be successful in its consumer loan

operations or that it will not incur losses. Losses from consumer loan operations can negatively affect the

Bank’s results of operations.

1.6 The Bank may be unable to recover the assessed value of its collateral when its borrowers

default on their obligations, which may expose the Bank to significant losses.

As of December 31, 2016, 2017, and 2018, the Bank’s secured loans represented 7.8%, 6.3% and 6.2% of

the Bank’s total loans and other receivables, respectively. As of the same periods, 4.4%, 3.7% and 3.3%,

respectively, of the collateral on these loans consisted of real estate properties. The recorded values of the

Bank’s collateral may not accurately reflect its liquidation value, which is the maximum amount the Bank is

likely to recover from a sale of collateral, less expenses of such sale. There can be no assurance that the

realised value of the collateral would be adequate to cover the Bank’s loans. An economic downturn, in

particular, a downturn in the real estate market, could result in a fall in relevant collateral values for the

Bank. Some of the valuations in respect of the Bank’s collateral may also be out of date or may not

accurately reflect the value of the collateral. In certain instances, where there are no purchasers for a

particular type of collateral, there may be significant difficulties in disposing of such collateral at a

reasonable price. Any decline in the value of the collateral securing the Bank’s loans, including with respect

to any future collateral taken by the Bank, would mean that the Bank may not be able to recover fully the

19

provisions that absorbed the NPL. Any increase in the Bank’s loan loss provisions would adversely affect its

business, its financial condition, results of operations and capital adequacy ratio (CAR).

In addition, the Bank may not be able to recover in full the value of any collateral or enforce any guarantee

due, in part, to difficulties and delays that may be involved in enforcing such obligations through the

Philippine legal system. The procedures to foreclose on collateral or enforce a guarantee are subject to

administrative and bankruptcy law requirements which may be more burdensome than in certain other

jurisdictions. The resulting delays can last several years and lead to the deterioration in the physical

condition and market value of the collateral, particularly where the collateral is in the form of inventory or

receivables. In addition, such collateral may not be insured. These factors may expose the Bank to legal

liability while in possession of the collateral. These factors may also significantly reduce the Bank’s ability

to realise the value of its collateral and therefore the effectiveness of taking security for the loans it grants.

Furthermore, the Bank may incur expenses to maintain such properties and prevent their deterioration. In

realising cash value for such properties, the Bank may incur further expenses such as legal fees and taxes

associated with such realisation. There can be no assurance that the Bank will be able to realize the full

value, or any value, of any collateral on its loans.

1.7 The Bank has significant credit exposure to certain sectors and deterioration in the

performance of any of these industries may adversely impact the asset quality of the Bank’s

loan portfolio and its business.

The Bank’s three largest industry exposures were to other consumption (comprised mostly of City Savings

salary loans), real estate activities, and financial and insurance activities, representing 25.6%, 16.1% and

14.8%, respectively, of the Bank’s total loan portfolio and other receivables as of December 31, 2018. The

global and domestic trends in these industries may have a bearing on the Bank’s financial position. Any

significant deterioration in the performance of a particular sector, driven by events outside the Bank’s

control, such as regulatory action or policy announcements by the Government or the general condition of

the domestic and global economies, would adversely impact the ability of borrowers in that industry to

service their debt obligations to the Bank. In addition, if the loans to these borrowers were to become non-

performing, this could adversely affect the Bank’s business and results of operations.

1.8 The Bank’s portfolio of real and other properties acquired (ROPA) exposes the Bank to risks

related to realising the value of its ROPA and risks related to the valuation of, and provisions

with respect to, its ROPA.

The Bank has significant exposure to the Philippine property market due to its portfolio of loans to

customers in the real estate industry as well as the level of real estate it holds as collateral. The Bank’s

outstanding mortgage loans to customers amounted to ₱21.4 billion, ₱27.6 billion and ₱37.0 billion as

of December 31, 2016, 2017, and 2018, respectively, representing 9.1%, 10.2% and 12.0%, respectively, of

its total loans, gross of unearned discounts, as of those dates. The Bank acquires ROPA when it forecloses

on the collateral provided by a borrower or whenever assets, usually real estate, are conveyed to or acquired

by the Bank as payment. Accordingly, the level of the Bank’s ROPA varies according to the level of its

NPLs. As of December 31, 2018, ROPA amounted to ₱12.9 billion, representing 1.9% of the Bank’s total

assets.

The Bank periodically disposes of its ROPA in public auctions and through negotiated sales at prevailing

market prices, which are largely determined by purchasers. The Philippine property market has in the past

been cyclical and property values have been affected by supply of and demand for comparable properties,

the rate of economic growth in the Philippines, and political and social developments.

To the extent that property values decline in the future, there can be no assurance that the Bank will be able

to sell and recover the value of the ROPA stated in the financial statements or that the ability of the Bank’s

customers in the real estate industry to make timely payment on their loans will not deteriorate. Furthermore,

20

given the Bank’s significant amount of ROPA, it may take a number of years before the Bank is able to

realise a significant part of the value of its ROPA.

If the Bank is unable to dispose of its ROPA, it may be required to recognise levels of provisions in future

years which are higher than those currently recognised by the Bank. Furthermore, if the Bank’s customers in

the real estate industry fail to make timely payment on their loans, it may have to set aside additional

provisions for impairment losses. An increase in the level of the Bank’s provisions will reduce the Bank’s

net income and consequently, adversely affect the Bank’s business, financial condition and results of

operations.

1.9 The Bank’s consumer loan portfolio has significant credit exposures to borrowers whose

incomes have been increased by TRAIN Law tax reform

As of December 31, 2018, 33.1% of the Bank’s loan portfolios have credit exposures to the consumer sector,

which includes salary loans to public school teachers under the DepEd’s APDS and to other government and

private sector employees. The entry into force of the Republic Act No. 10963, or the Tax Reform for

Acceleration and Inclusion (TRAIN Law) tax reform on January 1, 2018 has substantially increased the net

take home pay of lower income earners. An increase in incomes of these segments may affect the demand

for the Bank’s salary loans thereby lowering interest revenue in the salary loan segment and overall loan

portfolio growth, which could adversely affect the Bank’s business, financial condition and results of

operations.

1.10 The Bank’s funding is primarily short-term and if depositors do not roll over deposited funds

upon maturity, the Bank’s business could be adversely affected.

A significant portion of the Bank’s funding needs is satisfied from short-term sources, primarily in the form

of demand, savings and time deposits. Accordingly, the maturity profile of the Bank’s assets and liabilities

may from time to time show a negative gap in the short term when the Bank’s liabilities which are composed

of short-term funding sources (primarily in the form of deposits), subordinated notes and other liabilities are

of shorter average maturity than its loans and investments, thereby creating a potential for funding

mismatches. Although these deposits have historically been a stable source of funding for the Bank, there

can be no assurance that this will continue to be the case. In the event the Bank is unable to attract or retain

sufficient deposits or if a substantial number of the Bank’s depositors do not roll over deposited funds upon

maturity, its liquidity position could be adversely affected and the Bank may be unable to fund its loan

portfolio and may be required to seek alternative sources of funding such as swaps, sale of its securities

portfolio or entering into repurchase agreements. The Bank can provide no assurance as to the availability or

terms of such funding. To the extent the Bank is unable to obtain sufficient funding on acceptable terms or at

all, the Bank’s financial condition and results of operations may be adversely affected.

1.11 The Bank may not be able to maintain its technological advantage over its competitors.

The Bank is heavily reliant on technology in certain business operations and uses technology to differentiate

its products and services from those of its competitors. While the Bank aims to remain at the forefront of

technology banking in the Philippines, there are no significant barriers that prevent its competitors from

adopting a similar technology for their products and services. The Bank may also fail to develop, acquire, or

implement any new technology in a timely manner or at all, putting it at a disadvantage to its competitors.

Furthermore, the Bank may need to incur a significant amount of research and development and/or capital

expenditures to maintain its technological advantage. Accordingly, there can be no assurance that the Bank

will be able to maintain its technological advantage over its competitors which may have an adverse effect

on the Bank’s business, financial condition or results of operations.

21

1.12 The Bank’s failure to manage risks associated with its information and technology systems

could adversely affect its business.

The Bank’s failure to manage information technology risks could adversely affect the Bank’s business,

financial condition and results of operations. Any disruption, outage, delay or other difficulties in the

operation of hardware, software, and connectivity infrastructure used by the Bank, may result in loss of

income and decreased consumer confidence. There is also a potential for fraud, litigation and financial losses

that are not fully covered by any insurance maintained by the Bank.

Cognisant of these risks, the Bank invested heavily on upgrading its security systems and IT infrastructure to

implement the requisite controls and monitoring systems while ensuring that legal contracts also protect the

Bank’s interests. The holistic approach to securing and building this digital space is guided by a

technological blueprint (i.e., enterprise architecture) which ensures that all inclusions to the digital

infrastructure have adequately been risk assessed and controls are instituted. This secure IT environment

leads to achieving six sigma, 24/7 and straight through processing as part of the Bank’s vision.

As an on-going and continuous effort to improve the electronic defences, the Bank instituted a 24/7

Integrated Operation Centre (IOC) manned by certified IT and cyber security controllers and headed by an

incident management officer. In addition, the Bank upgraded its information and data storage, and back-up

solutions along with building the capabilities of its IT practitioners using the IT Service Management model.

The potential for fraud and securities problems continues to increase and there can be no assurance that these

security measures will be adequate or successful. The costs of maintaining such security measures may also

increase substantially. Failure in security measures could have a material adverse effect on the Bank’s

business, financial condition and results of operations.

1.13 The Bank is subject to foreign currency risk and interest rate risk.

As a financial organisation, the Bank is exposed to exchange rate risk. Movements in foreign exchange rates

could affect the Bank’s business and results of operations. The decline or appreciation in the value of the

Peso against foreign currencies, in particular, the U.S. dollar may affect the ability of the Bank’s customers

to service debt obligations denominated in foreign currencies and, consequently, potentially increase NPLs

depending on the pace of currency adjustment, the nature of the clients’ enterprises, and degree to which

they are hedged. There can be no assurance that the Peso will not fluctuate further against other currencies

and that such fluctuations will not ultimately have an effect on the Bank. In addition, the foreign exchange

transactions of Philippine banks are subject to certain BSP regulations. Under BSP guidelines, the Bank is

required to provide a 100.0% foreign asset cover for all foreign currency liabilities in its foreign currency

deposit unit books. As of December 31, 2018, ₱164.7 billion and ₱160.2 billion of the Bank’s total assets

and total liabilities, respectively, are in the Bank’s FCDU books and denominated in foreign currencies,

primarily in U.S. dollars. These represent 24.4% and 27.5% of the Bank’s total assets and total liabilities,

respectively, as of December 31, 2018.

The Bank realises income from the margin between interest-bearing assets, such as investments and loans,

and on interest-bearing liabilities, such as deposits and borrowings. The business of the Bank is subject to

fluctuations in market interest rates as a result of mismatches in the re-pricing of assets and liabilities. These

interest rate fluctuations are neither predictable with certainty nor controllable and might have a material

adverse impact on the operations and financial condition of the Bank. In a rising interest rate environment, if

the Bank is not able to pass along higher interest costs to its customers in a timely manner, it might

negatively affect the Bank’s profitability. If such increased costs are passed along to customers, such

increased rates might make loans less attractive to potential customers and result in a reduction in customer

volume and hence operating revenues. In a decreasing interest rate environment, potential competitors might

find it easier to enter the markets in which the Bank operates and to benefit from wider spreads. As a result,

fluctuations in interest rates could have an adverse effect on the Bank’s margins and volumes and in turn

affect the Bank’s business, financial condition and results of operations.

22

1.14 An increase in interest rates could decrease the value of the Bank’s securities portfolio and

raise the Bank’s funding costs.

Domestic interest rates have remained manageable since 2009, with the monetary policy directed towards

stimulating the economy. At the Monetary Board meeting on February 7, 2019, the BSP maintained its key

policy rates at 4.25% for the overnight deposit facility and 5.25% for the overnight lending facility.

However, interest rates may increase in the future as price pressures begin building as a result of strong

economic growth and inflation pressures.

The Bank realises income from the margin between income earned on its interest-earning assets and interest

paid on its interest-bearing liabilities. As some of its assets and liabilities are re-priced at different times, the

Bank is vulnerable to fluctuations in market interest rates and any changes in the liquidity position of the

Philippine market. As a result, volatility in interest rates could have a material adverse effect on the Bank’s

financial position, liquidity and results of operations.

An increase in interest rates could lead to a decline in the value of securities in the Bank’s portfolio and the

Bank’s ability to earn excess trading gains as revenue. A sustained increase in interest rates will also raise

the Bank’s funding costs without a proportionate increase in loan demand (if at all). Rising interest rates will

therefore require the Bank to re-balance its assets and liabilities in order to minimise the risk of potential

mismatches and maintain its profitability. In addition, rising interest rate levels may adversely affect the

economy in the Philippines and the financial position and repayment ability of its corporate and retail

borrowers, including holders of credit cards, which in turn may lead to a deterioration of the Bank’s credit

portfolio in addition to lower levels of liquidity in the system which may lead to an increase in the cost of

funding.

1.15 The Bank relies on certain key personnel and the loss of any such key personnel or the

inability to attract and retain them may negatively affect its business.

The Bank’s continued success depends upon, among other factors, the retention of its key management

executives and upon its ability to attract and retain other highly capable individuals. The Bank has leadership

development and retention programs, and a succession plan in place. This ensures that business continuity is

achieved even if key personnel are separated from employment with the Bank. These programs are regularly

reviewed by the Bank’s business centre heads and the Compensation and Remuneration Committee of the

Bank’s board of directors (the Board). The loss of the Bank’s key management, senior executives or an

inability to attract or retain other key individuals could hinder the Bank’s implementation of its strategies

which may adversely affect its business and financial condition.

1.16 The Bank’s business, reputation and prospects may be adversely affected if it is not able to

detect and prevent fraud or other misconduct on a timely basis.

The Bank is exposed to the risk that fraud and other misconduct committed by employees or outsiders could

occur. Such incidences may adversely affect banks and financial institutions more significantly than

companies in other industries due to the large amounts of cash that flow through their systems. Any

occurrence of such fraudulent events may damage the reputation of the Bank and may adversely affect its

business, financial condition, results of operations and prospects. In addition, failure on the part of the Bank

to prevent such fraudulent actions may result in administrative or other regulatory sanctions by the BSP or

other Government agencies, which may be in the form of fines, remedial measures, suspension or other

limitations placed on the Bank’s banking and other business activities.

The Bank has put in place various processes and structures to detect and prevent fraud and other misconduct

committed by the Bank’s employees or outsiders on a timely basis. However, there can be no assurance that

these processes and structures will detect and prevent fraud and other misconduct in a timely manner or at

all. Failure on the part of the Bank to prevent such fraudulent actions may result in administrative or other

23

regulatory sanctions by the BSP or other Government agencies, which may be in the form of suspension or

other limitations placed on the Bank’s banking and other business activities.

1.17 The Bank is involved in litigation, which could result in financial losses or harm its business.

The Bank is and may in the future be, implicated in lawsuits on an ongoing basis. Litigation could result in

substantial costs to, and a diversion of effort by, the Bank and/or subject the Bank to significant liabilities to

third parties. There can be no assurance that the results of such legal proceedings will not materially harm

the Bank’s business, reputation or standing in the marketplace or that the Bank will be able to recover any

losses incurred from third parties, regardless of whether the Bank is at fault. However, there can be no

assurance that (i) losses relating to litigation will not be incurred beyond the limits, or outside the coverage,

of the Bank’s insurance, or that any such losses would not have a material adverse effect on the results of the

Bank’s business, financial condition or results of operation, or (ii) provisions made for litigation related

losses will be sufficient to cover the Bank’s ultimate loss or expenditure.

1.18 The Bank’s past or current results may not be indicative of the Bank’s future performance.

The Bank’s results in the future are dependent upon many factors, including among other factors, the Bank’s

ability to implement its business strategies, economic growth in the Philippines and foreign markets,

performance of its loan portfolio, and fluctuation in interest rates and exchange rates. There can be no

assurance that the Bank will be profitable or will not incur operating losses in the future.

1.19 Losses in the Bank’s subsidiaries’ operations may affect the financial standing of the Bank.

As a universal bank, the Bank is authorised, subject to certain limits, to invest in allied and non-allied

undertakings and joint ventures.

A portion of the Bank’s earnings may be derived from dividends or may be otherwise affected by the

financial performance of its subsidiaries. For the years ended December 31, 2016, 2017 and 2018, the Bank

had derived equity income of ₱3.5 billion, ₱3.4 billion and ₱1.8 billion, respectively, from its subsidiaries.

Losses in these undertakings may affect the financial standing of the Bank and could have a material adverse

effect on the Bank’s financial condition.

Furthermore, certain financial institutions owned or controlled by the Bank are also subject to BSP audit, the

results of which may affect the banking licence of these subsidiaries, and consequently affect the cashflow to

the Bank in terms of dividends.

1.20 The Bank is subject to Philippine foreign ownership limitations.

Under the General Banking Law (Republic Act No. 8791) (the “General Banking Law”), as clarified by BSP

Circular No. 256, the aggregate voting stock in a domestic bank held by foreign individuals and non-bank

corporations must not exceed 40% of the outstanding voting stock of such bank. Although the aggregate

ceiling on the equity ownership in a domestic bank does not apply to Filipinos and domestic non-bank

corporations, their individual ownership is limited to only up to 40% of the voting stock. The percentage of

foreign-owned voting stock in a bank shall be determined by the citizenship of the individual stockholders in

that bank. The citizenship of the corporation which is a stockholder in a bank, shall follow the citizenship of

the controlling stockholders of the corporation, irrespective of the place of incorporation. Since the

aggregate foreign ownership in the Bank is limited to a maximum of 40% of its voting stock, the Bank

cannot allow the issuance or the transfer of its Common Shares to persons other than Philippine Nationals

and cannot record transfers in its books if such issuance or transfer would result in the Bank ceasing to be a

Philippine National for purposes of complying with the restrictions under the General Banking Law.

On July 15, 2014, Republic Act No. 10641, otherwise known as “An Act Allowing the Full Entry of Foreign

Banks in the Philippines,” amending for the purpose Republic Act No. 7721 (“RA 10641”) was enacted,

24

which provided that established, reputable and financially sound foreign banks may be authorized by the

Monetary Board to operate in the Philippine banking system through any of the following modes of entry:

(a) by acquiring, purchasing or owning up to 100% of the voting stock of an existing bank; (b) by investing

in up to 100% of the voting stock of a new banking subsidiary incorporated under the laws of the

Philippines; or (c) by establishing branches with full banking authority.

The passage of RA 10641, however, did not entirely eliminate the foreign ownership controls under the

General Banking Law. While qualified foreign banks may own up to 100% of voting shares in a universal

bank, other foreign individuals or non-bank corporations are still subject to the 40% foreign ownership

limitation under the General Banking Law. Further, the aggregate foreign-owned voting stock owned by

foreign individuals and non bank corporations shall not exceed 40% of the voting stock of the universal

bank.

In addition, the Philippine Constitution and related statutes limits ownership of land in the Philippines to

Filipino citizens or to corporations the outstanding capital stock of which is at least 60% owned by

Philippine Nationals. Republic Act No. 7042, as amended, otherwise known as the Foreign Investments Act

of 1991, and the Eleventh Regular Foreign Investment Negative List, provide that certain activities are

nationalized or partly nationalized, such that the operation and/or ownership thereof are wholly or partially

reserved for Filipinos. Under these regulations, and in accordance with the Philippine Constitution,

ownership of private lands is partly nationalized and thus, companies that own land may only have a

maximum of 40% foreign equity.

2. RISKS RELATING TO THE PHILIPPINE BANKING INDUSTRY

2.1 The Philippine banking industry is highly competitive and increasing competition may result

in declining margins in the Bank’s principal businesses.

The Bank is subject to significant levels of competition from many other Philippine banks and branches of

international banks, including competitors which, in some instances, have greater financial and other capital

resources, a greater market share and greater brand name recognition than the Bank. In addition, increased

competition may arise from, among others:

other large Philippine banks and financial institutions with significant presence in Metro

Manila and extensive country-wide branch networks;

full entry of foreign banks in the Philippines through any of the following modes allowed

under Republic Act No. 10641 (An Act Allowing the Full Entry of Foreign Banks in the

Philippines, Amending for the Purpose Republic Act No. 7721 (An Act Liberalising the

Entry and Scope of Operations of Foreign Banks in the Philippines)) (RA 10641): (a) the

acquisition, purchase or ownership of up to 100% of the voting stock of an existing bank; (b)

investment of up to 100% of the voting stock in a new banking subsidiary incorporated

under Philippine law; or (c) establishment of branches with full banking authority;

foreign banks, due to, among other things, standards which permitted large foreign banks to

open branch offices;

domestic banks entering into strategic alliances with foreign banks with significant financial

and management resources, and in some cases, resulting in excess capital that can be used as

leverage for asset growth and market share gains; and

continued consolidation and increased mergers and acquisitions in the banking sector

involving domestic and foreign banks, driven in part by the gradual removal of foreign

ownership restrictions.

25

The recent mergers and consolidations in the banking industry, as well as the liberalisation of foreign

ownership regulations in banks, have allowed the emergence of foreign and bigger local banks in the market.

For example, there has been increased foreign bank participation in the Philippines following the lifting of

the ban on granting of new licences by the Monetary Board of the BSP (the Monetary Board), as well as the

amendment of banking laws with respect to the limit on the number of foreign banks. This has led to

Sumitomo Mitsui Banking Corporation, Cathay United Bank, Industrial Bank of Korea, Shinhan Bank,

Yuanta Bank, United Overseas Bank, Hua Nan Commercial Bank, Bank of Taiwan, and Land Bank of

Taiwan being granted new licences, and also equity investments by Bank of Tokyo-Mitsubishi UFJ into

Security Bank, Cathay Life into Rizal Commercial Banking Corporation and Woori Bank into Wealth

Development Bank. In addition, the establishment of the ASEAN Economic Community in 2015 may

enhance cross-border flows of financial services (in addition to goods, capital, and manpower) among

member nations. This is expected to increase the level of competition both from Philippine banks and

branches of international banks. This may impact the Philippine banks’ operating margins, but this would

also enhance the industry’s overall efficiency, business opportunities, and service delivery. As of December

31, 2018, according to data from the BSP, there were a total of 45 domestic and foreign universal and

commercial banks operating in the Philippines.

There can be no assurance that the Bank will be able to compete effectively in the face of such increased

competition. Increased competition may make it difficult for the Bank to continue to increase the size of its

loan portfolio and deposit base, as well as cause increased pricing competition, which could have a material

adverse effect on its growth plans, margins, results of operations and financial condition.

2.2 The Bank may have to comply with strict regulations and guidelines issued by banking

regulatory authorities in the Philippines, including the BSP, the BIR, the SEC, the PSE and

international bodies including the FATF

The Bank is regulated and supervised principally by, and have reporting obligations to, the BSP. The Bank is

also subject to the banking, corporate, taxation and other regulations and laws in effect in the Philippines,

administered by agencies such as the Anti-Money Laundering Council (AMLC), the Bureau of Internal

Revenue (the BIR), the Philippine Securities and Exchange Commission (the Philippine SEC) and the

Philippine Stock Exchange (PSE) as well as international bodies such as the Financial Action Task Force

(the FATF).

In recent years, existing rules and regulations have been modified, new rules and regulations have been

enacted and reforms have been implemented which are intended to provide tighter control and added

transparency in the Philippine banking sector. These rules include new guidelines on the monitoring and

reporting of suspected money laundering activities as well as regulations governing the capital adequacy of

banks in the Philippines. Institutions that are subject to Anti-Money Laundering Act of 2001 (RA 9160), as

amended, are required to establish and record the identities of their clients based on official documents, and

update said client information no later than once every three years. In addition, all records of transactions are

required to be maintained and stored for a minimum of ten years from the date of a transaction. Records of

closed accounts must also be kept for five years after their closure.

The BSP has also ordered universal, commercial, and thrift banks to conduct real estate stress tests to

determine whether their capital is sufficient to absorb a severe shock. The real estate stress test limit (the

REST Limit) combines a macro-prudential overlay of a severe stress test scenario, the principle of loss

absorbency through minimum capital ratio thresholds, and heightened supervisory response. If a bank fails to

comply with the prescribed REST Limits, it shall be directed to explain why its exposures do not warrant

immediate remedial action. If the bank is unable to render a sufficient explanation, the bank shall be required

by the Monetary Board to submit an action plan to meet the REST Limits within a reasonable time frame.

The BIR has also promulgated rules on the submission of an Alphabetical List (Alphalist) of portfolio

investors receiving income payments and dividends. The BIR requires all withholding agents to submit an

Alphalist of payees’ income payments subject to creditable and withholding taxes and prohibit the lumping

26

into a single amount and account of various income payments and taxes withheld. The Supreme Court,

however, issued a temporary restraining order against the said BIR rule last September 9, 2014 with regards

to the lumping into a single amount.

In June 2016, the BSP implemented the interest rate corridor (IRC) which effectively narrowed the band

among the BSP’s key policy rates. The pricing benchmark, which used to be the special deposit account

prior to the implementation of the IRC, was replaced by the overnight deposit facility whose rate is currently

at 4.25%, and forms the lower band of the IRC. Meanwhile, the rate for the overnight lending facility

replaced the repurchase facility. The rate for the overnight lending facility, which forms the upper bound of

the IRC, is currently at 5.25%. The BSP likewise introduced the term deposit facility to serve as the main

tool for absorbing liquidity through weekly term deposit facility auctions, the frequency for which may be

changed depending on the BSP’s liquidity forecasts. According to the BSP, the changes from IRC are purely

operational in nature to allow it to conduct its monetary policy effectively.

In the event of any changes to existing guidelines or rules, or introduction of additional regulations, the Bank

will have to comply with the same and may incur substantial compliance and monitoring costs. The Bank’s

failure to comply with current or future regulations and guidelines issued by regulatory authorities in the

Philippines and in other relevant jurisdictions could have a material adverse effect on the Bank’s business,

financial condition and results of operations. Such failure to comply could also result in the imposition of

administrative sanctions or filing of criminal charges against the Bank and its employees responsible for

violations.

2.3 Increased enforcement by the Government of regulations relating to priority lending for

agrarian reform and the agricultural sector could adversely affect the Group’s business,

financial condition and results of operations.

The Government has imposed a lending policy requiring Philippine banks to extend certain loan amounts to

the agriculture and fisheries sector and agrarian reform beneficiaries of the country. Failure to meet the

specified level of loans may result in penalties being assessed against a non- or under-compliant bank. As

of December 31, 2018, the requirement applicable to the Group was ₱42.0 billion. Because the Group is

unable to generate sufficient exposure to agrarian reform and agricultural sector due to its prudent credit and

risk management policies, the Group has paid penalties in the past and may continue to do so in the future.

There can be no assurance that the Government will not increase its penalties for non- or undercompliance or

force banks to lend in accordance with the policy.

2.4 The Bank may experience difficulties due to the implementation of Basel III in the Philippines.

On January 15, 2009, the BSP issued Circular No. 639 covering the Internal Capital Adequacy Assessment

Process (ICAAP) which supplements the BSP’s risk-based capital adequacy framework under BSP Circular

No. 538. The BSP requires banks to have in place an ICAAP that (i) takes into account not just the credit,

market and operational risks but also all other material risks to which a bank is exposed (such as interest rate

risk in the banking book, liquidity risk, compliance risk, strategic/business risk and reputation risk); (ii)

covers more precise assessments and quantification of certain risks (i.e. credit concentration risk); and (iii)

evaluates the quality of capital. On January 10, 2011, the BSP issued BSP Circular No. 709, which aligns

with the Basel Committee on Banking Supervision on the eligibility criteria on Additional Group Concern

capital and Tier 2 capital to determine eligibility of capital instruments to be issued by Philippine

banks/quasi-banks as Hybrid Tier 1 capital and Lower Tier 2 capital. Moreover, on March 25, 2011, the BSP

issued Circular No. 716, which amends the definition of qualifying capital instruments under the risk-based

capital adequacy framework for Philippine banks/quasi-banks. Under BSP Circular No. 716, among the

conditions to be eligible to be qualified as a Lower Tier 2 capital is the submission of a written external legal

opinion that the requirements enumerated for Lower Tier 2 capital, including subordination features, have

been met. Further, in January 2013, the BSP issued Circular No. 781 as the Basel III Implementing

Guidelines on Minimum Capital Requirements, which took effect in January 2014. The guidelines include

the following highlights:

27

adoption of a new categorisation of the capital base;

adoption of an eligibility criteria for each capital category that is not yet included in Circular

No. 709;

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

keeping the minimum CAR at 10%, and prescribing: (i) a minimum common equity Tier 1

(CET1) ratio of 6.0%, (ii) a minimum Tier 1 CAR ratio of 7.5%, and (iii) an additional

capital conservation buffer (CCB) of 2.5%;

revaluation of certain available for sale (AFS) securities and of impairments that could arise

from trading losses;

if the Bank is classified as “systemically important”, it may be required to hold additional

capital reserves;

by January 1, 2014, rendering ineligible existing capital instruments as of December 31,

2010 that do not meet the eligibility criteria for capital instruments under the revised capital

framework;

by January 1, 2016, rendering ineligible regulatory capital instruments issued under

Circulars No. 709 and 716 before the revised capital framework became effective; and

subjecting covered banks and quasi-banks to the enhanced disclosure requirements

pertaining to regulatory capital.

On October 29, 2014, the BSP issued Circular No. 856, or the “Implementing Guidelines on the Framework

for Dealing with Domestic Systemically Important Banks (D-SIBs) under Basel III” to address systemic risk

and interconnectedness by identifying banks which are deemed systemically important within the domestic

banking industry. Banks that will be identified as D-SIBs shall be required to have higher loss absorbency,

on top of the minimum CET1 capital and CCB. Identified D-SIBs will need to put up an additional 1.5% to

3.5% CET1 depending on their classification. Compliance with this requirement was phased-in starting

January 1, 2017, with full compliance required by January 1, 2019.

On March 10, 2016, the BSP issued Circular No. 905, or the “Implementation of Basel III Framework on

Liquidity Standards — Liquidity Coverage Ratio (LCR) and Disclosure Standards”. Furthermore, banks face

new liquidity requirements under Basel III’s new liquidity framework, namely, the LCR and the net stable

funding ratio (NSFR). The LCR requires banks to hold sufficient level of high-quality liquid assets to enable

them to withstand a 30 day-liquidity stress scenario. Beginning on January 1, 2018, the LCR threshold that

banks will be required to meet will be 90%, which was increased to 100% beginning on January 1, 2019.

During the observation period prior to January 1, 2018, banks were required to submit quarterly LCR reports

for monitoring purposes.

On March 15, 2019, the BSP issued Circular No. 1035, which introduced certain amendments to the Basel

III LCR Framework and Minimum Liquidity Ratio Framework. BSP Circular No. 1035 (i) extended the

observation period of the minimum Basel III LCR requirement to December 31, 2019 for subsidiary banks

and quasi-banks of universal and commercial banks, (ii) adopted the 70% LCR floor for subsidiary banks

and quasi-banks during the observation period, and (iii) amended the formula for minimum liquidity ratio.

On January 26, 2017, the BSP issued Circular No. 943 which approved a one-year extension of the Basel III

Leverage Ratio monitoring period from December 31, 2016 to December 31, 2017, and set new deadlines for

the submission of the reporting and disclosure requirements. During the monitoring period, the BSP will

continue to assess the calibration and treatment of the components of the leverage ratio. Final guidelines will

28

be issued in view of the changes to the framework as well as migration from monitoring of the leverage ratio

to a Pillar 1 requirement starting January 1, 2018.

On January 22, 2018, the BSP issued BSP Circular No. 990 which approved the extension of the Basel III

Leverage Ratio monitoring period from December 31, 2017 to June 30, 2018, and set new deadlines for the

submission of the reporting and disclosure requirements. The monitoring of the leverage ratio has been

implemented as a Pillar 1 minimum requirement effective on July 1, 2018. The NSFR requires banks’ assets

and activities to be structurally funded with long-term and more stable funding sources.

On June 6, 2018, the BSP issued Circular No. 1007 in relation to the implementing guidelines on the

adoption of the Basel III Framework on Liquidity Standards – NSFR. The implementation of the minimum

NSFR shall be phased in to help ensure that the covered banks and quasi-banks can meet the standard

through reasonable measures without disrupting credit extension and financial market activities. Covered

banks and quasi-banks shall undergo an observation period from July 1, 2018 to December 31, 2018 before

the actual implementation of the minimum 100% NSFR in January 1, 2019 and thereafter. On March 15,

2019, the BSP issued Circular No. 1034, further extending the observation period for subsidiary banks/quasi-

banks of universal and commercial banks from July 1, 2018 to December 31, 2019 before the

implementation of the minimum 100% NSFR starting January 1, 2020.

The BSP has approved the Philippine Adoption of the Basel III Countercyclical Capital Buffer (CCB) under

Circular No. 1024 issued on December 6, 2018. A CCB sets as percent of risk-weighted assets shall be

required of banks, comprised of CET1 capital. The CCB is meant to ensure that banking sector capital

requirements take into account of the macrofinancial environment in which banks operate. The primary aim

of the countercyclical capital buffer regime is to use a buffer of capital to achieve the broader

macroprudential goal of protecting the banking sector from the build-up of systemic vulnerabilities.

These may result in an increase in the capital adequacy requirement of the Bank. Unless the Bank is able to

access the necessary amount of additional capital, any incremental increase in the capital requirement due to

the implementation of ICAAP and Basel III, may impact the Bank’s ability to grow its business, which could

materially and adversely affect the Bank’s business, financial condition and results of operations. There can

be no assurance that the Bank will be able to raise adequate additional capital in the future on terms

favourable to it or at all and comply with the requirements of Basel III as implemented by the BSP.

Whenever the capital accounts of a bank are deficient with respect to the prescribed risk-based CAR of 10%,

the Monetary Board, may impose monetary and non-monetary sanctions. The Monetary Board will also

prohibit the opening of new branches whenever a bank’s CAR falls below 12% on a non-consolidated and

consolidated basis. Furthermore, the Monetary Board will also prohibit the distribution of dividends

whenever a bank’s CET1 ratio and CAR falls below 8.5% and 10%, respectively. Such limitations or

restrictions imposed by the BSP’s implementation of Basel III could materially and adversely affect the

Bank’s business, financial condition and results of operations.

As of December 31, 2018, the Bank’s consolidated Tier 1 capital adequacy ratio/CET1 ratio and total

consolidated capital adequacy ratio were 12.7% and 15.2%, respectively.

On October 29, 2014, the BSP issued BSP Circular No. 855 regarding guidelines on sound credit risk

management practices, including the amendment on loan loss provisions on loans secured by real estate

mortgages. Under this regulation, loans may be considered secured by collateral to the extent the estimated

value of net proceeds at disposition of such collateral can be used without legal impediment to settle the

principal and accrued interest of such loan, provided that such collateral has an established market and a

sound valuation methodology. Under the new rules, the maximum collateral value for real estate collateral

shall be 60% of the value of such collateral, as appraised by an appraiser acceptable to the BSP. While this

maintains existing regulations already applicable to universal and commercial banks, the collateral value cap

will be particularly relevant in securing DOSRI transactions and in potentially accelerating the setting up of

allowable loan for losses in case a loan account gets distressed.

29

The BSP also clarified that the collateral cap on real estate mortgages is not the same as a loan-to-value ratio

limit. Under the current rules, the minimum borrower equity requirement remains a bank-determined policy

(which, according to the BSP, averages 20% under current industry practice). However, under the enhanced

guidelines of the BSP, the bank’s internal policy as to minimum borrower equity will be subject to closer

regulatory scrutiny as to whether the borrower equity requirement of a bank is prudent given the risk profile

of its target market.

Stricter lending and prudential regulations may reduce the lending appetite of the Bank or cause the Bank to

alter its credit risk management systems, which may adversely affect the Bank’s business, financial condition

and results of operations.

Although intended to strengthen banks’ capital positions and thwart potential asset bubbles, the new BSP and

Monetary Board regulations will add pressure to local banks to meet these additional capital adequacy

requirements, which may effectively create greater competition among local banks for deposits and temper

bank lending in the commercial property and home mortgage loan sectors given that banks’ ability to lend to

these sectors depends on their exposure to the sector and the capital levels they maintain. This may also lead

banks in the Philippines to conduct capital raising exercises. Through its compliance with these regulations,

the Bank’s business, financial position and results of operations may be adversely affected.

2.5 Any future changes in PFRS may affect the financial reporting of the Bank’s business.

PFRS continues to evolve, and certain newly promulgated standards and interpretations took effect

on January 1, 2018. PFRS 9, Financial Instruments replaced PAS 39, Financial Instruments: Recognition

and Measurement, and all previous versions of PFRS 9. The Bank early adopted the previous versions of

PFRS 9 (2009 and 2010 versions), relating to the classification and measurement of financial assets and

financial liabilities with a date of initial application of January 1, 2014. The revised standard, which took

effect on January 1, 2018, introduced new requirements for classification and measurement, impairment, and

hedge accounting. PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A

debt financial asset may, if the fair value option is not invoked, be subsequently measured at: (a) amortized

cost, if it is held within a business model that has the objective to hold the assets to collect the contractual

cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of

principal and interest on the outstanding principal; or (b) at fair value through other comprehensive income

(FVOCI), if the financial asset is held within a business model whose objective is achieved by both

collecting contractual cash flows and selling financial assets and its contractual terms give rise, on specified

dates, to cash flows that are solely payments of principal and interest on the outstanding principal. All other

debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets

are measured at fair value either through other comprehensive income or profit or loss. Equity financial

assets held for trading must be measured at fair value through profit or loss. For financial liabilities

measured using the fair value option, the amount of change in the fair value of a liability that is attributable

to changes in credit risk must be presented in other comprehensive income. The remainder of the change in

fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liability’s

credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss.

All other PAS 39 classification and measurement requirements for financial liabilities have been carried

forward into PFRS 9, including the embedded derivative separation rules and the criteria for using the fair

value option.

PFRS 9 also introduced a new expected loss impairment model that will require more timely recognition of

expected credit losses. Under the impairment approach in PFRS 9, it is no longer necessary for a credit

event to have occurred before credit losses are recognized. Instead, an entity always accounts for expected

credit losses, and changes in those expected credit losses. The amount of expected credit losses is updated at

each reporting date to reflect changes in credit risk since initial recognition and, consequently, more timely

information is provided about expected credit losses.

30

PFRS 9 also replaced the rules-based hedge accounting model of PAS 39 with a more principles-based

approach. Changes include replacing the rules-based hedge effectiveness test with an objectives-based test

that focuses on the economic relationship between the hedged item and the hedging instrument, and the

effect of credit risk on that economic relationship.

The Bank’s PFRS 9 classification model assists the Bank in categorizing its financial assets into amortized

cost, FVOCI and fair value through profit and loss. In addition, the standards assist the Bank in determining

its expected credit loss measurement and achieving a significant increase in credit risk determination, each of

which enables the Bank to estimate its expected credit loss for each of the three credit risk stages for

financial assets measured at amortized costs and FVOCI.

On July 26, 2018, the BSP also issued BSP Circular No. 1011, Series of 2018 setting out the Guidelines for

the Adoption of PFRS 9.

PFRS 15, Revenue from Contracts with Customers, supersedes PAS 11 Construction Contracts, PAS 18

Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless

those contracts are in the scope of other standards. The new standard establishes a five-step model to

account for revenue arising from contracts with customers. Under PFRS 15, revenue is recognized at an

amount that reflects the consideration to which an entity expects to be entitles in exchange for transferring

goods or services to a customer.

PFRS 16, Leases replaces the accounting requirements for leases under the old standard (PAS 17, Leases).

The new standard requires all leases to be reported on the balance sheet as assets and liabilities. PFRS 16

took effect on January 1, 2019. The early adoption of PFRS 16 by entities is allowed provided such entities

have also adopted PFRS 15. The Bank expects that the impact of the adoption of PFRS 15 is not significant

while PFRS 16 will result in the recognition of intangible asset representing the Group’s right-of-use assets

on its lease arrangements.

2.6 The Philippine banking sector may face another downturn, which could materially and

adversely affect the Bank.

The Philippine banking sector has in the past recovered from regional and global economic crises in 2009.

According to data published by the BSP as of December 31, 2018, past due ratios in the Philippine universal

and commercial banking system was at 1.8%, a decrease from the 3.0 to 5.0% range reported from 2009

to 2011. Further, the NPL coverage ratio in the Philippine universal and commercial banking system

reached 130.7% as of December 31, 2018, an increase from the 96.0 to 126.0% range reported from 2009

to 2011. The Bank has realised some benefits from this recovery, including increased liquidity levels in the

Philippine market, lower levels of interest rates as well as lower levels of NPLs. However, there is no

guarantee that the Philippine banking industry will not face significant financial and operating challenges.

These may include, among other things, a sharp increase in the level of NPLs, variations of asset and credit

quality, significant compression in bank net interest margins, low loan growth and potential or actual under-

capitalisation of the banking system. Fresh disruptions in the Philippine financial sector, or general economic

conditions in the Philippines, may cause the Philippine banking sector in general, and the Bank in particular,

to experience similar problems to those faced in the past, including substantial increases in NPLs, problems

meeting capital adequacy requirements, liquidity problems and other challenges.

2.7 The sovereign credit ratings of the Philippines may adversely affect the Bank’s business.

The sovereign credit ratings of the Philippines directly affect companies resident and domiciled in the

Philippines as international credit rating agencies issue credit ratings by reference to that of the sovereign. In

2013, the Philippines earned investment grade status from all three major credit ratings agencies — Fitch

(BBB-), Standard and Poor’s (BBB-) and Moody’s (Baa3). In 2014, S&P and Moody’s upgraded their

ratings to “BBB” and “Baa2” in May and December, respectively, with both agencies affirming these ratings

in April and June 2017, respectively. In December 2017, Fitch lifted its sovereign rating to “BBB” from

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“BBB-”. All ratings are a notch above investment grade and the highest that the Philippines have received so

far from any credit ratings agency.

International credit rating agencies issue credit ratings for companies with reference to the country in which

they are resident. As a result, the sovereign credit ratings of the Philippines directly affect companies that are

resident in the Philippines, such as the Bank. There is no assurance that Fitch, Moody’s, S&P or other

international credit rating agencies will not downgrade the credit rating of the Philippines in the future. Any

such downgrade could have a material adverse effect on the liquidity in the Philippine financial markets and

the ability of the Government and Philippine companies, including the Bank, to raise additional financing,

and will increase borrowing and other costs.

2.8 The Philippine banking industry is generally exposed to higher credit risks and greater market

volatility than that of more developed countries.

Philippine banks are subject to the credit risk that Philippine borrowers may not make timely payment of

principal and interest on loans and, in particular that, upon such failure to pay, Philippine banks may not be

able to enforce the security interest they may have. The credit risk of Philippine borrowers is, in many

instances, higher than that of borrowers in developed countries due to the greater uncertainty associated with

the Philippine regulatory, political, legal and economic environment, the vulnerability of the Philippine

economy in general to a severe global downturn as it impacts on its export sector, employment in export-

oriented industries, and overseas Filipino workers’ (OFW) remittances, the large foreign debt of the

Government and the corporate sector, relative to the gross domestic product of the Philippines, and the

volatility of interest rates and U.S. dollar/Peso exchange rates.

Higher credit risk has a material adverse effect on the quality of loan portfolios and exposes Philippine

banks, including the Bank, to more potential losses and higher risks than banks in more developed countries.

In addition, higher credit risk generally increases the cost of capital for Philippine banks compared to their

international counterparts. Such losses and higher capital costs arising from this higher credit risk may have

a material adverse effect on the Bank’s financial condition, liquidity and results of operations. According to

data from the BSP, the average gross NPL ratios exclusive of interbank loans of the Philippine universal and

commercial banking system were 1.4%, 1.4% and 1.3%, as of the years ended December 31, 2016, 2017 and

2018, respectively.

2.9 Philippine banks’ ability to assess, monitor and manage risks inherent in its business differs

from the standards of its counterparts in more developed countries.

Philippine banks are exposed to a variety of risks, including credit risk, market risk, portfolio risk, foreign

exchange risk, and operational risk. The effectiveness of their risk management is limited by the quality and

timeliness of available data in the Philippines in relation to factors such as the credit history of proposed

borrowers and the loan exposure borrowers have with other financial institutions. In addition, the

information generated by different groups within each bank, including the Bank, may be incomplete or

obsolete. The Bank may have developed credit screening standards in response to such inadequacies in

quality of credit information that are different from, or inferior to, the standards used by its international

competitors. As a result, the Bank’s ability to assess, monitor and manage risks inherent in its business

would not meet the standards of its counterparts in more developed countries. If the Bank is unable to

acquire or develop in the future the technology, skills set and systems available to meet such standards, it

could have a material adverse effect on the Bank’s ability to manage these risks and on the Bank’s financial

condition, liquidity and results of operations.

However, BSP’s early adoption of Basel III on January 1, 2014 a year ahead of the Basel Committee on

Banking Supervision’s recommended implementation timeline as well as the imposition of higher limits and

stricter minimum requirements for regulatory capital relative to international standards, with no transition

period, are seen as efforts to boost the Philippine banking industry’s resiliency and enhance its ability to

absorb risks. In addition, the BSP has been prudent and conservative in setting the minimum reserve

32

requirement compared to other regulators in the region, with a minimum reserve requirement for Peso

deposit balances of 18% to be held with the BSP (compared to, for example, Indonesia, where the minimum

local currency reserve requirement is 6.5% of local currency deposit balances). Any future changes in

Philippine taxation may materially and adversely affect the Bank’s business, financial condition and results

of operations.

The Bank is subject to the taxation laws and regulations in effect in the Philippines. In the event of any

changes to existing laws, the Bank’s business, financial condition and results of operations could be

materially affected. On December 19, 2017, President Rodrigo Duterte signed into law package 1 of the Tax

Reform for Acceleration and Inclusion (TRAIN) Law or Republic Act No. 10963. Effective January 1, 2018,

the law amends the National Internal Revenue Code of 1997 on individual income taxation, documentary

stamp tax (DST), among others.

If the Bank is unable to comply with existing and new rules and regulations applicable to it, it could incur

penalties and its business reputation may suffer, which could have a material adverse effect on its business,

financial position and results of operations.

2.10 Uncertainties and instability in global market conditions could adversely affect the Bank’s

business, financial condition, and results of operations.

Global markets have experienced, and may continue to experience, significant dislocation and turbulence

due to economic and political instability in several areas of the world. These ongoing global economic

conditions have led to significant volatility in capital markets around the world, including Asia, and further

volatility could significantly impact investor risk appetite and capital flows into emerging markets including

the Philippines, as well as the trading price of the Bonds.

In 2015, the effect of the devaluation of the Renminbi by the PRC, coupled with the slowing of economic

growth in various regions around the world, has had an impact on the prospective economic growth in the

global financial markets and downward pressure on equity prices. Moreover, the continued appreciation of

the U.S. dollar relative to a number of emerging economy currencies (including the Peso) in 2016 resulted in

capital outflows from these economies. Meanwhile, the three-year bailout granted by the Eurozone leaders in

August 2015 provides Greece a temporary relief from its liquidity pressure, but concerns remain on whether

the Greek government will be successful in implementing the proposed austerity measures and necessary

economic reforms to satisfy the conditions of the bailout and its creditors.

Further, economic conditions in some Eurozone sovereign states could possibly lead to these member states

re-negotiating or restructuring their existing debt obligations, which may lead to a material change in the

current political and/or economic framework of the European Monetary Union. One potential change that

may result from the crisis is an end to the single-currency system that prevails across much of Europe, with

some or all European member states reverting to currency forms used prior to adoption of the euro. The

crisis could also lead to the restructuring or breakup of other political and monetary institutions within the

European Union. The risk may have been exacerbated by the referendum on membership of the European

Union, held in the United Kingdom on June 23, 2016, where the United Kingdom public voted by a majority

in favour of the British government taking the necessary action for the United Kingdom to leave the

European Union. If the United Kingdom or certain states within the Eurozone were to exit the European

Union, or following the occurrence of such other reform as contemplated herein, such countries may not be

able to meet their existing debt obligations or may default on these obligations, which could have a ripple

effect across sovereign states and the private sector in Europe and the rest of the world and possibly lead to a

global economic crisis. Any changes to the euro currency could also cause substantial currency

readjustments across Europe and other parts of the world, further exacerbating the credit crisis. These events

and uncertainties could adversely impact the Bank’s business, financial condition and results of operations.

The broad ramifications of “Brexit” to the United Kingdom, the European Union and the global economy

have yet to unravel, casting uncertainty to global prospects and possible volatility in financial markets. In

33

addition, the uneven and divergent conditions across major economies and the resulting desynchronisation in

policy environment persist, with the U.S. continuing to show firmer signs of economic growth and possible

monetary tightening in the horizon, while Japan and the Eurozone require more economic stimulus and

unconventional monetary measures (e.g., negative interest rates) to revive their economies. Likewise putting

a downside risk to the global outlook are the protracted economic slowdown in China, the ongoing

geopolitical crises that include among others, Syrian civil war and terrorist acts committed by ISIS.

This year, the global economy growth is at risk due to recent events such as the global trade tensions

resulting from US trade policies, the United Kingdom’s exit from the European Union, and slowdown in

China’s conomic growth. Global capital and equity markets also remain volatile due to these factors. Further

volatility is expected if the United States’ Federal Reserve decides to accelerate the rise in its policy rates

this year.

There can be no assurance that the uncertainties affecting global markets will not negatively impact credit

markets in Asia, including in the Philippines. These developments may adversely affect trade volumes with

potentially negative effects on the Philippines. The success of the Bank’s business is highly dependent upon

its ability to maintain certain minimum liquidity levels, and any rise in market interest rates could materially

and adversely affect the Bank’s liquidity levels and force it to reduce or cease its offering of certain banking

and other financial services.

3. RISKS RELATING TO THE PHILIPPINES

3.1 Volatility in the value of the Peso against the U.S. dollar and other currencies as well as in the

global financial and capital markets could adversely affect the Bank’s businesses.

The Philippine economy has experienced volatility in the value of the Peso as well as limitations to the

availability of foreign exchange. In July 1997, the BSP announced that the Peso can be traded and valued

freely on the market. As a result, the value of the Peso underwent significant fluctuations between July 1997

and December 2004 and the Peso declined from approximately ₱29.00 to U.S.$1.00 in July 1997 to ₱56.18

to U.S.$1.00 by December 2004.

While the value of the Peso has recovered since 2010, its valuation may be adversely affected by certain

events and circumstances such as the strengthening of the U.S. economy, the rise of the interest rates in the

U.S., global trade tensions, and other events affecting the global markets or the Philippines, causing investors

to move their investment portfolios from the riskier emerging markets such as the Philippines. Consequently,

an outflow of funds and capital from the Philippines may occur and may result in increasing volatility in the

value of the Peso against the U.S. Dollar and other currencies. As of December 31, 2018, according to

Bankers Association of the Philippines data, the Peso has depreciated ₱52.58 per US$1.00 from ₱49.93 per

U.S.$1.00 at the end of 2017.

3.2 All of the Bank’s operations and assets are based in the Philippines and, therefore, a slowdown

in economic growth in the Philippines could materially and adversely affect the Bank’s

business, financial position and results of operations.

All of the Bank’s business activities and assets are based in the Philippines, which exposes the Bank to risks

associated with the country, including the performance of the Philippine economy. Historically, the Bank has

derived substantially all of its revenues and operating profits from the Philippines and, as such, their

businesses are highly dependent on the state of the Philippine economy. Demand for banking services is

directly related to the strength of the Philippine economy (including its overall growth and income levels),

the overall levels of business activity in the Philippines as well as the amount of remittances received from

OFWs and overseas Filipinos. Factors that may adversely affect the Philippine economy include:

decreases in business, industrial, manufacturing or financial activities in the Philippines, the

Southeast Asian region or globally;

34

scarcity of credit or other financing, resulting in lower demand for products and services

provided by companies in the Philippines, the Southeast Asian region or globally;

exchange rate fluctuations and foreign exchange controls;

downgrade in the long-term foreign and local currency sovereign credit ratings of the

Philippines or the related outlook for such ratings;

rising inflation or increases in interest rates;

levels of employment, consumer confidence and income;

changes in the Government’s fiscal and regulatory policies;

Government budget deficits;

adverse trends in the current accounts and balance of payments of the Philippine economy;

re-emergence of Middle East Respiratory Syndrome-Corona virus (MERS-Cov), SARS,

avian influenza (commonly known as bird flu), or H1N1 (commonly known as swine flu), or

the emergence of another similar disease (such as Zika) in the Philippines or in other

countries in Southeast Asia;

natural disasters, including but not limited to tsunamis, typhoons, earthquakes, fires, floods

and similar events;

political instability, terrorism or military conflict in the Philippines, other countries in the

region or globally; and

other regulatory, social, political or economic developments in or affecting the Philippines.

There can be no assurance that the Philippines will maintain strong economic fundamentals in the future.

Changes in the conditions of the Philippine economy could materially and adversely affect the Bank’s

business, financial condition and results of operations.

3.3 Political instability in the Philippines could destabilise the country and may have a negative

effect on the Bank’s businesses.

The Philippines has from time to time experienced political and social instability. The Philippine

Constitution provides that, in times of national emergency, when the public interest so requires, the

Government may take over and direct the operation of any privately owned public utility or business. In the

last few years, there were instances of political instability, including public and military protests.

On March 27, 2014, the Government and the Moro Islamic Liberation Front (MILF) signed a peace

agreement, the Comprehensive Agreement on Bangsamoro. On September 10, 2014, the draft of the

Bangsamoro Basic Law (BBL) was submitted by then President Aquino to Congress. The BBL is a draft law

intended to establish the Bangsamoro political entity in the Philippines and provide for its basic structure of

government, which will replace the existing Autonomous Region in Muslim Mindanao. Following the

Mamasapano incident where high-profile terrorists clashed with armed members of the Bangsamoro Islamic

Freedom Fighters and MILF leading to the deaths of members of the Special Action Force of the Philippine

National Police, MILF, the Bangsamoro Islamic Freedom Fighters, and several civilians, the Congress

stalled deliberations on the BBL. The Board of Inquiry on the Mamasapano incident and the Senate released

their reports on the Mamasapano incident. On March 27, 2015, former President Aquino named a Peace

Council consisting of five original members to study the draft BBL. 17 co-convenors were later named as

35

part of the Peace Council. The Peace Council examined the draft law and its constitutionality and social

impact. The Peace Council Members testified before the House of Representatives and the Senate, and

submitted their report, which endorses the draft BBL but with some proposed amendments. On the 13th and

14th of May 2015, the Senate conducted public hearings on the BBL in Zamboanga and Jolo, Sulu, with the

Zamboanga City government and sultanate of Sulu opposing their inclusion in the proposed Bangsamoro

entity. On June 6, 2017, the Bangsamoro Transition Commission approved the final draft of the BBL. The

final draft was submitted to President Rodrigo Duterte in the presence of Congress on July 17, 2017. On

September 20, 2017, President Duterte gave verbal commitments to certify as urgent the BBL in order to

facilitate the immediate passage of the bill. On May 30, 2018 and May 31, 2018, the House of

Representatives and the Senate, respectively, approved their final version of the bill. Representatives from

the two chambers of Congress met for the bicameral conference committee during recess to iron out

differences in their versions of the BBL in meetings from July 9 to July 13, 2018. On July 27, 2018,

President Duterte signed Republic Act No. 11054, approving the BBL, which was renamed the “Bangsamoro

Organic Law” (BOL). The Bangsamoro plebiscite was held on January 21, 2019, and the Bangsamoro

Organic Law was ratified. Further to said plebiscite, the people of the Autonomous Region in Muslim

Mindanao (ARMM) voted to ratify the law creating a new Bangsamoro region also known as the

Bangsamoro Autonomous Region in Muslim Mindanao which will replace the ARMM. The next step is for

President Duterte to appoint the chief minister and officials who will form the Bangsamoro Transition

Authority.

The Philippine Presidential elections were held on May 9, 2016, and on June 30, 2016, President Rodrigo

Duterte assumed the presidency with a mandate to advance his “Ten-Point Socio-Economic Agenda”

focusing on policy continuity, tax reform, infrastructure spending, and countryside development, among

others. The Duterte government has initiated efforts to build peace with communist rebels and other

separatists through continuing talks with these groups. The shift to the federal-parliamentary form of

government is likewise targeted to be achieved in two years.

Since assuming his post, President Duterte has waged a supposed all-out war against illegal drugs. Led by

the Philippine National Police, the Government has continued to extensively pursue thousands of drug

suspects all over the country. As at January 31, 2017, police data show that there have been 43,593 police

operations conducted; 53,025 drug personalities arrested; 7,069,095 houses visited; and a total of 1,179,462

suspects have surrendered. The drug war, however, has been heavily criticized, both domestically and

internationally, for having resulted in a spate of killings. It was reported that at least 4,729 suspects have

been killed in police anti-drug operations as of May 2018. Human rights organizations, however, estimate

the actual number to be approximately 20,000. Philippine National Police documents also reveal that since

the drug war started on July 1, 2016 and up to June 11, 2018, there have been 23,518 Homicide Cases Under

Investigation (HCUI) recorded, which is equivalent to an average of 33 killings per day. Church leaders and

many civil society organizations have called for an end to the drug war but the extensive police drug

operations continue to this date.

On June 29, 2016, son of former dictator Ferdinand E. Marcos and defeated vice-presidential candidate

Ferdinand Marcos, Jr., filed an election protest against the election of Vice President Leni Robredo. The

recount of ballots for the electoral protest began on March 19, 2018 and it is uncertain when the results of

such recount will come out. Notably, however, President Duterte has publicly stated that if Marcos wins his

election case against Robredo, he will likely step down as President to pave the way for a Marcos

Presidency.

In March 2018, following President Duterte’s highly publicized calls for then Chief Justice Maria Lourdes

Sereno’s ouster, the Committee on Justice of the Philippines House of Representatives approved six articles

of impeachment against Sereno on the basis of a complaint filed by a known Duterte ally. In an

unprecedented move, however, on May 11, 2018, the Supreme Court of the Philippines en banc voted 8-6

and ousted Chief Justice Maria Lourdes Sereno via a quo warranto petition on the basis of an allegedly

invalid appointment. The ouster was labelled as political persecution and was heavily marred by controversy

as it was not coursed through the constitutional process of impeachment.

36

There can be no assurance that the current administration will continue to implement social and economic

policies favoured by the previous administration. Major deviation from the policies of the previous

administration or fundamental change of direction, including with respect to Philippine foreign policy, may

lead to an increase in political or social uncertainty and instability. The President’s unorthodox and radical

methods may also raise risks of social and political unrest. Any potential instability could have an adverse

effect on the Philippine economy, which may impact the Bank’s businesses, prospects, financial condition

and results of operations.

Further, the Philippines will hold its national elections for twelve seats in the Senate, all the seats in the

House of Representatives and local government officials on 13 May 2019. There can be no assurance that the

elected officials will continue to implement the economic, development and regulatory policies of their

predecessors, including those policies that may have an effect on the Bank’s assets and operations. In

addition, there can be no assurance that acts of election-related or other political violence will not occur in

the upcoming elections, and any such events could negatively impact the Philippine economy. The upcoming

elections may lead to an increase in political or social uncertainty and instability.

3.4 Acts of terrorism could destabilise the country and could have a material adverse effect on the

Bank’s businesses, financial condition and results of operation.

The Philippines has been subject to a number of terrorist attacks since 2000. In recent years, the Philippine

army has also been in conflict with the Abu Sayyaf organisation, which has ties to the al-Qaeda terrorist

network, and has been identified as being responsible for certain kidnapping incidents and other terrorist

activities particularly in the southern part of the Philippines. In September 2015, Canadians John Ridsdel and

Robert Hall, Norwegian Kjartan Sekkingstad and Filipina Marites Flor were kidnapped from a tourist resort

on Samal Island in southern Philippines by the Abu Sayyaf which demanded ransom for the hostages’

release. Hall and Ridsdel were later beheaded on separate occasions in April and June 2016, respectively,

after the ransom demands were not allegedly met. The fate of Sekkingstad and Flor is still unknown. After

almost a year in captivity, Sekkingstad and Flor were finally released. In September 2016, the Abu Sayaff

abducted Jurgen Gustav Kantner and killed his wife while the couple were sailing off the waters of the

southern Philippines. Recently, Kantner was beheaded in February 2017, after ransom demands were not

allegedly met. An increase in the frequency, severity or geographic reach of these terrorist acts could

destabilise the Philippines, and adversely affect the country’s economy.

Moreover, there were isolated bombings in the Philippines in recent years, mainly in regions in the southern

part of the Philippines, such as the province of Maguindanao. Although no one has claimed responsibility for

these attacks, it is believed that the attacks are the work of various separatist groups, possibly including the

Abu Sayyaf organisation. An increase in the frequency, severity or geographic reach of these terrorist acts

could destabilise the Philippines and adversely affect the country’s economy.

The Government and the Armed Forces of the Philippines have clashed with members of several separatist

groups seeking greater autonomy, including the MILF, the Moro National Liberation Front and the New

People’s Army.

In January 2015, a clash took place in Mamasapano in Maguindanao province between the SAF of the

Philippine National Police and the Bangsamoro Islamic Freedom Fighters and the MILF, which led to the

deaths of 44 members of the Special Action Force of the Philippine National Police, 18 from the MILF, five

from the Bangsamoro Islamic Freedom Fighters, and several civilians, including Zulkifli Abdhir, a

Malaysian national included in the U.S. Federal Bureau of Investigation’s most wanted terrorists.

On September 2, 2016, a bombing that killed 15 and injured 71 took place in Davao City, Mindanao. It is

believed that the Abu Sayyaf organisation and/or their allies are responsible for the bombing.

37

On May 23, 2017, a terrorist group led by the Maute group, which pledged allegiance to the Islamic State of

Iraq and the Levant, captured parts of Marawi City in Lanao del Sur to allegedly establish an Islamic State

caliphate in Mindanao. In response, President Duterte issued Proclamation No. 216 declaring martial law and

suspended the privilege of writ of habeas corpus in Mindanao, allowing warrantless arrests for those

connected with the crisis. The Congress has granted the request of President Duterte to extend martial law in

Mindanao until December 31, 2017. On October 17, 2017, President Duterte declared the liberation of

Marawi City from terrorists and the beginning of the rehabilitation of Marawi City. As of October 30, 2017,

more than 1,000 people including at least 165 soldiers, 919 Maute group fighters, and 47 civilians have been

killed since fighting broke out. Currently, several fund raising activities are being held by local government

units to help rebuild Marawi City as well as aid families of the soldiers and policemen who were killed in the

campaign to retake Marawi City from the terrorists.

Similar attacks or conflicts between the Government and armed or terrorist groups could lead to further

injuries or deaths of civilians and police or military personnel, which could destabilise parts of the country

and adversely affect the country’s economy. An increase in the frequency, severity, or geographic reach of

terrorist acts could adversely affect the country’s economy. Any such destabilisation could cause interruption

to parts of the Bank’s businesses and materially and adversely affect its financial conditions, results of

operations and prospects. An increase in the frequency, severity or geographic reach of terrorist acts could

adversely affect the country’s economy.

3.5 The proposed amendment of the Philippine Constitution, advocated by the Duterte

Administration, has caused, and may continue to cause, political unrest which could adversely

affect the Bank's financial condition, results of operations, and cash flows.

Despite constitutional reform being a divisive issue in the Philippines, the Duterte Administration has

considered it a legislative priority to amend the Philippine Constitution primarily to change the form of

Philippine government from a unitary one to a federal one (Charter Change). The shift to a federal form of

government was among President Duterte's key promises during his election campaign in 2016. President

Duterte believes that the shift would promote peace most especially in conflict-torn Mindanao, curb poverty

nationwide, and empower local government units in the Philippines.

The House of Representatives has already taken the initial steps toward the establishment of a Philippine

federal structure of government. On January 16, 2018, the House of Representatives passed Joint Resolution

No. 9, proposing that both the Senate and the House of Representatives transform into a Constitutional

Assembly with the authority to amend the Constitution. On January 17, 2018, the subcommittee on

constitutional amendments of the House of Representatives presented its proposed amendments to political

provisions of the current Constitution, including the establishment of a Federal Republic divided into five

states: Luzon, Metro Manila, Visayas, Bangsamoro, and Mindanao. Each state, under the said proposal,

would have a unicameral state assembly with legislative powers and a premiere with executive powers. The

subcommittee likewise proposed to establish a parliament with a 300-member Federal Assembly as national

legislative department and a Senate as the regional legislative body. Meanwhile, the President would remain

as head of state under the proposal and would have a term of five years with one re-election, whereas a

Prime Minister would be constituted as the head of the Philippine government, and would be elected by

members of the Philippine parliament.

With respect to proposed amendments to economic provisions of the current Constitution, the House of

Representatives subcommittee also proposed to delete certain provisions in the current Constitution

providing foreign nationality restrictions, particularly in the following areas: exploitation, development and

utilization of natural resources, ownership of alienable lands, franchise on public utilities, practice of

profession, ownership of educational institutions, mass media, and advertising. Business groups in the

Philippines believe that such amendments will enable the Government to achieve its goal of sustainable and

inclusive economic growth, and that an increase in foreign investments would create more job opportunities

for Filipinos.

38

The Speaker of the House of Representatives has posited that the House of Representatives alone may

proceed to amend the Constitution even without the concurrence of the Senate, but senators insist that the

lower house of Congress must wait for Senate concurrence to formally begin proposing amendments to the

Constitution. The impasse between the two chambers has resulted to a crisis of government administration,

causing conflicts among different political groups. In addition, while President Duterte has stated that he

wishes to step down from office at the end of his six-year term in 2022, critics believe that Charter Change

would pave the way for Duterte to perpetuate his political power and begin an authoritarian regime over the

archipelago.

Due to the Bank’s business being subject to extensive regulation from the Government and dependence on

economic stability, the potential for instability and unrest may have a material adverse effect on the Bank

and its financial condition, results of operations, and prospects.

3.6 Public health epidemics or outbreaks of diseases could have an adverse effect on economic

activity in the Philippines, and could materially and adversely affect the Bank’s business,

financial condition and results of operations.

In April 2009, an outbreak of the H1N1 virus, commonly referred to as “swine flu,” occurred in Mexico and

spread to other countries, including the Philippines. In August 2014, the World Health Organisation declared

the Ebola outbreak that originated in West Africa as an international health emergency in view of the rising

death toll due to the disease. While Ebola-free, the Philippines, however, remains vulnerable to exposure and

spread of the disease for the following reasons: a) the considerable number of OFWs in the Ebola-hit West

African countries; b) the impact of international travel which raises the probability of transmission; and c)

lack of the necessary infrastructure to contain the spread of the disease. In March 2016, the Director-General

of the World Health Organisation terminated the Public Health Emergency of International Concern in

regards to the Ebola virus disease outbreak.

In February 2015, a Filipina nurse who arrived from Saudi Arabia tested positive for MERS-CoV. She was

quarantined, received medical treatment and later discharged and cleared of the disease by the Department of

Health. All known contacts of the said nurse, including some passengers in the same flight that arrived from

Saudi Arabia, were also cleared of the infection, putting the Philippines free of an active case of the disease.

In March 2016, reports of an American woman who stayed in the Philippines for four weeks in January

2016, tested positive for the Zika virus upon returning home, indicating the local transmission of the disease

through the Aedes aegypti mosquito. In May 2016, a South Korean national was reported to have acquired

the infection while visiting the Philippines, following earlier reports of two other confirmed cases of the viral

infection in the country. All of the patients had recovered, indicating that the Zika viral infection acquired in

the country was self-limiting.

In August 2017, an outbreak of bird flu from a poultry farm in Central Luzon was confirmed, and the avian

influenza strain was later found to be transmissible to humans. In response to the outbreak, restrictions on the

transport and sale of birds and poultry products produced outside a seven-kilometre radius control area

surrounding the affected site were imposed. The Philippines has since been cleared of any human infection

of the avian influenza virus.

If the outbreak of the Ebola virus, MERS-CoV, Zika virus, bird flu virus or any public health epidemic

becomes widespread in the Philippines or increases in severity, it could have an adverse effect on economic

activity in the Philippines, and could materially and adversely affect the Bank’s business, financial condition

and results of operations.

39

3.7 Natural or other catastrophes, including severe weather conditions, may adversely affect the

Bank’s business, materially disrupt the Bank’s operations and result in losses not covered by

its insurance.

The Philippines has experienced a number of major natural catastrophes over the years, including typhoons,

droughts, volcanic eruptions and earthquakes. There can be no assurance that the occurrence of such natural

catastrophes will not materially disrupt the Bank’s operations. These factors, which are not within the Bank’s

control, could potentially have significant effects on the Bank’s branches and operations. While the Bank

carries insurance for certain catastrophic events, of types, in amounts and with deductibles that the Bank

believes are in line with general industry practices in the Philippines, there are losses for which the Bank

cannot obtain insurance at a reasonable cost or at all. The Bank also does not carry any business interruption

insurance. Should an uninsured loss or a loss in excess of insured limits occur, the Bank could lose all or a

portion of the capital invested in such business, as well as the anticipated future turnover, while remaining

liable for any costs or other financial obligations related to the business. Any material uninsured loss could

materially and adversely affect the Bank’s business, financial condition and results of operations.

3.8 Territorial disputes with China and a number of Southeast Asian countries may disrupt the

Philippine economy and business environment.

The Philippines, China and several Southeast Asian nations have been engaged in a series of long-standing

territorial disputes over certain islands in the West Philippine Sea, also known as the South China Sea. The

Philippines maintains that its claim over the disputed territories is supported by recognised principles of

international law consistent with the United Nations Convention on the Law of the Sea. The Philippines

made several efforts during the course of 2011 and 2012 to establish a framework for resolving these

disputes, calling for multilateral talks to delineate territorial rights and establish a framework for resolving

disputes.

Despite efforts to reach a compromise, a dispute arose between the Philippines and China over a group of

small islands and reefs known as the Scarborough Shoal. In April and May 2012, the Philippines and China

accused each other of deploying vessels to the shoal in an attempt to take control of the area, and both sides

unilaterally imposed fishing bans at the shoal later that year. These actions threatened to disrupt trade and

other ties between the two countries, including a temporary ban by China on Philippine banana imports, as

well as a temporary suspension of tours to the Philippines by Chinese travel agencies. Since July 2012,

Chinese vessels have reportedly turned away Philippine fishing boats attempting to enter the shoal, and the

Philippines has continued to protest China’s presence there. In January 2013, the Philippines sent notice to

the Chinese embassy in Manila that it intended to seek international arbitration to resolve the dispute under

the United Nations Convention on the Law of the Sea. China has rejected and returned the notice sent by the

Philippines to initial arbitral proceedings.

On May 9, 2013, a Philippine Coast Guard ship opened fire on a Taiwanese fisherman’s vessel in a disputed

exclusive economic zone between Taiwan and the Philippines, killing a 65-year old Taiwanese fisherman.

Although the Government maintained that the loss of life was unintended, Taiwan imposed economic

sanctions on the Philippines in the aftermath of the incident. Taiwan eventually lifted the sanctions in August

2013 after a formal apology was issued by the Government. However, the incident has raised tensions

between the two countries in recent months.

In September 2013, the Permanent Court of Arbitration in The Hague, Netherlands issued rules of procedure

and an initial timetable for the arbitration in which it will act as a registry of the proceedings. On July 12,

2016, the five-member Arbitral Tribunal at the Permanent Court of Arbitration in The Hague, Netherlands,

unanimously ruled in favour of the Philippines on the maritime dispute over the West Philippine Sea. The

Tribunal’s landmark decision contained several rulings, foremost of which invalidated China’s “nine-dash

line”, or China’s alleged historical boundary covering about 85% of the South China Sea, including 80% of

the Philippines exclusive economic zone in the West Philippine Sea. China rejected the ruling, saying that it

did not participate in the proceedings for the reason that the court had no jurisdiction over the case. Any such

40

impact from these disputes could adversely affect the Philippine economy, and materially and adversely

affect the Bank’s business, financial position and results of operations.

Should territorial disputes between the Philippines and other countries in the region continue or escalate

further, the Philippines and its economy may be disrupted and the Bank’s operations could be adversely

affected as a result. In particular, further disputes between the Philippines and other countries may lead to

reciprocal trade restrictions on the other’s imports or suspension of visa-free access and/or overseas Filipinos

permits. Any impact from these disputes could materially and adversely affect the Bank’s business, financial

condition and results of operations.

3.9 Corporate governance and disclosure standards in the Philippines may differ from those in

more developed countries.

There may be less publicly available information about Philippine public companies, such as the Bank, than

is regularly made available by public companies in the U.S. and other countries. As a result, Bondholders

may not have access to the same amount of information or have access to information in as timely of a

manner as may be the case for companies listed in the U.S. and many other jurisdictions. Furthermore,

although the Bank complies with the requirements of the BSP and the Philippine SEC with respect to

corporate governance standards, these standards may differ from those applicable in other jurisdictions. For

example, the Securities Regulation Code of the Philippines (Republic Act No. 8799) requires the Bank to

have at least two independent Directors or such number of independent Directors as is equal to 20.0% of the

Board, whichever is the lower number. The Bank currently has three independent directors. Many other

jurisdictions may require more independent directors.

Furthermore, corporate governance standards may be different for public companies listed on the Philippine

securities markets than for securities markets in developed countries. Rules and policies against self-dealing

and regarding the preservation of Bondholder interests may be less well-defined and enforced in the

Philippines than elsewhere, putting Noteholders at a potential disadvantage. Because of this, the directors of

Philippine companies may be more likely to have interests that conflict with the interests of Noteholders

generally, which may result in them taking actions that are contrary to the interests of Noteholders.

4. RISKS RELATING TO THE BONDS

4.1 Liquidity of the Bonds

The Bank intends to list the Bonds for trading in PDEx on the Issue Date. Upon listing of the Bonds with

PDEx, investors shall course their secondary market trades through the trading participants of PDEx for

execution in the PDEx Trading Platform in accordance with the PDEx Trading Rules, Conventions and

Guidelines, as these may be amended or supplemented from time to time, and must settle such trades on a

Delivery versus Payment (DvP) basis in accordance with PDEx Settlement Rules and Guidelines. These

Settlement Rules and Guidelines include guidelines on minimum trading lots and record dates. The

secondary trading of Bonds in PDEx may be subject to such fees and charges of PDEx, the trading

participants of PDEx, and other providers necessary for the completion of such trades. The PDEx rules and

conventions are available in the PDEx website (www.pds.com.ph). An investor Frequently Asked Questions

(FAQ) discussion on the secondary market trading, settlement, documentation and estimated fees are also

available in the PDEx website.

As with other fixed income securities, no assurance can be given that an active trading market for the Bonds

will develop. Even if such a market were to develop, the Bonds could trade at prices that may be higher or

lower than the price at which the Bonds are issued depending on many factors, among them:

prevailing interest rates;

the Bank’s results of operations and financial condition;

political development in the Philippines;

market for similar securities, and;

41

financial condition and stability of the banking sector Subject to the “Events of Default” in the Terms and Conditions, the Bonds cannot be preterminated at the

instance of any Bondholder before Maturity Date. In the case of an event of default, the Trustee or the

Majority Bondholders may declare the principal and all accrued interest (including Penalty Interest) on all

the Bonds and other charges thereon (including any incremental tax that may be due on the interest income

already earned under the Bonds), if any, to be immediately due and payable.

However, the Bank may, subject to the General Banking Law of 2000, BSP Circular Nos. 975 and 1010 and

other related circulars and issuances, as may be amended from time to time, redeem all and not only part of

the outstanding Bonds on any Interest Payment Date prior to Maturity Date, at an Early Redemption Amount

equal to the Issue Price plus interest accrued and unpaid up to but excluding the Early Redemption Date.

4.2 The Bank may be unable to redeem the Bonds

At maturity, the Bank will be required to redeem all of the Bonds. The Bank may not have sufficient cash in

hand and may not be able to arrange financing to redeem the Bonds in time, or on acceptable terms, or at all.

The ability to redeem the Bonds may also be limited by the terms of other debt instruments. Failure to repay,

repurchase or redeem the Bonds by the Bank would constitute an event of default under the Bonds, which

may also constitute a default under the terms of other indebtedness of the Bank.

4.3 The priority of debt evidenced by a public instrument

Under Philippine law, in the event of liquidation of a company, unsecured debt of the company (including

guarantees of debt) which is evidenced by a public instrument as provided in Article 2244 of the Civil Code

of the Philippines will rank ahead of unsecured debt of the company which is not so evidenced. Under

Philippine law, a debt becomes evidenced by a public instrument when it has been acknowledged before a

notary or any person authorized to administer oaths in the Philippines. Although the position is not clear

under Philippine law, it is possible that a jurat (which is a statement of the circumstances in which an

affidavit was made) may be sufficient to constitute a debt evidenced by a public instrument. Any such debt

evidenced by a public instrument may, by mandatory provision of law, rank ahead of the Bonds in the event

of the liquidation of the Bank.

4.4 Secondary Transfers

All transfers or assignments of the Bonds shall be coursed through a PDEx Trading Participant, subject to

PDEx Trading Rules. Consequently, the parties to a transfer may be subject to the guidelines of PDEx and

the payment to PDEx and the Registrar and Paying Agent of any reasonable fees and applicable taxes. There

is no assurance that the secondary trading of the Bonds may not be affected given these restrictions.

Any transfer between investors with a different tax status with respect to the Bonds will be subject to

applicable rules as may be issued from time to time by PDEx.

4.5 Issuance and Transfer Restrictions

The Bonds may not be issued or transferred to any other Prohibited Holders as defined in the Terms and

Conditions of the Bonds.

The Registrar is authorized to refuse any transfer or transaction in the Registry which may be in violation of

these restrictions. There is no assurance that the secondary trading of the Bonds may not be affected given

these restrictions.

4.6 Taxation of the Bonds

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The Tax Code provides that interest-bearing obligations of Philippine residents are Philippine sourced

income subject to Philippine income tax.

Interest Income on Short-Term Bonds

Interest income on short-term bonds, with maturities of less than five (5) years derived by Philippine citizens

and alien resident individuals from the Bonds is subject to income tax, which is withheld at source, at the

rate of 20% based on the gross amount of interest. Generally, interest on the Bonds received by non-resident

aliens engaged in trade or business in the Philippines is subject to a 20% final withholding tax while that

received by non-resident aliens not engaged in trade or business is subject to a final withholding tax rate of

25%. Interest income received by domestic corporations and resident foreign corporations from the Bonds is

subject to a final withholding tax rate of 20%. Interest income received by non-resident foreign corporations

from the Bonds is subject to a 30% final withholding tax.

Interest Income on Long-Term Bonds

A. For Individuals

Interest income on long-term bonds, with maturities of five (5) or more years, may be exempt from final

withholding tax. In order to be exempt, the following characteristics/conditions must be present:

a) The investor is an individual citizen (resident or non-resident) or resident alien or non-

resident alien engaged in trade or business in the Philippines;

b) The long-term bonds should be under the name of the individual;

c) The long-term bonds must be in the form of savings, common or individual trust funds,

deposit substitutes, investment management accounts and other investments evidenced by

certificates in such form prescribed by the BSP;

d) The long-term bonds must be issued by banks only and not by other entities or individuals;

e) The long-term bonds must have a maturity period of not less than five (5) years;

f) The long-term bonds must be in denominations of Ten Thousand Pesos (P10,000) and other

denominations as may be prescribed by the BSP;

g) The long-term bonds should not be terminated by the original investor before the fifth (5th)

year, otherwise they shall be subjected to the graduated rates of 5%, 12% or 20% on interest

income earnings; and

h) Except those specifically exempted by law or regulations, any other income such as gains

from trading, foreign exchange gain shall not be covered by income tax exemption.

For interest income derived by individuals investing in common or individual trust funds or investment

management accounts, the following additional characteristics/conditions must all be present:

a) The investment must be actually held/managed by the bank for the named individual at least

five (5) years without interruption;

b) The underlying investments of the common or individual trust account or investment

management accounts must comply with the requirements of Section 22 (FF) of the NIRC of

1997, as amended, as well as the requirements mentioned above;

c) The common or individual trust account or investment management account must hold on to

such underlying investment in continuous and uninterrupted period for at least five (5) years.

If such long-term bond is pre-terminated before the fifth (5th) year, it shall be subject to a final withholding

tax at the rates prescribed to be deducted and withheld from the proceeds based on the length of time that the

instrument was held by the taxpayer in accordance with the following schedule:

Holding Period Rate

Four (4) years to less than five (5) years 5%

43

Three (3) years to less than four (4) years 12%

Less than three (3) years 20%

For nonresident alien not engaged in trade or business in the Philippines, interest income received from long-

term bonds shall be subject to a Final Withholding Tax (FWT) at the rate of twenty five percent (25%)

pursuant to Section 25 (B) of the NIRC of 1997, as amended.

A. For Corporations

Interest income derived by domestic and resident foreign corporations from deposit substitutes, offered to the

public, is subject to FWT at the rate of twenty percent (20%) pursuant to Sections 27 (D) (1) and 28 (A) (7)

(a) of the NIRC of 1997, as amended, payable upon original issuance of the deposit substitutes. While

interest income received by domestic and resident foreign corporation from long-term deposit or investment,

which are not offered to the public, shall be subject to regular income tax at the rate of thirty percent (30%)

pursuant to Sections 27 (A) and 28 (A) (1) of the NIRC of 1997, as amended.

As used herein: “deposit substitutes”, as defined in Section 22 (Y) of the NIRC of 1997, as amended, means

an alternative form of obtaining funds from the public other than deposits, through the issuance,

endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of re-lending

or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or

dealer.

"Public", is defined as borrowing from twenty (20) or more individual or corporate lenders at any one time.

For non-resident foreign corporations, interest income received from long-term bonds, shall be subject to a

FWT at the rate of thirty percent (30%) pursuant to Section 28 (B)(1) of the NIRC of 1997, as amended.

The foregoing rates are subject to further reduction by any applicable tax treaties in force between the

Philippines and the country of residence of the non-resident owner. Most tax treaties to which the Philippines

is a party generally provide for a reduced tax rate of 15% in cases where the interest which arises in the

Philippines is paid to a resident of the other contracting state. However, most tax treaties also provide that

reduced withholding tax rates shall not apply if the recipient of the interest who is a resident of the other

contracting state, carries on business in the Philippines through a permanent establishment and the holding of

the relevant interest-bearing instrument is effectively connected with such permanent establishment. The

Bonds may not be a suitable investment for all investors

4.7 Each potential investor in the Bonds must determine the suitability of that investment in light

of its own circumstances. In particular, each potential investor should:

have sufficient knowledge and experience to make a meaningful evaluation of the Bonds, the merits

and risks of investing in the Bonds and the information contained or incorporated by reference in this

Offering Circular or any applicable supplement;

have access to, and knowledge of, the appropriate analytical tools to evaluate, in the context of its

particular financial situation, an investment in the Bonds and the impact the Bonds will have on its

overall investment portfolio;

have sufficient financial resources and liquidity to bear all of the risks of an investment in the Bonds,

including where the currency for principal or interest payments is different from the potential

investor’s currency;

understand thoroughly the terms of the Bonds and be familiar with the behavior of any relevant

indices and financial markets; and

44

be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for

economic, interest rate and other factors that may affect its investment and its ability to bear the

applicable risks.

Investors may purchase Bonds as a way to manage risk or enhance yield with an understood, measured,

appropriate addition of risk to their overall portfolios. A potential investor should not invest in the Bonds

unless it has the expertise (either alone or with a financial adviser) to evaluate how the Bonds will perform

under changing conditions, the resulting effects on the value of the Bonds and the impact this investment will

have on the potential investor’s overall investment portfolio.

4.8 Early Redemption

Under the Terms and Conditions, and subject to BSP Rules, the Bank has the option (Early Redemption

Option), but not the obligation, to redeem all (but not less than all) of the Bonds on any Interest Payment

Date at an amount equal to the aggregate issue price thereof, plus accrued and unpaid interest thereon as of

the Early Redemption Date (Early Redemption Amount), for any cause as may be allowed under the BSP

Rules, including, without limitation if or when: (i) there shall occur at any time during the term of the Bonds

any change in any applicable law, rule or regulation or in the terms and/or interpretation or administration

thereof or a new applicable law should be enacted, issued or promulgated which shall result in payments by

the Bank becoming subject to additional or increased taxes, other than the taxes and rates of such taxes

prevailing on the Issue Date, and such additional or increased rate of such tax cannot be avoided by use of

reasonable measures available to the Bank; or (ii) at any time during the term of the Bonds, the Bonds

become subject to additional or increased reserves required by the BSP, other than the six percent (6%)

statutory regular reserves required in BSP Circular No. 1004, Series of 2018.

In exercising the Early Redemption Option, the Bank shall give not less than thirty (30) but not more than

sixty (60) days’ prior notice to the Bondholders, PDEx, the Registrar and the BSP. The Bank shall also cause

the publication of such notice at least once a week for two consecutive weeks in at least two newspapers of

general circulation in the Philippines. Such notice shall state the Interest Payment Date on which such

Bonds are to be redeemed, the Early Redemption Amount and the manner in which redemption will be

effected. Such notice shall be irrevocable and shall be binding on the Bank.

After the issuance of the Early Redemption Notice, the Bank shall be obliged to repay all (and not only part)

of the Bonds (Early Redemption Bonds) at the Early Redemption Amount on the Early Redemption Date

and, upon confirmation by the Paying Agent that the Early Redemption Amount has been paid, the Registrar

shall transfer all of the interests of the Bondholders in the Early Redemption Bonds to the Bank. All Early

Redemption Bonds shall then be deemed fully redeemed and cancelled. If, as a consequence of the exercise

of the Early Redemption Option, interest income already earned under the Early Redemption Bonds shall be

subjected to incremental taxes, such taxes shall be for the account of the Bank.

The investor should seek its own tax advisors to determine its tax liabilities or exposures given that the Bank

does not have gross-up obligations in case of changes in any applicable law, rule or regulation or in the terms

and/or interpretation or administration thereof or a new applicable law should be enacted, issued or

promulgated, which shall subject payments by the Bank to additional or increased taxes, other than the taxes

and rates of such taxes prevailing as of the Issue Date.

5. RISKS RELATING TO THE MARKET GENERALLY

Set out below is a description of material market risks, including liquidity risk, exchange rate risk, interest

rate risk and credit risk:

45

5.1 The value of the Bonds may be adversely affected by movements in market interest rates.

Investment in the Bonds involves the risk that if market interest rates subsequently increase above the rate

paid on the Bonds, this will adversely affect the value of the Bonds.

5.2 Credit ratings assigned to the Bank may not reflect all the risks associated with an investment

in those Bonds.

One or more independent credit rating agencies may assign credit ratings to the Bank. The ratings may not

reflect the potential impact of all risks related to structure, market, additional factors discussed above, and

other factors that may affect the value of the Bonds. A credit rating is not a recommendation to buy, sell or

hold securities and may be revised, suspended or withdrawn by the rating agency at any time.

5.3 Legal investment considerations may restrict certain investments.

The investment activities of certain investors are subject to legal investment laws and regulations, or review

or regulation by certain authorities. Each potential investor should consult its legal advisers to determine

whether and to what extent (1) Bonds are legal investments for it; (2) Bonds can be used as collateral for

various types of borrowing; and (3) other restrictions apply to its purchase or pledge of any Bonds. Financial

institutions should consult their legal advisers or the appropriate regulators to determine the appropriate

treatment of Bonds under any applicable risk-based capital or similar rules.

46

TERMS AND CONDITIONS OF THE BONDS

The following are the Terms and Conditions of the Bonds to be issued under the Bank’s Bond Program which

will be incorporated by reference into each Series or Tranche of Bonds issued thereto. The applicable

Pricing Supplement in relation to any Series or Tranche of Bond may specify other terms and conditions

which shall, to the extent so specified or to the extent inconsistent with the following Terms and Conditions,

replace or modify the following Terms and Conditions for the purpose of such Series or Tranche of Bonds.

The Terms and Conditions contained herein do not purport to be a complete listing of all the rights,

obligations, or privileges of the Bonds and the Bondholders. Some rights, obligations, or privileges may be

further limited or restricted by other document, including the applicable Pricing Supplement in relation to

any Series or Tranche of Bonds. Prospective investors are enjoined to carefully review the articles of

incorporation, by-laws, and resolutions of the Board of Directors and Shareholders of the Bank, the

information contained in the Offering Circular, the Trust Agreement, Program Agreement, Registry and

Paying Agency Agreement, the Pricing Supplement, and other agreements relevant to the issuance of any

Series or Tranche of the Bonds.

The issuance in series or tranches of up to Thirty Nine Billion Pesos (₱39,000,000,000.00) aggregate

principal amount of bonds under the Bank’s Bond Program (each Series or Tranche to be issued, are the

“Bonds”) described in this Terms and Conditions was authorized by resolutions of the Board of Directors of

the Bank dated August 31, 2018 and February 22, 2019, respectively.

The Bonds have not been and will not be registered with the Securities and Exchange Commission (“SEC”).

Since the Bonds qualify as exempt securities under Section 9.1(e) of the Philippine Securities Regulation

Code, the Bonds may be sold and offered for sale or distribution in the Philippines without registration.

Pursuant to BSP Circular No. 1010, Series of 2018, each Series or Tranche of the Bonds to be issued under

the Bank’s Bond Program shall be listed or enrolled in the PDEx upon issuance. Once registered and lodged,

each Series or Tranche of the Bonds will be eligible for transfer through the trading participants by electronic

book-entry transfers in the relevant Register of Bondholders, and issuance of Registry Confirmations in

favor of transferee bondholders. All transfers or assignments of the Bonds shall be coursed through the

PDEx.

The net proceeds of the issuance of the Bonds are intended to be used to expand funding base, support

business expansion plans, and for other general corporate purposes of the Bank.

The Bonds to be issued under the Bond Program is constituted by a Trust Indenture Agreement executed on

April 26, 2019 (the “Trust Agreement”) entered into between the Bank and Development Bank of the

Philippines - Trust Banking Group (the “Trustee”), which term shall, wherever the context permits, include

all other persons or companies for the time being acting as trustee or trustees under the Trust Agreement.

The description of the terms and conditions of the Bonds set out below includes summaries of, and is subject

to, the detailed provisions of the Trust Agreement. A registry and paying agency agreement was executed on

April 26, 2019 (the “Registry and Paying Agency Agreement”) in relation to the Bonds to be issued under

the Bond Program between the Bank and the Philippine Depository & Trust Corp. as registrar (the

“Registrar”) and as paying agent (the “Paying Agent”).

The Bonds will be repaid at 100% of face value on the relevant Maturity Date, unless the Bank exercises its

optional redemption according to the conditions therefore. See “Redemption and Purchase”.

The Registrar and Paying Agent has no interest in or relation to the Bank which may conflict with its role as

Registrar for the Bonds. The Trustee has no interest in or relation to the Bank which may conflict with its

role as Trustee for the Bonds. The Hongkong and Shanghai Banking Corporation Limited and ING Bank

N.V., Manila Branch (as the “Program Arrangers” and “Initial Lead Arrangers”) and any other entity which

47

the Bank may appoint as issue managers and bookrunners for the offer of the Bonds under the Bond Program,

and notice of whose appointment has been given to the Registrar, Paying Agent and the Trustee by the Bank

in accordance with the provisions of the Program Agreement have no interest in or relation to the Bank

which may conflict with their role as Lead Arrangers for the offer of the Bonds under the Bond Program.

Copies of the Trust Agreement and the Registry and Paying Agency Agreement are available for inspection

during normal business hours at the specified offices of the Trustee. The holders of the Bonds (the

“Bondholders”) are entitled to the benefit of, are bound by, and are deemed to have notice of, all the

provisions of the Trust Agreement and are deemed to have notice of those provisions of the Registry and

Paying Agency Agreement applicable to them. Defined terms used herein and not otherwise defined shall

have the meanings ascribed to such terms under the Trust Agreement.

1. FORM, DENOMINATION AND TITLE

Form and Denomination

The Bonds, upon issuance, are in scripless form and will be maintained in electronic form with the Registrar,

subject to the payment by the Bondholder of applicable fees to the Registrar, and in compliance with the

provisions of Republic Act No. 8792, otherwise known as the Electronic Commerce Act, particularly on the

existence of assurances on the integrity, reliability, and authenticity of the Bonds in electronic form. A

Registry Confirmation will, however, be issued by the Registrar in favor of the Bondholders in accordance

with the BSP Rules and shall be subject to the relevant fees of PDEx and PDTC.

The Bonds shall be issued in such form and denomination as stated in the applicable Pricing Supplement to

be issued for every Series or Tranche of Bonds.

Title

Legal title to the Bonds shall be shown in the relevant Register of Bondholders maintained by the Registrar.

A Registry Confirmation confirming the principal amount of the Bonds purchased by each applicant in the

relevant Offer shall be issued by the Registrar to all Bondholders following the relevant Issue Date. Upon

any assignment, title to the Bonds shall pass by recording of the transfer from the transferor to the transferee

in the electronic Register of Bondholders maintained by the Registrar. Settlement in respect of such transfer

or change of title to the Bonds, including the settlement of any cost arising from such transfers, including,

but not limited to, documentary stamp taxes, if any, arising from subsequent transfers, shall be for the

account of the relevant Bondholder, unless such is otherwise assumed by the transferee in writing under the

terms of the relevant transfer agreement executed between the transferring Bondholder and its transferee.

2. RATING

The Bonds are and will be unrated. The Bonds are not required to be rated for purposes of the Offer.

However, the Issuer is currently rated Baa2 by Moody’s.

A rating is not a recommendation to buy, sell, or hold securities and may be subject to revision, suspension,

or withdrawal at any time by the assigning rating organization. The rating is subject to regular annual

reviews, or more frequently as market developments may dictate.

3. TRANSFER OF THE BONDS

Register of Bondholders

The Bank shall cause the Register of Bondholders to be kept by the Registrar, in electronic form. The names

and addresses of the relevant Bondholders and the particulars of the relevant Bonds held by them and of all

transfers of the relevant Bonds shall be entered into the Register of Bondholders. As required by Circular No.

428-04 issued by the BSP, the Registrar shall send each Bondholder a written statement of registry holdings,

48

in the manner stated in the application to purchase the Bonds (“Application to Purchase”), at least quarterly

(at the cost of the Bank), and a written advice confirming every receipt or transfer of the Bonds that is

effected in the Registrar’s system. Such statement of registry holdings shall serve as the confirmation of

ownership of the relevant Bondholder as of the date thereof. Any requests of Bondholders for certifications,

reports or other documents from the Registrar, except as provided herein, shall be for the account of the

requesting Bondholder. No transfer of the Bonds may be made during the period commencing on a relevant

Record Date as defined in this section on “Interest Payment Dates” until a relevant Interest Payment Date.

Transfers; Tax Status

The Registrar shall ultimately and conclusively determine all matters regarding the evidence necessary to

effect any transfers of the Bonds. Settlement in respect of such transfers or change of title to the Bonds,

including the settlement of any documentary stamp taxes, if any, arising from subsequent transfers, shall be

settled directly between the transferee and/or the transferor Bondholders.

All secondary trading of the Bonds shall be coursed through or effected using the trading facilities of the

PDEx, subject to compliance with such applicable rules of PDEx and the payment by the Bondholder of

applicable fees to the PDEx and the Registrar and Paying Agent. All transfers of the Bonds shall only be

effective upon the receipt by the Registrar of a duly accomplished transfer form in the forms attached to the

Registry and Paying Agency Agreement from the relevant PDEx Trading Participant and other required

documentation and the registration and recording by the Registrar of such assignment or transfer in the

Register of Bondholders; provided, that no such registration and recording shall be allowed during the

Closed Period.

Where a transfer or assignment of the Bonds will result in a change in the tax treatment of the interest

income derived from the Bonds (such as but not limited to transfers between a taxable and non-taxable

person), the transferor Bondholder shall be liable for any and all taxes that may be due on interest income

previously earned on the Bonds. The amount of such taxes shall be calculated by the PDEx based on the

length of time the transferor Bondholder shall have held such Bonds, and an amount equal to such taxes will

be deducted from the purchase price due to the transferor Bondholder.

No partial transfers of title, interest and rights of the Bondholder in or to any Bonds shall be allowed unless

as a result thereof: (1) the transferor shall either retain Bonds with an aggregate principal amount of at least

the minimum denomination stated in the applicable Pricing Supplement registered in its name (or cease to be

a registered holder of the Bonds altogether); and (2) the transferee shall have Bonds with an aggregate

principal amount of at least the minimum denomination stated in the applicable Pricing Supplement

registered in its name.

Any and all taxes, as well as settlement fees and other charges (other than registration fees which shall be

paid for by the Bank) that may be imposed by PDEx and the Registrar and Paying Agent in respect of any

transfer or change of beneficial title to the Bonds, including the settlement of documentary stamp taxes, if

any, shall be for the account of the transferring Bondholder, unless such cost is otherwise assumed by the

transferee in writing under the terms of the relevant transfer agreement executed between the transferring

Bondholder and its transferee.

A Bondholder claiming tax-exempt status is required to submit a written notification of the sale or purchase

to the Trustee and the Registrar, including the tax status of the transferor or transferee, as appropriate,

together with the supporting documents specified under the Registry and Paying Agency Agreement upon

submission of the account opening documents to the Registrar. Transfers taking place in the Register of

Bondholders after the Bonds are listed or enrolled on PDEx shall be allowed between tax-exempt and taxable

entities without restriction and observing the tax exemption of tax-exempt entities, if and/or when so allowed

under and in accordance with the relevant rules, conventions and guidelines of PDEx and PDTC.

In no case shall the Bonds be transferred or assigned to Prohibited Bondholders as defined in the Offering

Circular.

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Secondary Trading of the Bonds

The Bank shall list or enroll the Bonds on PDEx for secondary market trading. The Bonds will be traded in

such minimum board lot size, and in such multiples in excess of the relevant minimum board lot size, as

indicated in the Pricing Supplement to be issued for every Series or Tranche of Bonds. Secondary market

trading in PDEx shall follow the applicable PDEx rules and conventions and guidelines, including rules,

conventions and guidelines governing trading and settlement between Bondholders of different tax status,

and shall be subject to the relevant fees of PDEx and PDTC.

4. RANKING

The Bonds shall constitute the direct, unconditional, unsecured, and unsubordinated obligations of the Bank,

enforceable according to the terms and conditions set out herein, and shall at all times rank pari passu and

without any preference or priority among themselves and at least pari passu with all other present and future

direct, unconditional, unsecured, and unsubordinated obligations of the Bank, except for any obligation

enjoying a statutory preference or priority established under Philippine laws.

5. INTEREST

Interest Payment Dates

Except as may otherwise be modified, changed, or amended in the applicable Pricing Supplement, the Bonds

shall bear interest on its principal amount from and including the relevant Issue Date at the rate so specified

in the applicable Pricing Supplement.

The cut-off date in determining the existing Bondholders entitled to receive interest or principal amount due

shall be two (2) Business Days prior to the relevant Interest Payment Dates (the “Record Date”), which shall

be the reckoning date in determining the Bondholders entitled to receive interest, principal or any other

amount due under the Bonds. No transfers of the Bonds may be made during this period intervening between

and commencing on the Record Date and the relevant Interest Payment Dates.

Interest Accrual

The Bonds shall cease to bear interest from and including the relevant Maturity Date, as defined in the

discussion on “Final Redemption” below, unless, upon due presentation, payment of the principal in respect

of the Bonds then outstanding is not made, is improperly withheld or refused, in which case the Penalty

Interest (see “Penalty Interest” below) shall apply.

Determination of Interest Amount

The interest shall be calculated on the basis of a three hundred sixty (360)-day year consisting of twelve (12)

months of thirty (30) days each and, in the case of an incomplete month, the number of days elapsed on the

basis of a month of thirty (30) days.

6. REDEMPTION AND PURCHASE

Final Redemption

Unless otherwise earlier redeemed or previously purchased and cancelled, the Bonds shall be redeemed at

par or 100% of face value on the relevant Maturity Date. However, if the Maturity Date is not a Business

Day, payment of all amounts due on such date will be made by the Bank through the Paying Agent, without

50

adjustment for accrued interest, on the succeeding Business Day.

Optional Redemption

Subject to the BSP Rules, the Bank shall have the option (the “Early Redemption Option”), but not the

obligation, to redeem all (but not less than all) of a Series or Tranche of Bonds on any Interest Payment Date

(such date, the “Early Redemption Date”) at an amount equal to the aggregate issue price thereof, plus

accrued and unpaid interest thereon as of the Early Redemption Date (the “Early Redemption Amount”), for

any cause as may be allowed under the BSP Rules, including, without limitation if or when: (i) there shall

occur at any time during the term of the relevant Series or Tranche of Bonds any change in any applicable

law, rule or regulation or in the terms and/or interpretation or administration thereof or a new applicable law

should be enacted, issued or promulgated which shall result in payments by the Bank becoming subject to

additional or increased taxes, other than the taxes and rates of such taxes prevailing on the Issue Date, and

such additional or increased rate of such tax cannot be avoided by use of reasonable measures available to

the Bank; or (ii) at any time during the term of the relevant Series or Tranche of Bonds, the Bonds become

subject to additional or increased reserves required by the BSP, other than the six percent (6%) statutory

regular reserves required in BSP Circular No. 1004, Series of 2018.

In exercising any Early Redemption Option, the Bank shall give not less than thirty (30) but not more than

sixty (60) days’ prior notice (the “Early Redemption Notice”) to the relevant Bondholders, the PDEx, the

Registrar and the BSP Supervision and Examination Sector. The Bank shall also cause the publication of

such notice at least once a week for two (2) consecutive weeks in at least two newspapers of general

circulation in the Philippines. Such notice shall state the Interest Payment Date on which such Bonds are to

be redeemed, the Early Redemption Amount and the manner in which redemption will be effected. Such

notice shall be irrevocable and shall be binding on the Bank.

After the issuance of any Early Redemption Notice, the Bank shall be obliged to repay all (and not only part)

of the relevant Bonds (the “Early Redemption Bonds”) at the relevant Early Redemption Amount on the

Early Redemption Date and, upon confirmation by the Paying Agent that the Early Redemption Amount has

been paid, the Registrar shall transfer all of the interests of the Bondholders in the Early Redemption Bonds

to the Bank. All Early Redemption Bonds shall then be deemed fully redeemed and cancelled. If, as a

consequence of the exercise of the Early Redemption Option, interest income already earned under the Early

Redemption Bonds shall be subjected to incremental taxes, such taxes shall be for the account of the Bank.

For the avoidance of doubt, the Bank may exercise its Early Redemption Option to a particular Series or

Tranche of Bonds without any obligation to redeem any other Series or Tranche issued under the Bank’s

Bond Program.

Purchase and Cancellation

The Bank may at any time purchase any of the Bonds at any price in the open market or by tender or by

contract at any price, without any obligation to purchase (and the Bondholders shall not be obliged to sell)

Bonds pro-rata from all the relevant Bondholders. Any Bonds so purchased shall be redeemed and cancelled

and may not be re-issued.

Upon listing or enrollment of the Bonds on PDEx, the Bank shall disclose any such transactions in

accordance with the applicable PDEx disclosure rules.

Change in Law or Circumstance

The following events shall be considered as changes in law or circumstances as it refers to the obligations of

the Bank and the rights and interests of the Bondholders under the Trust Agreement and the Bonds:

(a) Any government and/or non-government consent, license, authorization, registration or

51

approval now or hereafter necessary to enable the Bank to comply with its obligations under

the Trust Agreement or the Bonds shall be modified, withdrawn or withheld in a manner

which, in the reasonable opinion of the Trustee, will materially and adversely affect the

ability of the Bank to comply with such obligations; or

(b) Any provision of the Trust Agreement or any of the related documents is or becomes, for

any reason, invalid, illegal or unenforceable to the extent that it becomes for any reason

unlawful for the Bank to give effect to its rights or obligations thereunder, or to enforce any

provisions of the Trust Agreement or any of the related documents in whole or in part; or

any law is introduced or any applicable existing law is modified or rendered ineffective or

inapplicable to prevent or restrain the performance by the parties thereto of their obligations

under the Trust Agreement or any other related documents; or

(c) Any concessions, permits, rights, franchise or privileges required for the conduct of the

business and operations of the Bank shall be revoked, cancelled or otherwise terminated, or

the free and continued use and exercise thereof shall be curtailed or prevented, in such

manner as to materially and adversely affect the financial condition or operations of the

Bank.

Payments

The principal of, interest on, and all other amounts payable on, the Bonds shall be paid to the relevant

Bondholders by crediting of the settlement accounts designated by each of the Bondholders. The principal of,

and interest on, the Bonds shall be payable in Philippine Pesos. The Bank shall ensure that so long as any of

the Bonds remains outstanding, there shall at all times be a Paying Agent for purposes of disbursing

payments on the Bonds. In the event the Paying Agent shall be unable or unwilling to act as such, the Bank

shall appoint a qualified financial institution in the Philippines authorized to act in its place. The Paying

Agent may not resign its duties or be removed without a successor having been appointed.

Payment of Additional Amounts - Taxation

Interest Income on Short-Term Bonds

Interest income on short-term bonds, with maturities of less than five (5) years, is subject to a final

withholding tax at rates of between 20% and 30% depending on the tax status of the relevant Bondholder

under relevant law, regulation or tax treaty.

Interest Income on Long-Term Bonds

A. For Individuals

Interest income on long-term bonds, with maturities of five (5) or more years, may be exempt from final

withholding tax. In order to be exempt, the following characteristics/conditions must be present:

a) The investor is an individual citizen (resident or non-resident) or resident alien or non-

resident alien engaged in trade or business in the Philippines;

b) The long-term bonds should be under the name of the individual;

c) The long-term bonds must be in the form of savings, common or individual trust funds,

deposit substitutes, investment management accounts and other investments evidenced by

certificates in such form prescribed by the BSP;

d) The long-term bonds must be issued by banks only and not by other entities or individuals;

e) The long-term bonds must have a maturity period of not less than five (5) years;

f) The long-term bonds must be in denominations of Ten Thousand Pesos (P10,000) and other

52

denominations as may be prescribed by the BSP;

g) The long-term bonds should not be terminated by the original investor before the fifth (5th)

year, otherwise they shall be subjected to the graduated rates of 5%, 12% or 20% on interest

income earnings; and

h) Except those specifically exempted by law or regulations, any other income such as gains

from trading, foreign exchange gain shall not be covered by income tax exemption.

For interest income derived by individuals investing in common or individual trust funds or investment

management accounts, the following additional characteristics/conditions must all be present:

a) The investment must be actually held/managed by the bank for the named individual at least

five (5) years without interruption;

b) The underlying investments of the common or individual trust account or investment

management accounts must comply with the requirements of Section 22 (FF) of the NIRC of

1997, as amended, as well as the requirements mentioned above;

c) The common or individual trust account or investment management account must hold on to

such underlying investment in continuous and uninterrupted period for at least five (5) years.

If such long-term bond is pre-terminated before the fifth (5th) year, it shall be subject to a final withholding

tax at the rates prescribed to be deducted and withheld from the proceeds based on the length of time that the

instrument was held by the taxpayer in accordance with the following schedule:

Holding Period Rate

Four (4) years to less than five (5) years 5%

Three (3) years to less than four (4) years 12%

Less than three (3) years 20%

For nonresident alien not engaged in trade or business in the Philippines, interest income received from long-

term bonds shall be subject to a Final Withholding Tax (FWT) at the rate of twenty five percent (25%)

pursuant to Section 25 (B) of the NIRC of 1997, as amended.

B. For Corporations

Interest income derived by domestic and resident foreign corporations from deposit substitutes, offered to the

public, is subject to FWT at the rate of twenty percent (20%) pursuant to Sections 27 (D) (1) and 28 (A) (7)

(a) of the NIRC of 1997, as amended, payable upon original issuance of the deposit substitutes. While

interest income received by domestic and resident foreign corporation from long-term deposit or investment,

which are not offered to the public, shall be subject to regular income tax at the rate of thirty percent (30%)

pursuant to Sections 27 (A) and 28 (A) (1) of the NIRC of 1997, as amended.

As used herein: “deposit substitutes”, as defined in Section 22 (Y) of the NIRC of 1997, as amended, means

an alternative form of obtaining funds from the public other than deposits, through the issuance,

endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose of re-lending

or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or

dealer.

"Public", is defined as borrowing from twenty (20) or more individual or corporate lenders at any one time.

For non-resident foreign corporations, interest income received from long-term bonds, shall be subject to a

FWT at the rate of thirty percent (30%) pursuant to Section 28 (B)(1) of the NIRC of 1997, as amended.

Except for such withholding tax and as otherwise provided, all payments of principal and interest are to be

made free and clear of any deductions or withholding for or on account of any present or future taxes or

duties imposed by or on behalf of Republic of the Philippines, including, but not limited to, issue,

registration or any similar tax or other taxes and duties, including interest and penalties, if any. If such taxes

53

or duties are imposed, the same shall be for the account of the Bank; provided however that, the Bank shall

not be liable for the following:

a) The withholding tax applicable on interest earned on the Bonds prescribed under the Tax Code, as

amended, and its implementing rules and regulations as may be in effect from time to time. An

investor who is exempt from the aforesaid withholding tax, or is subject to a preferential withholding

tax rate shall be required to submit the following requirements to the Registrar, subject to acceptance

by the Bank as being sufficient in form and substance:

(i) a current and valid certified true copy of the tax exemption certificate, ruling, or

opinion issued by the BIR confirming the Bondholder’s exemption from taxation of

interest on fixed income securities;

(ii) original of the duly notarized declaration warranting its tax-exempt status or

entitlement to reduced treaty rates, undertaking to immediately notify the Bank and

the Registrar and Paying Agent of any suspension or revocation of its tax exemption

or treaty privileges, and agreeing to indemnify and hold the Bank and the Registrar

and Paying Agent free and harmless against any claims, actions, suits, and liabilities

resulting from the non-withholding or reduced withholding of the required tax

substantially in the form attached to the Registry and Paying Agency Agreement;

(iii) For those who are claiming benefits under tax treaties, duly accomplished

Certificate of Residence for Tax Treaty Relief (“CORTT”) Form (Part I and Part II)

or the prescribed certificate of residency of the country of their residence with the

CORTT Form Part I (A, B and C) and Part II in accordance with the relevant BIR

regulations; and

(iv) Such other documentary requirements as may be reasonably required by the

Registrar and the Selling Agents as proof of the eligible Bondholders’ tax-exempt

status or as may be required under the applicable regulations of the relevant taxing

or other authorities.

b) Gross Receipts Tax under Section 121 of the Tax Code;

c) Taxes on the overall income of any securities dealer or Bondholder, whether or not subject to

withholding; and

d) Value Added Tax (“VAT”) under Sections 106 to 108 of the Tax Code, and as amended by Republic

Act No. 9337 and Republic Act No. 10963.

Documentary stamp tax for the primary issue of the Bonds and the execution of the Bond Agreements, if

any, shall be for the Bank’s account.

7. REPRESENTATIONS AND WARRANTIES

The Bank hereby makes the following representations and warranties in favor of the Bondholders:

(a) No order preventing or suspending the use of the Offering Circular has been issued by the BSP. The

Offering Circular: (i) is compliant and will remain compliant in all material respects with relevant

54

BSP Rules; (ii) contains all information and particulars which is material in the context of the issue

and the offering of the Bonds including without limitation, all information required by the applicable

laws and regulations of the Philippines and the information which is required to be provided to

potential investors in order to make an informed assessment of the financial position and prospects

of the Bank in its entirety and the rights attaching to the Bonds; and (iii) do not contain any untrue

statement of a material fact nor omit to state a material fact required to be stated or necessary to

make the statements made not misleading under the circumstances under which it is made. All

reasonable enquiries have been made by the Bank to ascertain such facts and to verify the accuracy

of all such information and statements. Any additional written information used in the offering and

sale of the Bonds, at the date of publication of such information, was in every material respect true,

and accurate and not misleading and that there are no other facts in relation to the Bank, and the

Bonds the omission of which would, in the context of the issue of the Bonds, make any statement in

the Offering Circular and/or such other information misleading in any material respect.

(b) No order suspending the issuance of the Bonds has been issued, and no proceeding for that purpose

has been instituted or, to the best knowledge of the Bank after due and careful inquiry, threatened by

the BSP.

(c) Since the respective dates as of which information is given in the Offering Circular and/or the

applicable Pricing Supplement, there has not been any material change, or any development

involving a prospective material change, in or affecting the general affairs, business, prospects,

management, financial position, stockholders’ equity, or results of operations of the Bank otherwise

than as disclosed in the Offering Circular. Except as disclosed in the Offering Circular and/or the

applicable Pricing Supplement, the Bank has not, since the dates indicated, entered into any material

transaction or agreement (whether or not in the ordinary course of business) which would have an

Adverse Effect.

As used herein, Adverse Effect means any material and adverse effect on the Bank’s operations,

activities, business, property, liabilities, condition (financial or otherwise) or prospects;

implementation of the issuance of the Bonds; or its ability to duly perform and observe its

obligations and duties under the Bonds and the Bond Agreements.

(d) Except as disclosed in the Offering Circular and/or the applicable Pricing Supplement, the Bank and

each of the Principal Subsidiaries is a corporation duly organized, validly existing, and in good

standing under and by virtue of the laws of its place of incorporation, has its principal office at the

address indicated in the Offering Circulars, is registered or qualified to do business in every

jurisdiction where registration or qualification is necessary, and has the corporate power and

authority to conduct its business as presently being conducted and to own its properties and assets

now owned by it as well as those to be hereafter acquired by it for the purpose of its business.

As used herein, “Principal Subsidiary” means at any time a Subsidiary (i.e., directly controlled, or

more than fifty percent (50%) of whose issued voting equity share capital (or equivalent) is then

beneficially owned, by the Bank and/or one or more of its subsidiaries or affiliates) of the Bank:

(i) whose net profits (consolidated in the case of a Subsidiary which itself has Subsidiaries) or

whose net assets (consolidated in the case of a Subsidiary which itself has Subsidiaries)

represent in each case (or, in the case of a Subsidiary acquired after the end of the financial

period to which the then latest audited consolidated accounts of the Bank and its

Subsidiaries relate, are equal to) not less than five percent (5%) of the consolidated net

profits or, as the case may be, consolidated net assets of the Bank and its Subsidiaries taken

as a whole, all as calculated respectively by reference to the then latest audited accounts

(consolidated or, as the case may be, unconsolidated) of such Subsidiary and the then latest

audited consolidated accounts of the Bank and its Subsidiaries, provided that:

55

(A) if the then latest audited consolidated accounts of the Bank and its Subsidiaries

show (x) a net loss for the relevant financial period then there shall be substituted

for the words “net profits” the words “gross revenues” for the purposes of this

definition and/or (y) negative assets at the end of the relevant financial period then

there shall be substituted for the words “net assets” the words “total assets” for the

purposes of this definition;

(B) in the case of a Subsidiary of the Bank acquired after the end of the financial period

to which the then latest audited consolidated accounts of the Bank and its

Subsidiaries relate, the reference to the then latest audited consolidated accounts of

the Bank and its Subsidiaries for the purposes of the calculation above shall, until

consolidated accounts for the financial period in which the acquisition is made have

been prepared and audited as aforesaid, be deemed to be a reference to such first-

mentioned accounts as if such Subsidiary had been shown in such accounts by

reference to its then latest relevant audited accounts, adjusted as deemed appropriate

by the Bank;

(ii) to which is transferred the whole or substantially the whole of the undertaking and assets of

a Subsidiary of the Bank which immediately prior to such transfer is a Principal Subsidiary,

provided that the transferor Subsidiary shall upon such transfer forthwith cease to be a

Principal Subsidiary and the transferee Subsidiary shall cease to be a Principal Subsidiary

pursuant to this subparagraph (ii) on the date on which the consolidated accounts of the

Bank and its Subsidiaries for the financial period current at the date of such transfer have

been prepared and audited as aforesaid but so that such transferor Subsidiary or such

transferee Subsidiary may be a Principal Subsidiary on or at any time after the date on which

such consolidated accounts have been prepared and audited as aforesaid by virtue of the

provisions of subparagraph (i) above or, prior to or after such date, by virtue of any other

applicable provision of this definition; or

(iii) to which is transferred an undertaking or assets which, taken together with the undertaking

or assets of the transferee Subsidiary, generated (or, in the case of the transferee Subsidiary

being acquired after the end of the financial period to which the then latest audited

consolidated accounts of the Bank and its Subsidiaries relate, generate net profits equal to)

not less than five percent (5%) of the consolidated net profits, or represent (or, in the case

aforesaid, are equal to) not less than five percent (5%) of the consolidated net assets of the

Bank and its Subsidiaries taken as a whole, all as calculated as referred to in subparagraph

(i) above, provided that the transferor Subsidiary (if a Principal Subsidiary) shall upon such

transfer forthwith cease to be a Principal Subsidiary unless immediately following such

transfer its undertaking and assets generate (or, in the case aforesaid, generate net profits

equal to) not less than five percent (5%) of the consolidated net profits, or its assets

represent (or, in the case aforesaid, are equal to) not less than five percent (5%) of the

consolidated net assets of the Bank and its Subsidiaries taken as a whole, all as calculated as

referred to in subparagraph (i) above, and the transferee Subsidiary shall cease to be a

Principal Subsidiary pursuant to this subparagraph (iii) on the date on which the

consolidated accounts of the Bank and its Subsidiaries for the financial period current at the

date of such transfer have been prepared and audited but so that such transferor Subsidiary

or such transferee Subsidiary may be a Principal Subsidiary on or at any time after the date

on which such consolidated accounts have been prepared and audited as aforesaid by virtue

of the provisions of subparagraph (i) above or, prior to or after such date, by virtue of any

other applicable provision of this definition.

(e) All corporate authorizations, approvals, and other acts legally necessary for the execution and

delivery by the Bank of the Bond Agreements, the Offer and issuance by the Bank of the

Bonds, the circulation by the Bank of the Offering Circular, the applicable Pricing Supplement

56

and the Bank’s compliance with its obligations under the Bond Agreements and the Bonds have

been obtained or effected and are in full force and effect.

(f) All government authorizations, approvals, rulings, registrations, and other acts legally necessary

for the execution and delivery by the Bank of the Bond Agreements, the Offer, issuance, and

payment by the Bank of the Bonds, and the Bank’s compliance with its obligations under the

Bond Agreements and the Bonds, have been obtained and are in full force and effect.

(g) All conditions imposed or required under the BSP Rules and other applicable laws and

regulations in respect of the execution and delivery of the Bond Agreements and the Offer,

issuance, and payment of the Bonds have been complied with by the Bank as of the date and/or

time that they are required to be complied with.

(h) None of the information, data, or submissions provided or made by the Bank to any government

agency, or to the Lead Arrangers, Selling Agents (other than the Bank), Registrar or

Bondholders in connection with the Bonds violates any applicable statute, rule, or regulation.

Such information, data, and submissions are true, complete, and accurate in all material

respects. There is no fact, matter or circumstance in connection with the Bonds which has not

been disclosed to the Lead Arrangers, such other Selling Agents, Registrar or Bondholders

which renders any such information, data or submissions untrue, inaccurate or misleading in

any material respect, or which might reasonably affect the willingness of such parties to

proceed with the transactions contemplated by the Bonds and these Terms and Conditions.

(i) The obligations of the Bank under the Bond Agreements and (upon their issuance) the Bonds

constitute the Bank's legal, valid, binding, direct, and unconditional obligations, enforceable in

accordance with their terms, and the compliance by the Bank with its obligations under the

Bond Agreements and the Bonds will not conflict with, nor constitute a breach or default of, the

articles of incorporation, by-laws, or any resolution of the board of directors of the Bank, or any

rights of the stockholders of the Bank, or any contract or other instrument by which the Bank or

its properties is bound, or any law of the Republic of the Philippines, or any law, rule,

regulation, or judgment, decree or order of any government, governmental body, court, office,

agency, or instrumentality applicable to the Bank.

(j) The Bonds, upon issuance, shall constitute direct, unconditional, unsecured, and unsubordinated

obligations of the Bank, enforceable according to the terms and conditions herein, and shall at

all times rank pari passu and without any preference or priority among themselves and at least

pari passu with all other present and future direct, unconditional, unsecured, and

unsubordinated obligations of the Bank, except for any obligation enjoying a statutory

preference or priority established under Philippine laws.

(k) Except as disclosed in the Offering Circular and/or the applicable Pricing Supplement, there are

no legal, administrative, or arbitration actions, suits, or proceedings pending or threatened

against or affecting the Bank or its Principal Subsidiaries which, if adversely determined, would

have an Adverse Effect, or which would enjoin or otherwise adversely affect the execution,

delivery or performance of the Bond Agreements or the Offer, issuance or performance of the

Bonds. To the best of the Bank’s knowledge after due and careful inquiry, no such proceedings

are threatened or contemplated by government authorities or threatened by others.

(l) The audited financial statements of the Bank as of the last two (2) years from the date of each

relevant Offer are complete and correct in all material respects. The audited financial

statements of the Bank and the reviewed interim consolidated financial statements of the Bank

as of the last two (2) years from the date of each relevant Offer are in accordance with the

books and records of the Bank, are complete and correct in all material respects, have been

prepared in accordance with Philippine Financial Reporting Standards, and fairly represent in

all material respects the Bank's financial condition and results of operations as of the dates

57

indicated. Since the last audited financial statement from the date of each relevant Offer, there

has been no material change in the financial condition or results of operations of the Bank

sufficient to impair its ability to perform its obligations under the Bonds according to their

terms.

(m) Except as otherwise disclosed in the Offering Circular or the applicable Pricing Supplement or

its audited financial statements or the reviewed interim consolidated financial statements of the

Bank as of the last two (2) years from the date of each relevant Offer, the Bank has, as of the

date hereof, no liabilities or obligations of any nature, whether accrued, absolute, contingent, or

otherwise, including but not limited to tax liabilities due or to become due, and whether

incurred in respect of or measured by any income for any period prior to such date or arising

out of transactions entered into or any state of facts existing prior thereto, which may in any

case or in the aggregate, materially and adversely affect the Bank's ability to discharge its

obligations under the Bonds.

(n) Since the last audited financial statements or reviewed interim consolidated financial statements

of the Bank as of the last two (2) years from the date of each relevant Offer, there has been no

change in the financial condition, assets, and liabilities of the Bank, other than such changes

that (i) are disclosed in the Offering Circular and/or the applicable Pricing Supplement and (ii)

do not materially and adversely affect the Bank's ability to discharge its obligations under the

Bonds.

(o) No event has occurred and is continuing which constitutes a default by the Bank under or in

respect of any agreement binding upon the Bank or its properties, and no event has occurred

which, with the giving of notice, lapse of time, or other condition, would constitute a default by

the Bank under or in respect of such agreement, which default shall (i) constitute an Adverse

Effect or (ii) materially and adversely affect the Bank’s ability to comply with the terms of the

Bonds and pay the principal and interest that may be due on the Bonds..

(p) The Bank has good and marketable title to all its properties, free and clear of liens,

encumbrances, restrictions, pledges, mortgages, security interest, or charges, except for the

following: (i) any liens, encumbrances, restrictions, pledges or mortgages over its properties

existing prior to the date of the Offering Circular and disclosed in its latest audited financial

statements as of the date of each relevant Offer; (ii) any lien over those properties which are

acquired by the Bank through any legal action or proceedings or which are conveyed to the

Bank via dacion en pago or other similar arrangement in the course of the ordinary business of

the Bank; (iii) liens arising in the ordinary course of its business, or imposed or arising solely

by operation of law (other than any statutory preference or priority under Article 2244(14) of

the Civil Code of the Philippines), such as carrier’s, warehousemen’s and mechanic’s liens and

other similar liens arising in the ordinary course of business; (iv) liens for taxes, assessments or

governmental charges on properties or assets of the Bank if the same shall not at the time be

delinquent or thereafter can be paid without penalty, (v) liens arising from workmen’s

compensation laws, pensions and social security legislations; (vi) any lien which secures

foreign currency and interest rate swap and derivative transactions undertaken by the Bank in

the ordinary course of its business; (vii) the Registrar and Paying Agent’s lien or security right

on the funds of the Bank in relation to all fees, charges, and expenses, and any credit facility or

accommodation granted to the Bank by the Registrar, as contemplated by the Registry and

Paying Agency Agreement; and (viii) any extension, renewal or replenishment in whole or in

part of the foregoing liens.

(q) The Bank and each of its Principal Subsidiaries is conducting its business and operations in

compliance with applicable laws and regulations, has filed true, complete, and timely tax

returns, and has paid all taxes due in respect of the ownership of its properties and assets or the

conduct of its operations, except to the extent that the payment of such taxes is being contested

in good faith and by appropriate proceedings.

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(r) The Bank and each of its Principal Subsidiaries is compliant with all Philippine laws, statutes,

regulations, and circulars, including without limitation the circulars, rules, regulations, and

orders issued by the BSP, applicable to it.

(s) The Bank has in good faith complied with, and corrected the findings, and continues to

implement the recommendations, to the satisfaction of the BSP, resulting from all past audits

and examinations conducted by the BSP on the Bank.

(t) The Bank and each of its Principal Subsidiaries has obtained all the necessary authorizations,

approvals, licenses, permits or privileges required from all governmental and regulatory bodies

for the conduct of its business and operations as well as those of its Principal Subsidiaries as

currently conducted, and shall have free and continued use thereof, except where such failure to

possess or obtain the same could not qualify as, or result in, an Adverse Effect.

(u) The Bank and each of its Principal Subsidiaries, maintains insurance with responsible and

reputable insurance companies in such amounts, covering such risks as are prudent and

appropriate and as are usually carried by companies engaged in similar business as those in

which the Bank operates. There are no claims pending, or to the best of the Bank’s knowledge

after due and reasonable inquiry, threatened against the Bank or any of its Principal Subsidiaries

by any employee or third party, in respect of any accident or injury not fully covered by

insurance.

(v) None of the Bank or any of its Principal Subsidiaries, or, to the best of the Bank's knowledge

after due and careful inquiry, their respective directors or officers nor any agent, employee,

affiliate or other person acting on behalf of any of them, is aware of or has taken or will take

any action, directly or indirectly, that would result in a violation by such persons of any

applicable statutes, laws, rules, regulations, judgments, orders or decrees relating to anti-bribery

or other corrupt practices, including, without limitation, making any offer, payment, promise to

pay or authorization of the payment of any money, or other property, gift, promise to give or

authorization of the giving of anything of value to any government official or any political party

or official thereof or any candidate for political office, to influence official action or secure an

improper advantage, or in contravention of any applicable anti-bribery or anti-corruption laws.

The Bank and its Principal Subsidiaries have conducted and will continue to conduct their

businesses in compliance with all applicable statutes, laws, rules, regulations, judgments, orders

or decrees relating to anti-bribery or other corrupt practices and have instituted and maintain

policies and procedures designed to ensure, and which are reasonably expected to continue to

ensure, compliance therewith, and will not use the proceeds of the offering, directly or

indirectly, in violation of applicable anti-bribery or anti-corruption laws. There are no pending

or (to the best knowledge of the Bank and its Principal Subsidiaries after due and careful

inquiry) threatened actions, suits or proceedings by or before any court or governmental agency,

authority or body or any arbitrator alleging such corrupt practices against any of the Bank and

its Principal Subsidiaries.

(w) The operations of the Bank and its Subsidiaries are and have been conducted at all times in

compliance with applicable financial recordkeeping and reporting requirements of all applicable

laws, and in compliance with all applicable anti-money laundering and anti-terrorism financing

statutes, the rules and regulations thereunder, and to the extent applicable to the Bank and its

subsidiaries and affiliates or any of their respective properties, any related or similar rules,

regulations or guidelines, issued, administered or enforced by any governmental agency

(collectively, the “Anti-Money Laundering and Anti-Terrorism Financing Laws”) and subject

to the provisions of the Bond Agreements, no action, suit or proceeding by or before any court

or governmental agency, authority or body or any arbitrator involving any of the Bank or its

subsidiaries with respect to the Anti-Money Laundering and Anti-Terrorism Financing Laws is

pending or, to the best knowledge of the Bank after due and careful inquiry, threatened. The

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proceeds hereof shall not be used directly or indirectly in violation of the Anti-Money

Laundering and Anti-Terrorism Financing Laws.

(x) The Bank and each of its Principal Subsidiaries maintains systems of internal accounting

controls sufficient to provide reasonable assurance that (i) transactions are executed in

accordance with management’s general or specific authorizations; (ii) transactions are recorded

as necessary to permit preparation of financial statements in conformity with Philippine

Financial Reporting Standards and to maintain asset accountability; (iii) access to assets is

permitted only in accordance with management’s general or specific authorization; (iv) the

recorded accountability for assets is compared with the existing assets at reasonable intervals

and appropriate action is taken with respect to any differences; and (v) the Bank and each of its

Principal Subsidiaries has made and kept books, records and accounts which, in reasonable

detail, accurately and fairly reflect the transactions and dispositions of assets of such entity and

provide a sufficient basis for the preparation of the Bank’s consolidated financial statements in

accordance with Philippine Financial Reporting Standards; and the Bank’s current management

information and accounting control system has been in operation for at least twelve (12) months

during which none of the Bank nor any of its Principal Subsidiaries has experienced any

material difficulties with regard to (i) through (v) above;

(y) The Bank and its Principal Subsidiaries have no outstanding guarantees or contingent payment

obligations in respect of indebtedness of third parties except those issued in the ordinary course

of business or as described in the Offering Circular and/or the applicable Pricing Supplement;

the Bank and its Principal Subsidiaries are in compliance with all of its obligations under any

outstanding guarantees or contingent payment obligations as described in the Offering Circular

and/or the applicable Pricing Supplement;

(z) The Offering Circular and/or the applicable Pricing Supplement accurately and fully describes:

(i) all trends, demands, commitments, events, uncertainties and risks, and the potential effects

thereof, which the Bank believes would materially affect liquidity and are reasonably likely to

occur and necessary to enable investors to make an informed assessment of the assets and

liabilities, financial position, profits and losses and prospects of the Bank; and (ii) all off-

balance sheet transactions, arrangements, and obligations; and neither the Bank nor any of its

Principal Subsidiaries has any material relationships with unconsolidated entities that are

contractually limited to narrow activities that facilitate the transfer of or access to assets by the

Bank or any other subsidiary, such as structured finance entities and special purpose entities

that are reasonably likely to have a material effect on the liquidity of the Bank or its

Subsidiaries or the availability thereof or the requirements of the Bank or its Subsidiaries for

capital resources;

(aa) The Bank has appointed and will maintain as its auditors, a firm of independent public

accountants of internationally recognized standing.

(bb) All information provided by the Bank to its external auditors required for the purposes of their

comfort letters in connection with the offering and sale of the Bonds has been supplied, or as

the case may be, will be supplied, in good faith and after due and careful enquiry; such

information was when supplied and remains (to the extent not subsequently updated by further

information supplied to such persons prior to the date hereof), or as the case may be, will be

when supplied, true and accurate in all material respects and no further information has been

withheld the absence of which might reasonably have affected the contents of any of such

letters in any material respect;

(cc) Except as specifically described in the Offering Circular, the Bank and its Principal Subsidiaries

legally and validly own or possess, all patents, licenses, inventions, copyrights, know-how,

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trademarks, service marks, trade names or other intellectual property (collectively, “Intellectual

Property”) necessary to carry on the business now operated by them, and they have not

received any notice or is otherwise aware of any infringement of or conflict with asserted rights

of others with respect to any Intellectual Property or of any facts or circumstances which would

render any Intellectual Property invalid or inadequate to protect its interests therein, and which

infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or

invalidity or inadequacy, singly or in the aggregate, would reasonably be expected to result in

an Adverse Effect; and

(dd) Each of the Bank and its Principal Subsidiaries is Solvent. As used in this paragraph, the term

“Solvent” means, with respect to a particular date, that on such date (i) the present fair market

value (or present fair saleable value) of its assets is not less than the total amount required to

pay its liabilities on its total existing debts and liabilities (including contingent liabilities) as

they become absolute and matured; (ii) it is able to realize upon its assets and pay its debts and

other liabilities, contingent obligations and commitments as they mature and become due in the

normal course of business; (iii) it is not incurring debts or liabilities beyond its ability to pay as

such debts and liabilities mature; (iv) it is not engaged in any business or transaction, and does

not propose to engage in any business or transaction, for which its property would constitute

unreasonably small capital after giving due consideration to the prevailing practice in the

industry in which it is engaged; (v) it will be able to meet its obligations under all its

outstanding indebtedness as it falls due; and (vi) it is not a defendant in any action that would

result in a judgment that it is or would become unable to satisfy.

These representations and warranties are true and correct as of the Issue Date and shall remain true and

correct as long as any Series or Tranche of Bonds or any portion thereof remain outstanding, by reference to

the facts and circumstances then existing.

8. COVENANTS

For as long as any Series or Tranche of the Bonds or any portion thereof remain outstanding, the Bank shall:

(a) pay and discharge all taxes, assessments, and government charges or levies imposed upon it

or upon its income or profits or upon any properties belonging to it prior to the date on

which penalties are assessed thereto; pay and discharge when due all lawful claims which, if

unpaid, might become a lien or charge upon any of the properties of the Bank; and take such

steps as may be necessary in order to prevent its properties or any part thereof from being

subjected to the possibilities of loss, forfeiture, or sale; provided, that the Bank shall not be

required to pay any such tax, assessment, charge, levy, or claim which is being contested in

good faith and by proper proceedings or as could not reasonably be expected to have an

Adverse Effect. The Registrar shall be notified by the Bank within thirty (30) days from the

date of the receipt of written notice of the resolution of such proceedings.

(b) preserve and maintain its corporate existence or, in the case of a merger, consolidation,

reorganization, reconstruction or amalgamation, ensure that the surviving corporation or the

corporation formed thereby effectively assumes without qualification or condition, the entire

obligations of the Bank under the Bonds and for such corporation to preserve and maintain

its corporate existence.

(c) maintain adequate financial records and prepare all financial statements in accordance with

Philippine Financial Reporting Standards, consistently applied and in compliance with the

regulations of the government body having jurisdiction over it, and, subject to receipt of a

written request within a reasonable period, furnish to such requesting Bondholder or its duly

designated representatives copies of the books of accounts and records pertinent to the

compliance by the Bank of the Terms and its obligations under the Bonds.

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(d) comply with all the requirements, terms, covenants, conditions, and provisions of all laws,

rules, regulations, orders, writs, judgments, indentures, mortgages, deeds of trust,

agreements, and other instruments, arrangements, obligations, and duties to which it, its

business or its assets may be subject, or by which it, its business, or its assets are legally

bound where non-compliance would have an Adverse Effect.

(e) satisfactorily comply with all BSP directives, orders, issuances, and letters, including those

regarding its capital, licenses, risk management, and operations; and satisfactorily take all

corrective measures that may be required under BSP audit reports on its operations.

(f) promptly and satisfactorily pay all indebtedness and other liabilities and perform all

contractual obligations pursuant to all agreements to which it is a party to or by which it or

any of its properties may be bound, except those being contested in good faith and by proper

proceedings or as could not reasonably be regarded to have an Adverse Effect.

(g) pay all amounts due under the Bonds at the times and in the manner specified herein, and

perform all its obligations, undertakings, and covenants under the Bonds.

(h) exert its best efforts to obtain at its sole expense the withdrawal of any order delaying,

suspending or otherwise materially and adversely affecting the transactions with respect to

the Bonds at the earliest time possible.

(i) ensure that any documents related to the Bonds will, at all times, comply in all material

respects with the applicable laws, rules, regulations, and circulars, and, if necessary, make

the appropriate revisions, supplements, and amendments to make them comply with such

laws, rules, regulations, and circulars.

(j) make available to the Bondholders financial and other information regarding the Bank by

filing with the SEC, PDEx, and/or the Philippine Stock Exchange (“PSE”) at the time

required or within any allowed extension, the reports required by the SEC, PDEx and/or

PSE, as the case may be, from listed companies in particular and from corporations in

general.

(k) maintain the services of its current external auditor and where the current external auditor of

the Bank shall cease to be the external auditor of the Bank for any reason, the Bank shall

appoint another reputable, responsible and internationally accredited external auditor.

(l) not engage in any business except that authorized by its articles of incorporation;

(m) not sell, transfer, convey, or otherwise dispose of all or substantially all of its assets;

(n) except as may be allowed under existing Bank policies and practices pursuant to benefits,

compensation, reimbursements, and allowances and BSP Rules and regulations, not extend

any loan or advances to its directors and officers;

(o) not assign, transfer, or otherwise convey or encumber any right to receive any of its material

income or revenues unless in its ordinary course of business;

(p) not declare or pay any dividends (other than stock dividends) during an Event of Default or

if declaration or payment of such dividends would result in an Event of Default;

(q) not voluntarily suspend all or substantially all of its business operations;

(r) not grant, in any of its future loan or credit agreements, any creditor any right, above and

beyond what is required under Philippine law, to apply amounts on deposit with or in

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possession of any such creditor by way of set-off in reduction of any amount owing under

any loan or credit agreements;

(s) except with the consent of the Majority Bondholders (which consent shall not be

unreasonably withheld), not enter into any management contracts, profit-sharing, or any

similar contracts or arrangements whereby its business or operations are managed by, or its

income or profits are, or might be shared with, another person, firm or company, which

management contracts, profit-sharing or any similar contracts or arrangements will

materially and adversely affect the Bank’s ability to perform its material obligations under

the Bonds;

(t) except with the consent of the Majority Bondholders (which consent shall not be

unreasonably withheld), not amend its articles of incorporation or by-laws if such

amendments have the effect of changing the general character of its business from that being

carried on at the date hereof;

(u) not, and shall not permit or authorize any other person to, directly or indirectly, use, lend,

make payments of, contribute or otherwise make available, all or any part of the proceeds of

the Bonds or other transaction(s) contemplated by these Terms and Conditions and the Bond

Agreements to fund any trade, business or other activities: (i) involving or for the benefit of

any Restricted Party, or (ii) in any other manner that would reasonably be expected to result

in the Bank or any party to the Bond Agreements being in breach of any Sanctions (if and to

the extent applicable to either of them) or becoming a Restricted Party; and

(v) as long as any obligations under the Bonds remain outstanding, not create, issue, assume or

otherwise incur any bond, note, debenture, or similar security which shall be or purport to be

unsecured and unsubordinated obligations of the Bank, unless such obligations rank pari

passu with, or junior to, the Bank’s obligations under the Bonds in any proceedings in

respect of the Bank for insolvency, winding up, liquidation, receivership, or other similar

proceedings.

The covenants of the Bank shall survive the issuance of any Series or Tranche of the Bonds and shall be

performed fully and faithfully by the Bank at all times while any Series or Tranche of the Bonds or any

portion thereof remain outstanding.

9. EVENTS AND CONSEQUENCES OF DEFAULT

The Bank shall be considered in default under the Bond Agreements in respect of any Series or Tranche of

the Bonds in case any of the following events (each an “Event of Default”) shall occur and is continuing:

(a) Non-payment. The Bank defaults in the repayment of any principal in respect of the relevant Series

or Tranche of Bonds on the relevant due date for payment thereof or default is made in the payment

of any amount of interest in respect of such Series or Tranche of Bonds on the relevant due date of

payment thereof, provided, that such non-payment shall not constitute an Event of Default if the

Bank has confirmed the relevant Payment Instruction Report (as defined in the Registry and Paying

Agency Agreement) prepared by the Registrar and Paying Agent and there are sufficient funds

standing in the relevant Payment Account (as defined in the Registry and Paying Agency

Agreement) on a relevant payment date.

(b) Insolvency Default. The Bank: (i) is declared insolvent or bankrupt or unable to pay its debts; (ii)

stops, suspends or threatens to stop or suspend payment of all or a material part of its debts; (iii)

proposes or makes any agreement for the deferral, rescheduling or other readjustment of all of its

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debts (or of any part which it will or might otherwise be unable to pay when due); or (iv) proposes or

makes a general assignment or an arrangement or composition with or for the benefit of the relevant

creditors in respect of any of such debts; or (v) appoints a trustee or receiver of all or a substantial

portion of its properties. In addition, if a moratorium is agreed or declared in respect of or affecting

all or any part of the debts of the Bank, such agreement or declaration shall also constitute an Event

of Default under this paragraph.

(c) Cross-default. The Bank: (i) defaults in the repayment of any amount of principal and premium (if

any) or interest, in respect of any contract executed by the Bank with any bank, financial institution

or other person, corporation or entity for the payment of borrowed money in an aggregate amount

exceeding USD10,000,000.00 or its equivalent which constitutes an event of default, or with the

giving of notice or the passage of time would constitute an event of default, under said contract; (ii)

violates any other term or condition of a contract, law, or regulation, which is irremediable or, if

remediable, (x) is not remedied by the Bank within thirty (30) days from notice sent to the Bank in

accordance with Notice of Default provision or is otherwise not contested by the Bank, and (y)

results in the acceleration or declaration of the whole financial obligation to be due and payable prior

to the stated normal date of maturity; or (iii) defaults in the repayment of any amount of principal or

interest, in respect of any Series or Tranche of Bonds issued pursuant to the Bond Program; provided

that the events specified in (i) and (ii) shall have an Adverse Effect on the Bank’s ability to perform

its obligations under the Bonds.

(d) Winding-Up Proceedings. The Bank takes any corporate action or other steps are taken or legal

proceedings are started for its winding up, bankruptcy, dissolution or reorganization (except in any

such case for the purposes of a merger, consolidation, reorganization, reconstruction or

amalgamation upon which the continuing corporation or the corporation formed thereby effectively

assumes the entire obligations of the Bank under the Bonds or for the appointment of a receiver,

administrator, administrative receiver, or similar officer of it or of any or all of its revenues and

assets).

(e) Illegality. Any act or condition or thing required to be done, fulfilled, or performed at any time in

order (i) to enable the Bank lawfully to enter into, exercise its rights and perform the obligations

expressed to be assumed by it under the Bonds, or (ii) to ensure that the obligations expressed to be

assumed by the Bank hereunder are legal, valid and binding, is not done, fulfilled or performed at

such time and such failure, if remediable, is not remedied by the Bank within thirty (30) days from

notice sent to the Bank in accordance with the Notice of Default provision.

(f) Representation/Warranty Default. Any representation and warranty of the Bank or any certificate or

opinion submitted by the Bank in connection with the issuance of the Bonds is untrue, incorrect, or

misleading in any material respect.

(g) Covenant Default. The Bank fails to perform or violates its covenants under the Bonds, and such

failure or violation is not remediable or, if remediable, continues to be unremedied for a period of

thirty (30) days from notice sent to the Bank in accordance with the Notice of Default provision.

(h) License Default. Any governmental consent, license, approval, authorization, declaration, filing, or

registration which is granted or required in connection with the Bonds expires or is terminated,

revoked, or modified and the result thereof is to make the Bank unable to discharge its obligations

hereunder or thereunder.

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(i) Expropriation Default. The government or any competent authority takes any action to suspend the

whole or the substantial portion of the operations of the Bank, or condemns, seizes, nationalizes or

expropriates (with or without compensation) the Bank or any substantial portion of its properties or

assets.

(j) Judgment Default. Any final and executory judgment, decree, or arbitral award for the sum of

money, damages, fine, or penalty in excess of USD10,000,000.00 or its equivalent in any other

currency is entered against the Bank and the enforcement of which is not stayed, and is not paid,

discharged, or duly bonded within thirty (30) days after the date when payment of such judgment,

decree, or award is due under the applicable law or agreement.

(k) Writ and Similar Process Default. Any writ, warrant of attachment or execution, or similar process

shall be issued or levied against more than half of the Bank's assets, singly or in the aggregate, and

such writ, warrant, or similar process shall not be released, vacated, or fully bonded within thirty

(30) days after its issue or levy.

(l) Closure Default. The Bank voluntarily suspends or ceases operations of a substantial portion of its

business for a continuous period of thirty (30) days, except in the case of strikes or lockouts when

necessary to prevent business losses, or when due to fortuitous events or force majeure; provided,

that in any such event, there is no Adverse Effect.

(m) Contest Default. The Bank shall contest in writing the validity or enforceability of the Trust

Agreement or the Bonds or shall deny generally in writing the liability of the Bonds under the Trust

Agreement or the Bond Agreement.

Notice of Default

Subject to the terms of the Trust Agreement, the Trustee shall, within ten (10) Business Days after the

occurrence of any Event of Default, give to the Bondholders written notice of such default known to it unless

the same shall have been cured before the giving of such notice; provided that, in the case of payment default

as described in item (a) of “Events and Consequences of Default” above, the Trustee shall immediately

notify the Bondholders upon the occurrence of such payment default. The written notice required to be given

to the Bondholders hereunder shall be published in a newspaper of general circulation in Metro Manila for

two (2) consecutive days, further indicating in the published notice that the Bondholders or their duly

authorized representatives may obtain any information relating to such occurrence of an Event of Default at

the principal office of the Trustee upon presentation of sufficient and acceptable identification.

Consequences of Default

If any one or more of the Events of Default shall have occurred and be continuing, after any applicable cure

period shall have lapsed, and if any such event shall not have been waived by the Majority Bondholders as

set out below, then:

(i) the Trustee shall, by notice in writing delivered to the Bank, or upon the written direction of the Majority

Bondholders whose written instructions/consents/letters shall be authenticated and summarized by the

Registrar to the Trustee and by notice in writing delivered to the Bank, or (ii) the Majority Bondholders may,

by notice in writing to the Bank and the Trustee stating the Event of Default relied upon, declare the

principal and all accrued interest (including Penalty Interest, as specified below) on all the Bonds and other

65

charges thereon (including any incremental tax that may be due on the interest income already earned under

the Bonds), if any, to be immediately due and payable, and upon such declaration the same shall be

immediately due and payable, without presentment, demand, protest, or further notice of all kinds, all of

which are hereby expressly waived by the Bank.

This provision, however, is subject to the condition that the Majority Bondholders may, by written notice to

the Bank thereafter rescind and annul such declaration and its consequences or waive any past default of the

Bank under the Bonds, upon such terms, conditions and agreements, if any, as they may determine; but no

such rescission and annulment shall extend or shall affect any subsequent default or shall impair any right

arising therefrom. Any such waiver shall be conclusive and binding upon all the Bondholders and upon all

future holders and owners of such Bonds.

Penalty Interest

In case any amount payable by the Bank under the Bonds, whether for principal, interest, or otherwise, is not

paid on the relevant due date, the Bank shall, without prejudice to its obligations to pay the said principal,

interest, and other amounts, pay interest on the defaulted amount(s) at the rate of one percent (1%) per month,

net of applicable withholding taxes (the “Penalty Interest”) from the time the amount falls due until it is

fully paid.

Payment in the Event of Default

Subject to the applicable laws of the Philippines on bankruptcy, winding-up or liquidation and the

preferences established by law and under these Terms and Conditions, including the provisions of “Waiver

of Default by the Bondholders” below, the Bank covenants that, upon the occurrence of any Event of

Default, then in any such case, the Bank will pay to the Bondholders entitled to such payment, through the

Registrar and Paying Agent, the whole amount which shall then have become due and payable on all such

outstanding Bonds with interest at the rate borne by the Bonds on the overdue principal, net of applicable

withholding taxes, and with Penalty Interest thereon, when applicable, and, in addition thereto, the Bank will

pay to the Registrar and Paying Agent the actual amounts to cover the cost and expenses of collection,

including reasonable compensation to the Registrar and Paying Agent, its agents, attorneys and counsel, and

any reasonable expenses or liabilities incurred without gross negligence or bad faith by the Registrar and

Paying Agent hereunder.

Application of Payments

Upon the occurrence of an Event of Default, any money collected or delivered to the Paying Agent, and any

other funds held by it, subject to any other provision of the Bond Agreements relating to the disposition of

such money and funds, shall be applied by the Paying Agent in the order of preference as follows:

(a) first: to the pro-rata payment of the costs, expenses, fees and other charges of collection,

including reasonable compensation to the Trustee, the Registrar, the Paying Agent, PDEx,

Lead Arrangers, Selling Agents (other than the Bank), and their respective agents, attorneys

and counsel, and all documented and reasonable expenses and liabilities incurred or

disbursement made by them without gross negligence or bad faith;

(b) second: to the payment of all outstanding interest (including any Penalty Interest and

incremental tax thereon), in the order of maturity of such interest;

(c) third: to the payment of the whole amount then due and unpaid on the Bonds for principal;

and

(d) fourth: the remainder, if any, shall be paid to the Bank, its successors or assigns, or to

whosoever may be lawfully entitled to receive the same, or as a court of competent

jurisdiction may direct.

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Prescription

Claims in respect of principal and interest or other sums payable hereunder shall prescribe unless made

within ten (10) years (in the case of principal or other sums) or five (5) years (in the case of interest) from the

date on which payment becomes due.

Remedies

All remedies conferred by the Trust Agreement to the Trustee and the Bondholders shall be cumulative and

not exclusive and shall not be so construed as to deprive the Trustee or the Bondholders of any legal remedy

by judicial or extra judicial proceedings appropriate to enforce the conditions and covenants of the Trust

Agreement, subject to the discussion below on “Ability to File Suit”.

No delay or omission by the Trustee or the Bondholders to exercise any right or power arising from or on

account of any default hereunder shall impair any such right or power, or shall be construed to be a waiver of

any such default or an acquiescence thereto; and every power and remedy given by the Trust Agreement to

the Trustee or the Bondholders may be exercised from time to time and as often as may be necessary or

expedient.

Ability to File Suit

No Bondholder shall have any right, by virtue of or by availing of any provision of the Bond Agreements or

these Terms and Conditions, to institute any suit, action or proceeding for the collection of any sum due from

the Bank hereunder on account of principal, interest, and other charges, or for the appointment of a receiver

or similar officer, or for any other remedy hereunder unless: (i) such Bondholder previously shall have given

to the Bank and the Trustee written notice of the occurrence of an Event of Default; (ii) the Majority

Bondholders shall have decided and made the written request upon the Trustee to institute such action, suit

or proceeding in the latter’s name; (iii) the Trustee for sixty (60) days after the receipt of such notice and

request shall have neglected or refused to institute any such action, suit or proceeding; and (iv) no directions

inconsistent with such written request shall have been given under a waiver of default by the Bondholders, it

being understood and intended, and being expressly covenanted by every Bondholder with every other

Bondholder and the Trustee, that no one or more Bondholders shall have any right in any manner whatever

by virtue of or by availing of any provision of the Trust Agreement to affect, disturb or prejudice the rights

of the holders of any other such Bonds or to obtain or seek to obtain priority over or preference to any other

such holder or to enforce any right under the Trust Agreement, except in the manner herein provided and for

the equal, ratable and common benefit of all the Bondholders.

Waiver of Default by the Bondholders

The Majority Bondholders may, on behalf of the Bondholders, waive any past default, except the Events of

Default referred to in “Events of Default” paragraphs (a), (b), (d), (h) (i), or (l), and their respective

consequences.

In case of any such waiver, the Bank and the Bondholders shall be restored to their former positions and

rights hereunder; but no such waiver shall extend to any subsequent or other default or impair any right

consequent thereto. Any such waiver by the Majority Bondholders shall be conclusive and binding upon all

Bondholders and upon all future holders and owners thereof, irrespective of whether or not any notation of

such waiver is made upon the certificate(s) representing the Bonds.

10. SUBSTITUTION

Substitution of the Bonds is not contemplated.

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11. TRUSTEE; NOTICES

Notice to the Trustee

All documents required to be submitted to the Trustee pursuant to the Trust Agreement, the Offering Circular

and this Terms and Conditions and all correspondence addressed to the Trustee shall be delivered to:

To the Trustee: Development Bank of the Philippines Trust Banking Group

Attention: Ma. Teresa T. Atienza

Address: Trust Banking Group

Development Bank of the Philippines

Sen Gil J. Puyat Avenue, corner Makati Avenue

Makati City, Philippines

Subject: UBP Senior Fixed Rate Bonds

Fax No.: +63 2 818 9511 local 3400

All documents and correspondence not sent to the above-mentioned address shall be considered as not to

have been sent at all.

Notice to the Registrar and the Bank

All documents required to be submitted to the Registrar or the Bank pursuant to the Registry and Paying

Agency Agreement and these Terms and Conditions and all correspondence, addressed to such parties shall

be delivered to the following addresses:

To the Registrar: Philippine Depository and Trust Corporation

Attention: Josephine Dela Cruz

Director

Address: 37th Floor Tower 1, The Enterprise Center

6766 Ayala Avenue corner Paseo de Roxas

Makati City, Metro Manila, Philippines

Subject: UBP Senior Fixed Rate Bonds

Telephone no.: (+632) 884-4425

Fax no.: (+632) 884- 5099

E-mail: baby_delacruz@pds.com.ph

Attention: Patricia Camille Garcia

Registry Officer

Telephone no.: (+632) 884-4413

Fax no.: (+632) 884- 5099

E-mail: peachy.garcia@pds.com.ph

To the Bank: Union Bank of the Philippines

Attention: Jose Emmanuel U. Hilado

Senior Executive Vice President/

Chief Financial Officer/Treasurer

Address: 23/F UnionBank Plaza, Meralco Avenue corner Onyx Street,

Ortigas Center, Pasig City, Philippines

Telephone No.: (+632) 638 8601

(+632) 667 6388 local 8601

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Fax No.: (+632) 638 0368

E-mail: jeuhilado@unionbankph.com

All documents and correspondence not sent to the above-mentioned address shall be considered as not to

have been sent at all.

Any requests for documentation or certification and other similar matters available within the records of the

Registrar must be communicated by the Bondholders to the Registrar in writing and shall be subject to

review, acceptance, and approval by the Registrar. Upon such acceptance and approval, the Bondholder

shall pay to the Registrar the amount as per the Registrar’s pay schedule plus the costs of legal review,

courier and the like. The fees may be adjusted from time to time, at the discretion of the Registrar.

Notice to the Bondholders

Notices to Bondholders shall be sent to their mailing address as set forth in the Register of Bondholders.

Except where a specific mode of notification is provided for herein (including with respect to a notice of the

occurrence of an Event of Default or a Notice of Meeting which must be disseminated by publication),

notices to Bondholders shall be sufficient when made in writing and transmitted in any one of the following

modes: (i) registered mail; (ii) ordinary mail; (iii); electronic mail; (iv) by one-time publication in a

newspaper of general circulation in the Philippines; or (v) personal delivery to the address of record in the

Register of Bondholders. The Registrar shall rely on the Register of Bondholders in determining the

Bondholders entitled to notice. All notices shall be deemed to have been received: (i) ten (10) days from

posting, if transmitted by registered mail; (ii) fifteen (15) days from mailing, if transmitted by ordinary mail;

(iii) on the date of delivery for electronic mail; (iv) on date of publication; or (v) on date of delivery, for

personal delivery.

Binding and Conclusive Nature

Except as provided in the Registry and Paying Agency Agreement, all notifications, opinions,

determinations, certificates, calculations, quotations and decisions given, expressed, made or obtained by the

Registrar for the purposes of the provisions of the Registry and Paying Agency Agreement, will (in the

absence of willful default, bad faith or manifest error) be binding on the Bank and all Bondholders, and the

Registrar shall not be liable to the Bank or the Bondholders in connection with the exercise or non-exercise

by the Registrar of its powers, duties and discretion under the Registry and Paying Agency Agreement.

DUTIES AND RESPONSIBILITIES OF THE TRUSTEE

The Trustee is appointed as trustee for and on behalf of the Bondholders and accordingly shall perform such

duties and shall have such responsibilities as provided in the Trust Agreement and inform the Bondholders of

any event which has a material adverse effect on the ability of the Bank to comply with its obligations to the

Bondholders, breach of representations and warranties, and Events of Default within a reasonable period

from the time that the Trustee learns or is informed of such events. The Trustee shall have custody of and

hold in its name, for and in behalf of the Bondholders, the master certificates of indebtedness for the total

issuance of the Bonds. The Trustee shall promptly and faithfully carry out the instructions or decisions of the

Majority Bondholders issued or reached in accordance with the terms and conditions of this Trust

Agreement. The Trustee shall, in accordance with the terms and conditions of the Trust Agreement, monitor

the compliance or non-compliance by the Bank with all its representations and warranties, and the

observance by the Bank of all its covenants and performance of all its obligations, under and pursuant to the

Trust Agreement. The Trustee shall observe due diligence in the performance of its duties and obligations

under the Trust Agreement. For the avoidance of doubt, notwithstanding any actions that the Trustee may

take, the Trustee shall remain to be the party responsible to the Bondholders, and to whom the Bondholders

shall communicate with in respect to any matters that must be taken up with the Bank.

The Trustee shall, prior to the occurrence of an Event of Default or after the curing of all such defaults which

may have occurred, perform only such duties as are specifically set forth in the Trust Agreement. In case of

69

an Event of Default, the Trustee shall exercise such rights and powers vested in it by the Trust Agreement,

and use such judgment and care under the circumstances then prevailing that individuals of prudence,

discretion and intelligence, and familiar with such matters exercise in the management of their own affairs.

None of the provisions contained in the Trust Agreement, the Offering Circular, or this Terms and

Conditions shall require or be interpreted to require the Trustee to expend or risk its own funds or otherwise

incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights

or powers.

RESIGNATION AND CHANGE OF TRUSTEE

(a) The Trustee may at any time resign by giving ninety (90) days’ prior written notice to the Bank and

to the Bondholders of such resignation.

(b) Upon receiving such notice of resignation of the Trustee, the Bank shall immediately appoint a

successor trustee by written instrument in duplicate, executed by its authorized officers, one (1) copy

of which instrument shall be delivered to the resigning Trustee and one (1) copy to the successor

trustee. If no successor shall have been so appointed and have accepted appointment within thirty

(30) days after the giving of such notice of resignation, the resigning Trustee may petition any court

of competent jurisdiction for the appointment of a successor, or any Bondholder who has been a

bona fide bondholder for at least six (6) months (the “bona fide Bondholder”) may, on behalf of

himself and all other Bondholders, petition any such court for the appointment of a successor. Such

court may thereupon after notice, if any, as it may deem proper, appoint a successor trustee. Subject

to the provision of subsection (e) below, such a successor trustee should possess all the qualifications

required under pertinent laws, otherwise, the incumbent trustee shall continue to act as such.

(c) In case at any time the Trustee shall become incapable of acting, or has acquired conflicting interest,

or shall be adjudged as bankrupt or insolvent, or a receiver for the Trustee or of its property shall be

appointed, or any public officer shall take charge or control of the Trustee or of its properties or

affairs for the purpose of rehabilitation, conservation or liquidation, then the Bank may within thirty

(30) days from there remove the Trustee concerned, and appoint a successor trustee, by written

instrument in duplicate, executed by its authorized officers, one (1) copy of which instrument shall

be delivered to the Trustee so removed and one (1) copy to the successor trustee. If the Bank fails to

remove the Trustee concerned and appoint a successor trustee, any bona fide Bondholder may

petition any court of competent jurisdiction for the removal of the Trustee concerned and the

appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may

deem proper, remove the Trustee and appoint a successor trustee. Subject to the provisions of

subsection (e) below, such successor trustee should possess all the qualifications required under

pertinent laws; otherwise, the incumbent trustee shall continue to act as such until a successor trustee

is duly appointed.

(d) The Majority Bondholders may at any time remove the Trustee for cause, and appoint a successor

trustee, by the delivery to the Trustee so removed, to the successor trustee and to the Bank of the

required evidence under the provisions on “Evidence Supporting the Action of the Bondholders” in

this Terms and Conditions.

(e) Without prejudice to any liabilities of the Trustee which have accrued, any resignation or removal of

the Trustee and the appointment of a successor trustee pursuant to any of the provisions of this

subsection shall become effective upon the earlier of: (i) acceptance of appointment by the successor

trustee as provided in the Trust Agreement; or (ii) the effectivity of the resignation notice sent by the

Trustee under the Trust Agreement (a) (the “Resignation Effective Date”) provided, however, that

after the Resignation Effective Date and, as relevant, until such successor trustee is qualified and

appointed (the “Holdover Period”), the resigning Trustee shall discharge duties and responsibilities

solely as a custodian of records for turnover to the successor Trustee promptly upon the appointment

70

thereof by the Bank provided further that the resigning Trustee shall be entitled to the payment of the

fee stipulated in the Trust Agreement during the Holdover Period.

SUCCESSOR TRUSTEE

(a) Any successor trustee appointed shall execute, acknowledge and deliver to the Bank and to its

predecessor Trustee an instrument accepting such appointment, and thereupon the resignation or

removal of the predecessor Trustee shall become effective and such successor trustee, without

further act, deed or conveyance, shall become vested with all the rights, powers, trusts, duties and

obligations of its predecessor in the trusteeship with like effect as if originally named as trustee in

the Trust Agreement. The foregoing notwithstanding, on the written request of the Bank or of the

successor trustee, the Trustee ceasing to act as such shall execute and deliver an instrument

transferring to the successor trustee, all the rights, powers and duties of the Trustee so ceasing to act

as such. Upon request of any such successor trustee, the Bank shall execute any and all instruments

in writing as may be necessary to fully vest in and confer to such successor trustee all such rights,

powers and duties. Upon effectivity of the removal or resignation of the Trustee as provided above,

the Trustee’s liabilities and obligations shall immediately cease.

(b) Upon acceptance of the appointment by a successor trustee, the Bank shall notify the Bondholders in

writing of the succession of such trustee to the trusteeship. If the Bank fails to notify the

Bondholders within ten (10) days after the acceptance of appointment by the trustee, the latter shall

cause the Bondholders to be notified at the expense of the Bank.

REPORTS TO THE BONDHOLDERS

The Trustee shall submit to the Bondholders on or before February 28 of each year from Issue Date, until full

payment of the Bonds, a brief report dated December 31 of the immediately preceding year with respect to:

(i) The funds, if any, physically in the possession of the Paying Agent held in trust for the Bondholders

on the date of such report; and

(ii) Any action taken by the Trustee in the performance of its duties under the Trust Agreement which it

has not previously reported and which in its opinion materially affects the Bonds, except action in

respect of a default, notice of which has been or is to be withheld by it.

The Trustee shall submit to the Bondholders a brief report within ninety (90) days from the making of any

advance for the reimbursement of which it claims or may claim a lien or charge which is prior to that of the

Bondholders on the property or funds held or collected by the Paying Agent with respect to the character,

amount and the circumstances surrounding the making of such advance; provided that, such advance

remaining unpaid amounts to at least ten percent (10%) of the aggregate outstanding principal amount of the

Bonds at such time.

Inspection of Documents

The following pertinent documents may be inspected during regular business hours on any Business Day at

the principal office of the Trustee:

1. Trust Agreement;

2. Registry and Paying Agency Agreement; and

3. Articles of incorporation and by-laws of the Bank

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12. MEETINGS OF BONDHOLDERS

A meeting of the Bondholders may be called at any time and from time to time for the purpose of taking any

action authorized to be taken by or on behalf of the Bondholders of any specified aggregate principal amount

of Bonds under any other provisions of the Trust Indenture Agreement and Registry and Paying Agency

Agreement or under the law and such other matters related to the rights and interests of the Bondholders

under the Bonds.

In respect of any matter presented for resolution that affect the rights and interests of only the holders of a

particular Tranche or Series of Bonds, only such Bondholders of the particular Series or Tranche will be

considered for quorum and approval purposes.

Notice of Meetings

Meetings of the Bondholders may be called by: (1) the Bank, or (2) the Majority Bondholders (reckoned on

the basis of the Register of Bondholders as of the date on which notice to the Registrar is given), by giving

written instructions to issue a notice of such meeting to the Trustee, which instructions must include the

proposed time, place and (in reasonable detail) purpose of the meeting.

The Trustee shall no later than the Business Day immediately following its receipt of notice from the

Majority Bondholders of a request for a meeting, send a copy of such notice to the Bank by personal delivery

together with information on the total amount of the Bonds required to reach the threshold for Majority

Bondholders and, whether or not based on its calculations, the request for the meeting was signed by the

Majority Bondholders. The Bank shall promptly and in no event later than five (5) Business Days from its

receipt of such notice from the Trustee, deliver written notice to the Trustee confirming whether or not it

agrees with the determination that the Bondholders calling the meeting constitute the Majority Bondholders.

If the Bank is the party calling the meeting or has confirmed that its agrees with the determination that the

Bondholders calling the meeting constitute the Majority Bondholders, the Trustee shall, within twenty (20)

days of its receipt of such instructions or confirmation, cause the publication of the notice received from the

Bank or the Majority Bondholders (as applicable) of such meeting to the Bondholders (with a copy to the

Bank, if the Bank is not the party calling for such meeting) in accordance the provisions of “Notice to the

Bondholders” above, which notice shall state the time and place of the meeting and the purpose of such

meeting in reasonable detail. The date of the meeting shall not be more than forty-five (45) days nor less than

fifteen (15) days from the date such notice is issued. All reasonable costs and expenses incurred by the

Trustee for the proper dissemination of the requested meeting shall be reimbursed by the Bank within ten

(10) days from receipt of the duly supported billing statement.

Failure of the Trustee to Call a Meeting

In case at any time the Bank or the Majority Bondholders (reckoned on the basis of the Register of

Bondholders as of the date on which instructions to call a meeting are given to the Trustee) requested the

Trustee to call a meeting of the Bondholders by written notice setting forth in reasonable detail the purpose

of the meeting, and the Trustee shall not have issued, in accordance with the notice requirements, the notice

of such meeting within twenty (20) days after receipt of such request, then the Bank or the Majority

Bondholders may determine the time and place for such meeting and may call such meeting by issuing

notice thereof in accordance with the provisions of “Notice of Meetings” above.

For the avoidance of doubt, the Trustee shall not be liable for any failure to call a meeting notwithstanding

the receipt of instructions to do so from the Bank or the Majority Bondholders, save when such failure is due

to willful default or gross negligence.

(i) Quorum

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The presence of the Majority Bondholders, personally or by proxy, shall be necessary to constitute a quorum

to do business at any meeting of the Bondholders. For the avoidance of doubt, it shall be the responsibility of

the party calling the meeting to determine whether or not a quorum has been achieved (based on a list of the

registered Bondholders as of the Business Day immediately preceding the meeting, as certified by the

Registrar), and the Trustee shall not have any obligation to determine compliance with quorum requirements.

For the avoidance of doubt, only such Bondholders of the particular Series or Tranche shall be considered for

quorum and approval purposes.

Procedure for Meetings

(a) The Bank or the Bondholders calling the meeting, as the case may be, shall, in like manner, move for

the election of the chairman and secretary of the meeting.

(b) Any meeting of the Bondholders duly called may be adjourned from time to time for a period or

periods not to exceed in the aggregate of six (6) months from the date for which the meeting shall

originally have been called and the meeting as so adjourned may be held without further notice. Any

such adjournment may be ordered by persons representing a majority of the aggregate principal

amount of the Bonds represented at the meeting and entitled to vote, whether or not a quorum shall

be present at the meeting.

Voting Rights

To be entitled to vote at any meeting of the Bondholders, a person shall be a registered holder of the

particular Series or Tranche of Bonds holding the meeting, or a person appointed by an instrument in writing

as proxy by any such holder as of the date of the said meeting. The only persons who shall be entitled to be

present or to speak at any meeting of the Bondholders (of such particular Series or Tranche) shall be the

persons entitled to vote at such meeting and any representatives of the Bank and its legal counsel.

Voting Requirement

All matters presented for resolution by the Bondholders in a meeting duly called for the purpose shall be

decided or approved by the affirmative vote of the Majority Bondholders (of such particular Series or

Tranche. Any resolution of the Bondholders which has been duly approved with the required number of

votes of the Bondholders as herein provided shall be binding upon all the Bondholders and the Bank as if the

votes were unanimous. A Bondholder shall have such number of votes as the amount of Bonds (of such

particular Series or Tranche) held.

For the avoidance of doubt, only the vote of such Bondholders of the particular Series or Tranche subject of

the meeting will be considered for approval purposes.

Role of the Trustee in Meetings of the Bondholders

The party calling the meeting of the Bondholders (of a particular Series or Tranche) may make such

reasonable regulations as it may deem advisable for such meeting, in regard to the appointment of proxies by

registered Bondholders of the particular Series or Tranche of Bonds, the election of the chairman and the

secretary, the appointment and duties of inspectors of votes, the submission and examination of proxies,

certificates and other evidences of the right to vote and such other matters concerning the conduct of the

meeting as it shall deem fit. Proof of ownership of the particular Series or Tranche of Bonds shall be based

on a list of the registered Bondholders (of a particular Series or Tranche) as of the Business Day immediately

preceding the meeting, as certified by the Registrar.

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Amendments

The Bank and the Trustee may amend these Terms and Conditions or the Bonds without notice to any

Bondholder but with the written consent of the Majority Bondholders. However, without the consent of each

Bondholder affected thereby, an amendment may not:

(1) reduce the amount of Bondholder that must consent to an amendment or waiver;

(2) reduce the rate of or extend the time for payment of interest on any Bond;

(3) reduce the principal of or extend the Maturity Date of any Bond;

(4) impair the right of any Bondholder to receive payment of principal of and interest on such

Bondholder’s Bonds on or after the due dates therefore or to institute suit for the enforcement of

any payment on or with respect to such Bondholders;

(5) reduce the amount payable upon the redemption or repurchase of any Bond under the Terms

and Conditions or change the time at which any Bond may be redeemed;

(6) make any Bond payable in money other than that stated in the Bond;

(7) subordinate any Bond to any other obligation of the Bank;

(8) release any Bond interest that may have been granted in favor of the Bondholders;

(9) amend or modify the Payment of Additional Amounts, Taxation, the Events of Default of the

Terms and Conditions or the Waiver of Default by the Bondholders; or

(10) make any change or waiver of this Condition.

It shall not be necessary for the consent of the Bondholders under this Condition to approve the particular

form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof.

After an amendment under this Condition becomes effective, the Bank shall send a notice briefly describing

such amendment to the Bondholders in the manner provided in the section entitled “Notice to the

Bondholders”.

Evidence Supporting the Action of the Bondholders

Wherever in the Trust Agreement it is provided that the Bondholders of a specified percentage of the

aggregate outstanding principal amount of the Bonds may take any action (including the making of any

demand or requests, the giving of any notice or consent or the taking of any other action), the fact that at the

time of taking any such action the Bondholders of such specified percentage have joined therein may be

evidenced by: (i) any instrument executed by the Bondholders in person or by the agent or proxy appointed

in writing; or (ii) the record of voting in favor thereof at the meeting of the Bondholders duly called and held

in accordance herewith, as duly authenticated by the person selected to preside over the meeting of the

Bondholders under “Procedure for Meetings”; or (iii) a combination of such instrument and any such record

of meeting of the Bondholders.

Non-Reliance

Each Bondholder also represents and warrants to the Trustee that it has independently and, without reliance

74

on the Trustee, made its own credit investigation and appraisal of the financial condition and affairs of the

Bank on the basis of such documents and information as it has deemed appropriate and that he has

subscribed to the Issue on the basis of such independent appraisal, and each Bondholder represents and

warrants that it shall continue to make its own credit appraisal without reliance on the Trustee. The

Bondholders agree to indemnify and hold the Trustee harmless from and against any and all liabilities,

damages, penalties, judgments, suits, expenses and other costs of any kind or nature against the Trustee in

respect of its obligations hereunder, except for its gross negligence or wilful misconduct.

13. GOVERNING LAW

The Bond Agreements are governed by and are construed in accordance with Philippine law.

Dispute Resolution

Any legal action or proceeding arising out of, or connected with, the Bonds and the Trust Agreements shall

be brought exclusively in the proper courts of Makati City or Pasig City, each of the parties expressly

waiving any other venue.

Waiver of Preference

The obligations of the Bank to the Bondholders created under the Bond Agreements and the Bonds shall not

enjoy any priority of preference or special privileges whatsoever over any other unsecured, and

unsubordinated obligations of the Bank. Accordingly, whatever priorities or preferences that the Bond

Agreements or the Bonds may have conferred in favor of the Bondholders or any person deriving a right

from them under and by virtue of Article 2244, paragraph 14 of the Civil Code of the Philippines are hereby

absolutely and unconditionally waived and renounced, provided, however, that should any creditor to the

Bank hereinafter have a preference or priority over amounts owing under their respective agreements as a

result of a notarization, and the Bank has not either procured a waiver of this preference to the satisfaction of

the Bondholders and the Trustee or equally and ratably extended such preference to the Bondholders, then

then the waiver given hereunder is automatically withdrawn and deemed not given. For the avoidance of

doubt, this waiver and renunciation of the priority or preference under Article 2244, paragraph 14 of the

Civil Code of the Philippines shall not be deemed to have been given by any of the other parties to the Bond

Agreements, including the Lead Arrangers, Selling Agent, Registrar and Paying Agent, in their capacities as

such.

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USE OF PROCEEDS

The net proceeds from the Bonds Program shall be used to expand funding base, support business expansion

plans, and for other general corporate purposes.

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CAPITALISATION AND INDEBTEDNESS OF THE BANK

The following table sets out the unaudited consolidated capitalization and indebtedness of the Bank as of

December 31, 2018, and as adjusted to give effect to the issuance of the Bonds. This table should be read in

conjunction with the Bank’s audited consolidated financial statements as of December 31, 2018 included

elsewhere in this Offering Circular.

As of December 31, 2018

(₱ millions)

Indebtedness

Deposit Liabilities

Demand ........................................... 119,253.7

Savings ............................................ 67,348.1

Time ................................................ 228,100.7

Long-term Negotiable Certificate of Deposits 6,000.0

Total Deposit Liabilities ............ 420,702.5

Bills Payable ...................................... 90,964.5

Notes and Bonds Payable ................. 44,522.1

Other Liabilities ................................ 26,632.7

Total Liabilities.............................. 582,821.8

Equity

Equity attributable to the Parent Bank’s

stockholders:

Common stock ............................. 12,171.5

Additional paid-in capital ............ 14,147.0

Surplus free .................................. 61,456.6

Surplus reserves ........................... 3,502.8

Net unrealized fair value gains on investment

securities at FVOCI .................. 75.2

Remeasurements of defined benefit plan (985.5)

Other reserves .............................. 50.1

Total equity attributable to the Parent

Bank’s stockholders ................ 90,417.7

Non-controlling interests ................. 543.2

Total Equity ................................ 90,960.9

Total Indebtedness and Capitalization 673,782.7

Capital Ratios

CET 1 ratio ......................................... 12.7

Tier 1 capital ratio .............................. 12.7

Total capital ratio ................................ 15.2

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following selected financial information has been derived from (i) the audited consolidated financial

statements of the Bank and its subsidiaries as of and for the years ended December 31, 2016, 2017 and 2018

The Bank’s audited consolidated financial statements as of and for the years ended December 31, 2016 and

2017 were prepared in accordance with PFRS by the Bank and have been audited in accordance with

Philippine Standards on Auditing by Punonbayan & Aurallo, a member firm of Grant Thornton and the

audited consolidated financial statements as of and for the year ended December 31, 2018 were prepared in

accordance with PFRS by the Bank and have been audited by SyCip Gorres Velayo & Co. in accordance

with Philippine Standards on Auditing. Investors should read the following summary of consolidated

financial and other data relating to the Bank in conjunction with the financial statements and the related

notes included elsewhere in this Offering Circular.

CONSOLIDATED STATEMENTS OF INCOME

For the year ended December 31,

2016 2017 2018

(audited)

(₱ millions, except per share data)

Interest Income

Loans and other receivables ............................... 18,247.9 20,705.0 23,441.7

Investment securities at amortized cost and

FVOCI ............................................................ 4,719.6 6,658.2 7,836.1

Cash and cash equivalents .................................. 489.1 222.3 207.5

Interbank loans receivable .................................. 80.4 92.8 107.3

Trading securities at FVTPL .............................. 59.1 52.4 36.6

23,596.1 27,730.7 31,629.2

Interest Expenses

Deposit liabilities ................................................ 4,294.2 5,949.3 8,841.5

Bills payable and other liabilities ....................... 980.2 996.5 2,788.3

5,274.4 6,945.8 11,629.8

Net Interest Income .............................................. 18,321.7 20,784.9 19,999.4

Provision for Credit Losses .................................. 1,594.1 875.6 856.0

Net Interest Income after Provisions for Credit

Losses ................................................................. 16,727.6 19,909.3 19,143.4

Other Income

Service charges, fees and commissions .............. 1,321.3 1,420.1 1,572.2

Gains (losses) on trading and investment

securities at FVTPL and FVOCI .................... (136.2) (6.2) 1,390.9

Gains on sale of investment securities at

amortized cost ................................................. 3,951.2 272.8 152.2

Miscellaneous ..................................................... 2,077.8 2,845.7 2,558.6

7,214.1 4,532.4 5,673.9

Other Expenses

Salaries and employee benefits ........................... 5,072.6 5,285.0 5,726.6

Taxes and licenses .............................................. 1,435.8 2,091.7 2,563.6

Occupancy .......................................................... 686.2 735.1 849.5

Depreciation and amortization ............................ 716.4 634.9 743.4

Miscellaneous ..................................................... 4,054.8 5,008.9 6,436.5

11,965.8 13,755.6 16,319.6

Net Profit before Tax ........................................... 11,975.9 10,686.1 8,497.7

Income Tax Expense ............................................ 1,909.5 2,266.1 1,182.7

Net Profit ............................................................... 10,066.4 8,420.0 7,315.0

Attributable to:

Parent Bank’s stockholders ................................ 10,058.3 8,411.3 7,316.1

Non-controlling interests .................................... 8.1 8.7 (1.1)

10,066.4 8,420.0 7,315.0

Basic / Diluted Earnings per Share ..................... 9.50 7.95 6.66

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the year ended December 31,

2016 2017 2018

(audited)

(₱ millions)

Net Profit for the Year ......................................... 10,066.4 8,420.0 7,315.0

Other Comprehensive Income (Loss)

Items that may be reclassified to profit or loss

in subsequent periods:

Mark-to-market gains on reclassified

investment securities................................... - - 1,352.8

Realized gains on sale of investment

securities at FVOCI recognized in profit or

loss .............................................................. - - (1,496.6)

Unrealized mark-to-market gains (losses) on

investment securities at FVOCI .................. (0.3) - 218.9

Items that will not be reclassified to profit or

loss in subsequent periods:

Remeasurement gains (losses) on defined

benefit plan ................................................. (527.8) (51.2) 271.2

Income tax benefit (expense) ......................... 158.3 15.4 (81.4)

Share in changes in remeasurement gains

(losses) of subsidiaries ................................ - - -

Total Other Comprehensive Income (Loss) for

the Year

(369.8) (35.8) 264.9

Total Comprehensive Income for the Year 9,696.6 8,384.2 7,579.9

Comprehensive income attributable to the:

Parent Bank’s stockholders .... 9,688.7 8,375.7 7,581.0

Non-controlling interests ........ 7.9 8.5 (1.1)

9,696.6 8,384.2 7,579.9

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

December 31,

2016 2017 2018

(audited)

(₱ millions)

Assets

Cash and Other Cash Items .......................... 6,021.4 6,633.2 10,916.5

Due from Bangko Sentral ng Pilipinas ........ 56,151.2 66,277.0 56,510.7

Due from Other Banks .................................. 42,425.3 54,520.5 14,942.2

Interbank Loans Receivable ......................... 24,362.8 4,793.2 -

Trading and Investment Securities

At fair value through profit or loss .............. 3,789.9 3,182.0 8,283.7

At amortized cost ......................................... 117,778.6 166,471.7 200,173.7

At fair value through other comprehensive

income ..................................................... 43.8 43.8 9,815.0

Loans and Other Receivables – Net ............. 234,530.2 280,178.9 326,199.5

Investment in Subsidiaries and Associates .. 2.3 2.5 29.6

Bank Premises, Furniture, Fixtures and

Equipment – Net ........................................ 3,523.2 3,765.8 5,108.8

Investment Properties ................................... 13,525.0 14,153.5 15,253.5

Goodwill ......................................................... 11,258.3 11,258.3 15,726.3

Other Assets – Net ......................................... 10,378.1 10,152.0 10,823.2

Total Assets .................................................... 523,790.1 621,432.4 673,782.7

Liabilities and Equity

Liabilities

Deposit Liabilities

Demand ....................................................... 121,166.8 127,424.3 119,253.7

Savings ........................................................ 49,320.5 57,744.9 67,348.1

Time ............................................................ 202,997.8 259,447.0 228,100.7

Long-term Negotiable Certificate of Deposits 3,000.0 3,000.0 6,000.0

79

December 31,

2016 2017 2018

Total Deposit Liabilities ........................ 376,485.1 447,616.2 420,702.5

Bills Payable ................................................... 48,100.2 43,070.8 90,964.5

Notes and Bonds Payable .............................. 7,200.0 32,128.2 44,522.1

Other Liabilities ............................................. 25,059.5 25,272.8 26,632.7

Total Liabilities .......................................... 456,844.8 548,088.0 582,821.8

Equity

Equity attributable to the Parent Bank’s

stockholders:

Common stock ......................................... 10,583.4 10,583.4 12,171.5

Additional paid-in capital ........................ 5,819.9 5,819.9 14,147.0

Surplus free ............................................. 49,877.9 56,053.1 61,456.6

Surplus reserves ....................................... 1,734.7 1,959.9 3,502.8

Net unrealized fair value gains on investment

securities at FVOCI ............................. 0.0 0.0 75.2

Remeasurements of defined benefit plan . (1,139.7) (1,175.3) (985.5)

Other reserves .......................................... 50.1 50.1 50.1

Total equity attributable to the Parent

Bank’s stockholders ........................... 66,926.4 73,291.2 90,417.7

Non-controlling interests ............................. 18.8 53.2 543.2

Total Equity ........................................... 66,945.2 73,344.4 90,960.9

Total Liabilities and Equity .......................... 523,790.1 621,432.4 673,782.7

SELECTED FINANCIAL RATIOS

As of December 31,

2016 2017 2018

Return on assets(1) ................................................................. 2.2 1.5 1.2

Return on shareholders' equity(2) .......................................... 16.1 12.0 9.0

Net interest margin(3) ............................................................ 5.1 4.8 4.1

Cost-to-income ratio(4) .......................................................... 46.9 54.3 63.6

Operating Expenses ...................................................... 11,965.8 13,755.6 16,319.6

Net Interest Income ...................................................... 18,321.7 20,784.9 19,999.4

Other Income ................................................................ 7,214.1 4,532.4 5,673.9

Gross loans-to-deposits(6) ..................................................... 62.3% 60.3% 72.6%

Gross loans(5) ................................................................ 234,559.4 269,916.9 305,221.5

Loans and discounts ............................................... 226,262.0 261,785.3 298,082.6

Customers’ liabilities under acceptances and trust

receipts ................................................................... 3,790.0 4,633.9 4,371.1

Bills purchased ....................................................... 4,507.4 3,497.7 2,767.8

Total deposits ............................................................... 376,485.1 447,616.2 420,702.5

Tier I capital adequacy ratio(7) .............................................. 12.9 12.1 12.7

Total capital adequacy ratio(8) ............................................... 15.7 14.4 15.2

Total equity-to-total assets(9) ................................................ 12.8% 11.8% 13.5%

Total equity .................................................................. 66,945.2 73,344.4 90,960.9

Total assets ................................................................... 523,790.1 621,432.4 673,782.7

Total non-performing loans to-total loans — excluding interbank

loans(10) ................................................................................. 4.0% 3.9% 4.1%

Total non-performing loans .......................................... 9,308.3 10,504.3 12,403.3

Total loans excluding IBCL(11) ..................................... 234,080.7 270,018.9 306,097.8

Gross loans ............................................................. 234,559.4 269,916.9 305,221.5

Accrued Interest Receivable ................................... 1,327.1 1,888.1 2,377.3

Less: Unearned Discounts ...................................... 1,805.8 1,786.1 1,501.0

Total non-performing loans-to-total loans — including interbank

loans(12) .............................................................................. 3.6% 3.8% 4.1%

80

As of December 31,

2016 2017 2018

Total non-performing loans .......................................... 9,308.3 10,504.3 12,403.3

Total loans excluding IBCL ......................................... 234,080.7 270,018.9 306,097.8

IBCL 24,362.8 4,793.3 -

Total loans including IBCL .......................................... 258,443.5 274,812.2 306,097.8

Specific allowances for impairment losses (loans) to gross

loans(13) .............................................................................. 3.3% 2.3% 1.7%

Specific allowances for impairment losses (loans) ....... 7,726.7 6,294.6 5,329.2

Gross loans ................................................................... 234,559.4 269,916.9 305,221.5

Total allowances for loan impairment losses-to- total non-

performing loans(14) ........................................................... 109.4% 96.8% 59.9%

Total allowances for impairment losses (loans) ........... 10,187.6 10,165.1 7,434.7

Total non-performing loans .......................................... 9,308.3 10,504.3 12,403.3

Earnings per share (₱)(15) ...................................................... 9.50 7.95 6.66

____________ Notes:

(1) Net income divided by average total resources for the period indicated.

(2) Net income divided by average total capital funds for the period indicated.

(3) Net interest income divided by average interest-earning assets. Average interest-earning assets is composed of due from

other banks, interbank loans receivable, trading and investment securities, and loans and discounts. Average interest-

earning assets is calculated on the basis of the daily balances of such assets.

(4) Total operating expenses divided by the sum of net interest income and other income.

(5) Sum of loans and discounts, customers’ liabilities under acceptances and trust receipts, and bills purchased.

(6) Total gross loans divided by total deposits.

(7) Tier I capital divided by total risk-weighted assets (computed using Basel III standards).

(8) Total capital divided by total risk-weighted assets (computed using Basel III standards).

(9) Total capital funds divided by total resources.

(10) Total non-performing loans divided by total loans excluding interbank loans.

(11) Sum of gross loans and accrued interest receivable less unearned discounts

(12) Total non-performing loans divided by total loans including interbank loans.

(13) Specific allowance for impairment losses (loans) divided by total gross loans.

(14) Total allowance for loan impairment losses divided by non-performing loans.

(15) Annualized Net income divided by weighted average common shares.

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DESCRIPTION OF THE BANK

Overview

Union Bank of the Philippines (the Bank) is a publicly-listed universal bank whose principal shareholders

are Aboitiz Equity Ventures, Inc. (AEV), Social Security System (SSS) and The Insular Life Assurance

Company, Ltd. (Insular Life). It distinguishes itself through technology and innovation, unique branch sales

and service culture, and centralised backroom operations. The Bank’s technology allows delivery of online,

real time business solutions to meet the customers’ changing and diverse needs through innovative and

customised cash management products and service offerings. Its unique branch sales and service culture

ensures efficient and quality service as well as mitigates operational risk. The Bank’s distinct centralised

backroom operations enable it to provide responsive, scalable, and secure transaction processing.

As of December 31, 2018, the Bank had a total of 433 branches and offices nationwide, which includes the

branches and offices of its subsidiaries, City Savings, PR Savings Bank and Fair Bank, and 389 ATMs. The

Bank’s consolidated total resources amounted to ₱523.8 billion, ₱621.4 billion and ₱673.8 billion as of

December 31, 2016, 2017 and 2018, respectively. As of December 31, 2018, the Bank ranked seventh in

terms of total resources among publicly-listed universal banks in the Philippines based on consolidated

quarterly reports filed with the Philippine SEC. Net profit was ₱10.1 billion, ₱8.4 billion and ₱7.3 billion for

the years ended December 31, 2016, 2017 and 2018, respectively.

As of December 31, 2018, the Bank’s Tier 1 and total capital adequacy ratio remained greater than the

minimum regulatory requirements of 7.5% and 10.0%, respectively. For the full year ended December 31,

2018, the Bank’s return on average equity, return on average assets and cost to-income ratios were 9.0%,

1.2% and 63.6%, respectively.

The authorized capital stock of the Bank is comprised of 1,311,422,420 common shares with a par value of

₱10.0 each and 100,000,000 preferred shares with a par value of ₱100.0 each. As of the date of this

prospectus, there were 1,217,149,512 issued and outstanding common shares, fully paid. As of the date of

this Offering Circular, no preferred shares have been issued. Based on the closing price of ₱63.95 of its

shares on the PSE on December 31, 2018, the Bank had a market capitalization of approximately ₱77.8

billion.

The Bank offers a broad range of products and services, which include deposit and related services;

corporate and middle market lending, consumer finance loans such as mortgage, auto, and salary loans, and

credit cards; investment, treasury, and capital markets; trust and fund management; and remittance, cash

management, and mobile banking. In addition, the Bank offers estate planning solutions and a global and

diversified multi-asset fund to its high-net-worth and ultra-high-net-worth clients through its partnership with

Lombard Odier, and various life insurance products through its bancassurance partnership with Insular Life.

The Bank’s Retail Banking Centre offers deposit and bancassurance products as well as remittance services

to retail customers comprising individuals, small businesses and sole proprietorships. The Bank’s Consumer

Finance Centre offers credit cards, auto, mortgage and salary loans. The Bank’s Transaction Banking Centre

offers cash management products and services, including custom-tailored disbursement, remittance,

collection, and information portal solutions, to corporate customers. The Bank’s Corporate Banking Centre

offers deposit and cash management products and loan offerings to large corporate customers, including top

tier corporations, conglomerates, and large multinational companies. The Bank’s Commercial Banking

Centre provides loan products and services to small and medium-sized enterprises (SME), and the middle

marker segment. The Bank’s Trust and Investment Services Group (TISG) provides a wide range of trust

products and services as well as alternative investment opportunities through its investment fund products.

The Bank’s treasury, funding and trading businesses are undertaken by its Treasury Group. For the year

ended December 31, 2018, the Bank’s consumer, corporate and commercial banking, and treasury and others

business segments accounted for 49.7%, 21.7% and 28.6%, respectively, of the Bank’s net revenues. As of

December 31, 2018, the Bank’s consumer loans comprised 33.1% of its total loan portfolio, compared to

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18.3% for the Philippine banking industry (computed by taking outstanding consumer loans of the industry

divided by the average daily balance of total loans, net of interbank loans), according to BSP.

Aligned with its thrust of being at the forefront of technology-based banking in the Philippines, the Bank

endeavours to elevate its systems and processes to be at par with international standards and best practices. It

obtained the ISO 9001:2000 quality management system (QMS) certification for its central processing

services (CPS) in 2008, making it then the first and only bank to be awarded for its entire centralised

backroom operations. In 2010, the Bank received the ISO 9001:2008 certification, an upgrade from the

previous. Thereafter, the Bank obtained the ISO 27001:2005 certification for its information security

management system, attesting to its commitment to become the leader and benchmark for service quality,

technological advancement, and operational excellence. The Bank also achieved ISO 9001:2008

certifications for its customer service group in 2012 and branch operations management in 2013. In 2015, the

Bank earned ISO 9001:2015 QMS certifications for its branch operations management, CPS, and customer

services groups. The Bank is the first local bank that was certified under the new ISO standard. In 2016, the

loans and trade finance operations management of the Bank also earned the ISO 9001:2015 QMS

certification and in 2017, Treasury Operations was also added as an ISO unit. In those years, 2015, 2016,

and 2017 the Bank was certified as having zero non-conformance rating during quality audits, demonstrating

the Bank’s dedication to uphold quality in its business processes. Last October 2018, the Bank has

again been re-certified for the ISO 9001:2015 with zero non-conformance reaffirming the dedication of the

bank's operational units in maintaining and ensuring quality services to its stakeholders.

The Bank is the first local bank that was certified under the new ISO standard. In 2016, the loans and trade

finance operations management of the Bank also earned the ISO 9001:2015 QMS certification. In 2015 and

2016, the Bank was certified as having zero non-conformance rating during quality audits, demonstrating the

Bank’s dedication to uphold quality in its business processes. In 2017, the Bank successfully passed the ISO

9001:2015 QMS Standard 2nd surveillance audit, as conducted by TUV Rheinland in November. The

certification was extended to Treasury Operations.

The Bank is in the second half of its ten-year strategic roadmap, FOCUS 2020, with the main objective of

becoming one of the top three universal banks in the Philippines “by building a bank of enduring greatness”

in terms of financial value as measured by the return on equity and return on assets ratios, and operational

excellence as measured by the cost-to-income ratio. As part of FOCUS 2020, the Bank aims to shift from

proprietary trading towards building a core earning asset base with recurring income. For the years ended

December 31, 2016, 2017 and 2018, the Bank’s revenues were largely recurring in nature and 49.7% of its

operating income was derived from the retail segment.

In addition to FOCUS 2020, the Bank is implementing its digital transformation strategy which is comprised

of three major plans: to digitise the Bank by creating an agile infrastructure as it scales up its business

operations, to launch a digital bank through the EON brand, which is a fully branchless and paperless

banking experience, and to engage financial technology firms to deliver best-in-class services.

History

The Bank, originally known as “Union Savings and Mortgage Bank”, was incorporated in the Philippines on

August 16, 1968. On January 12, 1982, it was given the license to operate as a commercial bank. The Bank’s

common shares were listed in the PSE on June 29, 1992 and shortly after, it was granted the license to

operate as a universal bank on July 15, 1992. The Bank became the 13th and youngest universal bank in the

country in only its tenth year of operation as a commercial bank.

The Bank’s principal shareholder groups include AEV, a shareholder of the Bank since 1988 and the public

holding company of the Aboitiz group of companies (the Aboitiz Group), one of the largest conglomerates

in the Philippines with interests in power generation and distribution, financial services, real estate, food

manufacturing and industrial production; SSS, a Government-owned and—controlled corporation that

83

provides social security to workers in the private sector; and Insular Life, one of the leading and largest

Filipino-owned life insurance companies in the Philippines.

The Bank has undertaken two mergers, with the International Corporate Bank in 1994 and the International

Exchange Bank (iBank) in 2006.

The Bank has received various awards and recognition including: “Asia’s Best Bank Transformation” in the

2018 Euromoney Awards for Excellence; "Digital Banking Initiative of the Year - Philippines" and "Online

Banking Initiative of the Year - Philippines" at the Asian Banking and Finance - 2018 Retail Banking

Awards; "Best Customer Experience - Branch (Winner)", "Best Omni-Channel Customer Experience

(Highly Commended)", "Best Technology Implementation - Back Office (Highly Commended)", and "Best

Technology Implementation - Front End (Highly Commended)" from Retail Banker International - 4th

Customer Experience in Financial Services Awards; "Asia’s Leader in Omnichannel Engagement" by IDC's

2018 Financial Insights Innovation Awards; "Best App for Mobile Banking" and "Excellence in Mobile

Banking - Over-all" from Retail Banker International - Asia Trailblazer Awards 2018; "Best Investor

Relations Company" and "Asia's Best CFO" from Corporate Governance Asia; "Most Innovative Bank of

the Year 2018" from The European - Global Banking and Finance Awards; “Digital Bank of the Year in the

Philippines 2017” in The Asset Triple A Digital Awards; “Best Universal Bank 2017” by London-based

CFI.co; “Best Digital Bank - Philippines” at the Asiamoney Banking Awards 2017; “Gold Banking

Employer of the Year” at The Stevie for Great Employers Awards 2017, affirming the Bank’s leadership in

the industry. UnionBank's President and CEO was also recognized as “Best Banking CEO for 2018” by The

European Magazine’s Global Banking and Finance Awards and "Best Banking CEO of the Year - Asia

2018" by International Banker.

Recent Developments

Acquisitions

In March 2013, the Bank acquired City Savings, a thrift bank that focuses on granting teachers’ loans under

the DepEd’s APDS.

In May 2013, the Bank’s subsidiary, UPI, completed the acquisition of FUIFAI, a company organised to

primarily engage in the business of a general agent for life and non-life insurance, and other allied financial

services.

In December 2016, the Bank’s subsidiaries, City Savings and UPI, completed the joint acquisition of a

majority stake in Fair Bank, a rural bank that provides banking and microfinance services and loan products

to micro, small and medium enterprises, and micro housing institutions.

In December 2017, the Bank’s subsidiary, City Savings, signed a Share Purchase Agreement with the

ROPALI Group to acquire 100% of the common shares and another with International Finance Corp. (IFC)

on February 2018 to acquire 100% of the preferred shares of Philippine Resources Savings Bank

Corporation (PR Savings Bank). PR Savings Bank is a thrift bank engaged in providing motorcycle, agri-

machinery, and teachers’ salary loans. The acquisition of shares in PR Savings was approved by the

Philippine Competition Commission on April 5, 2018. The BSP has issued its approval-in-principle of the

acquisition on June 14, 2018. The merger of City Savings and PR Savings Bank was approved by the BSP

on December 27, 2018 while the SEC approved the same on March 4, 2019.

In January 2018, the Bank's subsidiaries, City Savings and UPI executed a Share Purchase Agreement with

the majority shareholders of Progressive Bank, Inc. (PBI) for the acquisition of a 75% equity interest in PBI

through a combination of subscription and purchase of common shares. PBI is a rural bank based in Iloilo

engaged in the business of extending credit to farmers, tenants, and rural industries of enterprises. The BSP

has yet to issue its approval.

84

In February 2018, City Savings and UPI signed a share purchase agreement with AEV to purchase 51% of

the common shares of PETNET, Inc. The transaction is subject to closing conditions and regulatory

approval. PETNET, more widely known by its retail brand name PeraHub, has over 2,800 outlets

nationwide which offers a variety of cash-based services, including remittance, currency exchange, and bills

payment. In a decision dated May 8, 2018, the Philippine Competition Commission approved the

transactions. The BSP issued its approval for the Bank’s acquisition of PETNET on December 11, 2018.

Partnerships

The Bank continuously evaluates opportunities that strategically fit its existing business, expand the products

and services that it offers to its customers, and support its strategic roadmap. See “Business Strategies.” In

August 2016, the Bank entered into a cooperation agreement with Lombard Odier, a Swiss global wealth and

asset manager, to expand its wealth and asset management businesses. The Bank and Lombard Odier plan to

offer estate planning solutions and launch a global and diversified multi-asset fund customised for the

Bank’s high-net-worth and ultra-high-net-worth clients’ requirements. In July 2017, the Capital

Accumulation Global Fund of Funds, a U.S. dollar-denominated fund of funds that is invested in various

mutual funds and exchange traded funds in the global markets, was launched.

In January 2017, the Bank and City Savings entered into a bancassurance partnership with Insular Life for

the sale and distribution of Insular Life insurance products across the Bank’s and City Savings’ respective

networks. The bancassurance partnership with Insular Life is a first in the Philippine market. Unlike the

traditional model where a bank’s staff is limited to referrals, the bancassurance partnership with Insular Life

allows the Bank to have ownership of the sales force. The Bank’s relationship managers (RMs) and financial

advisors (FAs) are trained and licensed to cross-sell Insular Life insurance products. The Bank believes that

its model enables a seamless sales process and facilitates client suitability analysis.

In May 2018, the Bank entered into a partnership with ConsenSys, a New York-based blockchain startup, to

utilize Kaleido, an enterprise blockchain solution launched on top of the Ethereum blockchain protocol that

is used to process information and transactions more securely and transparently. In connection with this

partnership, the Bank intends to launch a pilot program named “Project i2i” with the aim of connecting rural

banks to the country’s main financial network and help bring unbanked Filipinos under the mainstream

financial system.

Capital Markets Transactions

On October 18, 2013, the Bank raised ₱3.0 billion from its offering of long-term negotiable certificates of

deposits (the 2013 LTNCDs). The 2013 LTNCDs carry a coupon rate of 3.5% per annum and will mature on

April 17, 2019. The proceeds of the issuance were utilised to improve the Bank’s deposit maturity profile

and support business expansion plans.

On November 20, 2014, the Bank issued ₱7.2 billion worth of Basel III-compliant Tier 2 unsecured

subordinated notes with a coupon rate of 5.375% per annum, which will mature on February 20, 2025.

On July 26, 2017, the Board approved the issuance by the Bank of up to ₱20.0 billion worth of long-term

negotiable certificates of deposits in one or more tranches. The issuance of the LTNCDs was approved by

the BSP in its Resolution No. 2049 dated December 12, 2017.

On November 29, 2017, the Bank raised U.S.$500 million in fixed rate senior notes (the Notes) under the

Bank’s medium term note programme. The Notes were issued at par with a yield of 3.369% per annum and a

tenor of five (5) years. Proceeds of the Notes will be used to refinance the Bank’s existing liabilities, expand

its funding base and for other general corporate purposes. The Notes will mature on November 29, 2022.

On February 21, 2018, the Bank issued ₱3.0 billion in long-term negotiable certificates of deposits (the

“2018 LTNCDs”). The 2018 LTNCDs carry a coupon rate of 4.375% per annum and will mature in August

85

2023. The net proceeds of the issuance will be used to diversify the Bank’s maturity profile of funding

sources and to support its business expansion plans.

On September 28, 2018, the Bank announced the completion of its ₱10.0 billion Stock Rights Offer (SRO)

following the end of the offer period on September 21, 2018. The bank issued 158,805,583 common shares

or 15% of UBP’s outstanding shares prior the Offer and was priced at ₱62.97 each. The rights shares were

listed at the Philippine Stock Exchange on the same day.

On December 7, 2018, the Bank issued ₱11.0 billion Fixed Rate Bonds (the “2018 Bonds”). The 2018

Bonds carry a coupon rate of 7.061% per annum and will mature in December 2020. The net proceeds of the

issuance will be used to support the Bank’s business expansion plans and for general corporate purposes.

Competitive Strengths

The Bank considers the following to be among its principal competitive strengths:

Strong group synergies and support from the Aboitiz Group.

AEV is a shareholder of the Bank since 1988. As of June 30, 2018, the Bank is the second highest

contributor to AEV’s revenues. The Bank believes that its business segments and product lines effectively

support the business objectives of other Aboitiz Group companies in the areas of, among others, loans, other

types of financing, and portfolio investments.

The Bank enjoys various synergies with the other members of the Aboitiz Group, such as new business

opportunities for joint project development, cross-selling of products to customers and shared marketing

networks, and knowledge and expertise with respect to key economic sectors and business industries. As the

sole banking business platform and a key strategic business segment of the Aboitiz Group, the Bank enjoys

strong shareholder support from AEV. Key officers of the Aboitiz Group are members of the Bank’s Board

and actively participate in the Bank’s various committees.

Strong, diversified, and experienced management team with track record of customer, talent and value

retention.

The Bank has a strong, diversified, and experienced management team with a track record for successfully

executing business plans and achieving results. The Bank’s management team and senior executive officers

(consisting of officers at the senior vice president level and above) have, on average, over 15 years of

experience in, among others, the banking and financial services, fast-moving consumer goods,

telecommunications, and technology firm/sectors. In addition, the Bank’s management team and senior

executive officers have a broad range of experience in their respective areas with some of the largest and

most recognised institutions in the Philippines and in the region as well as with global offices of

multinational firms.

Leverages on innovation as a differentiator in customising cash management solutions for its anchor

clients.

The Bank has developed technologically innovative products and services, including corporate cash

management solutions, in which the Bank utilised information technology in a cost-efficient manner to offer

tailor-made solutions to customers. For instance, the Bank’s electronic payment products and services are

being utilised by several Government agencies. See “— Business of the Bank — Transaction Banking.”

The Bank’s ability to use technology to develop advanced banking solutions has enabled it to capture and

secure a loyal customer base, as well as to establish relationships with the suppliers, distributors, and dealers,

and even further down to executives, employees, and customers, of its anchor corporate clients. This unique

86

customer acquisition strategy has enabled the Bank to attain considerable scale without the capital

investment and expenses attached to branch expansion.

Unique customer-centric branch sales and service culture.

Consistent with its brand promise of being relevant, being an expert, and challenging conventions, the Bank

veered away from the traditional channel-centric organisational structure where the sales and service

functions are under a branch manager. The Bank’s operations team is separate from sales at the branch level

to ensure efficient and quality service as well as to mitigate operational risk. The Bank’s salesforce also has

distinctly defined performance metrics to steer them towards achieving a common sales target.

The Bank’s customer-centric model is complemented by its ability to maintain operational efficiencies and

boost productivity by streamlining processes through the use of technology. Its unique backroom structure

enables the Bank to provide responsive, scalable, and secure transaction processing. For the year ended

December 31, 2018, the Bank’s cost-to-income ratio is below the Philippine banking industry’s ratio.

Unique digital transformation strategy.

The Bank is implementing a digital transformation strategy which it believes is unique in the Philippine

banking industry. The Bank’s digital transformation strategy is comprised of three major plans: first, to

digitise the Bank by creating an agile infrastructure as it scales up its business operations, second, to launch a

digital bank through its EON brand, which is a fully branchless and paperless banking experience, and third,

to engage financial technology firms to deliver best-in-class services.

The Bank has embarked on various initiatives that support its thrust towards digital transformation. It defined

its own application program interface (API) for commercial publication to engage partnerships. Through its

EON mobile application, the Bank introduced the first “selfie banking” functionality in the Philippines. The

Bank also launched its convergent banking application which allows technology updates in sprints to address

user feedback and expectations. Moreover, the Bank launched “The Ark”, the Bank’s concept branch that

exhibits the agility and level of transformation required from branches to address the constantly changing

customer expectations in the future. In December 21, 2018, the Bank incorporated UBX Philippines Corp as

a holding company for potential fintech investments.

Strong growth of recurring income.

As part of its strategic roadmap, the Bank aims to shift from proprietary trading towards building a core

earning asset base with recurring income. The Bank’s net income was ₱7.3 billion for the year ended

December 31, 2018 compared to ₱8.4 billion for the year ended December 31, 2017. The Bank’s net interest

income was flat at ₱20.0 billion for the year ended December 31, 2018 due to higher funding costs with an

elevated interest rate environment last year. As of December 31, 2016, 2017 and 2018, the Bank’s recurring

revenues (comprised of net interest income, service charges, fees and commissions, foreign exchange gain,

and other income) amounted to, ₱21.7 billion, ₱25.1 billion and ₱24.1 billion, respectively, representing

85%, 99% and 94% of the Bank’s total revenues, respectively. The Bank believes that loans, investments at

amortized cost, total deposits, and digital channel growth are the key drivers of its recurring income.

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Cost Efficient “Asset-Light” Business Model.

The Bank believes it has implemented an “asset-light” business model of selective expansion of its physical

branch network. While other banks in the Philippines have, historically, taken aggressive branch expansion

approaches, the Bank believes its targeted and selective branch expansion has resulted in greater operating

cost efficiencies as against its peers. The Bank has remained to be among the most cost-effective banks in

the country. As of December 31, 2016, 2017 and 2018, the Bank’s cost to income ratio (computed by

dividing total operating expenses by total income (net interest income plus other income)) was 46.9%, 54.3%

and 63.6%, respectively which is better compared to industry average of 63.8%, 64.0% and 64.5%,

respectively. Moving forward, the Bank believes that the enhancement of its digital banking proposition

resulting to better customer experience will encourage customers to transact using its digital channels, rather

than at physical branch locations.

Business Strategies

The Bank’s corporate vision is to become one of the top three universal banks in the Philippines “by building

a bank of enduring greatness” in terms of financial value as measured by the return on equity and return on

assets ratios, and operational excellence as measured by the cost-to-income ratio. To achieve this vision, it

has adopted the FOCUS 2020 strategic roadmap which is comprised of five key imperatives on Financial

value, Operational excellence, Customer franchise, UnionBank brand/experience, and Superior innovation.

The key elements of the Bank’s strategy are as follows:

Further strengthen the Bank’s capital.

The Bank will further strengthen its capital by focusing on stable recurring income to reduce mark-to-market

movements in its qualifying capital. In doing so, the emphasis is to further build the Bank’s core earning

asset base. The Bank aims to expand its customer loan books and diversify its securities investment portfolio.

Earning asset expansion shall be supported by continued growth in deposits, with emphasis on low cost

current account and savings account deposits (CASA).

Enhance and maximise the Bank’s branch network.

The Bank aims to increase sales opportunities in the branches by expanding its branch sales force and

continuously transforming its product offerings and servicing capabilities. It defined the optimal RM-to-

branch ratio to complement its brick-and-mortar presence. The Bank will continue to consider partnership

opportunities to expand its product suite. The Bank and City Savings entered into a bancassurance

partnership with Insular Life for the sale and distribution of its insurance products by the Bank’s and City

Savings’ licensed sales force. Moreover, the Bank recently launched its concept branch, called “The Ark”,

allowing the Bank to transform customer experience in line with the constantly changing customer

expectations.

Deepen strategic relationships and develop new corporate relationships.

The Bank aims to increase, diversify, and deepen its customer base by introducing new and customised

products and services (including cash management and other e-commerce enabling products) that cater to the

needs of a wider range of customers. The Bank generates its retail loans from its corporate relationships

through the Workplace Arrangement Program for employees of corporate clients. The Bank intends to

continue the same strategy to expand its retail customer base. The Bank also plans to offer financing

products to the communities of suppliers and dealers surrounding the corporate principals that utilise the

Bank’s cash management systems. Lastly, it also plans to extend the distribution of its foreign exchange and

treasury products to these corporate customers.

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Grow new partnerships.

Through its branch network, the Bank offers estate planning solutions and a global and diversified multi-

asset fund to its high-net-worth and ultra-high-net-worth clients through its partnership with Lombard Odier.

As part of its digital transformation strategy, the Bank will engage financial technology partners to leverage

on technological advances and enhance customer experience across its banking products and services. In

addition, the Bank will capitalise on its relationship with City Savings to increase its reach to mass market

customers. The Bank will continue to partner with companies and institutions in various industries and

sectors to provide unique product offerings. Through various corporate social responsibility initiatives, the

Bank also aims to on-board more SME partners by providing them the venue and platform that will support

their on-line sales and marketing aspirations.

Further improve the Bank’s processes.

The Bank aims to reduce its operating costs while improving its productivity and quality of service. To

achieve this objective, the Bank intends to continue streamlining its operations and processes, and

minimising costs by eliminating redundancies, automating processes, and institutionalising a high- standard

quality of service throughout the Bank’s operations.

The Bank intends to extend its ability to customise banking solutions to its retail customers and to build

capacity for retail volume through a digital back office. The Bank plans to provide its customers with an end-

to-end transaction fulfilment experience through, among others, self-service functionality at its branches and

convergent banking. This will be supplemented by increased access through the integration of the Bank’s

channels. The Bank believes that these initiatives will reduce operating costs while serving a larger customer

base. To support the utilisation of the Bank’s electronic channels, the Bank also implemented various

information technology and security measures such as the use of behavioural analytics for targeting and risk

underwriting, the publication of its API, and the establishment of a 24/7 security centre.

Create a UnionBank experience for the Bank’s customers.

The Bank will continue to distinguish itself from its competitors by establishing a unique brand image in

strategic markets. It will continue to position itself as a challenger of conventions to deliver smarter solutions

to its customers. The Bank aims to provide a personal and efficient service to its customers through a team

focused on smart banking which would help increase the loyalty of its customers.

Extend to mass market segments for financial inclusion.

The Bank aims to expand its reach into the unbanked and underbanked segments by offering financial

services, particularly personal loans. It seeks opportunities to acquire institutions that focus on lending to the

underserved market such as microfinance institutions, rural banks, and cooperatives. The Bank intends to

replicate the operating model of City Savings in order to lower its cost of operations in serving the mass

market, and thereby have the ability to offer products that suit the needs of its customers. Lastly, it also aims

to leverage on its EON digital bank proposition to further provide retail banking solutions to the mass market

segment.

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Organisational Structure

The following chart sets out an overview of the functional organisational structure of the Bank and its key divisions as of December 31, 2018:

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Business of the Bank

Overview

The Bank’s core businesses are retail banking, consumer finance, corporate banking, commercial banking

(comprising middle-market banking), cash management, trust banking, and treasury, funding and trading

(involving management of the Bank’s liquidity and funding requirements and handling of transactions in the

financial markets covering foreign exchange, fixed income trading and investments, and derivatives). In

addition, the Bank offers estate planning solutions and a global and diversified multi-asset fund to its high-

net-worth and ultra-high-net-worth clients through its partnership with Lombard Odier, and various

insurance products through its bancassurance partnership with Insular Life.

Retail Banking

The Bank’s retail banking activities principally involve offering deposit products and services to retail

customers comprising individuals, small businesses and sole proprietorships. The Bank’s deposit products

and services are also accessible to the customers through the Bank’s internet banking network and

convergent banking mobile application, where customers can, among others, check balances, pay bills,

transfer funds, execute wire transfers, order chequebooks, print statements, and issue stop payment orders on

a real time basis.

Deposit Products

The Bank offers a comprehensive range of deposit products that contain features that are tailored to each

segment’s financial profile and other characteristics. The Bank’s deposit products consist principally of the

following:

Peso demand deposits, which do not accrue interest or accrue interest at a rate that is lower than the

rate applicable to time deposits and allow customers to deposit or withdraw funds at any time;

Peso savings deposits, which allow customers to deposit and withdraw funds at any time and accrue

interest at a rate set by the Bank;

Peso time deposits, which generally require customers to maintain a deposit for a fixed term during

which interest accrues at a fixed rate and any withdrawal before maturity may only be made by

paying penalties;

U.S. dollar savings deposits, which require customers to maintain a deposit of at least U.S.$1,000

and allows customers to withdraw funds at any time and accrue interest at a rate set by the Bank;

U.S. dollar time deposits, which generally require customers to maintain a deposit of at least

U.S.$1,000 for a fixed term during which interest accrues at a fixed rate and any withdrawals before

maturity may only be made by paying penalties; and

other foreign currency time deposits, which allow customers to deposit funds denominated in

Sterling Pounds, Euro, Japanese Yen or Australian dollars, generally requiring the customer to

maintain a minimum deposit amount (which varies depending on the currency of deposits) for a

fixed term during which interest accrues at a fixed rate and any withdrawals before maturity may

only be made by paying penalties.

The Bank offers varying interest rates on its deposit products depending on market interest rates, the rate of

return on its earning assets and interest rates offered by other commercial banks. Deposits generated by

retail banking, including City Savings, PR Savings Bank, and Fair Bank, as of December 31, 2016, 2017 and

2018, amounted to ₱238.9 billion, ₱247.0 billion and ₱251.5 billion, respectively, representing 63.5%,

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55.2% and 59.8% respectively, of the Bank’s total deposits on a consolidated basis. The Bank offers

“Business Class” priority banking accounts, which are targeted specifically at, and available only to, affluent

retail customers with a total relationship balance of ₱1,000,000 (or its equivalent in other currencies). The

“Business Class” priority banking account offers special services, such as dedicated service counters at

selected branches of the Bank, financial advisory services, preferential pricing on its retail banking products,

and a wide range of electronic banking services, including internet and mobile phone banking services.

Marketing

Direct marketing and sales of the Bank’s products and services are undertaken through RMs. The Bank

believes that such an arrangement, as opposed to placing branch managers in charge of marketing, reduces

inefficiencies, removes potential conflicts inherent in having the same person handling both sales and

operations, and maximises sales. In addition, this increases the depth of relationships established with

customers, and helps create marketing and sales opportunities at each of its branches.

As of December 31, 2018, the Bank had a total of 319 RMs.

EON

The EON cyber account, the Philippine’s first online payment card, was launched in 1999. In 2017, EON

was relaunched souped up by new products in its portfolio. EON introduced the first digital bank account

specially designed for tech-savvy customers, mostly e-gig practitioners and e-commerce entrepreneurs. It is

the only electronic money product in the Philippines which boasts modern application security features

including the first ever Selfie Banking in Asia which employs facial recognition log-in through a smart

phone, Touch ID, Remote pin change, and the ability to lock-and-unlock your card via the EON App.

Since then, EON has positioned itself as a neo banking platform relevant to its customers, the "Digital

Me", and continues to fully harness technology and spearhead market-first innovations such as (1)

Open Banking, which allows customers to use any VISA/Mastercard Debit or Prepaid card to enjoy seamless

in-app purchases using the EON App (2) EON Zero, a gadget loan platform where loan underwriting,

application processing, and releasing of proceeds are all completed digitally, (3) EON Duo, a virtual credit

card and; (4) EON Zoom, is a customizable auto loan that will fit your preference with the best value.

EON has also been recognized by various international awarding bodies: (1) Best Digital Bank in the

Philippines - 2017 Asiamoney Banking Awards, (2) Best Mobile Banking Project in the Philippines - 2017

Asian Banker Philippines Country Awards, (3) Best New Digital Product Launch – 2017 VISA, (4) Best

Digital Bank - 2018 The Asian Banker Excellence in Retail Financial Services Awards, (5) Asia’s Leader in

Omnichannel Engagement – 2018 Financial Insights Innovation Awards (IDC), (6) Best App for Customer

Experience – 2018 Retail Banker International, (7) Best Digital Wallet of the Year - 2018 Global

Retail Banking Awards, and (8) Digital Banking Initiative of the Year - Philippines - 2018 Asian Banking

and Finance - Retail Banking Awards.

As of December 31, 2018, the Bank had over 116,000 EON account holders.

Transaction Banking

The Bank’s cash management products and services consist of a wide range of custom-tailored

disbursement, remittance, collection, and information portal solutions. The Transaction Banking Centre

delivers its cash management products primarily through internet banking.

The Bank is able to specifically design and alter the interface of each cash management product to meet the

specific needs of its customers with the end objective of helping them increase productivity, achieve cost

efficiency, and generate savings. One such product is the electronic invoice processing and payment system

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developed in 1997 for the fast consumer goods market, under which the Bank’s customers, and their

suppliers and vendors can submit invoices, and receive and make payments through the internet.

The Bank’s electronic payment products and services are utilised by several Government agencies, including

the BIR, the SSS, the Philippine Health Insurance Corporation (PhilHealth), the Home Development Mutual

Fund or Pag-IBIG and the Bureau of Customs (BoC). To provide corporate customers with seamless filing

and payment convenience, the Bank launched OneHub.Gov, the first single web platform offering in the

Philippines that enables customers to make online payments, and file salary loan payments and tax returns

electronically with, government agencies, including the BIR, the SSS, PhilHealth, Pag-IBIG and the BoC.

In 2013, the Bank was accredited as a settlement bank by the Securities Clearing Corporation of the

Philippines and the PSE which enabled broker firms to open trading accounts with the Bank for the

settlement of trade transactions.

As of December 31, 2016, 2017 and 2018, the Parent Bank’s transaction banking activities accounted for

60.5%, 59.7% and 73.3% of the Parent Bank’s total low-cost deposits, respectively.

Consumer Finance

The Bank offers various types of consumer finance products to individuals, which consist principally of

residential mortgage loans, auto loans, quick loans, and credit cards.

The Bank reviews various factors in pricing its loan products, including the capacity of the borrower to repay

the loan, estimated delinquency rates, funding costs, expenses related to making loans and a target spread.

Loan terms are differentiated according to factors such as a customer’s financial condition, loan purpose,

collateral and the quality of relationship with the Bank.

The following table shows a breakdown of the Bank’s significant consumer banking portfolio as of the

periods indicated.

As of December 31,

2016 2017 2018

(Percentages)(1)

Residential mortgage loans................................... 67.6 71.7 75.6

Auto loans............................................................. 14.2 10.0 6.8

Credit card business .............................................. 18.2 18.3 17.5

Quick Loans ......................................................... 0.0 0.0 0.1

Total ..................................................................... 100.0 100.0 100.0

_______________

Note:

(1) The percentages in this table do not include City Savings, PR Bank and Fairbank’s consumer banking portfolio.

Residential Mortgage Loans

A majority of the Bank’s residential mortgage loans are extended to property buyers in the Philippines who

intend to occupy the premises. All of the Bank’s residential mortgage loans are secured by a first mortgage

on the property. In addition, the Bank generally requires residential mortgage borrowers to have an equity

interest. The loan-to-value ratio ranges from 60.0 to 70.0% and the tenor of residential mortgage loans

typically ranges from five to 15 years. Interest rates are re-priced periodically based on prevailing market

rates. Fixed rate options are also offered to provide flexibility to borrowers.

As of December 31, 2018, the Bank’s total residential mortgage loans amounted to ₱37.0 billion. The Bank

intends to increase its residential mortgage loan portfolio by actively marketing in partnership with leading

property developers. The Bank has also begun to expand its brokers channel to provide customers more

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avenues to apply for residential mortgage loans, in addition to any of the Bank’s branches or through a

developer’s sales offices and project sites. See “— Business of the Bank — Branch Network.”

When a borrower falls in arrears with its mortgage payments, it can either agree to a voluntary disposition of

the property to the Bank or the Bank may commence foreclosure proceedings. Once the mortgaged collateral

is foreclosed, the Bank classifies such collateral as ROPA and thereafter, it is managed by the Bank’s Asset

Recovery Group (the ARG). See “— Business of the Bank — Asset Recovery Group.”

Auto Loans

The Bank generates new auto loans through its branch network and existing bank depositors. Auto loans are

also generated through the Bank’s corporate relationships such as the Workplace Arrangement Program for

employees of corporate clients, and Fleet Program for corporate clients’ vehicle requirements.

All of the Bank’s auto loans are secured by a chattel mortgage over the car being purchased. In addition to

being subject to the Bank’s internal credit checks, the Bank generally requires the borrower to make a

minimum down payment of 20.0% of the purchase price for a new car, and 25.0 to 30.0% in the case of a

second-hand car. The tenor of auto loans generally ranges from 12 to 60 months with interest rates fixed over

the life of the loan. When an instalment payment falls 90 days past the due date, the Bank may commence

foreclosure proceedings. Foreclosed cars are generally sold by the Bank through a public auction. See “—

Business of the Bank — Asset Recovery.”

As of December 31, 2018, the Bank’s total auto loans amounted to ₱3.3 billion.

Credit Card Products

The Bank’s credit cards were launched in 1999. As a late entrant, the Bank adopted a segmentation strategy

to gain market share. It used geographic, psychographic and behavioural variables to identify specific,

unique and under-served market needs, and customised unique products for particular market segments.

The total credit card balance as of December 31, 2018 amounted to ₱8.6 billion. Beginning in 2010, the

credit card group of the Bank shifted acquisition strategies to focus on the premium card segment, which

resulted in the increase in the profitability of the portfolio. The Bank continues to acquire new customers

through a wholesale approach by looking at co-branding opportunities and developing products for specific

segments of the market. Interest charged on revolved outstanding balance and deferred payments/instalments

is 3.5% of the average daily balance per month while annual fees range from ₱1,500 to ₱5,000.

As of December 31, 2018, the Bank had more than 389,000 cards in force. Its products include the

UnionBank Classic, Gold, Platinum and Corporate (Visa and Mastercard) cards. It has more than 50 co-

brand/affinity credit cards in partnership with various retail, educational, medical, financial, service, life and

non-life insurance, and airline companies and institutions to provide unique offers to each partner’s customer

base. In 2016, the Bank, together with GetGo, the rewards program of Cebu Pacific Air (Cebu Pacific), and

Visa, launched the Cebu Pacific GetGo cards. It has also added the GetGo Prepaid card to its lineup of

cards. This fleet of debit, credit and prepaid cards enables the holder to earn GetGo points from dining,

shopping, and online purchases. Accumulated points are automatically transferred to the holder’s GetGo

account which may be used to redeem Cebu Pacific flights.

Quick Loans

In 2017, the Bank launched its Quick Loans Programme targeted at existing payroll customers. It utilises

data analytics to identify potential borrowers. The process is straight through and the loan can be availed

upon accessing an exclusive digital portal. As of December 31, 2018, the Bank’s total outstanding quick

loans amounted to ₱62.0 million.

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City Savings

The Bank offers salary loan products principally through City Savings which include salary loans to public

school teachers under the DepEd’s APDS and to other government employees. The guidelines for the grant

of salary loans to public school teachers are set out in a memorandum of agreement between the DepEd and

City Savings. In 2016, City Savings launched its Pensionado loans for GSIS and SSS pensioners.

As of December 31, 2016, 2017 and 2018, City Savings’ total gross loan portfolio amounted to ₱58.5 billion,

₱58.2 billion and ₱50.0 billion, respectively.

Fair Bank

Fair Bank is a rural bank that provides banking and microfinance services and loan products to micro, small

and medium enterprises, and micro housing institutions in the Visayas region of the Philippines. Its deposit

products include regular savings deposit, microfinance savings, Bulilit Happy Savers for children and

students, time deposit and checking account. Fair Bank also offers a wide range of loan products such as

SME loan, agro-industrial loan (for working capital requirements or acquisition of fixed assets such as post-

harvest facilities and piggery), Kaabag loan (a group-lending approach that provides additional capital

resources to enterprising women), Pamilya loan (for working capital requirements of an individual’s

business), Palengke loan (for working capital requirements of an individual’s business in the marketplace),

and revolving credit line.

Philippine Resources Savings Banking Corporation (PR Savings Bank)

Established in 1977 as the Rural Bank of Naguilian, PR Savings Bank is a thrift banking institution dedicated

to serving the Mass Market by catering to the financial requirements of consumers, teachers, farmers and

small business owners. Its lending services consist of motorcycle loans, salary loans to public school

teachers, agricultural loans and microfinance. The Bank also offers regular savings deposit and time deposit

accounts.

Corporate Banking

The Bank’s corporate banking activities comprise principally of deposit and cash management products and

loan offerings to large corporate customers. The customer accounts under this group belong to top tier

corporations, conglomerates, and large multinational companies.

Deposit Products

The Corporate Banking Centre offers a comprehensive range of deposit products that target different

segments of the corporate market. To generate deposits and expand its corporate banking business, the

Corporate Banking Centre is also focused in becoming the customers’ main operating bank by meeting the

cash management requirements of its top corporate customers by offering collection, disbursement and

payroll solutions aside from the traditional deposit products and credit facilities. This initiative, in

coordination with the Bank’s Transaction Banking Centre, leverages the Bank’s technological ability to

customise its products and services to meet customer needs.

As of December 31, 2016, 2017 and 2018, the total deposits of the Bank’s corporate customers amounted to

₱76.7 billion, ₱106.5 billion and ₱106.9 billion, respectively, representing 20.4%, 23.8% and 25.4%,

respectively, of the Bank’s total deposits.

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Loan Products

The Bank provides a wide range of loan products and services to its corporate customers, including

revolving credit lines, foreign currency loans, bills purchased, acceptances, trade finance facilities, project

finance, term loans and corporate credit cards.

Most of the Bank’s corporate clients are based in the Philippines and operate in various industries including

real estate, power, and communications. The facilities offered to corporate customers include both secured

and unsecured loan products, depending on the credit risks associated with a customer and its business. The

Bank primarily provides short- to medium-term financing on a bilateral basis or participates in syndicated

loans.

As of December 31, 2016, 2017 and 2018, the total loans made by the Bank to large corporate customers

amounted to ₱103.9 billion, ₱117.6 billion and ₱129.1 billion, respectively, representing 44.3%, 43.6% and

42.0% of the Bank’s total loans. As of December 31, 2018, other consumption, real estate activities, and

financial and insurance activities, represented the largest sectors of the Bank’s loan portfolio at 25.6%,

16.1% and 14.8%, respectively.

Commercial Banking

The Bank’s Commercial Banking Centre provides loan products and services to customers from the middle

market, SMEs, and individual entrepreneurs. The loan facilities provided to middle-market customers are

predominantly composed of self-liquidating working capital facilities, which include promissory note lines,

various discounting lines, and trade finance lines, among others. The Bank also provides working capital

funding via its SME Banking program, which offers a loan product that is fully secured by the customers’

deposits or real property.

The Bank believes that the development and expansion of its middle market customer base is essential to its

growth and success. As such, the Bank intends to concentrate on growing its middle market portfolio as one

of its core target customer groups. The Bank plans to provide regional middle market customers with

convenient channels for addressing their borrowing and cash management requirements by offering a

personalised and enhanced banking experience through loan services bundled with cash management,

treasury, and trust banking products and services.

The Bank is also seeking to expand its middle market customer base through its “Community Banking”

programme. Under this initiative, the Bank leverages on its relationships with existing middle market

customers to identify their suppliers, customers, and other business relationships, and engage them as

prospective clients.

As of December 31, 2018, the Bank had over 3,000 middle market and SME banking customers with total

loans amounting to ₱50.3 billion, of which ₱6.4 billion is under the Business line program. Contingent

liabilities, comprised of unused commercial letters of credit and outstanding guarantees issued, amounted to

₱3.6 billion for the same period.

Trust Banking

The Bank provides a wide range of trust products and services through its TISG. The TISG is a full service

trust banking unit, which offers, among others, fund management, investment management services, escrow,

custodianship, administratorship and collateral agency services, and stock and transfer agency services.

TISG provides investment products that satisfy the corporate and retail client’s investment objectives. The

Bank believes that its fee-based income from such investment fund products is one of the key drivers of its

recurring income.

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As of the date of this Offering Circular, the Bank manages 15 UITF products, which are primarily marketed

to retail customers. The funds are geared towards long-term capital appreciation and are largely invested in

fixed income securities of the Government and equity securities of financially sound corporations. As of

December 31, 2018, assets under management amounted to ₱7.1 billion in respect of UITF products and

₱38.5 billion in respect of managed accounts, and total assets under management of ₱45.6 billion.

Treasury

The Bank’s treasury, funding and trading businesses are undertaken by its Treasury Group, which also has

the primary responsibility for managing the Bank’s sources of funding, and ensuring that the Bank has

adequate liquidity at all times. In addition, it manages the Bank’s domestic and foreign currency-

denominated investment instruments. The Treasury Group actively engages in trading for its own proprietary

account, as well as for individual and institutional investors who are customers of the Bank. It also engages

in derivatives transactions for proprietary position-taking, to hedge the Bank’s foreign exchange and interest

rate risks, as well as to service the hedging requirements of its clients. The Treasury Group is responsible for

conducting the Bank’s foreign exchange business.

Trading and Investment Securities

The Trading, Positioning and Funds Management (TPFM) Centre manages the domestic and foreign

currency-denominated securities trading and investment portfolios of the Bank. As a Government Securities

Eligible Dealer, the Bank has been an active participant in the trading of Government securities, which are

mainly comprised of treasury notes. The Bank also invests in foreign currency-denominated sovereign,

quasi-sovereign and corporate bonds to match its foreign currency-denominated liabilities in the form of

foreign currency deposits and notes, thereby reducing its foreign exchange risks.

As of December 31 2016, 2017 and 2018, the Bank’s trading and investment securities amounted ₱121.6

billion, ₱169.7 billion and ₱218.3 billion respectively, accounting for 23.2%, 27.3% and 32.4%,

respectively, of the Bank’s consolidated total assets.

For the years ended December 31, 2016, 2017 and 2018, the Bank’s interest income from trading and

investments securities amounted to ₱4.8 billion, ₱6.7 billion and ₱7.9 billion, respectively, accounting for

18.7%, 26.5% and 30.7%, respectively, of its net revenues.

The following table sets out, as of the dates indicated, information relating to the Bank’s total investment

portfolio: As of December 31,

2016 2017 2018

(₱ millions)

Government securities(1) ..................... 114,278.3 163,654.9 210,585.1

Other debt securities(2) ........................ 3,500.3 2,816.8 4,586.9

Total debt securities ............................ 117,778.6 166,471.7 215,172.0

Non-debt securities(3) .......................... 3,833.7 3,225.8 3,117.6

Total ................................................... 121,612.3 169,697.5 218,289.6

Less: Allowance for

impairment. .................................... 0.0 0.0 (17.1)

Total ................................................... 121,612.3 169,697.5 218,272.5

_______________

Notes:

(1) Comprised of Government bonds and other Government debt securities.

(2) Comprised of all non-Government debt securities.

(3) Comprised of equity securities and derivative assets.

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Derivatives

The Bank has a Type 2 derivative license to engage in the trading of derivative instruments, such as currency

and interest rate swaps, currency and interest rate forward contracts, financial futures, and options both for

its proprietary and customers’ accounts. Derivative transactions are entered into for the purpose of hedging

currency, interest rate, and liquidity risks.

Asset Recovery Group

The Bank’s ARG is responsible for the remedial management, loan restructuring, and asset recovery

activities of all business centres of the Bank. When the collateral provided by either retail or corporate

borrowers is foreclosed, such collateral is classified as ROPA and is managed by the Bank’s ARG. As of

December 31, 2018, the Bank’s ROPA amounted to ₱12.9 billion, comprised of the Bank’s holdings in

automobiles (₱39.5 million), chattels (₱521.8 million), and real properties (₱12.3 billion) which consisted of

2,544 properties.

The Bank generally sells its real estate ROPA through property auctions and negotiated sales. Real estate

ROPA is generally sold on an instalment basis over a period of 15 years, and the Bank requires purchasers to

make an initial down payment of at least 10% of the offered price. With respect to instalment payments that

are classified as “sales contract receivables” (SCR), the Bank generally charges an interest rate of 11.0% per

annum for the entire 15-year period. Titles to the real estate ROPA remain with the Bank until it receives full

payment of the purchase price. Upon default in the payment of any SCR instalment, the purchaser is deemed

to forfeit all prior principal payments, and the Bank records such prior payments as rental over the property

while the remaining unpaid balance will be booked as ROPA. Once the Bank repossesses the real restate

ROPA, the property is resold through auctions or negotiated sales.

For the year ended December 31, 2018, the Bank sold ₱932.3 million worth of real estate ROPA. Real estate

ROPA sales settled in cash for the year ended December 31, 2018 amounted to ₱336.2 million, while the

remainder was sold for payment on an instalment basis at an interest rate of 8% to 15% per annum.

Branch Network

As of December 31, 2018, the Bank had a total of 433 branches nationwide, which includes 207, 115, 102

and eight branches and offices of the Bank, City Savings, PR Savings Bank and Fair Bank, respectively.

Select branches were relocated to strategic areas situated within and outside of Metro Manila to maximise

visibility and expand customer reach. Customers can do over-the-counter withdrawals and check encashment

at any of the Bank’s branches. High-volume transaction branches are provided with Transaction Assistant

Portal, an in-house developed self-service innovation, which aims to facilitate faster processing time through

paperless transactions and use of a card that stores bills payment and account information. The Bank’s

cheque verification system utilises the Philippine Clearing House Corporation’s cheque images, which is

instrumental in enabling fast and reliable check clearing.

The Bank provides 4-hour banking services through its 389 ATMs as of December 31, 2018, 316 of which

are located in its branches while 73 are in off-site locations, such as office buildings of selected key clients,

hospitals, and entertainment/shopping centres. Customers are given access to the ATM facilities through

ATM cards, which are issued to checking and savings account holders. The Bank also is a member of

Bancnet and Expressnet, which are ATM networks that allow its customers to use ATM terminals operated

by other banks in the same network. Through these networks, customers have access to approximately

13,000 additional ATMs nationwide.

The following table sets out details of the Bank’s consolidated branches and ATMs in the Philippines in

operation as of the specified dates:

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As of December 31,

2016 2017 2018

Metro Manila .......................................................... 144 144 158

Other areas of Luzon .............................................. 82 83 171

Visayas ................................................................... 48 59 67

Mindanao ................................................................ 30 30 37

Total ....................................................................... 304 316 433

ATMs ..................................................................... 313 326 389

In 2016, the Bank launched the 24/365 Smart Banking Branch at the 32nd St. Branch in Bonifacio Global

City that allows 24/365 customer support by way of video conferencing, all-day access to online banking

through the e-banking kiosks, and real-time credit to account of deposit transactions through the cash

acceptance machines.

The Bank launched its first fully digital branch branded The Ark in September 2017. The Ark is the

prototype branch under the Bank’s branch transformation strategy, and was conceptualised to showcase and

introduce the Bank’s customers to the future of branch banking. The Bank is also set to launch the first

automated teller machines meant for digital currencies, which would allow customers to buy and sell digital

units for cash.

PeraHub branches operate as an extension of the Bank’s branch network by providing loan application

processing for City Savings. As of December 31, 2018, there are 407 PeraHub-owned branches equipped to

process teachers’ salary and pension loans. The PeraHub acquisition was meant to increase the operational

synergies between PeraHub and City Savings. The sales of DepEd Teachers Loans, Pensionado loans

(GSIS, SSS), OFW, and Seafarer loans are performed by PeraHub (the last three, exclusively).

Alternative Delivery Channels

Mobile Banking

UnionBank Online, launched in August 2017, is the new online and mobile banking platform for the Bank’s

customers. It is designed with an omni-channel user experience wherein the same look and feel applies to

different touchpoints (website and mobile app), operating systems (Android or IOS) and device types.

UnionBank Online enables the Bank’s customers to sign up, transact, view their account information, and

update their details online without visiting a branch or ATM, or messaging or calling the Bank’s call centre.

UnionBank Online enables customers to, among others, customise account viewing, login through

fingerprint authentication or a one-time password, and manage transaction limits.

Call Centre

Retail customer relationship and care is handled by the Bank’s 24-hour call centre, catering to deposit and

card product queries, among others. The call centre utilises a mix of phone, postal mail, email, fax and

internet as customer touch points. In handling customer complaints, it adheres to certain service-level

agreements such as feedback or resolution of ATM-related concerns within five banking days and redelivery

of card within Metro Manila after five days. Customer complaint handling is continuously improved through

resolution tracking.

Customer Service Chatbot

In 2017, the Bank launched “Rafa”, the Philippines’ first banking chatbot that delivers instant 24/7 customer

service. Rafa is accessible through Facebook messenger. It is capable of answering customer queries on,

among other things, the nearest ATM and branch, provides the latest foreign exchange rate of up to ten

currencies, assists customers who are exploring auto loans, and provides customers with options to get the

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credit card that best suits them. The Bank believes that Rafa provides a more personal and conversational

customer experience compared to the interactive voice response or auto reply forms.

PESONet and InstaPay

The Bank is one of seven institutions supervised by the BSP to participate in the government’s National

Retail Payment Systems PESONet (or “Philippine Electronic Fund Transfer System and Operations

Network”) and InstaPay.

PESONet allows government businesses and individuals to initiate electronic fund transfers and recurring

payments from accounts maintained in BSP-supervised financial institutions (BSFI) to corresponding

accounts in other BSP-supervised financial institutions. Funds transferred through PESONet are available in

the recipient account within the same Banking Day, or immediately upon clearing, and is free of charge.

InstaPay allows customers to send and receive funds or make payments in real time through an unlimited

number of transactions of up to ₱50,000 per transaction. Bank customers can transfer funds through

PESONet and InstaPay by logging on to the Bank’s online platform and mobile application, eliminating the

need to go in to a bank branch or use a payment counter transactions.

Information Technology

The Bank’s Information Technology Services Group is responsible for the proper and efficient functioning

of the Bank’s information technology systems and infrastructure. It manages the Bank’s network of ATMs

and oversees the Bank’s system and office automation software, hardware, and network facilities.

The Bank is the first bank in the Philippines to commercially publish its API. The Bank believes that APIs

will enable it to create entirely new businesses and provide its customers with an even richer menu of

services. The Bank is also the first in the Philippines to launch a banking chatbot named Rafa, aiming to

deliver 24/7 instant customer service to its clients. Using the Facebook Messenger platform, Rafa takes

customer inquiries and handles general information requests, helps customers locate the nearest ATM,

provides the latest foreign exchange rate of up to ten currencies, assists customers who are exploring auto

loans, and provides customers with options to get the credit card that best suits them, among others. The

Bank believes that Rafa provides a more personal and conversational customer experience compared to the

interactive voice response or auto reply platforms.

In September 2018, the Bank launched the first blockchain-based platform for a fast and cost-effective way

to communicate policy and procedural guidelines and regulatory requirements. Through this platform,

employees of the Bank could access the homepage that displays all published general circulars and check the

latest, updated or revised version, accurately and more quickly.

The Bank has also dedicated substantial efforts to ensure security in its information technology systems. In

early 2017, the Bank received the certification for Payment Card Industry Data Security Standard version

3.2, making it the first universal bank in the Philippines to be certified with the latest card data security

standard. In May 2017, the Bank inaugurated its IOC, a 24/7 security centre and a collaborative facility for

developing security measures against constantly evolving cybersecurity threats. The IOC is also responsible

for monitoring the performance of systems, servers, and applications, as well as monitoring uptime of leased

lines.

Acknowledging its reliance on technology and as part of the Bank’s business continuity plan, the Bank

undertook a mirroring project in 2007, an information technology initiative which mirrors the two sites of the

Bank for its failover scheme to achieve disaster readiness. See “— Business of the Bank — Channel

Management Centre.” It is a resilient and dynamic technology on data replication, offering flexibility in

choosing between the Bank’s data centres in capturing real time transactions. The Bank maintains three

storage areas in different off-site locations to store its vital records.

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Channel Management Centre

All of the Bank’s head office operations, back-office operations of each of the other business centres and

internet banking operations are currently undertaken by the Bank’s two central processing units, one located

in Metro Manila and the other in Cebu City. The Bank believes that this arrangement eliminates operation

process redundancy, reduces processing errors, and benefits the Bank through economies of scale. The

Bank’s Channel Management Centre also oversees these operations, which eliminates further redundancies

and helps institutionalise a high-standard quality of service throughout the Bank’s operations.

Subsidiaries

Universal banks in the Philippines, such as the Bank, may invest in the equity of banking-related companies

or “allied undertakings.” Financial allied undertakings include leasing companies, banks, investment houses,

financing companies, credit card companies and financial institutions catering to SMEs.

A publicly listed universal or commercial bank in the Philippines may own 100% of the voting stock of only

one other universal or commercial bank. A universal bank may also own up to 100% of the equity of thrift

banks, rural banks or financial or non-financial allied enterprises. Prior Monetary Board approval is required

for investments in allied and non-allied undertakings.

The total investments in equities of allied and non-allied enterprises shall not exceed 50% of the net worth of

the Bank, subject to the further requirement that the equity investment in any one enterprise, whether allied

or non-allied, shall not exceed 25% of the net worth of the Bank.

As of December 30, 2018, the Bank’s subsidiaries, all of which are incorporated in the Philippines, are as

follows:

Subsidiary

Percentage of

Ownership Nature of Business

City Savings Bank, Inc. .......................................................... 99.78% Thrift Bank

First-Agro Industrial Rural Bank, Inc. .................................... 87.53%(1) Rural Bank

Philippine Resources Savings Bank ...................................... 100.00%(6) Thrift Bank

PetNet, Inc. ............................................................................ 51.00%(7) Remittances / money transfer

Union Properties, Inc. ............................................................. 100.00% Real estate administration

First Union Direct Corporation .............................................. 100.0%(2) Financial products marketing

First Union Plans, Inc. ............................................................ 100.0%(2) Pre-need

First Union Insurance and Financial Agencies, Inc. ............... 100.0%(2)(3) Agent for insurance and financial

products

UBP Securities, Inc. ............................................................... 100.0%(4)(5) Securities brokerage ________________

Notes: (1) First-Agro Industrial Rural Bank, Inc. is owned by City Savings Bank, Inc. (49%) and Union Properties, Inc. (37.67%).

(2) A wholly owned subsidiary of UPI.

(3) First Union Insurance and Financial Agencies, Inc. was acquired by Union Properties, Inc. on August 23, 2013. (4) Inactive.

(5) In the process of dissolution.

(6) PR Bank, acquired in 2018, is a wholly-owned subsidiary of CSB (7) PetNet, Inc. is owned by City Savings, Bank (40%) and Union Properties, Inc. (11%)

A brief description of each of the Bank’s active subsidiaries is set out below:

City Savings

City Savings was incorporated and registered with the Philippine SEC on 9 December 1965. It is a thrift

bank primarily engaged in granting teachers’ loans under the DepEd’s APDS. On December 9, 2014, the

Philippine SEC approved the amendment of City Savings’ articles of incorporation extending its corporate

term for another 50 years beginning on December 9, 2015. As of December 31, 2018, the Bank owned

99.78% of City Savings’ issued and outstanding capital stock.

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Fair Bank

Fair Bank was incorporated and registered with the Philippine SEC on September 25, 1998. It is a rural bank

primarily engaged in providing banking and microfinance services and loan products to micro, small and

medium enterprises, and micro housing institutions. As of December 31, 2018, the Bank’s subsidiaries, City

Savings and UPI, owned 49.0% and 38.53%, respectively, of Fair Bank’s issued and outstanding capital

stock.

PR Savings Bank

Established in 1977 as the Rural Bank of Naguilian, PR Savings Bank is a thrift banking institution dedicated

to serving the Mass Market by catering to the financial requirements of consumers, teachers, farmers and

small business owners. Its lending services consist of motorcycle loans, salary loans to public school

teachers, agricultural loans and microfinance. The Bank also offers regular savings deposit and time deposit

accounts. As of December 31, 2018, City Savings owned 100% of PR Savings Bank’s issued and

outstanding capital stock.

PetNet

PETNET, more widely-known by its retail brand name PERA HUB, has the largest network of Western

Union outlets in the Philippines. PETNET has over 2,800 outlets nationwide. It offers a variety of cash-based

services including remittance, currency exchange and bills payment.

Union Properties, Inc.

UPI was incorporated and registered with the Philippine SEC on December 23, 1993. It is engaged in the

administration and management of the Bank’s premises and other properties such as buildings,

condominium, units and other real estate, wholly- or partially-owned by the Bank. UPI is also engaged in the

sale of pre-need plans and marketing of financial products through its wholly-owned subsidiaries, First

Union Plans, Inc. and First Union Direct Corporation. As of December 31, 2018, the Bank owned 100.0% of

UPI’s issued and outstanding capital stock.

First Union Direct Corporation (FUDC)

FUDC was incorporated and registered with the Philippine SEC in 1999, and is a wholly-owned subsidiary

of UPI. It is a direct selling company that is principally engaged in the marketing of retail financial services

and related products, such as credit cards of the Bank and pre-need pension plans of First Union Plans, Inc.

First Union Plans, Inc. (FUPI)

FUPI was incorporated and registered with the Philippine SEC in 2000, and is a wholly-owned subsidiary of

UPI. It is principally engaged in the business of selling pre-need pension plans to retail customers. As of the

date of this Offering Circular, FUPI is not selling pre-need products but continues to service its customers.

First Union Insurance and Financial Agencies, Inc. (FUIFAI)

FUIFAI was incorporated and registered with the Philippine SEC in 2000, and is a wholly owned subsidiary

of UPI. It was organised to primarily engage in the business of a general agent for life and non-life

insurance, and other allied financial services.

Employees

As of December 31, 2018, the Company had 5,999 employees, of which 3,740 were classified as bank

officers and engaged in a professional management capacity, and 2,259 were classified as staff members.

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The following table presents the number of the Bank’s employees by category as of the dates indicated:

As of December 31,

2016 2017 2018

Bank officers .................................................. 2,308 2,678 2,803

Staff ................................................................ 734 811 797

Total ............................................................... 3,042 3,489 3,600

The Bank’s management believes it has a good relationship with its staff. In June 2018, the Bank

commenced negotiations in relation to the economic provisions of its existing collective bargaining

agreement for the years 2018 to 2020.

The Bank believes that the key for customer engagement is employee engagement. As such, the Bank

provides its employees with comprehensive training facilities and programs, and workplace benefits for their

professional development and personal well-being. Through its e-Learning portal, UnionBank University,

the Bank is able to expand training reach to all branches and locations nationwide, while maximising training

budgets and reducing training costs.

As part of its initiatives to instil a culture of “continuous improvement” in its operations, the Bank

continually sends high potential employees to Six Sigma Black and Green Belt training programmes. To

engrain its commitment to service quality and productivity, the Bank has made the Six Sigma Black Belt

certification a requirement for career progression of its executives involved in operations. The Bank also

developed its own six sigma orange belt training programme under which candidates are responsible for

regularly initiating process improvement projects with supervision from Six Sigma Green and Black Belt

alumni. In addition, the Bank adopts the Define-Measure-Analyse-Improve-Control methodology for all its

quality improvement projects.

In September 2017, the Stevie Awards for Great Employers awarded the Bank with a Gold Stevie for

Employer of the Year in Banking. The Bank was also named Best Company to Work For in Asia at the 2016

Asia Corporate Excellence & Sustainability Awards. In 2015 and 2016, the Bank received the Employer of

the Year — Bronze Award at the Asian Banking and Finance Retail Banking Awards. In 2015, the Bank

received the Best Employee Engagement award at The Asian Banker’s International Excellence in Retail

Financial Services Awards.

City Savings, PR Savings Bank, and Fair Bank had 1,169, 813, and 417 employees, respectively, as of

December 31, 2018

Insurance

The Bank’s policy is to adequately insure all of its properties (including ROPA) against fire and other risks

inherent to its business. It maintains insurance for operational risks such as the loss of cash or securities

through loss or theft. The Bank also requires appropriate insurance coverage for any collateral provided by

its customers. The Bank’s insurance policies are subject to exclusions which are customary for insurance

policies of the type held by the Bank, including those exclusions which relate to war and terrorism-related

events.

Consistent with standard practice in the Philippine banking industry, the Bank does not have business

interruption insurance covering loss of revenues in the event that its operations are affected by unexpected

events. The Bank believes that its existing insurance policies are appropriate for its business.

The Bank believes that its insurance policies as described above are appropriate and sufficient for its

business.

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Properties

As of December 31, 2018, the Bank owned 44 properties (excluding ROPA) in the Philippines with an

aggregate floor area of approximately 94,604.9 square meters. Most of these properties are used as offices

for the Bank’s head office, branch offices, or for back office operations. These properties are not subject to

any mortgage, lien or encumbrance. In addition, the Bank also leases 289 properties in the Philippines used

as the Bank’s branches and offices. For the years ended December 31, 2016, 2017 and 2018, the total rental

expenses of the Bank amounted to ₱533.3 million, ₱571.3 million and ₱664.3 million, respectively. The

average term of these leases is seven years.

Intellectual Property

The Bank has registered a number of trademarks and tradenames, including the logo of the Bank,

“UnionBank” and “Union Bank of the Philippines”. Patents registered by the Bank include the UnionBank

Business Check Writing System and Device. The Bank also has a number of registrations in connection with

its products that have been filed with the Intellectual Property Office at the Department of Trade and

Industry of the Philippines, which are currently pending.

Legal Proceedings

The Bank is a party in legal proceedings which arise in the ordinary course of its business activities. None of

such legal proceedings arising in the ordinary course, either individually or in the aggregate, are expected to

have a material adverse effect on the Bank or its consolidated financial position.

Corporate Social Responsibility

The Bank believes that it has a vital role and responsibility in building strong and resilient communities and

has supported different causes in the areas of e-commerce, education, community well-being, and the

environment.

GoBeyond Communities is the Bank’s main CSR intervention, democratized and decentralized. It is an

employee engagement program where employees can promote their personal advocacies by conceptualising,

developing, and implementing community-enriching programs, with funding provided by the Bank. As of

the date of this Offering Circular, the Bank’s employees have recorded 124,590 hours, reaching a total of

885 communities.

In 2015, the Bank received the Gold Award for Corporate Social Responsibility Program for GoBeyond

Communities at the Asian Banking and Finance Retail Banking Awards. The Bank received two Gold Anvils

for the UREKA forum and the GoBeyond Communities project at the 2017 Anvil Awards.

Another flagship program, UREKA, convenes leading businesses, institutions, and industry experts in a

forum and provides an online business development platform to MSMEs (Micro, Small, and Medium

enterprises). As of the date of this Offering Circular, the Bank has staged four fora in Baguio, Iloilo, Davao,

and Manila which already activated 1,500 local entrepreneurs. The UREKA Shops carry a diverse range of

homegrown products and services offered by Filipino MSMEs.

Competition

The Bank faces competition in all its principal areas of business. Philippine domestic and foreign banks are

the Bank’s main competitors, followed by finance companies, mutual funds and investment banks. The Bank

also faces competition from financial technology firms and non-financial firms. In particular, non-financial

firms pose a challenge to Philippine banks by offering digital products such as mobile payments or online

services. Financial technology firms utilises software to provide financial services and disrupts existing

financial systems and corporations that rely less on software by offering faster, more convenient, and more

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efficient ways of transacting. In addition, purely digital financial technology or non-financial firms have no

branches and thus have lower costs. The Bank seeks to gain a competitive advantage by implementing its

FOCUS 2020 strategic roadmap.

As of December 31, 2018, according to data from the BSP, there were a total of 45 domestic and foreign

universal and commercial banks operating in the Philippines. While mergers, acquisitions, and closures

reduced the number of industry players, the entry of foreign banks under new and liberalised banking laws

and regulations resulted in the growth of the number of universal and commercial banks. Corporate lending

remained competitive resulting in even narrower spreads especially under a low interest rate environment.

Pockets of growth were, however, seen in the middle corporate market, SMEs, and consumer segments.

See “The Philippine Banking Industry — Competition.”

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RISK MANAGEMENT

The Bank is exposed to a range of potential risks arising from its business activities. Risk

management is the process by which the Bank identifies its key risks, obtains consistent and

understandable risk measures, decides which risks to take on or reduce and how this will be

accomplished, and establishes procedures for monitoring the resultant risk positions. The objective of

risk management is to ensure that the Bank conducts its business within the risk levels set by the

Board while business units pursue their objective of maximising returns.

Risk Management Structure

The Board exercises oversight of the Bank’s risk management process as a whole and through its

various risk committees. For the purpose of day-to-day management of risks, the Bank established

independent risk management units that objectively review and ensure compliance to the risk

parameters set by the Board. They are responsible for the monitoring and reporting of risks to senior

management and the various committees of the Bank.

The Board is primarily responsible for setting the risk appetite, approving risk parameters, credit

policies, and investment guidelines, as well as establishing the overall risk taking capacity of the

Bank. Committees have been established by the Board to oversee the increasingly varied risk

management activities of the Bank with the active participation of senior management. The

committees of the Board relevant in this context are the Executive Committee, Risk Management

Committee, Market Risk Committee (MRC), Operational Risk Management Committee, and Audit

Committee. For a description of these committees, see “Management Board Committees.”

The Bank’s Asset and Liability Committee (ALCO) is responsible for ensuring that the Bank’s

liquidity management process is adequate, and that the Bank maintains adequate liquidity and

sufficient capital. It manages the Bank’s balance sheet and ensures that business strategies are

consistent with the Bank’s liquidity, capital, and funding strategies as well as sets targets for balance

sheet size. It also establishes asset/liability pricing policies appropriate to the Bank’s balance sheet

objectives, and determines the level of stress condition the Bank is experiencing.

The ALCO is composed of the President, the Treasurer, Centre Heads and Group Heads. The ALCO

is chaired by the President.

Credit Risk

Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its

financial or contractual obligation to the Bank. The risk may arise from lending, trade finance,

treasury, investments, derivatives, and other activities undertaken by the Bank. Credit risk is managed

through strategies, policies, and limits that are approved by the Board. Further, the Bank has a well-

structured and standardised credit approval process and credit scoring system for each of its business

and/or product segments.

The Risk Management Unit (RMU) undertakes several functions with respect to credit risk

management. It independently performs credit assessment, evaluation, and review for the retail,

corporate and commercial financial products to ensure consistency in the Bank’s risk assessment

process. The RMU also ensures that the Bank’s credit policies and procedures are adequate, and are

constantly updated to meet the changing demands or risk profiles of the business units.

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Credit Risk Assessment for Corporate and Commercial Lending

The Bank undertakes a comprehensive procedure for the credit evaluation and risk assessment of

large corporate and commercial borrowers based on a credit risk rating system that assesses risks on a

three-dimensional level: borrower risk, facility risk and security risk. It also established

concentration limits depending on the borrower risk rating and overall credit quality.

Borrower risk is evaluated by considering (i) quantitative factors, such as profitability, liquidity,

capital adequacy, and sales growth; (ii) qualitative factors, such as management skills and

management integrity; and (iii) industry risk. Industry risk is assessed by considering certain industry

characteristics, such as its importance to the economy, growth outlook, cyclicality, industry structure,

and relevant government policies.

Each borrower is assigned a borrower risk rating (BRR) using the S&P credit assessment scorecards,

a 10-scale scoring system that ranges from AAA to Lower than CCC. Borrowers with high grade

BRRs are considered to have very strong credit where the Bank may be comfortable giving clean

short-term facilities. Borrowers with standard BRRs are similarly acceptable credit but may require

collateral to mitigate the credit risk. Borrowers with sub-standard BRRs are deemed high risk,

requiring very strong collateral to be an acceptable credit risk, and may be required by the Bank to

pledge high grade collateral or other forms of credit enhancements.

In addition to the BRR, the Bank assigns a loan exposure rating (LER), a 100-point system which is

comprised of a facility tenor rating (FTR) and a security risk rating (SRR). The FTR measures the

maturity risk-based on the length of loan exposure, while the SRR measures the quality of the

collateral and risk of its potential deterioration over the term of the loan. The FTR and the SRR, each

a 100-point scoring system, are given equal weight in determining the LER.

Once the BRR and the LER have been determined, the credit limit to a borrower is determined under

the risk asset acceptance criteria (RAAC) which is a range of acceptable combinations of the BRR

and the LER. For example, under the RAAC, a borrower with a high BRR will have a broader range

of acceptable LERs.

The credit rating for each borrower is reviewed annually or earlier if the borrower has a higher risk

profile or when there are extraordinary or adverse developments affecting the borrower, the industry,

and/or the Philippine economy. Any major change in the credit scoring system, the RAAC range,

and/or the risk-adjusted pricing system is presented to and approved by the Risk Management

Committee.

Credit Risk Assessment for Consumer Lending

Each of the product groups in the Bank’s consumer banking segment has its own risk guidelines and

risk assessment system. Although each loan application is examined through an individual credit

evaluation process (combined manual and automated process), the consumer loans are managed on a

portfolio basis with respect to defaults as well as accept, reject and review standards.

The Bank has categorised the scorecard into three levels: outright accept, review band, and outright

reject. The outright accept category refers to applicants that are within the risk profile acceptable to

the Bank and whose applications are automatically approved, subject to the verification and

validation system presently in place. The outright reject category refers to applicants that are below

the minimum risk profile acceptable to the Bank. Applications that fall within the review band are

borderline cases which are accepted or rejected based on the predetermined review parameters.

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Credit Approval Authority and Process

Before any extension of credit, the Bank identifies the needs of the prospective borrower, analyses the

appropriateness of the exposure, and evaluates inherent risks. The lending officers are responsible for

soliciting target customers, identifying borrowing requirements, and initiating credit lines. The RMUs

independently perform credit risk assessment and evaluation and prepare the credit application for

approval by the relevant approving authority.

The Risk Management Review Committee (RMRC) is a senior level committee comprised of a

chairman (the Chief Risk Officer) and four members who are senior credit officers of the Bank. It is

responsible for, among others, reviewing credit facilities approved within management’s credit

authority limit, screening credit proposals which exceed management-delegated authorities prior to

endorsement to the Executive Committee and the Board, and approving credit procedural guidelines.

All credit proposals approved by the RMRC are confirmed by the Excom and credit proposal

approved by the Excom are confirmed by the Board. Credit proposals exceeding the Excom’s credit

authority limit and those which carry an unusual or material risk require approval of the Board. The

Board has the ultimate authority to approve credit transactions, and is also the only body with

authority to approve DOSRI loans.

Credit Monitoring and Review Process

Pursuant to the BSP’s regulations, the Bank is required to establish a system of identifying and

monitoring existing or potential problem loans and other risk assets, and of evaluating credit policies

vis-à-vis prevailing circumstances and emerging portfolio trends. In compliance with this

requirement, the RMUs, on a regular basis or as circumstances require, establish and maintain a

system for monitoring, among others, the financial condition and compliance with existing covenants

of individual accounts or a portfolio of accounts, and update senior management accordingly. All

individual accounts of corporate and commercial lending are reviewed at least once a year together

with the credit line renewal. Larger exposures and lower rated-borrowers or counterparties are

reviewed more frequently, as necessary. The Credit Review Unit (CRU) is independently responsible

for reviewing the Bank’s credit process and loan portfolio quality.

The RMU is also responsible for establishing and updating directors, officers, stakeholders and other

related interests (DOSRI) masterlist. The Bank and its subsidiaries, from time to time and in the

ordinary course of business, enter into loan transactions with DOSRI. All such loans are on a

commercial and arm’s-length basis. The General Banking Law of 2000 or Republic Act No. 8791

(the General Banking Law) and BSP regulations require that (a) the amount of individual

outstanding loans, other credit accommodations, and guarantees to DOSRI should not exceed an

amount equivalent to their unencumbered deposits and the book value of their paid-in capital

investment in the bank; (b) unsecured loans, other credit accommodations, and guarantees to DOSRI

should not exceed 30.0% of the aggregate ceiling or the outstanding loans, other credit

accommodations and guarantees, whichever is lower; and (c) the total outstanding loans, other credit

accommodations, and guarantees to DOSRI may not, without the prior approval of the Monetary

Board, exceed 15.0% of the Bank’s total loan portfolio or 100.0% of the Bank’s net worth, whichever

is lower. The total outstanding loans, other credit accommodations, and guarantees granted to each

subsidiary or affiliate of a bank should not exceed (a) 10.0% of the net worth of the lending bank, or

(b) 5.0% of such net worth, if unsecured. The total outstanding loans, other credit accommodations,

and guarantees granted to all subsidiaries and affiliates of a bank should not exceed 20.0% of the net

worth of the lending bank.

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Market Risk

Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate

due to changes in market variables such as interest rate, foreign exchange rates, and equity prices.

The Group classifies exposures to market risk into either trading book or banking book. The market

risk for the trading portfolio is managed and monitored based on a Value-at-Risk (VaR)

methodology. The market risk for the non-trading positions are managed and monitored using other

sensitivity analyses.

The Group applies the VaR methodology to assess the market risk of positions held and to estimate

the potential economic loss based upon a number of parameters and assumptions for various changes

in market conditions. VaR is a method used in measuring financial risk by estimating the potential

negative change in the market value of a portfolio at a given confidence level and over a specified

time horizon.

The Group uses the historical VaR approach in assessing the possible changes in the market value of

its trading portfolio based on historical data for a rolling one-year period. The VaR models are

designed to measure market risk in a normal market environment. The models assume that any

changes occurring in the risk factors affecting the normal market environment will follow a normal

distribution. The use of VaR has limitations because it is based on historical correlations and

volatilities in market prices and assumes that future price movements will follow a statistical

distribution. Due to the fact that VaR relies heavily on historical data to provide information and may

not clearly predict the future changes and modifications of the risk factors, the probability of large

market moves may be underestimated if changes in risk factors fail to align with the normal

distribution assumption.

Market Risk Management Process

The Bank’s Treasury Group, in coordination with the Market & Subsidiaries Risk Unit (MSRU),

develops a risk measurement and management process that is appropriate for the Bank’s business.

Such process is approved by the MRC and the Board. A product program manual which sets out,

among other things, a standardised process of measuring and managing credit, market and liquidity

risks, operational procedures, and controls and approval procedures, is then prepared for each

product.

Market Risk Limits

The Bank also manages its market risks through application of various limits set by the MRC and

approved by the Board. Such limits primarily include the following:

aggregate control limits — These place a ceiling on the total volume of trading/ownership of

given product lines at given tenors;

aggregate VaR limit — This places a ceiling on the monetary amount of potential loss on the

held-for-trading and AFS portfolios of the Bank deemed tolerable by management;

nominal position limits — These determine the maximum size of open risk positions that may

be held by the Bank within a given time period. Such limits include overnight and

daylight position limits which may vary for overbought and oversold positions. These

limits must conform to the regulatory limits set by the BSP;

management action trigger/loss alert/stop loss limits — These establish management’s

tolerance levels for accepting cumulative year-to-date and month-to-date market risk

losses on trading positions; and

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trader/dealer limits — These set the maximum volume of transactions that a trader/dealer

may execute, and is determined relative to the depth of experience and level of expertise

of the personnel making the risk-bearing decision.

Compliance with the above limits is closely monitored and reported in accordance with an escalation

process established by the MRC.

The Internal Audit Division is responsible for conducting back-testing to compare hypothetical and

actual trading results with the Bank’s internal model-generated risk measures at the end of each

quarter. Based on the results of the back-testing, if a certain market risk is not addressed by the

Bank’s internal model, the internal model is modified to capture such risk. The MRU is also

responsible for conducting quarterly stress tests on the Bank’s portfolio of financial instruments and

reporting the results of such tests to the MRC for a more concrete assessment of the risks. The stress

tests evaluate the Bank’s potential losses resulting from changes in market factors, such as foreign

exchange rates and interest rates, caused by simulated hypothetical scenarios or historical events

where extreme movements have been observed.

Interest Rate Risk

A critical element of the Group’s risk management program consists of measuring and monitoring the

risks associated with fluctuations in market interest rates on the Group’s net interest income, and

ensuring that the exposure in interest rates is kept within acceptable limits.

The Group employs “gap analysis” to measure the interest rate sensitivity of its assets and liabilities,

also known as Earnings-at-Risk (EaR). This sensitivity analysis is performed at least every quarter.

The EaR measures the impact on the net interest income for any mismatch between the amounts of

interest-earning assets and interest-bearing liabilities within a one-year period. The EaR is calculated

by first distributing the interest sensitive assets and liabilities into tenor buckets based on time

remaining to the next re-pricing date or the time remaining to maturity and then subtracting the

liabilities from the assets to obtain the re-pricing gap. The re-pricing gap per tenor bucket is then

multiplied by the assumed interest rate movement and appropriate time factor to derive the EaR per

tenor. The total EaR is computed as the sum of the EaR per tenor within one year. To manage the

interest rate risk exposure, Board approved EaR limits were established.

Foreign Exchange Risk

Foreign exchange risk is the risk to earnings or capital arising from changes in foreign exchange

rates.

The Group’s net foreign exchange exposure, taking into account any spot or forward exchange

contracts, is computed as foreign currency assets less foreign currency liabilities. The foreign

exchange exposure is limited to the day-to-day, over-the-counter buying and selling of foreign

exchange in the Group’s branches, as well as foreign exchange trading with corporate accounts and

other financial institutions. The Group is permitted to engage in proprietary trading to take advantage

of foreign exchange fluctuations.

Liquidity Risk

Liquidity risk is the risk that there are insufficient funds available to adequately meet the credit

demands of the Bank’s customers and repay deposits on maturity. The ALCO and the Treasurer of

the Bank ensure that sufficient liquid assets are available to meet short-term funding and regulatory

requirements. Liquidity is monitored by the Group on a daily basis and under stressed situations. A

contingency plan is formulated to set out the amount and the sources of funds (such as unused credit

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facilities) that are available to the Group and the circumstances under which the Group may use such

funds.

The Bank also manages its liquidity risks through the use of a Maximum Cumulative Outflow

(MCO) limit which regulates the outflow of cash on a cumulative basis and on a tenor basis. To

maintain sufficient liquidity in foreign currencies, the Group has also set an MCO limit for certain

designated foreign currencies. The MCO limits are endorsed by the MRC and approved by the Board.

As of December 31, 2018, the total amount of funds that were available to the Bank under credit

facilities for secured and unsecured borrowings and swaps were ₱350.4 billion.

The Bank takes a multi-tiered approach to maintaining liquid assets. BSP regulations require the

Bank to maintain minimum cash reserves and liquid assets as a proportion of its overall deposits. As

of December 31, 2018, the Bank’s principal source of liquidity is comprised of ₱10.9 billion of cash,

deposits with other banks of ₱14.9 billion, and due from the BSP of ₱56.5 billion,. In addition to

regulatory reserves, the Bank maintains what it believes to be a sufficient level of secondary reserves

in the form of liquid assets such as investment securities that can be realized quickly. As of

December 31, 2018, the total portfolio of investment securities of the Bank amounted to ₱218.3

billion.

Operational Risk

Operational risk is the risk of loss arising from inadequate or failed internal processes, people, and

systems or external events. This definition includes legal risk, but excludes strategic and reputational

risk. This also covers potential losses that could occur as a result of the Bank’s use of technology-

related products, services, delivery channels, and processes.

Each specific unit of the Bank has its roles and responsibilities in the management of operational risk

and these are clearly stated in the Bank’s operational risk management framework. At the Board

level, an Operational Risk Management Committee was formed to provide overall direction in the

management of operational risk.

Operational Controls and Procedures in Branches

The Bank has operating manuals detailing the procedures for the processing of various banking

transactions and the operation of the application software. Amendments to these manuals are

implemented through circulars sent to all offices.

The Bank has a scheme of delegation of financial powers that sets out the monetary limit for each

employee concerned with respect to the processing of transactions in a customer’s account. The

Bank’s banking software has multiple security features to protect the integrity of applications and

data.

The Bank gives importance to computer security and has a comprehensive information technology

security policy. Most of the information technology assets including critical servers are hosted in

centralised data centres, which are subject to appropriate physical and logical access controls.

Operational Controls and Procedures for Internet Banking

The Bank has established a multi-factor security system to improve internet banking security. The

Bank issues each customer that opens an internet banking account a user identity and password to

access his account online. For security purposes, the customer will be required to change the default

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password on his first successful log in attempt. To further strengthen the security, the customer shall

also be required to enrol a transaction password for his internet banking account. This transaction

password will be required for every internet banking transaction made by the customer, to ensure the

transaction’s authenticity. Encryption, authentication, and validation are also in place for internet-

based transactions. Network controls are implemented for secured internet banking.

Operational Controls and Procedures in CPS locations

To improve operational controls, enhance customer service at the Bank’s physical locations, reduce

operating costs, and capitalise on economies of scale, the Bank handles processing of common

transactions at central locations by taking away such operations from each business centre.

With two operating locations, one in Metro Manila and the other in Cebu City, the Bank’s main

backroom operations hub, uses high level of automation in its operations. Except for some critical

processes that are jointly handled by both Manila and Cebu as a business continuity strategy, each

CPS location, in general, houses its own centralised processes, thus setting it apart from the other

location. The CPS location in Cebu City handles branch accounting, subsidiaries accounting, account

reconciliation, expense accounting, and regulatory reporting while the CPS location in Metro Manila

handles centralised production of cards, operation processes of check clearance, as well as back office

activities for auto and residential mortgage loans and other administrative support services.

Operational Controls and Procedures in Treasury

The Bank has a high level of automation in its trading operations. The Bank uses technology to

monitor risk limits and exposures. The Bank’s front office, middle and back office, and accounting

and reconciliation functions are fully segregated. The respective middle offices use various risk

monitoring tools such as counter-party limits, nominal position limits, aggregate control limits,

aggregate VaR limit, earnings-at-risk limits, MCO limits, stop loss, loss alert, and individual dealer

limits (per trader, position limits, stop loss and loss alert, among others). Procedures for reporting

breaches in limits and escalation to management are also in place.

The Bank’s front office treasury operations cover transactions in fixed income securities, inter-bank

money markets, and foreign exchange. The Bank’s traders analyse the market conditions and take

views on price movements. Thereafter, they enter into transactions in conformity with various limits

relating to counterparties, securities, and brokers. The agreements are confirmed by the middle office

and then forwarded to the back office for settlement. The Bank also monitors delayed transactions.

The Treasury Middle Office Unit confirms trades and monitors counter-party credit risk limits and the

MRU evaluates the mark-to-market impact on various positions taken by dealers, and monitors

market risk exposure of the investment portfolio and adherence to various market risk limits set up by

the MRC.

The Bank’s back office undertakes the settlement of funds and securities. The back office has

procedures and controls for minimising operational risks, including procedures with respect to deal

confirmations with counterparties, verifying the authenticity of counter-party checks and securities,

ensuring receipt of contract notes from brokers, monitoring receipt of interest and principal amounts

on due dates, ensuring transfer of title in the case of purchases of securities, reconciling actual

security holdings with the holdings pursuant to the records, and reporting any irregularity or

shortcoming observed.

Audit

The Internal Audit Division (IAD) is an independent unit responsible for providing assurance and

consulting activity designed to add value and improve the Bank’s operations. It helps the Bank

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accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the

effectiveness of risk management, control, and governance processes.

The IAD is responsible for undertaking a comprehensive audit of all business groups and other

functions, in accordance with a risk-based audit plan, and provides an independent appraisal of the

adequacy and effectiveness of the risk management and control processes in operation throughout the

Bank. Various components of information technology from applications to databases, networks, and

operating systems are covered under the annual audit plan. The audit plan for every fiscal year is

approved by the Audit Committee.

The Head of the IAD reports directly to the Audit Committee and the Board. These reporting lines

and organisational structures ensure that the IAD has the full support and access required to

efficiently and systematically conduct its work independently. The IAD issues various reports to the

Audit Committee, the Chairman of the Board, management, and other relevant parties throughout the

year, including audit reports, compulsory audit reports of branch visits, and periodic reports issued to

the Audit Committee, the Board and management.

Anti-Money Laundering Controls

Under the RA 9160, the Bank is required to submit a “covered” transaction report involving a single

transaction in cash or other equivalent monetary instruments in excess of ₱500,000.00 within one

banking day. The Bank is also required to submit a “suspicious” transaction report to the AMLC of

the BSP if there is reasonable ground to believe that any amounts processed are the proceeds of

money laundering activities. The Bank is required to establish and record the identities of their clients

based on official documents. In addition, all records of transactions are required to be maintained and

stored for five years from the date of a transaction. Records of closed accounts must also be kept for

five years after their closure.

In an effort to further prevent any money laundering activities through the Bank, it has adopted more

stringent KYC policies and guidelines. Under the KYC guidelines, each business unit is required to

validate the true identity of a customer based on official or other reliable identifying documents or

records before an account is opened. Each business unit is also required to monitor account activities

to determine whether transactions conform to the normal or expected transactions for a customer or

an account. Persons with higher potential or risk for money laundering require enhanced due

diligence. Decisions to enter into a business relationship with a higher risk customer, such as a

politically exposed person or a private individual holding a prominent position, are made exclusively

at the senior management level.

Legal Risk

Legal risks belong to non-quantifiable risks that are not subject to specific numerical measurements

but likewise require similar management attention. While unpredictable, non-quantifiable risk may

cause severe impact of the Bank’s profit and loss. These risks are mitigated by developing a strong

“control culture” and an organisational structure that is risk-aware and an effective internal control

system that continually monitors and updates processes and procedures.

Legal risks include the potential for the Bank to suffer a financial loss due to non-existent,

incomplete, incorrect, and unenforceable documentation used by the Bank to protect and enforce its

rights under contracts and obligations. This risk is closely related to credit risk as it most often

involves legal problems with counterparties to the Bank’s transactions. It is also closely related to

other non-quantifiable risks that have to be assessed: fiduciary, reputational risk, and regulatory risk.

A legal review process is the primary control mechanism for legal risks and shall be part of every

product program of the Bank. The review aims to validate the existence, propriety, and enforceability

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of documents, and verify the capacity and authority of counterparties and customers to enter into

transactions.

Regulatory Risk

Regulatory risk refers to the potential risk for the Bank to suffer financial loss due to changes in the

laws or monetary, tax or other governmental regulations of a country. The monitoring of the Bank’s

compliance with these regulations, as well as the study of the potential impact of new laws and

regulations, is the primary responsibility of the Bank’s Chief Compliance and Corporate Governance

Officer. The Chief Compliance and Corporate Governance Officer is responsible for communicating

and disseminating new rules and regulations to all units, analysing and addressing compliance issues,

performing periodic compliance testing and regularly reporting to the Corporate Governance

Committee and the Board.

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DESCRIPTION OF THE BANK’S ASSETS AND LIABILITIES

The tables below and accompanying discussions provide selected financial highlights regarding the

Bank’s assets and liabilities. The following audited information should be read together with the

Bank’s consolidated financial statements included in this Offering Circular as well as “Risk

Management” and “Description of the Bank”.

Funding

The Bank’s funding operations are designed to ensure both a stable source of funds and effective

liquidity management. Total deposits represented 62.4% of the Bank’s sources of funding as of

December 31, 2018. As of the same period, time(1)

, savings and demand deposits represented 55.7%,

16.0% and 28.3%, respectively, of total deposits of ₱420.7 billion. In recent years, the Bank has

made directed efforts to increase its deposit base. The Bank also sources its funding requirements

from the interbank market and general financings.

Sources of Funding

The following table sets out an analysis of the Bank’s principal funding sources as of the periods

indicated (in ₱ millions):

As of December 31,

2016 2017 2018

(audited) Deposits by currency:

Peso ........................................................ 278,850.1 339,163.6 318,221.5

Foreign ................................................... 97,635.0 108,452.6 102,481.0

Total .......................................................... 376,485.1 447,616.2 420,702.5

Borrowings(2)

:

Peso ........................................................ 8,992.0 14,110.4 44,264.2

Foreign (included under bills payable)... 39,108.2 28,960.4 46,700.3

Total .......................................................... 48,100.2 43,070.8 90,964.5

_________________

Note:

(1) Including LTNCD

(2) Comprised of bills payable only.

Deposit liabilities bore an annual interest of 0.0% to 9.0% in 2016, 2017, and 2018.

The range of the interest rates of bills payable per currency is set out in the table below:

As of December 31,

2016 2017 2018

Pesos ................................................................... 2.6% to 12.0% 2.6% to 12.0% 2.8 to 6.8%

Foreign currencies .............................................. 0.0% to 2.1% 0.2% to 2.5% 1.4 to 3.6%

Deposits

Historically, the Bank’s principal source of deposits is its retail banking customers. As of December

31, 2018, retail banking customers accounted for 59.8% of the Bank’s total deposit liabilities while

customers of corporate banking and treasury accounted for the balance at 25.4% and 14.8%,

respectively.

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The Bank’s foreign currency deposits and funding are primarily handled through its FCDU operation,

which is permitted to accept deposits and extend credit in foreign currencies. As of December 31,

2016, 2017 and 2018, the Bank’s foreign currency deposits made up 25.9%, 24.2% and 24.4%,

respectively, of its total deposits.

The Bank has expanded its sources of funds in order to diversify the scheduled maturities of deposits

and maintain a funding portfolio that will enable it to achieve funding stability, liquidity, and reduce

the discrepancies between its loan and deposit maturities. The Bank continues to grow its CASA

through internal and external programs to encourage increases in deposits, particularly traditional

demand and savings deposits.

As of December 31, 2018, 44.3% of the Bank’s outstanding deposits were demand and savings

deposits which can be withdrawn on demand without any prior notice from the customer.

The general increase in deposits was primarily the result of the Bank’s efforts to expand its deposit

business, as well as the growth of the Philippine economy. The following table sets out an analysis of

the maturities of the deposit base of the Bank (in ₱ millions):

As of December 31,

2016 2017 2018

(audited)

Up to one year ............................. 366,292.6 431,693.5 389,614.0

One to five years ......................... 6,658.1 6,415.1 10,197.2

Over five years ............................ 3,534.4 9,507.6 20,891.3

Total ........................................... 376,485.1 447,616.2 420,702.5

On October 18, 2013, the Bank raised ₱3.0 billion from its maiden offering of long-term negotiable

certificates of deposits (the “2013 LTNCDs”). The 2013 LTNCDs carry a coupon rate of 3.5% per

annum and will mature in April 2019.

On February 21, 2018, the Bank issued P3.0 billion in long-term negotiable certificates of deposits

(the “2018 LTNCDs”). The 2018 LTNCDs carry a coupon rate of 4.375% per annum and will

mature in August 2023. The net proceeds of the issuance will be used to diversify the Bank’s

maturity profile of funding sources and to support its business expansion plans.

Credit Lines

The Bank also maintains credit lines with domestic commercial banks and financial institutions in the

interbank market primarily for treasury management purposes. Interbank borrowings are typically for

short-term duration of between one day and a few weeks. Interbank deposits do not usually form a

significant part of the Bank’s funding base but, together with the Government bond market, are

important in the management of the Bank’s liquidity. The BSP is a lender of last resort to the

Philippine banking industry.

The Bank is a member of the Philippine Deposit Insurance Corporation (the PDIC) which insures all

deposits up to a maximum of ₱500,000.00 per depositor. The PDIC is funded by semi-annual

assessment fees at a prescribed percentage of the Bank’s deposit liabilities less certain exclusions.

Bills Payable and Other Borrowings

The Bank also sources funds through bills payable and other borrowings which includes subordinated

debt and bonds payable. The Bank’s bills payable represent borrowings from local and foreign banks.

The Bank’s bills payable represent borrowings from local and foreign banks. As of December 31,

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2016, 2017 and 2018, bills payable amounted to ₱48.1 billion, ₱43.1 billion and ₱91.0 billion,

respectively, of which 81.3%, 67.2% and 51.3%, respectively, are denominated in foreign currencies.

The Bank also issues subordinated debt from time to time to strengthen its capital base as well as to

raise funds. The following describes certain details of the Bank’s outstanding subordinated debt.

Senior Fixed Rate Bonds

On December 7, 2018, the Bank issued ₱11.0 billion in Fixed Rate Senior Bonds with an interest rate

of 7.061% per annum, maturing December 7, 2020. The net proceeds from the Bonds shall be used to

support business expansion plans and for general corporate purposes.

Senior Notes

On November 29, 2017, the Bank issued U.S.$500 million in Fixed Rate Senior Notes with a yield of

3.369% per annum, maturing November 29, 2022 under the Bank’s Medium Term Note Program,

which was established on November 14, 2017. The proceeds of the notes will be used to refinance

the Bank’s existing liabilities, expand its funding base, for other general corporate purposes and to

fund other business growth, i.e. investment securities and other assets.

Subordinated Notes

On November 20, 2014, the Bank issued ₱7.2 billion worth of Basel III-compliant Tier 2 unsecured

subordinated notes with a coupon rate of 5.375% per annum and will mature in February 2025.

Interest expense on notes and bonds payable amounted to ₱387.0 million, ₱461.8 million and ₱1.3

billion for the years ended December 31, 2016, 2017 and 2018, respectively.

Liquidity

The Bank manages its liquidity to meet financial liabilities arising from the withdrawal of deposits,

repayments of deposits at maturity and working capital needs. Funds are required to create assets in

the form of loans and extensions of other forms of credit, investments in securities, trade financing,

and capital investments. The Bank seeks to ensure sufficient liquidity through a combination of active

management of liabilities, a liquid asset portfolio, the securing of ample money market lines and

swap lines, and the maintenance of repurchase facilities.

Pursuant to BSP regulations, commercial banks are required to maintain a statutory legal reserve

against deposits and deposit substitute liabilities of 18.0% of the same base. The required reserves

must be kept in the form of deposits placed in a demand deposit account with the BSP. Government

securities, which may form part of the reserves against deposits/deposit substitute liabilities of banks

must bear an interest at the rate of 4.0% per annum, must be non-negotiable, and shall carry BSP

support. The BSP also requires banks to maintain asset cover of 100.0% for foreign currency

liabilities of their FCDUs, of which 30.0% must be in liquid assets. The Bank has consistently

complied with the reserve requirements for Peso deposits and the cover requirements for FCDU

described above.

The Bank’s liquid assets as of December 31, 2018 amounted to ₱90.7 billion, representing 13.5% of

the Bank’s total assets. Liquid assets include cash and other cash items, due from BSP, due from

other banks, and trading and investment securities (excluding amortized cost investments and

financial assets at FVOCI).

The following table sets out information with respect to the Bank’s liquidity position as of the dates

indicated:

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As of December 31,

2016 2017 2018

(₱ millions)

Liquid assets(1) .................................. 132,750.6 135,406.0 90,653.1

Cash and other cash items ......... 6,021.4 6,633.2 10,916.5

Due from BSP ........................... 56,151.2 66,277.0 56,510.7

Due from other banks................ 42,425.3 54,520.5 14,942.2

Interbank loans receivable

and SPURA ................................... 24,362.8 4,793.3 -

Financial assets at FVTPL ........ 3,789.9 3,182.0 8,283.7

Financial Ratios:

Liquid assets to total assets ............... 25.3% 21.8% 13.5%

Liquid assets ............................. 132,750.6 135,406.0 90,653.1

Total assets................................ 523,790.1 621,432.4 673,782.7

Liquid assets to total deposits ........... 35.3% 30.3% 21.5%

Liquid assets ............................. 132,750.6 135,406.0 90,653.1

Total deposits ............................ 376,485.1 447,616.2 420,702.5

Net loans(2) to total deposits .............. 59.5% 58.1% 71.0%

Total loans ................................ 234,080.7 270,018.9 306,097.8

Less: Allowance for

Impairment .................................... (10,187.6) (10,165.1) (7,434.7)

Net loans ................................... 223,893.1 259,853.8 298,663.1

Total deposits ............................ 376,485.1 447,616.2 420,702.5

_________________

Notes: (1) Liquid assets includes cash and cash items, deposits with the BSP and deposits with other banks, interbank loans receivable and

trading and investment securities but excludes amortized cost investments and financial assets at FVOCI.

(2) Ttotal loans (excluding IBCL) net of allowance for impairment.

Loan Portfolio

As of December 31, 2016, 2017 and 2018, the Bank’s total loans, inclusive of accrued interest

receivable, amounted to ₱235.9 billion, ₱271.8 billion, and ₱307.6 billion, respectively, representing

45.0% 43.7%, and 45.7%, respectively, of its total assets.

The Bank maintains a well-diversified loan portfolio. The following table sets out the Bank’s gross

loans and advances by principal lending units, inclusive of accrued interest receivable, as of the dates

indicated (in ₱ millions):

As of December 31,

2016 2017 2018

(audited)

Corporate Banking 103,873.1 117,609.3 129,064.1

Commercial Banking 33,157.8 49,055.4 50,270.0

Consumer Finance(1) 90,179.9 96,684.9 101,951.5

Others(2) 8,675.6 8,455.4 26,313.2

Total loan portfolio 235,886.5 271,805.0 307,598.8

_________________

Note:

(1) Consumer finance consists of credit cards, auto, mortgage, and quickloans, Fairbamk, PR Savings and City Savings loans.

(2) Others consist of: bills purchased, branch loans, community banking, salary loans, HR loans, and other adjustments.

Industry Concentration

As of December 31, 2018, other consumption (comprised mostly of City Savings salary loans), real

estate activities, and financial and insurance activities represented the largest sectors of the Bank’s

loan portfolio at 56.5%. The majority of lending to these sectors takes the form of working capital

loans. The Bank implements internal limits on industry exposures in addition to the regulatory limits

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for loans to the real estate sector and credit concentration limit to a particular industry or economic

activity.

The internal limits are expressed as a percentage of the Bank’s net worth. These vary across

industires depending on the prospects of the Bank. For the regulatory limits, loans to real estate

business are limited by BSP regulations to 20.0% in the aggregate of the Bank’s total loan portfolio.

Excluded from this ceiling are loans extended to individual households to finance the acquisition or

improvement of residential units, regardless of amount, loans extended to land

developers/construction companies for the purpose of development and/or construction of socialised

and low cost residential properties, loans to the extent guaranteed by the Home Guaranty Corporation,

loans to the extent collateralised by non-risk assets, and loans to finance the construction,

rehabilitation, and improvement of infrastructure projects intended for public use. The trust

departments of universal and commercial banks are also exempt from the said loan ceiling. The BSP

also imposes a credit concentration limit of 30.0% of total loan portfolio to any industry or economic

activity.

Banks are required to allocate 25.0% of their loanable funds for agriculture and agrarian reform credit

in general, of which at least 10.0% must be made available for agrarian reform beneficiaries.

Alternatively, a bank may meet all or a portion of the mandatory agriculture and agrarian reform

credit by investing in eligible government securities, and loans and other credits under certain

conditions. As with most banks in the Philippines, due to the lack of agriculture and agrarian

borrowers that meet the Bank’s credit standards and due to the shortage in eligible Government

securities, the Bank is not in strict compliance with this standard. The following tables set out an

analysis of the Bank’s loans and other receivables by economic activity, as defined and categorised

by the BSP (in ₱ millions, except percentages):

As of December 31,

2016 2017 2018

(audited)

Real estate activities .................... 41,027.8 17.3% 46,910.4 16.0% 54,175.1 16.1%

Financial and insurance

activities .................................. 31,952.2 10.8% 43,289.1 14.8% 49,709.2 14.8%

Electricity, gas steam and

air conditioning supply ........... 15,942.8 6.6% 25,744.2 8.8% 23,179.4 6.9% Manufacturing ............................. 14,422.2 6.1% 13,064.3 4.4% 18,153.9 5.4%

Wholesale and retail trade,

repair of motor vehicles .......... 7,803.8 3.3% 19,832.5 6.8% 27,711.4 8.3% Information and

communication ....................... 16,924.8 7.1% 30,842.2 10.5% 31,377.1 9.4%

Agriculture, forestry and fishing ..................................... 2,453.6 1.0% 1,315.7 0.4% 2,266.9 0.7%

Transportation and storage .......... 8,408.4 3.6% 9,455.0 3.2% 11,851.9 3.5%

Activities of households as employers and

undifferentiated goods and

services ................................... 1,940.6 0.7% 1,924.3 0.7% 9,256.4 2.8% Other service activities ................ 6,223.0 2.4% 4,538.5 1.6% 3,805.7 1.1%

Construction ................................ 3,328.1 1.4% 4,312.2 1.5% 5,836.3 1.7%

Accommodation and food service activities ...................... 5,920.9 2.5% 8,543.5 2.9% 11,932.7 3.6%

Arts, entertainment and

recreation ................................ 378.5 0.2% 1,174.6 0.4% 106.9 0.0% Professional, scientific and

technical activities................... 199.7 0.1% 290.1 0.1% 431.2 0.1%

Others(1) ....................................... 90,323.2 36.9% 81,551.4 27.9% 86,008.2 25.6%

Total ........................................... 247,249.6 100.0% 292,788.0 100.0% 335,802.3 100.00%

____________

Note:

(1) Others include water, public administration, education, human health, mining and quarrying, administrative and

support service activities, and other consumption.

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The Bank intends to continue to focus its lending activities on consumer loans, SMEs and other high

growth sectors of the economy such as the information and technology, real estate, power and

infrastructure industries.

The Bank maintains a flexible policy toward exposure to the Philippine economy, in principal

avoiding exposure of more than 30.0% to a particular individual sub-sector of the economy in

accordance with regulatory requirements. The Bank also monitors its exposure to specific sectors of

the economy, specifically the real estate sector, to ensure compliance with specific pre- determined

lending requirements imposed by law on all Philippine banks. The Bank must likewise comply with

legal requirements to make loans available to SMEs. Mandatory credit allocation laws require all

Philippine banks to allocate 8.0% of their loan portfolios to micro and small-sized enterprises and

2.0% to medium-sized enterprises.

Maturity

Approximately one third of the Bank’s loans and other receivables are due within one year. As of

December 31, 2018, loans and other receivables due within one year represented 35.6% of the Bank’s

total loans. Loans repayable on demand principally comprise inter-bank loans, while short-term loans

principally comprise loans to corporates for working capital and loans to consumers and SMEs.

Medium-and long-term loans are typically granted to corporations and businesses to finance capital

expenditures and mortgages advanced for property purchases. The percentage of the Bank’s loans and

other receivables with longer maturities has increased recently primarily due to growth in corporate

loans and in consumer loans.

The following table sets out an analysis of the Bank’s loans by maturity (gross of allowance and net

of unearned discount) (in ₱ millions, except percentages):

As of December 31,

2016 % 2017 % 2018 %

(audited)

Within one year ................. 75,520.6 30.7% 95,390.1 32.8% 119,014.3 35.6%

One to five years ............... 85,901.7 34.9% 101,585.1 34.9% 109,127.8 32.6%

More than five years .......... 84,877.3 34.5% 94,026.7 32.3% 106,159.2 31.8%

Total ................................. 246,299.6 100.0% 291,001.9 100.0% 334,301.3 100.00%

Currencies

The Bank provides loans to customers in Peso and certain foreign currencies. The Bank maintains its

practice of extending foreign currency loans primarily to exporters who have an identifiable source of

foreign currency earnings from which to repay the loans or otherwise hedged, and to importers who

have authorisation from the BSP to purchase foreign currency to service their foreign currency

obligations.

As of December 31, 2018, 96.7% of the Bank’s loan portfolio was denominated in Pesos with 3.3%

being denominated in foreign currencies, the majority of which comprised U.S. dollars. Substantially

all of the Bank’s foreign currency-denominated loans are loans to corporate customers.

The following table shows an analysis of the Bank’s gross loans by currency (in ₱ millions, except

percentages):

As of December 31,

2016 % 2017 % 2018 %

(audited)

Pesos .................................. 224,306.0 95.6% 260,997.3 96.7% 293,946.6 96.3%

Foreign currency ................ 10,253.4 4.4% 8,919.6 3.3% 11,274.9 3.7%

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As of December 31,

2016 % 2017 % 2018 %

(audited)

Total .................................. 234,559.4 100.0% 269,916.9 100.0% 305,221.5 100.00%

Interest Rates

An important component of the Bank’s asset and liability policy is its management of interest rate

risk, which is the relationship between market interest rates and the Bank’s interest rates on its

interest-earning assets and interest-bearing liabilities. (See “Risk Management — Interest Rate Risk

Management”)

The Bank’s loan pricing is set by the ALCO. The Bank’s loan pricing is driven by market factors, the

Bank’s funding position, and the credit risk associated with the relevant borrower. The lending

market in the Philippines is principally based on floating rate lending. The Bank’s floating rate loans

are re-priced periodically by reference to the Philippine domestic interest rates, and to the Bank’s

internal cost of funds known as the transfer pool rate plus a spread. As a result, the Bank’s exposure

to interest rate fluctuations is significantly reduced. (See “Risk Management — Interest Rate Risk

Management”.) The Bank’s pricing policy with respect to its interest-bearing liabilities is set by the

Bank’s ALCO. CASA deposits do not pay any interest for deposits falling below a maintaining

balance. The basic rate for savings account deposits that are above the minimum threshold is 0.10%

per annum. The Bank also offers special interest rates for deposits under its time deposits account.

These larger deposits are placed on pre-agreed terms and pay interest rates that generally track

Philippine domestic interest rates.

Size and Concentration of Loans

The BSP generally prohibits any bank from maintaining a financial exposure to any single person or

group of connected persons in excess of 25.0% of its net worth. In determining whether the Bank

meets the SBL, the Bank includes exposure to related accounts (including accounts of subsidiaries

and parent companies of the borrower). This limit does not apply to loans which are secured with

non-risk assets, including cash deposits and Government securities. The Bank has complied with the

SBL on all of its loans.

As of December 31, 2018, the Bank’s single largest corporate borrower accounted for 3.9% of the

Bank’s outstanding loan portfolio. As of the same period, the Bank’s ten largest performing

borrowers (including groups of individuals and companies) accounted for ₱73.6 billion or 24.2% of

the Bank’s outstanding loan portfolio. Of the Bank’s top ten borrowers, none were related parties.

The following table presents a breakdown of total loans by principal amount as of the periods

indicated (in ₱ millions, except percentages):

As of December 31,

2016 % 2017 % 2018 %

(audited)

₱5,000,000 or less .............. 94,008.0 40.1% 101,462.0 37.6% 67,916.3 22.3% ₱5,000,001 to

₱10,000,000 ................... 7,405.2 3.2% 8,995.3 3.3% 59,491.0 19.5%

₱10,000,001 to ₱15,000,000 ................... 5,897.2 2.5% 4,262.1 1.6% 3,368.2 1.1%

More than ₱15,000,000 ...... 127,249.0 54.2% 155,197.5 57.5% 174,446.0 57.1%

Total .................................. 234,559.4 100.0% 269,916.9 100.0% 305,221.5 100.00%

Secured and Unsecured Loans

The Bank principally focuses on cash flows and cash generating capabilities in assessing the

creditworthiness of borrowers. However, the Bank will secondarily seek to minimise credit risk with

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respect to a loan by securing loans with collateral or guarantees. As of December 31, 2018, 6.2% of

the total loans were extended on a secured basis, with 3.3% backed by real estate mortgages.

The following table sets out the Bank’s secured and unsecured loans, classified (in the case of secured

loans) according to type of security (in ₱ millions, except percentages):

As of December 31,

2016 % 2017 % 2018 %

(audited)

Secured:

Government securities . 1,256.7 0.5% 1,806.8 0.6% 2,158.3 0.6% Real estate .................... 10,755.7 4.4% 10,656.3 3.7% 11,056.0 3.3%

Chattel mortgage .......... 3,568.7 1.5% 3,024.4 1.0% 2,152.9 0.6%

Deposit hold-out 978.5 0.4% 753.6 0.3% 850.2 0.3% Others .......................... 2,694.1 1.0% 1,972.2 0.7% 4,637.1 1.4%

Total Secured .................. 19,253.7 7.8% 18,213.3 6.3% 20,854.5 6.2%

Unsecured(1) ...................... 226,190.1 92.2% 272,788.6 93.7% 313,446.8 93.8%

Total ................................ 245,443.8 100.0% 291,001.9 100.0% 334,301.3 100.00%

____________

Note:

(1) Unsecured Loans consist of loans granted on clean basis, assignment of receivables, club shares, cross guaranty

of parent company, negative pledge on all assets, surety and joint and several signatures.

Loan Administration and Loan Loss Provisioning

Loan Classifications

The Bank utilises S&P scorecards for its wholesale credit exposures which are mapped into a 10-

point masterscale. Significant changes in the credit risk considering movements in credit rating,

among other account-level profile and performance factors, define whether the accounts are classified

in either Stage 1, Stage 2, or Stage 3 per PFRS 9 loan impairment standards.

Provisions

The Bank transitioned into ECL-based provisioning in line with IFRS 9 impairment standards & BSP

Circular No. 1011. The ECL is driven by probabilities of default, loss given default, and exposure at

default considering the Bank’s obligor risk, facility risk, and exposure risk, and adjusted for

macroeconomic factors.

The significant increase/improvement in credit risk (SICR) model is used to classify accounts into

PFRS 9 ECL’s three stages. The 12-month ECL is computed for Stage 1 accounts, while the lifetime

ECL is calculated for Stage 2 and Stage 3 accounts. Accounts with evident impairment are classified

under Stage 3. The improvement in credit risk is guided by BSP Circular No. 941 and BSP Circular

No. 1011, which require both quantitative and qualitative assessments.

In line with BSP Circular No. 1011 governing PFRS 9 implementation, stages 2 and 3 ECL are

classified as specific provision (SP), while stage 1 ECL for loans is booked as general provision

(GP). Compliance with the required 1% minimum floor for general loan loss provision is maintained

by appropriating retained earnings with an amount equivalent to the excess of 1% of outstanding loan

exposures over computed stage 1 ECL. The appropriated retained earnings is considered part of the

Tier 2 capital subject to the limit provided under the Capital Adequacy Ratio (CAR) framework.

As of December 31, 2018, the Bank’s ratio of total allowance for impairment (loans) to total NPLs

was at 59.9%.

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The following table sets out the Bank’s reconciliation of its balance of reserves on loans (gross of

accrued interest receivable) as of the periods indicated (in ₱ millions):

As of December 31,

2016 2017 2018

(audited)

Balance of reserves at beginning of period .. 10,068.4 10,187.6 10,165.1

Provision during the year ............................. 1,496.2 879.1 849.9

Other adjustments(1) ..................................... (1,377.0) (901.6) (3,580.3)

Balance at end of period .............................. 10,187.6 10,165.1 7,434.7

Note: (1) Other adjustments for the period ended December 31, 2018 include the effect of the adoption of PFRS 9.

On a monthly basis, all past-due accounts are updated for movements according to aging of past due

accounts reports, which are summarised for portfolio tracking purposes and used to implement pro-

active strategies. Going forward, the Bank may consider sales of a portion of its NPLs to manage its

liabilities and performance.

Non-Performing Assets

In accordance with BSP guidelines, loans and other assets in litigation are classified as non-

performing assets (NPAs). The Bank’s NPAs are principally composed of ROPA and NPLs. Loans

are considered as non-performing if any principal and/or interest amount are unpaid for more than 90

days from the contractual due date. NPLs shall remain classified until payments have been received

for at least six months in line with BSP Circular No. 941.

As of December 31,

2016 2017 2018

(₱ millions, except percentages)

NPLs - gross ........................................................... 9,308.3 10,504.3 12,403.3

NPLs - net .............................................................. 1,581.6 4,209.8 7,074.2

Total loans (without interbank call loan (IBCL)) ... 234,080.7 270,018.9 306,097.8 Total loans (including IBCL) ................................. 258,443.5 274,812.2 306,097.8

Total loans - net of reserves (including IBCL) ....... 248,255.9 264,647.1 298,663.1

Total loans - net of reserves (without IBCL) .......... 223,893.1 259,853.8 298,663.1 Total NPLs to total loans (including IBCL)(1) ......... 3.6% 3.8% 4.1%

Total NPLs to total loans (without IBCL)(1) ........... 4.0% 3.9% 4.1%

Non-accruing loans ................................................ 9,767.3 11,042.9 14,505.9 Non-accruing loans to total loans(without IBCL) ... 4.2% 4.1% 4.7%

Non-accruing loans ........................................ 9,767.3 11,042.9 14,505.9

Total loans (without IBCL) ........................... 234,080.7 270,018.9 306,097.8 NPAs ...................................................................... 20,637.6 22,381.3 25,281.3

NPLs - gross .................................................. 9,308.3 10,504.3 12,403.3

ROPA ............................................................ 11,329.3 11,877.0 12,878.0 NPAs as a percentage of total assets ....................... 3.9% 3.6% 3.8%

Allowance for impairment (loans) as a

percentage of total NPLs .................................... 109.4% 96.8% 59.9% Allowance for impairment (total) as a percentage

of NPAs ............................................................. 53.7% 49.1% 32.9%

Allowance for impairment (total) .................. 11,075.4 10,984.7 8,318.0 NPAs ............................................................. 20,637.7 22,381.4 25,281.3

Total restructured loans(2) ....................................... 1,611.6 1,596.9 1,745.1 Restructured loans as a percentage of total loans

(without IBCL) .................................................. 0.7% 0.6% 0.6%

_____________________

Notes:

(1) On September 2002, the BSP issued Circular No. 351 allowing banks that have no unbooked valuation reserves to

exclude from non-performing classification loans classified “loss” in the latest examination of the BSP which are

fully covered by allowance for impairment, provided that interest on said loans shall not be accrued. On October 16,

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2012, the BSP issued Circular No. 772, amending computation of net NPL ratio effective January 2013 to exclude

specific allowance for credit losses on the total loan portfolio from the gross NPLs; provided that such specific

allowance for credit losses on the total loan portfolio shall not be deducted from the total loan portfolio (including

IBCL).

(2) Total restructured loans include restructured credit card receivables.

Loans are classified as non-accruing (or past due) if (i) any repayment of principal at maturity or any

scheduled payment of principal or interest due quarterly (or longer) is not made when due and (ii) in

the case of any principal or interest due monthly, if the amount due is not paid and has remained

outstanding for three months. In the case of (i), such loans are treated as non-performing if the

payment is not made within a further 30 days. In the case of (ii), such loans are treated as non–

performing upon the occurrence of the default in payment.

Accrued interest arising from loan accounts are classified according to the classification of their

corresponding loan accounts except for those which remain uncollected after six months from the

date such loans or instalments have matured or have become past due for which a 100.0% allowance

for uncollected accrued interest receivables is made.

Ten Largest NPLs

As of December 31, 2018, the Bank’s ten largest NPLs accounted for 0.6% of its total loans to

customers and 15.3% of its gross NPLs to customers. As of December 31, 2018, the Bank’s exposure

to its ten largest NPLs amounted to ₱1.9 billion in aggregate.

As of December 31, 2018, none of the borrowers accounted for more than 5.0% of the Bank’s total

amount of gross NPLs.

The following table sets out certain information relating to the Bank’s gross top ten NPLs as defined

by industry or economic activity as of December 31, 2018:

Industry

Type of

Banking

Arrangement

Gross

Principal

Outstanding Provisions

Principal

Outstanding

Net of

Provisions for

Credit Losses

Type of

Collateral

(₱ millions)

Manufacturing .............................. L & D(1) 600.0 600.0 - Clean

Manufacturing .............................. L & D 313.2 313.2 - Clean

Information and communication ... L & D 215.7 210.9 4.8 Clean

Administrative and support

service activities ........................ L & D 210.1 210.1 -

Clean

Wholesale and retail trade ............. L & D 139.3 138.1 1.2 Clean

Construction.................................. L & D 107.6 106.1 1.5 Clean

Real Estate Activities .................... L & D 106.0 106.0 - Clean

Accommodation an Food

Service Activities ...................... L & D 74.1 74.1 -

Clean

Wholesale and Retail Trade;

Repair of Motor Vehicles.......... L & D 65.0 64.3 0.7

Clean

Manufacturing .............................. L & D 63.8 63.4 0.4 Clean

Total ............................................. 1,894.8 1,886.2 8.6

________________ Notes: (1) L & D means loans and discounts.

Loan Restructuring

The Bank has, from time to time, restructured those NPLs which it considers suitable or viable for

restructuring in order to manage its loan portfolio and reduce its exposure to NPLs. The decision to

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restructure a NPL, as well as the method of restructuring, is borrower-specific. The Bank has

restructured loans through extensions of maturity or rescheduling interest or principal payments based

on expected cash flows of the borrower. The Bank has, in some instances, agreed to debt-for-asset

swaps as part of a broader restructuring scheme.

In accordance with BSP guidelines, restructured loans shall be considered non-performing. However,

if prior to restructuring, the loans were categorized as performing, such classification shall be

retained. Non-performing restructured exposures that have exhibited improvement in creditworthiness

of the counterparty may only be transferred from Stage 3 to Stage 1 after a total of one (1) year

probation period i.e., six (6) months in Stage 3 before transferring to Stage 2, and another six (6)

months in Stage 2 before transferring to Stage 1; or directly from Stage 3 to Stage 1, without passing

through Stage 2, after twelve (12) months; and Restructured accounts classified as "performing" prior

to restructuring shall be initially classified under Stage 2. The transfer from Stage 2 to Stage 1 will

follow the six (6)-month rule.

Foreclosure and Disposal of Assets

The Bank’s preferred strategy for managing its exposure to NPLs that are secured is to foreclose on a

NPL if the borrower cannot or will not repay the loan on acceptable terms. In the case of larger loans,

the Bank may also consider accepting a dacion en pago arrangement.

The Bank had real estate ROPA of ₱10.7 billion, ₱11.3 billion, and ₱12.3 billion as of December 31,

2016, 2017 and 2018, respectively. In 2018, a total of ₱379.1 million worth of properties were

foreclosed by the bank.

For details of the Bank’s NPLs, non-accruing loans, ROPA, NPAs, restructured loans, and write-offs

for loan losses as of and for the periods indicated, please refer to the table on NPAs above.

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MANAGEMENT

Board of Directors

The overall management and supervision of the Bank is undertaken by its Board. The Board is

empowered to direct, manage, and supervise, under its collective responsibility, the affairs of the

Bank. The Articles of Incorporation of the Bank provide for a Board of not more than 15 directors.

Directors are elected at the annual meeting of shareholders which is, in accordance with the Bank’s

by-laws, held on the fourth Friday of May each year. The 15 candidates receiving the highest number

of votes shall be declared elected. Each elected director has a term of office of one year and is eligible

for re-election the following year. As of the date of this Offering Circular, the Board consists of 15

directors.

The following table sets out certain information regarding the Bank’s directors as of December 31,

2018:

Name Citizenship Position

Justo A. Ortiz ........................................... Filipino Chairman

Erramon I. Aboitiz ................................... Filipino Vice Chairman

Edwin R. Bautista .................................... Filipino President, Chief Executive

Officer

Sabin M. Aboitiz ...................................... Filipino Director

Luis Miguel O. Aboitiz ........................... Filipino Director

Manuel R. Lozano .................................... Filipino Director

Juan Alejandro A. Aboitiz ....................... Filipino Director

Nina Perpetua D. Aguas ........................... Filipino Director

Aurora C. Ignacio ..................................... Filipino Director

Michael G. Regino ................................... Filipino Director

Carlos B. Raymond, Jr ............................. Filipino Independent Director

Reynato S. Puno ....................................... Filipino Independent Director

Francisco S.A. Sandejas ........................... Filipino Independent Director

Erwin M. Elechicon ................................. Filipino Independent Director

Roberto G. Manabat ................................. Filipino Independent Director

The business experience of each of the Bank’s directors is set out below.

Justo A. Ortiz is the Chairman of the Board of the Bank. He is also a director of AEV, the Chairman

of UPI, First Vice President and director of the Bankers Association of the Philippines, and a member

of the Philippine Trade Foundation, Inc. Mr. Ortiz was formerly the Managing Director for Global

Finance and Country Executive for Investment Banking at Citibank. He holds a degree in economics

from the Ateneo de Manila University (“ADMU”).

Erramon I. Aboitiz is a director of the Board. He is also the President and CEO of Aboitiz & Co. and

of AEV, CEO of APC, Chairman of Aboitiz Renewables, Inc., and a director of Pilmico Foods

Corporation (“Pilmico Foods”). He holds a degree in business administration from Gonzaga

University.

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Edwin R. Bautista is the President and Chief Executive Officer (“CEO”) of the Bank. He is also a

director of City Savings, FUPI, and UPI. Mr. Bautista was formerly the President of iBank,

Marketing and Sales Director for Philippines and Guam at American Express International, and Vice

President/Group Head of transaction banking at Citibank. He holds a degree in mechanical

engineering from De La Salle University and completed the Harvard Business School Advanced

Management Program.

Sabin M. Aboitiz is a director of the Board. He is also the President and COO of Pilmico Foods and

of Aseagas Corporation, the EVP and COO of AEV, and a director of AboitizLand, Inc. and of other

members of the Aboitiz Group. He holds a degree in business administration from Gonzaga

University.

Luis Miguel O. Aboitiz is a director of the Board. He is also a director of Aboitiz & Co. and of other

members of the Aboitiz Group, the Executive Vice President (“EVP”) and COO of APC, and the

Chairman and President of the Philippine Independent Power Producers Association. He holds a

computer engineering degree from Santa Clara University and an MBA from the University of

Berkeley in California.

Manuel R. Lozano is a director of the Board. He is also the SVP and Chief Financial Officer

(“CFO”) of AEV. Mr. Lozano was formerly the CFO of APC and a director of Paxys, Inc. He holds a

degree in business administration from the University of the Philippines (“UP”) and an MBA from

The Wharton School of the University of Pennsylvania.

Juan Alejandro A. Aboitiz is a director of the Board. He is also FVP for Energy Trading and Sales of

Aboitiz Power Corporation. He also served as Assistant Vice President for Corporate Finance of

Aboitiz Equity Ventures. He holds a degree in Accounting from Loyola Marymount University and

an MBA from the Hong Kong University of Science and Technology.

Nina Perpetua D. Aguas is a director of the Board. She is also the CEO and a member of the board

of trustees of Insular Life. She was formerly the President and CEO of the Philippine Bank of

Communications, and the Managing Director of ANZ (for private banking) in Singapore and

Citigroup (for corporate center compliance) in New York. She holds a degree in commerce and

accounting from the University of Santo Tomas (“UST”).

Aurora C. Ignacio is a director of the Board. She is the President and CEO of SSS. She was

formerly the Assistant Secretary for Special Projects in the Office of the President and was designated

as the Focal Person for Anti-Illegal Drugs. She obtained her Bachelor of Science degree in

Commerce, Banking and Finance from the Centro Escolar University.

Michael G. Regino is a director of the Board. He is presently a member of the Board of the Social

Security Commission and publicly-listed company Philex Mining Corporation. He served as the

President and member of the Board of Directors of San Agustin Services, Inc., Agata Mining

Ventures, Inc. and Exploration Drilling Corp. Mr. Regino holds a bachelor degree from Ateneo de

Zamboanga University and an MBA from ADMU.

Carlos B. Raymond, Jr. is an independent director of the Board. He is also a director and corporate

secretary of Manuel Teves, Inc., Chairman of Pacific Healthcare Philippines, Inc., and a member of

the board of trustees of Payatas Orione Foundation, Inc. and of Dualtech Training Center Foundation,

Inc. He was formerly the President and General Manager of El Lilly Philippines. He holds a degree

in Business Administration from UP.

Reynato S. Puno is an independent director of the Board. He is also an independent director of San

Miguel Corporation and of San Miguel Brewery Hong Kong Ltd., and a director of Manila Standard

Today. He was the Chief Justice of the Supreme Court of the Philippines from 2007 to 2010. He

127

holds a degree in law from UP, a master of laws from the University of California in Berkeley

in 1968 and a master in comparative law from the Southern Methodist University in Texas.

Francisco S.A. Sandejas is an independent director of the Board. He is also the President of Narra

Venture Capital, Executive Chairman of Stratpoint Technologies, Inc. and of Xepto Computing, Inc.,

and cofounder of Brian Gain Network. He holds a degree in applied physics from UP and completed

his M.S. and PhD in electrical engineering from Stanford University.

Erwin M. Elechicon is an independent director of the Board. He is presently the Chairman of the

Board of Directors of Silver Machine Digital Communications, Inc. He is also a member of the Board

of Directors of Alliance Select Foods International, Inc.* and a founding Partner of the T88C

Company. In addition to working in entrepreneurial pursuits, Mr. Elechicon is the Vice Chairman

and member of the Board of Trustees of Ateneo de Iloilo, Inc. and the President and member of the

Board of Trustees of the P&Gers Fund, Inc. He graduated Cum Laude with a degree in Economics

from Ateneo de Manila University. He also attended courses in Finance and Marketing at Columbia

University and at Kellogg School of Management, respectively.

Roberto G. Manabat is an independent director of the Board. He is a Certified Public Accountant.

He is currently the Chairman Emeritus of KPMG R.G. Manabat & Co., a member firm of KPMG

International. He is also a member of the Board of Trustees of the Institute of Corporate Directors

and an Adviser on Corporate Governance of SM Investments Corporation. Mr. Manabat graduated

from the University of the East with a degree in Business Administration. He obtained his Master in

Business Administration from Asian Institute of Management.

The directors of the Bank are elected at the annual shareholders’ meeting to hold office until the next

succeeding annual meeting and until their respective successors have been elected and qualified.

Chairman and CEO Justo A. Ortiz is a relative within the 6th degree of consanguinity (second cousin)

of directors Erramon I. Aboitiz, Sabin M. Aboitiz, and Luis Miguel O. Aboitiz. Other than these

relationships, none of the Bank’s directors are related to one another or to any of the Bank’s executive

officers.

Board Committees

The Board has created each of the following committees and appointed board members thereto.

Executive Committee

The Executive Committee, composed of seven members of the Board, exercises certain functions as

delegated by the Board including, among others, the approval of credit proposals, asset recovery, and

ROPA sales within its delegated limits.

Risk Management Committee

The Risk Management Committee, composed of seven members of the Board, shall advise the Board

of Directors of the Bank’s overall current and future risk appetite, oversee Senior Management’s

adherence to the risk appetite statement, and report on the state of risk culture of the Bank.

Market Risk Committee

The Market Risk Committee, composed of nine members of the Board, sets policies and standards for

market risk identification, analysis, and management. It also monitors the sensitivity of the Bank’s

financial condition to the effects of market volatility and adverse price changes on the Bank’s

portfolio of financial instruments, and oversees the Bank’s liquidity position through the Asset and

Liability Committee.

128

Operational Risk Management Committee

The Operational Risk Management Committee is composed of seven members of the Board. It is

responsible for reviewing various operations risk policies and practices, including among others,

policies and practices of the Bank’s branches, internet banking, CPS, and treasury operations.

Audit Committee

The Audit Committee is a committee of the Board that is composed of seven members, most with

accounting, auditing, or related financial management expertise or experience. The Audit Committee

believes that the skills, qualifications, and experience of its members are appropriate for them to

perform their duties as laid down by the Board. Four of these seven members are independent

directors, including the Chairman.

The Audit Committee serves as principal agent of the Board in ensuring independence of the Bank’s

external auditors and the internal audit function, the integrity of management, and the adequacy of

disclosures and reporting to stockholders. It also oversees the Bank’s financial reporting process on

behalf of the Board. The Audit Committee assists the Board in fulfilling its fiduciary responsibilities

as to accounting policies, reporting practices and the sufficiency of auditing relative thereto, and

regulatory compliance.

Corporate Governance Committee

The Board is primarily assisted by the Corporate Governance Committee (CGC) in fulfilling its

corporate governance responsibilities. The CGC has nine members of the Board, four of whom are

independent directors, including its chairman, and one member from senior management. The CGC

makes recommendations to the Board regarding continuing education of directors and oversees the

periodic performance evaluation of the Board, its committees, senior management, and the function

of the Chief Compliance and Corporate Governance Officer. It also performs oversight functions over

the Compliance and Corporate Governance Office and the Anti-Money Laundering Committee of the

Bank.

Related Party Transactions Committee

The Related Party Transaction Committee (RPTC) is a board-level committee composed of five

members, three of whom are independent directors including its chairman. The other two members

are the Head of Internal Audit Division and the Chief Compliance and Corporate Governance Officer

who are both non-voting members. The RPTC assists the Board in the fulfilment of its corporate

governance responsibilities on related party transactions by ensuring that these are transacted at arm’s

length terms. Where applicable, the RPTC reviews and approves related party transactions or

endorses them to the Board for approval or confirmation.

Executive Officers

The following table sets out certain information regarding the Bank’s executive officers as of

December 31, 2018.

Name Citizenship Position

Edwin R. Bautista ........................................ Filipino President, Chief Executive Officer

Henry Rhoel R. Aguda ................................. Filipino Senior Executive Vice President

Jose Emmanuel U. Hilado ............................ Filipino Senior Executive Vice President,

Chief Financial Officer and

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Name Citizenship Position

Treasurer

Mary Joyce S. Gonzalez .............................. Filipino Head, Retail Banking Centre

Angelo Dennis L. Matutina .......................... Filipino Head, Channel Management Centre

Dennis D. Omila .......................................... Filipino Chief Information Officer

John Cary L. Ong ......................................... Filipino Head, Transaction Banking Centre

Manuel G. Santiago ..................................... Filipino Head, Consumer Finance Centre

Roberto F. Abastillas ................................... Filipino Head, Commercial Banking Centre

Alan Jay C. Avila ......................................... Filipino Trust Officer

Francis B. Albalate ....................................... Filipino Controller

Rafael G. Mariano ........................................ Filipino Chief Security Officer

Paolo Eugenio J. Baltao ............................... Filipino Head, EON Banking Group

Atty. Joselito V. Banaag .............................. Filipino General Counsel and Corporate

Secretary

Antonio Sebastian T. Corro ......................... Filipino Head, Cards Business

Ramon Vicente V. De Vera II ...................... Filipino Head, FinTech Group

Ana Maria A. Delgado ................................. Filipino Head, Consumer Finance and Chief

User Experience

Ramon G. Duarte ......................................... Filipino Head, Technical Services and

Solutions Group

Antonino Agustin S. Fajardo ....................... Filipino Head, Corporate Banking Group

Ronaldo Francisco B. Peralta ....................... Filipino Chief Risk Officer

Michaela Sophia E. Rubio ........................... Filipino HR Director

Myrna E. Amahan ........................................ Filipino Internal Auditor

Joselynn B. Torres ....................................... Filipino Chief Compliance and Corporate

Governance Officer

The business experience of each of the Bank’s executive officers is set out below.

Henry Rhoel R. Aguda is a SEVP, the Chief Technology and Operations Officer, and the Chief

Transformation Officer of the Bank. He was formerly the Chief Information Officer of Globe

Telecom, Inc. (Globe), a Senior Vice President for IT and the Chief Technology Officer of GSIS, and

the Chief Information Technology Officer of Digitel Telecommunications Philippines, Inc.

Jose Emmanuel U. Hilado is a SEVP, Chief Financial Officer, and Treasurer of the Bank. He was

formerly a SEVP, COO, and Treasurer of East West Banking Corporation, a SEVP and the Treasurer

of Rizal Commercial Banking Corporation (RCBC), and the Chairman of East West Insurance

Brokerage, Inc.

Mary Joyce S. Gonzalez is the head of the retail banking centre of the Bank. She is also the Chairman

of FUIFAI. She has 22 years of retail banking experience at the Bank, and prior to joining the Bank,

was a branch manager at Citytrust Banking Corporation.

Angelo Dennis L. Matutina is the head of the channel management centre of the Bank. For over 15

years, he played vital roles in the Bank’s various business processes such as branches, treasury and

trust, loans and trade, cash management and card operations, call centre, shared services, and business

process transformation. He was formerly a product manager in global transaction banking at Citibank.

Dennis B. Omila is the Chief Information Officer of the Bank. He was formerly the SVP for

infrastructure engineering and service operations of Globe.

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John Cary L. Ong is the head of the transaction banking centre of the Bank. He has 20 years of

experience in banking and banking related institutions, and was formerly the Country Head for

treasury and trade solutions at Citibank.

Manuel G. Santiago is the head of the consumer finance centre of the Bank. He was formerly

Director for operations at American Express Bank (Indonesia and Manila) and Head of consumer

services at Citibank.

Roberto F. Abastillas is the head of commercial banking centre of the Bank. He was formerly the

SVP and head of the account management centre 1 at iBank and head of the account management

group at UCPB.

Alan Jay C. Avila is the Trust Officer of the Bank. He was the previous Head of the Businesess

Development and Marketing of the Bank. He also held various positions in Maybank Philippines,

Inc., GE Money Bank, and BDO.

Francis B. Albalate is the Controller of the Bank. He is a certified public accountant with over 20

years of experience in audit and transaction advisory services. He was formerly the Financial Services

Industry Audit Leader at Deloitte and Audit Partner at Punongbayan & Araullo.

Rafael G. Mariano is the Head of Business Services Group and concurrent Chief Security Offier of

the Bank. He was the former Vice Commander of the Philippines Navy. He also held various

positions in the Philippine Navy.

Paolo Eugenio J. Baltao is the head of the EON banking group of the Bank. He was formerly the

President of G-Xchange, Inc., a category manager of RCBC, and an electronic products officer of

Equitable PCI Bank, Inc.

Atty. Joselito V. Banaag is the General Counsel and Corporate Secretary of the Bank. He was

formerly the Head of the legal and compliance division and corporate governance of GT Capital

Holdings, Inc., the General Counsel of the PSE, and the Chief Legal Counsel of the SCCP.

Antonio Sebastian T. Corro is the head of the Cards Business of the Bank. He was formerly the

Country Manager of Mastercard Asia/Pacific Pte. Limited in Thailand, Myanmar and Vietnam.

Ramon Vicente V. De Vera is the head of the Fintech Business Group. He is a founding member and

Vice-Chairman of the Blockchain Association of the Philippines. He is also a co-founder and director

of Tech-Up Pilipinas.

Ana Maria A. Delgado is the Deputy Center Head of Consumer Finance and Chief User Experience

Officer of the Bank. She is also a Director of City Savings Bank, Inc. Prior to joining the Bank, she

was an Assistant Vice President for Product Management at Citibank.

Ramon G. Duarte is the head of the technical services and solutions group of the Bank. He was

formerly the Chief Technology Officer of dotEnable, Inc. and the Head of electronic banking

transaction services at ABN AMRO.

Antonino Agustin S. Fajardo is the Center Head of the Corporate Banking Group. He has been with

the Bank for 24 years and has broad experience in handling corporate and consumer sectors in various

leadership roles.

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Ronaldo Francisco B. Peralta is the Chief Risk Officer of the Bank. He was formerly the Team

Head for corporate banking at the Bank of the Philippine Islands and the Head of the early alerts team

at ANZ (Australia). He also held various positions at Citibank.

Michaela Sophia E. Rubio is the HR and Corporate Social Responsibility Director of the Bank. She

was formerly the Vice President and Country Human Resource, Quality and Corporate

Communications Head of Asea Brown Boveri.

Myrna E. Amahan is the Internal Auditor of the Bank. She is a Certified Public Accountant,

Certified Internal Auditor, Certified Information Systems Auditor and has the designation of

Certification in the Governance of Enterprise Information Technology.

Joselynn B. Torres is the Chief Compliance and Corporate Governance Officer of the Bank. She has

over thirty years of experience in the financial and compliance services industries, working in the

areas of business development, mergers and acquisitions, audit, compliance, and quality assurance.

The executive officers of the Bank with the rank of Assistant Vice President and above are appointed

annually by the Board at its organisational meeting.

Other than as set out above, none of the Bank’s listed executive officers are related to one another or

to any of the Bank’s directors.

There are no binding contracts or arrangements with regards to the tenure of the Bank’s executive

officers.

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RELATED PARTY TRANSACTIONS

The Bank is a member of the Aboitiz Group. As of December 31, 2018, the Aboitiz Group, through

AEV, owned approximately 49.36% of the Bank’s issued and outstanding shares. The Bank, in its

ordinary course of business, engage in transactions with the Aboitiz Group. The Bank’s policy with

respect to related-party transactions is to ensure that related party transactions are all entered into at

arm’s length standard. These transactions are made and entered into substantially on the same terms

and conditions as transactions with other individuals and businesses of comparable risks. For further

information on the related party transactions of the Bank, see the respective note on Related Party

Transactions in the Bank’s Financial Statements.

DOSRI Loans and Deposits

In the ordinary course of business, the Bank has loan transactions with investees and certain DOSRI

(as discussed in BSP Circular No. 423 dated March 15, 2004, as amended). The General Banking

Law and BSP regulations require that (a) the amount of individual outstanding loans, other credit

accommodations, and guarantees to DOSRI should not exceed an amount equivalent to their

unencumbered deposits and the book value of their paid-in capital investment in the bank; (b)

unsecured loans, other credit accommodations, and guarantees to DOSRI should not exceed 30.0% of

the aggregate ceiling or the outstanding loans, other credit accommodations and guarantees,

whichever is lower; (c) the total outstanding loans, other credit accommodations and guarantees to

DOSRI may not, without the prior approval of the Monetary Board, exceed 15.0% of the bank’s total

loan portfolio or 100.0% of the bank’s net worth, whichever is lower.

The following table shows information relating to the loans, other credit accommodations and

guarantees classified as DOSRI accounts as of the period indicated:

As of December 31,

2016 2017 2018

(₱ millions, except percentages)

Total outstanding DOSRI loans .................................. 560.9 450.0 509.0

Percentage of DOSRI loans to total

loans ........................................................................ 0.2% 0.2% 0.2%

Percentage of unsecured DOSRI loans to

total DOSRI loans ................................................... 0.0% 0.0% 0.0%

Percentage of past due DOSRI loans to

total DOSRI loans ................................................... 0.0% 0.0% 0.0%

Percentage of non-accruing DOSRI loans to total

DOSRI loans ........................................................... 0.0% 0.0% 0.0%

BSP Circular No. 560, issued on January 31, 2007, provides the rules and regulations that govern

loans, other credit accommodations, and guarantees granted to subsidiaries and affiliates of banks and

quasi-banks. Under the said circular, the total outstanding loans, other credit accommodations, and

guarantees to each of the bank’s/quasi-bank’s subsidiaries and affiliates shall not exceed 10.0% of the

net worth of the lending bank/quasi-bank, provided that the unsecured portion shall not exceed 5.0%

of such net worth. Further, the total outstanding loans, credit accommodations, and guarantees to all

subsidiaries and affiliates shall not exceed 20.0% of the net worth of the lending bank/quasi-bank;

and the subsidiaries and affiliates of the lending bank/quasi-bank are not related interest of any

director, officer, and/or stockholder of the lending institution, except where such director, officer, or

stockholder sits in the board of directors or is appointed officer of such corporation as representative

of the bank/quasi-bank as reported to the BSP. As of December 31, 2016, 2017 and 2018, the total

outstanding loans, other credit accommodations, and guarantees to each of the Bank’s subsidiaries

and affiliates did not exceed 10.0% of the Bank’s net worth, and the unsecured portion did not exceed

5.0% of such net worth.

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BSP Circular No. 654, issued on May 12, 2009, provides a separate individual limit (25.0% of the net

worth of the lending bank/quasi-bank) to loans of banks/quasi-banks to their subsidiaries and

affiliates engaged in energy and power generation, provided that the unsecured portion thereof shall

not exceed 12.5% of such net worth. Such subsidiaries and affiliates should not be related interests of

any of the director, officer, and/or stockholder of the lending bank/quasi-bank, except where such

director, officer, or stockholder sits in the board of directors or is appointed officer of such

corporation as representative of the bank/quasi-bank. As of December 31, 2016, 2017 and 2018, the

total outstanding loans, other credit accommodations, and guarantees to each of the Bank’s

subsidiaries and affiliates engaged in energy and power generation did not exceed 25.0% of the

Bank’s net worth, and the unsecured portion did not exceed 12.5% of such net worth.

The balances as of the years ended December 31, 2016, 2017 and 2018 with respect to subsidiaries

included in the Bank’s financial statements are as follows:

As of December 31,

2016 2017 2018

(₱ millions)

Loans and receivables ....................................................................................... 1.6 1.9 0.8

Deposit liabilities .............................................................................................. 888.6 939.7 788.5

The income and expenses on loans and deposits for the years ended December 31, 2016, 2017

and 2018 in respect of subsidiaries included in the Bank’s financial statements are as follows

(amounts in millions):

Year ended December 31,

2016 2017 2018

(₱ millions)

Interest income................................................................................................... 0 0 29.6

Interest expense ................................................................................................. 2.2 4.1 3.6

The effects of the foregoing transactions are shown under the appropriate accounts in the Bank’s

financial statements.

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THE PHILIPPINE BANKING INDUSTRY

The information presented in this section has been extracted from publicly available documents from

various sources, including officially prepared materials from the Government, and has not been

prepared or independently verified by the Bank, the Lead Arrangers, or any of their respective

affiliates or advisers. None of the Bank, the Lead Arrangers, or any of their respective affiliates or

advisers makes any representation as to the accuracy or completeness of this information.

Introduction

The banking industry in the Philippines is composed of universal banks, commercial banks, rural

banks, thrift banks (including savings and mortgage banks, private development banks, and stock

savings and loan associations), cooperative banks, and Islamic banks.

According to BSP’s report on the Physical Network of the Philippine Banking System as of February

28, 2019, the commercial banking sector consisted of 46 banks, of which 21 were universal banks and

25 were commercial banks. Of the 21 universal banks, 12 were private domestic banks, 3 were

Government banks and 6 were branches of foreign banks. Of the 25 commercial banks, 5 were private

domestic banks, 2 were foreign bank subsidiaries, and 18 were branches of foreign banks.

Commercial banks are organised primarily to accept drafts and to issue letters of credit, discount and

negotiate promissory notes, drafts, bills of exchange, and other evidences of indebtedness, receive

deposits, buy and sell foreign exchange and gold and silver bullion, and lend money on a secured or

unsecured basis. Universal banks are banks that have authority, in addition to commercial banking

powers, to exercise the powers of investment houses, to invest in the equity of a business not related

to banking, and to own up to 100.0% of the equity in a thrift bank, a rural bank, or a financial allied or

non-allied enterprise. A publicly-listed universal or commercial bank may own up to 100.0% of the

voting stock of only one other universal or commercial bank.

Thrift banks primarily accumulate the savings of depositors and invest them, together with capital

loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage,

bonds and other forms of security or in loans for personal and household finance, secured or

unsecured, or in financing for home building and home development; in readily marketable debt

securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or

notes arising out of commercial transactions. Thrift banks also provide short-term working capital and

medium- and long-term financing for businesses engaged in agriculture, services, industry, and

housing as well as other financial and allied services for its chosen market and constituencies,

especially for SMEs and individuals. As of February 28, 2019, there were 54 thrift banks (including

microfinance oriented banks), based on BSP’s report on the Physical Network of the Philippine

Banking System.

Rural banks are organised primarily to make credit available and readily accessible in the rural areas

on reasonable terms. Loans and advances extended by rural banks are primarily for the purpose of

meeting the normal credit needs of farmers and fishermen, as well as the normal credit needs of

cooperatives and merchants. As of February 28, 2019, there were 470 rural and cooperative banks,

based on BSP’s report on the Physical Network of the Philippine Banking System.

Specialised Government banks are organised to serve a particular purpose. The existing specialised

banks are the Development Bank of the Philippines (DBP), Land Bank of the Philippines (LBP), and

Al-Amanah Islamic Investment Bank of the Philippines (AAIIB). DBP was organised primarily to

provide banking services catering to the medium- and long-term needs of agricultural and industrial

enterprises, particularly in rural areas and preferably for small- and medium-sized enterprises (SME).

LBP primarily provides financial support in all phases of the Philippines’ agrarian reform program. In

135

addition to their respective special functions, DBP and LBP are allowed to operate as universal banks.

AAIIB was organised to promote and accelerate the socio-economic development of the Autonomous

Region of Muslim Mindanao through banking, financing, and investment operations, and to establish

and participate in agricultural, commercial and industrial ventures based on Islamic banking

principles and rulings.

During the past decade, the Philippine banking industry has been marked by two major trends — the

liberalisation of the industry, and mergers and consolidation.

Foreign bank entry was liberalised in 1994, enabling foreign banks to invest in up to 60.0% of the

voting stock of an existing bank or a new banking subsidiary, or to establish branches with full

banking authority. This led to the establishment of ten new foreign bank branches in 1995. The

General Banking Law further liberalised the industry by providing that the Monetary Board may

authorise foreign banks to acquire up to 100.0% of the voting stock of one domestic bank. Under the

General Banking Law, any foreign bank, which prior to the effectiveness of the said law availed itself

of the privilege to acquire up to 60.0% of the voting stock of a domestic bank, may further acquire

voting shares of such bank to the extent necessary for it to own 100.0% of the voting stock thereof.

As of March 18, 2019, there were 24 foreign banks with branches and 2 foreign banks with

subsidiaries in the Philippines, based on BSP’s report on the Physical Network of the Philippine

Banking System, and as of March 31, 2019, they accounted for 7.0% of the total resources of the

Philippine banking system. Under RA 10641 and BSP Circular No. 858, Series of 2014 dated

November 21, 2014, which amended the relevant provisions of the MORB implementing RA 10641,

established, reputable and financially sound foreign banks may be authorised by the Monetary Board

to operate in the Philippine banking system through any one of the following modes of entry: (a) by

acquiring, purchasing, or owning up to 100.0% of the voting stock of an existing domestic bank

(including banks under receivership or liquidation, provided no final court liquidation order has been

issued); (b) by investing in up to 100.0% of the voting stock of a new banking subsidiary incorporated

under the laws of the Philippines; or (c) by establishing branches and sub-branches with full banking

authority. The foreign bank applicant must also be widely-owned and publicly-listed in its country of

origin, unless the foreign bank applicant is owned and controlled by the government of its country of

origin. Such established subsidiaries and branches of foreign banks shall be allowed to perform the

same functions and enjoy the same privileges of, and be subject to the same limitations imposed

upon, a Philippine bank of the same category. Privileges shall include the eligibility to operate under

a universal banking authority subject to compliance with existing rules and regulations.

Notwithstanding the entry of foreign banks, the BSP is mandated to adopt necessary measures to

ensure that at all times the control of 60.0% of the resources or assets of the entire banking system is

held by domestic banks, which are majority-owned by Filipinos.

The liberalization of foreign ownership regulations in banks has allowed the emergence of foreign

and local banks with foreign ownership in the market. This has led to Sumitomo Mitsui Banking

Corporation, Cathay United Bank, Industrial Bank of Korea, Shinhan Bank, Yuanta Bank, United

Overseas Bank, Hua Nan Commercial Bank, Bank of Taiwan, and Land Bank of Taiwan being

granted new licenses, and also equity investments by Bank of Tokyo-Mitsubishi UFJ into Security

Bank, Cathay Life into Rizal Commercial Banking Corporation and Woori Bank into Wealth

Development Bank.

The BSP has also been encouraging mergers and consolidations in the banking industry, seeing this as

a means to create stronger and more globally competitive banking institutions. To encourage this

trend, the BSP offered various incentives to merging or consolidating banks. Based on BSP data,

since the new package of incentives took effect in September 1998, there have been at least 49

mergers, acquisitions, and consolidations of banks. However, while recent mergers increased market

concentrations, BSP studies showed that they were not enough to pose a threat to the overall

competition levels since market share remained relatively well dispersed among the remaining

players.

136

Pursuant to the liberalisation, and to the mergers and consolidation trend, the BSP issued Circular No.

902, Series of 2016 dated February 15, 2016 to implement the phased lifting of the moratorium on the

grant of new banking licence or establishment of new domestic banks. As provided in the Circular

“the suspension of the grant of new banking licences or the establishment of new banks under the

MORB is lifted under a two-phased approach. Under Phase 1 of the liberalisation, the grant of new

universal/commercial banking licence shall be allowed in connection with the upgrading of an

existing domestic thrift bank. Under Phase 2, the moratorium on the establishment of new domestic

banks shall be fully lifted and locational restrictions shall be fully liberalised starting January 1, 2018.

The following table sets out a comparison, based on publicly available data, of the five largest

Philippine private domestic commercial banks in terms of assets, as of December 31, 2018:

Name

Market

Capitalization1

Total

Equity2

Total

Assets2

Loans and

Receivables

- net2

Customer

deposits2

No. of

Branches3

(in ₱ millions, except number of branches)

BDO Unibank, Inc. ............................ 572,101 328,149 3,022,247 2,071,834 2,419,965 1,179

Metropolitan Bank & Trust Co .......... 322,182 282,960 2,243,693 1,391,034 1,556,753 703

Bank of the Philippine Islands............ 423,230 249,206 2,085,088 1,383,000 1,587,980 839

Philippine National Bank ................... 53,401 117,833 909,670 521,886 683,317 692

China Banking Corporation ............... 72,788 87,857 866,071 505,805 722,123 302 _____________ Notes:

(1) Market Capitalization as of December 31, 2018.

(2) Financial data taken from each bank’s latest financial statements disclosed to the PSE as of December 31, 2018. (3) Data for a number of branches (including branches of subsidiaries) was taken from each bank’s annual report disclosed to PSE as of

December 31, 2017.

According to the results of the Q4 2018 Senior Bank Loan Officers’ Survey conducted by BSP, most

of the respondent banks (76.7%) for commercial real estate loans in Q4 2018 had unchanged credit

standards. The diffusion index approach, however, continued to indicate a net tightening of overall

credit standards for commercial real estate loans for the seventh consecutive quarter. The tighter

overall credit standards for commercial real estate loans reflected respondent banks’ wider loan

margins, reduced credit line sizes, stricter collateral requirements and loan covenants, and increased

use of interest rate floors.

The BSP issued Circular No. 839 Series of 2014 dated June 27, 2014 adopting a prudential REST

Limit for universal banks, commercial banks, and thrift banks on a solo and consolidated basis on

their aggregate real estate exposures. The REST Limit combines a macro-prudential overlay of a

severe stress test scenario, the principle of loss absorbency through minimum capital ratio thresholds,

and heightened supervisory response.

The prudential REST Limits which shall be complied with at all times by universal banks and

commercial banks are 6.0% of CET1 ratio and 10.0% of risk-based CAR, on a solo and consolidated

basis, under the prescribed write-off rate. For thrift banks, the prudential REST Limits which shall be

complied with at all times are 6.0% of CET1 capital, for thrift banks that are subsidiaries of universal

banks and commercial banks, 6.0% of Tier 1 capital, for stand-alone thrift banks, and 10.0% of risk-

based CAR for all thrift banks.

The BSP issued Circular No. 989 dated January 4, 2018 which imposed the Guidelines on the

Conduct of Stress Testing Exercises. The BSP issued the stress testing guidelines as part of its

continuing initiatives to further strengthen risk governance and contribute to the sustained safety and

soundness of the Philippine banking industry. Circular No. 989 provides that the bank’s board of

directors should consider the results of stress testing exercises in capital and liquidity planning, in

setting risk appetite, and in planning for business continuity management, and, in the case of D-SIBs,

in developing recovery plans. Banks are expected to employ a combination of different approaches

for stress testing. Methodologies may range from simple sensitivity analysis to the more complex

tools, such as scenario analysis and reverse stress testing. The guidelines are applicable to all types of

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banks on both a standalone and consolidated bases. Banks that are part of group structures should

conduct stress testing exercises on a consolidated basis or at the parent bank’s level, covering all

institutions considered as material entities in the banking group. The BSP has provided banks a

period of two years from the effectivity date of Circular No. 989 to progress from their existing stress

testing practices to the standards expected under Circular No. 989.

On October 29, 2014, the BSP issued Circular No. 854 which increased the minimum capital

requirement for all bank categories, namely, universal, commercial, thrift, rural, and cooperative

banks to strengthen the banking system. Below are the amended minimum capital requirements for

banks.

Bank Category/Network Size

Existing Minimum

Capitalisation

Reviewed Minimum

Capitalisation

(₱) (₱)

Universal Banks ....................................................................... 4.95 billion**

Head Office only ....................................................................... 3.0 billion

Up to 10 branches* .................................................................... 6.0 billion

11 to 100 branches* ................................................................... 15.0 billion

More than 100 branches*........................................................... 20.0 billion

Commercial Banks .................................................................. 2.4 billion**

Head Office only ....................................................................... 2.0 billion

Up to 10 branches* .................................................................... 4.0 billion

11 to 100 branches* ................................................................... 10.0 billion

More than 100 branches*........................................................... 15.0 billion

Thrift Banks

Head Office in:

Metro Manila ............................................................................. 1.0 billion**

Cebu and Davao cities ............................................................... 500.0 million**

Other Areas ................................................................................ 250.0 million**

Head Office in the National Capital Region (NCR)

Head Office only ....................................................................... 500.0 million

Up to 10 branches* .................................................................... 750.0 million

11 to 50 branches* ..................................................................... 1.0 billion

More than 50 branches* ............................................................ 2.0 billion

Head Office in All Other Areas Outside NCR

Head Office only ....................................................................... 200.0 million

Up to 10 branches* .................................................................... 300.0 million

11 to 50 branches* ..................................................................... 400.0 million

More than 50 branches* ............................................................ 800.0 million

Rural and Cooperative Banks ................................................

Head Office in:

Metro Manila ............................................................................. 100.0 million**

Cebu and Davao cities ............................................................... 50.0 million**

Other cities ................................................................................. 25.0 million**

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Bank Category/Network Size

Existing Minimum

Capitalisation

Reviewed Minimum

Capitalisation

(₱) (₱)

1st to 4th class municipalities .................................................... 10.0 million**

5th to 6th class municipalities .................................................... 5.0 million**

Head Office in NCR

Head Office only ....................................................................... 50.0 million

Up to 10 branches* .................................................................... 75.0 million

11 to 50 branches* ..................................................................... 100.0 million

More than 50 branches* ............................................................ 200.0 million

Head Office in All Other Areas Outside NCR

(All Cities up to 3rd Class Municipalities) .............................

Head Office only ....................................................................... 20.0 million

Up to 10 branches* .................................................................... 30.0 million

11 to 50 branches* ..................................................................... 40.0 million

More than 50 branches* ............................................................ 80.0 million

Head Office in All Other Areas Outside NCR

(4th to 6th Class Municipalities) .............................................

Head Office only ....................................................................... 10.0 million

Up to 10 branches* .................................................................... 15.0 million

11 to 50 branches* ..................................................................... 20.0 million

More than 50 branches* ............................................................ 40.0 million

_______________

Notes:

* Inclusive of Head Office

** With no distinction for network size

Restrictions on Branch Opening

Opening of branches by Philippine banks within or outside the Philippines requires BSP’s prior

approval, subject to certain conditions such as meeting the minimum capital requirements set by the

BSP. Upon BSP’s approval, these branches may be used by the banks as outlets for the presentation

and/or sale of financial products of their allied undertakings or investment house units. For more

information, see “Banking Regulation and Supervision—Regulation Relating to Capital Structure”

and “Banking Regulation and Supervision—Regulations with Respect to Branches.”

Competition

The Bank faces competition from both domestic and foreign banks, in part, as a result of the

liberalisation of the banking industry by the Government. Since 1994, a number of foreign banks,

which have greater financial resources than the Bank, have been granted licences to operate in the

Philippines. Such foreign banks have generally focused their operations on larger corporations and

selected consumer finance products, such as credit cards. The foreign banks have not only increased

competition in the corporate market, but have as a result caused more domestic banks to focus on the

commercial middle-market, placing pressure on margins in both markets. On January 21, 2016, the

Monetary Board approved the phased lifting of the moratorium on the grant of new banking licence

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or establishment of new domestic banks. The moratorium on the establishment of new domestic

banks and locational restrictions shall be fully liberalised beginning on January 1, 2018.

Since September 1998, the BSP has been encouraging consolidation among banks in order to

strengthen the Philippine banking system. Mergers and consolidation result in greater competition, as

a smaller group of “top tier” banks compete for business.

As of December 31, 2018, the ten largest commercial banks (including unlisted banks such as LBP

and DBP) account for approximately 75.2% of total assets and 75.7% of total deposits of the

Philippine banking system based on published statements of condition.

Certain factors arising from the 1997 Asian crisis and the 2008 global financial crisis also resulted in

greater competition and exert downward pressure on margins. Banks instituted more restrictive

lending policies as they focused on asset quality and reduction of their NPLs, which resulted in

increasing liquidity. As Philippine economic growth further accelerates and banks apply such

liquidity in the lending market, greater competition for corporate, commercial, and consumer loans is

expected. As of December 31, 2018, the ten largest commercial banks (including unlisted banks such

as LBP and DBP) account for approximately 74.5% of the net customer loan portfolio of the

Philippine banking system, based on published statements of condition.

Republic Act No. 10667 (the Philippine Competition Act) was signed into law on July 21, 2015 and

took effect on August 8, 2015. This is the first anti-trust statute in the Philippines and it provides the

competition framework in the Philippines. The Philippine Competition Act was enacted to provide

free and fair competition in trade, industry, and all commercial economic activities. To implement its

objectives, the Philippine Competition Act provides for the creation of a Philippine Competition

Commission (the PCC), an independent quasi-judicial agency with five commissioners. Among its

powers are to: conduct investigations, issue subpoenas, conduct administrative proceedings, and

impose administrative fines and penalties. To conduct a search and seizure, the PCC must apply for a

warrant with the relevant court.

The Philippine Competition Act prohibits anti-competitive agreements between or among

competitions, and mergers and acquisitions which have the object or effect of substantially

preventing, restricting, or lessening competition. It also prohibits practices which involve abuse of

dominant position, such as selling goods or services below cost to drive out competition, imposing

barriers to entry or prevent competitors from growing, and setting prices or terms that discriminate

unreasonably between customers or sellers or the same goods, subject to exceptions.

On June 3, 2016, the PCC issued the implementing rules and regulations of the Philippine

Competition Act (IRR). Under the IRR, as a general rule, parties to a merger or acquisition are

required to provide notification when: (a) the aggregate annual gross revenues in, into or from the

Philippines, or value of the assets in the Philippines of the ultimate parent entity of the acquiring or

the acquired entities exceed ₱1.0 billion; and (b) the value of the transaction exceeds ₱1.0 billion, as

determined in the IRR; while parties to a joint venture transaction shall be subject to the notification

requirement if either (a) the aggregate value of the assets that will be combined in the Philippines or

contributed into the proposed joint venture exceeds ₱1.0 billion, or (b) the gross revenues generated

in the Philippines by assets to be combined in the Philippines or contributed into the proposed joint

venture exceed ₱1.0 billion. On March 5, 2018, the PCC issued Memorandum Circular No. 18-001

which raised the new thresholds to ₱5 billion for the Size of Person and ₱2 Billion for the Size of

Transaction as defined in the IRR.

On March 1, 2018, the PCC issued Memorandum Circular No. 18-001 (MC No. 18-001) to amend

Section 3 Rule 4 IRR to increase the initial thresholds. Under MC No. 18-001, parties to a merger or

acquisition are required to provide notification when: (a) the aggregate annual gross revenues in, into

or from the Philippines, or value of the assets in the Philippines of the ultimate parent entity of at least

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one of the acquiring or acquired entities, including that of all entities that the ultimate parent entity

controls, directly or indirectly, exceed ₱5 billion; and (b) the value of the transaction exceeds ₱2

billion, as determined in the IRR; while parties to a joint venture transaction shall be subject to the

notification requirement if either (a) the aggregate value of the assets that will be combined in the

Philippines or contributed into the proposed joint venture exceeds ₱2 billion; or (b) the gross

revenues generated in the Philippines by the assets to be combined in the Philippines or contributed

into the proposed joint venture exceed ₱2 billion. As provided in MC No. 18-001, the thresholds shall

be automatically adjusted commencing on March 1, 2019 and on March 1st of every succeeding year,

using as index the Philippine Statistics Authority’s official estimate of the nominal gross domestic

product growth of the previous calendar year rounded up to the nearest hundred million. The revised

thresholds, however, shall not apply to mergers or acquisitions pending review by the PCC; notifiable

transactions consummated before the effectivity of the memorandum circular; and transactions

already subject of a decision by the PCC.

PCC Advisory 2019-001 further adjusted the thresholds such that effective March 1, 2019, parties to

a merger or acquisition are required to provide notification when: (a) the aggregate annual gross

revenues in, into or from the Philippines, or value of the assets in the Philippines of the ultimate

parent entity of at least one of the acquiring or acquired entities, including that of all entities that the

ultimate parent entity controls, directly or indirectly, exceed ₱5.6 billion; and (b) the value of the

transaction exceeds ₱2.2 billion, as determined in the IRR; while parties to a joint venture transaction

shall be subject to the notification requirement if either (a) the aggregate value of the assets will be

combined in the Philippines or contributed into the proposed joint venture exceeds ₱2.2 billion; or (b)

the gross revenues generated in the Philippines by assets to be combined in the Philippines or

contributed into the proposed joint venture exceed ₱2.2 billion. The revised thresholds under PCC

Advisory No. 2019-001 shall not apply to mergers or acquisitions pending review by the PCC;

notifiable transactions consummated before the effectivity of PCC Advisory 2019-001 (i.e. 1 March

2019); and, transactions which are already subject of a decision by the PCC.

On September 9, 2018, the PCC published the Guidelines on Notification of Joint Ventures (JV

Guidelines). It defined joint ventures as a business arrangement where two or more entities or group

of entities contribute capital, services, assets, or a combination of any of the foregoing to undertake

an investment activity or a specific project, where each entity shall have the right to direct and govern

the policies in connection therewith, with the intention to share both profits and risks and losses

subject to the agreement by the parties. The PCC is also given the power to assess and evaluate any

joint venture, with respect to joint control, post-transaction. Joint control, as an element of joint

ventures exists, when the entity has the ability to determine the strategic commercial decisions of the

joint venture (positive joint control), or to veto strategic decisions (negative joint control).

Violations of the Philippine Competition Act and its IRR have severe consequences. Under the

Philippine Competition Act and its IRR, a transaction that meets the thresholds and does not comply

with the notification requirements and waiting periods shall be considered void and will subject the

parties to an administrative fine of 1 to 5% of the value of the transaction. Criminal penalties for

entities that enter into these defined anti-competitive agreements include: (i) a fine of not less than

₱50.0 million but not more than ₱250.0 million; and (ii) imprisonment for two to seven years for

directors and management personnel who knowingly and willfully participate in such criminal

offenses. Administrative fines of ₱100.0 million to ₱250.0 million may be imposed on entities found

violating prohibitions against anti-competitive agreements and abuse of dominant position. Treble

damages may be imposed by the PCC or the courts, as the case may be, where the violation involves

the trade or movement of basic necessities and prime commodities.

On September 15, 2017, the PCC published the 2017 Rules of Procedure (Rules) which apply to

investigations, hearings, and proceedings of the PCC, except to matters involving mergers and

acquisitions unless otherwise provided. It prescribes procedures for fact-finding or preliminary

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inquiry and full administrative investigations by the PCC. The Rules also include non-adversarial

remedies such as the issuance of binding rulings, show cause orders, and consent orders.

On November 23, 2017, the PCC published the 2017 Rules on Merger Procedures (Merger Rules)

which provides the procedure for the review or investigation of mergers and acquisition pursuant to

the Philippine Competition Act. The Merger Rules provides, among others, that parties to a merger

that meets the thresholds in Section 3 of Rule 4 of the IRR are required to notify the PCC within 30

days from signing of definitive agreements relating to the merger.

Certain Government Policies and Regulations in relation to the Philippine Banking System

The Philippine banking industry is highly regulated by the BSP and operates within a framework that

includes requirements on capital adequacy, corporate governance, management, anti-money

laundering and provisioning for NPLs. The BSP can alter any of these requirements and can

introduce new regulations to control any particular line of business. Please see “Banking Regulation

and Supervision” for a more detailed discussion.

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BANKING REGULATION AND SUPERVISION

The following description is a summary of certain sector specific laws and regulations in the

Philippines, which are applicable to the Bank. The information detailed in this chapter has been

obtained from publications available in the public domain. The regulations set out below may not be

exhaustive, and are only intended to provide general information to the investors and are neither

designed nor intended to substitute for professional legal advice or a detailed review of the relevant

laws and regulations.

Introduction

Republic Act No. 7653 (New Central Bank Act of 1993), as amended by Republic Act No. 11211,

(the New Central Bank Act) and Republic Act No. 8791 (the General Banking Law) vest the BSP,

which exercises its powers through the Monetary Board, with the authority to regulate and supervise

financial intermediaries in the Philippines. Financial intermediaries include banks or banking

institutions such as universal banks, commercial banks, thrift banks (composed of savings and

mortgage banks, stock savings and loan associations, and private development banks), rural banks,

co-operative banks as well as branches and agencies of foreign banks in the Philippines. Entities

performing quasi-banking functions, trust companies, building and loan associations, non-stock

savings and loan associations and other non-deposit accepting entities, while not considered banking

institutions, are also subject to regulation by the Monetary Board of the BSP.

The supervisory power of the BSP under the New Central Bank Act extends to the subsidiaries and

affiliates of banks and quasi-banking institutions engaged in allied activities. A subsidiary is defined

as a corporation with more than 50% of its voting stock owned by a bank or quasi-bank. An affiliate

is defined as a corporation whose voting stock, to the extent of 50% or less is owned by a bank or

quasi-bank or which is related or linked or such other factors as determined by the Monetary Board.

In this regard, the MORB defines an affiliate as an entity linked directly or indirectly to a bank by

means of: (a) ownership, control (as defined under the relevant portion of the MORB), or power to

vote, of at least twenty percent (20%) of the outstanding voting stock of the entity, or vice-versa; (b)

interlocking directorship or officership, where the concerned director or officer owns, controls (as

defined under the relevant portion of the MORB), or has the power to vote of at least twenty percent

(20%) of the outstanding voting stock of the entity; (c) common stockholders owning at least ten

percent (10%) of the outstanding voting stock of the bank and at least twenty percent (20%) of the

outstanding voting stock of the entity; (d) management contract or any arrangement granting power to

the bank to direct or cause the direction of management and policies of the entity; and (e) permanent

proxy or voting trusts in favour of the bank constituting at least twenty percent (20%) of the

outstanding voting stock of the entity, or vice-versa.

The power of supervision of the BSP under the General Banking Law includes the issuance of rules

of conduct or standards of operation for uniform application, conduct examination to determine

compliance with laws and regulations, to oversee compliance with such rules and regulations and

inquire into the solvency and liquidity of the covered entities. Section 7 of the General Banking Law

provides that the BSP in examining a bank shall have the authority to examine an enterprise which is

owned or majority-owned or controlled by a bank.

Section 28 of the New Central Bank Act provides that there shall be an interval of at least twelve (12)

months between regular examinations. A vote of at least five (5) members of the Monetary Board

may authorize a special examination.

As a general rule, no restraining order or injunction may be issued by a court to enjoin the BSP from

exercising its powers to examine any institution subject to its supervision. The BSP may compel any

officer, owner, agent, manager or officer-in-charge of an institution subject to its supervision or

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examination to present books, documents, papers or records necessary in its judgment to ascertain the

facts relative to the true condition of the institution as well as the books and records of persons and

entities relative to or in connection with the operations, activities or transactions of the institution

under examination, to the extent permitted by law. In addition to the general laws such as the General

Banking Law and Republic Act No. 9160 or the Anti-Money Laundering Act of 2001, as amended,

among others, banks must likewise comply with letters, circulars and memoranda issued by the BSP

some of which are contained in the Manual of Regulations for Banks (the MORB).

The MORB is the principal source of rules and regulations to be complied with and observed by

banks in the Philippines. The MORB contains regulations that include those relating to the

organisation, management and administration, deposit and borrowing operations, loans, investments

and special financing programme, and trust and other fiduciary functions of the relevant bank.

Supplementing the MORB are rules and regulations promulgated in various circulars, memoranda,

letters and other directives issued by the Monetary Board.

The MORB and other regulations are principally implemented by the Supervision and Examination

Sector (SES) of the BSP. The SES is responsible for ensuring the observance of applicable laws and

rules and regulations by banking institutions operating in the Philippines (including Government

credit institutions, their subsidiaries and affiliates, non-bank financial intermediaries, and subsidiaries

and affiliates of non-bank financial intermediaries performing quasi-banking functions, non-bank

financial intermediaries performing trust and other fiduciary activities under the General Banking

Law, non-stock and savings loans associations under Republic Act No. 3779 or the Savings and Loan

Association Act, and pawnshops under Presidential Decree No. 114 or the Pawnshop Regulation

Act).

Regulation relating to capital structure

Pursuant to the General Banking Law, no entity may operate as a bank without the permit of the BSP

through the Monetary Board. The Philippine SEC will not register the incorporation documents of

any bank or any amendments thereto without a Certificate of Authority issued by the Monetary

Board.

A bank can only issue par value stocks and it must comply with the minimum capital requirements

prescribed by the Monetary Board. A bank cannot purchase or acquire its own capital stock or accept

the same as security for a loan, except when authorised by the Monetary Board. Any stock so

purchased or acquired must be sold within six months from the time of its purchase or acquisition.

Under the New Central Bank Act, transfers or acquisitions, or a series thereof, of at least ten percent

(10%) of the voting shares in banks or quasi-banks require the prior approval of the BSP within such

period as may be prescribed by the Monetary Board.

On October 20, 2014, the Monetary Board decided to increase the minimum capital requirement for

all bank categories including universal, commercial, thrift, rural and cooperative banks. This is in line

with the BSP’s efforts of further strengthening the banking system. Under this regulation, the

minimum capital for universal and commercial banks will be tiered based on network size as

indicated by the number of branches. Existing banks that will not immediately meet the new

minimum capital requirement may avail of a five-year transition period to fully comply. Such banks

will be required to submit an acceptable capital build-up program. Banks that fail to comply with the

minimum capital requirements or fail to propose an acceptable capital build-up program face

curtailment of future expansion plans.

In accordance with BSP Circular No. 854, universal banks are required to have capital accounts of at

least ₱3 billion for head office only, ₱6 billion for head office with up to 10 branches, ₱15 billion for

head office with 11 to 100 branches, and ₱20 billion for head office with more than 100 branches.

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Commercial banks are required to have capital accounts of at least ₱2 billion for head office only, ₱4

billion for head office with up to 10 branches, ₱10 billion for head office with 11 to 100 branches,

and ₱15 billion for head office with more than 100 branches. Thrift banks with head office in Metro

Manila are required to have capital accounts of at least ₱500 million for head office only, ₱750

million for head office with up to 10 branches, ₱1 billion for head office with 11 to 100 branches, and

₱2 billion for head office with more than 100 branches. These minimum levels of capitalisation may

be changed by the Monetary Board from time to time. As of December 31, 2018, the Bank had

sufficient capital to meet the new minimum capital requirements.

For purposes of these requirements, the BSP Circular No. 1027 issued on December 28, 2018 states

that the term capital shall be synonymous to unimpaired capital and surplus, combined capital

accounts and net worth and shall refer to the total of the unimpaired paid-in capital, surplus and

undivided profits, less:

Treasury stock;

Unbooked allowances for probable losses (which includes allowance for credit losses and

impairment losses) and other capital adjustments as may be required by the BSP;

Total outstanding unsecured credit accommodations, both direct and indirect, to DOSRI

granted by the bank;

Total outstanding unsecured loans, other credit accommodations and guarantees granted

to subsidiaries and affiliates;

Total outstanding unsecured loans, other credit accommodations and guarantees granted

to related parties, as defined under Subsection X141.1 of the MORB, that are not at arm’s

length terms as determined by the appropriate supervising department of the BSP;

Deferred tax assets that rely on future profitability of the bank to be realized, net of any

(a) allowance for impairment and (b) associated deferred tax liability, if the conditions

cited in PAS 12 on Income Taxes are met: Provided, that, if the resulting figure is a net

deferred tax liability, such excess cannot be added to net worth;

Reciprocal investment in equity of other banks/enterprises, whether foreign or domestic,

the deduction shall be the lower of the investment of the bank or the reciprocal

investment of the other bank or enterprise; and

In the case of rural banks/cooperative banks, the government counterpart equity, except

those arising from conversion of arrearages under the BSP rehabilitation programme.

Also under BSP Circular No. 1027 dated December 28, 2018, deposits for stock subscription

recognized as equity pursuant to Section X128 of the MORB shall be added to capital.

On July 15, 2014, Republic Act No. 10641 (RA 10641) further liberalised the industry by providing

that the Monetary Board may authorise foreign banks to acquire up to 100.0% (previously 60%) of

the voting stock of one domestic bank. Under RA 10641, established, reputable and financially sound

foreign banks may be authorised by the Monetary Board to operate in the Philippine banking system

though any one of the following modes of entry: (a) by acquiring, purchasing or owning up to 100.0%

of the voting stock of an existing bank; (b) by investing in up to 100.0% of the voting stock of a new

banking subsidiary incorporated under the laws of the Philippines; or (c) by establishing branches

with full banking authority. The foreign bank applicant must also be widely-owned and publicly-

listed in its country of origin, unless the foreign bank applicant is owned and controlled by the

government of its country of origin. A foreign bank branch authorised to do banking business in the

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Philippines under RA 10641 may open up to five sub-branches as may be approved by the Monetary

Board. Locally incorporated subsidiaries of foreign banks authorised to do banking business in the

Philippines under RA 10641 shall have the same branching privileges as domestic banks of the same

category. Privileges shall include the eligibility to operate under a universal banking authority subject

to compliance with existing rules and regulations. Notwithstanding the entry of foreign banks, the

BSP is mandated to adopt necessary measures to ensure that at all times the control of 60% of the

resources or assets of the entire banking system is held by domestic banks, which are majority-owned

by Filipinos.

Under RA 10641, the Monetary Board was authorised to issue such rules and regulations as may be

needed to implement the provisions of RA 10641. On November 6, 2014, the Monetary Board issued

Resolution No. 1794 providing for the implementing rules and regulations of RA 10641 and on

November 21, 2014, the BSP issued Circular No. 858, amending the relevant provisions of the

MORB, accordingly. On February 15, 2016, BSP issued Circular No. 902, Series of 2016 to

implement the phased lifting of the moratorium on the grant of new banking licence or establishment

of new domestic banks pursuant to its policy to promote a competitive banking environment.

Individuals related to each other within the fourth degree of consanguinity or affinity, whether

legitimate, illegitimate or common-law, shall be considered family groups or related interests and

must be fully disclosed in all transactions by such an individual with the bank. Moreover, two or

more corporations owned or controlled by the same family group or same group of persons shall be

considered related interests, which must be fully disclosed in all transactions with the bank.

A bank cannot declare dividends greater than its accumulated net profits on hand deducting therefrom

its losses and bad debts. A bank cannot also declare dividends, unless at the time of declaration, it has

complied with the following:

Clearing account with BSP is not overdrawn;

Liquidity floor for government funds

Minimum capitalisation requirement and risk-based capital ratios as provided under

applicable and existing capital adequacy framework;

Capital conservation buffer requirement as defined in Appendix 59, Part III of the

MORB. for UBs/KBs, and their subsidiary banks for QBs;

Higher loss absorbency (HLA) requirement, phased-in starting January 1, 2017 with

full implementation by January 1, 2019, in accordance with D-SIB Framework as

provided under Section 128 of the MORB, for UB/KBs, and their subsidiary banks

and QBs that are identified as D-SIBs; and

Has not committed any unsafe or unsound banking practice as defined under existing

regulations and/or major acts or omissions as determined by BSP to be grounds for

suspension of dividend distribution, unless this has been addressed by the bank as

confirmed by the Monetary Board or the Deputy Governor, of the appropriate

section, as may be applicable, upon recommendation of the appropriate supervising

department of the BSP. For this purpose, “Major acts or omissions” is defined as

bank individual failure to comply with the requirements of banking laws, rules and

regulations as well as Monetary Board directives having material impact on bank

capital, solvency, liquidity or profitability, and/or those violations classified as major

offenses under the Report of Examination, except those classified under unsafe or

unsound practice.

Banks are required to ensure compliance with the minimum capital requirements and risk-based

capital ratios even after the dividend distribution.

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Regulations with respect to branches

Section 20 of the General Banking Law provides that universal and commercial banks may open

branches within or outside the Philippines upon prior approval of the BSP. The same provision allows

banks, with prior approval from the Monetary Board, to use any or all of their branches as outlets for

the presentation and/or sale of financial products of their allied undertakings or investment house

units. In line with this, BSP Circular No. 854 Series of 2014 provides various minimum capitalisation

requirements for branches of banks, depending on the number of branches (e.g., ranging from a

minimum of ₱6 billion for up to 10 branches of universal banks to a maximum of ₱20 billion for

more than 100 branches of universal banks).

Subject to compliance with the requirements provided in BSP Circular No. 624, issued on

October 13, 2008, which provides for BSP’s branching policy and guidelines, the Bank may apply to

the BSP for the establishment of branches outside its principal or head office. Generally, only

universal/commercial and thrift banks may establish branches on a nationwide basis. Pursuant to BSP

Circular No. 759, issued on May 30, 2012, the BSP liberalised its policy on the establishment of

branches by removing the limit set on the number of branches allowed to be applied for by a bank. It

permitted a bank to establish as many branches as its qualifying capital can support in accordance

with existing rules. Once approved by the BSP, a branch should be opened within three years from

the date of approval. Pursuant to BSP Circular No. 505, issued on December 22, 2005, banks are

allowed to establish branches in the Philippines, except in the cities of Makati, Mandaluyong, Manila,

Paranaque, Pasay, Pasig and Quezon and the municipality of San Juan, Metro Manila. However, this

branching restriction was liberalized pursuant to BSP Circular No. 728, issued on June 23, 2011.

Phase 1 of the liberalization allowed private domestically incorporated universal and commercial

banks and thrift banks with limited branch networks in the eight cities or “restricted areas” in Metro

Manila until June 30, 2014 to apply for and establish branches in said restricted areas. In Phase 2,

branching in the “restricted” areas was opened to all banks except rural banks and cooperative banks.

However, branches of microfinance-oriented banks and microfinance-oriented branches of regular

banks’ branches that will cater primarily to the credit needs of Barangay Micro Business Enterprises

duly registered under the Barangay micro business enterprises Act of 2002 (Republic Act No. 9178)

may be established anywhere upon the fulfillment of certain conditions. BSP Circular No. 759

further liberalized its policy on the establishment of branches by removing the limit set on the number

of branches allowed to be applied for by a bank.

In BSP Circular No. 987, Series of 2017, the BSP approved the guidelines on the establishment of

branch-lite units amending relevant provisions of the MORB. A branch-lite unit refers to any

permanent office or place of business of a bank, other than its head office or a branch which performs

limited banking activities and records its transactions in the books of the head office or the branch to

which it is annexed.

Regulations with respect to management of banks

Under the MORB, the board of directors of a bank must have at least five (5) and a maximum of

fifteen (15) members, at least one-third (1/3) but not less than two (2) members of the board of

directors shall be independent directors. In case of merged or consolidated banks, the number of

directors shall not exceed twenty-one (21). Meanwhile, according to the RA No. 11232, or the

Revised Corporation Code, the board of banks and quasi-banks must have independent directors

comprising at least 20% of such board. An independent director is a person who is not an officer or

employee of a bank, its subsidiaries or affiliate or related interests.

Foreigners are allowed to have board seats to the extent of the foreign participation in the equity of

the bank.

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The Monetary Board shall issue regulations that provide for the qualifications and disqualifications to

become a director or officer of a bank. After due notice to the board of directors of a bank, the

Monetary Board may disqualify, suspend or remove any bank director or officer who commits or

omits act which renders him unfit for the position.

The Monetary Board may regulate the payment by the bank of compensation, allowances, bonus,

fees, stock options and fringe benefits to the bank officers and directors only in exceptional cases

such as when a bank is under conservatorship, or is found by the Monetary Board to be conducting

business in an unsafe or unsound manner or when the Monetary Board deems it to be in

unsatisfactory condition.

Except in cases allowed under the Rural Bank Act, no appointive or elective public official, whether

full time or part time, may serve as officer of any private bank, except if the service is incidental to

financial assistance provided by government or government owned and controlled corporation or

when allowed by law.

On August 22, 2017, the BSP issued Circular No. 971, prescribing the Guidelines on Risk

Governance for BSP Supervised Financial Institutions (BSFIs), and requiring the appointment of a

Chief Risk Officer (CRO) in universal and commercial banks to head the risk management function.

In addition to overseeing the risk management function, the CRO shall also support the board of

directors in the development of the risk appetite of the BSFI and for translating the risk appetite into a

risk limits structure. The appointment, dismissal and other changes to the CRO requires the prior

approval of the board of directors.

On the same date, the BSP also issued Circular No. 972, prescribing the Enhanced Guidelines in

Strengthening Compliance Frameworks for BSFIs, and requiring the appointment of a Chief

Compliance Officer (CCO). The CCO is tasked to oversee the identification and management of the

BSFI’s compliance risk and shall supervise the compliance function staff. Additionally, the board of

directors should ensure that a compliance program is defined for the BSFI and that compliance issues

are resolved expeditiously. For this purpose, a board-level committee, chaired by a non-executive

director, shall oversee the compliance program.

Relatedly, on January 4, 2018, BSP Circular No. 989 was issued providing the Guidelines on the

Conduct of Stress Testing Exercises. Stress testing is a tool to evaluate the potential effects of

specified changes in risk factors. The Board of Directors must consider the results in capital and

liquidity planning and setting risk appetite, among others. Banks have a period of two years from

effectivity date to gradually change their stress testing practices until it is in compliance with the

circular’s requirements.

Regulations with respect to bank operations

A universal bank, such as the Bank, may open branches or offices within or outside the Philippines

subject to the prior approval by the BSP. A bank and its branches and offices shall be treated as one

unit. A bank, with prior approval of BSP, may likewise use any of its branches as outlets for

presentation and/sale of financial products of its allied undertakings or investment house units.

The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its

total risk assets which may include contingent accounts. In connection thereto, the Monetary Board

may require that the ratio be determined on the basis of the net worth and risk assets of a bank and its

subsidiaries, financial or otherwise, and prescribe the composition and the manner of determining the

net worth and total risk assets of banks and their subsidiaries. To ensure compliance with the set

minimum ratio, the Monetary Board may limit or prohibit the distribution of net profits by such bank

and require that such net profit be used to increase the capital accounts of the bank until the minimum

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requirement has been met. It may also restrict or prohibit acquisition of major assets and the making

of new investments by the bank.

A universal bank has the authority to exercise and perform i) activities allowed for commercial banks;

ii) powers of an investment house; iii) to invest in non-allied enterprise.

Capital adequacy requirements and reserve requirements

The Philippines adopted capital requirements based on the Basel Capital Accord in July 2001.

On July 1, 2007, the BSP issued Circular No. 538, which is the implementing guideline of the revised

International Convergence of Capital Measurement and Capital Standards known as Basel II.

In December 2010, a new update to the Basel Accords, known as Basel III, was issued by the Basel

Committee on Banking Supervision (BCBS) containing new standards that modify the structure of

regulatory capital. The Basel III regulations include tighter definitions of Tier 1 capital and Tier 2

capital, the introduction of a leverage ratio, changes in the risk weighting of counterparty credit risk, a

framework for counter-cyclical capital buffers, and short and medium-term quantitative liquidity

ratios. To align with the international standards, the BSP adopted part of the Basel Committee’s

eligibility criteria to determine eligibility of capital instruments to be issued by Philippine banks and

quasi-banks as Hybrid Tier 1 capital and Tier 2 with the issuance of BSP Circular No. 709 effective

January 1, 2011 as amended by BSP Circular No. 716.

In January 2012, the BSP announced that the country’s universal and commercial banks, including

their subsidiary banks and quasi-banks, will be required to adopt in full the capital adequacy

standards under Basel III with effect from January 1, 2014. It aims to replace Basel II, to further

strengthen the local bank’s loss absorption capacity and encourage banks to rely more on core capital

instruments like Common Equity Tier 1 and Tier 1 issues.

This thus allowed local banks one full year for a parallel run of the old and new guidelines prior to the

effectiveness of the new standards in 2014, marking an accelerated implementation compared to the

Basel Committee’s staggered timeline that stretches from January 2013 to January 2017. On January

15, 2013, the BSP issued the implementing guidelines for the adoption on January 1, 2014 of the

revised capital standards under the Basel III Accord for universal and commercial banks.

The guidelines set new regulatory ratios for banks to meet specific minimum thresholds for CET1

capital and Tier 1 capital in addition to the CAR. The BSP maintained the minimum CAR at 10.0%

and set a minimum CET1 ratio of 6.0% and a minimum Tier 1 ratio of 7.5%. The new guidelines also

introduced a capital conservation buffer of 2.5% which shall be made up of CET1 capital.

In addition, banks which issued capital instruments from 2011 will be allowed to count these

instruments as Basel III-eligible until end-2015. However, capital instruments that are not eligible in

any of the three components of capital were derecognised from the determination of the regulatory

capital on January 1, 2014.

Under the New Central Bank Act, the BSP requires banks to maintain cash reserves and liquid assets

in proportion to deposits in prescribed ratios. If a bank fails to meet this reserve during a particular

week on an average basis, it must pay a penalty to BSP on the amount of any deficiency.

Under BSP Circular 732 issued on August 3, 2011, as further amended by BSP Circular 753 issued

on March 29, 2012, BSP Circular 830 issued on April 3, 2014, BSP Circular 832 issued on May 27,

2014, BSP Circular 997 issued on February 15, 2018 and BSP Circular 1004 issued on May 24, 2018,

universal and commercial banks are required to maintain regular reserves of: (a) 18% against

demand deposits, savings deposit, time deposit and deposit substitutes, Peso deposits lodged under

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due to foreign banks, Peso deposits lodged under due to head office/branches/agencies abroad

(Philippine branch of a foreign bank); (b) 18% against negotiable order of withdrawal accounts; (c)

0% against deposit substitutes evidenced by repossession agreements; (d) 4% against long-term

negotiable certificates of time deposits under BSP Circular No. 304 issued on October 25, 2001; (e)

6% against bonds; and (f) 7% against long-term negotiable certificates of time deposits under BSP

Circular No. 824 issued on January 30, 2014.

On October 29, 2014, the Monetary Board approved the guidelines for the implementation of higher

capital requirements on D-SIBs by the BSP under Basel III. Banks deemed as D-SIBs by the BSP will

be imposed capital surcharge to enhance their loss absorbency and thus mitigate any adverse side

effects both to the banking system and to the economy should any of the D-SIBs fail. The assessment

started in 2014 with the BSP informing banks confidentially of their D-SIB status in 2015. To

determine the banks’ systemic importance, the BSP will assess and assign weights using the

indicator-based measurement approach based on the following: size, interconnectedness,

substitutability, and complexity. Depending on how they score against these indicators and the

buckets to which the scores correspond, the D-SIBs will have varying levels of additional loss

absorbency requirements ranging from 1.0% to 2.5%. Aside from the added capital pressure, D-SIBs

may be put at an undue disadvantage compared to G-SIBs (or Global Systemically Important Banks)

given that this framework was patterned for regional/global banks and thus may not be appropriate

for local banks. The phased-in compliance started on January 1, 2017 and became fully effective last

January 1, 2019.

In May 2015, the BSP approved the guidelines for the implementation of Basel III leverage ratio

(computed as banks’ Tier 1 capital divided by its total on-book and off-book exposure). On June 9,

2015, the BSP issued Circular No. 881 on the implementing guidelines and accordingly, amending

the relevant provisions of the guidelines. Under the guidelines, universal and commercial banks are

required to maintain a minimum leverage ratio of 5%, which is more stringent than the 3% minimum

leverage ratio under Basel III. The guidelines also provide for a monitoring period up to end-2016

during which banks are required to submit periodic reports; however, sanctions will not be imposed

on banks whose leverage ratios fall below the required 5% minimum during the period. The leverage

ratio serves as a backstop measure to the risk-based capital requirements. While this has no material

impact given that Philippine banks’ ratios are above the required minimum, the leverage ratio along

with other pending components of Basel III point to an increasing regulatory burden on banks.

On January 26, 2017, the BSP issued Circular No. 943 which approved the one-year extension of the

Basel III Leverage Ratio monitoring period from December 31, 2016 to December 31, 2017, and set

new deadlines for the submission of the reporting and disclosure requirements. During the monitoring

period, the BSP will continue to assess the calibration and treatment of the components of the

leverage ratio. The leverage ratio serves as a backstop measure to the risk-based capital requirements.

While this has no material impact given that Philippine banks’ ratios are above the required

minimum, the leverage ratio along with other pending components of Basel III point to increasing

regulatory burden on banks.’

On January 22, 2018, the BSP issued Circular No. 990 which approved the extension of the Basel III

Leverage Ratio monitoring period from December 31, 2017 to June 30, 2018, and set new deadlines

for the submission of the reporting and disclosure requirements. The monitoring of the leverage ratio

shall be implemented as a Pillar 1 minimum requirement effective on July 1, 2018.

Further, local banks face new liquidity requirements, namely, the LCR and the NSFR, under Basel

III. The LCR requires banks to hold sufficient level of High Quality Liquid Assets (HQLAs) to

enable them to withstand a 30 day-liquidity stress scenario. Meanwhile, the NSFR requires that

banks’ assets and activities are structurally funded with long-term and more stable funding sources.

While both ratios are intended to strengthen banks’ ability to absorb shocks and minimise negative

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spillovers to the real economy, compliance with these ratios may also further increase competition

among banks for deposits as well as HQLAs.

In March 2016, the Monetary Board approved the LCR framework with an observation period from

July 1, 2016 until the end of 2017, during which banks are required to commence reporting their LCR

to the BSP. Starting January 1, 2019, the LCR threshold that banks will be required to meet is 100%.

On June 6, 2018, the BSP issued Circular No. 1007 providing the guidelines on the adoption of the

Basel III Liquidity Framework on Liquidity Standards – Net Stable Funding Ratio. The guidelines

require that covered entities maintain an NSFR of at least 100% at all times. The framework applies

to all universal and commercial banks, their subsidiary banks, and quasi-banks. The Circular

provides for an observation period until December 31, 2018, during which NSFR Reports must be

submitted and should a covered entity be unable to meet the minimum NSFR for a period of two

consecutive weeks, it must immediately adopt a board-approved stable funding build-up plan. On

March 15, 2019, the BSP issued Circular No. 1034, further extending the observation period for

subsidiary banks/quasi-banks of universal and commercial banks from July 1, 2018 to December 31,

2019 before the implementation of the minimum 100% NSFR starting January 1, 2020. Circular No.

1035 of the BSP then introduced certain amendments to the Basel III LCR Framework and Minimum

Liquidity Ratio Framework. Circular No. 1035 (i) extended the observation period of the minimum

Basel III LCR requirement to December 31, 2019 for subsidiary banks and quasi-banks of universal

and commercial banks, (ii) adopted the 70% LCR floor for subsidiary banks and quasi-banks during

the observation period, and (iii) amended the formula for minimum liquidity ratio.

On February 12, 2016, the Monetary Board approved the guidelines on the submission of a recovery

plan by D-SIBs which shall form part of the D-SIBs’ Internal Capital Adequacy Assessment Process

(ICAAP) submitted to the BSP every 31st of March of each year. The recovery plan identifies the

course of action that a D-SIB should undertake to restore its viability in cases of significant

deterioration of its financial condition in different scenarios. At the latest, the recovery plan shall be

activated when the D-SIB breaches the total required CET1 capital, the HLA capital requirement

and/or the minimum liquidity ratios as may be prescribed by the BSP. As a preemptive measure, the

recovery plan should use early warning indicators with specific levels (i.e., quantitative indicators

supplemented by qualitative indicators) that will activate the recovery plan even before the above-

said breaches happen. This preparatory mechanism, including the operational procedures, monitoring,

escalation and approval process should be clearly defined in the recovery plan. The ICAAP document

which includes the first recovery plan was submitted on June 30, 2016 and will be re-submitted on the

31st of March of each year.

In addition, Basel III capital rules for banks include setting up a countercyclical capital buffer (CCB)

wherein banks build up the required level of capital during boom times and draw down on the buffer

in the event of an adverse turn in the cycle or during periods of stress, thus helping to absorb losses.

The CCB will require banks to hold additional common equity or other fully loss absorbing capital in

amounts ranging from 0% to 2.5% of the risk-weighted assets. The credit-to-GDP gap, defined as the

difference between the credit-to-GDP ratio and its long-term trend, has been chosen as the guide or

EWI (early warning indicator) for activating the CCB. However, some economists have raised the

issue that the credit-to-GDP gap is not the best EWI for banking crises or system vulnerabilities,

especially for emerging markets (including the Philippines).

On December 6, 2018, the BSP issued Circular No. 1024 adopting Basel III CCB. A CCB sets as

percent of risk-weighted assets shall be required of banks, comprised of CET1 capital. The CCB is

meant to ensure that banking sector capital requirements take into account of the macrofinancial

environment in which banks operate. The primary aim of the countercyclical capital buffer regime is

to use a buffer of capital to achieve the broader macroprudential goal of protecting the banking sector

from the build-up of systemic vulnerabilities.

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In October 2014, the BSP issued Circular No. 855 providing for new guidelines on sound credit risk

management practices. BSP Circular No. 855 mandates banks to establish appropriate credit risk

strategy and policies, processes and procedures including cash flow-based credit evaluation process,

and tighter provisioning guidelines. These are seen to increase costs as banks may have to upgrade

their risk management systems and provisioning requirements.

As a general rule, loan and other credit accommodation against real estate shall not exceed 60% of the

appraised value of the real estate security plus 60% of the appraised value of the insured

improvements, and such loans may be made to the owner of the real estate or to his assignees, except

for the following which shall be allowed a maximum value of 70% of the appraised value of the

insured improvements: (a) residential loans not exceeding ₱3.5 million to finance the acquisition or

improvement of residential units; and (b) housing loans extended by or guaranteed under the

Government’s “National Shelter Programme”, such as the Expanded Housing Loans Programme of

the Home Development Mutual Fund and the mortgage and guaranty and credit insurance programme

of the Home Insurance and Guaranty Corporation. Prior to lending on an unsecured basis, a bank

must investigate the borrower’s financial position and ability to service the debt and must obtain

certain documentation from the borrower, such as financial statements and tax returns. Any unsecured

lending should be only for a time period essential for completion of the operations to be financed.

Likewise, loans against chattels and intangible properties shall not exceed 75% of the appraised value

of the security and such loans may be made to the title-holder of the unencumbered chattels and

intangible properties or his assignee.

BSP Circular No. 855 set the collateral value (CV) for a loan backed up by real estate to only 60% of

its appraised value. Banks will still be allowed to lend more than 60% of the CV; however, the

portion above 60% will be considered unsecured, thus requiring banks to set up loan loss provisions

accordingly. The CV ruling should not be mistaken for the loanable value (LV), which is the loan

amount extended by banks to its borrowers. The current industry practice is a loan-to-value (LTV)

ratio of 70%-80%, which some banks may continue to grant provided that they have strict and

consistent lending standards, adequate capital buffer and provisions. This new ruling, along with

other BSP regulations intended to avert a property bubble, could result in an overall slowdown in

lending to the real estate sector as banks adjust to these rulings.

As of December 31, 2016, 2017 and 2018, the Bank had a capital adequacy ratio of 15.70%, 14.40%,

and 15.18%, respectively. Also, the Bank’s Tier 1 ratios were 12.97%, 12.08%, and 12.74% for the

respective periods. Meanwhile, the Bank’s CET1 ratio under Basel III (which became effective

January 1, 2014) was 12.74% as December 31, 2018. All three ratios were well above regulatory

standards.

To better monitor the banking industry’s exposure to the property sector, the BSP in September 2012

approved the guidelines that effectively widened the scope of banks’ real estate exposures (REEs) to

include mortgages and loans extended to the following: individuals to finance the

acquisition/construction of residential real estate for own occupancy as well as land developers and

construction companies for the development of socialised and low-cost housing. Securities

investments issued for purposes of financing real estate activities are also included under the new

guidelines. Banks were required to submit the expanded report starting end-December 2012.

Further on June 27, 2014, the BSP issued Circular No. 839 requiring banks to undergo Real Estate

Stress Test (REST) while setting prudential limits for banks’ real estate exposures to ensure that they

have adequate capital to absorb potential losses to the property sector. Universal and commercial

banks as well as thrift banks must meet a CAR of 10% of qualifying capital after adjusting for the

stress test results. Further, universal and commercial banks and their thrift bank subsidiaries are

required to maintain a level of CET1 capital that is at least 6% of qualifying capital after factoring in

the stress scenario. In addition, banks are mandated to submit quarterly reports of their real estate

exposures, in line with the new REST capital requirements.

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On October 10, 2017, the BSP issued Circular No. 976 which approved amendments to the expanded

report on the real estate exposure of banks, and required the submission of a report on project finance

exposures to enable the BSP to gather more granular information regarding these exposures. It also

clarified the definition of loans to finance infrastructure projects for public use that are currently

exempt from the 20% limit on real estate loans.

On November 23, 2017, the BSP issued BSP Circular No. 983 that prescribes the reduction in the

reserve requirement rate on repurchase transactions, as well as sets forth the features of the

repurchase program that shall be eligible for the zero reserve rate requirement. Deposit substitutes

evidenced by repurchase agreements covering government securities that are transacted in an

organized market under the Government Securities Repo Program shall be subject to the reserve

requirement of zero percent (0%) beginning the first week of December 2017.

Limitations on operations

The Single Borrower’s Limit

Except as prescribed by Monetary Board for reasons of national interest, the total amount of loan,

credit accommodations and guarantees (determined on the total credit commitment) that may be

extended by a bank to any person or entity shall at no time exceed 20.0% of the net worth of the bank

(or 30.0% of the net worth of the bank in the event that certain types and levels of security are

provided). This ceiling may be adjusted by the Monetary Board from time to time. As of December

31, 2011, the ceiling applicable to the Bank was 25.0% (or 35.0% of the net worth of the bank in the

event that certain types and levels of security are provided). The total amount of loans, credit

accommodations and guarantees may also be increased by an additional 25.0% for the purpose of

undertaking infrastructure and/or development projects under the Public-Private Partnership Program

of the Philippine government duly certified by the Secretary of Socio-Economic Planning. This shall

be allowed for a period of six years from December 28, 2010. The total amount of loans, credit

accommodations and guarantees may be increased by an additional 15.0% granted to finance oil

importation of oil companies which are not affiliates of the lending bank, engaged in energy and

power generation, for a period of three years from March 3, 2011 or until March 3, 2014. The total

amount of loans, credit accommodations and guarantees may also be increased by an

additional 25.0% granted to entities, which act as value chain aggregators of the lending banks’

clients, and/or economically-linked entities that are also actors/players in the value chain, this

increase shall only be for a period of three years from March 14, 2016, subject to review after said

period.

The limitations shall not apply to (a) loans and other credit accommodations secured by obligations of

the BSP or of the Government; (b) loans and other credit accommodations fully guaranteed by the

Government as to the payment of principal and interest; (c) loans and other credit accommodations

secured by U.S. Treasury Notes and other securities issued by central governments and central banks

of foreign countries with the highest credit quality given by any two internationally accepted rating

agencies; (d) loans and other credit accommodations to the extent covered by the hold-out on or

assignment of, deposits maintained in the lending bank and held in the Philippines; (e) loans, credit

accommodations and acceptances under letters of credit to the extent covered by margin deposits; and

(f) other loans or credit accommodations which the Monetary Board may from time to time specify as

non-risk items.

On July 5, 2017, the BSP issued BSP Circular No. 965, approving the guidelines on the exclusion

from the Single Borrower’s Limit of banks and quasi-banks’ short-term exposures to clearing and

settlement banks arising from payment transactions.

On April 30, 2018, the BSP issued BSP Circular No. 1001 which provided for a separate individual

limit of 25.0% of the net worth of the lending bank for loans, credit accommodations and guarantees

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granted by a bank to an entity for the purpose of project finance. The applicability of the separate

individual limit shall be subject to the following conditions: (a) the unsecured portion shall not

exceed 12.5% of the net worth of the lending bank when the project is already operational; (b) such

project finance loans are for the purpose of undertaking initiatives that are in line with the priority

programs and projects of the government; (c) the lending bank shall ensure that the standard

prudential controls in project finance loans designed to safeguard creditors’ interests are in place,

which may include pledge of a borrower’s shares, assignment of the borrower’s assets, assignment of

all revenues and cash waterfall accounts, and assignment of project document; (d) the lending bank

shall consider its total project finance exposures in complying with the guidelines in managing large

exposures and credit risk concentrations; (e) the subsidiary or affiliate is not a related interest of any

of the director, officer, and/or stockholder of the lending bank; and (f) the total outstanding loans,

other credit accommodations and guarantees to all subsidiaries and affiliates shall be subject to the

aggregate limits for related party transactions.

Limitation on DOSRI Transactions

No director or officer of any bank shall directly or indirectly, for himself or as the representative or

agent of others, borrow from such bank nor shall he become a guarantor, indorser or surety for loans

from such bank to others, or in the manner be an obligor or incur any contractual liability to the bank

except with the written approval of the majority of all the directors of the bank, excluding the director

concerned.

After due notice to the Board of Directors of the bank, the office of any officer or director who

violates the DOSRI limitation may be declared vacant and such erring officer or director shall be

subject to the penal provisions of the New Central Bank Act. The DOSRI account shall be limited to

an amount equivalent to their respective unencumbered deposits and book value of their paid-in

capital contribution in the bank. The limitation excludes loans, credit accommodations and guarantees

secured by assets which the Monetary Board considers as non-risk.

On June 2, 2016, the Monetary Board approved the revisions to prudential policy on loans, other

credit accommodations, and guarantees granted to DOSRIs. The Monetary Board approved the

exclusion of loans, other credit accommodation and guarantees granted by a bank to its DOSRI for

the purpose of project finance from the 30.0% unsecured individual ceiling during the project

gestation phase, provided, that the bank shall ensure that standard prudential controls in project

finance loans designed to safeguard creditors’ interests are in place, which may include pledge of the

borrower’s shares, assignment of the borrower’s assets, assignment of all revenues and cash waterfall

accounts, and assignment of project documents.

On June 23, 2016, the BSP issued Circular No. 914, Series of 2016 amending the prudential policy on

loans, other credit accommodations, and guarantees granted to DOSRI, subsidiaries and affiliates.

Circular No. 914 has raised the ceilings on the exposures of subsidiaries and affiliates of banks to

priority programs particularly infrastructure projects under the Philippine Development Plan/Public

Investment Program (PDP/PIP) needed to support economic growth. The exposures to subsidiaries

and affiliates in PDP/PIP projects will now be subject to higher individual and unsecured limits of

25% instead of 10% and 12.5% instead of 5% of the net worth of the lending bank, respectively,

subject to conditions. Further, the circular also provides for a refined definition of “related interest”

and “affiliates” to maintain the prudential requirements and preempt potential abuse in a borrowing

transaction between the related entities. The circular also amends the capital treatment of exposures to

affiliates by weighing the risk of both the secured and unsecured loans granted to the latter.’

On October 27, 2017, the BSP issued BSP Circular No. 978 which provided for exclusion of the

portion of loans and other credit accommodation covered by guarantees of international/regional

institutions/multilateral financial institutions where the Philippine Government is a

member/shareholder, from the ceilings on total outstanding loans, other credit accommodations and

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guarantees granted to banks’ subsidiaries and affiliates. BSP Circular No. 978 excluded the following

in determining compliance with the ceilings provided under BSP Circular No. 914: (1) Loans, other

credit accommodations and guarantees secured by assets considered as non-risk under existing BSP

regulations; (2) Interbank call loans; and (3) The portion of loans and other credit accommodations

covered by guarantees of international/regional institutions/multilateral financial institutions where

the Philippine Government is a member/shareholder, such as the International Finance Corporation

and the Asian Development Bank.

Banking Regulation and Supervision

Issuance of Bonds and Commercial Papers

On August 9, 2018, the BSP issued Circular No. 1010, amending BSP Circular No. 975, Series of

2017. Under the said circular, a bank/QB may issue bonds and/or commercial papers (CPs) without

prior BSP approval, provided it complies with the following criteria: (i) the bank must have a

CAMELS composite rating of at least "3" and a "Management" rating of not lower than "3" and QB

must have a RAS rating of at least "Acceptable”; (ii) the bank/QB has no major supervisory concerns

in governance, risk management systems, and internal controls and compliance system; and (iii) the

bank/QB has complied with directives and/or is not subject of specific directives and/or enforcement

actions by the BSP.

U/KBs and QBs only need to submit a certification of compliance with the prudential criteria and

other supporting documents reflecting that the debt issuance has undergone the required process of

approval by the board of directors and that it has been considered in the overall funding plan of the

institution. In addition, U/KBs and QBs should submit a written undertaking to enroll and/or trade the

bonds in a market which is organized in accordance with the SEC rules and regulations.

Under the circular, the BSP prohibits the issuing bank/QB, including its related parties, except its

trust departments or trust entities, from holding and acting as a market maker of the bank’s/QB’s

listed bonds or CPs to prevent possible undue price influence and backdoor pre-termination.

Likewise, the registry bank, including the underwriter/arranger of the issuance, is required to be an

independent third party.

Limitations on Loans and Credit Accommodations

As a general rule, loan and other credit accommodation against real estate shall not exceed 60% of the

appraised value of the real estate security plus 60% of the appraised value of the insured

improvements, and such loans may be made to the owner of the real estate or to his assignees, except

for the following which shall be allowed a maximum value of 70% of the appraised value of the

insured improvements: (a) residential loans not exceeding ₱3.5 million to finance the acquisition or

improvement of residential units; and (b) housing loans extended by or guaranteed under the

Government’s “National Shelter Program”, such as the Expanded Housing Loans Program of the

Home Development Mutual Fund and the mortgage and guaranty and credit insurance program of the

Home Insurance and Guaranty Corporation. Prior to lending on an unsecured basis, a bank must

investigate the borrower’s financial position and ability to service the debt and must obtain certain

documentation from the borrower, such as financial statements and tax returns. Any unsecured

lending should be only for a time period essential for completion of the operations to be financed.

Likewise, loans against chattels and intangible properties shall not exceed 75% of the appraised value

of the security and such loans may be made to the title-holder of the unencumbered chattels and

intangible properties or his assignee.

On 23 June 2016, the BSP issued Circular No. 914, Series of 2016 amending the prudential policy on

loans, other credit accommodations, and guarantees granted to DOSRI, subsidiaries and affiliates.

Circular No. 914 has raised the ceilings on the exposures of subsidiaries and affiliates of banks to

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priority programs particularly infrastructure projects under the Philippine Development Plan / Public

Investment Program (PDP/PIP) needed to support economic growth. The exposures to subsidiaries

and affiliates in PDP/PIP projects will now be subject to higher individual and unsecured limits

of 25% instead of 10% and 12.5% instead of 5% of the net worth of the lending bank, respectively,

subject to conditions. Further, the circular also provides for a refined definition of “related interest”

and “affiliates” to maintain the prudential requirements and preempt potential abuse in a borrowing

transaction between the related entities. The circular also amends the capital treatment of exposures to

affiliates by weighing the risk of both the secured and unsecured loans granted to the latter.

On October 27, 2017, the BSP issued BSP Circular No. 978 which provided for exclusion of the

portion of loans and other credit accommodation covered by guarantees of international/regional

institutions/multilateral financial institutions where the Philippine Government is a

member/shareholder, from the ceilings on total outstanding loans, other credit accommodations and

guarantees granted to banks’ subsidiaries and affiliates. BSP Circular No. 978 excluded the following

in determining compliance with the ceilings provided under BSP Circular No. 914: (1) Loans, other

credit accommodations and guarantees secured by assets considered as non-risk under existing BSP

regulations; (2) Interbank call loans; and (3) The portion of loans and other credit accommodations

covered by guarantees of international/regional institutions/multilateral financial institutions where

the Philippine Government is a member/shareholder, such as the International Finance Corporation

and the Asian Development Bank.

Limitation on Investments

The total investment of a universal bank in equities of allied and non-allied enterprises shall not

exceed 50% of its net worth. Moreover, the equity investment in any one enterprise whether allied or

non-allied, shall not exceed 25% of the net worth of the universal bank. Net worth for this purpose is

defined as the total unimpaired paid-in capital including paid-in surplus, retained earnings and

undivided profit, net of valuation reserves and other adjustments as may be required by BSP. The

Monetary Board must approve such acquisition of equities.

A universal bank can own up to 100.0% of the equity in a thrift bank, a rural bank or a financial or

non-financial allied enterprise. A publicly listed universal bank, such as the Bank, may own up to

100.0% of the voting stock of only one other universal or commercial bank. However, with respect to

non-allied enterprise, the equity investment in such enterprise by a universal bank shall not exceed

35% of the total equity in the enterprise nor shall it exceed 35% of the voting stock in that enterprise.

A bank’s total investment in real estate and improvements including bank equipment shall not exceed

50% of the combined capital accounts. Further, the bank’s investment in another corporation engaged

primarily in real estate shall be considered as part of the bank’s total investment in real estate, unless

otherwise provided by the Monetary Board.

The limitation stated above shall not apply with respect to real estate acquired by way of satisfaction

of claims. However, all these properties must be disposed by the bank within a period of five (5)

years or as may be prescribed by the Monetary Board.

Prohibition to act as Insurer

A bank is prohibited from directly engaging in insurance business as the insurer.

Permitted Services

In addition to the operations incidental to its banking functions, a bank may perform the following

services:

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Receive in custody funds, documents and valuable objects;

Act as financial agent and buy and sell, by order of and for the account of their

customers, shares evidences of indebtedness and all types of securities;

Upon prior approval of the Monetary Board, act as the managing agent, adviser,

consultant or administrator of investment management/advisory/consultancy

accounts; and

Rent out safety deposit boxes.

BSP Circular No. 1003, issued on May 16, 2018, outlined the Guidelines on the Establishment and

Operations of Bank and Non-Bank Credit Card Issuers to implement Republic Act No. 10870, also

known as the Philippine Credit Card Industry Regulations Law.

The Framework for Basic Deposit Accounts, found in BSP Circular No. 992 dated February 1, 2018,

was issued, with a view towards promoting account ownership among the unbanked by imposing no

minimum maintaining balance and an opening amount of not more than ₱100.00. It also supports the

National Retail Payments System (NRPS), which aims to promote resort to digital payments in the

country. On October 5, 2018, BSP issued Memorandum No. M2018-27, prescribing the guidelines

on the electronic submission of the updated reports arising from Circular No. 992.

Anti-Money Laundering Act of 2001

The NRPS has implications on a bank’s compliance with Republic Act No. 9160 or the Anti-Money

Laundering Act of 2001 (AMLA), as amended, requires covered institutions such as banks including

its subsidiaries and affiliates, to provide for customer identification, record keeping and reporting of

covered and suspicious transactions. This relationship between the NRPS and the AMLA was dealt

with in Memorandum No. M-2018-021 issued August 10, 2018.

While the Philippines enacted the AMLA to introduce more stringent anti-money laundering (AML)

regulations, these regulations did not initially comply with the standards set by the Financial Action

Task Fore (FATF). However, following pressure from the FATF, an amendment to the AMLA

became effective on March 23, 2003. In January 2005, the Philippines was removed from the list of

Non-Cooperative Countries and Territories and the AML systems (including strict customer

identification, suspicious transaction reporting, bank examinations, and legal capacities to investigate

and prosecute money laundering) were all identified to be of a satisfactory nature. Currently, the

Philippines is on the “grey list”, as the FATF, in news reports, noted a “high-level political

commitment” from local authorities to address noted deficiencies in its AML regime.

An amendment to the AML regime, Republic Act No. 10168, was enacted on June 18, 2012. This law

defined the crime of financing of terrorism. This is one of the last pending amendments to the AML

regime requested by the FATF, however, it is noted that this is not a guarantee that the Philippines

will not be blacklisted or will be removed from the watch list.

On February 15, 2013, Republic Act No. 10365, which took effect on March 7, 2013, expanded the

AMLA covered institutions and crimes. Additions to the enumeration of covered persons include

jewellery selling agents for transactions in excess of ₱1 million; company service providers, or those

who form companies for third parties, hold positions as directors or corporate secretaries for third

parties, provide business addresses or engage in correspondence or act as nominee shareholder for

others. Likewise, the following persons were added to the list: persons (a) who manage their client’s

money, security or other assets, or (b) who manage bank or securities accounts, or (c) who organize

funds for the creation, operation or management of companies, or (d) who create, operate or manage

entities or relationships, or (e) buy and sell business entities. The revised implementing rules and

regulations were published on the 23rd and 24th of December 2016.

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On March 15, 2017, the BSP issued BSP Circular No. 950 to amend the MORB in order to

effectively implement the provisions of the AMLA, as amended, and the revised implementing rules

and regulations of the AMLA, as amended.

Covered transactions are single transactions in cash or other equivalent monetary instrument

involving a total amount in excess of ₱500,000.00 within one banking day, and for covered persons

under Section 3(a)(8), a single casino transaction involving an amount in excess of ₱5 million or its

equivalent in any other currency.

Suspicious transactions are transactions with covered institutions such as a bank, regardless of the

amount involved, where any of the following circumstances exists:

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

The customer or client is not properly identified;

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

the client;

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

under the AMLA;

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

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

Similar or analogous transactions to the above.

Failure by any responsible official or employee of a bank to maintain and safely store all records of

all transactions of the bank, including closed accounts, for five (5) years from date of

transaction/closure of account shall be subject to a penalty of six (6) months to one (1) year

imprisonment and/or fine of ₱500,000.00.

Malicious reporting of completely unwarranted or false information relative to money laundering

transaction against any person is punishable by six (6) months to four (4) years imprisonment and a

fine of not less than ₱100,000.00 and not more than ₱500,000.00.

In compliance with the law, banks, their officers and employees are prohibited from communicating

directly or indirectly to any person or entity, the media, the fact that a covered or suspicious

transaction has been reported or is about to be reported, the contents of the report, or any information

relating to such report. Neither may such report be published or aired in any manner or form by the

mass media, electronic mail, or other similar devices. A violation of this rule is deemed a criminal

act.

Money laundering is committed by any person who, knowing that any monetary instrument or

property represents, involves, or relates to the proceeds of any unlawful activity:

(a) transacts said monetary instrument or property;

(b) converts, transfers, disposes of, moves, acquires, possesses or uses said monetary

instrument or property;

(c) conceals or disguises the true nature, source, location, disposition, movement or

ownership of or rights with respect to said monetary instrument or property;

(d) attempts or conspires to commit money laundering offenses referred to in paragraphs

(a), (b) or (c);

(e) aids, abets, assists in or counsels the commission of the money laundering offenses

referred to in paragraphs (a), (b) or (c) above;

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(f) performs or fails to perform any act as a result of which the person facilitates the

offense of money laundering referred to in paragraphs (a), (b) or (c) above; and

(g) knowingly fails to disclose and file with AMLC any monetary instrument or property

required to be disclosed and filed.

Money laundering is also committed by any covered person who, knowing that a covered or

suspicious transaction is required under this Act to be reported to the Anti-Money Laundering

Council (AMLC), fails to do so.

Under AMLA, banks, as covered persons, are required to report to the AMLC all covered transactions

and suspicious transactions within a period of five working days from occurrence thereof, unless the

AMLC prescribes a different period not exceeding fifteen (15) working days. The Court of Appeals

of the Philippines (Court of Appeals), upon verified ex-parte application by the AMLC and after

determination that probable cause exists that any monetary instrument or property is in any way

related to an unlawful activity as defined in the AMLA, has the authority to issue a freeze order

which shall be effective immediately, and which shall not exceed six months depending upon the

circumstances of the case. However, if no case is filed against a person whose account has been

frozen within the period determined by the Court of Appeals (but not exceeding six months), the

freeze order shall be deemed automatically lifted, provided, that a freeze order is without prejudice to

an asset preservation order which the relevant trial court may issue upon the same assets. Further, a

freeze order or asset preservation order shall be limited only to the amount of cash or monetary

instrument or value of property which the court finds probable cause to consider such property as

proceeds of the predicate crime.

BSP Circular No. 495 issued on September 20, 2005, as amended by BSP Circular 527 issued on

April 28, 2006, required all universal and commercial banks to adopt an electronic money laundering

transaction monitoring system by October 14, 2007. The said system should, at the minimum, be able

to detect and raise to the bank’s attention, transactions and/or accounts that qualify either as “covered

transactions” or “suspicious transactions” as defined under AMLA.

BSP Memorandum No. M2012-017 issued on April 4, 2012, as affirmed by BSP Circular No. 950

issued on March 15, 2017 likewise requires all covered banking institutions to comply with the anti-

money laundering risk rating system (ARRS), a supervisory system that aims to ensure that

mechanisms to prevent money laundering and terrorist funding are in place and effectively

implemented in banking institutions. Under the ARRS, each institution is rated based on the

following factors: (a) efficient board of directors and senior management oversight; (b) sound anti-

money laundering policies and procedures embodied in a money laundering and terrorist financing

prevention program duly approved by the board of directors; (c) robust internal controls and audit;

and (d) effective implementation. BSP Circular No. 950, further provides for specific requirements

on having a risk-based approach to customer identification by covered institutions, an ongoing

monitoring of customers, accounts, and transactions, and a policy of non-discrimination against

certain types of customers.

On July 19, 2017, the President of the Philippines signed into law Republic Act No. 10927, which

expanded the scope of covered persons to include casinos and the scope of covered transactions to

include a single casino cash transaction involving an amount in excess of P5.0 million or its

equivalent in any other currency. In addition, the law provides that (a) a freeze order issued by the Court

of Appeals pursuant to an ex parte petition by the AMLC shall not exceed six (6) months and if no case

is filed against a person against whose account has been frozen within the period determined by the

Court of Appeals (but not exceeding six (6) months), the freeze order shall be deemed automatically

lifted, provided, that a freeze order is without prejudice to an asset preservation order which the relevant

trial court may issue upon the same assets; and (b) a freeze order or asset preservation order shall be

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limited only to the amount of cash or monetary instrument or value of property which the court finds

probable cause to consider such property as proceeds of the predicate crime.

Institutions that are subject to AMLA are also required to establish and record the identities of their

clients based on official documents. In addition, all records of transactions are required to be

maintained and stored for a minimum of five (5) years from the date of a transaction, unless a case

has been filed involving the account, then the records must be retained and safely kept beyond the

five (5) year period until it is officially confirmed by the AMCL Secretariat that the case has been

resolved, decided or terminated with finality. Records of closed accounts must also be kept for five

(5) years after their closure.

On April 20, 2018, the AMLC issued AMLC Letter No. AMLET-18-03, providing for Operational

Guidelines in the Conduct of the 2018 Third Round Mutual Evaluation of the Philippines (the

“Guidelines”). The Guidelines aim to (a) create an inter-agency Mutual Evaluation Working Group

and sub-working groups; (b) enumerate the functions and obligations of the member-agencies with

respect to the Mutual Evaluation process; (c) outline the Mutual Evaluation process and provide

guidance as to the different components of the process; (d) provide timelines for the Mutual

Evaluation process and Mutual Evaluation-related activities; (e) enumerate effects of a “non-

compliant” or “poor” Mutual Evaluation; and (f) lay down the framework towards the adoption of a

national anti-money laundering/counter-financing of terrorism (AML/CFT) Strategy. The

Guidelines are addressed to all participating government agencies and other entities.

The Mutual Evaluation is a government-wide concern as what will be assessed is the compliance of

the Philippines with the Financial Action Task Force Forty Recommendations and the effectiveness

of its AML/CFT regime. The entire Mutual Evaluation process spans two (2) years, and will require

the support and active participation of various government agencies, including supervisory

authorities, law enforcement agencies, and public and private stakeholders. The Philippines will be

evaluated by a pool of experts from Financial Intelligence Units from other member-jurisdictions of

the Asia-Pacific Group on Money Laundering (APG), pursuant to the APG’s membership rules.

On November 23, 2018, the AMLC issued AMLC Regulatory Issuance A, B, and C, No. 3, Series of

2018, prescribing the guidelines on identifying beneficial ownership. In relation thereto, on January

14, 2019, BSP issued Circular Letter No. CL-2019-002, addressed to all BSFIs of the guidelines

issued by the AMLC on digitization of customer records and identification of beneficial owners.

Data Privacy Act

Republic Act No. 10173, otherwise known as the Data Privacy Act of 2012 (Data Privacy Act), was

signed into law on August 15, 2012, to govern the processing of all types of personal information

(i.e., personal, sensitive, and privileged information) in the hands of the government or private natural

or juridical person through the use of Information and Communications System (ICT), which refers

to a system for generating, sending, receiving, storing or otherwise processing electronic data

messages or electronic documents and includes the computer system or other similar device by or

which data is recorded, transmitted or stored and any procedure related to the recording, transmission

or storage of electronic data, electronic message, or electronic document. While the law provides that

it does not apply to information necessary for banks and other financial institutions under the

jurisdiction of BSP to comply with the AMLA and other applicable laws, the said law applies to all

other personal information obtained by banks for other purposes.

It mandated the creation of a National Privacy Commission, which shall administer and implement

the provisions of the Data Privacy Act and ensure compliance of the Philippines with international

standards set for data protection. The Philippines recognizes the need to protect the fundamental

human right of privacy and of communication, while ensuring free flow of information to promote

innovation and growth. It also identifies the vital role of information and communications technology

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in nation building and its inherent obligation to ensure that personal information in ICT in the

government and in the private sector are secured and protected.

The Data Privacy Act seeks to protect the confidentiality of “personal information”, which is defined

as “any information, whether recorded in material form or not, from which the identity of an

individual is apparent or can be reasonably and directly ascertained by the entity holding the

information, or when put together with other information would directly and certainly identify an

individual.” The law provides for certain rights of a data subject or an individual whose personal

information is being processed. The law imposes certain obligations on “personal information

controllers” and “personal information processors”. It also provides for penal and monetary sanctions

for violations of its provisions.

Electronic Banking Operations

The BSP has prescribed prudential guidelines in the conduct of electronic banking, which refers to

systems that enable bank customers to avail themselves of a bank’s products and services through a

personal computer (using direct modem dial-in, internet access, or both) or a telephone. Applicant

banks must prove that they have in place a risk management process that is adequate to assess,

control, and monitor any risks arising from the proposed electronic banking activities.

BSP released BSP Circular No. 542, dated September 1, 2006, providing for new guidelines on the

protection of electronic banking customers. These guidelines set specific requirements in the

following areas: (a) oversight by a bank’s board of directors, and other concerned officers over its

electronic banking activities; (b) the development of a risk management policy and internal controls

over its electronic banking activities; (c) the implementation of a consumer awareness program for

the customers of banks; (d) development of policy on disclosures and transparencies, and the

availability of electronic banking service; and (e) the development of complaint resolution procedure

for unauthorized transactions in electronic banking.

Private domestic banks with a BSP-approved electronic banking facility may accept payment of fees

and other charges of a similar nature for the account of the departments, bureaus, offices and agencies

of the government as well as all government-owned and controlled corporations. The funds accepted

shall be treated as deposit liabilities subject to existing regulations on government deposits and shall

not exceed the minimum working balance of such government entities.

BSP Circular No. 808, dated August 22, 2013, required BSP-supervised institutions to migrate their

entire payment network to the more secure Europay, MasterCard and Visa (EMV) chip-enabled

cards. In 2014, BSP Circular No. 859 set out the EMV Implementation Guidelines which shall

govern the implementation for debit cards in any card-accepting devices/terminals. The deadline set

for compliance with the migration to the EMV was initially set for January 1, 2017. However,

pursuant to BSP Memorandum No. M-2017-019 issued on June 9, 2017, BSFIs are required to fully

comply with the EMV requirement by June 30, 2018. Failure to do so is considered a serious offense

and will subject these institutions to monetary sanctions provided under relevant provision of the

MORB.

On February 22, 2019, the BSP issued BSP Circular No. 1033 introducing certain amendments to

regulations on electronic banking services and other electronic operations, particularly electronic

payment and financial services (EPFS). EPFS are products and services that enable customers to

receive payments or initiate financial transactions and other related services through an electronic

device. BSP Circular No. 1033 requires the prior approval of the BSP to offer EPFS and certain

reportorial requirements must be submitted to the BSP.

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Related Party Transactions

On December 14, 2015, the BSP issued Circular No. 895, or the Guidelines on Related Party

Transactions. The guidelines highlight that while transactions between and among the entities within

the same group create financial, commercial, and economic benefits, higher standards should be

applied to protect the interests of all stakeholders. It is emphasized that related party transactions are

generally allowed for as long as these are done on an arm’s length basis referring to the process

involved in handling the transaction as well as the economic terms of the transaction.

Under the guidelines, the board, as an oversight body, shall have overall responsibility in ensuring

that transactions with related parties are handled in a sound and prudent manner, with integrity and in

compliance with applicable laws and regulations. The board is expected to approve an overarching

policy on the handling of related party transactions that should cover the scope of its related party

transactions policy, guidelines in ensuring arm’s length terms, management of conflicts of interest,

materiality thresholds and limits, whistle blowing mechanisms, and restitution of losses and other

remedies for irregular related party transactions. Further, banks that are part of conglomerates are

required to create a related party transactions committee responsible for the continuing identification

and review of existing relations between and among businesses and counterparties, and for ensuring

that related party transactions are processed in the regular course of business, and are priced fairly.

The guidelines now explicitly require that the annual reports adequately disclose relevant information

on the governance of related party transactions and specific details of exposures to related parties.

Taxation for Banks

Banks are subject to regular corporate income tax, based on their taxable income at a tax rate of 30%.

Taxable net income refers to items of income specified under Section 32 (A) of the Tax Code less the

items of allowable deductions under Section 34 of the Tax Code or those allowed under special laws.

A Minimum Corporate Income Tax (MCIT) equivalent to 2% of the gross income of a bank is

payable beginning on the fourth year of operations of the bank only if the MCIT is greater than the

regular corporate income tax. Any excess MCIT paid over the regular corporate income tax can be

carried forward as tax credit for the three immediately succeeding years. For purposes of MCIT, the

bank’s gross income means: (a) gross receipts less sales returns, allowances, discounts and cost of

services, including interest expense; and (b) income derived from other businesses except income

exempt from income tax and income subject to final tax.

Net operating loss carry-over (NOLCO) can be claimed as deduction against taxable income within

three years after NOLCO is incurred.

An Improperly Accumulated Earnings Tax (IAET) equivalent to 10% of improperly accumulated

taxable income of a corporation is not applicable to banks.

Since banks are in the regular business of lending, interest income derived by banks which is

generally considered passive income by non-banks, is considered ordinary income of banks subject to

30% corporate income tax. Banks may also claim interest expense as tax deduction if such expense

complies with the requirements laid down in the Tax Code and Revenue Regulations No. 13-00. The

amount of interest expense which banks may claim as tax deduction shall be reduced by an amount

equal to 33% of the banks’ interest income that is subject to final tax.

The Tax Code does not allow banks to deduct interest expense or bad debts arising from transactions

with the following:

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An individual who directly or indirectly owns more than 50% in value of the

outstanding capital stock of the bank;

A corporation, more than 50% in value of the outstanding capital stock of which is

owned directly or indirectly, by or for the same individual in sub-paragraph (a), either

as a personal holding company or a foreign personal holding company.

Pursuant to Revenue Regulations No. 05-99 (as amended by Revenue Regulations No. 25-02), in

order for banks to claim bad debts as tax deductions, they must secure a certification from the BSP

that the accounts are worthless and can be written off, subject to the final determination by the BIR

that bad debts being claimed by the banks are worthless and uncollectible. However, on October 29,

2014, the BSP issued Circular 855 which provides that notice of write-off of problem credits shall be

submitted in the prescribed form to the BSP through the appropriate Central Point of Contract within

thirty (30) business after every write-off with a sworn statement signed by the President of the

financial institution or officer of equivalent rank that write-off did not include transactions with

DOSRI and was undertaken in accordance with board-approved internal credit policy. Based on the

said circular, a notice to the BSP would suffice, and that BSP approval with respect to a write-off of a

bad debt not related to a DOSRI transaction, is no longer required.

The banks’ passive income such as interest income earned from bank deposits is subject to final

withholding tax.

Banks are subject to percentage tax or Gross Receipt Tax (GRT), which is a tax levied on the gross

receipts of banks and non-bank financial intermediaries. On June 13, 2016, the BIR issued Revenue

Memorandum Circular No. 62-2016 (RMC 62-2016) seeking to clarify the tax treatment of the gross

receipts tax (GRT), which is passed on by banks through contractual stipulations to their clients.

RMC 62-2016 provides that if under a contract the GRT is passed on to the client, such passed-on

GRT should be treated as gross income and should itself be subject to a GRT of 7%.

Real and Other Properties Acquired (ROPA) of banks are considered as ordinary assets. The income

derived from their sale is subject to the regular corporate income tax. Moreover, the transaction is

subject to a 6% creditable withholding tax based on the highest among the zonal value, market value

in the tax declaration or selling price, which shall be withheld by the buyer and can be used as a credit

against the bank’s taxable income in the year that the gain is realised.

The Tax Code provides for a final tax at fixed rates for the amount of interest, yield or benefit derived

from deposit substitutes which shall be withheld and remitted by the payor of the said interest, yield

or benefit. This rule does not apply to gains derived from trading, retirement or redemption of the

debt instrument which is subject to regular income tax rates, except for bonds, debentures or other

certificate of indebtedness with maturity of more than five years.

To be considered as a deposit substitute, the debt instrument must have been issued or endorsed to 20

or more individuals at any one time at the time of the original issuance in the primary market or at the

issuance of each tranche in the case of instruments sold or issued in tranches.

Interbank call loans (IBCLs) with a maturity period of not more than five days and used to cover

deficiency in reserves against deposit liabilities are not considered deposit substitutes and are not

subject to documentary stamp tax (DST).

Foreign Currency Deposit Unit (FCDU) transactions with non-residents of the Philippines, offshore

banking units (OBUs), FCDUs of local banks and branches of foreign banks (i.e., offshore income)

are tax-exempt, while interest income from foreign currency loans granted to residents other than

OBUs or other depository banks under the expanded system is subject to 10.0% final tax. All other

income of FCDU is taxable at regular corporate income tax of 30.0%.

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On December 19, 2017, the President of the Philippines signed into law package 1 of the Tax Reform

for Acceleration and Inclusion or Republic Act No. 10963 (TRAIN Law) which took effect on

January 1, 2018. The TRAIN Law amends certain provisions of the Tax Code. The relevant changes

of the TRAIN Law are incorporated in the section titled “Philippine Taxation” beginning on page 57

of this Offering Circular.

On February 14, 2019, the President signed into law the Tax Amnesty Act of 2019 or Republic Act

No. 11213 (Tax Amnesty Law), which was intended to complement the provisions of the TRAIN

Law. However, following the President’s veto of the provisions granting general tax amnesty for all

unpaid national internal revenue taxes for taxable year 2017 and prior years, the current Tax Amnesty

Law only grants estate tax amnesty for estates of decedents who died on or before December 31, 2017

and whose estate taxes have remained unpaid or have accrued as of December 31, 2017 and tax

amnesty on delinquencies covering all national internal revenue taxes for taxable year 2017 and prior

years. Congress, by two-thirds vote of all Members of each House, voting separately, may pass the

vetoed provisions over the President’s veto. In which case, the vetoed provisions will become law.

The second package of the CTRP (TRABAHO Bill) aims to lower corporate income taxes while

rationalizing fiscal incentives for corporations, such as income tax holidays, special rates, and custom

duty exemptions. The House of Representatives approved its version of the TRABAHO Bill on

September 10, 2018 and transmitted the same to the Senate on September 11, 2018. The Senate’s

version of the TRABAHO Bill is currently pending with its Ways and Means Committee. If the

TRABAHO Bill is not passed before the adjournment of Congress on June 8, 2019, it will have to be

refiled with the next Congress.

Revised Corporation Code

Republic Act No. 11232 or the Revised Corporation Code (Code) was signed into law on February

20, 2019 and became effective on March 8, 2019. Among the salient features of the Revised

Corporation Code are:

Corporations are granted perpetual existence, unless the articles of incorporation provide

otherwise. Perpetual existence shall also benefit corporations whose certificates of

incorporation were issued before the effectivity of the Code, unless a corporation, upon a vote

of majority of the stockholders of the outstanding capital stock notifies the Securities and

Exchange Commission (Commission) that it elects to retain its specific corporate term under

its current Articles of Incorporation.

A corporation vested with public interest must submit to its shareholders and to the

Commission an annual report of the total compensation of each of its directors or trustees,

and a director or trustee appraisal or performance report and the standards or criteria used to

assess each director, or trustee.

Banks, quasi-banks, pawnshops, non-stock savings and loan associations (NSSLA), and

corporations engaged in money service business, preneed trust and insurance companies, and

other financial required, must have at least twenty percent (20%) independent directors in the

Board, in accordance with the Securities and Regulation Code. This requirement also applies

to other corporations engaged in businesses imbued with public interest, as may be

determined by the Commission.

The Code allows the creation of a “One Person Corporation”. However, it expressly prohibits

banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies,

among others, from being incorporated as such. This restriction also applies with respect

incorporations as Close Corporation.

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Material contracts between the Corporation and its own directors, trustees, officers, or their

spouses and relatives within the fourth civil degree of consanguinity or affinity must be

approved by at least two-thirds (2/3) of the entire membership of the Board, with at least a

majority of the independent directors voting to approve the same.

The right of stockholders to vote in the election of directors or trustees, or in shareholders

meetings, may now be done through remote communication or in absentia if authorized by

the corporate by-laws. However, as to corporations vested with public interest, these votes are

deemed available, even if not expressly stated in the corporate by-laws. The shareholders who

participate through remote communication or in absentia are deemed present for purposes of

quorum. When attendance, participation and voting are allowed by remote communication or

in absentia, the notice of meetings to the stockholders must state the requirements and

procedures to be followed when a stockholder or member elects either option,

As to amendments made to the by-laws of any bank, banking institution, building and loan

association, trust company, insurance company, public utility, and other corporations

governed by special laws, the Code requires that a prior certificate of the appropriate

government agency to the effect that such bylaws or amendments are in accordance with law,

must be submitted.

A favorable recommendation by the appropriate government agency is likewise required for

banks or banking institutions, building and loan associations, trust companies, insurance

companies, public utilities, and other corporations governed by special laws, before the

Commission approves any merger or consolidation; or any voluntary dissolution.

In case of transfer of shares of listed companies, the Commission may require that these

corporations whose securities are traded in trading markets and which can reasonably

demonstrate their capability to do so, to issue their securities or shares of stock in

uncertificated or scripless form in accordance with the Rules of the Commission.

The Code refers to the Philippine Competition Act in case of covered transactions under said

law involving the sale, lease, exchange, mortgage, pledge, or disposition of properties or

assets; increase or decrease in the capital stock, incurring creating or increasing bonded

indebtedness; or mergers or consolidations covered by the Philippine Competition Act

thresholds.

Other Regulations

Set out below are other regulations applicable to banks operating in the Philippines:

Implementation of Basel III Framework on Liquidity Standards. On March 10, 2016, the BSP

issued BSP Circular No. 905 which provided guidelines for the implementation of Basel III

framework on Liquidity Standards as it relates to LCR and Disclosure Standards. The Monetary

Board approved the LCR framework with an observation period from July 1, 2016 until the end

of 2017, during which banks are required to commence reporting their LCR to the BSP.

Beginning on January 1, 2018, the LCR threshold that banks will be required to meet will

be 90.0%, which will be increased to 100.0% commencing on January 1, 2019. On November 3,

2017, the BSP issued BSP Circular No. 981 which amended the guidelines on liquidity risk

management. The banks have until September 1, 2018 to develop or make appropriate changes

to their policies and procedures, provided that banks complete a gap analysis of the requirements

in BSP Circular No. 981 vis-à-vis their existing risk management systems by March 31, 2018,

the result of such gap analysis shall be documented and made available for review of the BSP.

On February 8, 2018, the BSP issued BSP Circular No. 996 which amended the LCR framework

and minimum prudential liquidity requirements for thrift banks, rural banks, cooperative banks,

and quasi-banks (QBs). With this new development, all banks and QBs will be subject to the

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calibrated minimum prudential liquidity requirements. On March 15, 2019, BSP issued Circular

No. 1035 to introduce certain amendments to the Basel III LCR Framework and Minimum

Liquidity Ratio Framework. Circular No. 1035: (i) extended the observation period of the

minimum Basel III LCR requirement to December 31, 2019 for subsidiary banks and quasi-

banks of universal and commercial banks, (ii) adopted the 70% LCR floor for subsidiary banks

and quasi-banks during the observation period, and (iii) amended the formula for minimum

liquidity ratio.

Implementation of Basel III Framework for Dealing with Domestic Systemically Important

Banks (DSIBs). On October 29, 2014, the BSP issued BSP Circular No. 856 which provided the

guidelines for implementing the Framework for dealing with D-SIBs under Basel III. Banks

deemed as D-SIBs by the BSP will be imposed with capital surcharge to enhance their loss

absorbency and thus mitigate any adverse side effects both to the banking system and to the

economy should any of the D-SIBs fail. To determine the banks’ systemic importance, the BSP

will assess and assign weights using the indicator-based measurement approach based on the

following: size, interconnectedness, substitutability, and complexity. Depending on how they

score against these indicators and the buckets to which the scores correspond, the D-SIBs will

have varying levels of additional loss absorbency requirements ranging from 1% to 2.5%. Aside

from the added capital pressure, D-SIBs may be put at an undue disadvantage compared to

Global Systemically Important Banks (G-SIBs) given that this framework was patterned for

regional/global banks and which may not thus be appropriate for local banks. The phased-in

compliance started on January 1, 2017 and will become fully effective on January 1, 2019. On

February 12, 2016, the Monetary Board approved the guidelines on the submission of a recovery

plan by DSIBs which shall form part of the DSIBs’ Internal Capital Adequacy Assessment

Process (ICAAP) submitted to the BSP every March 31st of each year. The recovery plan

identifies the course of action that a DSIB should undertake to restore its viability in cases of

significant deterioration of its financial condition in different scenarios. At the latest, the

recovery plan shall be activated when the DSIB breaches the total required CET1 capital, the

HLA capital requirement and/or the minimum liquidity ratios as may be prescribed by the BSP.

As a preemptive measure, the recovery plan should use early warning indicators with specific

levels (i.e., quantitative indicators supplemented by qualitative indicators) that will activate the

recovery plan even before the above-said breaches happen. This preparatory mechanism,

including the operational procedures, monitoring, escalation and approval process should be

clearly defined in the recovery plan. The ICAAP document, which includes the first recovery

plan, was submitted on June 30, 2016 and will be re-submitted on the 31st of March of each year.

Regulations Governing the Derivatives Activities of Banks. In line with the policy of the BSP to

support the development of the Philippine financial market by providing banks and their clients

with expanded opportunities for financial risk management and investment diversification

through the prudent use of derivatives, BSP Circular No. 594 was issued by the BSP in

January 2008 amending the existing regulations governing the derivatives activities of banks and

trust entities. Furthermore, BSP Circular No. 688 issued by the BSP in May 2010 prescribes

guidelines on the determination of the credit risk weighted assets for banks that will engage in

derivatives activities as end-users for hedging purposes and/or under limited-use authority. The

BSP also issued BSP Circular No. 891 on November 9, 2015 amending the sales and marketing

guidelines for derivatives under the MORB. Banks must ensure that the financial products (e.g.,

debt and equity securities, hybrid securities, derivatives, securitization structures and similar

products with substantial investment characteristics) it recommends to a client are appropriate for

that client through a client suitability process which involves obtaining client information,

classifying a client according to financial sophistication and risk tolerance, and conducting a

suitability review. Any informational or promotional presentation must be undertaken only by

personnel who are knowledgeable on the products involved and are qualified based on

qualification standards established by the bank. Any disclosures regarding its products and

services must meet the bank’s standards to ensure that its clients understand the nature of the

financial transaction. The BSP may bring about timely corrective actions and impose sanctions

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on the bank and responsible persons, which may include warning, reprimand, suspension,

removal, and disqualification of concerned directors, officers, and employees. In February 2017,

BSP issued Memorandum No. M-2017-004 advising all banks and quasi-banks that cross-border

derivative transactions involving non-centrally cleared derivatives shall be subject to margin

requirements pursuant to the policy framework adopted by the BCBS and the International

Organization of Securities Commissions. The framework requires all covered entities that engage

in non-centrally cleared derivatives to exchange initial and variation margins. Assets collected as

collateral for margin purposes should be highly liquid and should, after the application of an

appropriate haircut, be able to hold their value in time of stress. Variation margin requirements

were phased in from September 1, 2016 to March 1, 2017 while initial margin requirements are

being phased in from September 1, 2016 to September 1, 2020. As an initial step, banks and

quasi-banks should make a determination of the transactions that will be subject to margin

requirements implemented in other jurisdictions and assess whether they will be able to comply

with the margin requirements implemented in other jurisdictions and assess whether they will be

able to comply with the pertinent legal and operational arrangements. The Bank expects

increased competition in the swaps and other derivative transactions allowed under the

regulations. The Bank has already obtained its limited dealer authority for Foreign Exchange

Forwards (including non-deliverables), Foreign Exchange Swaps, Interest Rate Swaps, Cross

Currency Swaps, Forward Rate Agreements, as well as for European Foreign Exchange, Interest

Rate, Bond and Swap Options.

Amendments to Unit Investment Trust Fund (UITF) Regulations. In September 2004, the BSP

issued BSP Circular No. 447 (as amended by BSP Circular No. 675 [2009], BSP Circular No.

676 [2009], Memorandum No. M-2010-033 [2010], BSP Circular No. 767 [2012], BSP Circular

No. 852 [2014], BSP Circular No. 876 [2015] and BSP Circular No. 907 [2016]) which provided

guidelines for the launching and offering of new products to be known as UITFs, and was

intended to completely phase out common trust funds or convert them into UITFs within two

years from the date of the circular. UITFs are open-ended pooled trust funds denominated in any

acceptable currency that are to be operated and administered by trust entities. Eligible assets of

UITFs include bank deposits, securities issued by or guaranteed by the Government or the BSP,

tradable securities issued by the government of a foreign country, exchange listed securities,

marketable instruments that are traded in an organized exchange, loans traded in an organized

market, loans arising from repo agreements which are transacted through an exchange recognized

by the Philippine SEC and such other tradable investments outlets/categories as the BSP may

allow. These assets are subject to mark-to-market valuation on a daily basis. The stated

objective of the BSP is to align the operation of pooled funds with international best practices and

enhance the credibility of pooled funds to investors. In January 2008, the BSP issued BSP

Circular No. 593 to improve risk disclosure on investing in UITFs, by requiring banks to conduct

a client suitability assessment to profile the risk-return orientation and suitability of the client to

the specific type of UITF that he wants to participate in, and to update the client’s profile at least

every three years. The Bank has joined with the BSP in this endeavor to guide clients in choosing

investment outlets that are best suited to their objectives, risk tolerance, preferences and

experience. In December 2009, the BSP issued BSP Circular No. 676 allowing cross-currency

investment for Peso trust, other fiduciary and investment management accounts, including Peso

UITFs. In September 2012, the BSP issued BSP Circular No. 767 to include investments by

UITFs in units/ shares in collective investment schemes as an allowable investment and

recognizing UITF structures such as feeder funds and fund-of-funds. On October 21, 2014, the

BSP issued Circular 852, amending the UITF Regulations. Through this circular, the BSP

strengthened the disclosure requirements for UITFs by prescribing the use of the Key Information

and Investment Disclosure Statement and online posting of UITF information via a website. On

March 10, 2016, the BSP issued BSP Circular No. 907 to amend certain exposure limits, and

allowable investment and valuation on UITFs invested in feeder fund and fund-of-funds. UITF

investments shall only be limited to bank deposits and collective investment schemes (e.g., target

fund, exchange-traded funds), subject to such target fund not being structured or similarly

structured as a feeder fund or a fund-of-funds. On March 14, 2018, BSP issued BSP Circular No.

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999 which further amended the allowable investment and valuation of UITFs invested in feeder

fund or fund-of-funds. Under the circular, offshore/global funds which use financial derivatives

for efficient portfolio management (EPM) may be allowed as target fund, provided that financial

derivatives are not extensively or primarily used as an investment strategy of the target fund and

that the risk level of the target fund remain consistent with the objective and risk profile of the

investor fund. Alternatively, the target fund shall comply with the relevant regulatory

requirements of its home jurisdiction as regards the use of financial derivatives for EPM.

Limit on Real Estate Loans of Universal Banks. In February 2008, the BSP issued BSP Circular

No. 600 removing interbank loans from the total loan base to be used in computing the aggregate

limit on real estate loans, and amending the inclusions and exclusions to be observed in the

computation. On October 10, 2017, the BSP issued BSP Circular No. 976 which approved

amendments to the expanded report on the real estate exposure of banks, and required the

submission of a report on project finance exposures to enable the BSP to gather more granular

information regarding these exposures. It also clarified the definition of loans to finance

infrastructure projects for public use that are currently exempt from the 20.0% limit on real estate

loans.

Exemption of Paired ROP Warrants from Capital Charge for Market Risk. In connection with

the Government’s Paired Warrants Program, the BSP issued BSP Circular No. 605 in

March 2008 exempting warrants paired with ROP Global Bonds from capital charge for market

risk to the extent of a bank’s holdings of bonds paired with warrants equivalent to not more

than 50.0% of total qualifying capital. The Bank holds such investments which give it additional

flexibility for capital deployment.

Exemption of Paired Government Warrants from Capital Charge for Market Risk. In

connection with the Government’s Paired Warrants Programme, the BSP issued Circular No. 605

in March 2008 exempting warrants paired with the Philippines’ Global Bonds from capital charge

for market risk to the extent of a bank’s holdings of bonds paired with warrants equivalent to not

more than 50.0% of total qualifying capital. The Bank holds such investments which give it

additional flexibility for capital deployment.

Guidelines on Securities Borrowing and Lending Transactions. Guidelines by the PSE on SBL

govern SBL transactions between local/foreign borrowers and local/foreign lenders. BSP

Circular No. 611, Series of 2008, provides guidelines on SBL transactions in the PSE involving

borrowings by foreign entities of PSE-listed shares from local investors/lenders. In May 2008,

the BSP Monetary Board authorized the issuance of BSP Registration Documents to cover the

PSE-listed shares of stock borrowed by foreign entities from local investors and lenders. This

will allow foreign borrowers to purchase foreign exchange from the banking system for

remittance abroad using the Peso sales proceeds of the borrowed shares including the related

income from the SBL transaction, such as rebates or shares in the income earned on the

reinvestment of the cash collateral, interest and dividends earned on the Peso denominated

government securities and PSE-listed shares used as collateral.

Reclassification of Financial Assets between Categories. The BSP issued BSP Circular No. 628

dated October 31, 2008, amending BSP Circular No. 626 dated October 23, 2008 and the

Resolution of the Monetary Board No. 1423 dated October 30, 2008, which approved the

guidelines governing the reclassification of financial assets between categories. Financial

Institutions shall be allowed to reclassify all or a portion of their financial assets from “held for

trading” or “available for sale” categories to the “available for sale” or “held to maturity” or

“unquoted debt securities classified as loans” categories effective July 1, 2008. Any

reclassification made in periods beginning on or after November 15, 2008 shall take effect from

the date when the reclassification is made.

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Taxes. All banks are subject to certain tax rules specific to financial institutions. In November

2005, the Government increased the gross receipts tax (GRT), which is applied to the Bank’s

non-interest income, from 5.0% to 7.0%. On June 13, 2016, the BIR issued Revenue

Memorandum Circular 62-2016 (RMC 62-2016), seeking to clarify the tax treatment of GRT,

which is passed on by banks through contractual stipulations to their clients. RMC 62-2016

provides that if under a contract the GRT is passed on to the client, such passed-on GRT should

be treated as gross income and should itself be subject to a GRT of either 5.0% or 7.0%,

depending on the provision of the National Internal Revenue Code of the Philippines or the Tax

Reform Act of 1997 (the Tax Code) covering the type of income or activity. The Tax Code was

recently amended by Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion

(TRAIN). Among the amendments to the Tax Code included increasing the rate of documentary

stamp tax (DST) on debt instruments. All such affected instruments will generally be subject to

DST at the rate of one peso and fifty centavos (₱1.50) on each two hundred pesos (₱200.00), or

fractional part thereof, of the issue value of such instruments.

Adjustment of Reserve Requirements of Peso Deposits Liabilities and Deposit Substitutes

Taxes. Under BSP Circular No. 732 (2011), as further amended by BSP Circular No. 753 (2012),

BSP Circular No. 830 (2014), BSP Circular No. 832 (2014), BSP Circular No. 983 (2017), BSP

Circular No. 997 (2018), and BSP Circular 1004 issued on May 24, 2018, universal and

commercial banks are required to maintain regular reserves of: (a) 18% against demand deposits,

savings deposit, time deposit and deposit substitutes, Peso deposits lodged under due to foreign

banks, Peso deposits lodged under due to head office/branches/agencies abroad (Philippine

branch of a foreign bank); (b) 18% against negotiable order of withdrawal accounts; (c) 0%

against deposit substitutes evidenced by repossession agreements; (d) 4.0% against long-term

negotiable certificates of time deposits under BSP Circular No. 304 (2001); (e) 6% against bonds;

and (f) 7% against long-term negotiable certificates of time deposits under BSP Circular No. 824

(2014).

Rules and Regulations on the Mandatory Allocation for Agriculture and Agrarian

Reform Credit. In July 2011, the BSP issued BSP Circular No. 736 as a component of the

Implementing Rules and Regulations of the Republic Act No. 10000 or the Agri-Agra

Reform Credit Act. Aside from retaining the mandatory credit allocation, it also rationalizes the

modes of compliance. In addition to direct compliance through loans to qualified borrowers, a

list of alternative compliance mechanisms is also provided. On July 20, 2018, the BSP issued

BSP Circular No. 1009, Series of 2018 further amending the Rules and Regulations on the

Mandatory Credit Allocation for Agriculture and Agrarian Reform Credit.

Valuations of Government Securities Held by Banks. In October 2013, the BSP amended the

rules on valuations of government securities held by banks to reflect actual market rates, with the

guideline applying to both benchmark and non-benchmark securities. Under BSP Circular

No. 813, the weighted average of done or executed deals shall be used as the basis for valuation.

In the absence of weighted average done deals for benchmark bonds, the simple average bids

shall be used. In the absence of both weighted done deals and simple average bids for non-

benchmark securities, interpolated yields derived from reference rates in accordance with BSP-

approved guidelines shall be used

Segregation of Customer Funds and Securities Received by Banks. On August 14, 2015, the

BSP issued BSP Circular No. 885 requiring the segregation of customer funds and securities

received by banks in the performance of their securities brokering functions. Banks are required

to institute adequate risk management systems and controls to ensure protection of customer

funds and securities, proper segregation of functions, and prevention of conflict of interest

situations that may arise in the conduct of securities brokering activities within the bank. Banks

must also make and keep current books and records relating to customer funds and securities and

submit monthly reportorial requirements.

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Creation of Personal Management Trust. On August 18, 2016, the BSP issued BSP Circular

No. 920 allowing for the creation of the personal management trust (PMT), which is a living trust

arrangement that seeks to meet the estate planning and asset management needs of individuals.

The trustor may or may not nominate a third party beneficiary. It is supposed to serve as a more

flexible tool in the management of an individual’s financial affairs. Upon the effectivity of the

circular, all living trust accounts (LTAs) were discontinued and all those that remained valid

were automatically considered as PMT.

Clearing of Checks via Electronic Presentment. On September 7, 2016, the BSP issued BSP

Circular No. 924, amending the MORB in view of the clearing of checks via electronic

presentment, which shall be implemented by the Philippine Clearing House Corporation

(PCHC). On January 20, 2017, the BSP began the electronic clearing of checks. Under this new

system, only digital images of the checks and their electronic payment information shall be

required to be transmitted to the paying bank. The clearing time was reduced to just one banking

day, as against three banking days previously, since no physical delivery of checks will be

needed.

Effective Reporting System Generation and Timely Submission of Reports. On June 26, 2017,

the BSP amended the MORB through BSP Circular No. 963, Series of 2017, which issuance

instituted governance processes in accordance with the BSP’s expectation that banks establish an

effective reporting system generation and timely submission of reports. Said reports must be

comply with those standards prescribed by the BSP, and those banks that fail to do so (i.e., files

an erroneous report, delayed report, or did not submit at all) are meted with certain sanctions that

can be aggravated by habitual violations. It further provided that banks had until December 31,

2017 to make the necessary preparations to their systems and processes in order to comply with

the new provision. Its full implementation started on January 1, 2018.

Requirements for the Issuance of Bonds and Commercial Papers. On October 10, 2017, the

BSP amended the MORB by the issuance of BSP Circular No. 975 which provides that all banks

with quasi-banking authority/ quasi-banks issuing bonds or commercial papers shall comply with

the SRC and its Implementing Rules and Regulation, and other applicable rules and regulations

issued by the SEC. Banks and quasi-banks that will issue bonds and/or commercial papers shall

ensure that they have adequate control system and effective liquidity risk management in place in

accordance with the MORB. Further, the bank/ quasi-bank shall be required to notify the BSP

Supervising and Examination Sector of the bond issue within five (5) days from approval by the

board of directors of the bank/ quasi-bank. BSP Circular No. 1010 was issued on August 9, 2018

to provide additional requirements for the issuance by banks of bonds and commercial papers.

Circular No. 1010 provides that a bank may issue bonds and/or commercial papers without prior

BSP approval, provided that the following conditions are met:

(1) The bank must have a CAMELS composite rating of at least “3” and a “Management”

rating of not lower than “3”.

(2) The bank has no major supervisory concerns in governance, risk management systems,

and internal controls and compliance system;

(3) The bank/QB has complied with directives and/or is not subject of specific directives

and/or enforcement actions by the BSP; and

(4) The bonds issued are enrolled and/or traded in a market which is organized in

accordance with the SEC rules and regulations.

Further, the issuing bank, including its subsidiaries, affiliates, and the wholly or majority-owned

or -controlled entities of such subsidiaries and affiliates, except for its trust departments or related

trust entities, is prohibited from holding or acting as a market maker of the bank’s listed/traded

bonds or commercial papers. Likewise, the registry bank, including the underwriter/arranger of

the issuance, shall be a third party with no subsidiary/affiliate relationship with the issuing bank

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and which is not related to the issuing bank in any manner that would undermine its

independence.

Guidelines on the Adoption of PFRS 9. On August 14, 2018, the BSP issued Circular No. 1011

which provides guidelines on the adoption of PFRS 9. The Circular provides that where there are

differences between the BSP regulation and PFRS 9, as when more than one option are allowed

or certain limits are prescribed, then the option or limit prescribed by the BSP should be adopted.

The circular further provides that with respect to the preparation of prudential reports, banks

should adopt in all respect the PFRS, except in the following cases:

(1) in preparing consolidated financial statements, only investments in financial allied

subsidiaries except insurance subsidiaries shall be consolidated with the financial

statements of the parent bank on a line-by-line basis, while insurance and non-

financial allied subsidiaries shall be accounted for using the equity method.

Investments in financial/non-financial allied/non-allied associates and joint ventures

shall be accounted for using the equity method in accordance with the provisions of

PAS 28.

In preparing solo/separate financial statements, investments in financial/nonfinancial

allied/non-allied subsidiaries/associates, including insurance subsidiaries/associates,

shall be accounted for using the equity method as described in PAS 28.

(2) banks shall recognize adequate and timely allowance for credit losses at all times. ln

this respect, banks shall adopt the principles provided under the enhanced standards

on credit risk management in measuring credit losses in the MORB.

Marking to market of financial instruments. BSP Circular No. 1021 dated November 15, 2018

provides that financial instruments that are required to be classified and measured at fair value,

within the scope of PFRS 9 shall be marked-to-market in accordance with the provisions of PFRS

13 on Fair Value Measurement and the related rules and regulations issued by the Securities and

Exchange Commission

Basic Deposit Accounts. BSP Circular No. 992, issued on February 01, 2018, requires banks to

establish a basic deposit account which refers to interest or non-interest-bearing account designed

to promote financial inclusion. The basic deposit account shall have an opening amount of not

more than ₱100.00 and no minimum maintaining balance but with a maximum balance of not

more than ₱50,000.00. If the depositor exceeds the ₱50,000.00 maximum balance, the bank shall

convert the basic deposit account to a regular deposit account. The basic deposit account shall

have no dormancy charges and has no reserve requirement. On March 1, 2018, the BSP issued

Circular No. 998, clarifying the guidelines on the basic security deposit requirements. The

circular provides that, as security for the faithful performance of its trust and other fiduciary

duties, the basic security deposit shall be at least one percent (1%) of the book value of the total

trust, other fiduciary and investment management assets, and at no time shall be less than

P500,000.00; further, as security for the faithful performance of its investment management

activities, the basic security deposit shall be at least one percent of the book value of the total

investment management assets, and at no time less than P500,000.00. The Circular also

prescribes the methodology in determining compliance with the basic security deposit for the

faithful performance of trust and other fiduciary business and investment management activities,

and amends the compliance period to require banks, that are authorized to engage in trust and

other fiduciary business and investment management activities, to comply with the basic security

deposit requirement on a quarterly basis, as well as, at the time of withdrawal, replacement or

redemption of the government securities deposited with the BSP within the quarter period. On

February 15, 2019, the BSP issued Circular No. 1032 amending the guidelines on the basic

security deposit requirement. The circular provided that the trustee or fiduciary/investment

manager shall ensure compliance with the required basic security deposit. Any deficiency must

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be corrected through the immediate posting of additional securities. Trustees or

fiduciary/investment mangers shall submit quarterly reports on compliance with the basic security

deposit requirement and report on the basic security deposit transactions.

Electronic Banking Services and Other Electronic Operations. On February 22, 2019, the BSP

issued BSP Circular No. 1033, which classifies electronic payments and financial services

(EPFS) into basic and advanced and establishes guidelines for the licensing of EPFS. Further,

BSFIs that are licensed to offer funds transfer services shall make these interoperable by

participating in automated clearing houses.

Reserves against trust and other fiduciary accounts (TOFA). BSP Circular No. 1025 dated

December 13, 2018 provides that in addition to the basic security deposit, banks authorized to

engage in trust and other fiduciary business shall maintain reserves on TOFA -others, except

accounts held under (1) administratorship; (2) trust under indenture; (3) custodianship and

safekeeping; (4) depository and reorganization; (5) employee benefit plans under trust; (6)

escrow; (7) personal trust (testamentary trust); (8) executorship; (9) guardianship; (10) life

insurance trust; (11) pre-need plans (institutional/individual); (12) Personal Equity And

Retirement Account (PERA); (13) legislated and quasi-judicial trust; and (l4) specialize

institutional accounts under trust.

Adoption of National Retail Payment System (NRPS) Framework. On November 6, 2017, in

line with BSP’s adoption of the NRPS framework consistent with its regulations on risk

management, the BSP issued Circular No. 980, which requires BSFIs to ensure that the retail

payment systems they participate in demonstrate sound risk management and effective and

efficient interoperability. The NRPS framework covers all retail payment-related activities,

mechanisms, institutions and users. Under this framework, sound governance shall be performed

by a payment system management body (PSMB), which is duly recognized and overseen by

BSP. In the absence of a PSMB, the functions of providing sound governance to the retail

payment system participated in by BSFIs shall be discharged by BSP.

Guidelines on Liquidity Risk Management. On November 3, 2017, the BSP issued Circular No.

981, amending the guidelines on liquidity risk management and the related amendments to the

MORB. Among the highlights of the said changes were the additional guidelines relative to

Foreign Currency Management, Intraday Liquidity Management, Intragroup Liquidity

Management, Collateral Management, Liquidity Stress Testing, Contingency Funding Plans,

Factors to Consider in Developing a Funding Strategy, and Factors to Consider in Developing

Cash Flow Projections. Banks shall have until September 1, 2018 to develop or make appropriate

changes to their policies and procedures, provided that they complete a gap analysis of the

requirements of the said BSP Circular vis-a-vis their existing risk management systems by March

31, 2018.

Enhanced Guidelines in Information Security Management. On November 9, 2017, BSP

issued Circular No. 982, providing enhanced guidelines on information security risk management

(ISRM) of BSFIs in view of the rapidly evolving technology and cyber-threat landscape in which

they operate. The amendments highlight the role of the BSFIs’ board and senior management in

spearheading sound information security governance and strong security culture within their

respective networks. Likewise, BSFIs are mandated to manage information security risks and

exposures within acceptable levels through a dynamic interplay of people, policies, processes,

and technologies following a continuing cycle (i.e. identify, prevent, detect, respond, recover and

test phases). The new guidelines also recognize that BSFIs are at varying levels of cyber-maturity

and cyber-risk exposures which may render certain requirements restrictive and costly vis-à-vis

expected benefits. Thus, the IT profile classification has been expanded from two to three,

namely: “Complex,” “Moderate” and “Simple” to provide greater flexibility in complying with

the requirements

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Guidelines on the Conduct of Stress Testing Exercises. On January 4, 2018, BSP issued

Circular No. 989, which defined minimum prudential requirements on stress testing and

supplement the relevant provisions on stress testing provided under the risk management

guidelines that were earlier issued by BSP. It provides that a board of directors should consider

the results of stress testing exercises in capital and liquidity planning, in setting risk appetite, and

in planning for business continuity management, and, in the case of DSIBs, in developing

recovery plans. These expectations are consistent with the earlier issued guidelines on corporate

governance under Circular No. 969.

Amendments to the Basic Security Deposit Requirements. On March 1, 2018, the BSP issued

Circular No. 998, clarifying the guidelines on the basic security deposit requirements. The

circular provides that, as security for the faithful performance of its trust and other fiduciary

duties, the basic security deposit shall be at least one percent (1%) of the book value of the total

trust, other fiduciary and investment management assets, and at no time shall be less than

P500,000.00; further, as security for the faithful performance of its investment management

activities, the basic security deposit shall be at least one percent of the book value of the total

investment management assets, and at no time less than P500,000.00. The Circular also

prescribes the methodology in determining compliance with the basic security deposit for the

faithful performance of trust and other fiduciary business and investment management activities,

and amends the compliance period to require banks, that are authorized to engage in trust and

other fiduciary business and investment management activities, to comply with the basic security

deposit requirement on a quarterly basis, as well as, at the time of withdrawal, replacement or

redemption of the government securities deposited with the BSP within the quarter period.

Currency Rate Risk Protection program (CRPP Facility) and the Implementing Guidelines. On

September 24, 2018, and October 5, 2018, the BSP issued Circular No. 1014 and 1015,

respectively, revising the guidelines on the CRPP Facility. The CRPP Facility is a non-

deliverable USD/PHP forward contract (NDF) between BSP and a universal/commercial bank in

response to the request of bank clients desiring to hedge their eligible foreign currency

obligations. Transactions under the CRPP facility are considered part of banks' Generally

Authorized Derivatives Activities (GADA). Under the CRPP Facility, only the net difference

between the contracted forward rate and the prevailing spot rate shall be settled in pesos at

maturity of the contract. Should the eligible obligation be denominated in a foreign currency

other than the USD, the CRPP contract shall be denominated in USD equivalent using the

exchange rate indicated in the BSP Reference Exchange Rate Bulletin on deal date. The BSP

shall have supervisory enforcement actions or right to deploy its range of supervisory tools to

promote adherence to the requirements set forth in the guidelines. Any violation of the guidelines,

including willful delay in the submission, non-submission and/or willful making of a false or

misleading statement in the notarized certification required to be submitted therein to the BSP

Sections shall constitute grounds for the imposition on the bank of penalties.

Adoption of Policy Framework on the Grant of Regulatory Relief to Banks/Quasi Banks

Affected by Calamities. On October 10, 2018, the BSP issued Circular No. 1017, which provides

the policy framework on the grant of regulatory relief measures to banks/quasi-banks (QBs)

affected by calamities. Under the framework, banks/QBs may avail of the regulatory relief

packages, including the provision of financial assistance to officers who are affected by the

calamity even in the absence of BSP approved purposes, for a period of one (1) year from the

date of declaration of state of calamity.

Technology and Cyber-Risk Reporting and Notification Requirements. On October 31, 2018,

the BSP issued Circular No. 1019, which amended provisions relating to the technology and

cyber-risk reporting and notification requirements for BSFIs. The amendments were made to

enable the BSP to have ready access to accurate, timely, and actionable information regarding

BSFI’s technology risk profiles as well as the evolving cyber-threat environment for a more

responsive, proactive and effective banking supervision.

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PHILIPPINE TAXATION

The following is a general description of certain Philippine tax aspects of the Bonds. It is based on

the laws, regulations, and administrative rulings in force as of the date of this Offering Circular and

is subject to any changes in law or regulation occurring after such date, which changes can be made

on a retroactive basis. It does not purport to be a comprehensive description of all of the tax

considerations that may be relevant to a decision to purchase, own, or dispose of the Bonds.

Prospective purchasers should consult their tax advisors as to the laws of other applicable

jurisdictions and the specific tax consequences of acquiring, holding, and disposing of the Bonds.

As used in this section, the term “resident alien” refers to an individual whose residence is within the

Philippines but who is not a citizen of the Philippines; a “non-resident alien” is an individual whose

residence is not within the Philippines and who is not a citizen of the Philippines; a non-resident alien

who is actually within the Philippines for an aggregate period of more than 180 days during any

calendar year is considered a “non-resident alien doing business in the Philippines”; otherwise, such

non-resident alien who is actually within the Philippines for an aggregate period of 180 days or less

during any calendar year is considered a “non-resident alien not doing business in the Philippines.” A

“resident foreign corporation” is a foreign corporation engaged in trade or business within the

Philippines; and a “non-resident foreign corporation” is a foreign corporation not engaged in trade or

business within the Philippines. The term “foreign” when applied to a corporation means a

corporation which is not domestic while the term “domestic” when applied to a corporation means a

corporation created or organized in the Philippines or under its laws.

Philippine Taxation

On January 1, 2018, Republic Act No. 10963, otherwise known as the “Tax Reform for Acceleration

and Inclusion” (TRAIN) Act, took into effect. The TRAIN Act amended provisions of the Philippine

Tax Code including provisions on Documentary Stamp Tax, tax on interest income and other

distributions, Estate Tax, and Donor’s Tax.

Taxation of Interest Income

The Philippine Tax Code provides that interest-bearing obligations of Philippine residents are

Philippine sourced income subject to Philippine income tax.

Interest Income on Short-Term Bonds

Interest income on short-term bonds, with maturities of less than five (5) years derived by Philippine

citizens and alien resident individuals from the Bonds is subject to income tax, which is withheld at

source, at the rate of 20% based on the gross amount of interest. Generally, interest on the Bonds

received by non-resident aliens engaged in trade or business in the Philippines is subject to a 20%

final withholding tax while that received by non-resident aliens not engaged in trade or business is

subject to a final withholding tax rate of 25%. Interest income received by domestic corporations and

resident foreign corporations from the Bonds is subject to a final withholding tax rate of 20%. Interest

income received by non-resident foreign corporations from the Bonds is subject to a 30% final

withholding tax.

Interest Income on Long-Term Bonds

A. For Individuals

Interest income on long-term bonds, with maturities of five (5) or more years, may be exempt from

final withholding tax. In order to be exempt, the following characteristics/conditions must be present:

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a) The investor is an individual citizen (resident or non-resident) or resident alien or

non-resident alien engaged in trade or business in the Philippines;

b) The long-term bonds should be under the name of the individual;

c) The long-term bonds must be in the form of savings, common or individual trust

funds, deposit substitutes, investment management accounts and other investments

evidenced by certificates in such form prescribed by the BSP;

d) The long-term bonds must be issued by banks only and not by other entities or

individuals;

e) The long-term bonds must have a maturity period of not less than five (5) years;

f) The long-term bonds must be in denominations of Ten Thousand Pesos (P10,000)

and other denominations as may be prescribed by the BSP;

g) The long-term bonds should not be terminated by the original investor before the fifth

(5th) year, otherwise they shall be subjected to the graduated rates of 5%, 12% or

20% on interest income earnings; and

h) Except those specifically exempted by law or regulations, any other income such as

gains from trading, foreign exchange gain shall not be covered by income tax

exemption.

For interest income derived by individuals investing in common or individual trust funds or

investment management accounts, the following additional characteristics/conditions must all be

present:

a) The investment must be actually held/managed by the bank for the named individual

at least five (5) years without interruption;

b) The underlying investments of the common or individual trust account or investment

management accounts must comply with the requirements of Section 22 (FF) of the

NIRC of 1997, as amended, as well as the requirements mentioned above;

c) The common or individual trust account or investment management account must

hold on to such underlying investment in continuous and uninterrupted period for at

least five (5) years.

If such long-term bond is pre-terminated before the fifth (5th) year, it shall be subject to a final

withholding tax at the rates prescribed to be deducted and withheld from the proceeds based on the

length of time that the instrument was held by the taxpayer in accordance with the following

schedule:

Holding Period Rate

Four (4) years to less than five (5) years 5%

Three (3) years to less than four (4) years 12%

Less than three (3) years 20%

For nonresident alien not engaged in trade or business in the Philippines, interest income received

from long-term bonds shall be subject to a Final Withholding Tax (FWT) at the rate of twenty five

percent (25%) pursuant to Section 25 (B) of the NIRC of 1997, as amended.

A. For Corporations

Interest income derived by domestic and resident foreign corporations from deposit substitutes,

offered to the public, is subject to FWT at the rate of twenty percent (20%) pursuant to Sections 27

(D) (1) and 28 (A) (7) (a) of the NIRC of 1997, as amended, payable upon original issuance of the

deposit substitutes. While interest income received by domestic and resident foreign corporation

from long-term deposit or investment, which are not offered to the public, shall be subject to regular

income tax at the rate of thirty percent (30%) pursuant to Sections 27 (A) and 28 (A) (1) of the NIRC

of 1997, as amended.

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As used herein: “deposit substitutes”, as defined in Section 22 (Y) of the NIRC of 1997, as amended,

means an alternative form of obtaining funds from the public other than deposits, through the

issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the

purpose of re-lending or purchasing of receivables and other obligations, or financing their own needs

or the needs of their agent or dealer.

"Public", is defined as borrowing from twenty (20) or more individual or corporate lenders at any one

time.

For non-resident foreign corporations, interest income received from long-term bonds, shall be

subject to a FWT at the rate of thirty percent (30%) pursuant to Section 28 (B)(1) of the NIRC of

1997, as amended.

The foregoing rates are subject to further reduction by any applicable tax treaties in force between the

Philippines and the country of residence of the non-resident owner. Most tax treaties to which the

Philippines is a party generally provide for a reduced tax rate of 15% in cases where the interest

which arises in the Philippines is paid to a resident of the other contracting state. However, most tax

treaties also provide that reduced withholding tax rates shall not apply if the recipient of the interest

who is a resident of the other contracting state, carries on business in the Philippines through a

permanent establishment and the holding of the relevant interest-bearing instrument is effectively

connected with such permanent establishment.

Early Redemption Option

Under the Terms and Conditions, if any payment of principal or interest due under the Bonds becomes

subject to additional or increased taxes other than the taxes and rates of such taxes prevailing as of the

Issue Date as a result of any change in, or amendment to, the laws, rules or regulations of the Republic

of the Philippines or any political subdivision or any authority thereof or therein having power to tax,

or any change in the application or official interpretation of such laws, rules or regulations (including

but not limited to any decision by a court of competent jurisdiction) which change or amendment

becomes effective on or after the Issue Date, and such additional or increased rate of such tax cannot

be avoided by the use of reasonable measures available to the Bank, the Bank, subject to the BSP

Rules, shall have the option (but not the obligation) to pre-terminate and redeem all, but not in part,

the Bonds on any Interest Payment Date before Maturity Date at the Early Redemption Amount.

We suggest that the investor seek its own tax advisors to determine its tax liabilities or exposures

given that the Bank does not have gross-up obligations in case of changes in any applicable law, rule

or regulation or in the terms and/or interpretation or administration thereof or a new applicable law

should be enacted, issued or promulgated, which shall subject payments by the Bank to additional or

increased taxes, other than the taxes and rates of such taxes prevailing as of the Issue Date.

Tax-Exempt Status or Entitlement to Preferential Tax Rate

The tax authorities have prescribed certain procedures for availment of tax treaty relief on interest

under Revenue Memorandum Order No. 8-2017. The preferential treaty rates for interest shall be

applied and used outright by the withholding agent/income payer upon submission of the Certificate

of Residence for Tax Treaty Relief (CORTT) Form by the non-resident before interest is credited.

The CORTT Form is made up of two parts: Part I states the information of the income

recipient/beneficial owner and the certification from the competent tax authority or authorized tax

office of country of residence. Part II includes the information of the withholding agent/income

payor, details of income payment and the affixture of signatures by both the non-resident income

recipient/beneficial owner and the income payor.

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The withholding agent/income payor shall submit an original copy of the duly accomplished CORTT

Form within thirty (30) days after the remittance of the withholding tax to the BIR. In the case of

staggered payment of interest, the withholding agent shall submit an updated Part II of the CORTT

Form within 30 days after payment of withholding taxes.

The BIR will no longer issue a ruling for the said CORTT Form submissions but the compliance

check and post reporting validation on withholding tax obligations and confirmation of

appropriateness of availment of treaty benefits shall be part of BIR’s regular audit investigations.

For claims of tax exemption, BIR Revenue Memorandum Circular No. 8-2014 mandates the Bank, as

a withholding agent, to require from individuals and entities claiming tax exemption a copy of a valid,

current, and subsisting tax exemption certificate or ruling before payment of the related income. The

tax exemption certificate or ruling must explicitly recognize the tax exemption, as well as the

corresponding exemption from withholding tax. Failure on the part of the taxpayer to present the said

tax exemption certificate of ruling shall subject him to the payment of the appropriate withholding

taxes due on the transaction.

If the Bank withheld taxes, or withheld the regular rate of tax imposed pursuant to the Philippine Tax

Code on interest, the concerned bondholder may file a claim for a refund from the Philippine taxing

authorities on the basis of a tax exemption or applicable tax treaty.

Philippine Tax Code.

Value-Added Tax

Gross receipts arising from the sale of the Bonds in the Philippines by dealers in securities shall be

subject to a 12.0% value-added tax. The term “gross receipt” means gross selling price less

acquisition cost of the Bonds sold.

Gross Receipts Tax

Bank and non-bank financial intermediaries performing quasi-banking functions are subject to gross

receipts tax on gross receipts derived from sources within the Philippines in accordance with the

following schedule:

On interest, commissions and discounts from lending activities as well as income from financial

leasing, on the basis of remaining maturities of instruments from which such receipts are derived:

Maturity period is five years or less 5%

Maturity period is more than five years 1%

Non-bank financial intermediaries not performing quasi-banking functions doing business in the

Philippines are likewise subject to gross receipts tax. Gross receipts of such entities derived from

sources within the Philippines from interests, commissions and discounts from lending activities are

taxed in accordance with the following schedule based on the remaining maturities of the instruments

from which such receipts are derived:

Maturity period is five years or less 5%

Maturity period is more than five years 1%

In case the maturity period of the instruments held by banks, non-bank financial intermediaries

performing quasi-banking functions and non-bank financial intermediaries not performing quasi-

banking functions is shortened through pre-termination, then the maturity period shall be reckoned to

end as of the date of pretermination for purposes of classifying the transaction and the correct rate

shall be applied accordingly.

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Net trading gains realized within the taxable year on the sale or disposition of the Bonds by banks and

nonbank financial intermediaries performing quasi-banking functions shall be taxed at 7%.

Documentary Stamp Taxes

A documentary stamp tax is imposed upon the issuance of debt instruments issued by Philippine

companies, such as the Bonds, at the rate of ₱1.50 for each ₱200.00, or fractional part thereof, of the

issue price of such debt instruments; provided that, for debt instruments with terms of less than one

year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with

the ratio of its term in number of days to 365 days.

The documentary stamp tax is collectible wherever the document is made, signed, issued, accepted, or

transferred, when the obligation or right arises from Philippine sources, or the property is situated in

the Philippines. Any applicable documentary stamp taxes on the original issue shall be paid by the

Bank for its own account.

Taxation on Gains upon the Sale or Other Disposition of the Bonds

Income Tax

Any gain realized from the sale, exchange or retirement of bonds will, as a rule, form part of the gross

income of the sellers, for purposes of computing the relevant taxable income subject to ordinary

income tax rates (at graduated rates from 20% to 35% for individuals and 30% for domestic and

resident foreign corporations). On the other hand, gains realized by non-residents from the sale or

transfer of debt instruments, such as Bonds, are subject to final withholding tax at the rate of (i) 25%,

if the holder is a non-resident alien not engaged in trade or business within the Philippines, or (ii)

30%, if the holder is a non-resident foreign corporation. If the bonds are sold by a seller, who is an

individual and who is not a dealer in securities, who has held the bonds for a period of more than

twelve (12) months prior to the sale, only 50% of any capital gain will be recognized and included in

the sellers’ gross taxable income.

However, under the Philippine Tax Code, any gain realized from the sale, exchange or retirement of

bonds, debentures and other certificates of indebtedness with an original maturity date of more than

five years (as measured from the date of issuance of such bonds, debentures or other certificates of

indebtedness) shall not be subject to income tax. Moreover, any gain arising from such sale,

regardless of the original maturity date of the bonds, may be exempt from income tax pursuant to

various income tax treaties to which the Philippines is a party, and subject to procedures prescribed

by the BIR for the availment of tax treaty benefits.

Estate and Donor’s Tax

The transfer by a deceased person, whether a Philippine resident or a non-Philippine resident, to his

heirs of the Bonds shall be subject to an estate tax which is levied on the net estate of the deceased at

a uniform rate of 6%. A Bondholder shall be subject to donor’s tax based on the transfer of the Bonds

by way of gift or donation at a uniform rate of 6% on the basis of the total gifts in excess of

₱250,000.00 made during a calendar year for both individuals and corporate holders, whether the

donor is a stranger or not.

The estate or donor’s taxes payable in the Philippines may be credited with the amount of any estate

or donor's taxes imposed by the authority of a foreign country, subject to limitations on the amount to

be credited, and the tax status of the donor. The estate tax and the donor‘s tax, in respect of the

Bonds, shall not be collected (a) if the deceased, at the time of death, or the donor, at the time of the

donation, was a citizen and resident of a foreign country which, at the time of his death or donation,

did not impose a transfer tax of any character in respect of intangible personal property of citizens of

the Philippines not residing in that foreign country; or (b) if the laws of the foreign country of which

178

the deceased or donor was a citizen and resident, at the time of his death or donation, allows a similar

exemption from transfer or death taxes of every character or description in respect of intangible

personal property owned by citizens of the Philippines not residing in the foreign country.

In case the Bonds are transferred for less than an adequate and full consideration in money or money's

worth, the amount by which the fair market value of the Bonds exceeded the value of the

consideration may be deemed a gift and may be subject to donor’s taxes. However, a sale, exchange,

or other transfer made in the ordinary course of business (a transaction which is bona fide, at arm’s

length, and free from any donative intent), will be considered as made for an adequate and full

consideration in money or money’s worth.

Documentary Stamp Tax

No documentary stamp tax is imposed on the subsequent sale or disposition of the Bonds, trading the

Bonds in a secondary market or through an exchange. However, if the transfer constitutes a renewal

of the Bonds, documentary stamp tax is payable anew.

Taxation Outside the Philippines

The tax treatment of non-resident holders in jurisdictions outside the Philippines may vary depending

on the tax laws applicable to such holder by reason of domicile or business activities and such holder’s

particular situation. This Offering Circular does not discuss the tax considerations on such non-resident

holders under laws other than those of the Philippines.

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DISTRIBUTION AND SALE

Method of Distribution

The Bonds are being issued subject to the Terms and Conditions, as well as BSP Circular No. 975

(Series of 2017) and BSP Circular No. 1010 (Series of 2018) and other related circulars and

issuances, as may be amended from time to time.

The Bonds are being issued by the Bank with HSBC and ING as Lead Arrangers, and to the extent

allowed under the Philippine laws and regulations, the Bank, as Selling Agents, Development Bank

of the Philippines – Trust Banking Group as Trustee and Philippine Depository & Trust Corp. as

Registrar and Paying Agent.

No action has been or will be taken by the Bank or the Lead Arrangers in any jurisdiction (other than

the Philippines), that would permit a public offering of any of the Bonds, or possession or distribution

of this Offering Circular, or any amendment or supplement thereto issued in connection with the

offering of the Bonds, in any country or jurisdiction where action for that purpose is required.

The Lead Arrangers are required to comply with all laws, regulations and directives as may be

applicable in the Philippines, including without limitation any regulations issued by the BSP, in

connection with the offering and purchase of the Bonds and any distribution and intermediation

activities, whether in the primary or secondary markets, carried out by or on behalf of the Lead

Arrangers in connection therewith.

Each of the Lead Arrangers is a third-party in relation to the Bank, such that, (i) it has no

subsidiary/affiliate relationship with the Bank; and (ii) it is not related in any manner to the Bank as

would undermine the objective conduct of due diligence on the Bank. The Registrar and Paying

Agent and the Trustee are likewise third-parties in relation to the Bank, such that, (i) they have no

subsidiary/affiliate relationship with Bank; and (ii) they are not related in any manner to Bank as

would undermine its independence.

If a jurisdiction requires that the offering be made by a licensed broker or dealer and the Selling

Agents or any affiliate of the Selling Agents is a licensed broker or dealer in that jurisdiction, the

offering shall be deemed to be made by that Selling Agent or its affiliate on behalf of the Issuer in

such jurisdiction.

The Bonds are newly issued securities for which there currently is no market. Metropolitan Bank &

Trust Company (the “Market Maker”) has committed to provide live bids good for the minimum

denomination under the Terms and Conditions, and a cumulative trading commitment per trading

day, as required under PDEx Trading Rules, Conventions, and Guidelines. The Lead Arrangers are

not obligated to make a market for the Bonds. Accordingly, no assurance can be given as to the

development or liquidity of any market for the Bonds

The Lead Arranger or their affiliates may purchase the Bonds for their own account or enter into

secondary market transactions or derivative transactions relating to the Bonds, including, without

limitation, purchase, sale (or facilitation thereof), stock borrowing or credit or equity-linked

derivatives such as asset swaps, repackagings and credit default swaps, at the same time as the

offering of the Bonds. Such transactions may be carried out as bilateral trades with selected

counterparties and separately from any existing sale or resale of the Bonds to which this Offering

Circular relates (notwithstanding that such selected counterparties may also be a purchaser of the

Bonds). As a result of such transactions, the Lead Arrangers or their affiliates may hold long or short

positions relating to the Bonds. The Lead Arrangers and their affiliates may also engage in investment

or commercial banking and other dealings in the ordinary course of business with the Issuer or its

affiliates from time to time and may receive fees and commissions for these transactions. In addition

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to the transactions noted above, each of the Lead Arrangers and its affiliates may, from time to time

after completion of the offering of the Bonds, engage in other transactions with, and perform services

for, the Issuer or its affiliates in the ordinary course of their business. The Lead Arrangers or their

affiliates may also purchase Bonds for asset management and/or proprietary purposes but not with a

view to distribution or may hold Bonds on behalf of clients or in the capacity of investment advisors.

While the Lead Arrangers and their affiliates have policies and procedures to deal with conflicts of

interests, any such transactions may cause the Lead Arrangers or their affiliates or their clients or

counterparties to have economic interests and incentives which may conflict with those of an investor

in the Bonds. The Lead Arrangers may receive returns on such transactions and has no obligation to

take, refrain from taking or cease taking any action with respect to any such transactions based on the

potential effect on a prospective investor in the Bonds.

Applications to Purchase the Bonds during the Offer Period

Applicants may purchase the Bonds during the Offer Period by submitting fully and duly

accomplished Application to Purchase (ATP) forms, in quadruplicate, together with all the required

attachments and the corresponding payments to the Selling Agent from whom such application was

obtained no later than 12:00 noon of the last day of the Offer Period. ATPs received after said date or

without the required attachments will be rejected. Only ATPs which are accompanied by payment in

the form of cash, manager’s checks made out to the order of “Union Bank of the Philippines”, debit

instructions or such other forms of instructions that are acceptable to the relevant Selling Agent and

which cover the entire purchase price shall be accepted.

In addition to duly executed ATP forms, each applicant shall submit the following documents to the

Selling Agents:

(i) Documents to be provided by individuals:

(1) either an original or a photocopy of at least one valid and subsisting identification

card as set out in the ID matrix attached as Annex A to the Terms and Conditions;

(2) two fully-executed specimen signature cards in the form attached to the ATP; and

(3) duly accomplished client suitability assessment forms; and

(4) in the case of foreign individual applicants, copies, duly certified by an authorized

officer of the issuing agency, of an Alien Certificate of Registration duly issued by

the Philippine Bureau of Immigration or certificate of residence issued by the BIR or

other relevant taxation authority.

(ii) Documents to be provided by corporate and institutional applicants:

(1) two copies, certified by the Securities and Exchange Commission (or equivalent

regulatory body) or corporate secretary of the applicant, of the certificate of

incorporation, articles of incorporation and by-laws or equivalent charter or

constitutive documents of the applicant, as amended to date;

(2) two copies, certified by the corporate secretary or other appropriate officer of the

applicant, of the resolutions adopted by the applicant’s board of directors or

equivalent body, authorizing the applicant to purchase the Bonds, and certifying

names and specimen signatures of the applicant’s duly authorized signatories for that

purpose;

(3) two fully executed specimen signature cards of authorized signatories in the form

attached to the ATP, together with either an original or a photocopy of at least one

valid and subsisting identification card as set out in the ID matrix attached as Annex

A to the Terms and Conditions;

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(4) a list, certified by the Corporate Secretary of the applicant, of the natural persons who

are the ultimate beneficial owners of the applicant; and

(5) such other documentary requirements as may be reasonably required by the Bank,

including, without limit, an undertaking to indemnify the Bank in the event of

changes to the corporate signatories, duly completed Anti-Money Laundering and

Combating Terrorist Financing Questionnaire for locally-registered entities,

certification of third party reliance for trust departments.

(iii) Additional documents to be provided by Tax-Exempt Bondholders

At least two sets of the following:

(1) A current and valid certified true copy of the tax exemption certificate, ruling, or

opinion issued by the BIR confirming the Bondholder’s exemption from taxation of

interest on fixed income securities;

(2) An original of the duly notarized undertaking declaration warranting its tax-exempt

status or entitlement to reduced treaty rates, undertaking to immediately notify the

Bank and the Registrar and Paying Agent of any suspension or revocation of its tax

exemption or treaty privileges, and agreeing to indemnify and hold the Bank and the

Registrar and Paying Agent free and harmless against any claims, actions, suits and

liabilities resulting from the non-withholding or reduced withholding the required tax

substantially in the form attached to the Registry and Paying Agency Agreement;

(3) For those who are claiming benefits under tax treaties, duly accomplished Certificate

of Residence for Tax Treaty Relief (CORTT) Form (Part I and Part II) or the

prescribed certificate of residency of the country of their residence with the CORTT

Form Part I (A, B and C) and Part II in accordance with the relevant BIR regulations;

and

(4) Such other documentary requirements as may be reasonably required by the Registrar

and the Selling Agents as proof of the Eligible Bondholders’ tax-exempt status or as

may be required under the applicable regulations of the relevant taxing or other

authorities.

In addition, the Lead Arrangers and the Selling Agents may each request such other documents from

an applicant in order to establish his/her/its eligibility as Bondholder of the Bonds, his/her/its

exemption from taxation of interest income from fixed income securities or to comply with applicable

requirements of the AMLA or the BSP Rules.

Allocation and Issue of the Bonds

Applications to purchase the Bonds shall be subject to the availability of the Bonds and acceptance by

the Bank. The Lead Arrangers, in consultation with the Bank, may accept, reject, scale down or

reallocate any application to purchase the Bonds applied for.

In the event that payment supporting any ATP is returned by the drawee bank for any reason

whatsoever, the ATP shall be automatically cancelled and any prior acceptance of the ATP shall be

deemed revoked. If any ATP is rejected or accepted in part only, the corresponding portion of the

tendered purchase price will be returned without interest by the relevant Selling Agent.

On the Issue Date, the Selling Agents shall, on behalf of the Bank, accept the relevant ATPs. The

acceptance of an ATP shall ipso facto convert such ATP into a purchase agreement between the Bank

and the relevant Bondholder.

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The Registrar shall rely solely on the Sales Report submitted by the Selling Agents in its preparation

of the Registry and the issuance of the Registry Confirmation for each Bondholder. Within seven (7)

Banking Days from the Issue Date, the Registrar shall distribute the Registry Confirmations directly

to the Holders in the mode elected by the Bondholder as indicated in the Sales Report.

Transactions in the Secondary Market

All secondary transfers of the Bonds shall be coursed through or effected using the trading facilities

of the Exchange, subject to compliance with the applicable rules of such Exchange and the payment

by the Bondholder of applicable fees to the Exchange and the Registrar and Paying Agent. All

transfers of the Bonds shall only be effective upon the receipt by the Registrar of a duly accomplished

Trade-Related Transfer Form or Non-Trade Related Transfer Form (as applicable) in the forms

attached to the Registry and Paying Agency Agreement or other relevant PDEx Trading Participant

and other required documentation and the registration and recording by the Registrar of such

assignment or transfer in the Registry; provided, that no such registration and recording shall be

allowed during the Closed Period.

The date of registration as appearing in the Registry shall be treated as the date of transfer with such

transfer and issuance of the Registry Confirmation to be made, in any case only upon, and within five

Banking Days from, the presentation of the following documents:

(a) the relevant Registry Confirmation;

(b) Tax Exempt/Treaty Documents, if applicable, in accordance with the Terms and Conditions;

(c) the relevant Trade-Related Transfer Form or Non-Trade Related Transfer Form, as the case

may be, duly accomplished by the transferor Bondholder and endorsed by the relevant PDEx

Trading Participant, substantially in the form agreed upon between the Bank and the

Registrar;

(d) the Investor Registration Form duly accomplished by the transferee Bondholder and endorsed

by the relevant PDEx Trading Participant, in the form agreed upon between the Bank and the

Registrar;

(e) written consent of the transferee Bondholder to be bound by the terms of the Bonds and the

Registry Rules, in the form agreed upon between the Bank and the Registrar; and

(f) such documents as may be reasonably required by the Registrar to be submitted by the

transferee Bondholder in support of the transfer or assignment of the Bonds in its favor.

Where the Bonds become listed on PDEx, all trade transactions must be coursed through PDEx in

accordance with the PDEx Rules and conventions.

Transfers of the Tranche of the Bonds made in violation of the restrictions on transfer under the

Terms and Conditions shall be null and void and shall not be registered by the Registrar.

Interest and Principal Payment

On the relevant Payment Date, the Paying Agent shall, upon receipt of the corresponding funds from

the Bank, make available to the Bondholders the amounts net of taxes and fees (if any), by way of

direct credits to the bank accounts through the identified Cash Settlement Banks by the Holders as

reflected in the Sales Report.

Schedule of Registry Fees

The Registrar and Paying Agent shall be entitled to charge the Holders and/or their counterparties

such reasonable fees as the Registrar and Paying Agent shall prescribe in connection with the services

183

that the Registrar and Paying Agent shall perform, such as, but not limited to, the opening and

maintaining of accounts in favor of the Bondholders, the maintenance of the records of the

Bondholder in the Registry, the issuance, cancellation, and replacement, when proper, of the Registry

Confirmations, and the transfers of the Bonds from a purchaser or seller/transferor of the Bonds.

Transfer Fees in the Secondary Trading

1. Transfer Fee of P100.00 to be paid each by the transferring Bondholder and the

buyer/transferee prior to the registration of any transfer of the Bonds in the Registry. Either

side may opt to pay the full charge of P200.00 per transfer. For transfers from a registry

account to the depository, the full charge of P200.00 per transfer shall be charged to the

transferring bondholder.

2. Account Opening Fee of P100.00 to be paid upfront by a transferee who has no existing

account in the Registry

3. Such transaction fees as PDTC shall prescribe for effecting electronic settlement instructions

received from the PDSClear System if so duly authorized by a bondholder

Transfer Fees due to Non-Trade Transactions

1. Transaction Fee of P100.00 to be paid each by the transferring bondholder and the requesting

party prior to the registration of any transfer of the Bonds in the Registry. Either side may opt

to pay the full charge of P200.00 per transfer.

2. Transaction Fee of P500.00 per side plus legal cost, for non-intermediated transfers (e.g.

inheritance, donation, pledge).

Other Fees charged to the Bondholder

These fees pertain to instances when PDTC is requested to undertake the printing of non-standard

reports for the Bondholders for which appropriate fees are charged to cover the related overhead costs.

The fee may vary depending on the type of report, as follows:

1. Fee of P200.00 to be paid upon each application for a certification request of holding.

2. Fee of P50.00 to be paid upon each application for a monthly statement of account (in

addition to the quarterly statement of account to be issued by the Registrar to each

Bondholder free of charge).

3. Fee of P50.00 to be paid upon application for the issuance of a replacement Registry

Confirmation for reasons such as mutilated, destroyed, stolen or lost.

4. The fee for Special Reports varies depending on request.

a. Report without back-up file restoration is subject to a fee of P100.00 per request, plus

P20.00 per page.

b. Report requiring back-up file restoration is subject to a fee of P300.00 per request,

plus P20.00 per page.

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INDEX TO FINANCIAL STATEMENTS

AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE BANK AS OF AND FOR THE

YEARS ENDED DECEMBER 31, 2016, 2017, AND 2018

Union Bank of the Philippines andSubsidiaries

Consolidated Financial StatementsDecember 31, 2018and Year Ended December 31, 2018(with Comparative Figures for 2017 and 2016)

and

Independent Auditor’s Report

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INDEPENDENT AUDITOR’S REPORT

The Board of Directors and StockholdersUnion Bank of the Philippines

Report on the Consolidated and Parent Bank Financial Statements

Opinion

We have audited the consolidated financial statements of Union Bank of the Philippines and itssubsidiaries (the Group) and the parent bank financial statements of Union Bank of the Philippines (theParent Bank), which comprise the consolidated and parent bank statements of financial position as atDecember 31, 2018, and the consolidated and parent bank statements of income, consolidated and parentbank statements of comprehensive income, consolidated and parent bank statements of changes in capitalfunds and consolidated and parent bank statements of cash flows for the year ended December 31, 2018,and notes to the consolidated and parent bank financial statements, including a summary of significantaccounting policies.

In our opinion, the accompanying consolidated and parent bank financial statements present fairly, in allmaterial respects, the financial position of the Group and the Parent Bank as at December 31, 2018, andtheir financial performance and their cash flows for the year ended December 31, 2018 in accordancewith Philippine Financial Reporting Standards (PFRSs).

Basis for Opinion

We conducted our audit in accordance with Philippine Standards on Auditing (PSAs). Ourresponsibilities under those standards are further described in the Auditor’s Responsibilities for the Auditof the Consolidated and Parent Bank Financial Statements section of our report. We are independent ofthe Group and the Parent Bank in accordance with the Code of Ethics for Professional Accountants in thePhilippines (Code of Ethics) together with the ethical requirements that are relevant to our audit of theconsolidated and parent bank financial statements in the Philippines, and we have fulfilled our otherethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that theaudit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in ouraudit of the consolidated and parent bank financial statements of the current period. These matters wereaddressed in the context of our audit of the consolidated and parent bank financial statements as a whole,and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For eachmatter below, our description of how our audit addressed the matter is provided in that context.

SyCip Gorres Velayo & Co.6760 Ayala Avenue1226 Makati CityPhilippines

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

BOA/PRC Reg. No. 0001, October 4, 2018, valid until August 24, 2021SEC Accreditation No. 0012-FR-5 (Group A), November 6, 2018, valid until November 5, 2021

A member firm of Ernst & Young Global Limited

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We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of theConsolidated and Parent Bank Financial Statements section of our report, including in relation to thesematters. Accordingly, our audit included the performance of procedures designed to respond to ourassessment of the risks of material misstatement of the consolidated and parent bank financial statements.The results of our audit procedures, including the procedures performed to address the matters below,provide the basis for our audit opinion on the accompanying consolidated and parent bank financialstatements.

Applicable to the Audit of the Consolidated and Parent Bank Financial Statements

Adoption of PFRS 9, Financial Instruments (2014)

On January 1, 2018, the Group and the Parent Bank adopted the final version of PFRS 9, FinancialInstruments (2014 version), which replaced PAS 39, Financial Instruments: Recognition andMeasurement and the previous versions of PFRS 9 (2009, 2010 and 2013 versions). The Group and theParent Bank have previously adopted the 2010 version of PFRS 9 with initial application date ofJanuary 1, 2014. PFRS 9 (2014) introduces a forward-looking expected credit loss model to assessimpairment on debt financial assets not measured at fair value through profit or loss and loancommitments and financial guarantee contracts. The Group and the Parent Bank used the modifiedretrospective approach in adopting PFRS 9 (2014).

The Group’s and the Parent Bank’s adoption of the ECL model is significant to our audit as it involvesthe exercise of significant management judgment. Key areas of judgment include: segmenting theGroup’s and the Parent Bank’s credit risk exposures; determining the method to estimate ECL; definingdefault; identifying exposures with significant deterioration in credit quality; determining assumptions tobe used in the ECL model such as the counterparty credit risk rating, the expected life of the financialasset and expected recoveries from defaulted accounts; and, incorporating forward-looking information(called overlays) in calculating ECL.

Refer to Notes 2 and 20 of the consolidated and parent bank financial statements for the disclosure on thetransition adjustments and details of the allowance for credit losses using the ECL model.

Audit Response

We obtained an understanding of the methodologies and models used for the Group’s and the ParentBank’s different credit exposures and assessed whether these considered the requirements of PFRS 9 toreflect an unbiased and probability-weighted outcome, and to consider time value of money and the bestavailable forward-looking information.

We (a) assessed the Group’s and the Parent Bank’s segmentation of its credit risk exposures based onhomogeneity of credit risk characteristics; (b) tested the definition of default and significant increase incredit risk criteria against historical analysis of accounts and credit risk management policies andpractices in place; (c) tested the Group’s and the Parent Bank’s application of internal credit risk ratingsystem by reviewing the ratings of sample credit exposures; (d) tested loss given default by inspecting

A member firm of Ernst & Young Global Limited

*SGVFS032841*

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historical recoveries and related costs, write-offs and collateral valuations; (e) tested exposure at defaultconsidering outstanding commitments and repayment scheme; (f) checked the reasonableness of forward-looking information used for overlay through statistical test and corroboration using publicly availableinformation and our understanding of the Group’s and the Parent Bank’s lending portfolios and broaderindustry knowledge; and, (g) tested the effective interest rate used in discounting the expected loss.

Further, we checked the data used in the ECL models by reconciling data from source system reports tothe data warehouse and from the data warehouse to the loss allowance models and financial reportingsystems. To the extent that the loss allowance analysis is based on credit exposures that have beendisaggregated into subsets of debt financial assets with similar risk characteristics, we traced or re-performed the disaggregation from source systems to the loss allowance analysis. We also assessed theassumptions used where there are missing or insufficient data.

We recalculated impairment provisions on a sample basis. We checked the appropriateness of thetransition adjustments as at January 1, 2018 and reviewed the completeness of the disclosures made in theconsolidated and parent bank financial statements.

We involved our internal specialists in the performance of the above procedures.

Valuation of Investment Properties at Fair Value

The Group accounts for its investment properties using the fair value model. Investment propertiesconsist of land, buildings and related improvements. The determination of the fair values of theseproperties involves significant management judgment in the use of assumptions and estimations. Thevaluation also requires the assistance of external appraisers whose calculations depend on certainassumptions, such as sales and listings of comparable properties registered within the vicinity andadjustments to sales price based on internal and external factors. Thus, we considered the valuation ofinvestment properties as a key audit matter.

The disclosures relating to fair value measurement of investment properties and the details of investmentproperties are included in Notes 7 and 17 to the consolidated and parent bank financial statements.

Audit Response

We evaluated the competence, capabilities and qualifications of the external appraisers by consideringtheir qualifications, experience and reporting responsibilities. We performed an understanding andreviewed the methodology and assumptions used in the valuation of investment properties. We assessedthe methodology adopted by referencing common valuation models. We reviewed the relevantinformation supporting the sales and listings of comparable properties and the adjustments made to thesales price. We also checked the mathematical accuracy of the calculations.

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Applicable to the Audit of the Consolidated Financial Statements

Impairment testing of goodwill

Under PFRS, the Group performs testing of goodwill for impairment annually or more frequently ifevents or changes in circumstances indicate that the carrying values may be impaired. The Group’simpairment assessment requires significant judgement and is based on management’s assumptions,specifically on revenue growth rate, discount rate and long-term growth rate. The disclosures in relationto the cash-generating units (CGUs) to which the goodwill is allocated and the Group’s impairmentassessment are included in Notes 3 and 18 to the consolidated financial statements.

Audit Response

We involved our internal specialist in evaluating the methodologies and the assumptions used incalculating the value-in-use (VIU) of the CGUs. We compared the key assumptions used such as revenuegrowth rate against the historical financial performance and the specific plans for the CGUs. In addition,we compared the long-term growth rate against the industry and market outlook and other relevantexternal data. We also tested the parameters used in the determination of the discount rate against marketdata.

Determination of purchase price allocation in relation to business acquisitions

The Group determined the provisional fair values of identifiable assets and liabilities and the relatedprovisional goodwill from the business acquisitions of Philippine Resources Savings Bank andPETNET, Inc., which were acquired in June 2018 and December 2018, respectively. The determinationof provisional fair values required significant management judgment and is based on estimates, whichinclude the determination of the fair value of loans and receivables using the discounted cash flowmethodology and the fair value of property and equipment and investment properties using valuationtechniques that take into account recent transaction prices for similar properties and economic conditionsprevailing at the time the valuations were made. Accordingly, this requires our significant attention in the2018 audit.

The Group’s disclosures about the fair value determination of the identifiable assets and liabilitiesacquired and the details of the business acquisitions are included in Notes 3 and 15 to the consolidatedfinancial statements.

Audit Response

We obtained the related fair values of identifiable assets and liabilities of the acquired entities. Weperformed an understanding and reviewed the methodology and assumptions used in the determination ofthe fair value, particularly for the loans and receivables, property and equipment and the investmentproperties. For loans and receivables, we checked the reasonableness of forecasted cash flows ofselected loans in reference to the contractual cash flows and the borrower’s current financial conditionand ability to pay the loan. We also checked whether the discount rate represents the Group’s current

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incremental lending rate for similar type of loans and receivables. For property and equipment andinvestment properties, we evaluated the competence, capabilities and qualifications of the externalappraisers by considering their qualifications, experience and reporting responsibilities. We performed anunderstanding and reviewed the methodology and assumptions used in the valuation of the property andequipment and investment properties. We assessed the methodology adopted by referencing commonvaluation models. We reviewed the relevant information supporting the sales and listings of comparableproperties and the adjustments made to the sales price. We checked the mathematical accuracy of theprovisional purchase price allocation and reviewed the presentation and disclosures in the consolidatedfinancial statements.

Other Matter

The Group and Parent Bank financial statements as of December 31, 2017 and 2016, and for the yearsthen ended were audited by another auditor whose report dated February 23, 2018 expressed anunqualified opinion on those consolidated and parent bank financial statements. As part of our audit ofthe 2018 consolidated and parent bank financial statements, we also audited the adjustments described inNote 2 that were applied to the 2017 and 2016 consolidated and parent bank financial statements to comeup with the consolidated and parent bank statements of financial position as at January 1, 2017 presentedherein as corresponding figures. In our opinion, such adjustments are appropriate and have been properlyapplied. We were not engaged to audit, review, or apply any procedures to the 2017 and 2016consolidated and parent bank financial statements other than with respect to the adjustments, andaccordingly, we do not express an opinion or any other form of assurance on the 2017 and 2016consolidated and parent bank financial statements taken as a whole.

Other Information

Management is responsible for the other information. The other information comprises the informationincluded in the SEC Form 20-IS (Definitive Information Statement), SEC Form 17-A and Annual Reportfor the year ended December 31, 2018, but does not include the consolidated and parent bank financialstatements and our auditor’s report thereon. The SEC Form 20-IS (Definitive Information Statement),SEC Form 17-A and Annual Report for the year ended December 31, 2018 are expected to be madeavailable to us after the date of this auditor’s report.

Our opinion on the consolidated and parent bank financial statements does not cover the otherinformation and we will not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated and parent bank financial statements, our responsibility isto read the other information identified above when it becomes available and, in doing so, considerwhether the other information is materially inconsistent with the consolidated and parent bank financialstatements or our knowledge obtained in the audits, or otherwise appears to be materially misstated.

Responsibilities of Management and Those Charged with Governance for the Consolidated andParent Bank Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated and parent bankfinancial statements in accordance with PFRSs, and for such internal control as management determinesis necessary to enable the preparation of consolidated and parent bank financial statements that are free

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from material misstatement, whether due to fraud or error.In preparing the consolidated and parent bankfinancial statements, management is responsible for assessing the Group’s and Parent Bank’s ability tocontinue as a going concern, disclosing, as applicable, matters related to going concern and using thegoing concern basis of accounting unless management either intends to liquidate the Group and the ParentBank or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s and Parent Bank financialreporting process.

Auditor’s Responsibilities for the Audit of the Consolidated and Parent Bank Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated and parent bankfinancial statements as a whole are free from material misstatement, whether due to fraud or error, and toissue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, butis not a guarantee that an audit conducted in accordance with PSAs will always detect a materialmisstatement when it exists. Misstatements can arise from fraud or error and are considered material if,individually or in the aggregate, they could reasonably be expected to influence the economic decisions ofusers taken on the basis of these consolidated and parent bank financial statements.

As part of an audit in accordance with PSAs, we exercise professional judgment and maintainprofessional skepticism throughout the audit. We also:

∂ Identify and assess the risks of material misstatement of the consolidated and parent bank financialstatements, whether due to fraud or error, design and perform audit procedures responsive to thoserisks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.The risk of not detecting a material misstatement resulting from fraud is higher than for one resultingfrom error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or theoverride of internal control.

∂ Obtain an understanding of internal control relevant to the audit in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Group’s and Parent Bank’s internal control.

∂ Evaluate the appropriateness of accounting policies used and the reasonableness of accountingestimates and related disclosures made by management.

∂ Conclude on the appropriateness of management’s use of the going concern basis of accounting and,based on the audit evidence obtained, whether a material uncertainty exists related to events orconditions that may cast significant doubt on the Group’s and Parent Bank’s ability to continue as agoing concern. If we conclude that a material uncertainty exists, we are required to draw attention inour auditor’s report to the related disclosures in the consolidated and parent bank financial statementsor, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the auditevidence obtained up to the date of our auditor’s report. However, future events or conditions maycause the Group and the Parent Bank to cease to continue as a going concern.

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∂ Evaluate the overall presentation, structure and content of the consolidated and parent bank financialstatements, including the disclosures, and whether the consolidated and parent bank financialstatements represent the underlying transactions and events in a manner that achieves fairpresentation.

∂ Obtain sufficient appropriate audit evidence regarding the financial information of the entities orbusiness activities within the Group to express an opinion on the consolidated financial statements.We are responsible for the direction, supervision and performance of the audit. We remain solelyresponsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scopeand timing of the audit and significant audit findings, including any significant deficiencies in internalcontrol that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevantethical requirements regarding independence, and to communicate with them all relationships and othermatters that may reasonably be thought to bear on our independence, and where applicable, relatedsafeguards.

From the matters communicated with those charged with governance, we determine those matters thatwere of most significance in the audit of the consolidated and parent bank financial statements of thecurrent period and are therefore the key audit matters. We describe these matters in our auditor’s reportunless law or regulation precludes public disclosure about the matter or when, in extremely rarecircumstances, we determine that a matter should not be communicated in our report because the adverseconsequences of doing so would reasonably be expected to outweigh the public interest benefits of suchcommunication.

Report on the Supplementary Information Required Under Revenue Regulations 15-2010

Our audit was conducted for the purpose of forming an opinion on the basic parent bank financialstatements taken as a whole. The supplementary information required under Revenue Regulations15-2010 in Note 37 to the parent bank financial statements is presented for purposes of filing with theBureau of Internal Revenue and is not a required part of the basic parent bank financial statements. Suchinformation is the responsibility of the management of Union Bank of the Philippines. The informationhas been subjected to the auditing procedures applied in our audit of the basic financial statements. In ouropinion, the information is fairly stated, in all material respects, in relation to the basic parent bankfinancial statements taken as a whole.

A member firm of Ernst & Young Global Limited

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The engagement partner on the audit resulting in this independent auditor’s report is Janet A. Paraiso.

SYCIP GORRES VELAYO & CO.

Janet A. ParaisoPartnerCPA Certificate No. 92305SEC Accreditation No. 0778-AR-3 (Group A), June 19, 2018, valid until June 18, 2021Tax Identification No. 193-975-241BIR Accreditation No. 08-001998-62-2018, February 26, 2018, valid until February 25, 2021PTR No. 7332517, January 3, 2019, Makati City

February 22, 2019

A member firm of Ernst & Young Global Limited

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UNION BANK OF THE PHILIPPINES AND SUBSIDIARIESSTATEMENTS OF FINANCIAL POSITIONDecember 31, 2018(With Comparative Figures as of December 31, 2017 and January 1, 2017)(Amounts are presented in thousands of Philippine Pesos)

Group Parent BankDecember 31 January 1 December 31 January 1

2018

2017(As Restated -

Note 2)

2017(As Restated -

Note 2) 2018

2017(As Restated -

Note 2)

2017(As Restated -

Note 2)RESOURCESCash and Other Cash Items (Note 8) P=10,916,533 P=6,633,237 P=6,021,358 P=10,334,793 P=6,249,122 5,630,560Due from Bangko Sentral ng Pilipinas

(Note 8) 56,510,701 66,276,960 56,151,239 52,961,426 60,350,126 52,208,244Due from Other Banks (Note 9) 14,942,213 54,520,482 42,425,310 11,550,166 53,690,233 41,412,122Interbank Loans Receivable (Note 10) − 4,793,280 24,362,800 − 4,793,280 24,362,800Trading and Investment Securities

At fair value through profitor loss (Note 11) 8,283,695 3,182,040 3,789,932 8,225,569 3,130,421 3,735,557

At amortized cost (Note 12) 200,173,730 166,471,659 117,778,563 200,173,730 166,471,659 117,778,228At fair value through other

comprehensive income (Note 13) 9,815,040 43,783 43,783 9,806,226 43,783 43,783Loans and Other Receivables - net

(Note 14) 326,199,466 280,178,875 234,530,182 258,411,076 211,976,032 171,921,347Investment in Subsidiaries and Associates (Note 15) 29,558 2,468 2,326 18,900,624 17,470,527 14,054,004Bank Premises, Furniture, Fixtures

and Equipment - net (Note 16) 5,108,843 3,765,796 3,523,273 3,957,015 3,456,303 3,119,151Investment Properties (Note 17) 15,253,451 14,153,546 13,524,963 13,715,250 13,523,010 13,101,547Goodwill (Note 18) 15,726,267 11,258,251 11,258,251 7,886,898 7,886,898 7,886,898Other Resources - net (Note 19) 10,823,188 10,152,065 10,378,101 6,313,691 5,289,322 4,445,573TOTAL RESOURCES P=673,782,685 P=621,432,442 P=523,790,081 P=602,236,464 P=554,330,716 P=459,699,814

LIABILITIES AND CAPITAL FUNDSLIABILITIESDeposit Liabilities (Note 21)

Demand P=119,253,735 P=127,424,349 P=121,166,835 P=119,847,171 P=128,048,765 P=121,866,838Savings 67,348,145 57,744,858 49,320,538 64,079,935 55,737,917 47,152,780Time 228,100,653 259,447,006 202,997,759 190,783,257 213,187,518 156,018,973Long-term negotiable certificate of

deposits 6,000,000 3,000,000 3,000,000 6,000,000 3,000,000 3,000,000420,702,533 447,616,213 376,485,132 380,710,363 399,974,200 328,038,591

Bills Payable (Note 22) 90,964,473 43,070,825 48,100,192 64,723,631 29,009,719 39,166,961Notes and Bonds Payable (Note 23) 44,522,066 32,128,177 7,200,000 44,335,260 32,128,177 7,200,000Other Liabilities (Note 24) 26,632,712 25,272,744 25,059,515 21,834,348 19,607,102 17,918,214

582,821,784 548,087,959 456,844,839 511,603,602 480,719,198 392,323,766CAPITAL FUNDSCapital funds attributable to the ParentBank’s stockholders (Note 25):

Common stock 12,171,495 10,583,439 10,583,439 12,171,495 10,583,439 10,583,439Additional paid-in capital 14,146,988 5,819,861 5,819,861 14,146,988 5,819,861 5,819,861Surplus free 61,456,681 56,053,148 49,877,917 63,299,634 58,097,354 51,840,442Surplus reserves 3,502,769 1,959,938 1,734,697 1,875,067 235,173 220,990Net unrealized fair value gains on

investment securities (Note 13) 75,165 25 25 75,165 25 25Remeasurements of defined benefit

plan (Note 28) (985,496) (1,175,320) (1,139,658) (985,608) (1,174,455) (1,138,830)Other reserves 50,121 50,121 50,121 50,121 50,121 50,121

Total capital funds attributable to theParent Bank’s stockholders 90,417,723 73,291,212 66,926,402 90,632,862 73,611,518 67,376,048

Non-controlling interests 543,178 53,271 18,840 − − −90,960,901 73,344,483 66,945,242 90,632,862 73,611,518 67,376,048

TOTAL LIABILITIES ANDCAPITAL FUNDS P=673,782,685 P=621,432,442 P=523,790,081 P=602,236,464 P=554,330,716 P=459,699,814

See accompanying Notes to Financial Statements.

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UNION BANK OF THE PHILIPPINES AND SUBSIDIARIESSTATEMENTS OF INCOMEFor the Year Ended December 31, 2018(With Comparative Figures for 2017 and 2016)(Amounts are presented in thousands of Philippine Pesos, Except Earnings per Share)

Group Parent BankYears Ended December 31 Years Ended December 31

2018

2017(As restated -

Note 2)

2016(As restated -

Note 2) 2018

2017(As restated -

Note 2)

2016(As restated -

Note 2)

INTEREST INCOME ONLoans and other receivables (Note 14) P=23,441,710 P=20,705,022 P=18,247,934 P=15,038,506 P=11,652,103 P=9,352,410Investment securities at amortized cost

and FVOCI (Notes 12 and 13) 7,836,159 6,658,201 4,719,560 7,836,159 6,658,201 4,719,560Cash and cash equivalents (Notes 8 and 9) 207,458 222,252 489,129 148,788 195,651 359,731Interbank loans receivable (Note 10) 107,254 92,777 80,449 126,167 92,777 80,449Trading securities at FVTPL (Note 11) 36,639 52,425 59,058 36,639 52,425 59,058

31,629,220 27,730,677 23,596,130 23,186,259 18,651,157 14,571,208

INTEREST EXPENSE ONDeposit liabilities (Note 21) 8,841,473 5,949,301 4,294,180 7,045,224 4,529,154 3,041,798Bills payable and other liabilities

(Notes 22, 23 and 28) 2,788,350 996,489 980,261 1,983,958 678,134 554,61111,629,823 6,945,790 5,274,441 9,029,182 5,207,288 3,596,409

NET INTEREST INCOME 19,999,397 20,784,887 18,321,689 14,157,077 13,443,869 10,974,799

PROVISION FOR CREDITLOSSES (Note 20) 855,991 875,587 1,594,120 803,576 881,744 1,163,393

NET INTEREST INCOME AFTERPROVISION FOR CREDITLOSSES 19,143,406 19,909,300 16,727,569 13,353,501 12,562,125 9,811,406

OTHER INCOMEService charges, fees and commissions

(Note 26) 1,572,244 1,420,141 1,321,266 1,284,667 1,078,127 957,368Gains (losses) on trading and investment

securities at FVTPL and FVOCI(Notes 11 and 13) 1,390,897 (6,260) (136,186) 1,390,867 (6,393) (137,266)

Gains on sale of investment securities atamortized cost (Note 12) 152,161 272,841 3,951,187 152,161 272,841 3,951,187

Miscellaneous (Note 27) 2,558,625 2,845,712 2,077,877 4,211,631 5,810,727 5,336,2265,673,927 4,532,434 7,214,144 7,039,326 7,155,302 10,107,515

OTHER EXPENSESSalaries and employee benefits (Note 28) 5,726,593 5,285,044 5,072,619 4,669,491 4,386,741 4,333,819Taxes and licenses (Notes 17 and 29) 2,563,610 2,091,662 1,435,798 1,776,391 1,312,329 866,243Occupancy 849,476 735,144 686,239 673,387 619,527 571,405Depreciation and amortization

(Notes 16 and 19) 743,409 634,902 716,429 506,900 432,074 483,923Miscellaneous (Note 27) 6,436,520 5,008,887 4,054,683 5,220,056 3,857,609 2,928,074

16,319,608 13,755,639 11,965,768 12,846,225 10,608,280 9,183,464

NET PROFIT BEFORE TAX 8,497,725 10,686,095 11,975,945 7,546,602 9,109,147 10,735,457

INCOME TAX EXPENSE (Note 29) 1,182,758 2,266,080 1,909,587 334,690 827,199 481,954

NET PROFIT P=7,314,967 P=8,420,015 P=10,066,358 P=7,211,912 P=8,281,948 P=10,253,503

Attributable to:Parent Bank’s stockholders P=7,316,102 P=8,411,325 P=10,058,276 P=7,211,912 P=8,281,948 P=10,253,503Non-controlling interests (1,135) 8,690 8,082 − − −

P=7,314,967 P=8,420,015 P=10,066,358 P=7,211,912 P=8,281,948 P=10,253,503

Basic/Diluted Earnings per Share (Note 32) P=6.66 P=7.95 P=9.50 P=6.57 P=7.83 P=9.69

See accompanying Notes to Financial Statements.

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UNION BANK OF THE PHILIPPINES AND SUBSIDIARIESSTATEMENTS OF COMPREHENSIVE INCOMEFor the Year Ended December 31, 2018(With Comparative Figures for 2017 and 2016)(Amounts are presented in thousands of Philippine Pesos)

Group Parent BankYears Ended December 31 Years Ended December 31

2018

2017(As restated -

Note 2)

2016(As restated -

Note 2) 2018

2017(As restated -

Note 2)

2016(As restated -

Note 2)

NET PROFIT FOR THE YEAR P=7,314,967 P=8,420,015 P=10,066,358 P=7,211,912 P=8,281,948 P=10,253,503

OTHER COMPREHENSIVEINCOME (LOSS)

Items that may be reclassified to profit or loss in subsequent periods: Mark-to-market gains on reclassified

investment securities (Note 12) 1,352,846 − − 1,352,846 − − Realized gains on sale of investment securities at FVOCI recognized

in profit or loss (Note 13) (1,496,649) − − (1,496,649) − − Unrealized mark-to-market gains (losses) on investment securities

at FVOCI 218,903 − (276) 218,903 − −Items that will not be reclassified to profit or loss in subsequent periods: Remeasurement gains (losses) on

defined benefit plan (Note 28) 271,197 (51,182) (527,789) 232,394 (29,087) (558,546) Income tax benefit (expense) (Note 29) (81,359) 15,355 158,337 (69,718) 8,726 167,564 Share in changes in remeasurement

gains (losses) of subsidiaries (Note 15) − − − 26,171 (15,264) 21,126

TOTAL OTHER COMPREHENSIVEINCOME (LOSS) FOR THE YEAR 264,938 (35,827) (369,728) 263,947 (35,625) (369,856)

TOTAL COMPREHENSIVE INCOMEFOR THE YEAR P=7,579,905 P=8,384,188 P=9,696,630 P=7,475,859 P=8,246,323 P=9,883,647

Attributable to:Parent Bank’s stockholders P=7,581,026 P=8,375,663 P=9,688,675 P=7,475,859 P=8,246,323 P=9,883,647Non-controlling interests (1,121) 8,525 7,955 − − −

P=7,579,905 P=8,384,188 P=9,696,630 P=7,475,859 P=8,246,323 P=9,883,647

See accompanying Notes to Financial Statements.

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UNION BANK OF THE PHILIPPINES AND SUBSIDIARIESSTATEMENTS OF CHANGES IN CAPITAL FUNDSFor the Year Ended December 31, 2018(With Comparative Figures for 2017 and 2016)(Amounts are presented in thousands of Philippine Pesos)

GroupEquity Attributable to Equity Holders of the Parent Bank

Capital StockAdditional

Paid-in Capital Surplus Free Surplus Reserves

Net UnrealizedFair Value

Gains onInvestment

Securities atFVOCI

Remeasurementsof Defined

Benefit Plan Other Reserves TotalNon-controlling

InterestsTotal Capital

FundsBalances as at January 1, 2018, as

previously reported P=10,583,439 P=5,819,861 P=56,693,737 P=1,959,938 P=25 (P=1,175,320) P=50,121 P=73,931,801 P=54,748 P=73,986,549Effect of adoption of PFRS 9, Financial Instruments (Note 2) − − 1,641,115 − 40 − − 1,641,155 (860) 1,640,295Effect of prior-period adjustments (Note 2) − − (640,589) − − − − (640,589) (1,477) (642,066)Balances as at January 1, 2018 10,583,439 5,819,861 57,694,263 1,959,938 65 (1,175,320) 50,121 74,932,367 52,411 74,984,778Total comprehensive income (loss) for the year − − 7,316,102 − 75,100 189,824 − 7,581,026 (1,121) 7,579,905Issuance of new shares (Note 25) 1,588,056 8,327,127 − − − − − 9,915,183 − 9,915,183Cash dividends − − (2,010,853) − − − − (2,010,853) − (2,010,853)Appropriations during the year (Note 25) − − (1,542,831) 1,542,831 − − − − − −Effect of business combination (Note 15) − − − − − − − − 493,635 493,635Acquisition of shares of non-controlling interests − − − − − − − − (1,747) (1,747)Balances as at December 31, 2018 P=12,171,495 P=14,146,988 P=61,456,681 P=3,502,769 P=75,165 (P=985,496) P=50,121 P=90,417,723 P=543,178 P=90,960,901

Balances as at January 1, 2017, aspreviously reported P=10,583,439 P=5,819,861 P=50,518,506 P=1,734,697 P=25 (P=1,139,658) P=50,121 P=67,566,991 P=20,317 P=67,587,308

Effect of prior-period adjustments (Note 2) − − (640,589) − − − − (640,589) (1,477) (642,066)Balances as at January 1, 2017, as restated 10,583,439 5,819,861 49,877,917 1,734,697 25 (1,139,658) 50,121 66,926,402 18,840 66,945,242Total comprehensive income (loss) for the year − − 8,411,325 − − (35,662) − 8,375,663 8,525 8,384,188Cash dividends − − (2,010,853) − − − − (2,010,853) − (2,010,853)Appropriations during the year (Note 25) − − (225,241) 225,241 − − − − − −Sale of shares to non-controlling interests − − − − − − − − 25,906 25,906Balances as at December 31, 2017 P=10,583,439 P=5,819,861 P=56,053,148 P=1,959,938 P=25 (P=1,175,320) P=50,121 P=73,291,212 P=53,271 P=73,344,483

Balances as at January 1, 2016, aspreviously reported P=10,583,439 P=5,819,861 P=42,322,902 P=1,459,541 P=301 (P=770,333) P=50,121 P=59,465,832 P=23,793 P=59,489,625

Effect of prior-period adjustments (Note 2) − − (640,589) − − − − (640,589) (1,477) (642,066)Balances as at January 1, 2016, as restated 10,583,439 5,819,861 41,682,313 1,459,541 301 (770,333) 50,121 58,825,243 22,316 58,847,559Total comprehensive income (loss) for the year − − 10,058,276 − (276) (369,325) − 9,688,675 7,955 9,696,630Cash dividends − − (1,587,516) − − − − (1,587,516) (3,619) (1,591,135)Appropriations during the year (Note 25) − − (275,156) 275,156 − − − − − −Acquisition of shares of non-controlling interests − − − − − − − − (7,812) (7,812)Balances as at December 31, 2016 P=10,583,439 P=5,819,861 P=49,877,917 P=1,734,697 P=25 (P=1,139,658) P=50,121 P=66,926,402 P=18,840 P=66,945,242

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Parent Bank

Capital StockAdditional

Paid-in Capital Surplus Free Surplus Reserves

Net UnrealizedFair Value

Gains onInvestment

Securities atFVOCI

Remeasurementsof Defined

Benefit Plan Other ReservesTotal Capital

FundsBalances as at January 1, 2018, as previously reported P=10,583,439 P=5,819,861 P=58,737,943 P=235,173 P=25 (P=1,174,455) P=50,121 74,252,107Effect of adoption of PFRS 9, Financial Instruments (Note 2) − − 2,014,149 − 40 − − 2,014,189Share in effect of prior-period adjustments (Note 2) − − (640,589) − − − − (640,589)Share in effect of adoption of PFRS 9 of subsidiaries (Note 2) − − (373,034) − − − − (373,034)Balances as at January 1, 2018 10,583,439 5,819,861 59,738,469 235,173 65 (1,174,455) 50,121 75,252,633Total comprehensive income for the year − − 7,211,912 − 75,100 188,847 − 7,475,859Issuance of new shares (Note 25) 1,588,056 8,327,127 − − − − − 9,915,183Cash dividends − − (2,010,853) − − − − (2,010,853)Appropriations during the year (Note 25) − − (1,639,894) 1,639,894 − − − −Balances as at December 31, 2018 P=12,171,495 P=14,146,988 P=63,299,634 P=1,875,067 P=75,165 (P=985,608) P=50,121 P=90,632,862

Balances as at January 1, 2017, as previously reported P=10,583,439 P=5,819,861 P=52,481,031 P=220,990 P=25 (P=1,138,830) P=50,121 P=68,016,637Share in effect of prior-period adjustments (Note 2) − − (640,589) − − − − (640,589)Balances as at January 1, 2017 10,583,439 5,819,861 51,840,442 220,990 25 (1,138,830) 50,121 67,376,048Total comprehensive income (loss) for the year − − 8,281,948 − − (35,625) − 8,246,323Cash dividends − − (2,010,853) − − − − (2,010,853)Appropriations during the year (Note 25) − − (14,183) 14,183 − − − −Balances as at December 31, 2017 P=10,583,439 P=5,819,861 P=58,097,354 P=235,173 P=25 (P=1,174,455) P=50,121 P=73,611,518

Balances as at January 1, 2016, as previously reported P=10,583,439 P=5,819,861 P=43,829,931 P=206,103 P=25 (P=768,974) P=50,121 P=59,720,506Share in effect of prior-period adjustments (Note 2) − − (640,589) − − − − (640,589)Balances as at January 1, 2016 10,583,439 5,819,861 43,189,342 206,103 25 (768,974) 50,121 59,079,917Total comprehensive income (loss) for the year − − 10,253,503 − − (369,856) − 9,883,647Cash dividends − − (1,587,516) − − − − (1,587,516)Appropriations during the year (Note 25) − − (14,887) 14,887 − − − −Balances as at December 31, 2016 P=10,583,439 P=5,819,861 P=51,840,442 P=220,990 P=25 (P1,138,830) P=50,121 P=67,376,048

See accompanying Notes to Financial Statements.

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UNION BANK OF THE PHILIPPINES AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Year Ended December 31, 2018(With Comparative Figures for 2017 and 2016)(Amounts are presented in thousands of Philippine Pesos)

GROUP PARENT BANKYears Ended December 31 Years Ended December 31

2018

2017(As restated -

Note 2)

2016(As restated -

Note 2) 2018

2017(As restated -

Note 2)

2016(As restated -

Note 2)

CASH FLOWS FROM OPERATINGACTIVITIES

Income before income tax P=8,497,725 P=10,686,095 P=11,975,945 P=7,546,602 P=9,109,147 P=10,735,456Adjustments for: Gain on sale of investment securities at

FVOCI (Note 13) (1,496,649) − − (1,496,649) − −Provision for credit losses (Note 20) 855,991 875,587 1,594,120 803,576 881,744 1,163,393

Amortization of premium or discount 789,669 776,049 1,019,220 789,669 776,049 1,019,220 Fair value gains on investment

properties (Notes 17 and 27) (632,923) (528,072) (385,687) (632,923) (518,386) (385,687) Depreciation and

amortization (Notes 16 and 19) 743,409 634,902 716,429 506,900 432,074 483,923 Unrealized foreign exchange loss

(gains) - net 208,731 (113,105) (227,052) 208,731 (113,105) (227,052) Gains on sale of investment securities

at amortized cost (Note 12) (152,161) (272,841) (3,951,187) (152,161) (272,841) (3,951,187) Gains on sale of investment

properties (Note 27) (57,558) (131,072) (66,350) (46,189) (125,833) (66,350)Gains or losses on foreclosure (Note 27) (51,904) (92,002) (82,685) (109,435) (85,320) (82,685)

Gain on disposal of property andequipment (44,296) (38,904) (47,863) (44,225) (38,904) (47,863)

Share in net loss (profit) of subsidiaries and associates (Notes 15 and 27) 8 (142) (151) (1,775,210) (3,429,942) (3,474,490)

Changes in operating assets and liabilities:Decreases (increases) in: Trading securities at FVTPL (5,101,655) 607,892 699,388 (5,095,148) 605,136 697,720

Loans and other receivables (30,076,903) (37,241,855) (53,145,389) (38,198,505) (36,866,812) (46,230,161)Other resources (281,437) (530,756) (111,606) (1,443,699) (1,597,413) (1,421,919)

Increases (decreases) in:Deposit liabilities (34,333,250) 71,131,081 64,901,694 (22,263,837) 71,935,609 59,367,168Other liabilities 1,227,633 104,925 3,054,149 2,370,605 1,818,212 4,403,230

Net cash provided by (used in) operations (59,905,570) 45,867,782 25,942,975 (59,031,898) 42,509,415 21,982,716Income taxes paid (1,715,018) (2,223,502) (2,011,576) (875,121) (784,621) (599,632)Net cash provided by (used in) operating

activities (61,620,588) 43,644,280 23,931,399 (59,907,019) 41,724,794 21,383,084

CASH FLOWS FROM INVESTINGACTIVITIES

Acquisitions of:Investment securities at amortized cost (64,539,694) (59,251,071) (55,728,255) (64,539,694) (59,251,071) (55,728,255)

Investment securities at FVOCI (10,673,937) − − (10,673,937) − − Bank premises, furniture, fixtures and

equipment (Note 16) (1,042,901) (781,898) (668,123) (906,532) (703,989) (527,534)Proceeds from maturities/sale of:

Investment securities at amortized cost 12,373,015 10,055,028 46,523,040 12,373,015 10,055,028 46,523,040Investment securities at FVOCI 20,537,059 − − 20,537,059 − −

Investment properties 337,631 381,485 292,235 315,474 371,414 292,235 Bank premises, furniture, fixtures and

equipment (Note 16) 70,920 66,580 114,251 64,781 52,189 61,148Acquisition of subsidiaries, net of cash

acquired (Note 15) (6,364,415) − − − − −Additional investment in subsidiaries − − − (1,747) (1,845) (1,832)Dividends received from subsidiaries − − − − − 1,565,869Net cash used in investing activities (49,302,322) (49,529,876) (9,466,852) (42,831,581) (49,478,274) (7,815,329)

(Forward)

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GROUP PARENT BANKYears Ended December 31 Years Ended December 31

2018

2017(As restated -

Note 2)

2016(As restated -

Note 2) 2018

2017(As restated -

Note 2)

2016(As restated -

Note 2)

CASH FLOWS FROM FINANCINGACTIVITIES

Payments of:Bills payable (P=613,840,876) (P=170,590,655) (P=144,125,571) (P=602,798,238) (P=121,190,186) (P=73,734,958)

Cash dividends (2,010,853) (2,010,853) (1,587,516) (2,010,853) (2,010,853) (1,587,516)Proceeds from:

Bills payable 657,746,587 165,702,992 150,674,062 638,847,784 111,174,648 82,334,612 Notes and bonds payable (Note 23) 11,013,685 25,097,553 − 10,863,685 25,097,553 −

Issuance of new shares (Note 25) 9,915,183 − − 9,915,183 − − Long term negotiable certificate of deposits (Note 21) 3,000,000 − − 3,000,000 − −Net cash provided by financing activities 65,823,726 18,199,037 4,960,975 57,817,561 13,071,162 7,012,138

EFFECT OF CHANGES IN FOREIGNCURRENCY EXCHANGE RATES 554,301 281,715 589,873 554,301 281,715 589,873

NET INCREASE (DECREASE) INCASH AND CASH EQUIVALENTS (44,544,883) 12,595,156 20,015,395 (44,366,738) 5,599,397 21,169,766

CASH AND CASH EQUIVALENTS ATBEGINNING OF THE YEAR

Cash and other cash items 6,633,237 6,021,358 6,566,176 6,249,122 5,630,560 6,190,565Due from Bangko Sentral ng Pilipinas (BSP) 66,276,960 56,151,239 70,036,867 60,350,126 52,208,244 60,992,001Due from other banks 54,520,482 42,425,310 19,697,783 53,690,233 41,412,122 18,376,441Interbank loans receivable 4,793,280 24,362,800 16,884,953 4,793,280 24,362,800 16,884,953Securities purchased under repurchase

agreement (SPURA) 13,572,371 4,240,467 − 4,130,362 − −145,796,330 133,201,174 113,185,779 129,213,123 123,613,726 102,443,960

CASH AND CASH EQUIVALENTS ATEND OF YEAR

Cash and other cash items 10,916,533 6,633,237 6,021,358 10,334,793 6,249,122 5,630,560Due from BSP 56,510,701 66,276,960 56,151,239 52,961,426 60,350,126 52,208,244Due from other banks 14,942,213 54,520,482 42,425,310 11,550,166 53,690,233 41,412,122Interbank loans receivable − 4,793,280 24,362,800 − 4,793,280 24,362,800SPURA 18,882,000 13,572,371 4,240,467 10,000,000 4,130,362 −

P=101,251,447 P=145,796,330 P=133,201,174 P=84,846,385 P=129,213,123 P=123,613,726

OPERATIONAL CASH FLOWS FROMINTERESTS AND DIVIDENDS

Interest received P=30,573,018 P=26,515,597 P=22,961,722 P=22,232,001 P=17,751,572 P=14,009,991Interest paid 10,573,621 5,730,710 4,640,033 8,137,924 4,307,703 3,035,192Dividends received 207,456 209,762 156,670 206,425 204,919 83,883

See accompanying Notes to Financial Statements.

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UNION BANK OF THE PHILIPPINES AND SUBSIDIARIESNOTES TO FINANCIAL STATEMENTS

1. Corporate Information

Incorporation and OperationsUnion Bank of the Philippines (the Bank, UnionBank or the Parent Bank) was incorporated in thePhilippines on August 16, 1968 and operates as a universal bank through its universal banking licenseacquired in July 1992. The Philippine Securities and Exchange Commission (SEC) has approved theBank’s amendment on its Articles of Incorporation on October 31, 2013 for the extension of theBank’s corporate life for another 50 years until August 16, 2068.

The Bank provides expanded commercial banking products and services such as loans and deposits,cash management, retail banking, foreign exchange, capital markets, corporate and consumer finance,investment management and trust banking. As of December 31, 2018, the Bank and its subsidiaries(the Group) has 433 branches and 316 on-site and 73 off-site automated teller machines (ATMs),located nationwide.

The Bank’s common shares are listed in the Philippine Stock Exchange (PSE). The Bank iseffectively 49.36% owned by Aboitiz Equity Ventures, Inc. (AEVI), a company incorporated anddomiciled in the Philippines. AEVI is the holding and management company of the Aboitiz Group ofCompanies.

The Bank’s subsidiaries (all incorporated in the Philippines), effective percentage of ownership andthe nature of the subsidiaries’ businesses, as of December 31, 2018, are as follows:

Percentage of ownershipName of Subsidiary 2018 2017 Nature of Business

City Savings Bank, Inc. (CSB) 99.78% 99.77% Thrift bankPhilippine Resources Savings Banking Corp.

(PR Savings Bank)* 100.00% − Thrift bankPetNet, Inc. (PETNET)* 51.00% − Remittances/ money transferFirst-Agro Industrial Rural Bank, Inc.

(FAIR Bank)** 87.53% 86.67% Rural bankUnion Properties, Inc. (UPI) 100.00% 100.00% Real estate administrationFirst Union Plans, Inc. (FUPI)*** 100.00% 100.00% Pre-needFirst Union Direct Corporation (FUDC)*** 100.00% 100.00% Financial products marketingFirst Union Insurance and Financial Agencies,

Inc. (FUIFAI) *** 100.00% 100.00%Agent for insurance and

financial productsUBP Insurance Brokers, Inc. (UBPIBI)**** − 100.00% Insurance brokerageUBP Securities, Inc. (UBPSI) 100.00% 100.00% Securities brokerageUnionBank Currency Brokers Corporation

(UCBC) 100.00% 100.00% Foreign currency brokerageUnionDataCorp (UDC) 100.00% 100.00% Data processingInterventure Capital Corporation (IVCC) 60.00% 60.00% Venture capital* Newly acquired subsidiaries in 2018, 100% of PRSB through CSB and 51% of PETNET through CSB and UPI with 40% and 11% share in ownership, respectively.** Acquired subsidiary in 2017 through CSB and UPI with 49% and 38.53% share in ownership, respectively.*** FUDC, FUPI and FUIFAI are wholly-owned subsidiaries of UPI.****Dissolved in 2018.

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Other relevant information about the subsidiaries’ nature of businesses and their status of operationsare discussed in the sections that follow:

(a) CSB was incorporated and registered with the SEC on December 9, 1965. On December 9, 2014,the SEC approved the amendment extending CSB’s corporate term for another 50 years fromDecember 9, 2015. It is a thrift bank specializing in granting teacher’s loans under theDepartment of Education’s Automatic Payroll Deduction System.

On January 23, 2015, the Board of Directors (BOD) approved the proposal to purchase theremaining 894 common shares of CSB held by some 41 minority shareholders. The Bankpurchased additional 68 shares, 38 shares and 36 shares in 2016, 2017 and 2018, respectively,thereby, further increasing the Bank’s percentage ownership to 99.76%, 99.77% and 99.78% asof December 31 of those respective years.

(b) In December 2017, CSB and the registered holders and beneficial owners of Philippine ResourcesSavings Banking Corp. (PR Savings Bank) from the Ropali Group signed a share purchaseagreement (“SPA”), whereby the former shall acquire 127.72 million common stock of PRSavings Bank with par value of P10 per share or a total par value of P1,277.23 million. Theshares represent 66.28% of the total outstanding capital stock of PR Savings Bank.

As part of the conditions precedent to the obligation of CSB to purchase the common stock, CSBand International Finance Corporation (IFC) entered into a Share Purchase Agreement(“Agreement”) on February 23, 2018, whereby the former shall acquire the 65.00 millionpreferred shares of PR Savings Bank owned by IFC, with par value of P10.00 per share or a totalpar value of P650.00 million. The shares represent 33.72% of the total issued and outstandingcapital stock.

On April 5, 2018, the Philippine Competition Commission (PCC) approved the acquisition of PRSavings Bank by CSB. The acquisition was also approved by the Monetary Board (MB) of theBSP under MB Resolution No. 1003 dated June 14, 2018 (see Note 15).

On July 5, 2018 and July 10, 2018, the BOD and the stockholders, respectively, of CSB approvedthe plan of merger with PR Savings Bank, with CSB as the surviving entity. On December 20,2018, the MB of the BSP approved the merger subject to certain conditions, including completionof the merger within one year from the date of receipt of the BSP approval and that the mergershould be effective on the date the SEC issues the certificate of merger. Subsequent to the BSPapproval, CSB has applied for merger with the SEC.

PR Savings is the 14th largest thrift bank in the country. Most of its 102 offices are located inLuzon offering motorcycle, agri-machinery, and salary loans to over 131,000 borrowers, mostlyfrom the mass market segment. The transaction will enable CSB to expand its reach in Luzon,and enter into new market segments, such as motorcycle and agri-machinery financing.

(c) In February 2018, CSB and UPI signed an SPA with AEVI for the purchase of 2,461,338common shares representing 51% ownership of AEVI on PETNET, Inc. (PETNET). OnMay 8, 2018, PCC approved the acquisition of PETNET, Inc. by CSB and UPI. The agreementwas approved by the BSP on November 23, 2018. On December 17, 2018, the parties closed thetransaction by settling the purchase price and confirming that all closing conditions have beenfulfilled (see Note 15).

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PETNET, more widely-known by its retail brand name PERA HUB, has the largest network ofWestern Union outlets in the Philippines. PETNET has over 2,800 outlets nationwide. It offers avariety of cash-based services including remittance, currency exchange and bills payment.

(d) FAIR Bank was registered with the SEC on September 15, 1998 primarily to engage in thebusiness of extending rural credit to small farmers and tenants and to deserving rural industries orenterprises. FAIR Bank has one (1) banking office and ten (10) branches located all over Cebu.On December 21, 2015, CSB, UPI and the major stockholders of FAIR Bank signed aMemorandum of Agreement which provided for the terms of the acquisition of a total of 77.78%of the issued and outstanding capital stock of FAIR Bank by CSB and UPI (Note 3). OnDecember 15, 2016, the MB of the BSP approved the acquisition by CSB and UPI of FAIRBank’s 441,000 common shares and 259,002 common shares, respectively, from the sellingshareholders of FAIR Bank. The common shares acquired by CSB and UPI represented 49.00%and 28.78%, respectively, of the issued and outstanding capital stock of FAIR Bank. The fundsfor the payment of the acquisition were deposited in an escrow account with UnionBank Trustand Investment Services Group (TISG) and the escrow amount were released in tranches,subjected to the fulfillment of certain conditions necessary to fully transfer ownership over theacquired shares to CSB and UPI.

On March 17, 2017, CSB and UPI subscribed to 294,000 and 306,000 new common shares,respectively, of FAIR Bank at par value of P100 per share. As a result of the subscription, thepercentage of ownership of UPI in FAIR Bank increased to 37.67% while CSB’s ownershipinterest stood at 49%.

To meet the minimum requirements of capital adequacy under the Manual of Regulations forBanks (MORB), additional subscription was made by CSB and UPI on November 13, 2018 of50,960 and 53,040 common shares, respectively, of FAIR Bank at par value of P100 per share.As a result of the additional subscription, the percentage of ownership of CSB’s ownershipinterest in FAIR Bank remained at 49% while UPI’s ownership interest in FAIR Bank increasedto 38.53%.

(e) UPI was incorporated and registered with the SEC on December 20, 1993. It is presentlyengaged in the administration and management of the Parent Bank’s premises and otherproperties such as buildings, condominium units and other real estate, wholly or partially ownedby the Group. Pursuant to the action of the BOD of UPI approving the amendment of its Articlesof Incorporation on May 13, 2004, the primary purpose of UPI was changed from a real estatedeveloper to a real estate administrator. The SEC approved such amendment on December 13,2004. Through its wholly-owned subsidiaries, FUPI, FUDC and FUIFAI, UPI is also engaged inthe sale of pre-need plans, marketing of financial products and being an agent for life and non-lifeinsurance products.

Non-operating subsidiaries

(a) UBPSI was incorporated and registered with the SEC on March 2, 1993. It was organized toengage in the business of buying, selling or dealing in stocks and other securities. In January1995, as approved by UBPSI’s stockholders and BOD, UBPSI sold its stock exchange seat in thePSE. Accordingly, UBPSI ceased its stock brokerage activities.

(b) UCBC was registered in the SEC on June 14, 1994. It was organized to engage in the foreigncurrency brokerage business. On March 23, 2001, the BOD of UCBC approved the cessation ofits business operations effective on April 16, 2001. Since then, UCBC’s activities weresignificantly limited to the settlement of its liabilities. The BOD and the stockholders of UCBC

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have approved to shorten the company’s corporate term to December 31, 2016. UCBC hassecured a tax clearance from the Bureau of Internal Revenue (BIR) in 2018.

(c) UDC was registered with the SEC on September 8, 1998. It was organized to handle thecentralized branch accounting services as well as the processing of credit card application formsof the Parent Bank and the entire backroom operations of FUPI. On July 1, 2003, the BOD ofUDC approved the cessation of its business operations effective on August 30, 2003, andsubsequently shortened its corporate term to December 31, 2017 by amending its Articles ofIncorporation. The services previously handled by UDC are now undertaken by the CentralizedProcessing Service Unit of the Parent Bank. UDC is still in process of securing the tax clearancefrom the BIR.

(d) IVCC was incorporated and registered with the SEC on October 10, 1980. It was organized todevelop, promote, aid and assist financially any small or medium scale enterprises and topurchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise dealwith such real and personal property, including securities and bonds of other corporations as thetransaction of the lawful business of the corporation may reasonably and necessarily require,subject to the limitations prescribed by law and the constitution. IVCC has ceased operationssince 1992.

(e) UBPIBI was organized to engage in the insurance brokerage business. It was incorporated andregistered with the SEC on February 27, 1992. In 1995, the BOD of UBPIBI approved thecessation of its operations. On November 15, 2018, the SEC approved the dissolution of UBPIBIafter it has secured a tax clearance from the Bureau of Internal Revenue (BIR) for the dissolutionin 2017.

The total assets, liabilities and capital funds of these non-operating subsidiaries amount to P=5,211,P=3,158 and P=2,053, respectively, as of December 31, 2018 and P=5,245, P=3,155 and P=2,090,respectively, as of December 31, 2017.

The Bank’s registered address, which is also its principal place of business, is at UnionBank Plaza,Meralco Avenue corner Onyx Street and Sapphire Road, Ortigas Center, Pasig City. AEVI’sregistered address is located at NAC Tower, 32nd Street, Bonifacio Global City, Taguig City, MetroManila.

Approval of Financial StatementsThe consolidated financial statements of UnionBank and Subsidiaries and the financial statements ofthe Parent Bank as of and for the year ended December 31, 2018 (including the comparative financialstatements as of December 31, 2017 and for the years ended December 31, 2017 and 2016, and thecorresponding figures as of January 1, 2017) were authorized for issue by the Bank’s BOD onFebruary 22, 2019.

2. Summary of Significant Accounting Policies

The significant accounting policies that have been used in the preparation of these financialstatements are summarized below. These policies have been consistently applied to all the yearspresented, unless otherwise stated.

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Basis of Preparation of Financial Statements

(a) Statement of Compliance with Philippine Financial Reporting Standards

The consolidated financial statements of the Group and the financial statements of the Bank havebeen prepared in accordance with Philippine Financial Reporting Standards (PFRS). PFRSs areadopted by the Financial Reporting Standards Council (FRSC) from the pronouncements issuedby the International Accounting Standards Board (IASB), and approved by the Philippine Boardof Accountancy.

The financial statements have been prepared using the measurement bases specified by PFRS foreach type of resource, liability, income and expense.

The measurement bases are more fully described in the accounting policies that follow.

(b) Presentation of Financial Statements

The financial statements are presented in accordance with Philippine Accounting Standards(PAS 1), Presentation of Financial Statements. The Group presents statement of comprehensiveincome separate from the statement of income.

The Group presents a third statement of financial position as at the beginning of the precedingperiod when it applies an accounting policy retrospectively, or makes a retrospective restatementor reclassification of items that have a material effect on the information in the statement offinancial position at the beginning of the preceding period. The related notes to the thirdstatement of financial position are not required to be disclosed.

(c) Functional and Presentation Currency

These financial statements are presented in Philippine pesos, the Group’s functional andpresentation currency, and all values are presented in thousands of Philippine Pesos except whenotherwise indicated.

Items included in the financial statements of the Group are measured using its functionalcurrency, the currency of the primary economic environment in which the Group operates.

Adoption of New and Amended PFRS(a) Effective in 2018 that are Relevant to the Group

Unless otherwise stated, the following new accounting standards, amendments and annualimprovements have no material impact to the Group’s annual consolidated financial statements asat and for the year ended December 31, 2018:

PFRS 2 (Amendments) Share-based Payment, Classification and Measurement of Share-based Payment

TransactionsPAS 40 (Amendments) Reclassification to and from Investment PropertyIFRIC 22 Foreign Currency Transactions and Advance

considerationAnnual Improvements to PFRS2014-2016 Cycle

PAS 28 (Amendment), Investment in Associates – Clarification on Fair Value through Profit or

Loss Classification

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∂ PFRS 9 (2014), Financial Instruments. This standard replaces PAS 39, FinancialInstruments: Recognition and Measurement and PFRS 9 (2009, 2010 and 2013 versions),herein referred to as PFRS 9. In addition to the principal classification categories forfinancial assets and financial liabilities, which were early adopted by the Group on January 1,2014, PFRS 9 (2014) includes the following major provisions:

- limited amendments to the classification and measurement requirements for financialassets, introducing the fair value through other comprehensive income (FVOCI)measurement for eligible debt securities; and

- an expected credit loss model in determining impairment of all financial assets that arenot measured at fair value through profit or loss (FVTPL), including irrevocable loancommitments and financial guarantee contracts which generally depends on whetherthere has been a significant increase in credit risk since initial recognition of a financialasset.

Classification and MeasurementThe FVOCI category for debt instruments, both for government securities and corporatebonds, was available effective January 1, 2018, in addition to the financial assets at amortizedcost and FVTPL categories of the previously adopted PFRS 9 (2009, 2010 and 2013versions). As a result of this amendment to the standard, the Group adopted the FVOCIbusiness model (see Note 12). Financial assets classified under the FVOCI category are bothheld in order to collect contractual cash flows and to realize fair value gains by selling theinstruments. Changes in the fair value of FVOCI securities are recognized in othercomprehensive income up until derecognition, when the fair value change will be recognizedin the statements of income.

Expected Credit LossThe adoption of PFRS 9 has fundamentally changed the Group’s accounting for impairmentlosses by replacing PAS 39’s incurred loss approach with a forward-looking Expected CreditLosses (ECL) approach. Thus, it is no longer required for a credit event to have occurredbefore credit losses are recognized. Instead, an entity calculates the ECL for all assetsclassified under Amortized Cost and FVOCI, which include, but are not limited to, corporateloans, consumer finance loans, and investments in bonds. ECLs are based on the differencebetween the contractual cash flows due in accordance with the contract and all the cash flowsthat the Group expects to receive. The shortfall is then discounted at the asset’s originaleffective interest rate. The ECL calculation is composed of three major components -probability of default (PD), loss given default (LGD), and exposure at default (EAD). PDcaptures the obligor or borrower risk. LGD reflects, in part, how collateral is being managed.EAD is largely the on-balance sheet amount and off-balance sheet amount (for irrevocablecommitted lines) in the event of a default. The off-balance sheet amount to be included shallbe computed through a credit conversion factor (CCF).

The significant increase/improvement in credit risk (SICR) model is used to classify accountsinto PFRS 9 ECL’s three stages. A set of defined empirical-based rules and expert judgmentthat discriminate good and bad credit make up the SICR. Accounts that do not demonstratesignificant increase in credit risk are classified under Stage 1, while accounts thatdemonstrate significant increase in credit risk since origination but does not have objectiveevidence of impairment as of reporting date are classified under Stage 2. On the other hand,accounts with objective evidence of impairment are classified under Stage 3.

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The 12-month ECL is computed for Stage 1 accounts, while the lifetime ECL is calculatedfor Stage 2 and Stage 3 accounts. Stage 1 and Stage 2 accounts shall use future values derivedfrom the term structures of the PD, LGD, and CCF. These future values also take intoconsideration prospective business environment conditions through the inclusion ofmacroeconomic forecasts.

Altogether, the resulting value is called the baseline ECL. In order to compute for theprobability-weighted ECL, calibration factors and scenario weights are embedded into thebaseline model. Finally, risk management policies complement the application ofprobability-weighted ECL models. Together, ECL models and their corresponding policies,shall enhance the assessment and monitoring of accounts.

At January 1, 2018, the Group determined the amount of provisions required under the ECLmodel, in accordance with its existing governance framework relevant to the implementationof PFRS 9. The Group continues to refine its processes to enhance its implementation ofPFRS 9.

The Group applied the modified retrospective application in adopting PFRS 9, which allowedthe Group not to restate comparative periods for the effect of the adoption. The effect ofadopting PFRS 9 is as follows:

Group

Amounts in thousands

Allowance forimpairment

Under PAS 39as at

December 31,2017 Remeasurement

ECL underPFRS 9

as atJanuary 1,

2018Due from other banks P=– P=9,082 P=9,082Interbank loans and receivables – 600 600Investment securities:

At amortized cost – 16,519 16,519 At fair value through other

comprehensive income 40 (40) −Loans and other receivables - net 10,822,982 (2,369,381) 8,453,601

P=10,823,022 (P=2,343,220) P=8,479,802

As of January 1, 2018, the adoption of ECL under PFRS 9 resulted in net reduction in totalAllowance for credit losses for the Group totaling P=2,343.2 million and decrease in Deferredtax asset of P=703.0 million, which accordingly resulted in increase in Surplus free attributableto equity holders of the Parent Bank amounting to P=1,641.1 million and decrease in thenon-controlling interest amounting to P=0.9 million. Net increase in total equity of the Groupamounted to P=1,640.3 million.

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Parent Bank

Amounts in thousands

Allowance forImpairment

Under PAS 39 as at

December 31,2017 Remeasurement

ECL underPFRS 9

as atJanuary 1,

2018Due from other banks P=– P=9,082 P=9,082Interbank loans and receivables – 600 600Investment securities:

At amortized cost – 16,519 16,519 At fair value through other

comprehensive income 40 (40) −Loans and other receivables - net 9,645,340 (2,903,516) 6,741,824

P=9,645,380 (P=2,877,355) P=6,768,025

As of January 1, 2018, the adoption of ECL under PFRS 9 resulted in net reduction in totalAllowance for credit losses for the Parent Bank totaling P=2,877.4 million, reduction inInvestment in subsidiaries amounting to P=373.0 million and decrease in Deferred tax asset ofP=863.3 million, which accordingly resulted in increase in Surplus free amounting toP=1,641.1 million.

In addition, the Group has presented separately the interest revenue, calculated usingeffective interest method, from other interest revenue. As a result, Interest income onInvestment securities at amortized cost and FVOCI is presented separately from Interestincome on trading securities at fair value through profit or loss. Previously, these interestincome items were presented together as Interest income on trading and investment securities.

PFRS 9 does not change the general principles of how an entity accounts for effective hedges.Applying the hedging requirements of PFRS 9 did not have a significant impact on theGroup’s consolidated financial statements.

∂ PFRS 15, Revenue from Contracts with Customers. The standard supersedes PAS 11,Construction Contracts, PAS 18, Revenue and related Interpretations and it applies to allrevenue arising from contracts with customers, unless those contracts are in the scope of otherstandards. The new standard establishes a five-step model to account for revenue arisingfrom contracts with customers. The five-step model is as follows:a. Identify the contract(s) with a customerb. Identify the performance obligations in the contractc. Determine the transaction priced. Allocate the transaction price to the performance obligations in the contracte. Recognize revenue when (or as) the entity satisfies a performance obligation

Under PFRS 15, revenue is recognized at an amount that reflects the consideration to whichan entity expects to be entitled in exchange for transferring goods or services to a customer.

The standard requires entities to exercise judgement, taking into consideration all of therelevant facts and circumstances when applying each step of the model to contracts with thecustomers. The standard also specifies the accounting for the incremental costs of obtaining acontract and the costs directly related to fulfilling a contract.

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The Group adopted PFRS 15, Revenue from Contracts with Customers, effectiveJanuary 1, 2018. The Group operates various rewards program for its credit card businesswhereby reward entitlement varies according to the type of card and available points earnedby the credit card holder.

Prior to adoption of PFRS 15, the rewards program offered by the Group resulted inrecognition of miscellaneous expense and accrued expense in relation to estimated pointsissued but not yet redeemed or expired. The new standard requires the Group to allocate aportion of the service fee (interchange fee) to the loyalty points awarded to the credit cardholders, as the loyalty points give rise to a separate performance obligation. The allocatedservice fee for the loyalty points is recognized as revenue upon fulfilment of its obligation,i.e. actual redemption of the loyalty points.

The Group’s recognition of this standard resulted in recognition of unearned revenue andreversal of accrued expense, pertaining to loyalty points earned by the credit card holders butwere not yet redeemed as of reporting date. The net effect of these adjustments was notmaterial to the Group’s annual consolidated financial statement. The Group adopted PFRS15 using the full retrospective method of adoption.

∂ PFRS 4 (Amendments), Applying PFRS 9 Financial Instruments with PFRS 4 InsuranceContracts. The amendments address concerns arising from implementing PFRS 9, the newfinancial instruments standard before implementing the new insurance contracts standard.The amendments introduce two options for entities issuing insurance contracts: a temporaryexemption from applying PFRS 9 and an overlay approach. The temporary exemption is firstapplied for reporting periods beginning on or after January 1, 2018. An entity may elect theoverlay approach when it first applies PFRS 9 and apply that approach retrospectively tofinancial assets designated on transition to PFRS 9. The entity restates comparativeinformation reflecting the overlay approach if, and only if, the entity restates comparativeinformation when applying PFRS 9.

(b) Standards Issued but not yet Effective

There are new PFRSs, amendments, interpretation and annual improvements, to existingstandards effective for annual periods subsequent to 2018, which are adopted by the FRSC.Management will adopt the following relevant pronouncements in accordance with theirtransitional provisions; and, unless otherwise stated, none of these are expected to havesignificant impact on the Group’s financial statements:

Effective beginning on or after January 1, 2019:

∂ PFRS 9 (Amendment), Prepayment Features with Negative Compensation. Under PFRS 9, adebt instrument can be measured at amortized cost or at fair value through othercomprehensive income, provided that the contractual cash flows are ‘solely payments ofprincipal and interest on the principal amount outstanding’ (the SPPI criterion) and theinstrument is held within the appropriate business model for that classification. Theamendments to PFRS 9 clarify that a financial asset passes the SPPI criterion regardless ofthe event or circumstance that causes the early termination of the contract and irrespective ofwhich party pays or receives reasonable compensation for the early termination of thecontract. The amendments should be applied retrospectively and are effective fromJanuary 1, 2019, with earlier application permitted. Management has assessed that theamendment has no impact on the consolidated and parent bank financial statements.

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∂ PFRS 16, Leases. This new standard sets out the principles for the recognition, measurement,presentation and disclosure of leases and requires lessees to account for all leases under asingle on-balance sheet model similar to the accounting for finance leases under PAS 17,Leases. The standard includes two recognition exemptions for lessees - leases of ’low-value’assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12months or less). At the commencement date of a lease, a lessee will recognize a liability tomake lease payments (i.e., the lease liability) and an asset representing the right to use theunderlying asset during the lease term (i.e., the right-of-use asset). Lessees will be requiredto separately recognize the interest expense on the lease liability and the depreciation expenseon the right-of-use asset.

Leesees will be also required to remeasure the lease liability upon the occurrence of certainevents (e.g., a change in the lease term, a change in future lease payments resulting from achange in an index or rate used to determine those payments). The lessee will generallyrecognize the amount of the remeasurement of the lease liability as an adjustment to theright-of-use asset.

Lessor accounting under PFRS 16 is substantially unchanged from today’s accounting underPAS 17. Lessors will continue to classify all leases using the same classification principle asin PAS 17 and distinguish between two types of leases: operating and finance leases.PFRS 16 also requires lessees and lessors to make more extensive disclosures than underPAS 17.

A lessee can choose to apply the standard using either a full retrospective or a modifiedretrospective approach. The standard’s transition provisions permit certain reliefs.

Upon adoption of this standard, the Group and the Parent Bank expect to recognize a right ofuse asset and lease liability for covered lease contracts. Management is currently assessingthe impact of this new standard in the consolidated and parent bank financial statements.

∂ PAS 19 (Amendments), Employee Benefits, Plan Amendment, Curtailment or Settlement.The amendments to PAS 19 address the accounting when a plan amendment, curtailment orsettlement occurs during a reporting period. The amendments specify that when a planamendment, curtailment or settlement occurs during the annual reporting period, an entity isrequired to:

∂ Determine current service cost for the remainder of the period after the plan amendment,curtailment or settlement, using the actuarial assumptions used to remeasure the netdefined benefit liability (asset) reflecting the benefits offered under the plan and the planassets after that event

∂ Determine net interest for the remainder of the period after the plan amendment,curtailment or settlement using: the net defined benefit liability (asset) reflecting thebenefits offered under the plan and the plan assets after that event; and the discount rateused to remeasure that net defined benefit liability (asset).

The amendments also clarify that an entity first determines any past service cost, or a gain orloss on settlement, without considering the effect of the asset ceiling. This amount isrecognized in the statements of income. An entity then determines the effect of the assetceiling after the plan amendment, curtailment or settlement. Any change in that effect,excluding amounts included in the net interest, is recognized in other comprehensive income.

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The amendments apply to plan amendments, curtailments, or settlements occurring on orafter the beginning of the first annual reporting period that begins on or after January 1, 2019,with early application permitted. These amendments will apply only to any future planamendments, curtailments, or settlements of the Group.

∂ PAS 28 (Amendments), Long-term Interests in Associates and Joint Ventures. Theamendments clarify that an entity applies PFRS 9 to long-term interests in an associate orjoint venture to which the equity method is not applied but that, in substance, form part of thenet investment in the associate or joint venture (long-term interests). This clarification isrelevant because it implies that the expected credit loss model in PFRS 9 applies to suchlong-term interests.

The amendments also clarified that, in applying PFRS 9, an entity does not take account ofany losses of the associate or joint venture, or any impairment losses on the net investment,recognized as adjustments to the net investment in the associate or joint venture that arisefrom applying PAS 28, Investments in Associates and Joint Ventures.

The amendments should be applied retrospectively and are effective from January 1, 2019,with early application permitted. Since the Group does not have such long-term interests inits associate and joint venture, the amendments will not have an impact on its consolidatedfinancial statements.

∂ IFRIC 23, Uncertainty over Income Tax Treatments. The interpretation addresses theaccounting for income taxes when tax treatments involve uncertainty that affects theapplication of PAS 12, Income Taxes, and does not apply to taxes or levies outside the scopeof PAS 12, nor does it specifically include requirements relating to interest and penaltiesassociated with uncertain tax treatments.

The interpretation specifically addresses the following:∂ Whether an entity considers uncertain tax treatments separately∂ The assumptions an entity makes about the examination of tax treatments by taxation

authorities∂ How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused

tax credits and tax rates∂ How an entity considers changes in facts and circumstances

An entity must determine whether to consider each uncertain tax treatment separately ortogether with one or more other uncertain tax treatments. The approach that better predictsthe resolution of the uncertainty should be followed.

This interpretation is not relevant to the Group because there is no uncertainty involved in thetax treatments made by management in connection with the calculation of current anddeferred taxes as of December 31, 2018 and 2017.

Annual Improvements to PFRS 2015-2017 Cycle

∂ Amendments to PFRS 3, Business Combinations, and PFRS 11, Joint Arrangements,Previously Held Interest in a Joint Operation. The amendments clarify that, when anentity obtains control of a business that is a joint operation, it applies the requirements fora business combination achieved in stages, including remeasuring previously held

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interests in the assets and liabilities of the joint operation at fair value. In doing so, theacquirer remeasures its entire previously held interest in the joint operation.

A party that participates in, but does not have joint control of, a joint operation mightobtain joint control of the joint operation in which the activity of the joint operationconstitutes a business as defined in PFRS 3. The amendments clarify that the previouslyheld interests in that joint operation are not remeasured.

An entity applies those amendments to business combinations for which the acquisitiondate is on or after the beginning of the first annual reporting period beginning on or afterJanuary 1, 2019 and to transactions in which it obtains joint control on or after thebeginning of the first annual reporting period beginning on or after January 1, 2019, withearly application permitted. These amendments are currently not applicable to the Groupbut may apply to future transactions.

∂ Amendments to PAS 12, Income Tax Consequences of Payments on FinancialInstruments Classified as Equity. The amendments clarify that the income taxconsequences of dividends are linked more directly to past transactions or events thatgenerated distributable profits than to distributions to owners. Therefore, an entityrecognizes the income tax consequences of dividends in the statements of income, othercomprehensive income or equity according to where the entity originally recognizedthose past transactions or events.

∂ Amendments to PAS 23, Borrowing Costs, Borrowing Costs Eligible for Capitalization.The amendments clarify that an entity treats as part of general borrowings any borrowingoriginally made to develop a qualifying asset when substantially all of the activitiesnecessary to prepare that asset for its intended use or sale are complete.

An entity applies those amendments to borrowing costs incurred on or after the beginningof the annual reporting period in which the entity first applies those amendments. Anentity applies those amendments for annual reporting periods beginning on or afterJanuary 1, 2019, with early application permitted.

Since the Group’s current practice is in line with these amendments, the Group does notexpect any effect on its consolidated financial statements upon adoption.

Effective beginning on or after January 1, 2020

∂ Amendments to PFRS 3, Definition of a Business. The amendments to PFRS 3 clarify theminimum requirements to be a business, remove the assessment of a market participant’sability to replace missing elements, and narrow the definition of outputs. The amendmentsalso add guidance to assess whether an acquired process is substantive and add illustrativeexamples. An optional fair value concentration test is introduced which permits a simplifiedassessment of whether an acquired set of activities and assets is not a business.

An entity applies those amendments prospectively for annual reporting periods beginning onor after January 1, 2020, with earlier application permitted.

These amendments will apply on future business combinations of the Group.

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∂ Amendments to PAS 1, Presentation of Financial Statements, and PAS 8, AccountingPolicies, Changes in Accounting Estimates and Errors, Definition of Material. Theamendments refine the definition of material in PAS 1 and align the definitions used acrossPFRSs and other pronouncements. They are intended to improve the understanding of theexisting requirements rather than to significantly impact an entity’s materiality judgements.

An entity applies those amendments prospectively for annual reporting periods beginning onor after January 1, 2020, with earlier application permitted.

Effective beginning on or after January 1, 2021

∂ PFRS 17, Insurance Contracts. The standard is a comprehensive new accounting standardfor insurance contracts covering recognition and measurement, presentation and disclosure.Once effective, PFRS 17 will replace PFRS 4, Insurance Contracts. This new standard oninsurance contracts applies to all types of insurance contracts (i.e., life, non-life, directinsurance and re-insurance), regardless of the type of entities that issue them, as well as tocertain guarantees and financial instruments with discretionary participation features. A fewscope exceptions will apply.

The overall objective of PFRS 17 is to provide an accounting model for insurance contractsthat is more useful and consistent for insurers. In contrast to the requirements in PFRS 4,which are largely based on grandfathering previous local accounting policies, PFRS 17provides a comprehensive model for insurance contracts, covering all relevant accountingaspects. The core of PFRS 17 is the general model, supplemented by:

∂ A specific adaptation for contracts with direct participation features (the variable feeapproach)

∂ A simplified approach (the premium allocation approach) mainly for short-durationcontracts

PFRS 17 is effective for reporting periods beginning on or after January 1, 2021, withcomparative figures required. Early application is permitted.

Deferred effectivity

∂ Amendments to PFRS 10, Consolidated Financial Statements, and PAS 28, Sale orContribution of Assets between an Investor and its Associate or Joint Venture. Theamendments address the conflict between PFRS 10 and PAS 28 in dealing with the loss ofcontrol of a subsidiary that is sold or contributed to an associate or joint venture. Theamendments clarify that a full gain or loss is recognized when a transfer to an associate orjoint venture involves a business as defined in PFRS 3. Any gain or loss resulting from thesale or contribution of assets that does not constitute a business, however, is recognized onlyto the extent of unrelated investors’ interests in the associate or joint venture.

On January 13, 2016, the Financial Reporting Standards Council deferred the original effectivedate of January 1, 2016 of the said amendments until the International Accounting StandardsBoard (IASB) completes its broader review of the research project on equity accounting that mayresult in the simplification of accounting for such transactions and of other aspects of accountingfor associates and joint ventures.

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Prior-Period AdjustmentsIn 2018, a subsidiary has changed the accounting for certain upfront fees on Loans and discountsfrom outright income recognition as Services charges, fees and commissions to amortizing the fees toInterest income over the expected life of the loans using the effective interest rate method. Inaddition, the subsidiary adjusted the deferred tax asset recognized in previous years.

The changes have been accounted for retroactively and resulted in the following for the Group’sconsolidated statements of financial position: (i) reduction in Surplus free amounting toP=0.64 billion as of both December 31, 2017 and December 31, 2016/January 1, 2017 (ii) decrease inLoans and discounts amounting to P=0.86 billion as of both December 31, 2017 andDecember 31, 2016/January 1, 2017, (iii) increase in Deferred tax asset amounting to P=0.21 billion asof both December 31, 2017 and December 31, 2016/January 1, 2017, and (iv) reduction inNon-controlling interest amounting to P=0.01 billion as of both December 31, 2017 andDecember 31, 2016/January 1, 2017. For the Group’s comparative consolidated statements ofincome, the changes resulted in the following: (i) increases in Interest income amounting toP=3.1 billion and P=3.4 billion for the years ended December 31, 2017 and 2016, respectively,(ii) decreases in Service charges, fees and commissions amounting to P=2.9 billion and P=3.2 billion forthe years ended December 31, 2017 and 2016, respectively, and (iii) increases in Miscellaneousexpenses amounting to P=0.2 billion for both the years ended December 31, 2017 and 2016.

The changes also resulted in decreases in the Investment in subsidiaries and Surplus free accountsamounting to P=0.64 billion as of both December 31, 2017 and December 31, 2016/January 1, 2017 inthe Parent Bank’s financial statements.

There is no material impact on net income of the Group and the Parent Bank for the years endedDecember 31, 2017 and 2016.

Basis of Consolidated Financial StatementsThe Group’s financial statements comprise the accounts of the Parent Bank and its subsidiaries, asenumerated in Note 1 and as disclosed under Note 15, after the elimination of material intercompanytransactions. All intercompany resources and liabilities, equity, income, and expenses and cash flowsrelating to transactions with subsidiaries are eliminated in full. Unrealized profits and losses fromintercompany transactions that are recognized in the separate financial statements are also eliminatedin full. Intercompany losses that indicate impairment are recognized in the Group’s financialstatements.

The financial statements of the subsidiaries are prepared in the same reporting period asthe Parent Bank using consistent accounting policies.

Non-controlling InterestsNon-controlling interest represents the portion of profit or loss and net assets not owned, directly orindirectly, by the Parent Bank.

The Group’s transactions with non-controlling interests that do not result in loss of control areaccounted for as equity transactions - that is, as transaction with the owners of the Group in theircapacity as owners. The difference between the fair value of any consideration paid and the relevantshare acquired of the carrying value of the net assets of the subsidiary is recognized in capital funds.Disposals of equity investments to non-controlling interests may result in gains and losses for theGroup that are also recognized in capital funds.

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When the Group ceases to have control over a subsidiary, any retained interest in the entity isremeasured to its fair value at the date when control is lost, with the change in carrying amountrecognized in the statements of income. The fair value is the initial carrying amount for the purposesof subsequently accounting for the retained interest as an associate, joint venture or financial asset. Inaddition, any amounts previously recognized in other comprehensive income in respect of that entityare accounted for as if the Group had directly disposed of the related resources or liabilities. Thismay mean that amounts previously recognized in other comprehensive income are reclassified toprofit or loss.

Investment in SubsidiariesSubsidiaries are entities (including structured entities) over which the Group has control. The Groupcontrols an entity when it has the power over the entity, it is exposed, or has rights to, variable returnsfrom its involvement with the entity, and it has the ability to affect those returns through its powerover the entity. Subsidiaries are consolidated from the date the Group obtains control.

The Group reassesses whether or not it controls an entity if facts and circumstances indicate that thereare changes to one or more of the three elements of controls indicated above. Accordingly, entitiesare deconsolidated from the date that control ceases.

In the Parent Bank’s separate financial statements, investments in subsidiaries are initially recognizedat cost and subsequently accounted for using the equity method (see Note 15).

All subsequent changes to the share in the equity of the subsidiaries are recognized in the carryingamount of the Parent Bank’s investment. Changes resulting from the profit or loss generated by thesubsidiaries are reported as Share in net profit of subsidiaries under Miscellaneous income account inthe Parent Bank’s separate statements of income.

Changes resulting from other comprehensive income of the subsidiaries are recognized in othercomprehensive income of the Parent Bank. Any distributions received from the subsidiaries(e.g., dividends) are recognized as reduction in the carrying amount of investment in subsidiaries.However, when the Parent Bank’s share of losses in a subsidiary equals or exceeds its interest in thesubsidiary, including any other unsecured receivables, the Parent Bank does not recognize furtherlosses, unless it has incurred obligations or made payments on behalf of the subsidiary. If thesubsidiary subsequently reports profits, the Parent Bank recognizes its share on those profits onlyafter its share of the profits exceeds the accumulated share of losses that has previously not beenrecognized.

In computing the Parent Bank’s share in net profit or loss of subsidiaries, unrealized gains or losseson transactions between the Parent Bank and its subsidiaries are eliminated to the extent ofthe Parent Bank’s interest in the subsidiaries. Where unrealized losses are eliminated, the underlyingasset is also tested for impairment from a group perspective.

The Parent Bank holds interests in various subsidiaries as presented in Notes 1 and 15.

Business Combinations and GoodwillBusiness acquisitions are accounted for using the acquisition method of accounting. This requiresrecognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. The consideration transferred for the acquisition of a subsidiary isthe fair value of the assets transferred, the liabilities incurred and the equity interests issued by theGroup, if any. The consideration transferred also includes the fair value of any asset or liabilityresulting from a contingent consideration arrangement.

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Acquisition-related costs are expensed as incurred and subsequent change in the fair value ofcontingent consideration is recognized directly in the statements of income.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a businesscombination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognizes any non-controlling interest in the acquiree, either at fairvalue or at the non-controlling interest’s proportionate share of the recognized amounts of acquiree’sidentifiable net assets.

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share ofthe net identifiable assets of the acquired subsidiary at the date of acquisition. Subsequent to initialrecognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is testedannually for impairment. Impairment losses on goodwill are not reversed.

Gain on bargain purchase which is the excess of the Group’s interest in the net fair value of netidentifiable assets acquired over acquisition cost is recognized directly to profit.

For the purpose of impairment testing, goodwill is allocated to cash-generating units or groups ofcash-generating units that are expected to benefit from the business combination in which thegoodwill arose. The cash-generating units or groups of cash-generating units are identified accordingto operating segment.

Gains and losses on the disposal of an interest in a subsidiary include the carrying amount ofgoodwill relating to it.

If the business combination is achieved in stages, the acquirer is required to remeasure its previouslyheld equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain orloss, if any, in the statements of income, as appropriate.

Any contingent consideration to be transferred by the Group is recognized at fair value at theacquisition date. Subsequent changes to the fair value of the contingent consideration that is deemedto be an asset or liability is recognized in accordance with PAS 37, Provisions, Contingent Liabilitiesand Contingent Assets, either in the statements of income or as a charge to other comprehensiveincome. Contingent consideration that is classified as capital funds is not remeasured, and itssubsequent settlement is accounted for within capital funds.

Fair Value MeasurementThe Group measures financial instruments such as financial assets at FVTPL and FVOCI at fair valueat each reporting date. Also, fair values of financial instruments measured at amortized cost andinvestment properties are disclosed in Note 7.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date. The fair value measurementis based on the presumption that the transaction to sell the asset or transfer the liability takes placeeither:∂ in the principal market for the asset or liability, or∂ in the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible to the Group. The fair value of anasset or a liability is measured using the assumptions that market participants would use when pricingthe asset or liability, assuming that market participants act in their economic best interest.

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If an asset or a liability measured at fair value has a bid price and ask price, the price within the bid-ask spread is the most representative of fair value in the circumstance shall be used to measure fairvalue regardless of where the input is categorized within the fair value hierarchy. The fair valuemeasurement of a nonfinancial asset takes into account the market participant's ability to generateeconomic benefits by using the asset in its highest and best use or by selling it to another marketparticipant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for whichsufficient data are available to measure fair value, maximizing the use of relevant observable inputsand minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements arecategorized within the fair value hierarchy, described in Note 7, based on the lowest level input that issignificant to the fair value measurement as a whole.

For assets and liabilities that are recognized in the financial statements on a recurring basis, theGroup determines whether transfers have occurred between levels in the hierarchy by re-assessingcategorization (based on the lowest level input that is significant to the fair value measurement as awhole) at the end of each reporting period.

Financial Instruments - Initial Recognition and Subsequent MeasurementDate of recognitionFinancial assets and liabilities, with the exception of loans and advances to customers and balancesdue to customers, are initially recognised on the trade date, i.e., the date that the Group becomes aparty to the contractual provisions of the instrument. This includes regular way trades: purchases orsales of financial-assets that require delivery of assets within the time frame generally established byregulation or convention in the market place. Loans and advances to customers are recognised whenfunds are transferred to the customers’ accounts. The Group recognises balances due to customerswhen funds are transferred to the Group.

Initial measurement of financial instrumentsThe classification of financial instruments at initial recognition depends on their contractual termsand the business model for managing the instruments, as described below. Financial instruments areinitially measured at their fair value; except in the case of financial assets and financial liabilitiesrecorded at FVTPL, transaction costs are added to, or subtracted from, this amount. When the fairvalue of financial instruments at initial recognition differs from the transaction price, the Groupaccounts for the Day 1 profit or loss, as described below.

‘Day 1’ differenceWhere the transaction price in a non-active market is different from the fair value based on otherobservable current market transactions in the same instrument or based on a valuation techniquewhose variables include only data from observable market, the Group recognizes the differencebetween the transaction price and the fair value (a ‘Day 1’difference) in the statements of incomeunless it qualifies for recognition as some other type of asset. In cases where transaction price used ismade of data which is not observable, the difference between the transaction price and model value isonly recognized in the statements of income when the inputs become observable or when theinstrument is derecognized. For each transaction, the Group determines the appropriate method ofrecognizing the ‘Day 1’ difference amount.

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Measurement categories of financial assets and liabilitiesFrom 1 January 2018, the Group classifies all of its financial assets based on the business model formanaging the assets and the asset’s contractual terms, measured at either at amortized cost, at FVOCIor at FVTPL.

The Group classifies and measures its derivative and trading portfolio at FVTPL. The Group maydesignate financial instruments at FVTPL, if so doing eliminates or significantly reducesmeasurement or recognition inconsistencies.

Before 1 January 2018, the Group classified its financial assets as amortized cost and FVPL.Financial liabilities, other than loan commitments and financial guarantees, are measured at amortisedcost or at FVPL when they are held for trading, derivative instruments or the fair value designation isapplied.

Financial AssetsFinancial assets are recognized when the Group becomes a party to the contractual terms of the financialinstrument. For purposes of classifying financial assets, an instrument is considered as an equityinstrument if it is non-derivative and meets the definition of equity for the issuer in accordance withthe criteria under PAS 32, Financial Instruments: Presentation. All other non-derivative financialinstruments are treated as debt instruments.

(a) Classification, Measurement and Reclassification of Financial Assets

Under PFRS 9, the classification and measurement of financial assets is driven by the entity’scontractual cash flow characteristics of the financial assets and business model for managing thefinancial assets.

As part of its classification process, the Group assesses the contractual terms of financial assets toidentify whether they meet the ‘solely payments of principal and interest’ (SPPI) test. ‘Principal’for the purpose of this test is defined as the fair value of the financial asset at initial recognitionand may change over the life of the financial asset (e.g. if there are repayments of principal oramortization of the premium or discount).

The most significant elements of interest within a lending arrangement are typically theconsideration for the time value of money and credit risk. To make the SPPI assessment, theBank applies judgement and considers relevant factors such as the currency in which the financialasset is denominated, and the period for which the interest rate is set.

In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatilityin the contractual cash flows that are unrelated to a basic lending arrangement do not give rise tocontractual cash flows that are solely payments of principal and interest on the amountoutstanding. In such cases, the financial asset is required to be measured at FVTPL.

The Group determines its business model at the level that best reflects how it manages groups offinancial assets to achieve its business objective.

The Bank's business model is not assessed on an instrument-by-instrument basis, but at a higherlevel of aggregated portfolios and is based on observable factors such as:∂ how the performance of the business model and the financial assets held within that business

model are evaluated and reported to the entity's key management personnel

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∂ the risks that affect the performance of the business model (and the financial assets heldwithin that business model) and, in particular, the way those risks are managed

∂ how managers of the business are compensated (for example, whether the compensation isbased on the fair value of the assets managed or on the contractual cash flows collected)

∂ the expected frequency, value and timing of sales are also important aspects ofthe Group’s assessment.

The business model assessment is based on reasonably expected scenarios without taking 'worstcase' or 'stress case’ scenarios into account. If cash flows after initial recognition are realized in away that is different from the Group's original expectations, the Group does not change theclassification of the remaining financial assets held in that business model, but incorporates suchinformation when assessing newly originated or newly purchased financial assets going forward.

The Group’s measurement categories are described below:

Financial Assets at Amortized Cost

Financial assets are measured at amortized cost if both of the following conditions are met:

∂ the asset is held within the Group’s business model whose objective is to hold financial assetsin order to collect contractual cash flows; and,

∂ the contractual terms of the instrument give rise, on specified dates, to cash flows that areSPPI on the principal amount outstanding.

Financial assets meeting these criteria are measured initially at fair value plus transaction costs.They are subsequently measured at amortized cost using the effective interest method, less anyimpairment in value.

The Group’s financial assets at amortized cost are presented in the statement of financial positionas Due from BSP, Due from other banks, Interbank loans receivable, Financial assets atamortized cost under Trading and investment securities, Loans and other receivables and certainaccounts under Other resources.

For purposes of cash flows reporting and presentation, cash and cash equivalents compriseaccounts with original maturities of three months or less, including Cash and other cash items,non-restricted balances of Due from BSP, Due from other banks, Interbank loans receivable andSecurities purchased under repurchase agreements included in Loans and other receivables.These generally include cash on hand, demand deposits and short-term, highly liquid investmentsreadily convertible to known amounts of cash and which are subject to insignificant risk ofchanges in value.

The Group may irrevocably elect at initial recognition to classify a financial asset that meets theamortized cost criteria above as at FVTPL if that designation eliminates or significantly reducesan accounting mismatch had the financial asset been measured at amortized cost. In 2017 and2016, the Group has not made such designation.

Financial Assets at FVTPL

Debt instruments that do not meet the amortized cost criteria, or that meet the criteria but theGroup has chosen to designate as at FVTPL at initial recognition, are classified as financial assetsat FVTPL. Equity investments are classified as financial assets at FVTPL, unless the Group

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designates an equity investment that is not held for trading as at FVOCI at initial recognition.The Group’s financial assets at FVTPL include government securities, corporate bonds andequity securities which are held for trading purposes.

A financial asset is considered as held for trading if:

∂ it has been acquired principally for the purpose of selling it in the near term;∂ on initial recognition, it is part of a portfolio of identified financial instruments that the Group

manages together and has evidence of a recent actual pattern of short-term profit-taking; or,∂ it is a derivative that is not designated and effective as a hedging instrument or financial

guarantee.

Financial assets at FVTPL are measured at fair value. Related transaction costs are recognizeddirectly as expense in the statements of income. Unrealized gains and losses arising fromchanges (mark-to-market) in the fair value of the financial assets at FVTPL category and realizedgains or losses arising from disposals of these instruments are included in Gains (losses) ontrading and investment securities at FVTPL and FVOCI account in the statements of income.

Interest earned on these investments is reported in the statements of income under Interestincome account while dividend income is reported in the statements of income underMiscellaneous income account when the right of payment has been established.

Financial Assets at FVOCI - Equity InvestmentsAt initial recognition, the Group can make an irrevocable election (on an instrument-by-instrument basis) to designate equity investments as at FVOCI; however, such designation is notpermitted if the equity investment is held by the Group for trading. The Group has designatedcertain equity instruments as at FVOCI on initial application of PFRS 9.

Financial assets at FVOCI are initially measured at fair value plus transaction costs.Subsequently, they are measured at fair value, with no deduction for any disposal costs. Gainsand losses arising from changes in fair value are recognized in other comprehensive income andaccumulated in Net unrealized fair value gains (losses) on investment securities in the statementsof financial position. When the asset is disposed of, the cumulative gain or loss previouslyrecognized in the Net unrealized fair value gains (losses) on investment securities account is notreclassified to profit or loss, but is reclassified directly to Surplus free account.

Any dividends earned on holding these equity instruments are recognized in the statements ofincome under Miscellaneous income account.

Applicable for the period beginning January 1, 2018The Group applies the new category under PFRS 9 of debt instruments measured at FVOCI whenboth of the following conditions are met:∂ the instrument is held within a business model, the objective of which is achieved by both

collecting contractual cash flows and selling financial assets, and∂ the contractual terms of the financial asset meet the SPPI test.

FVOCI debt instruments are subsequently measured at fair value with gains and losses arisingdue to changes in fair value being recognized in OCI. Interest income and foreign exchangegains and losses are recognized in the statements of income in the same manner as for financialassets measured at amortized cost. The ECL calculation for financial assets at FVOCI isexplained in the ‘Impairment of Financial Assets’ section.

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On derecognition, cumulative gains or losses previously recognized in OCI are reclassified fromOCI to the statements of income.

The Group can only reclassify financial assets if the objective of its business model for managingthose financial assets changes. Accordingly, the Group is required to reclassify financial assets:(i) from amortized cost to FVTPL, if the objective of the business model changes so that theamortized cost criteria are no longer met; and, (ii) from FVTPL to amortized cost, if the objectiveof the business model changes so that the amortized cost criteria start to be met and thecharacteristic of the instrument’s contractual cash flows meet the amortized cost criteria.

A change in the objective of the Group’s business model will be effected only at the beginning ofthe next reporting period following the change in the business model.

(b) Impairment of Financial AssetsApplicable for the year ended December 31, 2017 and prior yearsThe Group assesses at the end of each reporting period whether there is objective evidence that afinancial asset or group of financial assets is impaired. A financial asset or a group of financialassets is impaired and impairment losses are incurred if, and only if, there is objective evidence ofimpairment as a result of one or more events that occurred after the initial recognition of the asset(a loss event) and that loss event (or events) has an impact on the estimated future cash flows ofthe financial assets or group of financial assets that can be reliably estimated.

Objective evidence that a financial asset or group of assets is impaired includes observable datathat comes to the attention of the Group about certain loss events, including, among others: (i)significant financial difficulty of the issuer or debtor; (ii) a breach of contract, such as a default ordelinquency in interest or principal payments; (iii) the Group granting the borrower, for economicor legal reasons relating to the borrower’s financial difficulty, a concession that the lender wouldnot otherwise consider; (iv) it is probable that the borrower will enter bankruptcy or otherfinancial reorganization; (v) the disappearance of an active market for that financial asset becauseof financial difficulties; or, (vi) observable data indicating that there is a measurable decrease inthe estimated future cash flows from a group of financial assets since the initial recognition ofthose assets, although the decrease cannot yet be identified with the individual financial assets inthe group.

For financial assets classified and measured at amortized cost, the Group first assesses whetherobjective evidence of impairment exists individually for financial assets that are individuallysignificant and individually or collectively for financial assets that are not individuallysignificant. If the Group determines that no objective evidence of impairment exists for anindividually assessed financial asset, whether significant or not, it includes the asset in a group offinancial assets with similar credit risk characteristics and collectively assesses them forimpairment.

Financial assets that are individually assessed for impairment and for which an impairment loss isor continues to be recognized are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss on financial assets carried at amortized costhas been incurred, the amount of the loss is measured as the difference between the asset’scarrying amount and the present value of estimated future cash flows (excluding future creditlosses that have not been incurred), discounted at the financial asset’s original effective interestrate or current effective interest rate determined under the contract if the loan has a variableinterest rate. The carrying amount of the asset is reduced through the use of an allowance accountand the amount of the loss is recognized in the statements of income.

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If a financial asset carried at amortized cost has a variable interest rate, the discount rate formeasuring any impairment loss is the current effective interest rate determined under the contract.When practicable, the Group may measure impairment on the basis of an instrument’s fair valueusing an observable market price.

The calculation of the present value of the estimated future cash flows of a collateralized financialasset reflects the cash flows that may result from foreclosure less costs for obtaining and sellingthe collateral, whether or not foreclosure is probable.

For the purpose of collective evaluation of impairment for loans and receivables, financial assetsare grouped on the basis of similar credit risk characteristics (i.e., on the basis of the Group’sgrading process that considers asset type, industry, geographical location, collateral type, past-duestatus and other relevant factors). Those characteristics are relevant to the estimation of futurecash flows for groups of such assets by being indicative of the debtors’ ability to pay all amountsdue according to the contractual terms of the assets being evaluated.

Future cash flows in a group of financial assets that are collectively evaluated for impairment areestimated on the basis of the contractual cash flows of the assets in the group and historical lossexperience for assets with credit risk characteristics similar to those in the group. Historical lossexperience is adjusted on the basis of current observable data to reflect the effects of currentconditions that did not affect the period on which the historical loss experience is based and toremove the effects of conditions in the historical period that do not exist currently.

Estimates of changes in future cash flows for groups of assets should reflect and be directionallyconsistent with changes in related observable data from period to period (for example, changes inunemployment rates, property prices, payment status, or other factors indicative of changes in theprobability of losses in the group and their magnitude). The methodology and assumptions usedfor estimating future cash flows are reviewed regularly by the Group to reduce any differencesbetween loss estimates and actual loss experience.

The Group also takes into account basic guidelines in setting up allowance for credit losses asprescribed under BSP Circular No. 855 (Appendix 18). Financial institutions with creditoperations that may not economically justify a more sophisticated loan loss estimationmethodology or where practices fall short of expected standards shall be subject to the saidguidelines.

When possible, the Group seeks to restructure loans rather than to take possession of thecollateral. This may involve extending the payment arrangement and agreement for new loanconditions. Once the terms have been renegotiated, the loan is no longer considered past due.Management continuously reviews restructured loans to ensure that all criteria evidencing thegood quality of the loan are met and that future payments are likely to occur. The loans continueto be subject to an individual or collective impairment assessment, calculated using the loan’soriginal effective interest rate. The difference between the recorded amount of the original loanand the present value of the restructured cash flows, discounted at the original effective interestrate, is recognized as part of Provision for credit losses account in the statements of income.

When a loan receivable is determined to be uncollectible, it is written-off against the relatedallowance for impairment. Such loan or receivable is written-off after all the prescribedprocedures have been completed and the amount of the loss has been determined. Subsequentrecoveries of amounts previously written-off decrease the amount of impairment losses in thestatements of income.

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If, in a subsequent period, the amount of the impairment loss decreases and the decrease can berelated objectively to an event occurring after the impairment was recognized (such as animprovement in the debtor’s credit rating), the previously recognized impairment loss is reversedby adjusting the allowance account. The amount of the reversal is recognized in the statements ofincome.

Applicable beginning January 1, 2018The adoption of the final version of PFRS 9 has fundamentally changed the Group’s impairmentmethod by replacing PAS 39’s incurred loss approach with a forward-looking ECL approach.From January 1, 2018, the Group has been recording the allowance for expected credit losses forall loans and other debt financial assets carried at amortized cost, together with loan commitmentsand financial guarantee contracts. Equity instruments are not subject to impairment underPFRS 9.

ECL represent credit losses that reflect an unbiased and probability-weighted amount which isdetermined by evaluating a range of possible outcomes, the time value of money and reasonableand supportable information about past events, current conditions and forecasts of futureeconomic conditions. ECL allowances are measured at amounts equal to either (i) 12-month ECLor (ii) lifetime ECL for those financial instruments which have experienced a significant increasein credit risk (SICR) since initial recognition (General Approach). The 12-month ECL is theportion of lifetime ECL that results from default events on a financial instrument that are possiblewithin the 12 months after the reporting date. Lifetime ECL are credit losses that results from allpossible default events over the expected life of a financial instrument.

The Group has established a policy to perform an assessment, at the end of each reporting period,of whether a financial instrument’s credit risk has increased significantly since initial recognition,by considering the change in the risk of default occurring over the remaining life of the financialinstrument.

For non-credit-impaired financial instruments:∂ Stage 1 is comprised of all non-impaired financial instruments which have not experienced a

SICR since initial recognition. The Group and the Parent Bank recognizes a 12-month ECLfor Stage 1 financial instruments.

∂ Stage 2 is comprised of all non-impaired financial instruments which have experienced aSICR since initial recognition. The Group and the Parent Bank recognizes a lifetime ECL forStage 2 financial instruments.

For credit-impaired financial instruments:∂ Financial instruments are classified as Stage 3 when there is objective evidence of

impairment as a result of one or more loss events that have occurred after initial recognitionwith a negative impact on the estimated future cash flows of a loan or a portfolio of loans.The ECL model requires that lifetime ECL be recognized for impaired financial instruments.

The Group uses internal credit assessment and approvals at various levels to determine the creditrisk of exposures at initial recognition. Assessment can be quantitative or qualitative and dependson the materiality of the facility or the complexity of the portfolio to be assessed.

The Group defines a financial instrument as in default, which is fully aligned with the definitionof credit impaired, in all cases when the borrower becomes more than 90 days past due on itscontractual payments. As a part of a qualitative assessment of whether a customer is in default,the Group also considers a variety of instances that may indicate unlikeliness to pay. When such

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events occur, the Group carefully considers whether the event should result in treating thecustomer as defaulted. An instrument is considered to be no longer in default (i.e., to have cured)when it no longer meets any of the default criteria for a consecutive period of 180 days (i.e.consecutive payments from the borrowers for 180 days).

The criteria for determining whether credit risk has increased significantly vary by portfolio andinclude quantitative changes in probabilities of default and qualitative factors such as downgradein the credit rating of the borrowers and a backstop based on delinquency. The credit risk of aparticular exposure is deemed to have increased significantly since initial recognition if, based onthe Group’s internal credit assessment, the borrower or counterparty is determined to requireclose monitoring or with well-defined credit weaknesses. For exposures without internal creditgrades, if contractual payments are more than a specified days past due threshold (i.e. 30 days),the credit risk is deemed to have increased significantly since initial recognition. Days past dueare determined by counting the number of days since the earliest elapsed due date in respect ofwhich full payment has not been received. In subsequent reporting periods, if the credit risk ofthe financial instrument improves such that there is no longer a SICR since initial recognition, theGroup shall revert to recognizing a 12-month ECL.

ECL is a function of the PD, EAD and LGD, with the timing of the loss also considered, and isestimated by incorporating forward-looking economic information and through the use ofexperienced credit judgment.

The PD represents the likelihood that a credit exposure will not be repaid and will go into defaultin either a 12-month horizon for Stage 1 or lifetime horizon for Stage 2. The PD for eachindividual instrument is modelled based on historical data and is estimated based on currentmarket conditions and reasonable and supportable information about future economic conditions.The Group segmented its credit exposures based on homogenous risk characteristics anddeveloped a corresponding PD methodology for each portfolio. The PD methodology for eachrelevant portfolio is determined based on the underlying nature or characteristic of the portfolio,behavior of the accounts and materiality of the segment as compared to the total portfolio.

EAD is modelled on historic data and represents an estimate of the outstanding amount of creditexposure at the time a default may occur. For off-balance sheet and undrawn amounts, EADincludes an estimate of any further amounts to be drawn at the time of default. LGD is theamount that may not be recovered in the event of default and is modelled based on historical cashflow recovery and reasonable and supportable information about future economic conditions,where appropriate. LGD takes into consideration the amount and quality of any collateral held.

In certain circumstances, the Group modifies the original terms and conditions of a creditexposure to form a new loan agreement or payment schedule. The modifications can be givendepending on the borrower’s or counterparty’s current or expected financial difficulty. Themodifications may include, but are not limited to, change in interest rate and terms, principalamount, maturity date, date and amount of periodic payments and accrual of interest and charges.Distressed restructuring with indications of unlikeliness to pay are categorized as impairedaccounts and are moved to Stage 3.

(c) Derecognition of Financial Assets

A financial asset (or where applicable, a part of a financial asset or part of a group of financialassets) is derecognized when the contractual rights to receive cash flows from the financialinstruments expire, or when the financial assets and all substantial risks and rewards of ownershiphave been transferred to another party. If the Group neither transfers nor retains substantially all

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the risks and rewards of ownership and continues to control the transferred asset, the Grouprecognizes its retained interest in the asset and an associated liability for amounts it may have topay. If the Group retains substantially all the risks and rewards of ownership of a transferredfinancial asset, the Group continues to recognize the financial asset and also recognizes acollateralized borrowing for the proceeds received.

Derivative Financial InstrumentsThe Group is a counterparty to derivatives contracts, such as forwards, swaps and warrants. Thesecontracts are entered into as a means of reducing or managing the Group’s foreign exchange andinterest rate exposures as well as those of its customers.

Derivatives are initially recognized at fair value on the date on which the derivative contract isentered into and are subsequently measured at their fair values. Fair values are obtained from quotedmarket prices in active markets, including recent market transactions. All derivatives are carried asresources when fair value is positive and as liabilities when fair value is negative.

The best evidence of the fair value of a derivative at initial recognition is the transaction price (thefair value of the consideration given or received) unless the fair value of that instrument is evidencedby comparison with other observable current market transactions in the same instrument. When suchevidence exists, which indicates a fair value different from the transaction price, the Group recognizesa gain or loss at initial recognition.

For more complex instruments, the Group uses proprietary models, which usually are developed fromrecognized valuation models. Some or all of the inputs into these models may not be marketobservable, and are derived from market prices or rates or are estimated based on assumptions. Whenentering into a transaction, the financial instrument is recognized initially at the transaction price,which is the best indicator of fair value, although the value obtained from the valuation model maydiffer from the transaction price. This initial difference in fair value indicated by valuationtechniques is recognized in income depending upon the individual facts and circumstances of eachtransaction and not later than when the market data becomes observable.

Changes in the fair value of derivatives are recognized in the statements of income.

Financial LiabilitiesFinancial liabilities which include deposit liabilities, bills payable, notes and bonds payable, and otherliabilities (except tax-related payables, pre-need reserves and post-employment defined benefitobligation) are recognized when the Group becomes a party to the contractual terms of theinstrument.

Financial liabilities are recognized initially at their fair value and subsequently measured at amortizedcost using the effective interest method, for those with maturities beyond one year, less settlementpayments. All interest-related charges incurred on financial liabilities are recognized as an expense inthe statements of income under the caption Interest expense.

Deposit liabilities are stated at amounts in which they are to be paid. Interest is accrued periodicallyand recognized in a separate liability account before recognizing as part of deposit liabilities.

Bills payable and Notes and bonds payable are recognized initially at fair value, which is the issueproceeds (fair value of consideration received) less any issuance costs. These are subsequentlymeasured at amortized cost; any difference between the proceeds net of transaction costs and theredemption value is recognized in the statements of income over the period of the borrowings usingthe effective interest method.

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Derivative liabilities, which are included as part of Other Liabilities, are recognized initially andsubsequently measured at fair value with changes in fair value recognized in the statements ofincome.

Other liabilities, apart from derivative liabilities, are recognized initially at their fair value andsubsequently measured at amortized cost, using effective interest method for maturities beyond oneyear, less settlement payments.

Financial liabilities are derecognized from the statement of financial position only when theobligations are extinguished either through discharge, cancellation or expiration. Where an existingfinancial liability is replaced by another from the same lender on substantially different terms, or ifthe terms of an existing liability are substantially modified, such an exchange or modification istreated as a derecognition of the original liability and a recognition of the new liability, and thedifference in the respective carrying amounts is recognized in the statements of income.

Offsetting Financial InstrumentsFinancial resources and liabilities are offset and the resulting net amount, considered as a singlefinancial asset or financial liability, is reported in the statements of financial position when there is alegally enforceable right to offset the recognized amounts and there is an intention to settle on a netbasis, or realize the asset and settle the liability simultaneously. The right of set-off must be availableat the end of the reporting period, that is, it is not contingent on future event. It must also beenforceable in the normal course of business, in the event of default, and in the event of insolvency orbankruptcy; and must be legally enforceable for both entity and all counterparties to the financialinstruments.

Bank Premises, Furniture, Fixtures and EquipmentBank premises, furniture, fixtures and equipment are carried at acquisition cost less accumulateddepreciation and amortization, and any impairment in value.

The cost of an asset comprises its purchase price and directly attributable costs of bringing the assetto working condition for its intended use. Expenditures for additions, major improvements andrenewals are capitalized, while expenditures for repairs and maintenance are charged to expense asincurred.

Depreciation is computed on a straight-line basis over the estimated useful lives of the depreciableassets as follows:

Buildings 25 - 50 yearsFurniture, fixtures and equipment 5 - 10 years

Leasehold rights and improvements are amortized over the term of the lease or the estimated usefullives of the improvements of five to ten years, whichever is shorter.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’scarrying amount is greater than its estimated recoverable amount.

The residual values, estimated useful lives and method of depreciation and amortization of bankpremises, furniture, fixtures and equipment (except land) are reviewed and adjusted if appropriate, atthe end of each reporting period.

If a change in use requires an item of bank premises, furniture, fixtures and equipment to bereclassified to investment properties, the difference between the carrying amount of such asset and its

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fair value as of the date of change in use is recognized in other comprehensive income andaccumulated in equity under the Other reserves account. If the asset is subsequently retired ordisposed of, the related revaluation surplus is transferred directly to Surplus free account.

An item of bank premises, furniture, fixtures and equipment, including the related accumulateddepreciation, amortization and impairment losses, is derecognized upon disposal or when no futureeconomic benefits are expected to arise from the continued use of the asset. Any gain or loss arisingon derecognition of the asset (calculated as the difference between the net disposal proceeds and thecarrying amount of the item) is included in the statements of income in the year the item isderecognized.

Investment PropertiesInvestment properties are properties held either to earn rental income or for capital appreciation or forboth, but not for sale in the ordinary course of business, use in the production or supply of goods orservices or for administrative purposes.

Investment properties are measured initially at acquisition cost which comprise its purchase price anddirectly attributable cost incurred. These include parcels of land and buildings and relatedimprovements acquired by the Group from defaulting borrowers. Subsequently, investmentproperties are accounted for under the fair value model. It is revalued and reported in the statement offinancial position at its market value as determined by independent appraisal companies acceptable tothe BSP. The carrying amounts recognized in the statement of financial position reflect the prevailingmarket conditions at the reporting date.

Any gain or loss resulting from either a change in the fair value or the sale or retirement of aninvestment property is immediately recognized in the statements of income as Fair value gains orlosses on investment properties under Miscellaneous income or expenses account in the statements ofincome.

Investment properties are derecognized upon disposal or when permanently withdrawn from use andno future economic benefit is expected from its disposal. Any gain or loss on the retirement ordisposal of an investment property is recognized in the statements of income in the year of retirementor disposal.

Direct operating expenses related to investment properties, such as repairs and maintenance, and realestate taxes are normally charged against current operations in the period in which these costs areincurred.

Intangible AssetsIntangible assets include goodwill and acquired computer software. Goodwill represents the excessof the acquisition cost over the fair value of the identifiable net assets (a) of the former InternationalExchange Bank (iBank) in its merger with the Bank on April 30, 2006; (b) of CSB upon itsacquisition by the Bank on January 8, 2013, (c) of PR Savings Bank upon its acquisition by CSB onJune 14, 2018 and (d) of PETNET upon acquisition by the Group on December 17, 2018 (Note 1).Goodwill has indefinite useful life and, thus, not subject to amortization but requires an annual testfor impairment. Goodwill is subsequently carried at cost less accumulated impairment losses.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. Goodwillsometimes cannot be allocated on a non-arbitrary basis to individual cash-generating units, but onlyto groups of cash-generating units. As a result, the lowest level within the Parent Bank at whichgoodwill is monitored for internal management purposes sometimes comprises a number ofcash-generating units. The Group’s cash-generating unit represents all the branches and segments of

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the Parent Bank, including the units that were integrated to the Parent Bank as a result of theacquisitions.

Computer software used in administration is accounted for under the cost model. The cost of theasset is the amount of cash or cash equivalents paid or the fair value of the other considerations givenup to acquire an asset at the time of its acquisition or production.

Computer software licenses are capitalized on the basis of the costs incurred to acquire, develop, andinstall the specific software. These costs are amortized on a straight-line basis over the expecteduseful lives ranging from five to ten years, as the lives of these intangible assets are considered finite.These costs are recognized as part of Depreciation and amortization under the Other expenses accountin the statements of income. Costs associated with maintaining computer software are expensed asincurred. In addition, intangible assets are subject to impairment testing.

When an intangible asset is disposed of, the gain or loss on disposal is determined as the differencebetween the proceeds and the carrying amount of the asset and is recognized in the statements ofincome.

Other ResourcesOther resources pertain to resources controlled by the Group as a result of past events. These arerecognized in the financial statements when it is probable that the future economic benefits will flowto the Group and the asset has a cost or value that can be measured reliably.

Provisions and ContingenciesProvisions are recognized when present obligations will probably lead to an outflow of economicresources and they can be estimated reliably even if the timing or amount of the outflow may still beuncertain. A present obligation arises from the presence of a legal or constructive obligation that hasresulted from past events (e.g., legal dispute or onerous contracts).

Provisions are measured at the estimated expenditure required to settle the present obligation, basedon the most reliable evidence available at the end of the reporting period, including the risks anduncertainties associated with the present obligation. Any reimbursement expected to be received inthe course of settlement of the present obligation is recognized, if virtually certain as a separate asset,at an amount not exceeding the balance of the related provision. Where there are a number of similarobligations, the likelihood that an outflow will be required in settlement is determined by consideringthe class of obligations as a whole. When time value of money is material, long-term provisions arediscounted to their present values using a pretax rate that reflects market assessment and the risksspecific to the obligation. The increase in the provision due to passage of time is recognized asinterest expense. Provisions are reviewed at the end of each reporting period and adjusted to reflectthe current best estimate.

In those cases where the possible outflow of economic resource as a result of present obligations isconsidered improbable or remote, or the amount to be provided for cannot be measured reliably, noliability is recognized in the financial statements. Similarly, possible inflows of economic benefitsthat do not yet meet the recognition criteria of an asset are considered contingent assets, hence, arenot recognized in the financial statements. On the other hand, any reimbursement that the Group canbe virtually certain to collect from a third party with respect to the obligation is recognized as aseparate asset not exceeding the amount of the related provision.

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Pre-Need Reserves and Insurance Premium Reserves

(a) Pre-need Reserves

In the Group’s consolidated financial statements, pre-need reserves (PNR), presented as part ofOther liabilities in the consolidated statements of financial position, are recognized for allpre-need benefits guaranteed and payable by FUPI as defined in the pre-need pension plancontracts.

PNR for pension plans are determined using the requirements on provisioning of PAS 37 and thespecific method of computation required by the Insurance Commission (IC) as described below.

The amount recognized as a provision to cover the PNR is the best estimate of the expenditurerequired to settle the present obligation at the end of the reporting period. The risks anduncertainties that inevitably surround many events and circumstances were taken into account inreaching the best estimate of a provision.

PNR is computed based on the following considerations:

∂ On actively paying plans, provision is equivalent to the present value of future plan benefitsreduced by the present value of future trust fund contributions required per product modeldiscounted using the transitory discount rate which does not exceed the lower of theattainable rate as certified by the Trustee, and the discount interest rate prescribed by the ICin accordance with IC Circular Letter No. 23-2012, Valuation of Transitory Pre-needReserves, for old basket of plans previously approved by the SEC.

∂ On lapsed plans, provision is equivalent to the present value of future plan benefits reducedby the present value of future trust fund contributions at lapse date, multiplied by thereinstatement rate.

∂ On fully paid plans, provision is equivalent to the present value of future plan benefitsdiscounted using the transitory discount rate.

∂ Future events that may affect the foregoing amounts are reflected in the amount of theprovision for PNR where there is sufficient objective evidence that they will occur.

∂ The rates of surrender, cancellation, reinstatement, utilization and inflation, when applied,represent the actual experience of FUPI in the last three years, or the industry, in the absenceof a reliable experience.

∂ The probability of pre-termination or surrender of fully paid plans are considered indetermining the PNR of fully paid plans. A pre-termination experience on fully paid plans of5% and below are considered insignificant. In such cases, derecognition of liability shall berecorded at pre-termination date.

The computation of the foregoing assumptions is validated by the IC-accredited actuary ofFUPI.

Any excess in the amount of the trust fund as a result of the revised reserving requirementshall neither be released from the fund nor be credited/set-off to future required contributions.

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(b) Insurance Premium Reserves

Insurance premium reserves for pension plans represents FUPI’s actuarially-determined liabilityin accordance with PAS 37 to guarantee the benefits provided in the plan in consideration of theinsurance premium funds assigned for this purpose as determined and certified by theIC-accredited actuary.

Capital FundsCommon stock represents the nominal value of shares that have been issued.

Additional paid-in capital includes any premiums received on the issuance of common stock. Anytransaction costs associated with the issuance of shares are deducted from additional paid-in capital,net of any related income tax benefits.

Surplus free includes all current and prior period results as reported in the statements of income andwhich are available and not restricted for use by the Group, reduced by the amounts of dividenddeclared, if any.

Surplus reserves pertains to the following:

(a) Portion of the Group’s income from trust operations set-up on a yearly basis in compliance withBSP regulations. The surplus set-up is equal to 10% of the net profit accruing from the trustbusiness until the surplus shall amount to 20% of authorized capital stock. The reserve shall notbe paid out as dividends, but losses accruing in the course of the trust business may be chargedagainst this account.

(b) Accumulated trust fund income of FUPI that is automatically restricted to payments of benefits ofplanholders and related payments in accordance with the amended Pre-need Uniform Chart ofAccounts (PNUCA).

(c) The difference of the 1% required General Loan Loss Provision on Stage 1 on-balance sheetloans over the computed allowance for credit losses on Stage 1 accounts as required by the BSPCircular No. 1011 - Guidelines on the Adoption of the Philippine Financial Reporting Standard(PFRS) 9 - Financial Instruments.

Net unrealized fair value gains (losses) on investment securities pertains to cumulative mark-to-market valuation of financial assets at FVOCI.

Remeasurements of defined benefit plan refer to accumulated actuarial losses, net of gains, as a resultof remeasurements of post-employment defined benefit plan and return on plan assets (excludingamount included in net interest).

Other reserves pertains to the difference between the net carrying amount and fair value of certainproperties that were reclassified from owner-occupied properties to investment properties to reflectthe change in use.

Non-controlling interests represent the portion of the net resources and profit or loss not attributableto the Group which are presented separately in the Group’s statements of income and within thecapital funds in the Group’s statements of financial position and changes in capital funds.

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Revenue and Cost RecognitionRevenue is recognized to the extent that the revenue can be reliably measured; it is probable thatfuture economic benefits will flow to the Group; and the costs incurred or to be incurred can bereliably measured. Expenses are recognized in the statements of income upon utilization of theresources or services or at the date these are incurred. All finance costs are reported on an accrualbasis. The following specific recognition criteria of income and expenses must also be met beforeincome or expense is recognized:

(a) Interest income recognized using the effective interest rate method - Interest income is recognizedin the statements of income for all instruments measured at amortized cost and debt instrumentsclassified as financial assets at FVOCI using the effective interest method.

The effective interest method is a method of calculating the amortized cost of a financial asset ora financial liability and of allocating the interest income or interest expense over the relevantperiod. The effective interest rate is the rate that exactly discounts estimated future cashpayments or receipts through the expected life of the financial instrument or, when appropriate, ashorter period to the net carrying amount of the financial asset or financial liability. Whencalculating the effective interest rate, the Group estimates cash flows considering all contractualterms of the financial instrument but does not consider future credit losses. The calculationincludes all fees paid or received between parties to the contract that are an integral part of theeffective interest rate, transaction costs and all other premiums or discounts.

When financial asset becomes credit-impaired and is, therefore, regarded as ‘Stage 3’, the Groupcalculates interest income by applying the effective interest rate to the net amortized cost of thefinancial asset. If the financial assets cures and is no longer credit-impaired, the Group reverts tocalculating interest income on a gross basis.

(b) Other interest income - Interest income on all trading assets and financial assets mandatorilyrequired to be measured at FVTPL is recognized using the contractual interest rate and isincluded under Interest Income on financial assets at fair value through profit or loss.

(c) Service charges, fees and commissions - Service charges, fees and commissions are generallyrecognized when the service has been provided. Loan commitment fees are earned as services areprovided, recognized as other income on a time proportion basis over the commitment period.

The Group has a loyalty points programme as part of its credit cards business which allowscustomers to accumulate points that can be redeemed for free products. The loyalty points giverise to a separate performance obligation as they provide a material right to the customer.A portion of the interchange fee is allocated to the loyalty points awarded to customers based onrelative stand-alone selling price and recognised as a contract liability until the points areredeemed. Revenue is recognised upon redemption of products by the customer.

(d) Gain (loss) on trading and investment securities - Gain (loss) on trading and investment securitiesis recognized when the risk and rewards of the securities is transferred to the buyer (at an amountequal to the difference of the selling price and the carrying amount of securities) and as a result ofthe mark-to market valuation of outstanding securities classified as FVTPL at year-end.

(e) Premium revenues - Premiums from sale of pre-need plans are recognized as earned whencollected inclusive of advance premium payments. When premiums are recognized as income,the related cost of contracts is computed and recognized, with the result that the benefits andexpenses are matched with such revenue.

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(f) Miscellaneous income includes the following accounts:

∂ Commissions earned on credit cards - Commissions earned on credit cards are recognized asincome upon receipt from member establishments of charges arising from credit availmentsby credit cardholders. These commissions are computed based on certain agreed rates andare deducted from amounts remittable to member establishments. Purchases by the creditcardholders, collectible on installment basis, are recorded at the cost of the items purchased.Interest income is recognized on every term of installment billed to the cardholders andcomputed using the effective interest method.

∂ Gain (loss) from sale of assets - Profit or loss from assets sold or exchanged is recognizedwhen the control of the assets is transferred to the buyer or when the collectibility of theentire sales price is reasonably assured.

∂ Rental - Rental income arising from leased properties is accounted for on a straight-line basisover the lease terms on ongoing leases.

∂ Income from bancassurance business - Exclusive access fee (EAF) related to thebancassurance partnership is recognized as revenue by reference to the completion rate of thetarget cumulative annualized premium earned.

∂ Dividend - Dividend income is recognized when the Group’s right to receive payment isestablished.

∂ Income from trust operations - Trust fees related to investment funds are recognized inreference to the net asset value of the funds. The same principle is applied for wealthmanagement, financial planning and custody services that are continuously provided over anextended period of time.

LeasesThe Group accounts for its leases as follows:

(a) Group as LesseeLeases, which do not transfer to the Group substantially all the risks and benefits of ownership ofthe asset, are classified as operating leases. Operating lease payments (net of any incentivereceived from the lessor) are recognized as expense in the statements of income on a straight-linebasis over the lease term. Associated costs, such as repairs, maintenance and insurance, areexpensed as incurred.

(b) Group as LessorLeases, which do not transfer to the lessee substantially all the risks and benefits of ownership ofthe asset, are classified as operating leases. Lease income from operating leases is recognized asincome in the statements of income on a straight-line basis over the lease term.

The Group determines whether an arrangement is, or contains a lease based on the substance ofthe arrangement. It makes an assessment of whether the fulfilment of the arrangement isdependent on the use of a specific asset or assets and the arrangement conveys a right to use theasset.

Foreign Currency Transactions and TranslationsThe accounting records of the Group are maintained in Philippine pesos except for the ForeignCurrency Deposit Unit (FCDU) of the Parent Bank which are maintained in United States (U.S.)

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dollars. Foreign currency transactions during the period are translated into the functional currency atexchange rates which approximate those prevailing on transaction dates.

For financial reporting purposes, the accounts of the FCDU are translated into their equivalents inPhilippine pesos based on the Philippine Dealing System closing rates (PDSCR) prevailing at the endof the period (for resources and liabilities) and at the average PDSCR for the period (for income andexpenses).

Foreign exchange gains and losses resulting from the settlement of foreign currency transactions andfrom the translation at period-end exchange rates of monetary assets and liabilities denominated inforeign currencies are recognized in the statements of income.

Changes in the fair value of monetary financial assets denominated in foreign currency are analyzedbetween translation differences resulting from changes in the amortized cost of the security and otherchanges in the carrying amount of the security. Translation differences related to changes inamortized cost are recognized in the statements of income, and other changes in the carrying amountare recognized in other comprehensive income.

Impairment of Non-financial AssetsThe Group’s Intangible assets (consisting of goodwill and computer software recorded as part ofOther resources), Bank premises, furniture, fixtures and equipment, Investments in subsidiaries (forParent Bank only) and other non-financial assets are subject to impairment testing. Intangible assetswith an indefinite useful life, such as goodwill, are tested for impairment at least annually. All otherindividual assets or cash-generating units are tested for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable.

For purposes of assessing impairment, assets are grouped at the lowest levels for which there areseparately identifiable cash flows (cash-generating units). As a result, some assets are testedindividually for impairment and some are tested at cash-generating unit level.

Impairment loss is recognized in the statements of income for the amount by which the asset’s orcash-generating unit’s carrying amount exceeds its recoverable amount, which is the higher of fairvalue, reflecting market conditions, less costs to sell and value in use. In determining value in use,management estimates the expected future cash flows from each cash-generating unit and determinesthe suitable interest rate in order to calculate the present value of those cash flows. The data used forimpairment testing procedures are directly linked to the Group’s latest approved budget, adjusted asnecessary to exclude the effects of asset enhancements. Discount factors are determined individuallyfor each cash-generating unit and reflect management’s assessment of respective risk profiles, such asmarket and asset-specific risk factors.

All assets are subsequently reassessed for indications that an impairment loss previously recognizedmay no longer exist and the carrying amount of the asset is adjusted to the recoverable amountresulting in the reversal of the impairment loss, except for goodwill.

Employee BenefitsThe Group’s employment benefits to employees are as follows:

(a) Post-employment Defined Benefit PlanA defined benefit plan is a post-employment plan that defines an amount of post-employmentbenefit that an employee will receive on retirement, usually dependent on one or more factorssuch as age, years of service and salary. The legal obligation for any benefits from this kind ofpost-employment plan remains with the Group, even if plan assets for funding the defined benefit

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plan have been acquired. Plan assets may include assets specifically designated to a long-termbenefit fund, as well as qualifying insurance policies. The Group’s defined benefit post-employment plan covers all regular full-time employees. The pension plan is tax-qualified,noncontributory and administered by a trustee.

The liability recognized in the statement of financial position for a defined benefit plan (includedas part of Other Liabilities) is the present value of the defined benefit obligation (DBO) at the endof the reporting period less the fair value of plan assets. The DBO is calculated annually byindependent actuaries using the projected unit credit method. The present value of the DBO isdetermined by discounting the estimated future cash outflows arising from expended benefitpayments using a discount rate derived from the interest rates of a zero coupon government bondas published by Philippine Dealing & Exchange Corp., that are denominated in the currency inwhich the benefits will be paid and that have terms to maturity approximating to the terms of therelated post-employment liability.

Remeasurements, comprising of actuarial gains and losses arising from experience adjustmentsand changes in actuarial assumptions and the return on plan assets (excluding amount included innet interest) are reflected immediately in the statement of financial position with a charge orcredit recognized in other comprehensive income in the period in which they arise. Net interest iscalculated by applying the discount rate at the beginning of the period to the net defined benefitliability or asset and is included as part of Interest expense or Interest income in the statements ofincome.

Past-service costs are recognized immediately in the statements of income in the period of a planamendment or curtailment.

(b) Post-employment Defined Contribution PlanA defined contribution plan is a post-employment plan under which the Group pays fixedcontributions into an independent entity, such as the Social Security System. The Group has nolegal or constructive obligations to pay further contributions after payment of the fixedcontribution. The contributions recognized in respect of defined contribution plans are expensedas they fall due. Liabilities and assets may be recognized if underpayment or prepayment hasoccurred.

(c) Termination BenefitsTermination benefits are payable when employment is terminated by the Group before the normalretirement date, or whenever an employee accepts voluntary redundancy in exchange for thesebenefits. The Group recognizes termination benefits at the earlier of when it can no longerwithdraw the offer of such benefits and when it recognizes costs for a restructuring that is withinthe scope of PAS 37 and involves the payment of termination benefits. In the case of an offermade to encourage voluntary redundancy, the termination benefits are measured based on thenumber of employees expected to accept the offer. Benefits falling due more than 12 monthsafter the end of the reporting period are discounted to their present value.

(d) Profit-Sharing and Bonus PlansThe Group recognizes a liability and an expense for bonuses and profit-sharing, based on aformula that takes into consideration the profit attributable to the Parent Bank’s shareholders, asindicated in the statements of income, after certain regulatory adjustments. The Group recognizesa provision where it is contractually obliged to pay the bonus plans. The Group also recognizes aprovision for profit-sharing and bonus plans where there is a past practice that has created aconstructive obligation, whether paid in cash or in the form of shares of the Parent Bank to beissued under the Employee Stock Plan.

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(e) Compensated AbsencesCompensated absences are recognized for the number of paid leave days (including holidayentitlement) remaining at the end of the reporting date.

They are included as part of Accrued taxes and other expenses under the Other liabilities accountin the statement of financial position at the undiscounted amount that the Group expects to pay asa result of the unused entitlement.

Income TaxesTax expense recognized in the statements of income comprises the sum of deferred tax and currenttax not recognized in other comprehensive income or directly in capital funds, if any.

Current tax assets or liabilities comprise those claims from, or obligations to, fiscal authoritiesrelating to the current or prior reporting period, that are uncollected or unpaid at the end of thereporting period. They are calculated using the tax rates and tax laws applicable to the fiscal periodsto which they relate, based on the taxable profit for the year. All changes to current tax assets orliabilities are recognized as a component of tax expense in the statements of income.

Deferred tax is accounted for using the liability method on temporary differences at the end of thereporting period between the tax base of assets and liabilities and their carrying amounts for financialreporting purposes. Under the liability method, with certain exceptions, deferred tax liabilities arerecognized for all taxable temporary differences and deferred tax assets are recognized for alldeductible temporary differences and the carryforward of unused tax losses and unused tax credits tothe extent that it is probable that taxable profit will be available against which the deferred tax assetscan be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting periodand are recognized to the extent that it has become probable that future taxable profit will be availableto allow such deferred tax assets to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the periodwhen the asset is realized or the liability is settled, based on tax rates and tax laws that have beenenacted or substantively enacted at the end of the reporting period.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period andreduced to the extent that it is probable that sufficient taxable profit will be available to allow all orpart of the deferred tax assets to be utilized.

The measurement of deferred tax liabilities and assets reflects the tax consequences that would followfrom the manner in which the Group expects, at the end of the reporting period, to recover or settlethe carrying amount of its assets and liabilities. For purposes of measuring deferred tax liabilities anddeferred tax assets for investment properties that are measured using the fair value model, thecarrying amounts of such properties are presumed to be recovered entirely through sale, unless thepresumption is rebutted, that is, when the investment property is depreciable and is held within thebusiness model whose objective is to consume substantially all of the economic benefits embodied inthe investment property over time, rather than through sale.

Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in thestatements of income, except to the extent that it relates to items recognized in other comprehensiveincome or directly in capital funds. In this case, the tax is also recognized in other comprehensiveincome or directly in capital funds, respectively.

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Deferred tax assets and deferred tax liabilities are offset if the Group has a legally enforceable right toset off current tax assets against current tax liabilities and the deferred taxes relate to the same entityand the same taxation authority.

Related Party Relationships and TransactionsRelated party transactions are transfers of resources, services or obligations between the Group andtheir related parties, regardless of whether or not a price is charged.

Parties are considered to be related if one party has the ability to control the other party or exercisesignificant influence over the other party in making financial and operating decisions. These partiesinclude: (a) individuals owning, directly or indirectly through one or more intermediaries, control orare controlled by, or under common control with the Parent Bank; (b) associates; (c) individualsowning, directly or indirectly, an interest in the voting power of the Parent Bank that gives themsignificant influence over the Parent Bank and close members of the family of any such individual;and, (d) the Group’s funded retirement plan.

In considering each possible related party relationship, attention is directed to the substance of therelationship and not merely on the legal form.

Earnings Per ShareBasic earnings per share are determined by dividing the net profit for the year attributable to commonshareholders by the weighted average number of common shares outstanding during the year, afterretroactive effect to any stock dividends declared in the current year.

Diluted earnings per common share are also computed by dividing net profit by the weighted averagenumber of common shares subscribed and outstanding at the end of the reporting period, after makingadjustments to reflect the effects of any potentially dilutive preferred shares, stock options andwarrants.

Trust and Fiduciary ActivitiesThe Group commonly acts as trustee and in other fiduciary capacities that result in the holding orplacing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. Theseresources and the related income arising thereon are excluded from these financial statements, as theyare neither resources nor income of the Group.

Segment ReportingOperating segments are reported in a manner consistent with the internal reporting provided to theGroup’s chief operating decision-maker. The chief operating decision-maker is responsible forallocating resources and assessing performance of the operating segments.

In identifying its operating segments, management generally follows the Group’s products andservices as disclosed in Note 6, which represent the main products and services provided by theGroup.

Each of these operating segments is managed separately as each of these services require differenttechnologies and other resources as well as marketing approaches. All inter-segment transfers arecarried out at arm’s length prices.

The measurement policies the Group uses for segment reporting under PFRS 8, Operating Segments,are the same as those used in its consolidated financial statements in arriving at the operating profit ofthe operating segments.

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In addition, corporate assets which are not directly attributable to the business activities of anyoperating segment are not allocated to a particular segment.

There have been no changes from prior periods in the measurement methods used to determinereported segment profit or loss.

The Group’s operations are organized according to the nature of the products and services provided.Financial information on business segments is presented in Note 6.

Events After the End of the Reporting PeriodAny post-year-end event that provides additional information about the Group’s position at thestatement of financial position date (adjusting event) is reflected in the financial statements.Post-year-end events that are not adjusting events, if any, are disclosed when material to the financialstatements.

3. Summary of Accounting Judgments and Estimates

The preparation of the Group’s financial statements in accordance with PFRS requires managementto make judgments and estimates that affect the amounts reported in the financial statements andrelated notes. Judgments and estimates are continually evaluated and are based on historicalexperience and other factors, including expectations of future events that are believed to bereasonable under the circumstances. Actual results may ultimately differ from these estimates.

Unless otherwise stated, below significant judgments and estimates apply as of and for the yearsended December 31, 2018, 2017 and 2016.

Critical Management Judgments in Applying Accounting PoliciesIn the process of applying the Group’s accounting policies, management has made the followingjudgments, apart from those involving estimation, which have the most significant effect on theamounts recognized in the financial statements:

Determining functional and presentation currencyPAS 21 requires management to use its judgment to determine the entity’s functional currency suchthat it most faithfully represents the economic effects of the underlying transactions, events andconditions that are relevant to the entity. The Group has determined that its functional andpresentation currency is the Philippine pesos, considering the following:∂ the currency that mainly influences prices for financial instruments and services (this will often

be the currency in which prices for its financial instruments and services are denominated andsettled);

∂ the currency in which funds from financing activities are generated; and∂ the currency in which receipts from operating activities are usually retained.

Evaluation of business model in managing financial instrumentsThe Group manages its financial assets based on business models that maintain adequate level offinancial assets to match its expected cash outflows, largely arising from customers’ withdrawals andcontinuing loan disbursements to borrowers, while maintaining a strategic portfolio of financial assetsfor investment and trading activities consistent with its risk appetite.

The Group developed business models which reflect how it manages its portfolio of financialinstruments. The Group’s business models need not be assessed at entity level or as a whole but

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applied at the level of a portfolio of financial instruments (i.e., group of financial instruments that aremanaged together by the Group) and not on an instrument-by-instrument basis (i.e., not based onintention or specific characteristics of individual financial instrument).

In determining the classification of a financial instrument under PFRS 9, the Group evaluates inwhich business model a financial instrument or a portfolio of financial instruments belong to takinginto consideration the objectives of each business model established by the Group.

In 2017, the Parent Bank made certain changes in its investment policy, primarily in relation tomanagement’s assessment of liquidity and the risks surrounding it. The change in investment policytriggers realignment of its strategy for managing its HTC portfolio and introduction of a new portfoliowith the objective of maximizing risk-adjusted returns, minimizing cost of liquidity and providingalternative outlet with better returns on liquid assets. Accordingly, in October 2017,the Parent Bank’s BOD approved the change in the Parent Bank’s business model. As such, theBank’s classification of financial assets now consists of amortized cost, FVOCI and FVTPL, wherecertain securities at amortized cost were reclassified to the ‘Financial assets at FVOCI’ category at thebeginning of first quarter of 2018.

In addition, PFRS 9 emphasizes that if more than an infrequent and more than an insignificant sale ismade out of a portfolio of financial assets carried at amortized cost, an entity should assess whetherand how such sales are consistent with the objective of collecting contractual cash flows. In makingthis judgment, the Group considers certain circumstances documented in its business model manual toassess that an increase in the frequency or value of sales of financial instruments in a particular periodis not necessarily inconsistent with a held-to-collect business model if the Group can explain thereasons for those sales and why those sales do not reflect a change in the Group’s objective for thebusiness model.

In 2018, the Bank participated in bond exchanges resulting in disposal of certain financial assetscarried at amortized cost (see Note 12). The Parent Bank has assessed that such sales are not morethan infrequent and are necessary in order to ensure that the outstanding securities remain of anacceptable liquid quality. The disposals are considered not inconsistent with the objective of hold tocollect business model. The remaining securities in the affected portfolios continue to be measured atamortized cost as of December 31, 2018.

Testing the cash flow characteristics of financial assetsIn determining the classification of financial assets under PFRS 9, the Group assesses whether thecontractual terms of the financial assets give rise on specified dates to cash flows that are SPPI on theprincipal outstanding, with interest representing time value of money and credit risk associated withthe principal amount outstanding. The assessment as to whether the cash flows meet the test is madein the currency in which the financial asset is denominated. Any other contractual term that changesthe timing or amount of cash flows (unless it is a variable interest rate that represents time value ofmoney and credit risk) does not meet the amortized cost criteria. In cases where the relationshipbetween the passage of time and the interest rate of the financial instrument may be imperfect, knownas modified time value of money, the Group assesses the modified time value of money feature todetermine whether the financial instrument still meets the SPPI criterion. The objective of theassessment is to determine how different the undiscounted contractual cash flows could be from theundiscounted cash flows that would arise if the time value of money element was not modified(the benchmark cash flows). If the resulting difference is significant, the SPPI criterion is not met.In view of this, the Group considers the effect of the modified time value of money element in eachreporting period and cumulatively over the life of the financial instrument.

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Recognition of provisions and contingenciesJudgment is exercised by management to distinguish between provisions and contingencies. Policieson recognition and disclosures of provisions and of contingencies are discussed in Note 2 andrelevant disclosures are presented in Note 34.

Key Sources of Estimation UncertaintyThe following are the key assumptions concerning the future, and other key sources of estimationuncertainty at the end of the reporting period, that have a significant risk of causing a materialadjustment to the carrying amounts of assets and liabilities within the next reporting period:

Estimation of impairment losses on Loans and other receivables, Financial assets at amortized costand Financial assets at FVOCIApplicable for year ended December 31, 2017 and prior yearsThe Group reviews its loan and other receivables and investment portfolios to assess impairment atleast on an annual basis. In determining whether an impairment loss should be recorded in thestatements of income, the Group makes judgments as to whether there is any observable dataindicating that there is a measurable decrease in the estimated future cash flows from the portfoliobefore the decrease can be identified with an individual item in that portfolio. This evidence mayinclude observable data indicating that there has been an adverse change in the payment status ofborrowers or issuers in a group, or national or local economic conditions that correlate with defaultson assets in the group.

Management uses estimates based on historical loss experience for assets with credit riskcharacteristics and objective evidence of impairment similar to those in the portfolio when schedulingits future cash flows. The methodology and assumptions used for estimating both the amount andtiming of future cash flows are reviewed regularly to reduce any differences between loss estimatesand actual loss experience.

The carrying amount of loans and other receivables and the related allowance are disclosed inNotes 14 and 20, while the carrying amount of debt financial assets and the related allowance aredisclosed in Notes 8, 9, 10, 12, 13 and 20.

Applicable beginning January 1, 2018The measurement of impairment losses under PFRS 9 across all categories of financial assets requiresjudgment, in particular, the estimation of the amount and timing of future cash flows and collateralvalues when determining impairment losses and the assessment of a significant increase in credit risk.These estimates are driven by a number of factors, changes in which can result in different levels ofallowances.

The Group’s ECL calculations are outputs of complex models with a number of underlyingassumptions regarding the choice of variable inputs and their interdependencies. Significant factorsaffecting the estimates on the ECL model include:∂ The Group’s internal grading model, which assigns PDs to individual grades.∂ The Group’s criteria for assessing if there has been a significant increase in credit risk and so

allowances for financial assets should be measured on a Lifetime Expected Credit Loss (LTECL)basis and the qualitative assessment.

∂ The Group’s definition of default, which is consistent with regulatory requirements.∂ The segmentation of financial assets when the ECL is assessed on a collective basis .∂ Development of ECL models, including the various formulas and the choice of inputs.∂ Determination of associations between macroeconomic scenarios and, economic inputs, such as

unemployment levels and collateral values, and the effect on PDs, EADs and LGDs.∂ Definition of forward-looking macroeconomic scenario variables.

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Fair value of derivativesManagement applies valuation techniques to determine the fair value of derivatives that are notquoted in active markets. This requires management to develop estimates and assumptions based onmarket inputs, using observable data that market participants would use in pricing the instrument.Where such data is not observable, management uses its best estimate. Estimated fair values offinancial instruments may vary from the actual prices that would be achieved in an arm’s lengthtransaction at the reporting date.

Valuation techniques are used to determine fair values which are validated and periodically reviewed.To the extent practicable, models use observable data, however, areas such as credit risk (both ownand counterparty), volatilities and correlations require management to make estimates. Changes inassumptions could affect reported fair value of financial instruments. The Group uses judgment toselect a variety of methods and make assumptions that are mainly based on market conditionsexisting at the end of each reporting period.

The fair value of derivatives as of December 31, 2018 and 2017 are presented and grouped into thefair value hierarchy in Note 7.

Determination of fair value of investment propertiesThe Group’s investment properties is composed of land, buildings and related improvements carriedat fair value at the end of the reporting period.

The fair value of investment properties is determined based on valuations performed by independentappraisal companies acceptable to the BSP at the end of each reporting period. The fair value isdetermined by reference to market-based evidence, which is the amount for which the assets could beexchanged between a knowledgeable willing buyer and seller in an arm’s length transaction as at thevaluation date. Such amount is influenced by different factors including the location and specificcharacteristics of the property (e.g., size, features, and capacity), quantity of comparable propertiesavailable in the market, and economic condition and behavior of the buying parties. The amounts ofrevaluation and fair value gains recognized on certain land, buildings and land improvements aredisclosed in Note 17.

For investment properties with appraisal conducted prior to the end of the current reporting period,management determines whether there are significant circumstances during the intervening periodthat may require adjustments or changes in the fair value of those properties.

The fair value determination for investment properties is discussed in Note 7. The carrying amountsof investment properties are disclosed in Note 17.

Recognition of deferred tax assetsDeferred tax assets are recognized for all unused tax losses and temporary differences to the extentthat it is probable that future taxable profit will be available against which the losses can be utilized.Significant management judgment is required to determine the amount of deferred tax assets that canbe recognized, based upon the likely timing and level of future taxable income together with futuretax planning strategies.

Based on forecast, management assessed that it is probable that future taxable income will beavailable to utilize the deferred tax assets. The carrying value of recognized deferred tax assets isdisclosed in Note 29.

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Impairment of goodwillThe Group conducts an annual review for any impairment in the value of goodwill. Goodwill iswritten down for impairment where the recoverable amount is insufficient to support their carryingvalue. The Group determines the recoverable value of goodwill by discounting the estimated excessearnings using the Group’s cost of capital as the discount rate. The Group estimates the discount rateused for the computation of the net present value by reference to industry cost of capital.

The recoverable amount of the CGU is determined based on a value-in-use calculation using cashflow projections from financial budgets approved by senior management and BOD ofthe Parent Bank. The assumptions used in the calculation of value-in-use are sensitive to estimates offuture cash flows from business, interest margin, average yields and long-term growth rate used toproject cash flows. Though management believes that the assumptions used in the estimation of fairvalues reflected in the financial statements are appropriate and reasonable, significant changes inthese assumptions may materially affect the assessment of recoverable values and any resultingimpairment loss could have a material adverse effect on the results of operations.

The carrying amount of goodwill is disclosed in Note 18.

Valuation of post-employment and other benefitsThe determination of the Group’s obligation and cost of pension and other post-employment benefitsis dependent on the selection of certain assumptions used by actuaries in calculating such amounts.Those assumptions include, among others, discount rates, expected rates of salary increase, andemployee turnover rate. A significant change in any of these actuarial assumptions may generallyaffect the recognized expense, other comprehensive income or loss and the carrying amount of thepost-employment benefit obligation in the next reporting period.

The amounts of post-employment defined benefit obligation and expense and an analysis of themovements in the estimated present value of post-employment defined benefit obligation, as well assignificant assumptions such as salary rate increase, discount rates, and turnover rates used inestimating such obligation are presented in Note 28.

The Group also estimates other employee benefit obligations and expenses, including the cost of paidleaves based on historical leave availments of employees, subject to the Group and the Parent Bankpolicies. These estimates may vary depending on future changes in salaries and actual experiencesduring the year.

Fair value determination of assets acquired and liabilities assumed from business combinationsIn June and December 2018, the Group provisionally determined the fair values of the assets acquiredand liabilities assumed from the acquisition of PR Savings Bank and PETNET, respectively.The Group determines the provisional acquisition-date fair values of identifiable assets acquired andliabilities assumed from the acquiree without quoted market prices based on the following:∂ For assets and liabilities that are short term in nature, carrying values approximate fair values∂ For financial assets and liabilities that are long-term in nature, fair values are estimated through

the discounted cash flow methodology, using the appropriate market rates (e.g., current lendingrates)

∂ For nonfinancial assets such as property and equipment and investment properties, fair values aredetermined based on an appraisal which follows sales comparison approach and depreciatedreplacement cost approach depending on the highest and best use of the assets

Refer to Note 15 for the provisional fair values of the identifiable assets acquired and liabilitiesassumed from the business combination.

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4. Risk Management Objectives and Policies

Risks are inherent in the business activities of the Group. Among its identified risks are credit risk,liquidity risk, market risk, interest rate risk, foreign exchange risk, operational risk, legal risk, andregulatory risk. These are managed through a risk management framework and governance structurethat provides comprehensive controls and management of major risks on an ongoing basis.

Risk management is the process by which the Group identifies its key risks, obtains consistent andunderstandable risk measures, decides which risks to take on or reduce and how this will be done, andestablishes procedures for monitoring the resulting risk positions. The objective of risk managementis to ensure that the Group conducts its business within the risk levels set by the BOD while businessunits pursue their objective of maximizing returns.

Risk Management StrategiesThe Group maintains a prudent risk management strategy to ensure its soundness and profitability.Business units are held accountable for all the risks and related returns, and ensure that decisions areconsistent with business objectives and risk tolerance. Strategies, policies and limits are reviewedregularly and updated to ensure that risks are well-diversified and risk mitigation measures areundertaken when necessary. A system for managing and monitoring risks is in place so that allrelevant issues are identified at an early stage and appropriate actions are taken. The risk policies,guidelines and processes are designed to ensure that risks are continuously identified, analyzed,measured, monitored and managed. Risk reporting is done on a regular basis, either monthly orquarterly.

Although the BOD is primarily responsible for the overall risk management of the Group’s activities,the responsibility rests at all levels of the organization. The risk appetite is defined andcommunicated through an enterprise-wide risk policy framework.

Risk Management StructureThe BOD of the Parent Bank exercises oversight of the Parent Bank’s risk management process as awhole and through its various risk committees. For the purpose of day-to-day management of risks,the Parent Bank has established independent Risk Management Units (RMUs) that objectively reviewand ensure compliance to the risk parameters set by the BOD. They are responsible for themonitoring and reporting of risks to senior management and the various committees of the ParentBank.

On the other hand, the risk management processes of its subsidiaries are handled separately by theirrespective BODs.

The Parent Bank’s BOD is primarily responsible for setting the risk appetite, approving riskparameters, credit policies, and investment guidelines, as well as establishing the overall risk-takingcapacity of the Parent Bank. To fulfill its responsibilities in risk management, the BOD hasestablished the following committees, whose functions are described below.

(a) The Executive Committee (EXCOM), composed of seven (7) members of the BOD, exercisescertain functions as delegated by the BOD including, among others, the approval of creditproposals, asset recovery and real and other properties acquired (ROPA) sales within itsdelegated limits.

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(b) The Risk Management Committee (RMC) is composed of seven (7) members of the BOD,majority of whom are independent directors, including the Chairman. The RMC shall advise theBOD of the Parent Bank’s overall current and future risk appetite, oversee Senior Management’sadherence to the risk appetite statement, and report on the state of risk culture of the Parent Bank.The RMC shall oversee the risk management framework, adherence to the risk appetite ofthe Parent Bank and the risk management function.

(c) The Market Risk Committee (MRC) is composed of nine (9) members of the BOD, majority ofwhom are independent directors, including the Chairman. The MRC is primarily responsible forreviewing the risk management policies and practices relating to market risk including interestrate risk in the banking book and liquidity risk.

(d) The Operations Risk Management Committee (ORMC), composed of seven (7) members of theBOD, reviews various operations risk policies and practices.

(e) The Audit Committee is a committee of the BOD that is composed of seven (7) members, most ofwhom are with accounting, auditing, or related financial management expertise or experience.The skills, qualifications, and experience of the committee members are appropriate for them toperform their duties as laid down by the BOD. Four of the seven members are independentdirectors, including the Chairman.

The Audit Committee serves as principal agent of the BOD in ensuring independence ofthe Parent Bank’s external auditors and the internal audit function, the integrity of management,and the adequacy of disclosures and reporting to stockholders. It also oversees the Parent Bank’sfinancial reporting process on behalf of the BOD. It assists the BOD in fulfilling its fiduciaryresponsibilities as to accounting policies, reporting practices and the sufficiency of auditingrelative thereto, and regulatory compliance.

To effectively perform these functions, the Audit Committee has a good understanding of theParent Bank’s business including the following: Parent Bank’s structure, business, controls, andthe types of transactions or other financial reporting matters applicable to the Parent Bank as wellas to determine whether the Bank’s controls are adequate, functioning as designed, and operatingeffectively. It also considers the potential effects of emerging business risks and their impact onthe Parent Bank’s financial position and results of operations.

Among the responsibilities of the Audit Committee are:

∂ Oversight of the financial reporting process. The Audit Committee ensures thatthe Parent Bank has a high-quality reporting process that provides transparent, consistent andcomparable financial statements. In this regard, the Audit Committee works closely withmanagement especially the Office of the Financial Controller, the Internal Audit Division(IAD), as well as the external auditors, to effectively monitor the financial reporting processand the existence of significant financial reporting issues and concerns.

∂ Oversight of the audit process. The Audit Committee is knowledgeable on the audit functionand the audit process. The Audit Committee maintains supportive, trusting and inquisitiverelationships with both internal and external auditors to enhance its effectiveness.

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∂ Oversight of the whistle-blowing mechanism. The Audit Committee oversees theestablishment of a whistle-blowing mechanism in the Parent Bank by which officers and staffshall in confidence raise concerns about possible improprieties or malpractices in matters offinancial reporting, internal control, auditing or other issues to persons or entities that havethe power to take corrective action. It also ensures that arrangements are in place for theindependent investigation, appropriate follow-up, action and subsequent resolution ofcomplaints.

In the performance of these functions, the Audit Committee is supported by the IAD. The IADHead derives authority from and is directly accountable to the Audit Committee. However,administratively, the IAD Head reports to the President of the Bank.

The IAD is entirely independent from all the other organizational units of the Parent Bank, aswell as from the personnel and work that are to be audited. It operates under the direct control ofthe Audit Committee and is given an appropriate standing within the Bank to be free from biasand interference. The IAD is free to report its findings and appraisals internally at its owninitiative to the Audit Committee.

The IAD is authorized by the Audit Committee to have unrestricted access to all functions,records, property, and personnel of the Bank subject to existing mandate and applicable laws.This includes the authority to allocate resources, set audit frequencies, select subjects, determinescope of work, and apply the techniques required to accomplish the audit engagement objectives.

The IAD is also authorized to obtain the necessary assistance from personnel within the ParentBank units where they perform audits, as well as other specialized services within or outside theParent Bank.

The IAD presents its annual audit plan at the beginning of its fiscal year for approval by the AuditCommittee.

At least once a month, the Audit Committee meets to discuss the results of the assurance andconsulting engagements and case investigations by IAD. The results of these meetings areregularly reported by the Audit Committee Chairman to the BOD in its monthly meetings.

To align with the Bank’s direction to reshape the Bank into a “technology company with bankingutilities”, IAD has undertaken training programs to acquire the appropriate skill set to auditemerging technologies such as Blockchain, artificial intelligence, Robotic Process Automation,Application Programming Interface, cloud computing, etc.

Moreover, in view of increasing role of internal audit under Basel II, the IAD acquired the rightskill set and approach to fulfill its role to conduct an annual independent review of theParent Bank’s Internal Capital Adequacy Assessment Process (ICAAP) document and itsunderlying processes and procedures.

The Parent Bank’s IAD passed and obtained the highest rating of “Generally Conforms” on theexternal quality assessment conducted in January 2014. The review showed that theParent Bank’s IAD audit activities comply with the Institute of Internal Auditors’ InternationalStandards for the Professional Practice of Internal Auditing. The Parent Bank’s IAD is scheduledto undergo an external quality assessment in the fourth quarter of 2019.

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(f) The Corporate Governance Committee (CGC) is primarily responsible for helping the BODfulfill its corporate governance responsibilities. It is responsible in ensuring the BOD’seffectiveness and due observance of corporate governance principles and of oversight over thecompliance risk management.

The CGC is composed of at least six (6) members of the BOD, majority of whom, including itsChairman, shall be independent directors, and one (1) of whom shall be from the Parent Bank’sSenior Management.

CGC’s specific duties include, among others, making recommendations to the BOD regardingcontinuing education of directors, overseeing the periodic performance evaluation of the BOD, itscommittees, senior management, and the function of the Chief Compliance and CorporateGovernance Officer. It also performs oversight functions over the Compliance and CorporateGovernance Office (CCGO) and the Anti-Money Laundering Committee of the Parent Bank.

The Parent Bank’s CCGO assists the CGC in fulfilling its functions by apprising the same ofpertinent regulations and other issuances relating to compliance or corporate governance andcontinuously giving updates thereon. In addition, the CCGO keeps the CGC abreast ofgovernance issues being brought about among private organizations and individuals advocatinggood governance practices. It then makes recommendations to the CGC based on suchgovernance issues and practices applicable and relevant to the Parent Bank.

(g) The Nominations Committee (NOMCOM) is comprised of six (6) voting members of the BOD,one of whom is an independent director, and one non-voting member in the person of the HumanResources Director. The NOMCOM is responsible for reviewing the qualifications of andscreening candidates for the BOD, key officers of the Parent Bank and nominees for independentdirectors. It oversees the implementation of programs for identifying, retaining and developingcritical officers and the succession plan for various units in the organization.

(h) The Compensation and Remuneration Committee (COMPREM) is composed of seven (7)members of the BOD, two (2) of whom are independent directors, including its Chairman. It isresponsible for overseeing implementation of the programs for salaries and benefits of directorsand senior management. It monitors adequacy, effectiveness and consistency of the ParentBank’s compensation program vis-à-vis corporate philosophy and strategy.

(i) The Related Party Transaction Committee is a board-level committee composed of five (5)members, three (3) of whom are independent directors including its Chairman. The other two (2)members are the Head of Internal Audit Division and the Chief Compliance and CorporateGovernance Officer who are both non-voting members. The Committee assists the BOD in thefulfillment of its corporate governance responsibilities on related party transactions by ensuringthat these are transacted at arm’s length terms. Where applicable, the Committee reviews andapproves related party transactions or endorses them to the BOD for approval or confirmation.

The major risk types identified by the Group are discussed in the following sections:

Credit RiskCredit risk is the risk of loss resulting from the failure of a borrower or counterparty to honor itsfinancial or contractual obligation to the Group. The risk may arise from lending, trade finance,treasury, investments, derivatives and other activities undertaken by the Group. Credit risk ismanaged through strategies, policies and limits that are approved by the respective BOD of thevarious companies within the Group. With respect to the Parent Bank, it has a well-structured and

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standardized credit approval process and credit scoring system for each of its business and/or productsegments.

The RMU undertakes several functions with respect to credit risk management. The RMUindependently performs credit risk assessment, evaluation and review for its retail, commercial andcorporate financial products to ensure consistency in the Parent Bank’s risk assessment process. Italso ensures that the Parent Bank’s credit policies and procedures are adequate and are constantlyupdated to meet the changing demands or risk profiles of the business units.

The RMU’s portfolio management function involves the review of the Parent Bank’s loan portfolio,including the portfolio risks associated with particular industry sectors, regions, loan size andmaturity, and the development of a strategy for the Parent Bank to achieve its desired portfolio mixand risk profile. The RMU reviews the Parent Bank’s loan portfolio quality in line with the ParentBank’s policy of avoiding significant concentrations of exposure to specific industries or groups ofborrowers. Concentrations arise when a number of counterparties are engaged in similar businessactivities, or activities in the same geographic region, or have similar economic features.Concentrations indicate the relative sensitivity of the Parent Bank’s performance to developmentsaffecting a particular industry or geographical location.

In order to avoid excessive concentrations of risk, the Parent Bank’s policies and procedures includeguidelines for maintaining a diversified portfolio mix (e.g., concentration limits). Identifiedconcentrations of credit risks are controlled and managed accordingly. The RMU also monitorscompliance to the BSP’s limit on exposures.

Applicable for the year ended December 31, 2018The table below shows the breakdown of the Group and the Parent Bank’s exposure on receivablefrom customers and investments and placements as of December 31, 2018:

Group Parent BankCorporate Loans P=129,064,051 P=129,064,051Commercial Loans 50,270,027 50,270,027Home Loans 37,039,884 37,039,884Salary Loans 46,925,598 –Other Retail Products 17,985,972 17,985,972Other receivables from

customers 26,313,313 15,462,841Total receivables from

customers 307,598,845 249,822,775Investments and Placements* 277,087,677 277,087,677

584,686,522 526,910,452*Investments and Placements include Parent Bank's financial assets at amortized cost, financial assetsthrough other comprehensive income, due from other banks and due from BSP and the related accruedinterest receivable amounting to P=2.62 billion.

The following summarizes the Group’s credit risk management practices and the relevant quantitativeand qualitative financial information regarding the credit exposure according to portfolios:

Credit risk management practices and credit quality disclosures

Corporate LoansCorporate lending activities are undertaken by the Parent Bank’s Corporate Banking Center. Thecustomer accounts under this group belong to the top tier corporations, conglomerates and largemultinational companies.

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The Parent Bank undertakes a comprehensive procedure for the credit evaluation and risk assessmentof large corporate borrowers based on its obligor risk rating master scale.

The Parent Bank transitioned to a new internal rating system in 2018 and currently utilizes a singlerating system for both Corporate and Commercial accounts.

The new rating system assesses default risk based on financial profile, management capacity, industryperformance, and other factors deemed relevant. Significant changes in the credit risk consideringmovements in credit rating, among other account-level profile and performance factors, definewhether the accounts are classified in either Stage 1, Stage 2, or Stage 3 per PFRS 9 loan impairmentstandards.

Based on foregoing factors, each borrower is assigned a Borrower Risk Rating (BRR), from AAA toD. In addition to the BRR, the Parent Bank assigns a loan exposure rating (LER), a 100-point systemwhich is comprised of a Facility Tenor Rating (FTR) and a Security Risk Rating (SRR). The FTRmeasures the maturity risk based on the length of loan exposure, while the SRR measures the qualityof the collateral and risk of its potential deterioration over the term of the loan. The FTR and theSRR, each a 100-point scoring system, are given equal weight in determining the LER.

Once the BRR and the LER have been determined, the credit limit to a borrower is determined underthe Risk Asset Acceptance Criteria (RAAC) which is a range of acceptable combinations of the BRRand the LER. Under the RAAC system, a borrower with a high BRR will have a broader range ofacceptable LERs.

The credit rating for each borrower is reviewed monthly or earlier when there are extraordinary oradverse developments affecting the borrower, the industry and/or the Philippine economy. Anymajor change in the credit scoring system, the RAAC range and/or the risk-adjusted pricing system ispresented to and approved by the RMC.

The description of each credit quality grouping for the credit scores is explained further as follows:

Investment Grade - These accounts are of the highest quality and are likely to meet financialobligations.

Standard Grade - These accounts may be vulnerable to adverse business, financial and economicconditions but are expected to meet financial obligations.

Substandard Grade - These accounts are vulnerable to non-payment but for which default has not yetoccurred.

Non-Performing - These refer to accounts which are in default or those that demonstrate objectiveevidence of impairment.

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Below is the breakdown of the Parent Bank’s corporate loans exposure (outstanding balance andaccrued interest receivable) by masterscale rating as of December 31, 2018:

AmountCredit Score Masterscale Stage 1 Stage 2 Stage 3 Total

Investment GradeAAA to A- 1 P=− P=− P=− P=−BBB+ 2 − − − −BBB 3 23,058,039 − − 23,058,039

Standard GradeBBB- to BB+ 4 49,352,486 − − 49,352,486BB to BB- 5 13,356,771 − − 13,356,771B+ 6 25,909,875 − − 25,909,875B to B- 7 5,196,673 − − 5,196,673CCC+ to CCC 8 10,936,341 − − 10,936,341

Substandard GradeLower than

CCC 9 1,172,921 − − 1,172,921Non-Performing

Default 10 − − 80,945 80,945P=128,983,106 P=− P=80,945 P=129,064,051

Commercial LoansThe Parent Bank’s commercial banking activities are undertaken by its Commercial Banking Center(ComBank). These consist of banking products and services rendered to customers which are entitiesthat are predominantly small and medium scale enterprises (SMEs). These products and services aresimilar to those provided to large corporate customers, with the predominance of trade finance-relatedproducts and services.

Upon the adoption of a new internal rating system in 2018, ComBank currently uses the same obligormasterscale of corporate loans, and follows the same RAAC framework.

Below is the breakdown of the Parent Bank’s commercial loans exposure (outstanding balance andaccrued interest receivable) by masterscale rating as of December 31, 2018:

AmountCredit Score Masterscale Stage 1 Stage 2 Stage 3 Total

Investment GradeAAA to A- 1 P=– P=– P=– P=−BBB+ 2 – – – −BBB 3 1,149,059 – – 1,149,059

Standard GradeBBB- to BB+ 4 5,954,268 – – 5,954,268BB to BB- 5 11,134,892 8,222 – 11,143,114B+ 6 6,091,270 4,348 – 6,095,618B to B- 7 15,440,687 − – 15,440,687

Substandard GradeCCC+ to CCC 8 5,450,233 − – 5,450,233Lower than CCC 9 2,711,796 1,361 – 2,713,157

Non-PerformingDefault 10 – – 2,323,891 2,323,891

P=47,932,205 P=13,931 P=2,323,891 P=50,270,027

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Retail Financial ProductsThe consumer loan portfolio of the Parent Bank is composed of four main product lines, namely:Home Loans, Credit Cards, Auto Loans, and Business Line Loans. Each of these products hasestablished credit risk guidelines and systems for managing credit risk across all businesses. Scoringmodels have been revised and fine-tuned while data analytics have been enhanced to improveportfolio quality and product offers.

On the other hand, CSB, an accredited lending institution of the Department of Education (DepEd),provides salary loans to teachers under an agreement with DepEd for payroll deductions.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potentialborrowers to meet interest and capital repayment obligations and by changing these lending limitswhen appropriate.

The Retail products’ respective masterscale is defined by the credit scoring models, which considerdemographic variables and behavioral performance, to segment the portfolio according to riskmasterscale per product. The stages are defined by the approved Significant Increase in Credit Risk(SICR) for Retail which takes into account the following: NPL status, months on books, and creditscore rating for Application score (point of application) and Behavior Score (monthly creditperformance).

Each borrower is assigned a credit score with 1 as the highest quality and 7 as default.

Below is the breakdown of the Parent Bank’s major retail portfolio loans exposure (outstandingbalance and accrued interest receivable) by masterscale rating as of December 31, 2018:

Home Loans

AmountMasterscale Stage 1 Stage 2 Stage 3 Total

1 P=8,695,257 P=– P=– P=8,695,2572 17,523,071 – – 17,523,0713 813,094 13,409 – 826,5034 8,288,335 358,815 – 8,647,1505 276,668 23,574 – 300,2426 128,949 – – 128,9497 − − 918,712 918,712

P=35,725,374 P=395,798 P=918,712 P=37,039,884

Other Retail Products

AmountMasterscale Stage 1 Stage 2 Stage 3 Total

1 P=4,074,079 P=1,298 P=− P=4,075,3772 530,576 1,406 − 531,9823 2,337,962 3,069 − 2,341,0314 1,981,767 8,856 − 1,990,6235 643,088 1,731 − 644,8196 5,575,088 40,885 − 5,615,9737 − − 2,786,167 2,786,167

P=15,142,560 P=57,245 P=2,786,167 P=17,985,972*Consist of auto loans, credit cards and business lines, which are combined for disclosure purposes.

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Salary LoansFor salary loans, each borrower is assigned a credit score with E as minimal risk, D as low risk, C asmoderate risk, B as average risk and A as high risk.

The description of each credit quality grouping for the credit scores is explained further as follows:

High grade (minimal to low risk) - These are receivables which have a high probability of collection.The counterparty has the apparent ability to satisfy its obligation and the security on the receivables isreadily enforceable.

Standard grade (moderate to average risk) - These are receivables where collections are probable dueto the reputation and the financial ability of the counterparty to pay but with experience of default.

Substandard (high risk) - Accounts classified as “Substandard” are individual credits or portionsthereof which appear to involve a substantial and unreasonable degree of risk to the Bank because ofunfavorable record or unsatisfactory characteristics. There exists in such accounts the possibility offuture loss to the Bank unless given closer supervision. Those classified as “Substandard” must havea well-defined weakness or weaknesses that jeopardize their liquidation. Such well-definedweaknesses may include adverse trends or development of financial, managerial, economic orpolitical nature, or a significant weakness in collateral.

Below is the breakdown of CSB’s salary loans exposure (outstanding balance and accrued interestreceivable) by credit score as of December 31, 2018:

AmountCredit Score Stage 1 Stage 2 Stage 3 TotalD to E P=44,980,585 P=− P=− P=44,980,585B to C 79,300 48,665 − 127,965A ‒ 196,721 − 196,721Default − − 1,620,327 1,620,327

P=45,059,885 P=245,386 P=1,620,327 P=46,925,598

Other receivables from customersOther receivables from customers of the Group and the Parent Bank include small portfolios such as,with respect to the Parent Bank, (i) personal loans, (ii) HR loans, (iii) bills purchase and (iv) customerliabilities under acceptance, and, with respect to the subsidiaries, (i) personal loans, and(ii) motorcycle loans. Each of these products has established credit risk guidelines and systems formanaging credit risk across all businesses.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potentialborrowers to meet interest and capital repayment obligations and by changing these lending limitswhen appropriate.

Each product was risk rated using techniques appropriate to the Group’s and Parent Bank’s creditexperience. Such methods consider the payment history that are reflected in aging, delinquency,and/or change in rating. These provide the bases for the ECL stage determination.

The description of each groupings according to stage is explained further as follows:

Stage 1 - those that are considered current and up to 30 days past due, and based on change in rating,delinquencies and payment history, does not demonstrate significant increase in credit risk.

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Stage 2 - those that are considered more 30 days past due but does not demonstrate objectiveevidence of impairment as of reporting date, and, based on change in rating, delinquencies andpayment history, demonstrates significant increase in credit risk.

Stage 3 - Those that are considered default or demonstrates objective evidence of impairment as ofreporting date.

Below is a summary as of December 31, 2018 of the Group’s and Parent Bank’s other receivablesfrom customers.

AmountStage 1 Stage 2 Stage 3 Total

Group P=21,621,870 P=522,472 P=4,168,971 P=26,313,313Parent Bank 12,883,798 42,477 2,536,566 15,462,841

Investments and PlacementsInvestments and Placements include financial assets at amortized cost, debt financial assets throughother comprehensive income, due from BSP and due from other banks. Each has established creditrisk guidelines and systems for managing credit risk across all businesses.

Below is a breakdown of the Parent Bank’s investments and placement (outstanding balance andaccrued interest receivable) by masterscale rating as of December 31, 2018:

AmountMasterscale Stage 1 Stage 2 Stage 3 Total1 P=241,253,745 P=− P=– P=241,253,7452 19,231,715 − − 19,231,7153 − − − −4 139,811 747,721 − 887,5325 13,212,059 − − 13,212,0596 2,457,192 − − 2,457,1927 − − − −8 45,434 − − 45,4349 − − − −10 − − − −

P=276,339,956 P=747,721 P=− P=277,087,677

Analysis of movements of gross carrying amountsMovements in 2018 for total receivables from customers follow. The balances presented include therelated accrued interest receivables:

2018Stage 1 Stage 2 Stage 3 Total

Balance at beginning of year P=259,607,532 P=1,718,411 P=10,479,027 P=271,804,970Due to consolidation 7,393,104 475,695 637,412 8,506,211Newly originated assets that

remained in Stage 1 as atDecember 31, 2018 154,566,141 − − 154,566,141

Newly originated assets that moved toStage 2 and Stage 3 as atDecember 31, 2018 − 323,678 770,097 1,093,775

(Forward)

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2018Stage 1 Stage 2 Stage 3 Total

Movements in receivable balance(excluding write-offs) (P=124,993,207) (P=808,783) (P=1,359,369) (P=127,161,359)

Amounts written-off − − (1,210,893) (1,210,893)Transfers to Stage 1 1,256,425 (667,775) (588,650) −Transfers to Stage 2 (882,016) 906,153 (24,137) −Transfers to Stage 3 (2,482,980) (712,547) 3,195,527 −Balance at end of year P=294,464,999 P=1,234,832 P=11,899,014 P=307,598,845

The breakdown of movements in 2018 for total receivables from customers follow:

Corporate Loans - Group and Parent Bank2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=117,639,496 P=− P=87,445 P=117,726,941Newly originated assets that

remained in Stage 1 as atDecember 31, 2018 35,354,954 − − 35,354,954

Movements in receivable balance(excluding write-offs) (24,011,344) − (6,500) (24,017,844)

Balance at end of year P=128,983,106 P=− P=80,945 P=129,064,051

In 2018, there were no transfers between stages and write-offs of corporate loans.

Commercial Loans - Group and Parent Bank2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=41,093,594 P=220,910 P=1,896,868 P=43,211,372Newly originated assets that

remained in Stage 1 as atDecember 31, 2018 42,541,317 − − 42,541,317

Newly originated assets that movedto Stage 2 and Stage 3 as atDecember 31, 2018 − 4,274 384,309 388,583

Movements in receivable balance(excluding write-offs) (35,663,206) (181,537) (26,502) (35,871,245)

Transfers to Stage 1 66,799 (6,724) (60,075) −Transfers to Stage 3 (106,299) (22,992) 129,291 −Balance at end of year P=47,932,205 P=13,931 P=2,323,891 P=50,270,027

In 2018, there were no transfers to Stage 2 and no write-offs of commercial loans.

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Home Loans - Group and Parent Bank2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=25,598,593 P=708,457 P=1,053,633 P=27,360,683Newly originated assets that remained in

Stage 1 as at December 31, 2018 13,622,721 − − 13,622,721Newly originated assets that moved to

Stage 2 and Stage 3 as atDecember 31, 2018 − 252,244 62,750 314,994

Movements in receivable balance(excluding write-offs) (3,767,526) (50,686) (440,302) (4,258,514)

Transfers to Stage 1 760,610 (516,843) (243,767) −Transfers to Stage 2 (108,488) 113,538 (5,050) −Transfers to Stage 3 (380,536) (110,912) 491,448 −Balance at end of year P=35,725,374 P=395,798 P=918,712 P=37,039,884

In 2018, there were no write-offs of home loans.

Other Retail Products - Group and Parent Bank2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=12,478,941 P=34,518 P=2,454,917 P=14,968,376Newly originated assets that remained in

Stage 1 as at December 31, 2018 4,424,327 − − 4,424,327Newly originated assets that moved to

Stage 2 and Stage 3 as atDecember 31, 2018 − 40,910 254,043 294,953

Movements in receivable balance(excluding write-offs) (1,190,964) (20,932) (213,095) (1,424,991)

Amounts written-off − − (276,693) (276,693)Transfers to Stage 1 49,245 (15,542) (33,703) −Transfers to Stage 2 (24,804) 24,918 (114) −Transfers to Stage 3 (594,186) (6,627) 600,813 −Balance at end of year P=15,142,559 P=57,245 P=2,786,168 P=17,985,972

Salary Loans - Group2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P 51,806,928 P 656,074 P 2,058,982 P 54,521,984Newly originated assets that remained in

Stage 1 as at December 31, 2018 46,617,864 − − 46,617,864Newly originated assets that moved to

Stage 2 and Stage 3 as atDecember 31, 2018 − 1,159 143 1,302

Movements in receivable balance(excluding write-offs) (52,512,248) (391,971) (461,886) (53,366,105)

Amounts written-off − − (849,447) (849,447)Transfers to Stage 1 162,675 (61,852) (100,823) −Transfers to Stage 2 (263,640) 265,807 (2,167) −Transfers to Stage 3 (751,694) (223,831) 975,525 −Balance at end of year P=45,059,885 P=245,386 P=1,620,327 P=46,925,598

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Other Receivables from Customers

Group2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=10,989,980 P=98,452 P=2,927,182 P=14,015,614Due to consolidation 7,393,104 475,695 637,412 8,506,211Newly originated assets that remained in

Stage 1 as at December 31, 2018 12,004,958 − − 12,004,958Newly originated assets that moved to

Stage 2 and Stage 3 as atDecember 31, 2018 − 25,091 68,852 93,943

Movements in receivable balance(excluding write-offs) (7,847,919) (163,657) (211,084) (8,222,660)

Amounts written-off − − (84,753) (84,753)Transfers to Stage 1 217,096 (66,814) (150,282) −Transfers to Stage 2 (485,084) 501,890 (16,806) −Transfers to Stage 3 (650,265) (348,185) 998,450 −Balance at end of year P=21,621,870 P=522,472 P=4,168,971 P=26,313,313

Parent Bank2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=6,931,864 P=33,321 P=2,581,898 P=9,547,083Newly originated assets that remained in

Stage 1 as at December 31, 2018 9,853,577 − − 9,853,577Newly originated assets that moved to

Stage 2 and Stage 3 as atDecember 31, 2018 − 25,070 68,821 93,891

Movements in receivable balance(excluding write-offs) (3,883,555) (8,517) (102,556) (3,994,628)

Amounts written-off − − (37,082) (37,082)Transfers to Stage 1 16,572 (14,509) (2,063) −Transfers to Stage 2 (14,177) 14,668 (491) −Transfers to Stage 3 (20,483) (7,556) 28,039 −Balance at end of year P=12,883,798 P=42,477 P=2,536,566 P=15,462,841

Movements in 2018 for investments and placements follow. The balances presented include accruedinterest receivables:

Investments and Placements2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=285,786,101 P=− P=− P=285,786,101Newly originated assets that remained in

Stage 1 as at December 31, 2018 130,226,329 − − 130,226,329Movements in the balance (excluding

write-offs) (138,961,794) 37,041 − (138,924,753)Transfers to Stage 2 (710,680) 710,680 − −Balance at end of year P=276,339,956 P=747,721 P=− P=277,087,677

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In 2018, there were no transfers to Stage 1 and Stage 3 and write-offs of investments andplacements.

Applicable for the year ended December 31, 2017 and prior years

The following summarizes the Group’s credit risk management practices and the relevant quantitativeand qualitative financial information regarding the credit exposure according to portfolios:

Corporate LoansThe Parent Bank utilized two separate Internal Credit Risk Rating Systems (ICRRS) which weredesigned for Corporate and Commercial borrowers. For Corporate accounts, the rating systemassessed risks on a three-dimensional level: Borrower Risk, Facility Risk and Security Risk. It alsohas established concentration limits depending on the Borrower Risk Rating and overall creditquality. Each borrower is assigned a Borrower Risk Rating (BRR) which ranged from AAA to D,under a 10-grade scoring system.

The description of each credit quality groupings for the credit scores is explained further as follows:

High Quality - These borrowers have a comfortable degree of stability, substance and diversity. Theyhave access to a substantial amount of funds through the public market under normal conditions.These are normally the quality multinationals or local corporations which are well capitalized.

Satisfactory Quality - These borrowers have strong cash flows and acceptable degree of stability andsubstance under normal market conditions. However, they may be susceptible to cyclical changes orconcentrations of business risk may be present.

Average - These borrowers have adequate cash flows to meet its commitments and can withstandnormal business cycles. However, any prolonged unfavorable economic period would createdeterioration beyond acceptable levels as clear risk elements exist, reflecting volatility of earningsand performance.

Fair - These borrowers have adequate cash flows to meet its commitments but face on-goinguncertainties and exposure to adverse business, financial or economic conditions.

Low - Although these borrowers currently have adequate cash flows to meet their commitments,their performance has already been weakened and any continuation of adverse business, financial oreconomic conditions or further downturns are already expected to impair their capacity or willingnessto meet their financial commitments.

Substandard - These borrowers have inadequate cash flows and are exposed to a real risk of non-payment of principal. The probability of default increases as the credit score goes down to CCC andlower.

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Below is a summary as of December 31, 2017 of the Parent Bank’s corporate loans that are subject tothe Corporate ICRRS (gross of the related allowance for impairment and excluding accrued interestreceivables) with their respective credit scores:

Credit Score Description 2017High grade

AA High quality P=–A Satisfactory quality 54,685,093

Standard gradeBBB Average 28,762,773BB Fair 23,215,725B Low 239,850

Non-rated 4,093,273Substandard grade

CCC and below Substandard 6,612,570P=117,609,284

Commercial LoansThe Parent Bank utilized two separate Internal Credit Risk Rating Systems (ICRRS) which weredesigned for Corporate and Commercial borrowers. For Commercial accounts, the Parent Bank useda separate 10-grade credit scoring system comprised of an Obligor Risk Rating (ORR), a Facility RiskAdjustment (FRA) and a Final Risk Rating (FRR). Each borrower is assigned an ORR that rangedfrom 1 to 10 with 1 to 3 defined as High Grade, 4 to 6 as Standard Grade and 7 and lower asSubstandard Grade.

The description of each credit quality grouping for the credit scores is explained further as follows:

Substantially Risk-free - These borrowers have high degree of stability, substance and diversity. Theyare expected to remain of high quality in virtually all economic conditions and have access to asubstantial amount of funds through the public market at any time.

Minimal Risk - These borrowers have strong market and financial position with history of successfulperformance. The overall debt service capacity as measured by cash flow to total debt service, aswell as their ability to meet their financial commitments, is very strong.

Moderate Risk - These borrowers have strong cash flows and acceptable degree of stability andsubstance under normal market conditions. However, they may be susceptible to cyclical changes orconcentrations of business risk may be present.

Average Risk - These borrowers have adequate cash flows to meet its commitments and can withstandnormal business cycles. However, any prolonged unfavorable economic period would createdeterioration beyond acceptable levels as clear risk elements exist, reflecting volatility of earningsand performance.

Above Average Risk - These borrowers have adequate cash flows to meet its commitments but faceon-going uncertainties and exposure to adverse business, financial or economic conditions.

High Risk - Although these borrowers currently have adequate cash flows to meet their commitments,their performance has already been weakened and any continuation of adverse business, financial oreconomic conditions or further downturns are already expected to impair their capacity or willingnessto meet their financial commitments.

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Substandard - These borrowers have inadequate cash flows and are exposed to a real risk of non-payment of principal. The probability of default increases as credit rating goes down to seven.

Below is a summary as of December 31, 2017 of the Parent Bank’s commercial loans that are subjectto the Corporate ICRRS (gross of the related allowance for impairment and excluding accrued interestreceivables) with their respective credit scores:

AmountCredit Score Description 2017

High grade1 Substantially risk-free P=–2 Minimal risk 7,309,5263 Moderate risk 15,395,067

Standard grade4 Average risk 8,337,7725 Above average risk 5,921,4036 High risk 1,414,847

Substandard grade7 and below Past due and C rated 2,975,667Non-rated 2,209,528

P=43,563,810

Retail LoansThe consumer loan portfolio of the Parent Bank is composed of four main product lines, namely:Home Loans, Credit Cards, Auto Loans, and Salary Loans. Each of these products has an establishedcredit risk guidelines and systems for managing credit risk across all businesses. Scoring models havebeen revised and fine-tuned while data analytics has been enhanced to improve portfolio quality andproduct offers.

On the other hand, CSB, an accredited lending institution with the Department of Education (DepEd),provides salary loans to teachers under an agreement with DepEd for payroll deductions.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potentialborrowers to meet interest and capital repayment obligations and by changing these lending limitswhen appropriate.

As of December 31, 2017, the credit quality of loans and other receivables as well as investmentsecurities are summarized below.

Group2017 (As Restated - Note 2)

Loans and OtherReceivables

InvestmentSecurities Total

Neither past due nor impaired P=273,580,925 P=166,837,609 P=440,418,534Past due but not impaired 6,299,072 – 6,299,072Impaired 11,121,860 – 11,121,860

291,001,857 166,837,609 457,839,466Allowance for impairment (10,822,982) − (10,822,982)

P=280,178,875 P=166,837,609 P=447,016,484

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Parent Bank2017

Loans and OtherReceivables

InvestmentSecurities Total

Neither past due nor impaired P=207,291,620 P=166,837,609 P=374,129,229Past due but not impaired 4,275,920 – 4,275,920Impaired 10,053,832 – 10,053,832

221,621,372 166,837,609 388,485,981Allowance for impairment (9,645,340) – (9,645,340)

P=211,976,032 P=166,837,609 P=378,813,641

The table below shows the credit quality per class of financial assets that are neither past due norimpaired, based on the Bank’s rating system as of December 31, 2017.

Group2017

High GradeStandard

GradeSubstandard

Grade TotalDue from BSP P=66,276,960 P=– P=– P=66,276,960Due from other banks 53,655,721 864,761 – 54,520,482Interbank loans receivable 4,793,280 – – 4,793,280

124,725,961 864,761 – 125,590,722Financial assets at FVTPL

Derivative assets (Note 11) 281,314 84,636 – 365,950Debt securities – – – –

281,314 84,636 – 365,950Financial assets at amortized cost 136,967,485 26,687,430 – 163,654,915Government bonds and other debt

securities – – – –Other debt securities - Private bonds

and commercial papers 2,816,744 – – 2,816,744139,784,229 26,687,430 – 166,471,659

Loans and other receivablesReceivables from customers

Corporate 54,685,093 56,352,686 6,582,943 117,620,722Commercial 22,641,030 24,072,062 30,500 46,743,592

Consumer – 84,615,713 – 84,615,713Bills purchased – 3,463,370 – 3,463,370Accrued interest receivable – 1,766,776 – 1,766,776Others – 645,633 – 645,633

SPURRA 13,572,371 – – 13,572,371UDSCL 56,686 348,012 – 404,698AIR - other receivables 3,143 2,133,725 – 2,136,868Accounts receivable – 175,731 1,670,793 1,846,524

Sales contract receivable – 764,658 – 764,65890,958,323 174,338,366 8,284,236 273,580,925

P=355,749,827 P=201,975,193 P=8,284,236 P=566,009,256

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Parent Bank2017

High GradeStandard

GradeSubstandard

Grade TotalDue from BSP P=60,350,126 P=– P=– P=60,350,126Due from other banks 53,655,579 34,654 – 53,690,233Interbank loans receivable 4,793,280 – – 4,793,280

118,798,985 34,654 – 118,833,639Financial assets at FVTPL

Derivative assets 281,314 84,636 – 365,950 Debt securities – – – –

281,314 84,636 – 365,950Financial assets at amortized costGovernment bonds and other debt

securities 136,967,485 26,687,430 – 163,654,915Other debt securities - Private bonds

and commercial papers 2,816,744 – – 2,816,744139,784,229 26,687,430 – 166,471,659

Loans and other receivablesReceivables from customers

Corporate 54,685,093 56,352,686 6,582,943 117,620,722Commercial 22,641,030 24,013,036 30,500 46,684,566Consumer – 30,587,343 – 30,587,343

Bills purchased – 3,463,370 – 3,463,370Accrued interest receivable – 1,250,114 – 1,250,114Others 497,126 – 497,126

SPURRA 4,130,362 – – 4,130,362AIR - other receivables – 2,133,724 – 2,133,724Accounts receivable – 169,077 – 169,077Sales contract receivable – 755,216 – 755,216

81,456,485 119,221,692 6,613,443 207,291,620P=340,321,013 P=146,028,412 P=6,613,443 P=492,962,868

The tables below show the aging analysis of past due but not impaired financial assets per class of theGroup and the Parent Bank as of December 31, 2017:

Group2017

Less than31 days 31 to 90 days 91 to 180 days More than180 days Total

LoansCommercial P=1,425,691 P=1,108,943 P=347,124 P=1,294,613 P=4,176,371Consumer 111,326 52,968 11,112 16,534 191,940Corporate 903 9,672 14,509 486,289 511,373Accrued interest receivable 17,270 7,400 – – 24,670Others 13,477 10,321 – – 23,798

1,568,667 1,189,304 372,745 1,797,436 4,928,152Sales contracts receivable 256,931 110,063 52,655 12,560 432,209

1,825,598 1,299,367 425,400 1,809,996 5,360,361Other receivables - Accounts

receivable P=202,033 P=134,515 P=101,656 P=500,507 P=938,711

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Parent Bank2017

Less than31 days 31 to 90 days 91 to 180 days More than180 days Total

LoansConsumer P=110,993 P=52,379 P=11,112 P=16,534 P=191,018Commercial 1,154,609 633,106 40,478 698,561 2,526,754Corporate 903 9,672 14,509 486,289 511,373Accrued interest receivable 17,270 7,400 – – 24,670Others 9,439 4,320 – – 13,759

1,293,214 706,877 66,099 1,201,384 3,267,574Sales contracts receivable 256,931 110,002 52,567 11,960 431,460

1,550,145 816,879 118,666 1,213,344 3,699,034Other receivables - Accounts

receivable P=– P=121,966 P=92,298 P=362,592 P=576,886

For 2017, the maximum exposure to credit risk without taking into account any collateral held orother credit enhancements for on-books financial assets and off-books items, net of allowance, areshown below.

Group Parent BankCredit risk exposures relating to on-books items:

Due from BSP P=66,276,960 P=60,350,126Due from other banks 54,520,482 53,690,233Interbank loans receivable 4,793,280 4,793,280

125,590,722 118,833,639Financial assets at FVTPL

Derivative assets 365,950 365,950Debt securities – –

365,950 365,950125,956,672 119,199,589

Financial assets at amortized costGovernment bonds and other debt securities 163,654,915 163,654,915

Other debt securities - Private bonds andcommercial papers 2,816,744 2,816,744

Redeemable preferred shares – –166,471,659 166,471,659

Loans and receivablesReceivables from Customers

Corporate 116,261,352 116,261,352Consumer 90,600,239 35,157,389Commercial 47,189,182 47,124,310Bills purchased 3,423,349 3,423,349

Securities purchased under reverserepurchase agreement (SPURRA) 13,572,371 4,130,362

Accrued interest receivable (AIR) 1,796,717 1,280,056Others 582,916 423,159

Accounts receivable 3,014,315 855,655AIR - other receivables 2,136,868 2,133,724

(Forward)

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Group Parent BankSales contract receivables P=1,186,676 P=1,186,676

Unquoted debt securities classified as loans(UDSCL) 404,698 –

Installment contracts receivable 10,192 –280,178,875 211,976,032

Credit risk exposures relating to off-books items:Financial guarantees (see Note 34) 4,703,587 4,703,587

Loan commitments and other credit-relatedliabilities 24,186,916 23,936,916

28,890,503 28,640,503P=601,497,709 P=526,287,783

(a) Cash and Cash equivalents

The credit risk for cash and cash equivalents is considered negligible, since the counterparties arereputable banks with high quality external credit ratings. Included in the cash and cashequivalents are Due from BSP, Due from other banks and Interbank loans receivable.

(b) Investments

The Group continuously monitors defaults of borrowers and other counterparties, identified eitherindividually or by group, and incorporates this information into its credit risk controls. TheGroup’s policy is to deal only with creditworthy counterparties. All investments held by theGroup are considered as either as high grade or standard grade that is neither past due norspecifically impaired.

(c) Loans and Other Receivables

The RMU reviews the Parent Bank’s loan portfolio quality in line with the Parent Bank’s policyof avoiding significant concentrations of exposure to specific industries or groups of borrowers.In order to avoid excessive concentrations of risk, the Parent Bank’s policies and proceduresinclude guidelines for maintaining a diversified portfolio (e.g., concentration limits). Identifiedconcentrations of credit risks are controlled and managed accordingly. The RMU also monitorscompliance to the BSP’s limit on exposure to any single person or group of connected persons toan amount not exceeding 25% of the Parent Bank’s adjusted capital accounts.

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Concentrations of Credit RiskAn analysis of concentrations of credit risk for loans and other receivables and investment securities(grossed up for any allowance for impairment losses and unearned discounts) of the Group and theParent Bank by industry and by geographic location as of December 31, 2018 and 2017 is shown inthe succeeding pages.

Group2018

Loans and Other Receivables

Amount %

Trading andInvestmentSecurities* Total

Concentration by industryReal estate activities P=54,175,125 16.13 P=2,518,418 P=56,693,543Financial and insurance activities 49,709,176 14.80 171,571,585 221,280,761Information and communication 31,377,131 9.34 804,521 32,181,652Wholesale and retail trade, repair of motor

vehicles 27,711,422 8.25 424 27,711,846Electricity, gas steam and air conditioning

supply 23,179,406 6.90 37,776,215 60,955,621Manufacturing 18,153,915 5.41 2,826,502 20,980,417Accommodation and food service activities 11,932,740 3.55 – 11,932,740Transportation and storage 11,851,921 3.53 – 11,851,921Activities of households as employers and

undifferentiated goods and services 9,256,381 2.76 – 9,256,381Construction 5,836,312 1.74 – 5,836,312Other service activities 3,805,692 1.13 3,532 3,809,224Agriculture, forestry and fishing 2,266,941 0.68 – 2,266,941Professional, scientific and technical

activities 431,161 0.13 – 431,161Arts, entertainment and Recreation 106,928 0.03 – 106,928Others 86,008,050 25.62 45,370 86,053,420

P=335,802,301 100.00 P215,546,567 P551,348,868Concentration by locationPhilippines P=334,255,563 99.54 P=100,196,959 P=434,452,522Others - Asia 846,364 0.25 75,903,425 76,749,789South America 342,098 0.10 22,161,154 22,503,252North America 216,422 0.06 9,728,961 9,945,383Russia 110,650 0.04 4,890,490 5,001,140United States 22,343 0.01 2,656,717 2,679,060Europe 8,861 0.00 8,861 17,722

P=335,802,301 100.00 P=215,546,567 P=551,348,868

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Group2017

Trading andLoans and Other Receivables Investment

Amount % Securities TotalConcentration by industryReal estate activities P=46,910,394 16.02 P=2,641,001 P=49,551,395Financial and insurance activities 43,289,049 14.79 138,346,287 181,635,336Information and communication 30,842,229 10.53 7,577 30,849,806Electricity, gas steam and air conditioning

supply 25,744,226 8.79 25,794,080 51,538,306Wholesale and retail trade, repair of motor

vehicles 19,832,471 6.77 508 19,832,979Manufacturing 13,064,296 4.46 2,787 13,067,083Transportation and storage 9,454,975 3.23 – 9,454,975Accommodation and food service activities 8,543,498 2.92 – 8,543,498Other service activities 4,538,525 1.55 – 4,538,525Construction 4,312,242 1.47 – 4,312,242Activities of households as employers and

undifferentiated goods and services 1,924,257 0.66 – 1,924,257Agriculture, forestry and fishing 1,315,692 0.45 – 1,315,692Arts, entertainment and Recreation 1,174,569 0.40 – 1,174,569Professional, scientific and technical

activities 290,146 0.10 – 290,146Others 81,551,398 27.86 45,369 81,596,767

P=292,787,967 100.00 P=166,837,609 P=459,625,576Concentration by locationPhilippines P=291,725,048 99.64 P=92,408,663 P=384,133,711Others - Asia 706,602 0.24 53,243,125 53,949,727North America 110,132 0.04 4,749,146 4,859,278South America 131,489 0.04 9,847,069 9,978,558Russia 91,427 0.03 4,062,066 4,153,493United States 21,217 0.01 2,525,581 2,546,798Europe 2,052 – 1,959 4,011

P=292,787,967 100.00 P=166,837,609 P=459,625,576

Parent Bank2018

Trading andLoans and Other Receivables Investment

Amount % Securities TotalConcentration by industryReal estate activities P=54,174,341 20.39 P=2,518,418 P=56,692,759Financial and insurance activities 39,747,749 14.95 171,571,585 211,319,334Information and communication 31,376,526 11.81 804,521 32,181,047Wholesale and retail trade, repair of motor

vehicles 27,093,681 10.19 424 27,094,105Electricity, gas steam and air conditioning

supply 23,179,406 8.72 37,776,215 60,955,621Manufacturing 18,148,319 6.83 2,826,502 20,974,821Accommodation and food service activities 11,866,239 4.47 – 11,866,239Transportation and storage 11,209,175 4.22 − 11,209,175Activities of households as employers and

undifferentiated goods and services 9,256,381 3.48 – 9,256,381Construction 5,835,706 2.20 – 5,835,706Other service activities 3,507,739 1.32 3,532 3,511,271Agriculture, forestry and fishing 788,735 0.30 – 788,735

(Forward)

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Parent Bank2018

Trading andLoans and Other Receivables Investment

Amount % Securities TotalProfessional, scientific and technical

activities P=430,218 0.16 P=– P=430,218Arts, entertainment and Recreation 105,694 0.04 – 105,694Others 29,012,375 10.92 45,370 29,057,745

P=265,732,284 100.00 P=215,546,567 P=481,278,851Concentration by locationPhilippines P=264,185,546 99.42 P=100,196,959 P=364,382,505Others - Asia 846,364 0.32 75,903,425 76,749,789South America 342,098 0.13 22,161,154 22,503,252North America 216,422 0.08 9,728,961 9,945,383Russia 110,650 0.04 4,890,490 5,001,140United States 22,343 0.01 2,656,717 2,679,060Europe 8,861 – 8,861 17,722

P=265,732,284 100.00 P=215,546,567 P=481,278,851

Parent Bank2017

Loans and Other Receivables

Amount %Investment

Securities TotalConcentration by industryReal estate activities P=46,812,854 21.11 P=2,641,001 P=49,453,855Financial and insurance activities 33,196,029 14.97 138,346,287 171,542,316Information and communication 30,842,230 13.91 7,577 30,849,807Electricity, gas steam and air conditioning

supply 25,692,121 11.59 25,794,080 51,486,201Manufacturing 13,064,296 5.89 2,787 13,067,083Transportation, storage 9,454,975 4.26 – 9,454,975Wholesale and retail trade, repair of motor

vehicles 19,829,137 8.94 508 19,829,645Other service activities 4,525,322 2.04 – 4,525,322Accommodation and food service activities 8,543,498 3.85 – 8,543,498Construction 4,302,415 1.94 – 4,302,415Activities of households as employers and

undifferentiated goods and services 1,731,586 0.78 – 1,731,586Arts, entertainment and Recreation 1,174,569 0.53 – 1,174,569Agriculture, forestry and fishing 636,018 0.29 – 636,018Professional, scientific and technical

activities 290,146 0.13 – 290,146Others 21,670,384 9.77 45,369 21,715,753

P=221,765,580 100.00 P=166,837,609 P=388,603,189Concentration by locationPhilippines P=220,702,661 99.52 P=92,408,663 P=313,111,324Others - Asia 706,602 0.32 53,243,125 53,949,727Europe 2,052 – 1,959 4,011North America 110,132 0.05 4,749,146 4,859,278South America 131,489 0.06 9,847,069 9,978,558Russia 91,427 0.04 4,062,066 4,153,493United States 21,217 0.01 2,525,581 2,546,798

P=221,765,580 100.00 P=166,837,609 P=388,603,189

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Collateral Held as Security and Other Credit EnhancementsThe Group holds collateral against loans and other receivables from customers in order to mitigaterisk. The collateral may be in the form of mortgages over real estate property, chattels, inventory,cash, securities and/or guarantees. The Bank regularly monitors and updates the fair value of thecollateral depending on the type of credit exposure. Estimates of the fair value of collateral areconsidered in the review and assessment of the adequacy of allowance for credit losses. In general,the Bank does not require collateral for loans and advances to other banks, except when securities areheld as part of reverse repurchase agreements.

An estimate of the fair value of collateral and other security enhancements held by the Group andthe Parent Bank against loans and other receivables as of December 31, 2018 and 2017 is shownbelow:

Group

Exposure beforecollateral Property Deposits Others

Exposure afterfinancial effect of

collateralAs of December 31, 2018 P=335,802,301 P=31,702,972 P=595,409 P=11,506,779 P=291,997,141As of December 31, 2017 292,787,967 49,580,386 140,435 35,429,507 207,637,639

Parent Bank

Exposure beforecollateral Property Deposits Others

Exposure afterfinancial effect of

collateralAs of December 31, 2018 P=265,732,284 P=30,797,902 P=507,031 P=11,506,779 P=222,920,572As of December 31, 2017 221,765,580 49,429,711 89,155 35,429,507 136,817,207

The Group’s manner of disposing the collateral for impaired loans and receivables is normallythrough sale of the assets after foreclosure proceedings have taken place.

Liquidity RiskLiquidity risk is the risk that there are insufficient funds available to adequately meet the creditdemands of the Group’s customers and repay deposits on maturity. The ALCO and the Treasurer ofthe Group ensure that sufficient liquid assets are available to meet short-term funding and regulatoryrequirements. Liquidity is monitored by the Group on a daily basis and under stressed situations. Acontingency plan is formulated to set out the amount and the sources of funds (such as unused creditfacilities) that are available to the Group and the circumstances under which the Group may use suchfunds.

The Group also manages its liquidity risks through the use of a Maximum Cumulative Outflow(MCO) limit which regulates the outflow of cash on a cumulative basis and on a tenor basis. Tomaintain sufficient liquidity in foreign currencies, the Group has also set an MCO limit for certaindesignated foreign currencies. The MCO limits are endorsed by the MRC and approved by the BOD.

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The table below shows the financial assets and financial liabilities’ liquidty information whichincludes coupon cash flows categorized based on the contractual date on which the asset will berealized and the liability will be settled. For financial assets at FVTPL, the analysis into maturitygrouping is based on the remaining period from the end of the reporting period to the expected datethe assets will be realized (amounts in millions).

Group2018

OnDemand

Up to1 month

1 to 3Months

3 to 6Months

6 to 12Months

Beyond1 year Total

Financial assetsCash and other cash items P=10,917 P=− P=− P=− P=− P=− P=10,917Due from BSP 56,511 − − − − − 56,511Due from other banks 14,942 − − − − − 14,942Interbank loans receivable − − − − − − −

82,370 − − − − − 82,370Financial assets at FVTPL

Derivative assets 9 196 89 18 16 50 378Debt securities − 5,219 − − − − 5,219Equity securities − 2,690 − − − − 2,690

Financial assets at FVOCIDebt securities − 9 41 390 1,431 9,883 11,754Equity securities − − − − − 53 53

Financial assets at amortizedcostDebt securities − 1,243 1,570 4,611 5,904 378,690 392,018

9 9,357 1,700 5,019 7,351 388,676 412,112Loans and other receivables 43 42,266 30,217 24,223 26,641 240,761 364,151Other receivables

Accounts receivable − – – – – 4,711 4,711Accrued interest receivable − 5,081 – – – – 5,081

Sales contract receivable − 24 46 68 135 1,248 1,52143 47,371 30,263 24,291 26,776 246,720 375,464

Other financial assets Returned checks and other

cash items − 509 − − − − 509Sundry debits − 145 − − − − 145

− 654 − − − − 654Total assets P=82,422 P=57,382 P=31,963 P=29,310 P=34,127 P=635,396 P=870,600

Non-derivative liabilitiesDeposit liabilities

Demand P=119,253 P=– P=– P=– P=– P=– P=119,253Savings 67,348 – – – – – 67,348Time and LTNCD 341 130,740 61,218 9,644 6,160 33,053 241,156

186,942 130,740 61,218 9,644 6,160 33,053 427,757Bills payable – 58,326 13,483 970 15,844 4,275 92,898Notes and bonds payable – 37 291 738 1,029 48,089 50,184Manager’s checks 9,417 – – – – – 9,417Accrued interest payable – 1,369 – – – – 1,369Accounts payable – 3,956 – – – – 3,956Other liabilities – 4,308 – – – 234 4,542

196,359 198,736 74,992 11,352 23,033 85,651 590,123Derivative liabilities

Outflow – 16,627 4,549 1,547 922 – 23,645Inflow – (16,292) (4,518) (1,526) (899) – (23,235)

− 335 31 21 23 − 410Total liabilities P=196,359 P=199,071 P=75,023 P=11,373 P=23,056 P=85,651 P=590,533

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Group2017

OnDemand

Up to1 month

1 to 3Months

3 to 6Months

6 to 12Months

Beyond1 year Total

Financial assetsCash and other cash items P=6,633 P=− P=− P=− P=− P=− P=6,633Due from BSP 66,277 − − − − − 66,277Due from other banks 54,520 − − − − − 54,520Interbank loans receivable − 4,799 − − − − 4,799

127,430 4,799 − − − − 132,229Financial assets at FVTPL

Derivative assets − 252 67 − − 49 368Debt securities − − − − − − −Equity securities − 2,816 − − − − 2,816

Financial assets at FVOCIDebt securities − − − − − − −Equity securities − − − − − 44 44

Financial assets at amortizedcostDebt securities − 1,052 1,919 2,011 4,160 314,730 323,872

− 4,120 1,986 2,011 4,160 314,823 327,100Loans and other receivables 178 36,495 25,808 17,049 20,197 218,330 318,057Other receivables

Accounts receivable − − − − − 3,668 3,668Accrued interest receivable − 4,025 − − − − 4,025Sales contract receivable − 21 40 59 116 952 1,188

178 40,541 25,848 17,108 20,313 222,950 326,938Other financial assets

Returned checks and othercash items − 260,780 − − − − 260,780

Sundry debits − 160,650 − − − − 160,650− 421,430 − − − − 421,430

Total assets P=127,608 P=470,890 P=27,834 P=19,119 P=24,473 P=537,773 P=1,207,697Non-derivative liabilities

Deposit liabilitiesDemand P=127,424 P=– P=– P=– P=– P=– P=127,424Savings 57,745 – – – – – 57,745Time and LTNCD 117 159,980 71,771 9,329 7,505 18,371 267,073

185,286 159,980 71,771 9,329 7,505 18,371 452,242Bills payable 1 30,769 2,301 1,226 7,359 1,855 43,511Notes and bonds payable – – 97 518 615 36,013 37,243Manager’s checks 8,677 – – – – – 8,677Accrued interest payable – 941 – – – – 941Accounts payable – 2,854 – – – – 2,854Other liabilities – 4,085 – – – 189 4,274

193,964 198,629 74,169 11,073 15,479 56,428 549,742Derivative liabilities

Outflow – 3,934 32 13 8 – 3,987Inflow – (3,911) (32) (12) (8) – (3,963)

− 23 − 1 − − 24Total liabilities P=193,964 P=198,652 P=74,169 P=11,074 P=15,479 P=56,428 P=549,766

Parent Bank2018

OnDemand

Up to1 month

1 to 3Months

3 to 6Months

6 to 12Months

Beyond1 year Total

Financial assetsCash and other cash items P=10,335 P=− P=− P=− P=− P=− P=10,335Due from BSP 52,961 − − − − − 52,961Due from other banks 11,550 − − − − − 11,550Interbank loans receivable − − − − − − −

74,846 − − − − − 74,846Financial assets at FVTPL

Derivative assets 9 196 89 18 16 50 378Debt securities − 5,219 − − − − 5,219Equity securities − 2,632 − − − − 2,632

Financial assets at FVOCIDebt securities − − 41 390 1,431 9,883 11,745Equity securities − − − − − 44 44

Financial assets at amortizedcostDebt securities − 1,243 1,570 4,611 5,904 378,690 392,018

9 9,290 1,700 5,019 7,351 388,667 412,036

(Forward)

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Parent Bank2018

OnDemand

Up to1 month

1 to 3Months

3 to 6Months

6 to 12Months

Beyond1 year Total

Loans and other receivables P=− P=41,405 P=28,618 P=21,448 P=20,108 P=183,347 P=294,926Other receivables

Accounts receivable − − − − − 1,761 1,761Accrued interest receivable − 4,459 − − − − 4,459Sales contract receivable − 24 46 68 135 1,171 1,444

− 45,888 28,664 21,516 20,243 186,279 302,590Other financial assets

Returned checks and othercash items

− 508,709 − − − − 508,709

Sundry debits − 145,438 − − − − 145,438− 654,147 − − − − 654,147

Total assets P=74,855 P=709,325 P=30,364 P=26,535 P=27,594 P=574,946 P=1,443,619Non-derivative liabilities

Deposit liabilitiesDemand P=119,847 P=– P=– P=– P=– P=– P=119,847Savings 64,080 – – – – – 64,080Time and LTNCD 279 110,834 57,969 7,742 3,367 20,562 200,753

184,206 110,834 57,969 7,742 3,367 20,562 384,680Bills payable – 49,702 12,512 5 1,362 1,866 65,447Notes and bonds payable – – 291 734 1,025 47,922 49,972Manager’s checks 9,417 – – – – – 9,417Accrued interest payable – 1,108 – – – – 1,108Accounts payable – 3,256 – – – – 3,256Other liabilities – 4,303 – – – 234 4,537

193,623 169,203 70,772 8,481 5,754 70,584 518,417Derivative liabilities

Outflow – 16,627 4,549 1,547 922 – 23,645Inflow – (16,292) (4,518) (1,526) (899) – (23,235)

− 335 31 21 23 − 410Total liabilities P=193,623 P=169,538 P=70,803 P=8,502 P=5,777 P=70,584 P=518,827

Parent Bank2017

OnDemand

Up to1 month

1 to 3Months

3 to 6Months

6 to 12Months

Beyond1 year Total

Financial assetsCash and other cash items P=6,249 P=− P=− P=− P=− P=− P=6,249Due from BSP 60,350 − − − − − 60,350Due from other banks 53,690 − − − − − 53,690Interbank loans receivable − 4,799 − − − − 4,799

120,289 4,799 − − − − 125,088Financial assets at FVTPL

Derivative assets − 252 67 − − 49 368Debt securities − − − − − − −Equity securities − 2,764 − − − − 2,764

Financial assets at FVOCI −Debt securities − − − − − − −Equity securities − − − − − 44 44

Financial assets at amortizedcostDebt securities − 1,052 1,919 2,011 4,160 314,730 323,872

− 4,068 1,986 2,011 4,160 314,823 327,048Loans and other receivables P=− P=34,901 P=24,504 P=16,078 P=17,715 P=156,241 P=249,439Other receivables −

Accounts receivable − − − − − 1,498 1,498Accrued interest receivable − 3,505 − − − − 3,505Sales contract receivable − 21 40 59 116 952 1,188

− 38,427 24,544 16,137 17,831 158,691 255,630Other financial assets

Returned checks and othercash items

− 261 − − − − 261

Sundry debits − 161 − − − − 161− 422 − − − − 422

Total assets P=120,289 P=47,716 P=26,530 P=18,148 P=21,991 P=473,514 P=708,188

(Forward)

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Parent Bank2017

OnDemand

Up to1 month

1 to 3Months

3 to 6Months

6 to 12Months

Beyond1 year Total

Non-derivative liabilitiesDeposit liabilities

Demand P=128,049 P=– P=– P=– P=– P=– P=128,049Savings 55,738 – – – – – 55,738Time and LTNCD 64 128,491 66,569 7,820 6,498 8,670 218,112

183,851 128,491 66,569 7,820 6,498 8,670 401,899Bills payable 26,577 2,301 7 161 49 29,095Notes and bonds payable – – 97 518 615 36,013 37,243Manager’s checks 8,677 – – – – – 8,677Accrued interest payable – 793 – – – – 793Accounts payable – 2,367 – – – – 2,367Other liabilities 4,084 187 4,271

192,528 162,312 68,967 8,345 7,274 44,919 484,345Derivative liabilities -

Outflow – 3,934 32 13 8 – 3,987Inflow – (3,911) (32) (12) (8) – (3,963)

− 23 − 1 − − 24Total liabilities P=192,528 P=162,335 P=68,967 P=8,346 P=7,274 P=44,919 P=484,369

Market RiskMarket risk is the risk that the fair value or future cash flows of financial instruments will fluctuatedue to changes in market variables such as interest rate, foreign exchange rates and equity prices.The Group classifies exposures to market risk into either trading book or banking book. The marketrisk for the trading portfolio is managed and monitored based on a Value-at-Risk (VaR)methodology. Meanwhile, the market risk for the non-trading positions are managed and monitoredusing other sensitivity analyses.

The Group applies a VaR methodology to assess the market risk of positions held and to estimate thepotential economic loss based upon a number of parameters and assumptions for various changes inmarket conditions. VaR is a method used in measuring financial risk by estimating the potentialnegative change in the market value of a portfolio at a given confidence level and over a specifiedtime horizon.

The Group uses the historical VaR approach in assessing the possible changes in the market value ofinvestment securities based on historical data for a rolling one-year period. The VaR models aredesigned to measure market risk in a normal market environment. The models assume that anychanges occurring in the risk factors affecting the normal market environment will have the samedistribution as they had in the past. This involves running the portfolio across a set of historical pricechanges, thus creating a distribution of changes in portfolio value which may or may not be normal.The historical approach does not make any assumptions regarding the distribution of the risk factorsand therefore can accommodate any type of distribution.

VaR may also be underestimated or overestimated due to the assumptions placed on risk factors andthe relationship between such factors for specific instruments. Even though positions may changethroughout the day, the VaR only represents the risk of the portfolios at the close of each businessday, and it does not account for any losses that may occur beyond the 99% confidence level.

The VaR figures are backtested daily against actual and hypothetical profit and loss of the tradingbook to validate the robustness of the VaR model. To supplement the VaR, the Group performsstress tests wherein the trading portfolios are valued under extreme market scenarios not covered bythe confidence interval of the Group’s VaR model.

Since VaR is an integral part of the Group’s market risk management, VaR limits are establishedannually for all financial trading activities and exposures against the VaR limits and are monitored ona daily basis. Limits are based on the tolerable risk appetite of the Group.

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A summary of the Group’s VaR position at December 31, 2018 and 2017 follows (amounts inmillions of Philippine pesos):

ForeignExchange Interest Rate Equity Total VaR

2018 P=15.9 P=377.9 P=198.4 P=592.2Average daily 13.1 129.4 198.8 341.2Highest 86.5 990.0 206.1 1,282.6Lowest 1.9 – 187.6 189.5

2017 P=13.2 P=– P=196.0 P=209.2Average daily 15.9 3.3 204.0 223.2Highest 39.9 16.3 215.4 256.5Lowest 3.8 – 152.5 161.7

The high and low of the total portfolio may not equal to the sum of the individual components as thehighs and lows of the individual portfolios may have occurred on different trading days. The VaR forforeign exchange is the foreign exchange risk throughout the Parent Bank.

Interest Rate RiskA critical element of the Group’s risk management program consists of measuring and monitoring therisks associated with fluctuations in market interest rates on the Group’s net interest income andensuring that the exposure in interest rates is kept within acceptable limits.

The Group employs “gap analysis” to measure the interest rate sensitivity of its assets and liabilities,also known as Earnings-at-Risk (EaR). This sensitivity analysis is performed at least every month.The EaR measures the impact on the net interest income for any mismatch between the amounts ofinterest-earning assets and interest-bearing liabilities within a one-year period. The EaR is calculatedby first distributing the interest sensitive assets and liabilities into tenor buckets based on timeremaining to the next repricing date or the time remaining to maturity if there is no repricing and thensubtracting the liabilities from the assets to obtain the repricing gap. The repricing gap per tenorbucket is then multiplied by the assumed interest rate movement and appropriate time factor to derivethe EaR per tenor. The total EaR is computed as the sum of the EaR per tenor within one year.To manage the interest rate risk exposure, BOD-approved EaR limits were established.

Non-maturing or repricing assets or liabilities are considered to be non-interest rate sensitive and arenot included in the measurement.

A positive gap occurs when the amount of interest rate sensitive assets exceeds the amount of interestrate sensitive liabilities while a negative gap occurs when the amount of interest rate sensitiveliabilities exceeds the amount of interest rate sensitive assets. Accordingly, during a period of risinginterest rates, an entity with a positive gap will have more interest rate sensitive assets repricing at ahigher interest rate than interest rate sensitive liabilities which will be favorable to it. During a periodof falling interest rates, an entity with a positive gap will have more interest rate sensitive assetsrepricing at a lower interest rate than interest rate sensitive liabilities, which will be unfavorable to it.

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The asset-liability gap position of the Group and Parent Bank at carrying amounts follows (amountsin millions of Philippine pesos):

Group2018

Up toSix Months

BeyondSix Months

To One YearBeyond

One Year TotalResources

Loans P=102,018 P=17,300 P=206,881 P=326,199 Placements 14,942 – 56,511 71,453

Investments 3,821 949 213,502 218,272120,781 18,249 476,894 615,924

LiabilitiesDeposit liabilities 200,442 5,782 214,479 420,703Bills payable 72,467 14,972 3,525 90,964Notes and bonds payable 37 150 44,335 44,522

272,946 20,904 262,339 556,189Asset-Liability Gap (P=152,165) (P=2,655) P=214,555 P=59,735

Group2017

Up toSix Months

BeyondSix Months

To One YearBeyond

One Year TotalResources

Loans P=102,288 P=26,362 P=151,529 P=280,179Placements 61,425 – 64,165 125,590Investments 801 – 168,897 169,698Other financial assets 289 63 52 404

164,803 26,425 385,095 576,323Liabilities

Deposit liabilities 239,684 7,188 200,744 447,616Bills payable 33,180 7,161 2,730 43,071Notes and bonds payable – – 32,128 32,128

272,864 14,349 235,602 522,815Asset-Liability Gap (P=108,061) P=12,076 P=149,493 P=53,508

Parent Bank2018

Up toSix Months

BeyondSix Months

To One YearBeyond

One Year TotalResources

Loans P=85,622 P=6,558 P=166,231 P=258,411Placements 11,550 − 52,961 64,511Investments 3,812 949 213,445 218,206

100,984 7,507 432,637 541,128Liabilities

Deposit liabilities 175,699 3,233 201,778 380,710Bills payable 61,955 1,315 1,454 64,724Notes and bonds payable − − 44,335 44,335

237,654 4,548 247,567 489,769Asset-Liability Gap (P=136,670) P=2,959 P=185,070 P=51,359

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Parent Bank2017

Up toSix Months

BeyondSix Months

To One YearBeyond

One Year TotalResources

Loans P=81,963 P=15,952 P=114,061 P=211,976Placements 58,586 – 60,248 118,834Investments 801 – 168,845 169,646

141,350 15,952 343,154 500,456Liabilities

Deposit liabilities 201,984 6,317 191,673 399,974Bills payable 28,799 162 49 29,010Notes and bonds payable – – 32,128 32,128

230,783 6,479 223,850 461,112Asset-Liability Gap (P=89,433) P=9,473 P=119,304 P=39,344

The Parent Bank’s maturing financial liabilities within the one to six month period pertain to timedeposits as well as bills payable due to banks and other financial institutions. Maturing bills payableare usually settled through repayments. When maturing financial assets are not sufficient to cover therelated maturing financial liabilities, the bills payable and other currently maturing financial liabilitiesare rolled over/refinanced or are settled by entering into new borrowing arrangements with othercounterparties.

The following table sets out the impact of changes in interest rates on the Group’s and Parent Bank’snet interest income (amounts in millions of Philippine pesos):

Group Parent BankIncrease (decrease) in interest rates

(in basis points) 100 (100) 100 (100)2018Change in annualized net interest income (P=1,623) P=1,623 (P=1,392) P=1,392As a percentage of net interest income (9.3%) 9.3% (9.8%) 9.8%

2017Change in annualized net interest income (P=1,244) P=1,244 (P=993) P=993As a percentage of net interest income (7.1%) 7.1% (7.4%) 7.4%

This sensitivity analysis is performed for risk management purposes and assumes no other changes inthe repricing structure. Actual changes in net interest income may vary from the Bank’s internalmodel.

Foreign Exchange RiskForeign exchange risk is the risk to earnings or capital arising from changes in foreign exchangerates.

The Group’s net foreign exchange exposure, taking into account any spot or forward exchangecontracts, is computed as foreign currency assets less foreign currency liabilities. The foreignexchange exposure is limited to the day-to-day, over-the-counter buying and selling of foreignexchange in the Group’s branches, as well as foreign exchange trading with corporate accounts andother financial institutions. The Group is permitted to engage in proprietary trading to take advantageof foreign exchange fluctuations.

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The breakdown of the financial resources and financial liabilities of the Group and the Parent Bank asto foreign currency-denominated balances, translated to Philippine pesos as of December 31, 2018and 2017 is shown below.

2018

U.S. Dollars

OtherForeign

Currencies TotalResources:

Cash and other cash items P=2,684,743 P=757,251 P=3,441,994Due from other banks 8,711,992 1,819,838 10,531,830Financial assets at FVTPL 1,911,742 – 1,911,742

Financial assets at FVOCI 5,123,978 – 5,123,978Financial assets at amortized cost 138,214,218 1,873,269 140,087,487Loans and other receivables 12,603,289 63,554 12,666,843

P=169,249,962 P=4,513,912 P=173,763,874Liabilities:

Deposit liabilities P=99,109,399 P=3,371,657 P=102,481,056 Bills payable 46,692,300 8,003 46,700,303

Notes and bonds payable 26,233,746 – 26,233,746Derivative liabilities 10,499 – 10,499Accrued interest and other expenses 483,756 489 484,245Other liabilities 1,134,354 158,461 1,292,815

173,664,054 3,538,610 177,202,664Currency swaps and forwards 5,229,482 (1,058,691) 4,170,791Net exposure P=815,390 (P=83,389) P=732,001

2017

U.S. Dollars

OtherForeign

Currencies TotalResources:

Cash and other cash items P=551,642 P=163,435 P=715,077Due from other banks 50,579,934 2,449,693 53,029,627Interbank loans receivables 4,793,280 – 4,793,280Financial assets at FVTPL 52,917 – 52,917Financial assets at amortized cost 106,618,631 421,183 107,039,814Loans and other receivables 10,829,857 12,829 10,842,686

P=173,426,261 P=3,047,140 P=176,473,401Liabilities:

Deposit liabilities P=105,604,603 P=2,848,048 P=108,452,651Bills payable 28,953,460 6,951 28,960,411Notes payable 24,928,177 – 24,928,177Derivative liabilities 6,742 – 6,742Accrued interest and other expenses 355,778 495 356,273Other liabilities 365,901 72,563 438,464

160,214,661 2,928,057 163,142,718Currency swaps and forwards (12,640,760) (115,203) (12,755,963)Net exposure P=570,840 P=3,880 P=574,720

The Parent Bank’s foreign currency position for BSP reporting purposes also includes sundry debits,due from head office and branches, sundry credits and other dormant credits that are alsodenominated in foreign currencies. The Parent Bank’s net foreign currency exposure for BSPreporting, which is required to be presented in aggregate net U.S. dollar amounts and translated toPhilippine pesos, as of December 31, 2018 and 2017 follows:

2018 2017In U.S. dollars $11,332 $11,315In Philippine pesos P=595,837 P=564,958

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

The following table illustrates the sensitivity of the net results and capital funds to the changes inforeign exchange rates on the Group’s financial assets and financial liabilities. The percentageschange (increase and decrease) have been determined based on the average market volatility inexchange rates in the previous 12 months, using a confidence level of 99%. The sensitivity analysisis based on the Group’s and the Parent Bank’s foreign currency-denominated financial instrumentsheld at each reporting date, including currency swaps and forwards.

2018 2017

% Change

Effect onNet Profit

For the Year % Change

Effect onNet Profit

For the YearU.S. dollars 1.0% 7,591 0.5% 2,670Japanese yen 1.5% 1 1.5% 28Euros 1.5% (428) 1.5% 357Others 1.3% (637) 1.3% (745)

Operational RiskTo standardize the practice and to conform to international standards, the Parent Bank has adopted theBasel Committee’s definition of operational risk. This is formalized in the Parent Bank’s approvedOperational Risk Management Framework. Operational risk is the risk of loss arising frominadequate or failed internal processes, people, and systems or from external events. This definitionalso covers legal risk, as well as, the risk arising from dealings with Outsourced Service Providers(OSPs) and the use of technology-related products, services, delivery channels, and processes. Thisdefinition excludes strategic and reputational risk.

Each specific unit of the Parent Bank has its roles and responsibilities in the management ofoperational risk and these are clearly stated in the operational risk management framework. At theBOD level, an ORMC was formed to provide overall direction in the management of operational risk,aligned with the overall business objectives.

The ORMC covers the following areas of concern:

(a) The adequacy of the Parent Bank’s policies, procedures, organization and resources forpreventing, or limiting the damage from unexpected loss due to deficiencies in informationsystems, business, operational and management processes, employee skills and supervision,equipment and internal controls.

(b) Results of periodic or special risk assessments conducted in various businesses, operating units,products and information systems of the Parent Bank, to proactively uncover operational andinformation technology risks that may result to actual loss or damage to the Parent Bank.

(c) Summarized results of internal audits, BSP examinations and investigation of administrativecases that highlight trends indicative of present or emerging exposures to specific operationalrisks.

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(d) Regulatory compliance issues, whether currently existing, or anticipated to arise as a result ofnew laws or regulations.

(e) Business continuity strategies, plans, and resources.

An Operational Risk Management Unit (ORMU) was formed and given the mandate to build and leadthe roadmap in developing the foundations and systems necessary for the effective implementation ofan Operational Risk Management Framework. The ORMU, together with all other Risk Units,reports directly to the Chief Risk Officer.

In managing products, services and systems, these are implemented only after a thorough operationaland technical risk evaluation. As part of the product and systems approval process, product managersensure that risks are clearly identified and adequately controlled and mitigated. For existing products,services and systems, regular reviews are conducted and controls are assessed to determine continuedeffectiveness. The Parent Bank, as part of its continuing effort to manage operational risk, hasensured that the basic controls to manage exposure to operational risk have been embedded in itsprocesses.

For all technology-related activities and initiatives, the Parent Bank has a board level TechnologySteering Committee (TSC) to provide oversight function. It is composed of seven (7) members, two(2) of whom are members of the Bank’s BOD while five (5) are Senior Management officers fromboth the business and the operational units, thereby allowing a comprehensive and high-levelguidance on technology-related issues that may impact the Parent Bank. The Parent Bank hasdeveloped and implemented a Business Continuity Plan to give assurance that Bank services willcontinue in the event of disasters or unforeseen circumstances.

Legal Risk and Regulatory Risk ManagementLegal risk pertains to the Parent Bank’s exposure to losses arising from cases decided not in favor ofthe Parent Bank where significant legal costs have already been incurred, or in some instances, wherethe Parent Bank may be required to pay damages. The Parent Bank is often involved in litigation inenforcing its collection rights under loan agreements in case of borrower default. The Parent Bankmay incur significant legal expenses as a result of these events, but the Parent Bank may still end upwith non-collection or non-enforcement of claims. The Parent Bank has established measures toavoid or mitigate the effects of these adverse decisions and engages several qualified legal advisors,who were endorsed to and carefully approved by senior management. At year-end, the Parent Bankalso ensures that material adjustments or disclosures are made in the financial statements for anysignificant commitments or contingencies which may have arisen from legal proceedings involvingthe Parent Bank.

Regulatory compliance risk refers to the potential risk for the Parent Bank to suffer financial loss dueto changes in the laws, monetary, tax or other governmental regulations of the country. Themonitoring of the Parent Bank’s compliance with these regulations, as well as the study of thepotential impact of new laws and regulations, is the primary responsibility of the Parent Bank’s ChiefCompliance and Corporate Governance Officer. The Chief Compliance and Corporate GovernanceOfficer is responsible for communicating and disseminating new rules and regulations to all units,analyzing and addressing compliance issues, performing periodic compliance testing and regularlyreporting to the CGC and the BOD.

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5. Capital Management

Regulatory CapitalAs the Parent Bank’s lead regulator, the BSP sets and monitors capital requirements of the ParentBank.

In implementing current capital requirements, the BSP requires the Parent Bank to maintain aminimum capital amount and a prescribed ratio of qualifying capital to risk-weighted assets, knownas the “capital adequacy ratio” (CAR). Risk-weighted assets is the aggregate value of assets weightedby credit risk, market risk, and operational risk, based on BSP-prescribed formula provided underBSP Circular No. 360 and BSP Circular No. 538 which contain the implementing guidelines for therevised risk-based capital adequacy framework to conform to Basel II recommendations.

Effective January 1, 2014, the BSP has adopted the new risk-based capital adequacy frameworkparticularly on the minimum capital and disclosure requirements for the Philippine banking system inaccordance with the Basel III standards through BSP Circular No. 781. The adopted Basel III risk-based capital adequacy framework requires the Group to maintain:

(a) Common Equity Tier 1 (CET1) of at least 6.0% of risk-weighted assets;(b) Tier 1 Capital of at least 7.5% of risk-weighted assets;(c) Qualifying Capital (Tier 1 plus Tier 2 Capital) of at least 10.0% of risk-weighted assets; and,(d) Capital Conservation Buffer of 2.5% of risk-weighted assets, comprised of CET1 Capital.

The Group’s and the Parent Bank’s regulatory capital position as of December 31, 2018 and 2017, asreported to the BSP, follow (amounts in millions):

Group Parent Bank2018 2017 2018 2017

Common Equity Tier 1 CapitalPaid-up common stock P=12,171 P=10,583 P=12,171 P=10,583Additional paid in capital 14,145 5,820 14,145 5,820Surplus free 51,071 45,062 52,476 45,062Undivided profits 6,712 7,603 6,590 7,202Other comprehensive income (1,086) (911) (1,099) (894)Minority interest in financial allied subsidiary 539 44 – –

Sub-total 83,552 68,201 84,283 67,773Less Regulatory Adjustments:

Total outstanding unsecured credit accommodations,both direct and indirect, to DOSRI, and unsecuredloans, other credit accommodations and guaranteesgranted to subsidiaries and affiliates 250 213 173 149

Deferred income tax 4,888 4,443 3,767 3,782Goodwill 14,071 11,331 7,887 7,887Other intangible assets 1,182 731 942 640Un-booked valuation reserves 1,886 – 1,624 –Investments in equity of consolidated subsidiary banks and

quasi banks, and other financial allied undertakings – – 18,833 16,786Other equity investments in non-financial allied and

non-allied undertakings 656 853 656 853Total regulatory adjustments to Common Equity

Tier 1 capital 22,933 17,571 33,882 30,097Total Common Equity Tier 1 capital P=60,619 P=50,630 P=50,401 P=37,676Total Tier 1 capital P=60,619 P=50,630 P=50,401 P=37,676Tier 2 Capital

General loan loss provision P=4,417 P=2,524 P=4,141 P=2,000Unsecured subordinated debt 7,200 7,200 7,200 7,200Total Tier 2 capital P=11,617 9,724 P=11,341 9,200

(Forward)

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Group Parent Bank2018 2017 2018 2017

Net Tier 1 capital P=60,619 P=50,630 P=50,401 P=37,676Net Tier 2 capital 11,617 9,724 11,341 9,200Total qualifying capital P=72,236 P=60,354 P=61,742 P=46,876

Credit risk-weighted assets P=428,373 P=376,145 P=362,102 P=314,104Market risk-weighted assets 9,121 7,691 9,121 7,691Operational risk-weighted assets 38,234 35,307 25,424 25,563Total risk-weighted assets P=475,728 P=419,143 P=396,647 P=347,358Capital ratios:

Total regulatory capital expressed as percentage of totalrisk weighted assets 15.18% 14.40% 15.57% 13.50%

Total Tier 1 expressed as percentage of totalrisk-weighted assets 12.74% 12.08% 12.71% 10.85%

Total Common Equity Tier 1 expressed as percentageof total risk-weighted assets 12.74% 12.08% 12.71% 10.85%

Conservation buffer 6.74% 6.08% 6.71% 4.85%

The Group and the Parent Bank have fully complied with the CAR requirements of the BSP.

The breakdown of credit risk-weighted assets, market risk-weighted assets and operationalrisk-weighted assets follow (amounts in millions):

Group Parent Bank2018 2017 2018 2017

On-books assets P=420,680 P=371,439 P=354,409 P=309,398Off-books assets 2,628 2,917 2,628 2,917Counterparty risk-weighted

assets in the banking books 4,563 1,542 4,563 1,542assets in the trading books 502 247 502 247

Total Credit Risk-Weighted Assets P=428,373 P=376,145 P=362,102 P=314,104Capital Requirements P=42,837 P=37,615 P=36,210 P=31,410Interest rate exposures P=3,272 P=156 3,272 P=156Equity exposures 5,024 5,288 5,024 5,288Foreign exchange exposures 825 2,247 825 2,247Total Market Risk-Weighted Assets P=9,121 P=7,691 P=9,121 P=7,691Capital Requirements P=912 P=769 P=912 P=769Total Operational Risk-Weighted Assets - Basic indicator P=38,234 P=35,307 P=25,424 P=25,563Capital Requirements P=3,823 P=3,531 P=2,542 P=2,556

The total credit exposure broken down by type of exposures and risk weights follow (amounts inmillions):

Group2018

Credit RiskTotal Credit

Risk Exposure

TotalCredit Risk

Exposure after RiskMitigation 0%-50% 75%-100% 150%

TotalWeighted

AssetsRisk-Weighted On-Books AssetsCash on hand P=10,847 P=10,847 P=10,847 P=– P=– P=–Checks and other cash items 67 67 67 – – 13Due from BSP 56,519 56,519 56,519 – – –Due from other banks 14,925 14,925 10,899 4,026 – 9,124Financial assets at FVTPL 1 1 − 1 – 1Financial assets at FVOCI 9,838 9,050 5,447 3,603 – 4,007Financial assets at amortized cost 204,463 201,515 154,395 47,120 – 83,305Loans and receivables 299,223 299,045 7,910 284,945 6,190 295,970SPURRA 18,882 3,776 3,776 – – –Sales contract receivable (SCR) 1,513 1,513 – 373 1,140 2,084

(Forward)

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Group2018

Credit RiskTotal Credit

Risk Exposure

TotalCredit Risk

Exposure after RiskMitigation 0%-50% 75%-100% 150%

TotalWeighted

AssetsROPA P=4,736 P=4,736 P=– P=– P=4,736 P=7,104Other assets 17,809 17,809 160 17,649 – 17,649Total risk-weighted on-books assets not

covered by CRM 638,823 619,803 250,020 357,717 12,066 419,257Total risk-weighted on-books assets

covered by CRM – 19,020 19,012 8 – 1,423P=638,823 P=638,823 P=269,032 P=357,725 P=12,066 P=420,680

Risk-Weighted Off-Books AssetsDirect credit substitutes (e.g., general

guarantee of indebtedness andacceptances) P=977 P=– P=– P=977 P=– P=977

Transaction-related contingencies(e.g., performance bonds, bidbonds, warrantees and stand-byLCs related to particulartransactions) 1,851 – – 925 – 925

Trade-related contingencies arisingfrom movements of goods(e.g., documentary creditscollateralized by the underlyingshipments) and commitments withan original maturity of up to oneyear 3,629 – – 726 – 726

P=6,457 P=– P=– P=2,628 P=– P=2,628Counterparty Risk-Weighted Assets

in the Banking BooksRepo-style Exposure P=48,182 P=9,543 P=9,543 P=– P=– P=4,563Counterparty Risk-Weighted Assets

in the Trading BooksInterest Rate Contracts P=526 P=– P=– P=– P=– P=–Exchange Rate Contracts 44,207 761 492 269 – 502Total P=738,195 P=649,127 P=279,067 P=360,622 P=12,066 P=428,373

Group2017

Credit RiskTotal Credit

Risk Exposure

TotalCredit Risk

Exposure after RiskMitigation 0%-50% 75%-100% 150%

TotalWeighted

AssetsRisk-Weighted On-Books AssetsCash on hand P=6,622 P=6,622 P=6,622 P=– P=– P=–Checks and other cash items 9 9 9 – – 2Due from BSP 66,278 66,278 66,278 – – –Due from other banks 54,534 54,532 53,656 8,779 – 23,840Financial assets at FVTPL 1 1 – 1 – 1Financial assets at FVOCI 44 44 – 44 – 44Financial assets at amortized cost 169,992 166,769 136,880 29,889 – 61,957UDSCL 406 406 58 348 – 348Loans and receivables 266,462 266,229 12,631 250,517 3,081 257,702SPURRA 13,572 10,270 10,270 – – –Sales contract receivable (SCR) 1,097 1,097 – 245 852 1,523ROPA 4,916 4,916 – – 4,916 7,373Other assets 18,086 18,086 155 17,930 – 17,930Total risk-weighted on-books assets not

covered by CRM 602,019 595,259 286,559 307,753 8,849 370,720Total risk-weighted on-books assets

covered by CRM – 6,760 6,760 – – 719P=602,019 P=602,019 P=293,319 P=307,753 P=8,849 P=371,439

(Forward)

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Group2017

Credit RiskTotal Credit

Risk Exposure

TotalCredit Risk

Exposure after RiskMitigation 0%-50% 75%-100% 150%

TotalWeighted

AssetsRisk-Weighted Off-Books AssetsDirect credit substitutes (e.g., general

guarantee of indebtedness andacceptances) P=1,199 P=– P=− P=1,199 P=– P=1,199

Transaction-related contingencies(e.g., performance bonds, bidbonds, warrantees and stand-byLCs related to particulartransactions) 2,404 – – 1,202 – 1,202

Trade-related contingencies arisingfrom movements of goods(e.g., documentary creditscollateralized by the underlyingshipments) and commitments withan original maturity of up to oneyear 2,581 – – 516 – 516

P=6,184 P=– P=– P=2,917 P=– P=2,917Counterparty Risk-Weighted Assets

in the Banking BooksRepo-style Exposure P=25,925 P=3,951 P=3,951 P=– P=– P=1,542Counterparty Risk-Weighted Assets

in the Trading BooksExchange Rate Contracts 15,531 4,634 332 132 – 247Total P=649,659 P=610,604 P=297,602 P=310,802 P=8,849 P=376,145

Parent Bank2018

Credit RiskTotal Credit

Risk Exposure

TotalCredit Risk

Exposure after RiskMitigation 0%-50% 75%-100% 150%

TotalWeighted

AssetsRisk-Weighted On-Books AssetsCash on hand P=10,335 P=10,335 P=10,335 P=– P=– P=–Due from BSP 52,967 52,967 52,967 – – –Due from other banks 11,550 11,550 10,588 962 – 5,905Financial assets through other

comprehensive income 9,829 9,041 5,447 3,594–

3,998Financial assets at amortized cost 204,084 201,136 154,364 46,772 – 82,957Loans and receivables 244,090 243,912 7,910 231,496 4,506 240,205SPURRA 10,000 2,000 2,000 – – –SCR 1,435 1,435 – 294 1,141 2,005ROPA 4,371 4,371 – – 4,371 6,556Other assets 11,358 11,358 – 11,358 – 11,358Total risk-weighted on-books assets not

covered by CRM 560,019 548,105 243,611 294,476 10,018 352,984Total risk-weighted on-books assets

covered by CRM – 11,914 11,906 8 – 1,425P=560,019 P=560,019 P=255,517 P=294,484 P=10,018 P=354,409

Risk-Weighted Off-Books AssetsDirect credit substitutes (e.g., general

guarantee of indebtedness andacceptances) P=977 P=– P=– P=977 P=– P=977

Transaction-related contingencies (e.g.,performance bonds, bid bonds,warrantees and stand-by LCsrelated to particular transactions) 1,852 – – 925 – 925

(Forward)

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Parent Bank2018

Credit RiskTotal Credit

Risk Exposure

TotalCredit Risk

Exposure after RiskMitigation 0%-50% 75%-100% 150%

TotalWeighted

AssetsTrade-related contingencies arising

from movements of goods (e.g.,documentary credits collateralizedby the underlying shipments) andcommitments with an originalmaturity of up to one year P=3,629 P=– P=– P=726 P=– P=726

P=6,458 P=– P=– P=2,628 P=– P=2,628Counterparty Risk-Weighted Assets

in the Banking BooksRepo-style Exposure P=48,182 P=9,543 P=9,543 P=– P=– P=4,563Counterparty Risk-Weighted Assets

in the Trading BooksInterest Rate Contracts P=526 P=– P=– P=– P=– P=–Exchange Rate Contracts 44,207 761 492 269 – 502Total P=659,392 P=570,323 P=265,552 P=297,381 P=10,018 P=362,102

Parent Bank2017

Credit RiskTotal Credit

Risk Exposure

TotalCredit Risk

Exposure after RiskMitigation 0%-50% 75%-100% 150%

TotalWeighted

AssetsRisk-Weighted On-Books AssetsCash on hand P=6,249 P=6,249 P=6,249 P=– P=– P=–Due from BSP 60,351 60,351 60,351 – – –Due from other banks 53,690 53,690 53,656 35 – 22,995Financial assets through other

comprehensive income 44 44 – 44 – 44Financial assets at amortized cost 169,992 166,768 136,880 29,888 – 61,957Loans and receivables 209,415 209,182 12,627 195,409 1,147 199,737SPURRA 4,130 826 826 – – –SCR 1,097 1,097 – 245 852 1,523ROPA 4,831 4,831 – – 4,831 7,247Other assets 15,176 15,176 – 15,176 – 15,176Total risk-weighted on-books assets not

covered by CRM 524,975 518,214 270,589 240,797 6,830 308,679Total risk-weighted on-books assets

covered by CRM – 6,760 6,760 – – 719P=524,975 P=524,974 P=277,349 P=240,797 P=6,830 P=309,398

Risk-Weighted Off-Books AssetsDirect credit substitutes (e.g., general

guarantee of indebtedness andacceptances) P=1,199 P=– P=– P=1,199 P=– P=1,199

Transaction-related contingencies(e.g., performance bonds, bidbonds, warrantees and stand-byLCs related to particulartransactions) 2,404 – – 1,202 – 1,202

Trade-related contingencies arisingfrom movements of goods(e.g., documentary creditscollateralized by the underlyingshipments) and commitments withan original maturity of up to oneyear 2,581 – – 516 – 516

P=6,184 P=– P=– P=2,917 P=– P=2,917

(Forward)

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Parent Bank2017

Credit RiskTotal Credit

Risk Exposure

TotalCredit Risk

Exposure after RiskMitigation 0%-50% 75%-100% 150%

TotalWeighted

AssetsCounterparty Risk-Weighted Assets

in the Banking BooksRepo-style Exposure P=25,925 P=3,951 P=3,951 P=– P=– P=1,542Counterparty Risk-Weighted Assets

in the Trading BooksExchange Rate Contracts 15,532 464 331 132 – 247Total P=572,616 P=529,389 P=281,631 P=243,846 P=6,830 P=314,104

Risk weighted on-balance sheet assets covered by credit risk mitigants were based on collateralizedtransactions as well as guarantees by the Philippine National Government and those guarantors andexposures with the highest credit rating.

Standardized credit risk weights were used in the credit assessment of asset exposures. Third partycredit assessments were based on the ratings by Standard & Poor’s, Moody’s, Fitch and Philratingson exposures to Sovereigns, Multilateral Development Banks, Banks, Local Government Units,Government Corporations and Corporates.

Minimum Capital RequirementUnder the relevant provisions of current BSP regulations, the required minimum capitalization of auniversal bank is P=20.0 billion both as of December 31, 2018 and 2017. As of those dates, the Bankis in compliance with these regulations.

Ensuring Sufficient CapitalOn January 15, 2009, the BSP issued Circular No. 639, which articulates the need for banks to adoptand document an Internal Capital Adequacy Assessment Process (ICAAP). All universal andcommercial banks are expected to perform a thorough assessment of all their material risks, as well asmaintain capital adequate to support these risks. This is intended to complement the currentregulatory capital requirement of at least 10% of risk assets, which only covers credit, market andoperational risks. On December 29, 2009, the BSP issued Circular No. 677 that effectively extendsthe implementation of the ICAAP from January 2010 to January 2011.

Cognizant of the importance of a strong capital base to meet strategic and regulatory requirements,the Parent Bank has adopted a robust ICAAP on a group-wide level that is consistent with its riskphilosophy and risk appetite. The ICAAP Document embodies the Bank’s risk philosophy, riskappetite, and risk governance framework and structure, and integrates these with: (a) the ParentBank’s strategic objectives and long-term strategies; (b) the five-year financial and business plans;and, (c) the capital plan and dividend policy.

The ICAAP’s objective is to ensure that the BOD and senior management actively and promptlyidentify and manage the material risks arising from the general business environment, and that anappropriate level of capital is maintained to cover these risks. To test the adequacy of its capital evenunder difficult conditions, the Parent Bank conducts regular stress testing to assess the effects ofextreme but plausible events on its capital. The results are thoroughly discussed during RMCmeetings, and reported to the Board. In the course of its discussions, the BOD and seniormanagement may request for additional stress testing scenarios or revisions to the test assumptions inorder to better align these to current trends and forecasts.

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The Parent Bank has a cross-functional ICAAP technical team, comprised of representatives from thecore risk management units - credit, market, operational, information technology, and emerging risks;corporate planning; financial controllership; treasury; internal audit; and compliance. This ensures awell-coordinated approach to the development, documentation, implementation, review,improvement, and maintenance of the various sub-processes included in the ICAAP. The keymembers of the ICAAP technical team are enrolled in further training as well as various fora andbriefings to enhance their knowledge and expertise particularly on the subjects of ICAAP, Basel IIand III, and their interface with International Financial Reporting Standards.

On January 15, 2013, the BSP issued Circular No. 781, which specifies the implementing guidelineson the revised risk-based capital adequacy framework in accordance with the Basel III standards,applicable to universal and commercial banks as well as their subsidiary banks and quasi-bankseffective January 1, 2014. Beginning 2013, the Bank’s ICAAP Document considered the possibleimpact of Basel III implementation on the eligibility of unsubordinated notes as qualifying capital andthe changes in composition of qualifying capital.

On January 8, 2013, the BOD approved the purchase of CSB, aligned with the Parent Bank’slong-term strategy of building asset businesses based on consumers. With the materiality ofCSB’ assets in relation to the entire Group and the former’s expansion plans, the Bank’s ICAAPDocument showed the results of scenario analyses on a solo and consolidated basis.

The BSP, on October 29, 2014, issued Circular No. 856 that requires banks identified as DomesticSystemically Important Banks (D-SIBs) to comply with a higher loss absorbency (HLA) requirementon top of the common equity tier 1 and capital conservation buffer to increase going concern lossabsorbency and reduce extent or impact of failure on the domestic economy. The HLA requirementwill be phased-in from January 1, 2017 with full implementation by January 1, 2019. For the purposeof the ICAAP Document submitted starting 2016, the Parent Bank included in the assessment theimplications of the circular to its capital targets.

On March 10, 2016, BSP issued Circular No. 904 that sets out the guidelines that D-SIBs shouldfollow in maintaining a recovery plan for future destabilizing events and/or crises. The Parent Bank’sfirst recovery plan, approved by the BOD in May 2016, was submitted to the BSP in June 2016 as asupplement to the 2016 ICAAP Document. Moving forward, the recovery plan shall form an integralpart of the annual ICAAP Document submitted to BSP on or before March 31 of each year. TheParent Bank’s Capital Management Manual was also updated and presented to the BOD in June 2016to align with the D-SIB recovery plan guidelines set by the Circular.

The Parent Bank’s ICAAP Document is subjected each year to an independent review by the InternalAudit Division (IAD) to provide reasonable assurance that the Parent Bank has met the regulatoryrequirements. For the 2018 ICAAP Document submission, the results of the audit assessment werepresented to the Audit Committee and the BOD in February 2018. Based on IAD’s assessment of theICAAP document, its related supporting documents, and existing processes and structures, IADreported that the Parent Bank has satisfactorily complied with the minimum requirements prescribedin BSP Circular No. 639. Presence of a proper governance and oversight function of the ICAAP,comprehensive risk management framework, and sound capital management process were verified inthe audit process. For 2018, the Parent Bank’s ICAAP Document was submitted to the BSP onMarch 23, 2018.

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6. Segment Reporting

Business SegmentsThe Group’s main operating businesses are organized and managed separately according to the natureof products and services provided and the different markets served, with each segment representing astrategic business unit. These are also the basis of the Group in reporting to its chief operatingdecision-maker for its strategic decision-making activities. The Group’s main business segments areas presented in the succeeding pages.

(a) Consumer BankingThis segment principally handles individual customers’ deposits and provides consumer typeloans, such as automobiles and mortgage financing, credit card facilities and funds transferfacilities.

(b) Corporate and Commercial BankingThis segment principally handles loans and other credit facilities and deposit and current accountsfor corporate, institutional, small and medium enterprises, and middle market customers.

(c) TreasuryThis segment is principally responsible for managing the Bank’s liquidity and fundingrequirements, and handling transactions in the financial markets covering foreign exchange, fixedincome trading and investments, and derivatives.

(d) HeadquartersThis segment includes corporate management, support and administrative units not specificallyidentified with Consumer Banking, Corporate and Commercial Banking or Treasury.

These segments are the basis on which the Group reports its primary segment information.Transactions between segments are conducted at estimated market rates on an arm’s length basis.

Segment resources and liabilities comprise operating resources and liabilities including itemssuch as taxation and borrowings. Revenues and expenses that are directly attributable to aparticular business segment and the relevant portions of the Group’s revenues and expenses thatcan be allocated to that business segment are accordingly reflected as revenues and expenses ofthat business segment.

Analysis of Segment InformationSegment information of the Group as of and for the years ended December 31, 2018, 2017 and 2016follow (amounts in millions):

ConsumerBanking

Corporate andCommercial

Banking Treasury Headquarters TotalDecember 31, 2018Results of operations

Net interest income andother income P=12,752 P=5,560 P=4,947 P=2,415 P=25,674

Other expenses (7,221) (1,809) (1,439) (5,851) (16,320)Income before impairment

losses and income tax P=5,531 P=3,751 P=3,508 P=(3,436) 9,354Impairment losses − − − − (856)Tax expense − − − − (1,183)Net income − − − − 7,315Segment resources P=160,639 P=218,001 P=255,622 P=39,521 P=673,783Segment liabilities P=251,495 P=134,105 P=137,054 P=60,168 P=582,822Other information:

Depreciation and amortization P=269 P=29 P=12 P=433 ₱743Capital expenditures 426 142 47 1,714 2,329

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ConsumerBanking

Corporate andCommercial

Banking Treasury Headquarters TotalDecember 31, 2017Results of operations

Net interest income andother income P=13,262 P=4,897 P=4,452 P=2,707 P=25,318

Other expenses (6,743) (1,475) (1,183) (4,355) (13,756)Income before impairment

losses and income tax P=6,519 P=3,422 P=3,269 (P=1,648) 11,562Impairment losses − − − − (876)Tax expense − − − − (2,266)Net income − − − − P=8,420Segment resources P=152,942 P=190,458 P=250,591 P=27,441 P=621,432Segment liabilities P=248,330 P=127,347 P=123,078 P=49,333 P=548,088Other information:

Depreciation and amortization P=269 P=34 P=6 P=326 P=635Capital expenditures 450 135 14 646 1,245

ConsumerBanking

Corporate andCommercial

Banking Treasury Headquarters TotalDecember 31, 2016Results of operations

Net interest income andother income P=12,899 P=4,291 P=7,059 P=1,286 P=25,535

Other expenses (5,715) (1,235) (683) (4,332) (11,965)Income before impairment

losses and income tax P=7,184 P=3,056 P=6,376 (P=3,046) 13,570Impairment losses (1,594)Tax expense (1,910)Net income P=10,066Segment resources P=134,896 P=157,913 P=203,603 P=27,378 P=523,790Segment liabilities P=227,834 P=106,232 P=100,085 P=22,694 P=456,845Other information:

Depreciation and amortization P=341 P=54 P=6 P=315 P=716Capital expenditures 109 11 1 253 374

7. Categories, Fair Value Measurement and Offsetting of Financial Assets and Financial Liabilities

Comparison of Carrying Amounts and Fair ValuesThe carrying amounts and fair values of the categories of financial assets and financial liabilitiespresented in the statements of financial position are shown below.

Group2018

ClassesAt Amortized

Cost At Fair ValueCarryingAmount Fair Value

Financial AssetsAt amortized cost

Financial assets at amortized cost P=200,173,730 P=– P=200,173,730 P=179,655,178Loans and other receivables 326,199,466 – 326,199,466 329,756,674

At fair valueFinancial assets at FVTPL – 8,283,695 8,283,695 8,283,695Financial assets at FVOCI – 9,815,040 9,815,040 9,815,040Trust fund assets – 2,436,441 2,436,441 2,436,441

(Forward)

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Group2018

ClassesAt Amortized

Cost At Fair ValueCarryingAmount Fair Value

Financial LiabilitiesAt amortized cost

Deposit liabilities P=420,702,533 P=– P=420,702,533 P=420,447,783 Bills payable 90,964,473 – 90,964,473 90,964,473

Notes and bonds payable 44,522,066 – 44,522,066 43,197,489At fair value

Derivative liabilities − 407,037 407,037 407,037

Group2017

ClassesAt Amortized

Cost At Fair ValueCarryingAmount Fair Value

Financial AssetsAt amortized cost

Financial assets at amortized cost P=166,471,659 P=– P=166,471,659 P=161,669,316Loans and other receivables 280,178,875 – 280,178,875 280,213,033

At fair valueFinancial assets at FVTPL – 3,182,040 3,182,040 3,182,040

Financial assets at FVOCI – 43,783 43,783 43,783Trust fund assets – 3,768,669 3,768,669 3,768,669

Financial LiabilitiesAt amortized cost

Deposit liabilities P=447,616,213 P=– P=447,616,213 P=447,599,503Bills payable 43,070,825 – 43,070,825 43,070,825Notes and bonds payable 32,128,177 – 32,128,177 32,013,570

At fair value Derivative liabilities 23,684 23,684 23,684

Parent Bank2018

ClassesAt Amortized

Cost At Fair ValueCarryingAmount Fair Value

Financial AssetsAt amortized cost

Financial assets at amortized cost P=200,173,730 P=– P=200,173,730 P=179,655,178Loans and other receivables 258,411,076 – 258,411,076 261,968,284

At fair valueFinancial assets at FVTPL – 8,225,569 8,225,569 8,225,569Financial assets at FVOCI – 9,806,226 9,806,226 9,806,226

Financial LiabilitiesAt amortized cost Deposit liabilities P=380,710,363 P=− P=380,710,363 P=380,455,612

Bills payable 64,723,631 – 64,723,631 64,723,631Notes and bonds payable 44,335,260 – 44,335,260 43,010,683

At fair valueDerivative liabilities – 407,037 407,037 407,037

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Parent Bank2017

ClassesAt Amortized

Cost At Fair ValueCarryingAmount Fair Value

Financial AssetsAt amortized cost Financial assets at amortized cost P=166,471,659 P=– P=166,471,659 P=161,669,316

Loans and other receivables 211,976,032 – 211,976,032 212,010,190At fair value

Financial assets at FVTPL – 3,130,421 3,130,421 3,130,421Financial assets at FVOCI – 43,783 43,783 43,783

Financial LiabilitiesAt amortized cost

Deposit liabilities P=399,974,200 P=– P=399,974,200 P=399,957,489 Bills payable 29,009,719 – 29,009,719 29,009,719

Notes and bonds payable 32,128,177 – 32,128,177 32,013,570At fair value

Derivative liabilities – 23,684 23,684 23,684

The methods and assumptions used by the Group in estimating the fair value of the financialinstruments are:

∂ Cash and other cash items, Due from BSP and other banks, Interbank loans receivable and Returned checks and other cash items

The carrying amounts approximate the fair values due to the short-term nature of these accounts.

∂ Trading and investment securities at FVTPL, FVOCI and amortized costFair values of debt securities and equity investments are generally based on quoted market prices.Where the government debt securities are not quoted or the market prices are not readilyavailable, the fair value is determined in reference to PHP BVAL rates and interpolated PDST-R2rates provided by the Philippine Dealing and Exchange Corporation (PDEx) in 2018 and 2017,respectively.

∂ Loans and other receivablesThe estimated fair value of loans and receivables are estimated using the discounted cash flowmethodology, using the current incremental lending rates for similar types of loans andreceivables.

∂ Deposits and borrowingsThe estimated fair value of demand deposits with no stated maturity, which includes noninterest-bearing deposits, is the amount repayable on demand. The estimated fair value of long-term fixedinterest-bearing deposits and other borrowings without quoted market price is based ondiscounted cash flows using interest rates for new debts with similar remaining maturity.

∂ Other liabilities such as Manager’s checks, Bills purchased, Accounts payable, Accrued interest payable, Payment orders payable and Due to Treasurer of the Philippines

Due to their short duration, the carrying amounts of other liabilities in the statement of financialposition are considered to be reasonable approximation of their fair values.

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Fair Value HierarchyIn accordance with PFRS 13, Fair Value Measurement, the fair value of financial assets and liabilitiesand non-financial assets which are measured at fair value on a recurring or non-recurring basis andthose assets and liabilities not measured at fair value but for which fair value is disclosed inaccordance with other relevant PFRS, are categorized into three levels based on the significance ofinputs used to measure the fair value. The fair value hierarchy has the following levels:

∂ Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;∂ Level 2: inputs other than quoted prices included within Level 1 that are observable for the

resource or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and,∂ Level 3: inputs for the asset or liability that are not based on observable market data

(unobservable inputs).

The level within which the financial asset or liability is classified is determined based on the lowestlevel of significant input to the fair value measurement.

For purposes of determining the market value at Level 1, a market is regarded as active if quotedprices are readily and regularly available from an exchange, dealer, broker, industry group, pricingservice, or regulatory agency, and those prices represent actual and regularly occurring markettransactions on an arm’s length basis.

For investments which do not have quoted market price, the fair value is determined by usinggenerally acceptable pricing models and valuation techniques or by reference to the current market ofanother instrument which is substantially the same after taking into account the related credit risk ofcounterparties, or is calculated based on the expected cash flows of the underlying net asset base ofthe instrument.

When the Group uses valuation technique, it maximizes the use of observable market data where it isavailable and relies as little as possible on entity specific estimates. If all significant inputs requiredto determine the fair value of an instrument are observable, the instrument is included in Level 2.Otherwise, it is included in Level 3.

Financial Instruments Measured at Fair ValueThe financial assets and liabilities measured at fair value in the statements of financial position as ofDecember 31, 2018 and 2017 are grouped into the fair value hierarchy as follows:

GroupLevel 1 Level 2 Level 3 Total

December 31, 2018Resources

Financial assets at FVTPLDebt securities P=5,218,679 P=– P=– P=55,218,679Equity securities 2,569,908 120,490 − 2,690,398

Derivative assets − 324,840 49,688 374,528Trust fund assets 2,436,441 − − 2,436,441Financial assets at FVOCI

Debt securities 9,762,403 − − 9,762,403Equity securities − − 52,637 52,637

LiabilitiesDerivative liabilities − 407,037 – 407,037

(Forward)

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GroupLevel 1 Level 2 Level 3 Total

December 31, 2017Resources

Financial assets at FVTPLEquity securities P=2,695,600 P=120,490 P=– P=2,816,090Derivative assets − 318,766 47,184 365,950

Trust fund assets 3,768,669 − − 3,768,669Financial assets at FVOCI

Equity securities − − 43,783 43,783Liabilities

Derivative liabilities − 23,684 – 23,684

Parent BankLevel 1 Level 2 Level 3 Total

December 31, 2018Resources

Financial assets at FVTPLDebt securities P=5,218,679 P=– P=– P=5,218,679Equity securities 2,511,782 120,490 − 2,632,272

Derivative assets − 324,840 49,688 374,528Financial assets at FVOCI

Debt securities 9,762,403 − − 9,762,403Equity securities − − 43,823 43,823

LiabilitiesDerivative liabilities − 407,037 – 407,037

December 31, 2017Resources

Financial assets at FVTPLEquity securities P=2,643,981 P=120,490 P=– P=2,764,471Derivative assets − 318,766 47,184 365,950

Financial assets at FVOCIEquity securities − − 43,783 43,783

LiabilitiesDerivative liabilities − 23,684 – 23,684

There were no gains or losses recognized in 2018, 2017 and 2016 statements of income for Level 3instruments. There were neither transfers between Levels 1 and 2 nor changes in Level 3 instrumentsin both years.

Described below are the information about how the fair values of the Group and Parent Bank’sclasses of financial assets are determined.

(a) Debt securitiesFair values of debt securities under Level 1, composed of government securities issued by thePhilippine government and other foreign governments and private debt securities, are determinedbased on quoted prices at the close of business as appearing on Bloomberg.

(b) DerivativesThe fair values of derivative financial instruments that are not quoted in an active market aredetermined through valuation techniques using the net present value computation (see Note 3).

(c) Equity securitiesInstruments included in Level 1 comprise equity securities classified as financial assets atFVTPL. These securities were valued based on their closing prices on the PSE.

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Club shares classified as financial assets at FVTPL are included in Level 2 as their prices are notderived from market considered as active due to lack of trading activities among marketparticipants at the end or close to the end of the reporting period.

Financial Instruments Measured at Amortized Cost for Which Fair Value is DisclosedThe table below summarizes the fair value hierarchy of financial assets and financial liabilities whichare not measured at fair value in the 2018 and 2017 statements of financial position but for which fairvalue is disclosed.

Group2018

Level 1 Level 2 Level 3 TotalFinancial Assets

Financial assets at amortized cost P=179,655,178 P=– P=– P=179,655,178 Loans and other receivables – – 329,756,674 329,756,674Financial Liabilities

Deposit liabilities P=420,447,783 P=– P=– P=420,447,783Bills payable – 90,964,473 – 90,964,473Notes and bonds payable – 43,197,489 – 43,197,489

Group2017

Level 1 Level 2 Level 3 TotalFinancial Assets

Financial assets at amortized cost P=161,669,316 P=– P=– P=161,669,316Loans and other receivables − – 280,213,033 280,213,033

Financial LiabilitiesDeposit liabilities P=447,599,503 P=– P=– P=447,599,503Bills payable – 43,070,825 – 43,070,825

Notes and bonds payable – 32,013,570 – 32,013,570

Parent Bank2018

Level 1 Level 2 Level 3 TotalFinancial Assets

Financial assets at amortized cost P=179,655,178 P=– P=– P=179,655,178Loans and other receivables – – 261,968,284 261,968,284

Financial LiabilitiesDeposit liabilities P=380,455,612 P=– P=– P=380,455,612Bills payable – 64,723,631 – 64,723,631Notes and bonds payable – 43,010,683 – 43,010,683

Parent Bank2017

Level 1 Level 2 Level 3 TotalFinancial Assets

Financial assets at amortized cost P=161,669,316 P=– P=– P=161,669,316Loans and other receivables – – 212,010,190 212,010,190

Financial Liabilities Deposit liabilities P=399,957,489 P=– P=– P=399,957,489

Bills payable – 29,009,719 – 29,009,719Notes and bonds payable – 32,013,570 – 32,013,570

For Cash and other cash items, Due from BSP and other banks, Interbank loans receivable andReturned checks and other cash items, and Other liabilities such as Manager’s checks, Billspurchased, Accounts payable, Accrued interest payable, Payment orders payable and Due toTreasurer of the Philippines, management considers that the carrying amounts approximate their fairvalue due to its short-term nature. Accordingly, these are not presented in the tables above.

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The fair values of the financial assets and financial liabilities included in Level 2 and Level 3 in thepreceding pages, which are not traded in an active market, are determined by using generallyacceptable pricing models and valuation techniques or by reference to the current market value ofanother instrument which is substantially the same after taking into account the related credit risk ofcounterparties, or is calculated based on the expected cash flows of the underlying net asset base ofthe instrument. When the Group uses valuation technique, it maximizes the use of observable marketdata where it is available and rely as little as possible on entity specific estimates. If all significantinputs required to determine the fair value of an instrument are observable, the instrument is includedin Level 2. Otherwise, it is included in Level 3.

Fair Value Measurement of Investment PropertiesThe table below shows the levels within the hierarchy of investment properties measured at fair valueon a recurring basis as of December 31, 2018 and 2017.

2018Level 1 Level 2 Level 3 Total

GroupInvestment properties

Land P=– P=8,738,348 P=– P=8,738,348Building and improvements – – 6,515,103 6,515,103

Parent BankInvestment properties

Land P=– P=7,676,413 P=– P=7,676,413Building and improvements – – 6,038,837 6,038,837

2017Level 1 Level 2 Level 3 Total

GroupInvestment properties

Land P=– P=7,988,116 P=– P=7,988,116Building and improvements – – 6,165,430 6,165,430

Parent BankInvestment properties

Land P=– P=7,832,606 P=– P=7,832,606 Building and improvements – – 5,690,404 5,690,404

The fair values of the Group’s and the Parent Bank’s investment properties (see Note 17) aredetermined on the basis of the appraisals performed by independent appraisal companies acceptableto the BSP, with appropriate qualifications and recent experience in the valuation of similar propertiesin the relevant locations. The valuation process is conducted by the appraisers with respect to thedetermination of the inputs such as the size, age, and condition of the land and buildings, and thecomparable prices in the corresponding property location. In estimating the fair value of theseproperties, appraisal companies take into account the market participant’s ability to generateeconomic benefits by using the assets in their highest and best use. Based on management’sassessment, the best use of the Group’s and the Parent Bank’s non-financial assets indicated above istheir current use.

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The fair value of investment properties were determined based on the following approaches:

(a) Fair Value Measurement for LandThe Level 2 fair value of land was derived using the market data approach that reflects observableand recent transaction prices for similar properties in nearby locations. Under this approach,when sales prices of comparable land in close proximity are used in the valuation of the subjectproperty with no adjustment on the price, fair value is included in Level 2. On the other hand, ifthe observable and recent prices of the reference properties were adjusted for differences in keyattributes such as property size, zoning, and accessibility, the fair value will be the lower level ofthe hierarchy or Level 3. The most significant input into this valuation approach is the price persquare meter, hence, the higher the price per square meter, the higher the fair value.

(b) Fair Value Measurement for Building and ImprovementsThe Level 3 fair value of the investment properties was determined using the cost approach thatreflects the cost to a market participant to construct an asset of comparable usage, constructionstandards, design and layout, adjusted for obsolescence. The more significant inputs used in thevaluation include direct and indirect costs of construction such as but not limited to, labor andcontractor’s profit, materials and equipment, surveying and permit costs, electricity and utilitycosts, architectural and engineering fees, insurance and legal fees. These inputs were derivedfrom various suppliers and contractor’s quotes, price catalogues, and construction price indices.Under this approach, higher estimated costs used in the valuation will result in higher fair valueof the properties.

There has been no change to the valuation techniques used by the Group during the year for itsinvestment properties. The movements in the investment properties categorized under Level 3 ofthe fair value hierarchy follows:

Group Parent Bank2018 2017 2018 2017

Balance at beginning of year P=6,165,430 P=5,815,521 P=5,690,404 P=5,392,105Additions 191,658 315,475 185,796 273,938Fair value gains 490,543 245,973 490,543 228,966Adjustments (3,291) 4,710 (2,934) 11,644Net reclassification from (to) bank

premises, furniture, fixtures andequipment (2,560) − (2,560) −

Disposals (326,677) (216,249) (322,412) (216,249)Balance at year-end P=6,515,103 P=6,165,430 P=6,038,837 P=5,690,404

Fair value gains recognized from these investment properties are presented as part of Fair valuegains on investment properties under the Miscellaneous income account in the statements ofincome (see Note 27). On the other hand, realized gains from the sale of these investmentproperties recognized by the Group and the Parent Bank amounted to P=57,558 and P=46,189,respectively, in 2018, P=131,072 and P=125,833, respectively, in 2017, and P=66,350 and P=66,350,respectively, in 2016, for both the Group and the Parent Bank, and are presented as part of Gainon sale of investment properties under the Miscellaneous income account in the statements ofincome (see Note 27).

Offsetting Financial Assets and Financial LiabilitiesCertain financial assets and financial liabilities of the Group and the Parent Bank with amountspresented in the statements of financial position as of December 31, 2018 and 2017 are subject tooffsetting, enforceable master netting arrangements and similar agreements. However, there were nofinancial assets and financial liabilities presented at net in the statements of financial position.

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Presented below is the financial assets and financial liabilities subject to offsetting but the relatedamounts are not set-off in the statements of financial position.

GroupDecember 31, 2018 December 31, 2017

Related amounts not set off in the statement offinancial position

Related amounts not set off in the statement offinancial position

FinancialInstruments

CollateralReceived Net Amount

FinancialInstruments

CollateralReceived Net Amount

Financial assets at FVTPLCurrency forwards P=324,840 P=− P=324,840 P=318,766 P=– P=318,766Warrants 49,688 − 49,688 47,184 – 47,184

Loans and receivables 849,441 849,441 − 753,518 753,518 –Total financial assets 1,223,969 849,441 374,528 P=1,119,468 P=753,518 P=365,950Financial liabilitiesDerivative liabilities P=407,037 P=− P=407,037 P=23,684 P=– P=23,684Deposit liabilities 1,294,209 849,441 444,768 1,055,806 753,518 302,288Total financial liabilities P=1,701,246 P=849,441 P=851,805 P=1,079,490 P=753,518 P=325,972

Parent BankDecember 31, 2018 December 31, 2017

Related amounts not set off in the statement offinancial position

Related amounts not set off in the statement offinancial position

FinancialInstruments

CollateralReceived Net Amount

FinancialInstruments

CollateralReceived Net Amount

Financial assets at FVTPLCurrency forwards P= 324,840 P=− P=324,840 P=318,766 P=– P=318,766Warrants 49,688 − 49,688 47,184 – 47,184

Loans and receivables 794,541 794,541 − 753,518 753,518 –Total financial assets 1,169,069 794,541 374,528 P=1,119,468 P=753,518 P=365,950Financial liabilitiesDerivative liabilities P=407,037 P=− P=407,037 P=23,684 P=− P=23,684Deposit liabilities 1,208,244 794,541 413,703 1,055,631 753,518 302,113Total financial liabilities P=1,615,281 P=794,541 P=820,740 P=1,079,315 P=753,518 P=325,797

8. Cash and Balances with the BSP

These accounts are composed of the following as of December 31:

Group Parent Bank2018 2017 2018 2017

Cash and other cash items P=10,916,533 P=6,633,237 P=10,334,793 P=6,249,122Due from BSP

Mandatory reserves P= 54,503,045 P=63,651,796 51,133,191 P=59,922,734Non-mandatory reserves 2,007,656 2,625,164 1,828,235 427,392

P=56,510,701 P=66,276,960 P=52,961,426 P=60,350,126

Cash consists primarily of funds in the form of Philippine currency notes and coins in the Bank’s vaultand those in the possession of tellers, including ATMs. Other cash items include cash items (other thancurrency and coins on hand) such as checks drawn on other banks or other branches that were receivedafter the Bank’s clearing cut-off time until the close of the regular banking hours.

Mandatory reserves represent the balance of the deposit account maintained with the BSP to meetreserve requirements and to serve as clearing account for interbank claims. Due from BSP bearsannual interest rates ranging from 2.5% to 4.9% in 2018, and from 0.0% to 3.5% in 2017 and 2016,except for the amounts within the required reserve as determined by BSP. Total interest incomeearned by the Group amounted to P=68,500, P=187,511, and P=462,206 in 2018, 2017 and 2016respectively, while the total interest income earned by the Parent Bank amounted to P=40,126,P=171,583, and P=338,891 in 2018, 2017 and 2016, respectively. These are presented as part of Interestincome on cash and cash equivalents account in the statements of income.

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Cash and other cash items and due from BSP are included in cash and cash equivalents for cash flowstatement reporting purposes.

Under Section 254 of the MORB, a bank shall keep its required reserves in the form of depositsplaced in the bank’s demand deposit account with the BSP.

Section 254.1 of the MORB further provides that such deposit account with the BSP is not consideredas a regular current account as drawings against such deposits shall be limited to: (a) settlement ofobligation with the BSP, and (b) withdrawals to meet cash requirements.

9. Due from Other Banks

The balance of this account consists of regular deposits with the following:

Group Parent Bank2018 2017 2018 2017

Foreign banks P=10,450,895 P=52,867,637 P=10,450,895 P=52,867,637Local banks 4,491,318 1,652,845 1,099,271 822,596

P=14,942,213 P=54,520,482 P=11,550,166 P=53,690,233

The breakdown of this account as to currency follows:

Group Parent Bank2018 2017 2018 2017

U.S. dollars P=8,711,992 P=50,579,934 P=8,711,992 P=50,579,934Philippine pesos 4,410,383 1,490,855 1,018,336 660,606Other currencies 1,819,838 2,449,693 1,819,838 2,449,693

P=14,942,213 P=54,520,482 P=11,550,166 P=53,690,233

Annual interest rates on these deposits range from 0.0% to 6.8% in 2018, from 0.0% to 3.0% in 2017and from 0.0% to 1.6% in 2016. Total interest income on Due from other banks earned by the Groupamounted to P=138,958, P=34,741, and P=26,923 in 2018, 2017, and 2016, respectively, while totalinterest income earned by the Parent Bank amounted to P=108,662, P=24,068, and P=20,840 in 2018,2017 and 2016 respectively. These are presented as part of Interest income on cash and cashequivalents account in the statements of income.

Due from other banks are included in cash and cash equivalents for cash flow statement reportingpurposes.

10. Interbank Loans Receivable

Interbank loans receivable consists of loans granted to other banks. These loans have terms rangingfrom 1 to 28 days in 2018 and from 1 to 37 days in 2017.

All Interbank loans receivables of both the Group and the Parent Bank amounting to nil andP=4,793,280 as of December 31, 2018 and 2017, respectively, are denominated in foreign currencies.

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Total interest income on interbank loans in 2018 amounted to P=107,254 and P=126,167 for the Groupand the Parent Bank, respectively. Total interest income in 2017 and 2016 amounted to P=92,777 andP=80,449, respectively, for both the Group and the Parent Bank. Annual interest rates on interbankloans receivable range from 1.1% to 4.9% in 2018, 0.5% to 3.1% in 2017, and 0.07% to 2.6% in2016.

11. Financial Assets at Fair Value through Profit or Loss

The Group’s and Parent Bank’s financial assets at fair value through profit or loss as of December 31,2018 and 2017 consist of the following:

Group Parent Bank2018 2017 2018 2017

Debt securities P=5,218,769 P=− P=5,218,769 P=−Equity securities 2,690,398 2,816,090 2,632,272 2,764,471Derivative assets 374,528 365,950 374,528 365,950

P=8,283,695 P=3,182,040 P=8,225,569 P=3,130,421

The breakdown of this account as to currency follows:Group Parent Bank

2018 2017 2018 2017Philippine pesos P=6,371,953 P=3,129,123 P=6,313,827 P=3,077,504U.S. dollars 1,911,742 52,917 1,911,742 52,917

P=8,283,695 P=3,182,040 P=8,225,569 P=3,130,421

All financial assets at FVTPL are held for trading. Fair values of derivative assets were determinedthrough valuation technique using the net present value computation.

The Group recognized fair value losses on financial assets at FVTPL amounting to P=105,752, P=6,260and P=136,186 in 2018, 2017 and 2016, respectively, while the Parent Bank recognized fair valuelosses on financial assets at FVTPL amounting to P=105,782, P=6,393 and P=137,266 in 2018, 2017and 2016, respectively, and included as part of Gains (losses) on trading and investment securities atFVTPL and FVOCI in the statements of income.

Interest income generated from these financial assets amounted to P=36,639, P=52,425, and P=59,058 in2018, 2017, and 2016, respectively, and is shown as Interest Income on trading securities at FVTPLaccount in the statements of income of both the Group and the Parent Bank. In 2018, annual interestrates on these financial assets range from 3.4% to 8.0% and from 3.7% to 6.8% for securitiesdenominated in Philippine peso and U.S. dollars, respectively.

Derivative instruments include foreign currency forwards and warrants. Foreign currency forwardsrepresent commitments to purchase/sell foreign currency on a future date at an agreed exchange rate.

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The aggregate contractual or notional amount of derivative financial instruments and the total fairvalues of derivative financial assets and liabilities (see Note 24) are set out below.

December 31, 2018Notional Fair ValuesAmount Assets Liabilities

Currency forwardsBought P=25,992,905 P=15,132 P=394,148Sold 21,816,419 309,708 12,889

Warrants 4,732,200 49,688 –₱52,541,524 ₱374,528 ₱407,037

December 31, 2017Notional Fair ValuesAmount Assets Liabilities

Currency forwardsBought P=5,197,401 P=1,796 P=23,577Sold 16,681,238 316,970 107

Warrants 4,493,700 47,184 –P=26,372,339 P=365,950 P=23,684

12. Financial Assets At Amortized Cost

The Group’s and Parent Bank’s financial assets at amortized cost as of December 31, 2018 and 2017consist of the following:

Group and Parent Bank2018 2017

Government bonds and other debt securities P=200,008,312 P=163,654,915Private bonds and commercial papers 182,556 2,816,744

200,190,868 166,471,659Allowance for impairment (Note 20) (17,138) –

P=200,173,730 P=166,471,659

Investment securities of both the Group and the Parent Bank with an aggregate principal amount ofP=55,510,901 as of December 31, 2018 and P=24,216,050 as of December 31, 2017 were pledged ascollaterals for bills payable under repurchase agreements.

The breakdown of this account as to currency as of December 31, 2018 and 2017 follows:

Group and Parent Bank2018 2017

U.S. dollars P=138,214,821 P=106,618,631Philippine pesos 60,085,640 59,431,845Euros 1,873,269 421,183

P=200,173,730 P=166,471,659

Financial assets at amortized cost denominated in Philippine pesos have fixed interest rates rangingfrom 3.375% to 18.250% per annum both in 2018 and 2017 and from 3.375% to 9.375% per annumin 2016, while financial assets at amortized cost denominated in U.S. dollars and Euros have fixedinterest rates ranging from 2.250% to 9.50% per annum both in 2018 and 2017 and from 2.875% to9.5% per annum in 2016. These bonds have maturities of 1 to 31 years.

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Interest income generated from these financial assets, including amortization of premium or discount,amounted to P=7,539,909, P=6,658,201, and P=4,719,560 in 2018, 2017 and 2016, respectively, and isshown as part of Interest income on investment securities at amortized cost and FVOCI account in thestatements of income.

As discussed in Note 2, PFRS 9 introduced limited amendments to the classification andmeasurement requirements for financial assets, introducing the FVOCI measurement for eligible debtsecurities. As a result of this amendment to the standard, the Group adopted a business model whereits objective is both to collect contractual cash flow and selling financial assets (see Note 3). OnJanuary 1, 2018, the Group reclassified securities under the HTC business model to FVOCI categorywith a total fair value of P=19.4 billion. The difference of the amortized cost balance and fair value ofthe reclassified securities amounting to P=1.4 billion was taken to Net unrealized gains (losses) oninvestment securities at FVOCI in 2018.

In January 2018, the Parent Bank participated in the Republic of the Philippines (ROP) US Dollarbond exchange, as part of the national government’s liability management exercise, where itredeemed several series of older debt in exchange for either (i) exchange of new securities or(ii) tenders for cash. The Parent Bank received $87.00 million (P=4.5 billion) cash in exchange for theoutstanding securities under the HTC business model tendered with face amount of $66.40 million(P=3.4 billion). Also, in February 2018, the Parent Bank participated in the bond exchange offering ofa foreign issuer where the Parent Bank exchanged its outstanding securities amounting to$40.00 million (P=2.1 billion) in face amount for new 30-year securities with face amount of$37.10 million (P=2.0 billion). Total gain as a result of these transactions amounting to $2.94 million(P=151.7 million) is included as part of Gains on sale of investment securities at amortized cost(see Note 3).

Debt securities with face value of P=7.5 billion, P=6.9 billion and P=34.0 billion were disposed in 2018,2017 and 2016, respectively. These are considered infrequent in nature and not inconsistent with theGroup’s business model. The Group and Parent Bank recognized gains amounting to P=152,161,P=272,841, P=3,951,187 in 2018, 2017 and 2016, respectively, and is included as part of Gains on saleof investment securities at amortized cost in the statements of income.

Government bonds with face value of P=550,000 and P=700,000 as of December 31, 2018, and 2017,respectively, are deposited with BSP as security for the Bank’s faithful compliance with its fiduciaryobligations (see Note 30).

13. Financial Assets at Fair Value Through Other Comprehensive Income

The Group’s and Parent Bank’s financial assets at FVOCI as of December 31, 2018 and 2017 consistof the following:

Group Parent Bank2018 2017 2018 2017

Debt securities:Government bonds P=7,243,985 P=– P=7,243,985 P=–Private bonds and commercial papers 2,518,418 – 2,518,418 –

Equity securities 52,637 43,783 43,823 43,783P=9,815,040 P=43,783 P=9,806,226 P=43,783

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The breakdown of this account as to currency as of December 31, 2018 and 2017 follows:

Group Parent Bank2018 2017 2018 2017

U.S. dollars P=5,123,978 P=– P=5,123,978 P=–Philippine pesos 4,691,062 43,783 4,682,248 43,783

P=9,815,040 P=43,783 P=9,806,226 P=43,783

The Group has designated the above local equity securities as at FVOCI because they are held forlong-term investments and are neither held-for-trading nor designated as at FVTPL. Unquoted equitysecurities pertain to golf club shares and investments in non-marketable equity securities.

In 2018, annual interest rates on debt securities range from 6.0% to 8.1% and from 2.9% to 7.5% forsecurities denominated in Philippine peso and U.S. dollars, respectively. Interest income, includingamortization of premium or discount, amounted to P=296,250 in 2018 and is shown as part of Interestincome on investment securities at amortized cost and FVOCI account in the statements of income.

In 2018, the Group and the Parent Bank recognized gains from the sale of investments securities atFVOCI amounting to P=1.5 billion. The amount is included under Gains (losses) on trading andinvestments securities at FVTPL and FVOCI in the statements of income.

14. Loans and Other Receivables

The Group’s and Parent Bank’s loans and other receivables as of December 31, 2018 and 2017consist of the following:

Group Parent BankDecember 31 January 1 December 31

2018

2017(As restated -

Note 2)

2017As restated -

Note 2) 2018 2017Receivables from customers:

Loans and discounts P=298,082,575 P=261,785,276 P=226,261,989 P=240,928,253 P=203,311,422 Customers’ liabilities under

acceptances and trustreceipts 4,371,148 4,633,892 3,789,963 4,371,149 4,633,892

Bills purchased 2,767,821 3,497,698 4,507,453 2,767,821 3,497,698Accrued interest receivable 2,377,301 1,888,104 1,327,085 1,755,552 1,371,443

307,598,845 271,804,970 235,886,490 249,822,775 212,814,455Unearned discounts (1,501,009) (1,786,110) (1,805,764) (118,142) (144,208)

Allowance for impairment (7,434,714) (10,165,105) (10,187,637) (6,548,520) (9,000,632)298,663,122 259,853,755 223,893,089 243,156,113 203,669,615

Other receivables:SPURRA 18,882,000 13,572,371 4,240,467 10,000,000 4,130,362Accounts receivable 4,710,897 3,668,341 3,792,015 1,760,976 1,497,724Accrued interest receivable 2,703,873 2,136,868 1,482,707 2,703,873 2,133,724

Sales contracts receivable 1,522,261 1,189,315 1,374,648 1,444,660 1,189,315UDSCL 377,623 404,698 459,422 – –

Installment contractsreceivable 6,802 11,404 13,806 – –

28,203,456 20,982,997 11,363,065 15,909,509 8,951,125Allowance for impairment (667,112) (657,877) (725,972) (654,546) (644,708)

27,536,344 20,325,120 10,637,093 15,254,963 8,306,417P=326,199,466 P=280,178,875 P=234,530,182 P=258,411,076 P=211,976,032

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Non-performing loans (NPLs) of the Bank as of December 31, 2018 and 2017 as reported to the BSPare presented below, net of specific allowance for impairment in compliance with BSP Circular 855,respectively.

Group Parent Bank2018 2017 2018 2017

Gross NPLs P=12,403,326 P=10,504,321 P=8,681,263 P=7,919,234Specific allowance for credit losses on NPLs (5,329,156) (6,294,569) (3,045,136) (5,654,698)

P7,074,170 P=4,209,752 P5,636,127 P=2,264,536

Under BSP Circular 941, an account or exposure is considered non-performing, even without anymissed contractual payments, when it is deemed impaired under existing applicable accountingstandards, classified as doubtful or loss, in litigation, and/or there is evidence that full repayment ofprincipal and intrest is unlikely without foreclosure of collateral, in the case of secured accounts. Allother accounts, even if not considered impaired, shall be considered non-performing if anycontractual principal and/or interest are past due for more than ninety (90) days, or accrued interestsfor more than 90 days have been capitalized, refinanced, or delayed by agreement.

Microfinance and other small loans with similar credit characteristics shall be considered non-performing after contractual due date or after it has become past due. Restructured loans shall beconsidered non-performing. However, if prior to restructuring, the loans were categorized asperforming, such classification shall be retained.

Non-performing loans, investment, receivables, or any financial asset (and/or any replacement loan)shall remain classified as such until (a) there is a sufficient evidence to support that full collection ofprincipal and interests is probable and payments of interest and/or principal are received for at leastsix (6) months; or (b) written-off.

Restructured loans of the Group amounted to P=1,745,092 and P=1,596,891 as of December 31, 2018,and 2017, respectively. Interest income on these restructured loans amounted to P=14,491, P=15,586,and P=15,786 in 2018, 2017 and 2016, respectively.

As of December 31, 2018 and 2017, total loan loss reserves of the Group amounted toP=7,294,507 and P=10,073,718, respectively. These represent the balance of the allowance forimpairment on receivables from customers as of December 31, 2018 and 2017 less the allowance forimpairment on accrued interest receivable of P=140,207 and P=91,387, respectively.

The breakdown of total loans and other receivables (net of unearned discounts) as to secured, withcorresponding collateral types, and unsecured loans follows:

Group Parent BankDecember 31 January 1 December 31

2018

2017(As restated -

Note 2)

2017(As restated -

Note 2) 2018 2017Secured:

Government securities P2,158,268 P=1,806,818 P=1,256,691 P2,158,268 P=1,806,818Real estate 11,056,039 10,656,277 10,755,668 10,354,217 10,594,916

Chattel mortgage 2,152,924 3,024,432 3,568,714 2,152,924 3,024,432Deposit hold-out 850,190 753,612 978,478 795,291 753,518Others 4,637,030 1,972,158 2,694,157 4,631,885 1,972,158

20,854,451 18,213,297 19,253,708 20,092,585 18,151,842Unsecured 313,446,841 272,788,560 226,190,083 245,521,557 203,469,530

P334,301,292 P=291,001,857 P=245,443,791 P265,614,142 P=221,621,372

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The breakdown as to secured and unsecured of non-accruing loans of the Group, which theParent Bank reported to the BSP as of December 31, follows:

Group Parent Bank2018 2017 2018 2017

Secured P=2,102,549 P=1,549,145 P=1,956,567 P=1,530,260Unsecured 12,403,358 9,493,714 8,823,908 6,916,550

P=14,505,907 P=11,042,859 P=10,780,475 P=8,446,810

The maturity profile of loans and other receivables (net of unearned discounts) follows:

Group Parent Bank2018 2017 2018 2017

Less than one year P=119,014,263 P=95,390,064 P=102,435,981 P=80,430,667One year to less than five years 109,127,797 101,585,096 57,652,670 47,229,828Beyond five years 106,159,232 94,026,697 105,525,491 93,960,877

P=334,301,292 P=291,001,857 P=265,614,142 P=221,621,372

Loans and other receivables bear annual interest ranging from 4.00% to 17.94% in 2018, from 4.00%to 21.00% in 2017, and from 0.95% to 17.94% in 2016.

The breakdown of loans (receivable from customers excluding accrued interest receivable) as to typeof interest rate follows:

Group Parent Bank2018 2017 2018 2017

Variable interest rates P=138,078,831 P=191,270,498 P=138,054,443 P=191,230,409Fixed interest rates 167,142,713 78,646,368 110,012,780 20,212,603

P=305,221,544 P=269,916,866 P=248,067,223 P=211,443,012

The amounts of interest income per type of loans and receivables for each reporting period are asfollows:

Group

2018

2017(As restated -

Note 2)

2016(As restated -

Note 2)Receivables from customers P=22,847,102 P=20,256,962 P=17,951,046Other receivables:

SPURRA 390,270 301,038 139,579Sales contracts receivable 143,700 140,282 149,084UDSCL 7,810 5,985 7,456Installment contracts receivable 1,042 679 649Others 51,786 76 120

P=23,441,710 P=20,705,022 P=18,247,934

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Parent Bank2018 2017 2016

Receivables from customers P=14,774,556 P=11,355,974 P=9,102,151Other receivables:

SPURRA 126,947 155,847 101,175Sales contracts receivable 137,003 140,282 149,084

P=15,038,506 P=11,652,103 P=9,352,410

Loans and discounts amounting to P=18,000,000 as of December 31, 2018 and P=19,046 as of bothDecember 31, 2017 and 2016 have been assigned to BSP to secure the Bank’s borrowings under BSPrediscounting privileges (see Note 22).

15. Investments in Subsidiaries and Associates

This account in the Parent Bank’s financial statements pertains to investments in the followingsubsidiaries, which are accounted for using the equity method:

December 31% Interest 2018 2017

Acquisition costs:CSB 99.78% P=6,746,861 P=6,745,114UPI 100% 624,861 624,861UBPSI 100% 5,000 5,000UDC 100% 3,125 3,125UBPIBI 100% 2,500 2,500UCBC 100% 1,000 1,000

P=7,383,347 P=7,381,600

The movement of investments in subsidiaries is shown below:

2018 2017 2016Acquisition costs P=7,383,347 P=7,381,600 P=7,379,755Accumulated equity in total comprehensive income:

Beginning balance, as previously reported 10,729,519 7,314,838 5,385,091 Share in prior year period adjustments of

subsidiaries (Note 2) (640,589) (640,589) (640,589) Share in impact of adoption of PFRS 9 of

subsidiaries (Note 2) (373,034) − −Beginning balance, as restated 9,715,896 6,674,249 4,744,502Share in net profit (Note 27) 1,775,210 3,429,942 3,474,490

Share in other comprehensive income (loss)(Note 28) 26,171 (15,264) 21,126

Dividends − − (1,565,869)11,517,277 10,088,927 6,674,249

Net investment in subsidiaries P=18,900,624 P=17,470,527 P=14,054,004

The Parent Bank’s subsidiaries are all incorporated in the Philippines. The principal place of businessof these subsidiaries is in Metro Manila, Philippines except for CSB and FAIR Bank, which havetheir principal place of operations in Cebu, Philippines.

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Acquisition of PR Savings Bank

In 2018, CSB acquired 100% ownership of PR Savings Bank with par value of P=10 per share or atotal par value of P=1,277.23 million. The transaction is accounted for as a business combination.The acquisition date, which is the final approval of the BSP, is on June 14, 2018. For conveniencepurposes, CSB used June 30, 2018 as the date of the business combination (see Note 1).

The total consideration for the acquisition of PR Savings Bank amounted to P7.02 billion,P=300.00 million of which shall be released by CSB directly to a Joint Venture (JV) Company. Aspart of the other undertakings relevant to the SPA, the sellers shall cause the relevant Ropali Groupentity to execute a joint venture agreement with CSB to form an incorporated JV Company withinone year from closing date or such longer period as the parties may agree upon in writing. The JVCompany shall engage in motorcycle dealership. The parties agree that the remaining balance ofP=300.00 million shall be utilized exclusively to fund the capital subscription of the relevant RopaliGroup entity in the JV Company.

Other than Cash and other cash items, Due from BSP, and Due from other banks, the Groupdetermined the provisional fair values of identifiable assets and liabilities acquired, which shall beadjusted once relevant information has been obtained, including the valuation of external appraisers.The provisional fair values of the identifiable assets and liabilities acquired at the date of acquisitionare as follows (amounts in thousands):

Provisionalfair values

recognized onacquisition date

AssetsCash and other cash items P=60,096Due from Bangko Sentral ng Pilipinas 352,563Due from other banks 518,126Loans and receivables 8,699,868Property and equipment 823,439Investment properties 926,208Deferred tax assets 100,703Other resources 692,945Total assets 12,173,948LiabilitiesDeposit liabilities 4,419,570Bills payable 4,323,572Other liabilities 196,603Total liabilities 8,939,745Net assets acquired P=3,234,203

The acquisition resulted in provisional goodwill determined as follows:

Consideration for the common shares P=6,127,727Consideration for the preferred shares held by IFC 888,274Purchase price 7,016,001Fair value of net assets acquired 3,234,203Goodwill P=3,781,798

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The goodwill arising from the acquisition is attributed to expected synergies from combiningoperations of the acquiree and the acquirer. None of the goodwill recognized is expected to bedeductible for income tax purposes.

The fair value of the loans and receivables acquired as part of the business combination amounted toP=8.7 billion, with gross contractual amount of P=9.5 billion.

Net cash outflow related to the acquisition PR Savings Bank amounted to P=5.79 billion, net of cashacquired and unpaid consideration amounting to P=300 million which shall be released by CSBdirectly to the JV Company.

In 2018, PR Savings Bank reported a total operating income and net income of P=1.1 billion andP=22.6 million, respectively. Had the acquisition occurred at the beginning of 2018, the consolidatednet income would have decreased by P=24.2 million.

Acquisition of PETNET

In February 2018, CSB and UPI purchased of 2,461,338 common shares representing 51% ownershipof AEVI on PETNET. The transaction is accounted for as a business combination. The acquisitiondate, which is the settlement of purchase price, is on December 17, 2018. For convenience purposes,the Group used December 31, 2018 as the date of the business combination.

Other than Cash and other cash items, Due from other banks, Other resources, Notes and bondspayable and Other liabilities, the Group determined the provisional fair values of identifiable assetsand liabilities acquired, which shall be adjusted once relevant information has been obtained,including the valuation of external appraisers. The provisional fair values of the identifiable assetsand liabilities acquired at the date of acquisition are as follows (amounts in thousands):

Provisional fairvalues

recognized onacquisition date

AssetsCash and other cash items P=103,920Due from other banks 516,883Loans and receivables 459,982Investment in an associate 27,098Property and equipment 49,384Other resources 154,393Total assets P=1,311,660LiabilitiesNotes and bonds payable 36,806Other liabilities 267,436Total liabilities 304,242Net assets acquired P=1,007,418

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The acquisition resulted in provisional goodwill determined as follows:

Purchase price P=1,200,001Share in fair value of net assets acquired:

Fair values of net assets acquired P=1,007,418Less: Proportionate share of non-controlling interest 493,635 513,783

Goodwill P=686,218

Net cash outflow related to the acquisition PETNET amounted to P=579.20 million, net of cashacquired.

In 2018, PETNET reported a total operating income and net loss of P=282.3 million andP=32.6 million, respectively. Had the acquisition occurred at the beginning of 2018, the consolidatednet income would have decreased by P=16.7 million.

Acquisition of FAIR Bank

The Group, through CSB and UPI, obtained control of FAIR Bank on March 17, 2017 after acquiring77.78% of the issued and outstanding capital stock of FAIR Bank. The purchase is aligned with theBank’s long-term strategy of building asset or business based on consumers.

The following table summarizes the consideration paid for the acquisition of FAIR Bank and therecognized amounts of the identifiable assets acquired and liabilities assumed, as well as the fairvalue at the acquisition date of the non-controlling interests in FAIR Bank. For purposes ofdetermining the gain from purchase, the Group determined the fair value of the identified net assets asof March 17, 2017.

Total cash consideration P=102,777Recognized amounts of identifiable assets acquired and liabilities

assumed:Investment properties 198,509Loans and receivables 163,425Cash and cash equivalents 45,607Property, plant and equipment 26,101Other resources 34,986Deposit liabilities (242,181)Other liabilities (27,181)

Total identifiable net assets 199,266Non-controlling interests in FAIR Bank (26,569)Total identifiable net assets acquired 172,697Branch licenses granted by the BSP 60,000

232,697Gain from purchase (see Note 27) P=129,920

The gain from purchase was caused by the fair value adjustment of FAIR Bank’s investmentproperties and the branch licenses granted by the BSP.

The fair value of the loans and receivables acquired as part of the business combination amounted toP=163,425, with a gross contractual amount of P=195,972.

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Summarized Financial Information

The following table presents the financial information for CSB, UPI, FUPI, FUDC, FUIFAI, FAIRBank, PR Savings Bank and PETNET as of and for the years ended December 31, 2018 and 2017:

Assets Liabilities RevenuesNet Profit

(Loss)2018CSB P=75,743,466 P=60,744,307 P=7,538,378 P=1,787,580FAIR Bank 477,862 314,607 114,858 (24,477)PR Savings Bank 10,158,401 8,270,133 1,107,293 22,608PETNET 1,311,660 304,242 282,275 (32,597)UPI 972,814 174,830 85,282 (720)FUPI 2,531,768 2,755,697 43,104 (125,142)FUDC 48,383 17,017 79,943 23,510FUIFAI 63,318 19,246 83,446 44,684

2017CSB P=76,943,488 P=63,733,321 P=8,931,671 P=3,340,769FAIR Bank 473,218 311,722 255,916 86,228UPI 778,577 32,074 33,936 (37,523)FUPI 4,053,478 4,203,440 262,067 30,119FUDC 13,635 7,303 25,766 (432)FUIFAI 70,546 25,079 119,345 55,275

16. Bank Premises, Furniture, Fixtures and Equipment

The gross carrying amounts and accumulated depreciation and amortization of bank premises,furniture, fixtures and equipment as of December 31, 2018 and 2017 are shown below.

Group

Land Buildings

Furniture,Fixtures and

Equipment

LeaseholdRights and

Improvements TotalDecember 31, 2018Cost P=814,032 P=2,490,500 P=4,474,682 P=1,277,706 P=9,056,920Accumulated depreciation and amortization − (570,302) (2,681,114) (696,661) (3,948,077)Net carrying amount P=814,032 P=1,920,198 P=1,793,568 P=581,045 P=5,108,843December 31, 2017Cost P=262,558 P=2,266,640 P=3,685,321 P=739,202 P=6,953,721Accumulated depreciation and amortization – (513,804) (2,266,347) (407,774) (3,187,925)Net carrying amount P=262,558 P=1,752,836 P=1,418,974 P=331,428 P=3,765,796

Parent Bank

Land Buildings

Furniture,Fixtures and

Equipment

LeaseholdRights and

Improvements TotalDecember 31, 2018Cost P=289,619 P=2,194,723 P=3,553,389 P=521,294 P=6,559,025Accumulated depreciation and amortization – (477,062) (1,960,466) (164,482) (2,602,010)Net carrying amount P=289,619 P=1,717,661 P=1,592,923 P=356,812 P=3,957,015December 31, 2017Cost P=250,171 P=2,107,391 P=3,060,417 P=309,005 P=5,726,984Accumulated depreciation and amortization – (434,992) (1,728,743) (106,946) (2,270,681)Net carrying amount P=250,171 P=1,672,399 P=1,331,674 P=202,059 P=3,456,303

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A reconciliation of the carrying amounts at the beginning and end of 2018 and 2017 of bankpremises, furniture, fixtures and equipment is shown below:

Group

Land Buildings

Furniture,Fixtures and

Equipment

LeaseholdRights and

Improvements TotalBalance at January 1, 2018, net of accumulated

depreciation and amortization P=262,558 P=1,752,836 P=1,418,974 P=331,428 P=3,765,796Additions 39,448 93,268 652,215 257,970 1,042,901Disposals – – (26,624) – (26,624)Reclassifications/ adjustments – (4,681) 1,055 (2,512) (6,138)Depreciation and amortization charges

for the year – (56,529) (355,109) (128,277) (539,915)Effect of business combinations (Note 15) 512,026 135,304 103,057 122,436 872,823Balance at December 31, 2018, net of

accumulated depreciation and amortization P=814,032 P=1,920,198 P=1,793,568 P=581,045 P=5,108,843Balance at January 1, 2017, net of accumulated

depreciation and amortization P=255,614 P=1,768,982 P=1,173,448 P=325,229 P=3,523,273Additions 6,944 36,359 587,114 105,116 735,533Disposals – – (18,655) – (18,655)Reclassifications/ adjustments – 797 (1,428) (1,060) (1,691)Depreciation and amortization charges for the

year – (53,302) (321,505) (97,857) (472,664)Balance at December 31, 2017, net of

accumulated depreciation and amortization P=262,558 P=1,752,836 P=1,418,974 P=331,428 P=3,765,796

Parent Bank

Land Buildings

Furniture,Fixtures and

Equipment

LeaseholdRights and

Improvements TotalBalance at January 1, 2018, net of accumulated

depreciation and amortization P=250,171 P=1,672,399 P=1,331,674 P=202,059 P=3,456,303Additions 39,448 92,044 560,210 214,650 906,352Disposals – – (20,556) – (20,556)Reclassifications/adjustments – (4,694) 6,029 (2,361) (1,026)Depreciation and amortization charges

for the year – (42,088) (284,434) (57,536) (384,058)Balance at December 31, 2018 net of

accumulated depreciation and amortization P=289,619 P=1,717,661 P=1,592,923 P=356,812 P=3,957,015Balance at January 1, 2017, net of accumulated

depreciation and amortization P=250,171 P=1,688,319 P=1,047,077 P=133,584 P=3,119,151Additions – 26,261 540,066 91,297 657,624Disposals – – (13,285) – (13,285)Reclassifications/ adjustments – (545) (2,856) (932) (4,333)Depreciation and amortization charges

for the year – (41,636) (239,328) (21,890) (302,854)Balance at December 31, 2017, net of

accumulated depreciation and amortization P=250,171 P=1,672,399 P=1,331,674 P=202,059 P=3,456,303

Under BSP rules, investments in bank premises, furniture, fixtures and equipment should not exceed50% of the Parent Bank’s unimpaired capital. As of December 31, 2018 and 2017, the Parent Bankhas satisfactorily complied with this requirement.

As of December 31, 2018 and 2017, the acquisition cost of the Group’s fully-depreciated bankpremises, furniture, fixtures and equipment that are still in use is P=1,861,570 and P=1,584,258,respectively, while the acquisition cost of the Parent Bank’s fully-depreciated bank premises,furniture, fixtures and equipment that are still in use is P=1,270,337 and P=1,156,697, respectively.

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17. Investment Properties

The Group’s and Parent Bank’s investment properties include several parcels of land and buildingsheld for capital appreciation and are stated at fair value. The breakdown of this account as to type isshown below.

Group Parent Bank2018 2017 2018 2017

Land P=8,738,348 P=7,988,116 P=7,676,413 P=7,832,606Building 2,982,273 2,914,397 2,506,007 2,439,371Land improvements 3,532,830 3,251,033 3,532,830 3,251,033

P=15,253,451 P=14,153,546 P=13,715,250 P=13,523,010

The net fair value gains and losses from investment properties account is presented underMiscellaneous income account in the statements of income (see Note 27). Real property taxes relatedto these investment properties paid by the Group and recognized as expense for the years endedDecember 31, 2018, 2017 and 2016 totaled P=23,578, P=36,344, and P=26,561, respectively, and arepresented as part of Taxes and licenses account under Other expenses in the statements of income.

The changes in this account can be summarized as follows:

Group Parent Bank2018 2017 2018 2017

Balance at beginning of year P=14,153,546 P=13,524,963 P=13,523,010 P=13,101,547Effect of business combinations (Note 15) 926,208 − − −Disposals (876,174) (536,318) (865,386) (531,486)Fair value gains (Note 27) 632,923 528,072 632,923 518,386Additions 379,083 641,440 430,471 432,240Adjustments 40,425 (4,611) (3,208) 2,323Net reclassification to bank premises,

furniture, fixtures and equipment(Note 16) (2,560) – (2,560) –

Balance at end of year P=15,253,451 P=14,153,546 P=13,715,250 P=13,523,010

Rent income earned by the Group on its investment properties under operating leases amounted toP=154,899, P=184,375, and P=181,028 in 2018, 2017 and 2016, respectively, while rent income earnedby the Parent Bank on these investment properties amounted to P=150,462, P=180,708, and P=166,891 in2018, 2017 and 2016, respectively, and is included as part of Rental account under Miscellaneousincome in the statements of income (see Note 27).

Other information about the fair value measurement and disclosures related to the investmentproperties are presented in Note 7.

18. Goodwill

Goodwill represents the excess of the acquisition cost over the fair value of (a) former iBank’sidentifiable net assets on its merger with the Bank in April 2006; (b) the identifiable net assets of CSBat the date the Bank acquired ownership interest in January 2013, (c) PR Savings Bank uponacquisition by CSB in June 2018 and (d) of PETNET upon acquisition by the Group inDecember 2018 (see Note 1).

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The goodwill of the Group is allocated to the following CGUs:

Group Parent Bank2018 2017 2018 2017

iBank P=7,886,898 P=7,886,898 P=7,886,898 P=7,886,898City Savings Bank 3,371,353 3,371,353 − −PR Savings Bank 3,781,798 − − −PETNET 686,218 − − −

P=15,726,267 P=11,258,251 P=7,886,898 P=7,886,898

19. Other Resources

The composition of Other resources account as of December 31 follows:

Group Parent Bank

2018

2017(As restated -

Note 2)

2016(As restated -

Note 2) 2018 2017Deferred tax assets (Note 29) P=3,024,627 P=3,461,095 P=3,517,894 P=2,198,055 P=2,588,622Trust fund assets 2,436,441 3,768,669 4,882,444 – –Computer software - net 1,138,503 674,497 573,115 942,484 640,123Software under development 759,169 239,743 59,718 759,169 239,743Prepaid expenses 570,259 244,930 193,009 450,085 215,730Returned checks and other cash items 508,709 260,780 101,939 508,709 260,780Documentary stamps 387,470 267,519 164,630 230,690 164,874Sundry debits 145,438 160,650 186,808 145,438 160,667Net retirement asset (Note 28) 135,093 − − 17,496 ‒Miscellaneous - net 1,905,496 1,235,897 860,259 1,212,187 1,162,588

11,021,721 10,313,780 10,539,816 6,464,313 5,433,127Allowance for impairment

(Note 20) (198,533) (161,715) (161,715) (150,622) (143,805)P=10,823,188 P=10,152,065 P=10,378,101 P=6,313,691 P=5,289,322

Trust fund assets are maintained to cover pre-need liabilities of FUPI for pre-need plans computedbased on the provisions of PAS 37 as required by the IC and validated by a qualified actuary incompliance with the rules and regulations of the IC based on the amended PNUCA. The trust fundassets are managed by the Parent Bank’s Trust and Investments Services Group (TISG). The detailsof FUPI’s trust fund assets as of December 31 follow:

2018 2017Due from BSP and other banks P=95,768 P=346,977Financial assets at FVTPL 1,365,738 1,886,861Financial assets at amortized cost 988,847 1,517,322Miscellaneous - net (13,912) 17,509

P=2,436,441 P=3,768,669

Financial assets at FVTPL comprise of investments in shares of listed companies, governmentsecurities, other corporate debt instruments and investments in certain unit investment trust funds(UITF). Except for the Group’s investments in UITFs, the fair value of financial assets at FVTPLhave been determined directly by reference to quoted prices generated in active markets. On the otherhand, the fair value of investments in UITFs has been determined based on the closing market andtrade prices of the securities comprising the fund’s portfolio adjusted for the period end performanceof the funds including all trades made within the funds and the related income and expenses arising

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therefrom. Fair value is derived using the Net Asset Value per unit of the funds (computed bydividing the net asset value of the fund by the number of outstanding units at the end of the reportingperiod) published by the trustee banks and the Investment Company Association of the Philippines(see Note 7).

The movements in the Computer software account follow:

Group Parent Bank2018 2017 2018 2017

Balance at beginning of year P=674,497 P=573,115 P=640,123 P=529,336Additions 530,009 299,656 410,444 276,265Amortization charges for the year (166,923) (120,957) (108,083) (87,940)Effect of business combinations 100,920 − − −Reclassifications − (77,317) − (77,538)Balance at end of year P=1,138,503 P=674,497 P=942,484 P=640,123

Miscellaneous includes foreclosed machineries and chattels with carrying amount of P=19,796 andP=45,849 as of December 31, 2018 and 2017, respectively. In 2018, the Group and the Parent Bankrecognized depreciation expense for these foreclosed machineries and chattel amounting to P=36,571and P=14,759, respectively, while in 2017 and 2016, both the Group and the Parent Bank recognizeddepreciation expense amounting to P=41,281 and P=80,679, respectively. This is included as part ofDepreciation and amortization account in the statements of income.

20. Allowance for Impairment

The breakdown of allowance for impairment is shown in the table below:

Group Parent Bank2018 2017 2018 2017

Receivable from customers (Note 14) P=7,434,714 P=10,165,105 P=6,548,520 P=9,000,632Other receivables (Note 14) 667,112 657,877 654,546 644,708Investments and placements 17,626 40 17,626 40Others 198,533 161,715 150,622 143,805

P=8,317,985 P=10,984,737 P=7,371,314 P=9,789,185

Investments and placements include the Parent Bank’s financial assets at amortized cost, debtfinancial assets at FVOCI, and due from other banks. The ECL allowance for financial assets atFVOCI as of December 31, 2018 amounted to P=0.49 million. Others refers to allowance forimpairment of foreclosed machineries and chattels and other resources.

With the foregoing level of allowance for impairment and credit losses, management believes that theGroup has sufficient allowance for any losses that the Group may incur from the non-collection ornonrealization of its receivables and other risk assets.

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The reconciliation of allowance for the total receivables from customers follows. The balances at thebeginning of the year reflect the amounts after considering the effect of adoption of PFRS 9 onreceivables from customers (see note 2):

Total Receivables from Customers - Group2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=1,041,393 P=32,442 P=6,721,889 P=7,795,724Newly originated assets that remained in

Stage 1 as at December 31, 2018 811,862 − − 811,862Newly originated assets that moved to

Stage 2 and Stage 3 as atDecember 31, 2018 − 20,405 247,922 268,327

Effect of collections and othermovements in receivable balance(excluding write-offs) (494,156) (4,934) (224,690) (723,780)

Amounts written-off − − (1,210,893) (1,210,893)Transfers to Stage 1 159,505 (19,597) (139,908) –Transfers to Stage 2 (3,421) 4,136 (715) –Transfers to Stage 3 (37,329) (5,817) 43,146 –Impact on ECL of exposures transferred

between stages (115,485) 3,643 605,316 493,474Balance at end of year P=1,362,369 P=30,278 P=6,042,067 P=7,434,714

Reconciliation of the allowance for impairment by class follows:

Corporate Loans - Group and Parent Bank2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=190,504 P=− P=87,445 P=277,949Newly originated assets that remained in

Stage 1 as at December 31, 2018 343,305 − − 343,305Effect of collections and other

movements in receivable balance(excluding write-offs) (97,565) − (6,500) (104,065)

Balance at end of year P=436,244 P=− P=80,945 P=517,189

In 2018, there were no transfers between stages and write-offs for corporate loans.

Commercial Loans - Group and Parent Bank2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=203,331 P=1,353 P=1,351,598 P=1,556,282Newly originated assets that remained in

Stage 1 as at December 31, 2018 264,613 − − 264,613Newly originated assets that moved to

Stage 2 and Stage 3 as at December31, 2018 − 99 173,008 173,107

Effect of collections and othermovements in receivable balance(excluding write-offs) (183,220) (1,296) (5,147) (189,663)

Transfers to Stage 1 27,042 − (27,042) −Transfers to Stage 3 (759) (52) 811 −Impact on ECL of exposures transferred

between stages (27,037) − 55,488 28,451Balance at end of year P=283,970 P=104 P=1,548,716 P=1,832,790

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In 2018, there were no transfers to stage 2 and write-offs for commercial loans.

Home Loans - Group and Parent Bank2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=17,310 P=22,199 P=104,265 P=143,774Newly originated assets that remained in

Stage 1 as at December 31, 2018 3,633 − − 3,633Newly originated assets that moved to

Stage 2 and Stage 3 as atDecember 31, 2018 − 16,027 5,445 21,472

Effect of collections and othermovements in receivable balance(excluding write-offs) (13,487) (772) (5,835) (20,094)

Transfers to Stage 1 22,939 (15,961) (6,978) −Transfers to Stage 2 (32) 165 (133) −Transfers to Stage 3 (2,035) (4,136) 6,171 −Impact on ECL of exposures transferred

between stages (22,872) 6,202 27,077 10,407Balance at end of year P=5,456 P=23,724 P=130,012 P=159,192

In 2018, there were no write-offs for home loans.

Other Retail Products - Group and Parent BankOther Retail Products include auto loans, business line, and credit cards.

2018Stage 1 Stage 2 Stage 3 Total

Balance at beginning of year P=140,619 P=1,430 P=1,410,608 P=1,552,657Newly originated assets that remained in

Stage 1 as at December 31, 2018 27,508 − − 27,508Newly originated assets that moved to

Stage 2 and Stage 3 as atDecember 31, 2018 − 2,037 30,233 32,270

Effect of collections and othermovements in receivable balance(excluding write-offs) (12,842) (382) (39,316) (52,540)

Amounts written-off − − (276,693) (276,693)Transfers to Stage 1 14,620 (763) (13,857) −Transfers to Stage 2 (45) 52 (7) −Transfers to Stage 3 (6,167) (243) 6,410 −Impact on ECL of exposures transferred

between stages (14,322) 265 290,938 276,881Balance at end of year P=149,371 P=2,396 P=1,408,316 P=1,560,083

Salary Loans - Group2018

Stage 1 Stage 2 Stage 3 TotalBalance at beginning of year P=135,705 P=1,338 P=1,001,866 P=1,138,909Newly originated assets that remained in

Stage 1 as at December 31, 2018 35,018 − − 35,018Newly originated assets that moved to

Stage 2 and Stage 3 as atDecember 31, 2018 − 18 614 632

(Forward)

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2018Stage 1 Stage 2 Stage 3 Total

Effect of collections and othermovements in receivable balance(excluding write-offs) (P=52,355) (P=997) (P=40,818) (P=94,170)

Amounts written-off − − (849,447) (849,447)Transfers to Stage 1 12,877 (133) (12,744) −Transfers to Stage 2 (1,801) 2,075 (274) −Transfers to Stage 3 (10,373) (2) 10,375 −Impact on ECL of exposures transferred

between stages (11,128) (2,182) 95,237 81,927Balance at end of year P=107,943 P=117 P=204,809 P=312,869

Other Receivables from Customers

Group2018

Stage 1 Stage 2 Stage 3* TotalBalance at beginning of year P=353,924 P=6,122 P=2,766,107 P=3,126,153Newly originated assets that remained in

Stage 1 as at December 31, 2018 137,785 − − 137,785Newly originated assets that moved to

Stage 2 and Stage 3 as atDecember 31, 2018 − 2,224 38,622 40,846

Effect of collections and othermovements in receivable balance(excluding write-offs) (134,687) (1,487) (127,074) (263,248)

Amounts written-off − − (84,753) (84,753)Transfers to Stage 1 82,027 (2,740) (79,287) –Transfers to Stage 2 (1,543) 1,844 (301) –Transfers to Stage 3 (17,995) (1,384) 19,379 −Impact on ECL of exposures transferred

between stages (40,126) (642) 136,576 95,808Balance at end of year P=379,385 P=3,937 P=2,669,269 P=3,052,591*Includes long outstanding receivables from customers that are fully provided for allowance amounting to P=2.18 billion and P=2.26 billion asof December 31, 2018 and January 1, 2018, respectively.

Parent Bank2018

Stage 1 Stage 2 Stage 3* TotalBalance at beginning of year P=64,797 P=755 P=2,500,902 P=2,566,454Newly originated assets that remained in

Stage 1 as at December 31, 2018 38,769 − − 38,769Newly originated assets that moved to

Stage 2 and Stage 3 as atDecember 31, 2018 − 1,409 34,670 36,079

Effect of collections and othermovements in receivable balance(excluding write-offs) (51,504) (168) (81,373) (133,045)

Amounts written-off − − (37,082) (37,082)Transfers to Stage 1 629 (142) (487) –Transfers to Stage 2 (297) 576 (279) –Transfers to Stage 3 (1,794) (429) 2,223 −Impact on ECL of exposures transferred

between stages (597) (313) 9,001 8,091Balance at end of year P=50,003 P=1,688 P=2,427,575 P=2,479,266*Includes long outstanding receivables from customers that are fully provided for allowance amounting to P=2.18 billion and P=2.26 billion asof December 31, 2018 and January 1, 2018, respectively.

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Investments and Placements – Group and Parent Bank

2018Stage 1 Stage 2 Stage 3 Total

Balance at beginning of year P=26,201 P=− P=− P=26,201Newly originated assets that remained in

Stage 1 as at December 31, 2018 13,045 − − 13,045Effect of collections and other

movements in receivable balance(excluding write-offs) (34,173) − − (34,173)

Transfers to Stage 2 (92) 92 − −Impact on ECL of exposures transferred

between stages − 12,553 − 12,553Balance at end of year P=4,981 P=12,645 P=− P=17,626

In 2018, there were no transfers to Stage 1 and Stage 3. The were also no write-offs for investmentsand placements during the year.

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Group

For 2017, reconciliation of the allowance for impairment by class follows:

2017Loans and Receivables

Corporate * Commercial ConsumerAccounts

Receivable

AccruedInterest

Receivable

Sales andInstallment

ContractReceivable

Other LoanAccounts Total

FinancialAssets at

FVOCI

Assets Heldfor Sale and

OtherResources Total

Balance at beginning of year P=4,300,912 P=1,009,327 P=4,659,950 P=722,122 P=69,091 P=3,850 P=148,357 P=10,913,609 P=40 P=161,715 P=11,075,364Provision during the year 243,026 189,290 421,036 3,501 25,269 (7,038) 503 875,587 – – 875,587Other adjustments (81,225) 78,360 (964,547) (71,596) (2,973) 7,038 68,729 (966,214) – – (966,214)Balance at end of year P=4,462,713 P=1,276,977 P=4,116,439 P=654,027 P=91,387 P=3,850 P=217,589 P=10,822,982 P=40 P=161,715 P=10,984,737*Corporate includes accounts under Asset Recovery Group. Other loan accounts include Bills Purchase, Branch Loans, HR Loans and Salary Loans

Impairment at end of year broken down as to individual and collective assessment:

2017Loans and Receivables

Corporate * Commercial ConsumerAccounts

Receivable

AccruedInterest

Receivable

Sales andInstallment

ContractReceivable

Other LoanAccounts Total

FinancialAssets at

FVOCIOther

Resources TotalIndividual impairment P=4,317,365 P=1,181,255 P=6,072 P=645,611 P=91,387 P=3,850 P=20,605 P=6,266,145 P=40 P=161,715 P=6,427,900Collective impairment 145,348 95,722 4,110,367 8,416 – – 196,984 4,556,837 – – 4,556,837

P=4,462,713 P=1,276,977 P=4,116,439 P=654,027 P=91,387 P=3,850 P=217,589 P=10,822,982 P=40 P=161,715 P=10,984,737

Parent Bank

2017Loans and Receivables

Corporate * Commercial ConsumerAccounts

Receivable

AccruedInterest

Receivable

Sales andInstallment

ContractReceivable

Other LoanAccounts Total

FinancialAssets at

FVOCIOther

Resources TotalBalance at beginning of year P=4,300,912 P=1,009,183 P=3,318,722 P=707,509 P=69,091 P=2,639 P=148,357 P=9,556,413 P=40 P=143,805 P=9,700,258Provision during the year 243,026 189,098 422,157 2,194 25,269 – – 881,744 – – 881,744Other adjustments (81,225) 73,902 (763,514) (67,634) (2,973) – 48,627 (792,817) – – (792,817)Balance at end of year P=4,462,713 P=1,272,183 P=2,977,365 P=642,069 P=91,387 P=2,639 P=196,984 P=9,645,340 P=40 P=143,805 P=9,789,185*Corporate includes accounts under Asset Recovery Group. Other loan accounts include Bills Purchase, Branch Loans, HR Loans and Salary Loans.

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Impairment at end of year broken down as to individual and collective assessment:

2017Loans and Receivables

Corporate * Commercial ConsumerAccounts

Receivable

AccruedInterest

Receivable

Sales andInstallment

ContractReceivable

Other LoanAccounts Total

FinancialAssets at

FVOCIOther

Resources TotalIndividual impairment P=4,317,365 P=1,176,606 P=– P=642,069 P=91,387 P=2,639 P=– P=6,230,066 P=40 P=143,805 P=6,373,911Collective impairment 145,348 95,577 2,977,365 – – – 196,984 3,415,274 – – 3,415,274

P=4,462,713 P=1,272,183 P=2,977,365 P=642,069 P=91,387 P=2,639 P=196,984 P=9,645,340 P=40 P=143,805 P=9,789,185

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21. Deposit Liabilities

The breakdown of deposit liabilities account follows:

Group Parent Bank2018 2017 2018 2017

Due to banks:Demand P=688,657 P=382,180 P=687,587 P=840,085Savings 222,880 263,076 149,471 218,659Time 936,143 5,538,572 752,523 5,535,435Long-term certificate of deposits − 1,500 − 1,500

1,847,680 6,185,328 1,589,581 6,595,679Due to customers:

Demand 118,565,078 127,042,169 119,159,584 127,208,680Savings 67,125,265 57,481,782 63,930,464 55,519,258Time 227,164,510 253,908,434 190,030,734 207,652,083Long-term certificate of deposits 6,000,000 2,998,500 6,000,000 2,998,500

418,854,853 441,430,885 379,120,782 393,378,521P=420,702,533 P=447,616,213 P=380,710,363 P=399,974,200

The breakdown of deposit liabilities account as to currency follows:

Group Parent Bank2018 2017 2018 2017

Philippine pesos P=318,221,477 P=339,163,562 P=278,229,306 P=291,521,549Foreign currencies 102,481,056 108,452,651 102,481,057 108,452,651

P=420,702,533 P=447,616,213 P=380,710,363 P=399,974,200

The maturity profile of this account is presented below:

Group Parent Bank2018 2017 2018 2017

Less than one year P=389,613,988 P=431,693,529 P=359,660,844 P=389,316,706One to five years 10,197,224 6,415,111 190,094 1,166,880Beyond five years 20,891,321 9,507,573 20,859,425 9,490,614

P=420,702,533 P=447,616,213 P=380,710,363 P=399,974,200

Deposit liabilities bear annual interest at rates ranging from 0.0% to 9.0% in 2018, 2017 and 2016 inthe Group’s financial statements and from 0.0% to 7.9% in 2018, 2017 and 2016 in the Parent Bank’sfinancial statements. Demand and savings deposits usually have either fixed or variable interest rateswhile time deposits have fixed interest rates.

On December 12, 2017, the MB of the BSP approved the Parent Bank’s issuance of up toP=20,000,000 of Long-term Negotiable Certificate of Deposits (LTNCD). Out of the approvedamount, P=3,000,000 were issued on February 21, 2018 at a coupon rate of 4.375% per annum,payable quarterly and will mature on August 21, 2023. The net proceeds were utilized to furtherimprove the Parent Bank’s maturity profile and support business expansion plans.

On August 8, 2013, the MB of the BSP approved the Parent Bank’s issuance of up to P=5,000,000 ofLTNCD. Out of the approved amount, P=3,000,000 were issued on October 18, 2013 at a coupon rateof 3.50% per annum, payable quarterly and will mature on April 17, 2019.

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Interest expense on the deposit liabilities amounted to P=8,841,473, P=5,949,301 and P=4,294,180 in2018, 2017 and 2016, respectively, in the Group's statements of income, and P=7,045,224, P=4,529,154and P=3,041,798 in 2018, 2017 and 2016, respectively, in the Parent Bank's statements of income.

Under existing BSP regulations, non-FCDU deposit liabilities of the Bank are subject to unifiedreserve requirement equivalent to 20.0% from May 30, 2014 to March 1, 2018 (under BSP Circular832), 19.0% from March 2, 2018 to May 31, 2018 (under BSP Circular 997), and 18.0% fromJune 1, 2018 and thereafter (under BSP Circular 1004).

LTNCDs are subject to required reserves of 4.0% if issued under BSP Circular 304, and 7% if issuedunder BSP Circular 842. As of December 31, 2018 and 2017, the Group is in compliance with suchregulations.

Regular reserves as of December 31, 2018 and 2017 amounted to P=54,503,045 and P=63,279,707 ofthe Group, respectively, while that of the Parent Bank’s amounted to P=51,133,191 and P=59,375,188,respectively.

22. Bills Payable

Bills payable consist of borrowings from:

Group Parent Bank2018 2017 2018 2017

Banks, other financial institutions andindividuals P=63,709,472 P=42,797,416 P=46,604,139 P=28,810,109

BSP 18,000,000 19,046 18,000,000 19,046Others 9,255,001 254,363 119,492 180,564

P=90,964,473 P=43,070,825 P=64,723,631 P=29,009,719

Bills payable to banks and other financial institutions consist mainly of amortized cost balance ofshort-term borrowings. Certain bills payable to banks and other financial institutions arecollateralized by investment securities (see Note 12).

Bills payable to BSP mainly represent short-term borrowings availed of under the rediscountingfacility of the BSP. These are collateralized by eligible loans (see Note 14).

Other bills payable of the Group mainly pertain to availments of short-term loan lines from certainrelated parties (see Note 31).

The breakdown of bills payable as to currency follows:

Group Parent Bank2018 2017 2018 2017

Foreign currencies P=46,700,303 P=28,960,411 P=46,700,303 P=28,960,411Philippine pesos 44,264,170 14,110,414 18,023,328 49,308

P=90,964,473 P=43,070,825 P=64,723,631 P=29,009,719

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The breakdown of interest expense on bills payable, which is presented as part of Interest expense onbills payable and other liabilities account in the statements of income, follows:

Group Parent Bank2018 2017 2016 2018 2017 2016

Banks, other financialinstitutions and individuals P=1,177,258 P=381,244 P=358,913 P=567,059 P=141,812 P=114,425

BSP 39,435 – – 39,435 – –Others 190,158 82,485 185,379 69 2,941 4,217

P=1,406,851 P=463,729 P=544,292 P=606,563 P=144,753 P=118,642

The range of interest rates of bills payable per currency follows:

Group and Parent Bank2018 2017 2016

Philippine pesos 2.80% to 6.75% 2.59% to 12.0% 2.6% to 12.0%Foreign currencies 1.40% to 3.56% 0.20% to 2.50% 0.0% to 2.05%

23. Notes and Bonds Payable

The Group’s and the Parent Bank’s notes and bonds payable as of December 31, 2018 and 2017consist of the following:

Coupon Principal Outstanding BalanceInterest Amount 2018 2017 Issue Date Maturity Date Redemption Date

Senior debt 3.369% P=24,965,000 P=26,233,746 P=24,928,177 November 29, 2017 November 29, 2022 November 29, 2022Senior fixed rate

bonds 7.061% 11,000,000 10,901,514 – December 7, 2018 December 7, 2020 December 7, 2020Unsecured

subordinated notes 5.375% 7,200,000 7,200,000 7,200,000 November 20, 2014 February 20, 2025 February 20, 2020Total for Parent Bank 43,165,000 44,335,260 32,128,177Loans payable 5.750% 150,000 150,000 – May 31, 2018 May 31, 2023 May 31, 2023Others 2.900% 36,806 36,806 − December 28, 2018 January 28, 2019 January 28, 2019Total for Group P=43,351,806 P=44,522,066 P=32,128,177

Senior Debt(a) The 2017 Notes were issued on the initial issue date at 100% with face value of USD500 million;

(b) The 2017 Notes cannot be redeemed prior to their stated maturity [(other than (i) in specifiedinstalments, if applicable; (ii) for taxation reasons; or (iii) following an Event of Default)] or thatsuch Notes will be redeemable at the option of the Issuer and/or the Noteholders upon givingnotice to the Noteholders or the Issuer, as the case may be, on a date or dates specified prior tosuch stated maturity and at a price or prices and on such other terms as may be agreed betweenthe Issuer and the relevant Dealer.

(c) The 2017 Notes constitute direct, unconditional, unsubordinated and unsecured obligations of theParent Bank and will rank pari passu among themselves and equally with all other unsecuredobligations of the Parent Bank from time to time outstanding; and,

(d) There are restrictions on the offer, sale and transfer of the Notes in the United States, theEuropean Economic Area (including the United Kingdom), the Netherlands, Japan, Hong Kong,Singapore, the Philippines and the People’s Republic of China and such restrictions as may berequired in connection with the offering and sale of a particular Tranche of Notes.

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Senior Fixed Rate Bonds(a) The Bonds were issued on December 7, 2018 in scripless form in denominations of P=100 as a

minimum and increments of P50 thereafter, and were registered and represented by a MasterCertificate of Indebtedness. Pursuant to the BSP Circular No. 1010, the Bonds were listed in thePDEx.

(b) The Bonds will be redeemed at their principal amount on maturity date which is onDecember 7, 2020. The Bank may redeem the Bonds in whole and not only in part on the EarlyRedemption Date at the face value of the Bonds, plus accrued and unpaid interest as of butexcluding the Early Redemption Date.

(c) The Bonds constitute direct, unconditional, unsecured, and unsubordinated peso-denominatedobligations of the Bank, and shall at all times rank pari passu and ratably without any preferenceor priority amongst themselves, and at least pari passu with all other present and future direct,unconditional, unsecured, and unsubordinated peso-denominated obligations of the Bank, exceptfor any obligation enjoying a statutory preference or priority established under Philippine laws.

Unsecured Subordinated Notes(a) The 2014 Notes have a loss absorption feature which means the 2014 Notes are subject to a non-

viability write-down in case of a non-viability trigger event. A non-viability trigger event isdeemed to have occurred when the Parent Bank is considered non-viable as determined by theBSP. Upon the occurrence of a non-viability trigger event, the full principal amount of the 2014Notes may be permanently written down to the extent required by the BSP, which could go to aslow as zero, and the 2014 Notes may be cancelled;

(b) The 2014 Notes shall not be used as collateral for any loan made by the Parent Bank or any of itssubsidiaries and affiliates. The 2014 Noteholders or their transferees shall not be allowed, andwaive their right to set-off any amount that may be due the Parent Bank;

(c) The 2014 Notes constitute direct, unconditional, unsecured and subordinated obligations of theParent Bank. Claims of 2014 Noteholders in respect of the 2014 Notes shall at all times rank paripassu and without any preference among themselves; and,

(d) The 2014 Notes shall not be redeemable or terminable at the instance of the 2014 Noteholdersbefore the maturity date, unless otherwise expressly provided therein.

Loans PayableOn May 31, 2018, UPI entered into an agreement to avail of a term loan in the amount of P=150,000with a certain local bank. The loan is unsecured and carries a fixed interest rate of 5.75% per annumpayable semi-annually. The term of the loan is five (5) years and is payable in seven (7) equal semi-annual amortization commencing at the end of the second year from availment.

Others pertain to PETNET’s various bank loans which bear annual interest rates ranging from 2.14%to 3.50%, with terms ranging from one (1) to thirty-one (31) days. These bank loans representdrawdowns from the PETNET’s unsecured credit line with local banks, which are used to financetransactions during the holidays and long weekends.

The Group recognized interest expense on notes and bonds payable amounting to P=1,335,698,P=461,778 and P=387,000 in 2018, 2017, and 2016, respectively, while the Parent Bank recognizedinterest expense on notes and bonds payable amounting to P=1,330,657, P=461,778 and P=387,000 in2018, 2017, and 2016, respectively. These are included under Interest Expense on Bills Payable andOther Liabilities account in the statements of income.

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24. Other Liabilities

Other liabilities consist of the following as of December 31:

Group Parent Bank2018 2017 2018 2017

Manager’s checks P=9,417,061 P=8,676,900 P=9,417,048 P=8,676,900Accounts payable 3,955,546 2,853,536 3,256,082 2,367,083Accrued taxes and other expenses 3,276,120 2,618,810 2,561,710 1,932,164Bills purchased - domestic and foreign 2,733,492 3,463,370 2,733,492 3,463,370Pre-need reserves 2,678,321 4,124,818 – –Payment orders payable 1,335,586 430,508 1,335,586 430,508Unearned income - bancassurance

(Note 31) 733,333 833,333 733,333 833,333Other dormant credits 474,228 377,337 467,407 374,530Derivative liabilities (Note 11) 407,037 23,684 407,037 23,684Withholding taxes payable 228,019 163,890 214,602 126,039Post-employment defined benefit

obligation (Note 28) 98,806 938,729 23,127 841,223Deferred tax liabilities (Note 29) 10,516 − − −Due to Treasurer of the Philippines 3,005 3,005 3,005 3,005Miscellaneous 1,281,642 764,824 681,919 535,263

P=26,632,712 P=25,272,744 P=21,834,348 P=19,607,102

The breakdown of Accrued taxes and other expenses account follows:

Group Parent Bank2018 2017 2018 2017

Accrued interest payable P=1,368,588 P=941,243 P=1,107,926 P=792,842Accrued sick leave benefits 331,307 338,984 329,707 335,032Accrued income and other taxes (Note 37) 323,542 574,936 88,424 76,043Other accruals 1,252,683 763,647 1,035,653 728,247

P=3,276,120 P=2,618,810 P=2,561,710 P=1,932,164

Other accruals represent mainly fringe and other personnel benefits.

25. Capital Funds

Capital Stock

The Parent Bank’s capital stock in both 2018 and 2017 consists of the following:

Shares Amount2018 2017 2018 2017

Common – P=10 par valueAuthorized 1,311,422,420 1,311,422,420 P=13,114,224 P=13,114,224Issued and outstanding 1,217,149,512 1,058,343,929 12,171,495 10,583,439

Preferred – P=100 par value, non-votingAuthorized 100,000,000 100,000,000 P=10,000,000 P=10,000,000Issued and outstanding – – – –

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On June 29, 1992, the Parent Bank was originally listed with the then Makati Stock Exchange, nowPSE. A total of 89.7 million shares were issued at an issue price of P=22.50. As of December 31,2018 and 2017, there are 1,217.1 million and 1,058.3 million shares listed at the PSE, respectively.The number of holders and the closing price of the said shares is 4,957 and P=63.95 per share as ofDecember 31, 2018, respectively, and 4,995 and P=86.65 per share as of December 31, 2017,respectively.

On September 29, 2018, the Parent Bank issued new shares through a stock rights offering. The totalnumber of shares issued was 158,805,583 shares with par value of P=10 per share, issued at a price ofP=62.97 per share.

Surplus Free

The following is a summary of the dividends declared and distributed by the Group in 2018, 2017 and2016:

Date ofDeclaration Date of Record

Date of BSPApproval

Date ofPayment

Dividend perShare

OutstandingShares Total Amount

January 26, 2018 February 12, 2018 N/A February 27, 2018 P=1.90 1,058,343,929 P=2,010,853January 27, 2017 February 10, 2017 N/A February 24, 2017 1.90 1,058,343,929 2,010,853January 22, 2016 February 9, 2016 N/A February 19, 2016 1.50 1,058,343,929 1,587,516

In compliance with BSP regulations, the Parent Bank ensures that adequate reserves are in place forfuture bank expansion requirements. The foregoing cash dividend declarations were made within theBSP’s allowable limit of dividends.

Surplus Reserves

The amended PNUCA requires that the portion of retained earnings representing Trust fund incomeof FUPI be automatically restricted to payments of benefits of plan holders and related payments asallowed in the amended PNUCA. The accumulated Trust Fund income should be appropriated andpresented separately as Surplus Reserves in the statements of changes in capital funds. For the yearsended December 31, 2018, 2017 and 2016, FUPI appropriated (P=97.1 million), P=211.1 million andP=260.3 million, respectively, representing Trust fund income (loss) earned in those years and otheradjustments.

In compliance with BSP regulations, a portion of the Group’s income from trust operations is setup asSurplus Reserves. For the years ended December 31, 2018, 2017 and 2016, the Group and the ParentBank appropriated P=15.7 million, P=14.2 million and P=14.9 million, respectively.

In 2018, upon the full adoption of PFRS 9, the BSP has required the appropriation for the differenceof the 1% general loan loss provision over the computed ECL allowance for credit losses related toStage 1 accounts. The Parent Bank appropriated P=1.6 billion as of December 31, 2018.

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26. Service Charges, Fees and Commissions

This account is broken down as follows:

Group Parent Bank

2018

2017(As restated -

Note 2)

2016(As restated -

Note 2) 2018 2017 2016Service charges P=1,066,576 P=940,310 P=874,334 P=866,172 P=789,064 P=695,099Bank commissions 116,551 128,175 115,804 111,473 121,174 115,804Others 389,117 351,656 331,128 307,022 167,889 146,465

P=1,572,244 P=1,420,141 P=1,321,266 P=1,284,667 P=1,078,127 P=957,368

In 2018 and 2017, others include commissions earned from bancassurance partnership (see Note 31).

27. Miscellaneous Income and Expenses

Miscellaneous Income

Miscellaneous income is composed of the following:

Group2018 2017 2016

Fair value gains on investment properties (Notes 7 and 17) P=632,923 P=528,072 P=385,687Foreign exchange gains - net 584,920 593,419 589,873Dividend 207,456 209,762 206,245Trust fund income (Note 25) 198,919 261,653 122,733Rental (Notes 17 and 34) 160,713 190,025 186,796Income from trust operations (Note 30) 156,524 141,831 148,873Fines and penalties 131,690 79,299 73,225EAF earned (Note 31) 100,000 166,667 –Gain on sale of investment properties 57,558 131,072 66,350Gain or loss on foreclosure 51,904 92,002 82,685Gain from bargain purchase (Note 15) − 129,920 –Others 276,018 321,990 215,410

P=2,558,625 P=2,845,712 P=2,077,877

Parent Bank2018 2017 2016

Share in net profit of subsidiaries (Note 15) P=1,775,210 P=3,429,942 P=3,474,490Fair value gains on investment properties (Notes 7 and 17) 632,923 518,386 385,687Foreign exchange gains - net 584,904 593,418 589,862Dividend 206,425 204,919 133,458Income from trust operations (Note 30) 156,524 141,831 148,873Rental (Notes 17 and 34) 156,276 186,357 182,613Fines and penalties 131,690 79,299 73,225Gain or loss on foreclosure 109,435 85,320 82,685EAF earned (Note 31) 100,000 166,667 –Gain on sale of investment properties 46,189 125,833 66,350Others 312,055 278,755 198,983

P=4,211,631 P=5,810,727 P=5,336,226

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Miscellaneous Expenses

The breakdown of miscellaneous expenses follows:

Group

2018

2017(As restated -

Note 2)

2016(As restated -

Note 2)Insurance P=931,079 P=922,020 P=726,459Outside services 695,084 758,629 521,564Repairs and maintenance 868,804 437,336 369,655Advertising and publicity 700,155 352,428 341,828Management and professional fees 550,908 352,871 288,431Fines and penalties 475,490 113,642 3,231Communication 347,516 251,089 179,137Transportation and travel 252,775 194,442 165,891Card related expenses 224,190 308,592 205,450Supervision fees 183,134 149,755 120,385Litigation 176,599 202,383 162,857Stationery and supplies 171,523 163,342 133,510Plan benefits 158,000 215,321 301,500Representation and entertainment 83,701 81,364 87,339Others 617,562 505,673 447,446

P=6,436,520 P=5,008,887 P=4,054,683

Parent Bank2018 2017 2016

Insurance P=819,369 P=806,393 P=631,162Repairs and maintenance 818,647 409,708 323,096Outside services 615,933 533,354 463,880Advertising and publicity 619,463 285,695 180,215Management and professional fees 504,644 342,697 233,675Fines and penalties 369,145 92,234 3,192Communication 280,262 199,436 140,162Card related expenses 224,190 308,592 205,450Litigation 175,716 201,184 162,857Supervision fees 158,858 126,689 102,801Stationery and supplies 143,869 127,471 97,757Transportation and travel 171,099 128,196 111,253Representation and entertainment 75,204 80,225 86,228Others 243,657 215,735 186,346

P=5,220,056 P=3,857,609 P=2,928,074

28. Salaries and Employee Benefits

Salaries and Employee Benefits Expense

Expenses recognized for employee benefits are as follows:Group

2018 2017 2016Short-term benefits:

Salaries and wages P=3,289,797 P=2,899,712 P=2,376,970 Fringe benefits 1,333,921 1,074,915 791,504

Bonuses 458,956 654,234 1,304,972Social security costs 139,182 93,627 77,504Other benefits 102,110 107,748 171,439

Post-employment benefits 337,837 386,734 289,697Other long-term benefits 64,790 68,074 60,533

P=5,726,593 P=5,285,044 P=5,072,619

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Parent Bank2018 2017 2016

Short-term benefits:Salaries and wages P=2,631,683 P=2,395,817 P=1,981,598Fringe benefits 1,076,300 1,017,789 739,779Bonuses 453,652 432,575 1,099,287Social security costs 78,849 68,124 57,869Other benefits 103,048 72,104 144,374

Post-employment benefits 261,170 332,966 250,379Other long-term benefits 64,789 67,366 60,533

P=4,669,491 P=4,386,741 P=4,333,819

Post-employment Defined Benefit Plan

(a) Characteristics of the Defined Benefit Plan

The Group maintains funded, tax-qualified, noncontributory pension plans covering all regularfull-time employees that are being administered by the Parent Bank’s TISG for the Parent Bank,UPI and CSB and by trustee banks that are legally separated from the Group for FUIFAI, PRSavings Bank and PETNET. Under these pension plans, all covered employees are entitled tocash benefits after satisfying certain age and service requirements.

The Group maintains seven separate retirement plans. Two of which are being maintained forUnionBank and former iBank employees, hence, the Parent Bank presents pension information inits financial statements separately for the two plans. The other five pension plans are for UPI,CSB, FUIFAI, PR Savings Bank and PETNET employees.

UnionBank PlanThe normal retirement age is 60. The plan also provides for an early retirement at age 55, orage 50 with the completion of at least ten years of service. However, late retirement is subject tothe approval of the Parent Bank’s BOD. Normal retirement benefit is an amount equivalent to150% of the final monthly salary for each year of credited service.

Former iBank PlanThe normal retirement age is 60 with a minimum of five years of credited service. The plan alsoprovides for an early retirement at age 50 with the completion of at least ten years of service andlate retirement subject to the approval of the Parent Bank’s BOD on a case-to-case basis. Normalretirement benefit is an amount equivalent to 125% of the final monthly covered compensationfor every year of credited service.

UPI PlanThe optional retirement age is 60 and the compulsory retirement age is 65. Both must have aminimum of five years of credited service. Both have retirement benefit equal to one-halfmonth’s salary as of the date of retirement multiplied by the employee’s year of service. Uponretirement of an employee, whether optional or compulsory, his services may be continued orextended on a case to case basis upon agreement of management and employee.

This is based on the retirement plan benefits provided in the Retirement Law (R.A. No. 7641).

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Under the law, unless the parties provide for broader inclusions, the term one-half (1/2) monthsalary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay and the cashequivalent of not more than (5) days of service incentive leaves.

CSB PlanThe normal retirement age is 60 or completion of 30 years of service whichever is earlier. Theservice of any member, however, may be extended from year to year beyond the normalretirement date, provided such an extension of service is with the consent of the member and theexpress approval of CSB. The plan also provides for an early retirement after completion of atleast ten years of service. Normal retirement benefit is an amount equivalent to 100% of the finalbasic monthly salary multiplied by the number of years of service prior to January 1, 2008 and150% of the final basic monthly salary for services rendered starting January 1, 2008.

FUIFAI PlanThe normal retirement age is 60 with a minimum of five years of credited service. The plan alsoprovides for an early retirement at age 50 with a minimum of five years of credited service and lateretirement after age 60, both subject to the approval of FUIFAI’s BOD. Normal retirement benefitis an amount equivalent to 150% of the final monthly covered compensation (average monthlybasic salary during the last 12 months of credited service) for every year of credited service.

PR Savings Bank PlanThe normal retirement age is 60. Retirement benefit is an amount equivalent to 100%, 150% or200% of the latest basic monthly salary for each year of credited service if the years of service is 10years but less than 15 years, 15 years but less than 20 years and 20 years or more, respectively.

PETNET PlanThe normal retirement age is 60. The plan also provides for an early retirement at age 50 with thecompletion of at least ten years of service and late retirement beyond age 60. However, early andlate retirement are subject to the approval of the company. Retirement benefit is an amountequivalent to 92% of the final monthly salary for each year of continuous service.

(b) Analysis of Amounts Presented in the Financial Statements

Actuarial valuations are made annually to update the retirement benefit costs and the amount ofcontributions. All amounts presented in the subsequent pages are based on the actuarial valuationreports obtained from independent actuaries in 2018 and 2017.

The amounts of post-employment defined benefit obligation (net retirement asset) recognized inthe statements of financial position are determined as follows (see Notes 19 and 24):

Group2018 2017 2016

Present value of the obligation P=3,344,042 P=4,175,532 P=3,664,572Fair value of plan assets 3,380,329 3,236,803 2,130,338

(P=36,287) P=938,729 P=1,534,234

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As of December 31, 2018, the excess of plan assets over the obligation amounting to P=36,287 isseparately shown as Net retirement asset of P=135,093 (see Note 19) and as Post-employmentdefined benefit obligation of P=98,806 (see Note 24).

Parent Bank – UnionBank Plan2018 2017 2016

Present value of the obligation P=2,363,016 P=3,084,669 P=2,771,342Fair value of plan assets 2,339,889 2,384,204 1,436,298

P=23,127 P=700,465 P=1,335,044

Parent Bank – Former iBank Plan2018 2017 2016

Present value of the obligation P=482,049 P=729,661 P=611,652Fair value of plan assets 499,545 588,903 489,750

(P=17,496) P=140,758 P=121,902

The movements in the present value of the post-employment benefit obligation recognized in thefinancial statements are as follows:

Group2018 2017 2016

Balance at beginning of year P=4,175,532 P=3,664,572 P=3,326,413Current service cost 337,837 386,734 289,697Interest expense 187,136 172,511 160,581Remeasurements:

Actuarial losses (gains) arising fromChanges in financial assumptions (549,408) (127,015) 141,932

Experience adjustments 217,217 353,737 274,664Changes in demographic assumptions (23,676) (119,078) 5,316

Benefits paid (1,095,626) (155,929) (534,031)Effects of business combinations (Note 15) 95,030 − −Balance at end of year P=3,344,042 P=4,175,532 P=3,664,572

Parent Bank - UnionBank Plan2018 2016

Balance at beginning of year P=3,084,669 P=2,771,342 P=2,509,697Current service cost 227,011 295,295 209,394Interest expense 138,432 131,402 126,238Remeasurements:

Actuarial losses (gains) arising fromChanges in financial assumptions (458,958) (124,961) 135,930

Experience adjustments 230,179 231,948 285,922Changes in demographic assumptions − (122,153) 14,566

Benefits paid (858,317) (98,204) (510,405)Balance at end of year P=2,363,016 P=3,084,669 P=2,771,342

Parent Bank - Former iBank Plan2018 2017 2016

Balance at beginning of year P=729,661 P=611,652 P=544,008Current service cost 34,159 37,671 40,985Interest expense 30,819 25,894 24,372Remeasurements:

Actuarial losses (gains) arising fromChanges in financial assumptions (100,142) (28,656) 23,008Experience adjustments 12,860 160,838 7,553

Changes in demographic assumptions − (31,099) (9,250)Benefits paid (225,308) (46,639) (19,104)Balance at end of year P=482,049 P=729,661 P=611,652

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The movements in the fair value of plan assets are presented below.

Group2017 2016

Balance at beginning of year P=3,236,803 P=2,130,338 P=2,328,087Interest income 143,434 101,529 111,612Return on plan asset (excluding amounts included

in net interest) (84,670) 158,826 (105,877)Contributions to the plan 977,032 1,002,039 330,547Benefits paid (1,095,626) (155,929) (534,031)Effects of business combinations (Note 15) 203,356 − −Balance at end of year P=3,380,329 P=3,236,803 P=2,130,338

Parent Bank - UnionBank Plan2018 2017 2016

Balance at beginning of year P=2,384,204 1,436,298 1,705,407Interest income 107,423 69,448 85,782Return on plan asset (excluding amounts included

in net interest) (90,466) 49,046 (90,867)Contributions to the plan 797,045 927,616 246,381Benefits paid (858,317) (98,204) (510,405)Balance at end of year P=2,339,889 2,384,204 1,436,298

Parent Bank - Former iBank Plan2018 2017 2016

Balance at beginning of year P=588,903 P=489,750 P=454,694Interest income 24,661 21,208 20,370Return on plan asset (excluding amounts included

in net interest) 6,799 7,784 (9,869)Contributions to the plan 104,490 116,800 43,659Benefits paid (225,308) (46,639) (19,104)Balance at end of year P=499,545 P=588,903 P=489,750

The composition of the fair value of plan assets at the end of the reporting period by category andrisk characteristics is shown below.

Group2018 2017 2016

Bank deposits P=738,575 P=1,121,080 P=294,001Quoted equity securities: Financial and insurance activities 1,348,208 1,502,927 1,468,358

Electricity, gas and water 41,576 135,987 26,712Wholesale and retail trade 37,179 – 82,088Other service activities 28,766 82,106 –Real estate activities 8,364 11,967 11,719Manufacturing − – 158

Others 4,951 159 631,469,044 1,733,146 1,589,098

Debt securities:Philippine government bonds 539,926 232,832 104,824Corporate bonds 615,629 145,727 141,094

1,155,555 378,559 245,918Others 17,155 4,018 1,321

P=3,380,329 P=3,236,803 P=2,130,338

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Parent Bank - UnionBank Plan2018 2017 2016

Bank deposits P=500,412 P=878,453 P=167,578Quoted equity securities:

Financial and insurance activities 790,059 998,963 998,456Wholesale and retail trade 37,179 – 76,758Electricity, gas and water 32,686 107,840 16Other service activities 13,475 76,796 –

Others − 15 5873,399 1,183,614 1,075,235

Debt securities:Corporate bonds 507,399 112,726 109,302Philippine government bonds 443,759 206,174 83,517

951,158 318,900 192,819Others 14,920 3,237 666

P=2,339,889 P=2,384,204 P=1,436,298

Parent Bank - Former iBank Plan2018 2017 2016

Bank deposits P=38,647 P=121,091 P=52,885Quoted equity securities: Financial intermediation 352,542 412,120 399,647

Wholesale and retail trade − 5,310 5,330Others 4,890 17,148 –

357,432 434,578 404,977Debt securities:

Corporate bonds 76,814 33,001 31,791 Philippine government bonds 25,713 − −

102,527 33,001 31,791Others 939 233 97

P=499,545 P=588,903 P=489,750

Equity securities under the fund are primarily investments in corporations listed in the PSE,which include P=202,244 and P=252,583 investments in the shares of stocks of the Parent Bank asof December 31, 2018 and 2017, respectively, while debt securities represent investments ingovernment and corporate bonds, which include P=103,900 investment in the notes of the ParentBank as of both December 31, 2018 and 2017 (see Note 31).

The fair values of the above equity and debt securities are determined based on quoted marketprices in active markets (classified as Level 1 of the fair value hierarchy). The retirement fundneither provides any guarantee or surety for any obligation of the Parent Bank nor its investmentsin the Bank’s shares of stocks covered by any restriction and liens. Bank deposits are maintainedwith reputable financial institutions, which include P=498,603 and P=368,706 deposits with theParent Bank as of December 31, 2018 and 2017, respectively.

Actual returns on plan assets amounted to P=16,956 in 2018, P=118,494 in 2017 and (P=5,085)in 2016 for UnionBank Plan and P=31,460 in 2018, P=28,992 in 2017 and P=10,502 in 2016 forFormer iBank Plan.

The amounts recognized in the statements of income in respect of the post-employment definedbenefit plan are as follows:

Group2018 2017 2016

Current service cost P=337,837 P=386,734 P=289,697Net interest expense 43,702 70,982 48,969

P=381,539 P=457,716 P=338,666

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Parent Bank - UnionBank Plan2018 2017 2016

Current service cost P=227,011 P=295,295 P=209,394Net interest expense 31,009 61,954 40,456

P=258,020 P=357,249 P=249,850

Parent Bank - Former iBank Plan2018 2017 2016

Current service cost P=34,159 P=37,671 P=40,985Net interest expense 6,158 4,686 4,002

P=40,317 P=42,357 P=44,987

The amounts recognized in other comprehensive income in respect of the post-employmentdefined benefit plan are as follows:

Group2018 2017 2016

Actuarial losses (gains) arising from changes in:Financial assumption (P=549,408) P=127,015 P=141,932Experience adjustments 217,217 (353,737) 274,664Demographic assumptions (23,676) 119,078 5,316

Return on plan assets (excluding amounts included in net interest) 84,670 158,826 105,877

(P=271,197) P=51,182 P=527,789

Parent Bank - UnionBank Plan2018 2017 2016

Actuarial losses (gains) arising from changes in:Financial assumption (P=458,958) P=124,961 P=135,930Experience adjustments 230,179 (231,948) 285,922Demographic assumptions − 122,153 14,566

Return on plan assets (excluding amountsincluded in net interest) 90,466 49,046 90,867

(P=138,313) P=64,212 P=527,285

Parent Bank - Former iBank Plan2018 2017 2016

Actuarial losses (gains) arising from changes in:Financial assumption (P=100,142) (P=28,656) (P=23,088)Experience adjustments 12,860 160,838 (7,553)Demographic assumptions − (31,099) 9,250

Return on plan assets (excluding amountsincluded in net interest) (6,799) (7,784) (9,869)

(P=94,081) P=93,299 (P=31,260)

In addition to the above items, the Parent Bank also recognized its share of the othercomprehensive income of subsidiaries in respect of the post-employment defined benefit planamounting to P=26,171 gain, P=15,264 loss and P=21,126 gain in 2018, 2017 and 2016, respectively(see Note 15).

Amounts recognized in other comprehensive income were included within items that will not bereclassified subsequently to profit or loss.

The Group expects to contribute P=315,631 in 2019 while the Parent Bank expects to contributeP=281,151 and P=32,903 for the UnionBank Plan and for the Former iBank Plan, respectively,in 2019.

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In determining the retirement benefits, the following actuarial assumptions were used:

Parent Bank - UnionBank Plan2018 2017 2016

Retirement age 60 60 60Average remaining working life 9 years 9 years 26 yearsDiscount rate 7.30% 5.34% 5.03%Expected rate of salary increase 6.00% 7.00% 6.00%Employee turnover rate 0%-14% 0%-14% 0%-9%

Parent Bank - Former iBank Plan2018 2017 2016

Retirement age 60 60 60Average remaining working life 9 years 7 years 18 yearsDiscount rate 7.20% 4.83% 4.48%Expected rate of salary increase 6.00% 7.00% 6.00%Employee turnover rate 0%-15% 0%-22% 0%-5%

UPI2018 2017 2016

Retirement age 60 60 60Average remaining working life 5 years 6 years 14 yearsDiscount rate 7.18% 4.93% 4.93%Expected rate of salary increase 6.00% 7.00% 7.00%Employee turnover rate 0%-15% 0%-18% 0%-5%

CSB2018 2017 2016

Retirement age 60 60 60Average remaining working life 16 years 16 years 19 yearsDiscount rate 7.41% 5.58% 5.58%Expected rate of salary increase 6.00% 6.00% 6.00%Employee turnover rate 0%-5% 0%-5% 0%-5%

FUIFAI2018 2017 2016

Retirement age 60 60 60Average remaining working life 20 years 20 years 23 yearsDiscount rate 7.53% 5.70% 5.38%Expected rate of salary increase 10.00% 10.00% 10.00%

2018PR SAVINGS BANK PETNET

Retirement age 60 60Average remaining working life 11 years 9 yearsDiscount rate 7.88% 7.37%Expected rate of salary increase 6.00% 6.00%Employee turnover rate − 0% to 15%

Assumptions regarding future mortality and disability are based on published statistics andmortality tables. These assumptions were developed by management with the assistance of anindependent actuary. Discount factors are determined close to the end of each reporting period byreference to the interest rates of a zero coupon government bond with terms to maturityapproximating to the terms of the retirement obligation. Other assumptions are based on currentactuarial benchmarks and management’s historical experience.

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(c) Risk Associated with the Retirement Plan

The plans expose the Group to actuarial risks such as investment risk, interest rate risk, longevityrisk and salary risk.

∂ Investment and Interest Risk

The present value of the defined benefit obligation is calculated using a discount ratedetermined by reference to market yields of government bonds. Generally, a decrease in theinterest rate of a reference government bonds will increase the plan obligation. However, thiswill be partially offset by an increase in the return on the plan’s investments in debt securitiesand if the return on plan asset falls below this rate, it will create a deficit in the plan.Currently, the plans are mostly invested in equity securities. Due to the long-term nature ofplan obligation, a level of continuing equity investments is an appropriate element of theGroup’s long-term strategy to manage the plans efficiently.

∂ Longevity and Salary Risks

The present value of the defined benefit obligation is calculated by reference to the bestestimate of the mortality of the plan participants both during and after their employment andto their future salaries. Consequently, increases in the life expectancy and salary of the planparticipants will results in an increase in the plan obligation.

(d) Other Information

The information on the sensitivity analysis for certain significant actuarial assumptions, theGroup’s asset-liability matching strategy, and the timing and uncertainty of future cash flowsrelated to the retirement plan are described below and in the succeeding pages.

∂ Sensitivity Analysis

The following table summarizes the effects of changes in the significant actuarialassumptions used in the determination of the defined benefit obligation as of December 31:

Group

Impact on Post-Employment DefinedBenefit Obligation

Change inAssumption

Increase inAssumption

Decrease inAssumption

December 31, 2018Discount rate +/-1.0% (P=221,059) P=255,718Salary growth rate +/-1.0% 277,653 (245,328)Turn-over rate +/-1.0% (2,725) 2,529

December 31, 2017Discount rate +/-1.0% (P=253,895) P=294,607Salary growth rate +/-1.0% 299,468 (263,560)Turn-over rate +/-1.0% (15,635) 16,373

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UnionBank Plan

Impact on Post-Employment DefinedBenefit Obligation

Change inAssumption

Increase inAssumption

Decrease inAssumption

December 31, 2018Discount rate +/-1.0% (P=149,302) P=170,721Salary growth rate +/-1.0% 187,809 (166,972)Turn-over rate +/-1.0% (1,864) 1,622

December 31, 2017Discount rate +/-1.0% (P=181,200) P=209,923Salary growth rate +/-1.0% 210,433 (185,613)Turn-over rate +/-1.0% (13,236) 13,851

Former iBank Plan

Impact on Post-Employment DefinedBenefit Obligation

Change inAssumption

Increase inAssumption

Decrease inAssumption

December 31, 2018Discount rate +/-1.0% (P=29,274) P=33,034Salary growth rate +/-1.0% 36,610 (32,980)Turn-over rate +/-1.0% (780) 825

December 31, 2017Discount rate +/-1.0% (P=34,852) P=39,335Salary growth rate +/-1.0% 42,869 (38,719)Turn-over rate +/-1.0% (2,319) 2,440

The above sensitivity analysis is based on a change in an assumption while holding all otherassumptions constant. This analysis may not be representative of the actual change in thedefined benefit obligation as it is unlikely that the change in assumptions would occur inisolation of one another as some of the assumptions may be correlated. Furthermore, inpresenting the above sensitivity analysis, the present value of the defined benefit obligationhas been calculated using the projected unit credit method at the end of the reporting period,which is the same as that applied in calculating the defined benefit obligation recognized inthe statements of financial position.

∂ Asset-liability Matching Strategies

To efficiently manage the retirement plan, the Group through its Retirement Committee,ensures that the investment positions are managed in accordance with its asset-liabilitymatching strategy to achieve that long-term investments are in line with the obligations underthe retirement scheme. This strategy aims to match the plan assets to the retirementobligations by investing in long-term fixed interest securities (i.e., government or corporatebonds) with maturities that match the benefit payments as they fall due and in the appropriatecurrency. The Group actively monitors how the duration and the expected yield of theinvestments are matching the expected cash outflows arising from the retirement obligations.In view of this, investments are made in reasonably diversified portfolio, such that the failureof any single investment would not have a material impact on the overall level of assets.

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A large portion of assets as of December 31, 2018 and 2017 consists of equity securities andbonds, although the Group also invests in bank deposits. The Group believes that equitysecurities offer the best returns over the long term with an acceptable level of risk. Themajority of equities are in a diversified portfolio of investments in corporations listed in thePSE.

There has been no change in the Group’s strategies to manage its risks from previous periods.

∂ Funding Arrangements and Expected Contributions

There is no minimum funding requirement in the country.

The maturity profile of undiscounted expected benefits payments from the plan follows:

Group

2018 2017Within one year P=396,512 P=267,815More than one year to five years 1,425,452 1,319,237More than five years to ten years 2,055,480 1,937,696More than ten years to 15 years 2,733,449 2,464,946More than 15 years to 20 years 2,700,010 2,590,312More than 20 years 7,175,972 7,363,165

P=16,486,875 P=15,943,171

UnionBank Plan

2018 2017Within one year P=286,902 P=171,484More than one year to five years 1,110,827 997,656More than five years to ten years 1,592,433 1,487,729More than ten years to 15 years 2,122,283 1,947,381More than 15 years to 20 years 1,759,740 1,836,381More than 20 years 4,907,616 5,538,972

P=11,779,801 P=11,979,603

Former iBank Plan

2018 2017Within one year P=50,748 P=57,097More than one year to five years 249,960 288,995More than five years to ten years 252,331 301,502More than ten years to 15 years 308,656 293,055More than 15 years to 20 years 266,372 232,972More than 20 years 218,950 184,041

P=1,347,017 P=1,357,662

The weighted average duration of the defined benefit obligation is 16 years and 15 years in 2018and 2017, respectively.

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29. Income Taxes

Current and Deferred Income Taxes

The components of income tax expense (benefit) for the years ended December 31, 2018, 2017, and2016 are as follows:

Group2018 2017 2016

Reported in profit or lossCurrent tax expense:Final tax at 20%, 10% and 7.5% P=747,296 P=607,277 P=408,741Regular corporate income tax

(RCIT) at 30% 504,017 1,474,296 1,610,317MCIT at 2% 216,024 141,929 362

1,467,337 2,223,502 2,019,420Deferred tax expense (benefit) relating to origination and reversal of temporary

differences (284,579) 42,578 (109,833)P=1,182,758 P=2,266,080 P=1,909,587

Reported in other comprehensiveincomeDeferred tax expense (benefit) relating to origination and

reversal of actuarial gains orlosses (P=81,359) P=15,355 P=158,337

Parent Bank2018 2017 2016

Reported in profit or lossCurrent tax expense:Final tax at 20%, 10% and 7.5% P=672,123 P=607,117 P=400,740MCIT at 2% 182,501 141,929 –RCIT at 30% 22,245 35,575 191,047

877,049 784,621 591,787Deferred tax expense (income) relating to origination and reversal of temporary

differences (542,359) 42,578 (109,833)P=334,690 P=827,199 P=481,954

Reported in other comprehensiveincomeDeferred tax expense (income) relating to origination and

reversal of actuarial gains orlosses (P=69,718) P=8,726 P=167,563

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The reconciliation of the statutory income tax rate and the effective income tax rate follows:

Group2018 2017 2016

Statutory income tax rate 30.00% 30.00% 30.00%Adjustment for income subjected to

lower income tax rates (3.48) (2.54) (2.68)Tax effects of:

FCDU income before tax (13.66) (7.97) (14.77)Non-taxable income (8.27) (14.45) (5.02)Non-deductible expenses 5.84 12.95 2.68Others 3.49 3.22 5.72

Effective income tax rate 13.92% 21.21% 15.93%

Parent Bank2018 2017 2016

Statutory income tax rate 30.00% 30.00% 30.00%Adjustment for income subjected to

lower income tax rates (3.38) (2.41) (1.12)Tax effects of:

FCDU income before tax (15.38) (9.36) (16.47)Non-taxable income (9.15) (12.68) (10.55)Non-deductible expenses 6.08 4.30 2.77Others (3.73) (0.78) (0.14)

Effective income tax rate 4.44% 9.07% 4.49%

The components of the net deferred tax assets presented under Other resources (see Note 19) as ofDecember 31, 2018 and 2017 are as follows:

Group

2018

2017 (As restated -

Note 2)

2016(As restated -

Note 2)Deferred tax assets:

Allowance for impairment losses P=2,786,039 P=3,235,437 P=3,522,609Accrued other expenses 295,701 257,786 349,474Deferred service fees 427,832 529,841 548,213Excess MCIT 334,219 141,929 −Unrealized foreign exchange loss 329,292 10,254 261,315Net operating loss carry over (NOLCO) 209,217 − −Others 643,062 550,682 343,109

5,025,362 4,725,929 5,024,720Deferred tax liabilities:

Fair value gains on investment properties 1,525,145 1,127,598 1,135,486Unrealized foreign exchange gain 379,140 71,015 170,609Capitalized interest 29,653 30,751 31,849Others 66,797 35,470 168,882

2,000,735 1,264,834 1,506,826Net deferred tax assets P=3,024,627 P=3,461,095 P=3,517,894

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Parent Bank2018 2017

Deferred tax assets:Allowance for impairment P=2,189,686 P=2,923,968Unrealized foreign exchange swap loss 329,292 10,254Excess MCIT 324,430 141,929Accrued other expenses 259,250 257,786Net operating loss carry-over (NOLCO) 193,268 –Others 547,044 486,209

3,842,970 3,820,146Deferred tax liabilities:

Fair value gains on investment properties 1,188,474 1,106,101Unrealized foreign exchange gain 375,762 71,011Capitalized interest 29,653 30,751Others 51,026 23,661

1,644,915 1,231,524Net deferred tax assets P=2,198,055 P=2,588,622

Other deferred tax asset includes post-retirement obligation and other future deductible items.

The Parent Bank is subject to MCIT which is computed at 2% of gross income net of allowabledeductions, as defined under tax regulations or to RCIT, whichever is higher. In 2014 and 2013, theParent Bank recognized MCIT amounting to P=100,846 and P=95,555, respectively, which was appliedagainst RCIT in 2016.

In 2018 and 2017, the Parent Bank incurred MCIT amounting to P=182,501 and P=141,929,respectively, that can be applied against income tax liability for the next three consecutive years afterthe MCIT was incurred.

Additionally, in 2018, the Parent Bank incurred NOLCO amounting to P=644,227 that can also beapplied against RCIT for the next three consecutive years.

Relevant Tax RegulationsThe Republic Act 10963, The Tax Reform for Acceleration and Inclusion (TRAIN), is the firstpackage of the comprehensive tax reform program envisioned by the government. The bill wassigned into law on December 19, 2017 and took effect on January 1, 2018, amending the oldPhilippine tax system.

Except for resident foreign corporations, which is still subject to the existing rate of 7.5%, tax oninterest income of foreign currency deposits was increased to 15% under TRAIN. Documentarystamp tax on bank checks, drafts, certificate of deposit not bearing interest, all debt instruments, billsof exchange, letters of credit, mortgages, deeds and others are now subjected to a higher rate.

The following are the relevant tax regulations affecting the Group:

Income Tax(a) MCIT, computed at 2% gross income, net of allowable deductions as defined under the tax

regulations, or to RCIT of 30%, whichever is higher;(b) FCDU transactions with non-residents of the Philippines and other offshore banking units

(offshore income) are tax-exempt, while interest income on foreign currency loans from residentsother than offshore banking units (OBUs) or other depository banks under the expanded system issubject to 10% income tax;

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(c) Withholding tax of 7.5% is imposed on interest earned by resident foreign corporations (RFCs)under the expanded foreign currency deposit system, while withholding tax of 15% is imposed oninterest earned by residents other than RFCs; and,

(d) Net operating loss carry-over (NOLCO) can be claimed as deductions against taxable incomewithin three years after NOLCO is incurred. The excess of the MCIT over income tax due may becarried over to the three succeeding taxable years and credited against income tax due providedthe company is in RCIT position.

Gross Receipts TaxBanks are subject to gross receipts tax under Sec. 121 of the National Internal Revenue Code asamended.

Documentary Stamp TaxDocumentary stamp taxes (DST) (at varying rates) are imposed on the following:(a) Bank checks, drafts, or certificate of deposit not bearing interest, and other instruments;(b) Bonds, loan agreements, promissory notes, bills of exchange, drafts, instruments and securities

issued by the Government of any of its instrumentalities, deposit substitute debt instruments,certificates of deposits bearing interest and other not payable on sight or demand;

(c) Acceptance of bills of exchange and letters of credit; and,(d) Bills of lading or receipt.

The significant provisions relating to DST under TRAIN are summarized below:(a) On every original issue of debt instruments, there shall be collected a DST of 1.50 on each 200 or

fractional part thereof of the issue price of any such debt instrument; provided, that for such debtinstruments with terms of less than one year, the DST to be collected shall be of a proportionalamount in accordance with the ratio of its term in number of days to 365 days; provided furtherthat only one DST shall be imposed on either loan agreement or promissory notes to secure suchloan.

(b) On all sales or transfer of shares or certificates of stock in any corporation, there shall becollected a DST of 1.50 on each 200, or fractional part thereof, of the par value of such stock.

(c) On all bills of exchange (beteen points within the Philippines) or drafts, there shall be collected aDST of 0.60 on each 200, or fractional part thereof, of the face value of any such bill of exchangeor draft.

(d) The following instruments, documents and papers shall be exempt from DST:∂ Borrowings and lending of securities executed under the Securities Borrowing and Lending

Program of a registered exchange, or in accordance with regulations prescribed by theappropriate regulatory authority;

∂ Loan agreements or promissory notes, the aggregate of which does not exceed 250,000 or anysuch amount as may be determined by the Secretary of Finance, executed by an individual forhis purchase on installment for his personal use;

∂ Sale, barter or exchange of shares of stock listed and traded through the local stock exchange(as amended by RA No. 9648);

∂ Fixed income and other securities traded in the secondary market or through an exchange;∂ Derivatives including repurchase agreements and reverse repurchase agreements;∂ Bank deposit accounts without a fixed term or maturity; and,∂ Interbank call loans with maturity of not more than seven days to cover deficiency in reserve

against deposit liabilities.

Itemized DeductionIn 2018, 2017 and 2016, the Parent Bank opted to claim itemized deductions.

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30. Trust Operations

The following securities and other properties held by the Parent Bank in fiduciary or agency capacity(for a fee) for its customers are not included in the accompanying statement of financial position sincethese are not properties of the Parent Bank (see Note 34).

2018 2017Investments P=45,070,579 P=42,073,308Others 498,205 961

P=45,568,784 P=42,074,269

In compliance with the requirements of the General Banking Act relative to the Parent Bank’s trustfunctions:

(a) investment in government securities with a total face value of P=550,000 and P=700,000 as ofDecember 31, 2018 and 2017, respectively, are deposited with BSP as security for the ParentBank’s faithful compliance with its fiduciary obligations (see Note 12); and,

(b) ten percent of the Parent Bank’s trust income is transferred to Surplus reserves. This yearlytransfer is required until the surplus reserves for trust function is equivalent to 20% of the ParentBank’s authorized capital stock. No part of such reserves shall at anytime be paid out asdividends, but losses accruing in the course of business may be charged against such surplus. Asof December 31, 2018, the reserve for trust functions amounted to P=247,726 and is included aspart of Surplus reserves in the statements of financial position (see Note 25).

Income from trust operations of the Group and Parent Bank amounted to P=156,524, P=141,831 andP=148,873 for the years ended December 31, 2018, 2017 and 2016, respectively, and shown as Incomefrom trust operations account under Miscellaneous income in the statements of income (see Note 27).

31. Related Party Transactions

The Group’s and Parent Bank’s related parties include subsidiaries, stockholders, key managementpersonnel and others as described below.

The summary of the Group’s significant transactions with its related parties as of and for the yearsended December 31, 2018 and 2017 are as follows:

2018 2017

Related Party CategoryAmount

of TransactionOutstanding

BalanceAmount

of TransactionOutstanding

Balance Terms and Conditions/NatureApplicable to the Parent Bank

SubsidiariesLease of properties:

Lease income P=12,726 P=– P=10,715 P=– Lease renewed every 5 yearswith 5% escalation rateRefundable deposits – – – 683

Management services 78,656 – 25,153 –

Project management fee,commission and servicecharges

Trust fee income 13 – 25 – Fees paid to subsidiaries

(Forward)

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2018 2017

Related Party CategoryAmount

of TransactionOutstanding

BalanceAmount

of TransactionOutstanding

Balance Terms and Conditions/NatureDeposit liabilities:

Outstanding balance P=– P=788,484 P=– P=939,655With interest rate based onaverage daily bank deposit rate

Net movements (151,171) – 29,426 –Interest expense on deposits 3,618 – 4,079 –

Interbank lending -

Interest income 29,629 – – –Short-term lending with annualfixed rate of 3.22% to 4.97%

Loans -

Interest income 18,913

Peso-denominated loans withannual interest rates rangingfrom 6.83% to 7.12%, paid offduring the year

Advances:

Outstanding balance – 17,706 – 1,884Various expenses advanced bythe Bank

Net movements 15,822 – 1,879 –

Other liabilities 33,403Variable fee for credit cardtransactions

Applicable to the Group and theParent Bank

Stockholders and related partiesunder common ownership

Deposit liabilities:

Outstanding balance – 8,309,367 – 12,877,815With interest rate based onaverage daily bank deposit rate

Net movements (4,568,448) – (1,113,908) –

Interest expense on deposits 385,079 – 209,276 –With interest rate based onaverage daily bank deposit rate

Bills payable:

Outstanding balance – 8,593,874 – 73,799

Short term liabilities withannual fixed rate of 2.80% to6.75%

Net movements 8,520,075 – (4,619,820) –

Interest expense 185,451 – 3,263 –

Short term liabilities withannual fixed rate of 2.80% to6.75%

Income from bancassurancebusiness:

EAF earned 100,000 – 166,667 –Exclusive Access Fee paid atinception. See below.

Commission income 179,695 − 72,044 −

Income recognized on sale ofinsurance policies inaccordance with thebancassurance agreement.

Loans receivable 797 797 849 849Secured borrowings withannual interest rate of 8%

Key management personnel 1,861,027 – 1,799,571 –Employee benefits related tokey management personnel.

Directors, officers and otherrelated interests:

Loans 492,051 492,051 449,157 449,157

Employee fringe benefit loanswith annual fixed interest ratefrom 0.00% to 8.00%

Accounts receivable 117,889 117,889 95,123 95,123Fringe benefits related toemployee cars and laptop lease.

Bills purchased:Outstanding balance – 16,196 – – Short term receivablesNet movements 16,196 – (19,433) –

Outstanding receivables from and payables to related parties, if any, arising from lease of properties,management services and advances are unsecured, noninterest-bearing and generally settled in cashwithin 12 months or upon demand.

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The Parent Bank and its subsidiaries’ retirement plans have transactions directly and indirectly withthe Parent Bank as of December 31, 2018 and 2017 as follows:

2018 2017Amount

of TransactionOutstanding

BalanceAmount

of TransactionOutstanding

BalanceInvestment in Bank shares (P=48,339) P=204,244 P=58,056 P=252,583Investments in Parent Bank notes payable:

Outstanding balance – 103,900 – 103,900Interest income 5,565 5,460 –Accrued interest income – 171 – 367

Deposit liabilities:Outstanding balance – 498,603 – 368,706Net movements 129,897 – 93,136 –Interest income on deposits 13,043 – 5,768 –

Dividend income 110 – 4,049 –

Lease of PropertiesIn February 2014, the Parent Bank entered into a lease agreement with UPI, whereby the latter, as alessee, leases one of the Parent Bank’s investment properties for a period of five years. UPI pays theParent Bank a monthly rent of P=95, exclusive of VAT. Refundable deposit of UPI to the Parent Bankamounted to P=683 as of both December 31, 2018 and 2017.

Management ServicesThe Bank entered into a sales management agreement with FUDC whereby the latter sells UnionBankVisa Credit Cards through its direct selling network. Under the terms of the agreement, the ParentBank pays a fixed monthly service fee of P=4,123 and P=4,618 in 2018 and 2017, respectively, (net ofapplicable taxes and service charges) plus commission per approved principal card.

Deposit Liabilities and Interest ExpenseThe deposit accounts of subsidiaries and stockholders with the Parent Bank generally earn interestbased on daily bank deposit rates.

AdvancesThe Parent Bank also has advances to CSB and FUDC as of December 31, 2018 and 2017. These aregenerally settled in cash upon demand.

Bills Payable and Interest ExpenseIn 2017, CSB availed loan with Aboitiz Foundation, Inc., a related party, amounting toP=74,000 which is payable in five years which and bears an annual interest rate of 4.5%. Thisborrowing with outstanding balance of P=73,874 and P=73,799 (net of unamortized debt issue costs) asof December 31, 2018 and December 31, 2017, respectively, is included as part of Others under theBills payable account in the consolidated statements of financial position (see Note 22).

In 2018, CSB availed of short-term borrowings from AEVI, Aboitiz Power Corporation and Aboitizand Co., Inc., related parties under common ownership, amounting to P=2,250,000, P=300,000, andP=5,670,000, respectively. These were subsequently paid in the following month.

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Bancassurance AgreementOn January 27, 2017, the Parent Bank and its subsidiary, CSB, entered into a bancassurancepartnership (the Agreement) with Insular Life Assurance Company, Ltd. (Insular Life). Under theAgreement, Insular Life paid the Parent Bank an amount representing Exclusive Access Fee (EAF)with a term of 15 years. In the event that the cumulative annualized premium earned (APE) soldduring the first five year period is less than the agreed minimum amount, the Parent Bank shall refundthe proportion of EAF that equals the proportion by which the cumulative APE is less the minimumamount. EAF recognized for 2018 and 2017 is presented as Income from bancassurance businessunder Miscellaneous Income account in the statements of income. Unearned income arising from thistransaction is presented as part of Miscellaneous under Other liabilities account in the statements offinancial position (see Note 24).

Under the distribution agreement, Insular Life will have exclusive access to the branch network of theParent Bank and CSB. Additionally, the Parent Bank’s sales force, composed of relationshipmanagers and financial advisors, shall be trained and licensed to sell life insurance products. Underthe same Agreement, the Parent Bank shall earn commissions on all insurance policies sold by theParent Bank. Commissions earned for the years ended December 31, 2018 and 2017 are presented aspart of Others under Service charges, fees and commissions account in the statements of income(see Note 27).

Key Management Personnel CompensationThe compensation of key management personnel for the Group and Parent Bank follows:

Group2018 2017 2016

Short-term benefits P=1,673,823 P=1,584,646 P=1,224,869Post-employment benefits 115,052 147,560 97,224Other long-term benefits 72,152 67,365 60,533

P=1,861,027 P=1,799,571 P=1,382,626

Parent Bank2018 2017 2016

Short-term benefits P=1,486,828 P=1,363,854 P=1,096,136Post-employment benefits 103,092 129,683 83,255Other long-term benefits 72,140 67,366 60,533

P=1,662,060 P=1,560,903 P=1,239,924

Directors’ fees incurred by the Group amounted to P=75,800 in 2018, P=60,707 in 2017, and P=59,678 in2016, and by the Parent Bank amounted to P=66,672 in 2018, P=55,681 in 2017, P=55,031 in 2016, andare included as part of Salaries and employee benefits account in the statements of income.

Loans and Other TransactionsIn the ordinary course of business, the Group has loans, deposits and other transactions with itsrelated parties and with certain DOSRI. Under the Group’s existing policies, these transactions aremade substantially on the same terms and conditions as transactions with other individuals andbusinesses of comparable risks. The amount of individual loans to DOSRI, of which 70% must besecured, should not exceed the amount of the deposit and book value of their investment in the Group.In the aggregate, loans to DOSRI generally should not exceed the total equity or 15% of the total loanportfolio of the Group, whichever is lower.

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The following additional information is presented relative to DOSRI loans:

Group Parent Bank2018 2017 2018 2017

Total DOSRI loans* P=509,044 P=450,006 P=427,749 P=384,084Unsecured DOSRI loans* 147,413 118,407 66,119 53,333% of DOSRI loans to total loan

portfolio 0.2% 0.2% 0.2% 0.2%% of unsecured DOSRI loans

to total DOSRI loans* –% –% –% –%% of past due DOSRI loans

to total DOSRI loans –% –% –% –%% of non-accruing DOSRI accounts

to total DOSRI loans –% –% –% –%

*Total DOSRI loans and Unsecured DOSRI loans include fringe benefits that are excluded in determining the compliancewith the individual ceiling under subsection X330.1 of the MORB.

On January 31, 2007, BSP issued Circular No. 560 which provides the rules and regulations thatgovern loans, other credit accommodations and guarantees granted to subsidiaries and affiliates ofbanks and quasi-banks. Under the said circular, the total outstanding exposures to each of the ParentBank’s subsidiaries and affiliates shall not exceed 10% of bank’s net worth, the unsecured portion ofwhich shall not exceed 5% of such net worth. Further, the total outstanding exposures to subsidiariesand affiliates shall not exceed 20% of the net worth of the lending bank.

Transactions with the Retirement PlanThe retirement fund of the Group covered under defined benefit post-employment plan maintained forqualified employees is administered by the Retirement Committee. The members of the RetirementCommittee are Senior Executives and officers of the Parent Bank as approved by the Chairman/ChiefExecutive Officer. Through its Retirement Committee, it has appointed TISG as the trustee for theretirement fund which is covered by trust agreements.

The composition of the retirement plan assets of the Parent Bank and its subsidiaries as ofDecember 31, 2018 and 2017 are the following:

Group Parent Bank2018 2017 2018 2017

Investments in:Equity securities P=1,469,044 P=1,733,146 P=1,230,831 P=1,618,192Debt securities 1,155,555 378,559 1,053,685 351,901

Bank deposits 738,575 1,121,080 539,059 999,544Others 17,155 4,018 15,859 3,470

P=3,380,329 P=3,236,803 P=2,839,434 P=2,973,107

As of December 31, 2018 and 2017, the carrying value of the fund is equivalent to its fair value.

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The retirement fund of the Group includes investments in shares of stock and notes payable of theParent Bank amounting to P=202,244 and P=103,900, respectively, as of December 31, 2018 andP=252,583 and P=103,900, respectively, as of December 31, 2017. The investment in Parent Bankshares are primarily held for re-sale and the Group’s retirement fund does not intend to exercise itsvoting rights over those shares. The terms of the investment in notes payable are discussed inNote 23.

The combined retirement fund of the Group and the retirement funds of the Parent Bank havedeposits with the Parent Bank amounting to P=498,603 and P=380,790, respectively, as ofDecember 31, 2018 and P=368,706 and P=259,074, respectively, as of December 31, 2017.

The related dividend income, interest income and trading gain amounted to P=110, P=18,608 and nil,respectively, in 2018, P=4,049, P=11,228 and nil, respectively, in 2017 and P=4,049, P=8,748 and P=283,respectively, in 2016.

Group Life Insurance from a Related PartyThe Parent Bank entered into a contract with Insular Life for its group health insurance. The amountof the group health insurance package covering October 2017 to September 2018 is at P=93,000.

32. Earnings Per Share

As of December 31, 2018, 2017 and 2016, the Group and the Parent Bank have no outstandingpotentially dilutive securities, hence, basic earnings per share are equal to diluted earnings per share.The basic and diluted earnings per share were computed as follows:

Group2018 2017 2016

Net profit attributable to ParentBank’s stockholders P=7,316,102 P=8,411,325 P=10,058,276

Divided by the weighted averagenumber of outstandingcommon shares (thousands) 1,098,045 1,058,344 1,058,344

Basic and diluted earningsper share P=6.66 P=7.95 P=9.50

Parent Bank2018 2017 2016

Net profit P=7,211,912 P=8,281,948 P=10,253,503Divided by the weighted average

number of outstandingcommon shares (thousands) 1,098,045 1,058,344 1,058,344

Basic and diluted earningsper share P=6.57 P=7.83 P=9.69

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33. Selected Financial Performance Indicators

The following are some measures of the Group and Parent Bank’s financial performance:

Group 2018 2017 2016Return on average capital funds:

Net profit 9.0% 12.0% 16.1%Average total capital funds

Return on average resources:

Net profit 1.2% 1.5% 2.2%Average total resources

Net interest margin:

Net interest income 4.1% 4.8% 5.1%Average interest-earning

resources

Liquidity ratio:

Current Assets 37.0% 49.1% 51.0%Current Liabilities

Debt-to-equity ratio:

Liabilities 6.4:1 7.4:1 6.8:1Equity

Asset-to-equity ratio:

Asset 7.4:1 8.4:1 7.8:1Equity

Interest rate coverage ratio:

Earnings before interestsand taxes 1.7:1 2.5:1 3.3:1

Interest expense

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Parent Bank 2018 2017 2016Return on average capital funds:

Net profit 8.8% 11.9% 16.5%Average total capital funds

Return on average resources:

Net profit 1.3% 1.7% 2.7%Average total resources

Net interest margin:

Net interest income 3.3% 3.7% 3.7%Average interest-earning

resources

Liquidity ratio:

Current Assets 35.9% 49.9% 53.2%Current Liabilities

Debt-to-equity ratio:

Liabilities 5.6:1 6.5:1 5.8:1Equity

Asset-to-equity ratio:

Asset 6.6:1 7.5:1 6.8:1Equity

Interest rate coverage ratio:

Earnings before interestsand taxes 1.8:1 2.8:1 4.0:1

Interest expense

34. Commitments and Contingent Liabilities

LeasesThe Parent Bank leases various branch premises for an average period of seven years. The leasecontracts are cancellable upon mutual agreement of the parties or renewable at the Parent Bank’soption under certain terms and conditions. Various lease contracts include escalation clauses, most ofwhich bear an annual rent increase of 5%. Some leases include a clause to enable adjustment of therental charge on an annual basis based on prevailing market rates. As of December 31, 2018and 2017, the Parent Bank has neither a contingent rent payable nor an asset restoration obligation inrelation with these lease agreements.

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Rentals charged against current operations included as part of Occupancy account in the statements ofincome are as follows:

2018 2017 2016Group P=664,291 P=571,260 P=533,258Parent Bank 525,146 484,214 447,218

The estimated minimum future annual rentals payable under non-cancellable operating leases follows:

Group2018 2017

Within one year P=416,346 P=342,660Beyond one year but within five years 1,035,874 1,132,481Beyond five years 36,674 71,043

P=1,484,803 P=1,546,184

Parent Bank2018 2017

Within one year P=271,544 P=263,515Beyond one year but within five years 741,828 823,167Beyond five years 1,467 54,386

P=1,014,839 P=1,141,068

The Group has entered into commercial property leases on the Group’s surplus offices. Thesenon-cancellable leases have remaining non-cancellable lease terms of one to four years.

Total rent income earned included under Miscellaneous income account in the statements ofincome (see Note 27) by the Group and the Parent Bank for the years ended December 31, 2018,2017 and 2016 are as follows:

2018 2017 2016Group P=160,713 P=190,025 P=186,796Parent Bank 156,276 186,357 182,613

The estimated minimum future annual rentals receivable under non-cancellable operating leasesfollows:

Group2018 2017

Within one year P=131,424 P=139,709Beyond one year but within five years 189,418 133,061Beyond five years 5,884 −

P=326,726 P=272,770

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Parent Bank2018 2017

Within one year P=116,643 P=128,554Beyond one year but within five years 164,341 129,668

P=280,984 P=258,222

OthersIn the normal course of the Group’s operations, there are various outstanding commitments andcontingent liabilities such as guarantees, commitments to extend credit, which are not reflected in theaccompanying financial statements. The Group recognizes in its books any losses and liabilitiesincurred in the course of its operations as soon as these become determinable and quantifiable.Management believes that, as of December 31, 2018, no additional material losses or liabilities arerequired to be recognized in the accompanying financial statements as a result of the abovecommitments and transactions.

Following is a summary of the Parent Bank’s commitments and contingent accounts:

2018 2017Trust department accounts P=45,568,784 P=42,074,269Inward bills for collections 32,323,461 17,221,005Unused commercial letters of credit 3,041,698 4,038,136Outstanding guarantees issued 573,842 665,451Late deposits/payments received 63,446 5,642Outward bills for collection 41,377 32,288Other contingent accounts 3,148 3,016

There are several suits, assessments or notices and claims that remain unsettled. Managementbelieves, based on the opinion of its legal counsels, that the ultimate outcome of such suits,assessments and claims will not have a material effect on the Group’s and the Parent Bank’s financialposition and results of operations.

UPI acts as the project and fund manager of Kingswood Project. As fund manager, UPI isresponsible for the treasury and money management as well as arranging the necessary facilities andaccounting for the development of the project. UPI also receives a certain percentage of the salesprice related to Kingswood Project as sales commission and to compensate for the marketingexpenses incurred.

35. Notes to the Statements of Cash Flows

Non-cash investing activities include the following:∂ Reclassification of investment securities at amortized cost under the HTC business model with

carrying amount of P=18.0 billion to FVOCI category and with total fair value of P=19.4 billion asat January 1, 2018 (see Note 12).

∂ Bond exchange transaction with a foreign issuer, where the Parent Bank exchanged itsoutstanding securities at amortized cost with carrying amount of $35.58 million(P=1.86 billion) for new 30-year securities with face amount of $37.10 million (P=1.94 billion)(see Note 12).

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Presented below is the supplemental information on the Group’s and Parent Bank’s liabilities arisingfrom financing activities:

Group

LTNCD Bills PayableNotes and Bonds

Payable TotalBalance at January 1, 2018 P=3,000,000 P=43,070,825 P=32,128,177 P=78,199,002Cash flows from financing activities:

Additions 3,000,000 657,746,587 11,013,685 671,760,272Repayment of borrowings − (613,840,876) − (613,840,876)Issuance of new shares − − − −

Effect of business combinations − 4,323,571 36,806 4,360,377Non-cash financing activities:

Effects of foreign exchange rate changes − (335,634) 1,325,000 989,366Amortization of debt issue cost − − 18,398 18,398

Balance as of December 31, 2018 P=6,000,000 P=90,964,473 P=44,522,066 P=141,486,539

Balance at January 1, 2017 P=3,000,000 P=48,100,192 P=7,200,000 P=58,300,192Cash flows from financing activities:

Additions − 165,702,992 25,097,553 190,800,545 Repayments of borrowings − (170,590,655) − (170,590,655)Non-cash financing activities:

Effects of foreign exchange rate changes − (141,704) (170,000) (311,704)Amortization of debt issue cost − − 624 624

Balance as of December 31, 2017 P=3,000,000 P=43,070,825 P=32,128,177 P=78,199,002

Parent Bank

LTNCD Bills PayableNotes and Bonds

Payable TotalBalance at January 1, 2018 P=3,000,000 P=29,009,719 P=32,306,823 P=64,316,542Cash flows from financing activities:

Additions 3,000,000 638,874,784 10,863,685 652,738,469Repayment of borrowings − (602,798,238) − (602,798,238)Issuance of new shares − − − −

Non-cash financing activities: Effects of foreign exchange rate changes − (335,634) 1,325,000 989,366

Amortization of debt issue cost − − 18,398 18,398Balance as of December 31, 2018 P=6,000,000 P=64,723,631 P=44,513,906 P=115,264,537

Balance at January 1, 2017 P=3,000,000 P=39,166,961 P=7,200,000 P=49,366,961Cash flows from financing activities:

Additions − 111,174,648 25,097,553 136,272,201Repayments of borrowings − (121,190,186) − (121,190,186)

Non-cash financing activities: Effects of foreign exchange rate changes − (141,704) (170,000) (311,704)

Amortization of debt issue cost − − 624 624Balance as of December 31, 2017 P=3,000,000 P=29,009,719 P=32,128,177 P=64,137,896

36. Events After the End of the Reporting Period

Dividend DeclarationOn January 25, 2019, the Parent Bank’s BOD approved the declaration of cash dividends at P=1.90 pershare or for a total of P=2,312,584 based on the outstanding common stock of 1,217,149,512 shares asof December 31, 2018. Record date for stockholders entitled to said cash dividend isFebruary 11, 2019 while payment is expected to be made on February 28, 2019.

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37. Supplementary Information Required Under Revenue Regulations 15-2010

Presented below is the supplementary information required by the Bureau of Internal Revenue (BIR)under RR 15-2010 to be disclosed as part of the notes to financial statements. This supplementaryinformation is not a required disclosure under PFRS.

Gross Receipts TaxIn lieu of the value-added tax (VAT), the Parent Bank is subject to the GRT imposed on all banks andnon-bank financial intermediaries pursuant to Section 121 of the Tax Code.

The Parent Bank reported total GRT amounting to P=809,792 in 2018 as shown under Taxes andLicenses account. Total GRT payable as of December 31, 2018 amounted to P=73,893 and is includedas part of Accrued taxes and other expenses under Other liabilities account in the 2018 statement offinancial position (see Note 24).

Documentary Stamp TaxThe Bank is enrolled under the Electronic DST System. In general, the Parent Bank’s DSTtransactions arise from the execution of debt instruments, security documents, and bills of exchange.For the year ended December 31, 2018, DST affixed amounted to P=1,917,964.

Withholding TaxesThe details of total withholding taxes for the year ended December 31, 2018 are shown below:

Final P=1,291,618Expanded 693,561Compensation and benefits 180,729

P=2,165,908

Taxes and LicensesThe details of taxes and licenses in 2018 of the Parent Bank are as follows:

GRT P=809,792DST 895,821Real property tax 36,838Fringe benefit tax (FBT) 36,377Local and business permits 30,262Miscellaneous 3,678Less:

FBT charged to employee benefits 36,377P=1,776,391

Excise TaxesThe Parent Bank does not have excise taxes accrued since it did not have any transactions subject toexcise tax.

Claim for RefundThe Parent Bank has a pending claim for refund of taxes arising from the BIR’s denial of the ParentBank’s applications for administrative abatement in 2007. On August 5, 2013, the CTA granted theclaim for refund, ordering the BIR to refund or issue a tax credit certificate to the Parent Bank in theamount of P=90,923. The CTA en banc affirmed this decision on July 14, 2014. The BIRsubsequently appealed this decision before the Supreme Court.

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On July 4, 2018, the Supreme Court affirmed the CTA decision granting the Bank’s claim for refundamounting to P=90,923. On September 12, 2018, the BIR filed a Motion for Reconsideration of theSupreme Court’s Resolution.

Deficiency DSTThe Parent Bank has been assessed by the BIR for alleged deficiency DST on its Power SavingsAccount (“PSA”) in the amounts of P=22,882, P=5,815, P=34,506 and P=55,852 for taxable years 1994,1995, 1996 and 1997, respectively, and on its deficiency final withholding tax on onshore income fortaxable years 1994, 1996 and 1997 in the total amount of P=21,174, which was reduced by the Court ofTax appeals to P=10,830. On February 6, 2019, the Bank received the Supreme Court decision datedNovember 21, 2018 dismissing the Bank’s Petition for Review and ordering it to pay the aggregateamount of P=129,885 for DST and final withholding tax on onshore income, plus 20% delinquencyinterest per annum from July 16, 2001 until fully paid. In view of the recent signing into law ofRepublic Act No. 11213 or the 2019 Tax Amnesty Law, the Bank is currently assessing its positionon the matter.

Other Required Tax InformationThe Parent Bank has not paid or accrued any excise taxes or customs’ duties and tariff fees as it hadno importation for the year ended December 31, 2018.