ROAD MAP TO THE FUTURE INVESTMENTS BUSINESS FINANCIAL SOLUTIONS CONVENIENCE CUSTOMER RELATIONSHIP MOBILE BANKING PRODUCT INNOVation CREDIT ACCESS CASHLESS conVENIENCE GLOBAL PRESENCE Philippine National Bank Annual Report 2012 TABLE OF CONTENTS 3 Consolidated Financial Highlights 4 Message to Shareholders 8 Operational Highlights 17 2012 Awards / Corporate Social Responsibility 18 Corporate Governance 20 Risk Management 30 Our Board of Directors 34 Board of Directors Profile 38 Our Senior Management Team 42 Products and Services 45 The Bank’s Congenerics 46 Financial Statements 2 | PHILIPPINE NATIONAL BANK | ANNUAL REPORT 2012 PHILIPPINE NATIONAL BANK | ANNUAL REPORT 2012 | 1 Consolidated Financial Highlights (In Thousand Pesos, Except Per Share Amounts) December 31 2012 2011 Results of Operations Gross Income 22,232,003 22,866,871 Total Expenses 17,204,301 18,111,179 Net Income 5,027,702 4,755,692 Financial Condition Total Assets 331,006,539 312,066,639 Loans and Receivables 144,707,509 126,249,035 Total Liabilities 291,259,648 277,092,202 Deposit Liabilities 240,854,377 237,533,938 Total Equity 39,746,891 34,974,437 Per Share1/ Basic/Diluted Earnings Per Share 7.02 7.05 Book Value Per Share 58.65 52.01 1/ attributable to equity holders of the Parent Company PHILIPPINE NATIONAL BANK | ANNUAL REPORT 2012 | 3 Message to Shareholders ach year, we strive to deliver a solid performance across various financial metrics. We marked another milestone in bottom-line profits as we crossed the five-billion mark in net income in 2012. Since our Eturnaround nine years ago, we are relentless in trailing a roadmap focused on regaining our position as the premier financial institution in the country. This steadfast commitment goes beyond just bringing added value to our stakeholders, but more emanating out of a sense of pride and duty to an institution with a rich history destined to be the “PiNaka-Best” Bank in the hearts and minds of every Filipino. Our plans and initiatives have proven to be resilient to changing sector. The country’s external position was also solid with overall market forces, competition, and even internal adjustments. We balance of payments posting a surplus of 3.7% of GDP and the have been successful in keeping the momentum of exceptional international reserves reaching a record high of $83.8 billion by performance strong while we continuously strengthen our year-end, equivalent to a year’s worth of imports of goods and fundamentals. services. The peso appreciated by 6.6% against the US dollar to reach a five-year high of P41.2 to a dollar at the end of 2012 from Global & Domestic Backdrop P43.9 the previous year. The strong peso was underpinned by While there were collective attempts at jumpstarting the the sustained remittance inflow from overseas Filipino workers, turnaround of mature economies, the reversal of the situation was revenues from the business outsourcing industry, and influx of slow and volatile. Member countries of the European Monetary foreign investment inflows. Union continued to be challenged by the deterioration of their Amid a favorable economic environment, the Philippine banking fiscal numbers. The United States economy remained weak despite industry remained sound and stable, providing the needed support current expansionary monetary initiatives. Even China showed signs to sustain economic gains. Monetary authorities continued to of economic slowdown with growth rates registering below decade implement reforms to strengthen the industry. Banks meanwhile average. The Global economy turned to the emerging markets for the undertook capital raising and long-term deposit generating initiatives needed boost. to support their growth and expansion plans as well as to comply with The year 2012 was a good year for the Philippines as the international regulatory standards on capitalization. Consequently, country achieved a broad-based growth of 6.6% in real Gross total resources of the banking system rose to P8.4 trillion from P7.6 Domestic Product (GDP). The higher-than-expected increase was trillion the previous year. The quality of assets likewise improved attributed to the strong performance of construction, transport as shown in the steady decline in the non-performing loans of the and communication, real estate, renting and business activities, banking system to 2.6% as of Oct 2012 vs. 3.2% of the same period in and manufacturing. On the demand side, buoyant household 2011 and 2.9% by year-end. The Capital adequacy ratio of the system consumption, accelerated government spending and higher was over 15%, higher than the statutory level set by BSP and even investments bolstered economic expansion. exceeding the international standard. The sustained domestic demand was supported by the country’s improving macroeconomic fundamentals. The continued Financial Performance fiscal consolidation resulted in better government debt profile Riding high on the country’s renewed economic strength as well and lower debt service burden. Given the benign inflation and as leveraging on the gains from our business infrastructure build-up, the fragile global economy, the Bangko Sentral ng Pilipinas (BSP) we turned-in another year of good performance in 2012. Philippine reduced its policy rates by a cumulative 100 basis points during National Bank posted a net income of P5.03 billion, up 6% over last the year. This, in turn, led to the lowering of bank lending rates year’s P4.76 billion. This translated to a return on average equity of that propelled the 17.8% increase in credit extended to the private 13.5%. Return on assets was at 1.6%. 4 | PHILIPPINE NATIONAL BANK | ANNUAL REPORT 2012 Florencia G. Tarriela Chairman Omar Byron T. Mier President & CEO We managed to keep at bay our interest differential business issuances whose value appreciated strongly with the ensuing demand amidst a low interest rate environment and expanding liquidity in from both foreign and domestic investors. By end 2012, available- the market. Our net interest income of P7.0 billion accounted for for-sale investments amounted to P67 billion, up 28% from previous 40% of total operating income which grew to P17.6 billion in 2012. year’s level. Given our distribution capabilities, our Treasury Group Cost of funds was further reduced to 1.3% coming from 1.7% a year has propelled the Bank as one of the leading distributors of Treasury- ago. Interest expense on deposit liabilities went down by 23% even related financial products in the secondary market. as total deposits grew from P237 billion to P241 billion over the year. We were diligent in managing our overhead costs even as we There was a deliberate attempt to let go of high-cost borrowed funds continuously make investments to support business objectives. resulting in a reduction of on-book term placements by 13%. We were Operating expenses remained flat year-on-year. Our cost efficiency successful in keeping most of the funds within the Bank by providing ratio which excludes provisions for impairment and credit losses was alternative investments – one of which is through our Trust Banking at 60.9%, a much improved metric from 76% five years ago. Group which experienced a surge in individual accounts by 56% or Year-on-year, we were relentless in growing and strengthening the equivalent of P7.7 billion driven mainly by wealth management our balance sheet. Loans and deposit generation continue to be the services. On the other hand, lending was challenged by a squeeze in key drivers of growth. At the end of 2012, total consolidated resources margins. We balanced this off by growing our loans portfolio across totaled P331.01 billion, a 6% or P20 billion increase from the previous all customer segments more aggressively. Net loans and receivables year’s P312 billion. Consolidated equity stood at P39.7 billion, up by grew by 15% to P144.7 billion. P4.7 billion from P35 billion as of end-2011. The increase in capital Net gains from trading, investment securities and foreign exchange accounts was mainly due to the P5 billion net income in 2012. Our were up 37%. Through our Treasury Group, we were able to take capital position remained solid with a Capital Adequacy Ratio (CAR) of advantage of opportunities brought about by the strong demand 18.1%, well above the minimum 10% required by the BSP. Tier 1 capital for Philippine Peso and US dollar denominated ROP sovereign bond ratio was at 11.9%. PHILIPPINE NATIONAL BANK | ANNUAL REPORT 2012 | 5 Message to Shareholders We have been successful in significantly reducing our non- Our ATM Safe program, an innovative breakthrough offering in performing loans (NPL) in the shortest time possible. It used to be the market and a first in the industry, that replaces cash stolen from at the P10 billion level roughly five years ago. By the end of 2012, ATM skimming or robbery was widely accepted with over 500,000 the NPL was brought down to P3.8 billion. Consequently, gross over-the-counter enrollees to date. We innovated on the delivery of NPL ratio dropped to 2.4% vs. 3.1% of the previous year. Apart the product by offering a 30-day ATM Safe cover via enrolment in the from stepping-up our collection efforts, we entered into realistic ATM. This generated 220,000 new enrolments with a 30% renewal rate. repayment plans in lieu of foreclosures which are generally more Last year, we launched the PNB Visa Credit Card which gave costly, tedious and uncertain. With credit risk-modeling capabilities a 1% rebate on revolving interest – a milestone in the credit card firmly in place, provisions for impairment and credit losses stood at industry. We provided valuable rewards to our loyal credit card users P934 million, down from P1.55 billion in 2011.