ASIA BREWERY, INC.

ETON PROPERTIES PHILIPPINES, INC.

THE LT GROUP

PMFTC INC.

PHILIPPINE NATIONAL BANK

TANDUAY DISTILLERS, INC. FINANCIAL SUMMARY OUR BUSINESSES AT A GLANCE

Net Income REVENUES Total Assets (in Php Millions) (In Php Millions) (In Php Millions)

54,374 749,553 2015 2015

Eton Properties Philippines, Inc. 51,696 696,833 2014 2014 99.9% 99.6% 56.47% Asia Brewery, Inc. Eton Properties Philippine National 55,497 678,450 started as a brewery Philippines, Inc. is the Bank is the fourth 2013 in 1982. It offers real estate arm of the largest private 2013 alcoholic and group. It has a universal bank in the non-alcoholic diversified portfolio of country. beverages, as well as residential packaging materials. subdivisions, high-rise It is a market leader and mid-rise Net Income Total Liabilities in the energy drinks, condominiums, BPO (In Php Millions) (In Php Millions) alcopop and soymilk office buildings and 7 3 9 9 2

categories. It is also commercial centers 35 5 0 3 89 76 04 09 579,794 a co-leader in the 12 6,599 1, 1, 1, 10 12 31 6,2 5, 6, 2015 9,497 2015 bottled water 2,898 segment. ‘13 ‘14 ‘15 ‘13 ‘14 ‘15 ‘13 ‘14 ‘15 534,111 Note: Pooling Method 4,410 2014 2014 6,472 2,062 528,680 2013 8,669 2013 11,475 22.54% 2,806 49.6% 100% Victorias Milling PMFTC Inc. is the Tanduay Distillers, Inc. Company, Inc. is a business combination has a 99% market sugar refinery based in Net Income Attributable Non-controlling interest of Philip Morris share of rum in the Negros Occidental. In to Equity Holders of LTG 02 Philippines Philippines and over crop year 2014-2015, 03 Manufacturing Inc. and 20% market share of it was the highest Fortune Tobacco Corp. the distilled spirits contributor of refined EBITDA Equity It is the leading industry. sugar nationwide, and accounted 8 cigarette manufacturer 4 4 4

(In Php Millions) (In Php Millions) 0 for around 27% 2 9 9 2 1 in the Philippines. 5 41 08 08 44 13 of refined sugar 15,731 169,758 7, 1, 1, 18 86 10 42 manufactured 67 86 1, 2015 2015 ‘13‘14 ‘15 ‘13 ‘14 ‘15 in the Philippines. ‘13 ‘14 ‘15 128,876 Notes: LTG stake at 30.17% as of end-February 2016 13,128 For Crop Years September to August 2014 162,722 2014

ANNUAL REPORT 2015 18,069 124,228 2013 Attributable Net Income Contribution to LTG 149,771 (in Php Millions) 2013 117,536 % to total Total Equity Equity Attributable BANKING 2,501 57% to Equity Holders of LTG TOBACCO 1,121 25% BEVERAGE 147 3% 2014 DISTILLED SPIRITS 101 2% Per Share Data Ratios and Percentages 2015 PROPERTY DEVELOPMENT 119 3% (In Php, except Pay-out rate) 2015 2014 2013 VMC 379 9% OTHERS 42 1% 2015 2014 2013 Current (x) 0.75 0.73 0.63 TOTAL 4,410 100% Earnings per Share 0.61 0.41 0.85 Current w/out PNB (x) 4.29 3.44 3.29

Book Value (at year end) 11.91 11.48 10.86 Debt to Equity (x) 3.42 3.28 3.53 % to total % to total Cash Dividend 0.15 0.16 0.15 BANKING 3,508 53% BANKING 3,447 40% Debt to Equity w/out PNB (x) 0.13 0.18 0.28 TOBACCO 1,098 17% TOBACCO 1,042 12% Pay-out Rate 36.80% 19.97% 12.72% Return on Average Assets 1.3% 0.9% 1.8% BEVERAGE 1,036 16% BEVERAGE 3,921 45% DISTILLED SPIRITS 422 6% 2013 DISTILLED SPIRITS 185 2% Return on Average Equity 5.2% 3.6% 9.6% PROPERTY DEVELOPMENT 312 5% PROPERTY DEVELOPMENT 104 1% VMC 214 3% VMC – 0% OTHERS 9 0% OTHERS (30) 0% TOTAL 6,599 100% TOTAL 8,669 100% Notes: Banking: Attributable to LTG, net of inter-company transactions VMC: 2014 includes Php 335 million gain from the purchase of VMC share and Php 44 million equity in net earnings FINANCIAL SUMMARY OUR BUSINESSES AT A GLANCE

Net Income REVENUES Total Assets (in Php Millions) (In Php Millions) (In Php Millions)

54,374 749,553 2015 2015

Eton Properties Philippines, Inc. 51,696 696,833 2014 2014 99.9% 99.6% 56.47% Asia Brewery, Inc. Eton Properties Philippine National 55,497 678,450 started as a brewery Philippines, Inc. is the Bank is the fourth 2013 in 1982. It offers real estate arm of the largest private 2013 alcoholic and group. It has a universal bank in the non-alcoholic diversified portfolio of country. beverages, as well as residential packaging materials. subdivisions, high-rise It is a market leader and mid-rise Net Income Total Liabilities in the energy drinks, condominiums, BPO (In Php Millions) (In Php Millions) alcopop and soymilk office buildings and 7 3 9 9 2

categories. It is also commercial centers 35 5 0 3 89 76 04 09 579,794 a co-leader in the 12 6,599 1, 1, 1, 10 12 31 6,2 5, 6, 2015 9,497 2015 bottled water 2,898 segment. ‘13 ‘14 ‘15 ‘13 ‘14 ‘15 ‘13 ‘14 ‘15 534,111 Note: Pooling Method 4,410 2014 2014 6,472 2,062 528,680 2013 8,669 2013 11,475 22.54% 2,806 49.6% 100% Victorias Milling PMFTC Inc. is the Tanduay Distillers, Inc. Company, Inc. is a business combination has a 99% market sugar refinery based in Net Income Attributable Non-controlling interest of Philip Morris share of rum in the Negros Occidental. In to Equity Holders of LTG Philippines Philippines and over crop year 2014-2015, Manufacturing Inc. and 20% market share of it was the highest Fortune Tobacco Corp. the distilled spirits contributor of refined EBITDA Equity It is the leading industry. sugar nationwide, and accounted 8 cigarette manufacturer 4 4 4

(In Php Millions) (In Php Millions) 0 for around 27% 2 9 9 2 1 in the Philippines. 5 41 08 08 44 13 of refined sugar 15,731 169,758 7, 1, 1, 18 86 10 42 manufactured 67 86 1, 2015 2015 ‘13‘14 ‘15 ‘13 ‘14 ‘15 in the Philippines. ‘13 ‘14 ‘15 128,876 Notes: LTG stake at 30.17% as of end-February 2016 13,128 For Crop Years September to August 2014 162,722 2014 18,069 124,228 2013 Attributable Net Income Contribution to LTG 149,771 (in Php Millions) 2013 117,536 % to total Total Equity Equity Attributable BANKING 2,501 57% to Equity Holders of LTG TOBACCO 1,121 25% BEVERAGE 147 3% 2014 DISTILLED SPIRITS 101 2% Per Share Data Ratios and Percentages 2015 PROPERTY DEVELOPMENT 119 3% (In Php, except Pay-out rate) 2015 2014 2013 VMC 379 9% OTHERS 42 1% 2015 2014 2013 Current (x) 0.75 0.73 0.63 TOTAL 4,410 100% Earnings per Share 0.61 0.41 0.85 Current w/out PNB (x) 4.29 3.44 3.29

Book Value (at year end) 11.91 11.48 10.86 Debt to Equity (x) 3.42 3.28 3.53 % to total % to total Cash Dividend 0.15 0.16 0.15 BANKING 3,508 53% BANKING 3,447 40% Debt to Equity w/out PNB (x) 0.13 0.18 0.28 TOBACCO 1,098 17% TOBACCO 1,042 12% Pay-out Rate 36.80% 19.97% 12.72% Return on Average Assets 1.3% 0.9% 1.8% BEVERAGE 1,036 16% BEVERAGE 3,921 45% DISTILLED SPIRITS 422 6% 2013 DISTILLED SPIRITS 185 2% Return on Average Equity 5.2% 3.6% 9.6% PROPERTY DEVELOPMENT 312 5% PROPERTY DEVELOPMENT 104 1% VMC 214 3% VMC – 0% OTHERS 9 0% OTHERS (30) 0% TOTAL 6,599 100% TOTAL 8,669 100% Notes: Banking: Attributable to LTG, net of inter-company transactions VMC: 2014 includes Php 335 million gain from the purchase of VMC share and Php 44 million equity in net earnings 04 05

ANNUAL REPORT 2015 –Dr. LucioC.Tan gains andsustainingmomentum.” wesetoursightsonpreserving forward, management’s toppriority. Today andmoving “Last year, overcomingchallengeswas MESSAGE FROMTHECHAIRMAN In 2015, the Philippine economy sustained Our social welfare programs continue to its growth, creating more business offer aid and support to victims of natural opportunities and adding more workers to calamities. We are also doing our modest the labor force. Global credit rating agencies share in protecting the environment continued to give the country positive marks, through reforestation, irrigation and water in recognition of the economy’s strong conservation programs. performance and ability to withstand external shocks. Last year, overcoming challenges was management’s top priority. Today and As a result of the continued economic moving forward, we set our sights on growth, LT Group, Inc. (LTG) registered a net preserving gains and sustaining momentum. profit of Php6.6 billion in 2015, 50% higher than the Php4.4 billion reported during the As always, we are grateful to you, our previous year. shareholders, for your unwavering support. We assure you that your management team We, however, remain cautiously optimistic. will strive harder to increase shareholder We have yet to feel the full impact of the value by making our companies more ASEAN economic integration, especially in profitable in the years ahead. We also the manufacturing sector. Illicit tobacco trade thank our board of directors, partners and like non-payment of taxes, counterfeiting and employees for making LTG a profitable and smuggling continues to hound the sector. We socially responsible conglomerate we can all will continue to assist government in curbing be proud of. these illegal activities.

Stiff competition in the beverage, banking, liquor and real estate sectors is also a key factor that affects profitability. Your management team continues to find ways to innovate, cut costs and invest in new equipment and human capital to keep pace, Dr. Lucio C. Tan if not overtake, the competition. Chairman and Chief Executive Officer

As we devote our group’s resources toward profitability, we have not overlooked our corporate social responsibility. We continue to share our gains with the various causes and projects of the Tan Yan Kee Foundation, Inc. and Foundation for Upgrading the Standard of Education (FUSE). Scholarships, teacher training, provision of school supplies and infrastructure are still key focus areas. 06 07

ANNUAL REPORT 2015 MESSAGE FROMTHEPRESIDENT marketing efforts yielded positive results. remains, butmore selective yet aggressive Stiff competitioninourotherbusinesses progress ontaxcomplianceandpricing. business persists, although wenote some 2014. The illicit trade in the tobacco were somegains and improvements over challenging year for us,although there strong growth, 2015 remaineda While thePhilippineeconomy reported yearend. billion andhad1.2million employees by sector increased by 16%to almost US$22 3.4% growth, whilerevenues of the IT-BPO reached US$25.8billion, representing a consumer spending.OFW remittances (IT-BPO) sectorcontinuedtogrow, fueling Technology-Business Process Outsourcing OFW remittances and the Information Southeast Asia, afterVietnam. rate, butstill thesecondhighest in slightly slower than2014’s 6.1% growth Product (GDP) growthof 5.8%in2015, The Philippines reported a GrossDomestic We have also been able to forge new Php1.2 billion from the sale of lots to Eton. partnerships that will provide vehicles for The Bank booked a gain of Php1.6 billion future growth. from the sale of ROPA in 2015 compared to Php1.7 billion in 2014. The Bank also As a result of the slightly improved reclassified Php2.2 billion worth of ROPAs business environment, LT Group, Inc.’s to bank premises in 2015. As of end- (LTG) attributable net income for 2015 December 2015, the Bank’s ROPA stood at reached Php6.60 billion, 49.6% higher than Php11.8 billion. the Php4.41 billion we reported for 2014. Operating Expenses declined Philippine by 9% or Php1.7 billion to National Bank Php18.4 billion from Php20.2 (PNB)’s core billion as the Bank reversed business a previously booked probable drove earnings loss of Php974 million from growth; the National Steel Corporation asset quality case, as well as lower improving provisioning for 2015. Without the reversal, operating PNB reported expenses would have been a net income 4% lower. Non-Performing of Php6.77 billion for 2015, under the Loans (NPL) cover stood at 126% as of end- pooling method. This is 15% more than the 2015, from 99% as of end-2014, while net Php5.90 billion reported for 2014. NPL Ratio was at 0.3% from 0.9%.

Interest Income grew to Php21.7 billion, 6% higher year-on-year (y-o-y) from PMFTC Inc. (PMFTC) posts Php20.6 billion in 2014, as loans grew by improvement in profitability with the 20% to Php336 billion as of end-December improved mix and better pricing, but 2015 from Php279 billion as of end-2014. profits still considerably lower than Net Interest Margin was steady at 3.2%, historical resulting in a Net Interest Income of level Php17.6 billion for 2015, 6% more than 2014’s Php16.7 billion. PMFTC’s shipment Net Service Fees and Commission Income volume for increased by 38% to Php3.6 billion from 2015 reached Php2.6 billion due to higher fees earned by 66.2 billion PNB Capital, as well as more deposit- and sticks. While loan-related fees. this is 3.1% lower than Trading and Foreign Exchange Gains the previous declined to Php1.8 billion or by 34% from year, there is Php2.7 billion, while Other Income was a notable shift in the mix, with Marlboro 35% lower at Php3.7 billion from Php5.7 accounting for 27% of total volume from billion. Trading Gains and Other Income in 22% in 2014. The favorable change in mix 2014 included a Php1.3 billion gain from is attributed to the further narrowing of the sale of Victorias Milling Company (VMC) price gaps and the Marlboro CROSS|OVER shares to LTG. campaign launched in April 2015, which saw customers trading up to the more The Bank continued its disposal of Real and premium brand. The 18.8% y-o-y increase Other Properties Acquired (ROPA), reaching in Marlboro’s volume also enabled us to Php5.0 billion in book value in 2015, 127% slightly improve our market share to 74% higher than the Php2.2 billion sold in as of end-2015 from 72% in 2014, based 2014. ROPA sales in 2015 included Php1 on Nielsen estimates. As a result, our billion of Heritage Park memorial lots and equity in net earnings from PMFTC reached 08 09

ANNUAL REPORT 2015 for products consumption continues to fueldemand environment, butstrong consumer slightly affectedbyhighlycompetitive Asia BreweryInc.(ABI)’sprofitability our profitability. will enableustogrow tobacco business and the prospects ofthe stamps. This improves have the proper tax only cigarettesthat retailers topurchase wholesalers and our partin informing We willcontinue to do illicit cigarette trade. vigilant against the be required toremain on enforcement will in themarket, although afocused effort months, we have seena strong compliance market effective March 1, 2015.In recent on all locally manufactured packs in the produced startingDecember 1,2014,and to beaffixed oneachpackofcigarettes The government requiredtaxstamps the Excise Tax Law in2013. times toPhp2.00sincetheimplementationof priced cigaretteshasgoneupby atleast four recommended retailpriceofthesuperlow From onlyPhp0.50perstickin2012,the resulted inanon-level playing field. trade escalatedto unparalleled levels and below theearnings level beforethe illicit we earned in2014,butstillsubstantially 2015, 83.5% more than the Php515 million PMFTC to increase to Php945millionin enabled our Equity inNetEarnings from low-end andsuperlow-end brands. This the prices ofour main competitor for the at belowtaxor below costwhen matching to a level wherewe are nolongerselling recent price increases have pushed prices from Php1.50in2014to Php1 in 2015.The per stick,andthebottomof the market price gap betweenMarlboro, at Php3.00 the low-end brands. This narrowed the the super low-priced brands, and onefor In 2015, there were twopricehikes for Php515 million reportedfor 2014. Php975 million, 89%higher than the MESSAGE FROMTHEPRESIDENT To continually offer ourcustomers of over 70%. the alcopop categorywith a market share Tanduay Icehaving adominantpositionin around 20%ofABI’s revenues, with However, theseproductsstillcontribute of over 80%.Constructionofourplantis sales growth, and enjoys a market share Green Spot,continuesto post robust exclusive distributorshipagreement with Vitamilk, thesoymilk brand underan second quarter of 2016. expect thisto be completed withinthe will increasecapacity by around 60%. We the expansion of our Laguna plant that a 27%market share.In2015, we started in thebottledwater segment with about we continue to be one of the top players Through ourAbsolute and Summitbrands, major carbonatedcolas. as weremain affected by the pricewar of volume was 4%lowercomparedto2014, market share of over 70%. However, sales Cobra continues to have a dominant wholesalers and retailers. 29% largely duetoincentives given to (GPM) was slightlylowerat28% from beer and alcopop. Grossprofitmargin the drop in revenues for energydrinks, and soymilk products wereoffsetby billion as the growth in water, packaging Revenues wererelatively flat at Php14.3 billion in2015fromPhp1.122014. wars. Netincomewas 6%lowertoPhp1.05 in thebeverage market engaginginprice competitive environment withotherplayers ABI continuedtooperate inahighly further in2015. volume declining competition, with affected by thestiff continue to be business segments Our beerandalcopop second halfof 2016. beverage withinthe manufacture the to commercially we are targeting in fullswing,and beverages that cater to changing Our flagship product, Tanduay Five Years, preferences, as well as capture more continues to account for bulk of the of the young adult population, ABI volume, at around 77% of total, and was launched Barista’s Best in October 2015, a 2% higher y-o-y. However, brandy blend convenient ready-to-drink coffee in a PET Compañero’s volumes were substantially bottle. lower from a year ago, while Tanduay Light’s volume also declined, resulting in Tanduay Distillers, Inc. (TDI) gains an overall drop in volume of 3%. market share in an industry challenged by shrinking volumes Mid-year, we launched Tanduay Select, a rum with 30% alcohol content, to try to The year 2015 was a difficult one for capture more of the young urban drinkers, the distilled spirits industry, with overall and more of the Metro Manila-Luzon market.

Eton Properties Philippines, Inc. (Eton) enjoys full occupancy of its BPO office buildings and plans to build more to increase its recurring income stream

Eton’s net income for 2015 reached Php313 million, Php193 million more than the Php120 million reported for 2014. The increase is largely attributed to the growth in rental income. This was brought about by the higher rental rates that Eton was able to get for new and renewed lease volume declining based on Nielsen contracts in its BPO office buildings that estimates on customer off-take, as well currently enjoy full occupancy and are as the reported sales volume of three of located at Eton Centris in Quezon City the country’s largest players. However, and Eton Cyberpod Corinthian in Ortigas TDI fared relatively better, increasing Center, Pasig City. The retail space, which nationwide market share to 24.1% by end- complements these BPO office buildings, 2015 from 22.0% as of end-2014, based likewise saw an increase in revenue on Nielsen estimates. The market share contribution. gain came from the Visayas-Mindanao area where we continue to have the largest Revenues from the sale of residential share at 57.9% as of December 2015. TDI units were lower y-o-y as revenues were reported a 3% decline in volume, slightly largely from the percentage of completion lower than the industry’s 4% decline, of previously sold units. Eton halted sales based on reported sales volumes of major activities for about two years to revisit its industry players. projects’ master plans to optimize values, and only started selling units in projects A price increase was implemented in the that it previously launched in May 2015. fourth quarter of 2014, followed by two price increases in 2015, in January and Our BPO office-building portfolio is December, partly to cover the increase in currently around 125,000 square meters excise tax. Coupled with lower alcohol of gross leasable area (GLA), in seven prices, TDI managed to improve its GPM buildings. We plan to increase this with the to 19% in 2015 from 17% in the previous construction of additional BPO buildings at year. TDI ended the year with an income of Eton Centris, as well as in other locations Php422 million, Php321 million more than that are accessible to public transportation. 2014’s income of Php101 million, boosted by interest savings with the payment of its In the pipeline is the fifth BPO office Php5 billion bond in February 2015. building at Eton Centris with a GLA of 37,000 square meters, with construction 10 11

ANNUAL REPORT 2015 sense whenpaying the correct taxes. There still ata level that does not make economic we match our competitor’s prices,butit is some ofour products atbelowcost when on tax stamps. We areno longer selling tax and the relatively highercompliance improving as we move toward aunitized The outlookfor the tobacco business is dependent on agriculture. will affect thepurchasingpowerof those into newwave cities. However, the El Niño expanded beyond Metro Manila and Cebu space especially in urban areas thathave demand for consumerproducts and office sector will continue to grow, fueling job lossesintheMiddleEast.The BPO adversely affect OFWremittanceswith fuel andresinsfor PET bottles,but may reduce some manufacturing costs like The relatively lower oil priceswillhelp inflation environment islikely to persist. expected to sustain itsgrowth.A low over 2015,asthecountry’s economy is We aregenerally more optimisticfor 2016 Improved prospectsfor2016 complete. component requiringabout threeyears to the end of2016,with the mall and office Construction is targeted to start before as a 44-storey residentialcomponent. of GLAfor retail and officeuse, as well It willhave about 15,000 square meters development alongPasong Tamo, Makati. Eton WestEnd Square, a mixed-used Another projectinthe pipeline is Walk by 5,000squaremeters. Company willalso be expandingCentris 15,000 squaremetersat EtonCentris, the complement the existing retailspace of targeted to start in the middleof 2016. To MESSAGE FROMTHEPRESIDENT offerings. opportunities tofurtherincreaseitsproduct the property sector, as well as give Eton LTG additional source of earnings from is ongoing,andthisprojectwillprovide City. Development ofthemaster plan spans portions ofPasig City and Quezon along Circumferential Road 5(C-5), which to develop a 35-hectaretownship project venture agreement withAyala Land, Inc. In early 2016, LTG entered into a joint our portfolio, althoughat a gradual pace. we will take advantage of this by increasing office space should continuetogrow, and In the property sector, demand for BPO Manila andLuzon market. of the young urban drinkers and the Metro product offerings to try tocapture more sources ofrevenues, as well as new initiatives thatmay alsoprovide additional cost efficiencies thatincludeenergy-saving earnings with continuousimprovements on competition remains. We willimprove In the distilled spirits business, stiff capacity ofthebottledwater plant. of 2016, as well from the increased commercial operations in the secondhalf soymilk plantthat isexpectedtostart Incremental earnings willcome from the the midst ofeven toughercompetition. population andincreasingincomesin to take advantage of the growing adult In the beverage segment, we will continue quarter of 2017will result incost savings. 2016 andfullintegration in the first of a unified bankingsystembefore yearend efficiencies, and thepartialimplementation improving ourassetquality and cost income. We continue to work toward will provide another source of fee-based agreement and jointventure withAllianz loans growth. Therecentbancassurance process for consumerloanswillhelpboost economy. Thestreamliningof our approval the sustained growth in the country’s loans growth tocontinueon the backof In the banking industry, weexpect when thereisa level playing field. illicit trade issubstantiallyeliminatedand is roomfor marginimprovement when the The past year has shown your Company’s ability to bounce back from challenges. Working as a team, we were able to grow our earnings. But a lot of work still has to be done before we get back to the income level prior to the implementation of the excise tax law, which adversely affected some of our businesses.

We are investing for our future. We are strengthening our current brands and products while launching new ones, putting up new plants, expanding into new areas, and forging new partnerships. We remain committed to excellence and providing quality yet affordable products to our customers that will sustain our future growth.

I would like to thank our stakeholders for the continued support and trust in your Company, as well as to our Board of Directors, management team and staff.

Michael G. Tan President 13 12

ANNUAL REPORT 2015 MESSAGE FROMTHECFO net contribution oftheBank, followed by the LTG’s businessunits, mainly from the higher to theimproved profitability acrossmost of reported for 2014. The increase was due billion morethan the Php4.41billion was Php6.60billion,49.6% or Php2.19 The attributable net incomeofLTG for 2015 selling prices,resultedinflatrevenues. lower, which coupled withslightly higher Meanwhile, TDI’s salesvolume was slightly in water, packagingand soymilk products. beer and alcopop, were offset by thegrowth flat. ABI’s lower revenues forenergydrinks, Tanduay Distillers, Inc.(TDI) wererelatively revenues ofAsiaBrewery, Inc.(ABI) and income of the BPO officebuildings whilethe in Eton’s revenues came from higher rental income and service fee income. The growth revenues came from higher interest (Eton). TheincreaseintheBank’s (PNB) and Eton Properties Philippines,Inc. revenues fromPhilippine National Bank (y-o-y) increase, largely from higher a Php2.67 billion or5.2%year-on-year for 2015 amountedtoPhp54.37billion, LT Group, Inc.’s (LTG) totalrevenues tobacco business. PNB’s net contribution When the remaining convertible notes are was Php1.00 billion more while the converted to shares, LTG’s stake in VMC will tobacco business added Php889 million be at 30.91%. more. TDI provided an additional Php321 million, largely from interest savings with The LTG Parent Company infused Php5.5 the payment of the Php5 billion bond in billion to TDI and Eton in 2015. The Php3.9 February 2015. The Php193 million growth billion invested in TDI was part of the funds in Eton’s contribution was brought about by used to pay the Php5 billion bond. higher lease and occupancy rates at its BPO Meanwhile, the Php1.6 billion infused into office buidings. Eton was used to partially finance its projects. In early June, LTG paid a regular PNB posted an income of Php6.77 billion cash dividend of Php0.15 per share or a total under the pooling method, with LTG’s share at of Php1.62 billion to shareholders on record Php3.72 billion. Part of PNB’s income was a as of May 27. This is equivalent to 36.8% Php369 million gain from the sale of four (4) of 2014’s attributable income of Php4.41 properties to Eton. LTG’s share of the gain, billion, higher than the dividend policy of a at Php208 million was eliminated from LTG’s 20% pay-out rate. attributable net income from PNB, bringing PNB’s contribution for 2015 to Php3.51 LTG’s subsidiaries spent Php8.7 billion for billion. In 2014, PNB’s attributable capital expenditures in 2015. Eton spent income contribution to LTG was at Php2.50 Php3.8 billion for land acquisition and billion, from the Php3.26 billion share in construction of ongoing projects. PNB PNB’s income, less LTG’s share in the gain invested Php2.5 billion, mainly for the new from the sale of Victorias Milling Company IT system, targeted to be fully operational (VMC) shares of Php755 million, as LTG within the first quarter of 2017, which will purchased the VMC shares. Overall, PNB integrate the different core banking contributed an additional Php1 billion in systems of the former Allied Bank and 2015 versus 2014. PNB that were merged in 2013. ABI spent Php1.8 billion, principally on the soymilk Income from the tobacco business is plant and the expansion of its bottled water primarily from the equity in net earnings facilities. Tanduay spent Php551 million, from LTG’s 49.6% stake in PMFTC. This primarily for the dehydrator of the ethanol reached Php975 million in 2015, 89% higer facility and the solar power plant. than the Php515 million realized in 2014. Although an improvement over the previous LTG’s balance sheet remains strong, with the year, this is still substantially lower than the parent company’s cash balance at Php2.6 earnings realized in 2012 and 2013 as the billion as of the end of 2015. Debt-to-Equity illicit trade continues to affect the overall Ratio was at 3.41:1 as of end-2015 with the profitability of the tobacco business. bank, and at 0.13:1 without the bank.

The Bank’s attributable income contribution to LTG of Php3.51 billion was 53% of total. ABI’s contribution added Php1.10 billion or 17% of total, followed by the tobacco business at Php1.04 billion or 16%. TDI accounted for Php422 million or 6%, while Eton added Php312 million or 5%. Equity in net earnings from our stake in VMC provided Php214 million or 3% of total. Jose Gabriel D. Olives Chief Finance Officer As of end-2015, LTG’s stake in VMC stood at 22.54% compared to 20.17% as of the end of 2014, with the conversion of some convertible notes held into shares. In February 2016, LTG purchased 131.86 million additional shares of VMC at Php5 per share, for a total of Php659 million, and increased LTG’s stake in VMC to 30.17%. 14 15

ANNUAL REPORT 2015 INC. BREWERY, ASIA BEVERAGES advertising for Cobra. Company also spent more onpromotions and the “Gustoko pa” theme campaign.The the brand from soft drinks, ABI isreinforcing carbonated softdrinks market. To differentiate offs waged by indirect competitors in the decline broughtabout by aggressive price- healthy revenues despite a slight volume share of over 70% in 2015.Cobra provided energy drinks segment, maintaining its market Cobra upheld itsmarket leadership in the and competitive pressures. segments whichcontinue to face regulatory significant declinesinthebeer andalcopop posted resilientfinancial results in2015despite bottled water and soymilk segments, ABI With strongbrands in the energy drinks, current andnewmarkets. assessment of potential growth opportunities in key beverage categories and the continuous maintain its leading market positions across was marked by programs tostrengthen and Asia Brewery Inc.’s (ABI) performance in 2015 With sustained revenues, Cobra remained the Company’s flagship product, contributing more than a third of ABI’s revenue base. Bottled water was the second biggest contributor to revenues, followed closely by beer.

Sales of Absolute and Summit bottled water brands remained strong with volumes improving moderately over 2014. Absolute’s “Pure Water, Pure Love” campaign of actress Judy Ann Santos, along with nationwide trade programs, sustained the growth in this segment over the The beverage market continually provides past four years. To support the growth, ABI is strong growth potentials with the emergence adding new production lines to boost capacity. of new product segments as a result of the evolving lifestyles of consumers. ABI launched Vitamilk continued to dominate and expand Barista’s Best in October 2015, a ready-to-drink the soymilk market, holding over 80% market coffee brand catering to consumers who prefer share and increasing volume substantially over the convenience of consuming their coffee in 2014. Under an exclusive distributorship license bottled packaging. with Thailand’s Green Spot Company Ltd, the Philippines is the leading importer of Vitamilk Glass container volume increased by over 30% in the ASEAN region. The exemplary growth in 2015, driven by the full year operation of and acceptance of the brand by the Philippine the second furnace which came on stream in market over the past years have prompted the second half of 2014. Higher volumes from the construction of a soymilk plant targeted to commercial customers developed in 2014 and commence operations in the second half of 2016. new accounts for generic glass food containers

The beer and alcopop segments were boosted revenues to increase by close to 30% confronted with sustained pressures in 2015. during the year. The new round of excise tax hike in January 2015 forced industry-wide price increases To complement domestic growth, ABI is which dampened demand for alcoholic exploring opportunities to make its products beverages. This, coupled with aggressive available in other countries in Southeast Asia promotional and pricing activities by the and the Middle East. market leader in its effort to stem the industry- wide volume decline, adversely affected ABI continues to invest in research and ABI’s alcoholic offerings. Faced with these development for new products while challenges, ABI continues to reinforce its brand strengthening operational and distribution portfolio and fine-tune its promotional efforts efficiencies in order to focus on delivering while implementing operational efficiencies to product innovation and affordability to its improve profitability. customers. 16 17

ANNUAL REPORT 2015 INC. PHILIPPINES, PROPERTIES ETON PROPERTY DEVELOPMENT lifestyle andentertainment clusterCentris surge inrentalincome.These includethe City. Retail properties alsocontributedtothe Cyberpod CorinthianinOrtigasCenter, Pasig at EtonCentrisinQuezon City andEton rates fortheCompany’s BPOofficebuildings contracts wererenewedathigherrental growth over the year-ago level, aslease or 47%ofrevenues, representinga58% Rental incomeaccountedforPhp1.17billion income ofPhp120million. million, a161%increasefromits2014net billion. NetincomeclimbedtoPhp313 higher thanits2014revenues ofPhp2.28 revenues ofPhp2.49billionin2015,9% (BPO) industry, theCompany reportedgross from thebusinessprocessoutsourcing Driven by strongdemandforofficespaces new impetusonitsmarketing activities. primarily fromitsleasingoperations, with areas toachieve significantincomegrowth further strengtheneditscorebusiness Properties Philippines,Inc.(Eton),asit The year 2015was agood year forEton Walk, events venue Centris Elements and and align these with the market, to realize commercial center Centris Station, which is the best value of its projects and optimize directly linked to the Quezon Avenue MRT margins. station. During this period, the Company pushed To date, Eton has seven fully leased out sales activities for its completed residential BPO buildings covering 125,000 square projects in prime locations across Metro meters. Of the seven buildings, four Manila, including 68 Roces along Don A. are in Eton Centris in Quezon City while Roces Avenue in Quezon City; 8 Adriatico three are in Eton Cyberpod Corinthian in in the City of Manila; Belton Place and Eton Pasig City. Both areas are strategically Parkview Greenbelt in Makati; the West Wing located near transportation hubs and retail Residences at Eton City; and the Manors establishments, making these accessible to and West Wing Residences at North Belton BPO employees and complementing the 24/7 Communities in Quezon City. operations of their respective locators. Eton’s BPO office buildings are currently leased to In the face of sustained demand for its top global outsourcing companies. properties, especially among BPOs, and confident of the Philippines’ strong economic Real estate sales, on the fundamentals, Eton other hand, accounted for will continue to Php1.31 billion or 53% of expand its footprint revenues, a 13% drop from in both commercial 2014, as the Company and residential assessed its projects and spaces in 2016. embarked on cost-benefit strategies to ensure long- Construction of term sustainable growth. the 25-storey Eton pursued its plans to re- Cyberpod Centris assess its costs and prices Five, the fifth BPO facility in Eton Centris, will commence in the middle of 2016. Centris Walk, meanwhile, will be expanded to accommodate more retail and dining spaces. In Eton Tower Makati, the opening of The Mini Suites, a unique serviced residence, and its two-storey retail area that is directly connected to the Dela Rosa elevated walkway, will also take place within the year.

The Company will also break ground and launch Eton WestEnd Square in Makati City, a mixed-use development which includes a high rise residential condominium, an office tower, and a boutique mall, in 2016.

Having realized the early rewards of its refocusing strategy, Eton looks forward to 2016 with optimism and renewed confidence, as it commits to remain a trusted and reliable developer of prime properties and communities. 19 18

ANNUAL REPORT 2015 PMFTC INC. TOBACCO and directly contracts over 4,500 tobacco PMFTC employs over 4,800employees Nielsen. (31.1% share of market), accordingtoAC (21.1% shareof market) andFortune prior year), mainly driven by grown in 2015 to 73.4% (up 1.4pp versus dynamics, PMFTC’s market share has challenging regulatory, tax,andpricing selling brand inthe market today. Amid cigarette brand andFortune, led by brands available inthemarket in 2015 PMFTC manufactures nine outof top 15 diverse brand portfolio. with thebestsmokingexperiencethroughits been providing thecountry’s adultconsumers Philippines. For thepastsixyears, PMFTC has the leadingcigarettemanufacturerin Tobacco Corporation (FTC), continues to be Manufacturing Inc.(PMPMI)andFortune combination betweenPhilipMorrisPhilippines PMFTC Inc.(PMFTC), thebusiness Overview Marlboro, theworld’s number one the best- Marlboro

to lower-priced brands following the second excise tax increase after the Sin Tax Law implementation, PMFTC turned the corner in 2015, regaining market share and strengthening its leadership in the key price segments with the strong performance of both Marlboro and Fortune brand families.

Marlboro led the share growth driven by up trading following the narrowing of price gaps farmers from four tobacco-growing areas between the premium and super-low price in the country. The Company relies on its segments. The brand was also a focus for competent and diverse workforce supported consumer engagement and retail activation by individual development and career initiatives, such as the global Marlboro management programs that recognize CROSS|OVER Campaign, which ran from potential and reward achievement. April to July 2015 and provided a range of unique brand experiences and rewards

Operations In 2015, PMFTC completed the vertical integration of its leaf buying operations by directly contracting over 4,500 farmers and providing extensive support for all areas of tobacco growing, including best agricultural labor practices, seedling, planting, curing and for adult smokers as well as incentives for drying of leaf in addition to improving the trade partners and the field sales force. leaf growing communities and areas in the Capitalizing on Marlboro’s position as the country. leading premium brand in the market, the campaign strengthened brand equity and PMFTC values the safety of its employees. In boosted the brand’s distribution and volume October 2015, the Batangas Plant marked a growth. new milestone in Operations, achieving Five Million Safe Man Hours without any injuries The leading local brand Fortune also grew its or breach of safety policies. market share, driven by the Fortune Tribal brand family. Sales and Marketing PMFTC upgraded the pack and stick designs After a challenging 2014 whereby the of the Fortune Tribal brand family in the first market observed significant down trading 20 21

ANNUAL REPORT 2015 in morethan30widely read publications from August 2015 to the endof the year affixed taxstamps.Thecampaign ran retailers toonlypurchasepackswith campaign to inform wholesalersand PMFTC launcheda print advertisement To supportthisregulatoryinitiative, consumption. manufactured andimportedfor domestic excise taxes onallcigarettes packs intended toensurethepayment of Revenue’s (BIR) taxstamp program, introduction oftheBureau of Internal fully supportedand complied withthe major concernfor PMFTC. TheCompany The illicit cigarette trade remains a Tackling theIllicitCigaretteTrade results inthekey launchareas. and awareness programs, delivering strong supported by afullrange ofdistribution price mentholsegment.Thelaunchwas to broadenthebrand’s appealinthelow- corner box pack,was launchedinJuly2015 experience andpackagedinamodernround that delivers anintenserefreshingsmoking menthol variant withacapsuleinthefilter Fortune Tribal Mint Splash the brand’s progressive image.Inaddition, proposition anddifferentiation,reinforcing quarter of2015inordertoincreaseitsvalue TOBACCO , an innovative new work environment andculture. In2015,the nurturing adiverse workforceandinclusive PMFTC joinedthe globalinitiative on Diversity andInclusion start andbuildacareer. affirms PMFTC asanexcellent organization to 17 weregiven confirmedinternships.This undergo anon-groundassessmentactivity. applicants fromwhich93wereselectedto In itsfirst year, INKOMPASS received 4,501 job withPMFTC even beforetheygraduate. best inthemselves andpotentiallysecurea program, whichallowstalentstodiscover the INKOMPASS isatwo-year global internship open doorstoany desiredcareer. enable employees tolearntheskillsthat AT PMI”and“INKOMPASS” programs, which brand withthe launchof“UNLIMITYOURSELF In 2015,PMFTC strengtheneditsemployer International assignmentsprovide maximum and LatinAmericatoitstopmobiletalents. overseas careeropportunitiesinAsia,Europe affiliates globally. Ithasconsistentlyprovided across PhilipMorrisInternational(PMI) PMFTC isoneofthesourcestoptalent Human Resources continue in2016. and itforeseestheseenforcementeffortsto cigarettes indifferentpartsofthecountry, (BOC) in2015againsttraders ofillegal action by theBIRandBureauofCustoms PMFTC was alsopleasedtonoteenforcement Mindanao andin outlying areas. problematic areas remaininginCebuand stamps compliance across the nation, with World Bank showed ahigh level oftax of the year, publishedreports by the Bisaya –asidefrom English.By theend three languages–Tagalog, Ilokano, and print advertorial was translated into nationwide. To maximize the reach, they return. Philippines when level rolesinthe career ornext international PMI talents foran talents. Itopens development of and wider career acceleration Company formed a Core Group composed of Diversity and Inclusion champions across In 2015, PMFTC held the 9th Bright Leaf different departments. The Core Group aims Agriculture Journalism Awards (Bright Leaf) to review company policies and structure and with the mission to recognize the most formulate recommendation for the Company outstanding and relevant agriculture stories to become more responsible in embracing in print, radio, and television, published a multi-generational and multicultural and broadcasted nationwide. It also honors workforce, and gender sensitive policies and the most compelling photos that capture protocols. the essence of tobacco farming and the agriculture industry. After nearly a decade, the program has become one of the most Public Affairs, Corporate Citizenship and renowned journalism awards. Recognitions Since 2010, after the successful business PMFTC is a proud recipient of the CSR combination, PMFTC committed itself to give Company of the Year Award where the back to communities where its employees Company competed with over 100 local and work and live. Embrace, the Company’s multinational companies in the Philippines. corporate social responsibility (CSR) Awarded by the prestigious 2015 Asia CEO program, simultaneously mobilized fifteen Awards, it recognized PMFTC’s commitment projects aligned to address the 17 United to improving the lives of Filipino people Nations Sustainable Development Goals. The through the support of impactful and projects concentrated on community health sustainable charitable programs. and poverty alleviation, livelihood, education, environment, disaster preparedness, and This award is only one of the 25 local and calamity relief across the country. international recognitions garnered by PMFTC in 2015. In 2015, PMFTC began forging partnerships to rebuild the communities affected by Typhoon Yolanda (Haiyan) in 2014 and the earthquake that shook Visayas in 2013. This was done after careful consultation with responsible national government agencies and local government authorities after new hazard maps were drawn following the said disasters. The first wave of Memorandum of Agreements was already signed with the receiving local governments and actual construction will commence in 2016. 23 22

ANNUAL REPORT 2015 BANK NATIONAL PHILIPPINE BANKING the capital market’s confidence in the credit facility was 1.5 timesoversubscribed, indicating decade, the last beingin 1998. The said loan the syndicated loan market after more than a banks inApril2015,markingitsreturn to with alarge group of internationalandregional million three-year syndicatedtermloanfacility also successfullyclosed and signed a USD150 commercial/SME lendingbusiness. The Bank This was propelled by strongcorporate and which outpacedthe industry’s 13%growth. 74% given theBank’s 18%loan expansion, portfolio. The loan-to-deposit ratio rose to portfolio as well as an increase initsinvestment the back of a steady growthintheBank’s loan in a net interestincomeofPhp17.6billion on growth in the Bank’s core business resulted billion under the pooling method. Sustained For 2015,PNB recorded a net profit of Php6.8 universal bankin terms oftotalresources. Corporation tocreatethefourth largestprivate February 2013, PNB merged withAlliedBanking enterprises (SME)andretailcustomers. In corporate, middle market, small and medium range ofbankingand financial services tolarge private universal bankthat provides a full The Philippine National Bank (PNB) is a strength of the Bank. PNB was able to maintain its Net Interest Margin at 3.2% by tapping cheaper funding sources and increasing low- cost CASA deposits. As of end-2015, PNB’s total consolidated resources stood at Php666.5 billion.

Net service fees and commissions reached Php3.6 billion, a 38% increase over the previous year, principally generated from underwriting and credit-related transactions. The improvements in core revenues compensated for the reduced trading gains, which declined by 58% due to challenging conditions in both the local and international financial markets. Operating income was augmented by gains from the sale of PNB’s foreclosed assets, which innovative products like the Healthy Ka Pinoy amounted to Php1.56 billion. medical card and ATMSafe insurance. PNB During the year, two credit rating agencies and its wholly owned subsidiary, PNB Capital upgraded its outlook on PNB. Last May 2015, and Investment Corporation, were likewise Moody’s Investors Service upgraded PNB’s recognized internationally in the same month, long-term and short term rating two levels winning four awards from The Asset Triple A to investment grade to Baa3/P-3 from Ba2/ Asia Infrastructure Awards in Hong Kong. The NP. In October 2015, Fitch Ratings Inc. gave following deals were cited: a) Best Project PNB a higher credit rating of “BB” with a stable Finance Deal of the Year and Best Transport outlook, reflecting the Bank’s strong franchise Deal, both for the Php31 billion project finance and high capital ratios. syndicated term loan facility for Metro Manila Skyway Stage 3 Project; b) Best Transport Committed to continuously provide value to its Deal, Highly Commended for the Php23.3 customers and stakeholders, PNB has been a billion financing facility for GMR Megawide recipient of numerous awards and recognitions Cebu Airport Corporation Project; and c) Best by international award-giving bodies for market Power Deal for the Php33.3 billion financing leadership and product innovation. Last March, facility for Pagbilao Energy Corporation Project. Global Banking Finance and Review awarded These awards clearly demonstrate the Bank’s PNB’s retail product ATMSafe as the Most commitment in offering competitive financing Innovative Banking Product. ATMSafe is the structures to clients while contributing to country’s first insurance product against ATM economic development and nation building. fraud. In August, PNB won the Best Website of the Year at the Asian Banking and Finance For the past century, PNB has provided Retail Banking Awards held in Singapore. customers with a variety of financial services Revamped last 2014, the PNB website is a that offer innovative care. With its customers at fluent interpretation of the Bank’s dedication to the forefront and with 100 years of stability as meet the diverse digital needs of its customers its foundation, PNB is the bank that Filipinos can worldwide. With a more dynamic look and feel, lean on. PNB is here to serve You First. the website gives users a hassle-free means to access PNB’s products and services online. Later in the year, international publication The Asian Banker awarded PNB with Excellence in Retail Financial Services distinction under the “Best Remittance Business in the Philippines” category. This is in recognition of the value- added differentiation that the Bank provides to overseas Filipinos beyond remittance to include financial services such as Own-a- Philippine Home Loan, Pangarap Loan and Overseas Bills Payable System as well as other 25 24

ANNUAL REPORT 2015 INC. DISTILLERS, TANDUAY DISTILLED SPIRITS the World twice recognized as the received abigboostwhenthebrand was Tanduay’s dealers anddistributors. despite thecontinueddiscountsgiven to lower operating expensesandinterestcosts, gross profitmarginto19%from18%and Php101 millionwiththeimprovement in income increasedtoPhp422millionfrom in volume duetostiff competition. Net and brandy category, however declined Philippines to58%from56%.Thegin market share,particularlyintheSouthern year, whichenabledtheCompany toregain showed bettervolumes thantheprevious of highersellingprices.Therumcategory from Php12.0billionin2014asaresult improved slightlytoPhp12.1billionin2015 Tanduay DistillersInc.’s (TDI)revenues . Thefirstrecognition was given by statureasaninternationalbrand Brand Championof Tibay Tanduay” campaign was intensified with on-ground activation and promotional selling activities in different market channels. A year-round tri-media and merchandising focused heavily on Tanduay Five Years and Tanduay Rhum Light. In the virtual world, Tanduay engaged the customer through the editors of the Spirits Business magazine, popular social media sites like Facebook, the only dedicated international spirits Twitter and Instagram. Tanduay Select 60 magazine and website with a circulation proof was launched in the middle of the of more than 50,000 among spirits year to augment the low proof product line professionals worldwide. The second was which is the current preference among young given by the World Branding Organization in drinkers. In the premium segment, Tanduay London which gave the award to a Philippine Asian Rum has been made available on company for the first time. Tanduay also Philippine Airlines international flights, duty received the Monde Selection Crystal Prestige free shops, select wine cellars, restaurants Trophy, an award given to companies and bars in Metro Manila. that have won in the competition for 10 consecutive years. Further affirming the Company’s commitment to environmental best practices and energy- Continuing with the strategy of revitalizing efficient operations, TDI’s subsidiary, Absolut the Tanduay brand and capitalizing on Distillers, Inc., (ADI), launched a two- the changing trends in music marketing, megawatt solar power plant in Lian, Batangas a countrywide music tour titled "Tanduay in March 2015. ADI has been advocating Polarity: Rhum, Rock & Rave" featuring sustainable energy since the 1990s and famous local artists and disc jockeys was the solar power plant project is the LT introduced in 2015. The “Tibay ng Loob, Group’s first venture of this magnitude in renewable green energy following the Clean Development Mechanism (CDM) Project in 2006. The CDM project captures methane, one of the harmful gases causing global warming, from the distillation process and reuses this as power for the distillation plant. Shortly thereafter, in October, ADI launched its bioethanol facility with a capacity of 100,000 liters per day to further support the Government’s green energy program and avail of the opportunities under the Biofuels Act of 2006. Both projects are also expected to provide additional revenue sources and contribute to the Company’s bottom line.

The challenges to the Company’s business remain formidable but the resolve to perform better under pressure remains firm and stronger than ever. 26 27

ANNUAL REPORT 2015 Board andManagementarein pursuitofandin All ofthestrategic plansandeffortsofthe targets. effectively helpedthe latter achieve their by theBoard in monitoring the subsidiaries segments required. The mechanism adopted and provide thesupportwhicheach of the review enabledthe Directors to monitor closely and prior year performances. Themonthly month and compared the resultsagainst targets the performances of each of the segments every of itsoversight functions, theBoard reviewed meeting for theyear. Thereafter, intheexercise assessed anddeliberated upon during its first plans and targets which the Board reviewed, submitted to theBoard their respective business At the startof the year, the business sectors management teams of thesubsidiaries. the inspired cooperation of therespective and supportof theBoard of Directors and due to the rigorous and determinedsupervision of the subsidiaries were in nosmallmeasures momentum. The favorable positive performances the property company continues toregain of operations exceeded their budgets while The bankand beverage companies’ results including theliquorandcigarettebusinesses. experience growth in all businesssectors, challenges andpressures,continued to The Company, notwithstandingexternal CORPORATE GOVERNANCEREPORT stronger US dollar andregulatory challenges. by China’s economicslowdown,fallingoilprices, volatile anduncertainenvironment broughtabout steered theCompany torelative growthamidst a entrepreneurial backgrounds,have successfully individuals withimpressive professionaland The BoardofDirectors,comprisedthirteen THE BOARDOFDIRECTORSANDSTRUCTURE • To build thelargest,mosteffective distribution • To continuously improve thevalue of its products • To increase stockholder values through long-term commits: MISSION: Anchored to itsVision, theLT Group business partnersandshareholders. benefits to its consumers,communities, employees, in key Philippine industries while ensuring continuous maintaining a strong presence and dominant position forefront of Philippine economicgrowth,successfully VISION: A world-class conglomerate at the the Company whichstate: promotion oftheVisionandMissionStatements network and widest customer reach in the Philippines. network andwidestcustomerreachinthePhilippines. and betterchoices. and services to provide consumers with more growth in its major business groups. The Company is proud to note of the thirteen Audit and Risk Management Committee Meetings directors, three are female directors chosen for their No. of Meetings invaluable professional knowledge and experiences Held during No. of that invariably benefitted the Company. Moreover, Date of the year Meetings four Independent Directors helped in ensuring faithful Board Name Election (2015) Attended % and comprehensive adherence to the principles of Chairman Antonino Alindogan, Jr. 06/23/2015 7 5 86 good corporate governance, and together with the Member Lucio K. Tan, Jr. 06/23/2015 7 4 79 Member Juanita Tan Lee 06/23/2015 7 7 100 other members of the Board, helped in providing Member Washington Z. Sycip 06/23/2015 7 4 79 guidance and direction to the Management of Member Florencia G. Tarriela 06/23/2015 7 6 93 the Company and the Company’s subsidiaries. Member Wilfrido E. Sanchez 06/23/2015 7 6 93 Consonant with good corporate governance, the Board appointed Independent Directors in all of the Nomination and Compensation Committee Meetings Board Committees to render a balance and impartial No. of assessment of issues in order to protect the interest Meetings Held of all Stakeholders of the Company. during No. of Date of the year Meetings Board Name Election (2015) Attended % Further, as a policy, the Company promotes the Chairman Lucio C. Tan 06/23/2015 2 2 100 election of Independent Directors in the Board Member Lucio K. Tan, Jr. 06/23/2015 2 1 75 and in the Board Committees of the subsidiaries Member Harry C. Tan 06/23/2015 2 1 75 notwithstanding that some are not publicly owned. Member Michael G. Tan 06/23/2015 2 2 100 Member Juanita Tan Lee 06/23/2015 2 2 100 Lastly, the Company adheres to the policies set under Member Wilfrido E. Sanchez 06/23/2015 2 2 100 Circular No. 9 Series of 2011 of the Securities and Exchange Commission (SEC) which prescribes a term Corporate Governance Committee Meetings limit on independent directors of up to a maximum of No. of Meetings ten years. Currently there are three directors whose Held during No. of terms expire in 2017 as they will reach their limits of Date of the year Meetings five (5) years. After the cooling off period of two years, Board Name Election (2015) Attended % they may be appointed again for a maximum of five (5) Chairman Florencia G. Tarriela 06/23/2015 2 2 100 years. Member Lucio K. Tan, Jr. 06/23/2015 2 2 100 Member Michael G. Tan 06/23/2015 2 2 100 Additionally, the Company requires that its Independent Member Joseph T. Chua 06/23/2015 2 2 100 Member Antonino Alindogan, Jr. 06/23/2015 2 2 100 Directors be limited to five board seats only in other publicly listed companies outside the conglomerate. Furthermore the Board encourages its members and officers to update their knowledge and skills BOARD PERFORMANCE and continue to be relevant in the organization. The Company also sends its officers or staff to study or The Board and Officers of the Company continue secure the additional training they require to hone to conduct an annual self-performance assessment and improve on their respective disciplines. It also to evaluate their individual contribution and sets a training budget for the continued updating effectiveness in the corporate body. The measure of and compliance by the directors and officers on effectiveness varies but is generally shown by the good corporate governance as required under SEC positive performances of the respective subsidiaries Memorandum Circular No. 20 Series of 2013. During or businesses where they belong. All members the year, the directors and officers attended the of the Board are expected to attend all Board following seminars on Good Corporate Governance. and Committee meetings. The Board Members’ attendance is shown herein together with the Board of Directors: meetings held. Date of the Seminar Name attended Service Provider Lucio C. Tan Nov. 11, 2015 Center for Global Best Board of Directors’ Meetings Practices No. of Carmen K. Tan Nov. 11, 2015 Center for Global Best Meetings Practices Held during No. of Harry C. Tan Nov. 6, 2015 Institute of Corporate Date of the year Meetings Directors Board Name Election (2015) Attended % Michael G. Tan Nov. 11, 2015 Center for Global Best Chairman Lucio C. Tan 06/23/2015 14 10 71 Practices

Member Carmen K. Tan 06/23/2015 14 10 71 Lucio K. Tan, Jr. Sept. 15,2015; Institute of Corporate Nov. 11, 2015 Directors; Center for Global Member Harry C. Tan 06/23/2015 14 12 86 Best Practices

Member Michael G. Tan 06/23/2015 14 14 100 Joseph T. Chua Nov. 11, 2015 Center for Global Best Practices Member Lucio K. Tan, Jr. 06/23/2015 14 11 79 Juanita Tan Lee Sept. 15, 2015 Institute of Corporate Directors Member Joseph T. Chua 06/23/2015 14 14 100 Washington Z. Sycip Exempted Member Juanita Tan Lee 06/23/2015 14 14 100 Peter Y. Ong June 25, 2015 Institute of Corporate Member Washington Z. Sycip 06/23/2015 14 9 64 Directors

Member Peter Y. Ong 06/23/2015 14 14 100 Antonino L. Alindogan, Jr. Sept. 5, 2015 SGV & Co. Wilfrido E. Sanchez Sept. 15, 2015 Institute of Corporate Independent Robin C. Sy 06/23/2015 14 10 71 Directors Independent Florencia G. Tarriela 06/23/2015 14 12 86 Florencia G. Tarriela Dec. 10, 2015 Institute of Corporate Directors Independent Antonino Alindogan, Jr. 06/23/2015 14 11 79 Robin C. Sy Non-compliance Independent Wilfrido E. Sanchez 06/23/2015 14 13 93 29 28

ANNUAL REPORT 2015 Board of Advisor: Harry C.Tan Corp. andPMFTC Inc. Travel Corp., Progressive Farms Inc., MacroAsia Fortune Tobacco Corp., HimmelIndustriesInc., Lucky Inc., House Inc., Foremost Farms Inc., PhilippineAirlines is also a Director of Asia Brewery Inc., The Charter Carmen K.Tan Doctorate degrees. 2003 andisanawardee ofseveral otherhonorary in Commerce,by theUniversity ofSantoTomas in awarded thedegree,DoctorofPhilosophy, Major Chemical EngineeringfromFar EasternUniversity, Bank. HeholdsaBachelorofSciencedegreein Corp. He isalsoaDirectorof Inc., Foremost Farms Inc.andBasicHoldings Corp., AbsolutDistillersInc., Progressive Farms The CharterHouseInc., AlliedBankers Insurance Philippines Corporation, Tanduay DistillersInc., Lucky Travel Corp.,PALHoldingsInc Development Corp., HimmelIndustriesInc., Fortune Tobacco Corp., PMFTC Inc., Grandspan Properties PhilippinesInc., Philippine AirlinesInc., Asia BreweryInc., Eton Board oftheCompany. He isalsoChairmanof Dr. LucioC.Tan istheChairmanof and credentials of theDirectors: Below aresummariesof thebusinessexperiences The Board of Directors of the Company are: Officers: CORPORATE GOVERNANCEREPORT Robin C. Sy Florencia G. Tarriela Wilfrido E. Sanchez Antonino L. Alindogan, Jr. Peter Y. Ong Washington Z.Sycip Juanita Tan Lee Joseph T. Chua Lucio K. Tan, Jr. Michael G. Tan Harry C.Tan Carmen K.Tan Lucio C. Tan Name Erwin Go Marivic T. Moya Ma. Cecilia L. Pesayco Name Johnip G.Cua Name Air Philippines Corporation, PAL Holdings Inc,Air Philippines Corporation, is a Director of the Company. He Dec. 9,2015 Sept. 15,2015; Attended Date oftheSeminar is a Director of the Company. Officer Chief Legal Secretary Asst. Corp. Secretary Corporate Position Filipino Filipino Filipino Filipino Filipino American Filipino Filipino Filipino Filipino Filipino Filipino Filipino Citizenship MacroAsia Corp., Sept. 15,2015 Nov. 11,2015 Nov. 14,2015 attended Seminar Date ofthe Philippine National Directors; SGV&Co. Institute ofCorporate Service Provider June 9, 2014 A July 31, 2012 July 31, 2012 June 9, 2014 July 9, 2013 May 2, 2012 June 9, 2014 February 21,2003 February 21,2003 May 28,2008 May 5, 2010 July 2, 1999 the Board Date firstelectedto ugust 9, 2012 ., Air Directors Corporate Institute of Practices Global Best Center for Directors Corporate Institute of Provider Service She She Inc.; Board of Advisor of Corporation, Philippines Inc., Bulawan Mining, Air Philippines Philippines Inc.;Director of Lufthansa Technik Mining Corporation; Director/OIC of Eton Properties Properties Development Corp. and MacroAsia MacroAsia Catering Services Inc., MacroAsia Services Corporation, MacroAsia Air Taxi Services, (Guam); Director/President of MacroAsia Airport Director of GoodwindDevelopment Corporation Operating Officer of Resources Inc.; Director/President and Chief Business Solutions Inc., and Chairman of J.F. Rubber Philippines, Watergy Joseph T.Chua Northwestern University. from the Kellogg School of Management has a Master’s Degree inBusiness Administration a Bachelor of Science degree in Civil Engineering and from the University of California, Davis in 1991 with Corporation andShareholdings Inc.Hegraduated The CharterHouse Inc., Grandspan Development Inc., Himmel Industries Inc., Progressive Farms Inc., Distillers Inc., Asia Brewery Inc., Foremost Farms Inc., LuckyTravel Corp., Air Philippines Corp., Absolut Corp., National Bank, Insurance Corp., Philippine Airlines Inc., Philippine of Fortune Tobacco Corp.; Director of AlliedBankers and Eton Properties Philippines Inc.;Director/EVP is a Director/President of Tanduay Distillers Inc. Lucio K.Tan,Jr. Engineering, major inStructural Engineering. a Bachelor of Science degree in Applied Science in the University of British Columbia in Canada with Corporation. Treasurer of PALHoldings Inc. and Air Philippines and ShareholdingsInc. Heis a Director andthe Pan Asia SecuritiesInc., PhilippineAirlines Inc., Travel Corp., Maranaw Hotel (Century Park Hotel), Insurance Corp., Grandway Konstruct Inc., Lucky Distribution Systems Philippines Inc., AlliedBankers PMFTC Inc., Victorias MillingCo. Inc., Abacus Philippines Inc., PhilippineNational Bank, Director of Tangent Holdings Corp., Eton Properties to his currentpositionin2000. and heldvarious positionsuntilhis appointment Asia Brewery Inc.(ABI). He joined ABI in 1991, Tan is a Director andthe Chief Operating Officer of Michael G.Tan Engineering fromtheMapua Institute of Technology. holds a Bachelor ofScience degree in Chemical Development Corp. and Tanduay Distillers Inc. National Bank,Progressive Farms Inc., Grandspan Himmel IndustriesInc., PMFTC Inc., Philippine Inc., Basic Holdings Corp., Foremost Farms Inc., AlliedBankers Insurance Corp., Absolut Distillers Corp. He serves as Director of Asia Brewery Inc., President of Century Park Hotel, and Landcom Realty for Tobacco Board of Fortune Tobacco Corp., Director/ Director of The Charter House Inc., Director/Chairman Inc., and Lucky Travel Corp. He is also the Managing Eton PropertiesPhilippinesInc., Pan Asia Securities Treasurer of the Company. previously held thepositions of theVice Chairman and PMFTC Victorias MillingCompany Inc., PMFTC Philippine Airlines PAL Holdings Inc.,Philippine Airlines He graduated as head of his class at is the President of theCompany. Mr. PAL Holdings Inc., is a Director of the Company; is a Director of the Company; is a Director of the Company. Managing MacroAsia Corp.;Managing Philippine National Bank.

Mr. Tan is alsoDirector of Cavite Business Cavite Business He is also a Heis also a MacroAsia MacroAsia He He He He Mr. Chua has a double degree in AB Economics and targeting as an effective tool in price stability, and BS Management from De La Salle University. crafting innovative solutions to problem banks. He also took part in the BSP reorganization, upgrading Juanita Tan Lee is a Director and the Treasurer and modernization of facilities and bank-wide of the Company. She is also Director of Eton planning and budgeting process. He is a Certified Properties Philippines Inc.; Director/Corporate Public Accountant and holds a Bachelor of Science in Secretary of Asia Brewery Inc., Fortune Tobacco Commerce degree in Accounting (Magna Cum Laude) Corp., Corporate Secretary of Absolut Distillers from De La Salle College. Inc., The Charter House Inc., Foremost Farms Inc., Grandspan Development Corp., Himmel Industries Inc., Landcom Realty Corp., Lucky Travel Corp., Wilfrido E. Sanchez is an Independent Director PMFTC Inc., Progressive Farms Inc., Tanduay of the Company. He is the Tax Counsel of Quiason Distillers Inc.; and Assistant Corporate Secretary Makalintal Barot Torres Ibarra & Sison Law Offices; of Basic Holdings Corp. She holds a Bachelor of Vice Chairman of The Center for Leadership & Change Science degree in Business Administration major in Inc.; Independent Director of Adventure International Accounting from the University of the East. Tours, Inc., Amon Trading Corp., EEI Corporation, Grepalife Asset Management Corp., Grepalife Fixed Washington Z. Sycip is a Director of the Income Fund Corp., House of Investments Inc., Company; Founder of SyCip Gorres Velayo JVR Foundation Inc., Kawasaki Motor Corp., Magellan & Co.; Chairman Emeritus of the Board of Capital Holdings Corp., Omico Corporation; PETNET Trustees and Governors of the Asian Institute of Inc., PETPLANS Inc., Transnational Diversified Corp., Management; Chairman of Cityland Development Transnational Diversified Group Inc., Transnational Corp., Lufthansa Technik Philippines Inc., Financial Services Inc., and Universal Robina STEAG State Power Inc. and State Properties Corp.; Independent Director of Eton Properties Corporation; Independent Director of Asian Eye Philippines Inc. and Rizal Commercial Banking Institute, Belle Corporation, Lopez Holdings Corporation. He holds a Bachelor of Arts degree Corp., Commonwealth Foods Inc., First Philippine from the Ateneo de Manila University and has a Post- Holdings Corp., Highlands Prime Inc., Metro Pacific Graduate degree in Bachelor of Laws from the Ateneo Investments Corp., Philippine Equity Management De Manila University and Masters of Law from Yale Inc., Philippine Hotelier Inc., Philamlife Inc., Realty Law School. Investment Inc., The PHINMA Group, State Land Inc., and Century Properties Group Inc.; and Director Florencia G. Tarriela is an Independent Director of Philippine Airlines Inc., MacroAsia Corp., PAL of the Company. She is the Chairman of the Holdings Inc. and Philippine National Bank. Mr. Board of Directors and an Independent Director Sycip holds BS and MS degrees from the University of of Philippine National Bank. She also serves Santo Tomas, which later conferred him a Doctor of as Chair of PNB Global Remittance and Financial Accounting Education, honoris causa degree in 1984. Co. HK Ltd., She is a Trustee/Advisor/Director He also obtained a Master of Science in Commerce of Foundation for Filipino Entrepreneurship from Columbia Business School. Inc., Summer Institute of Linguistics, and Tulay sa Pagunlad Inc.; and a Columnist of Manila Peter Y. Ong is a Director of the Company. He is Bulletin. She obtained her Bachelor of Science a Director and the Treasurer of Merit Holdings & in Business Administration, Major in Economics, Equities Corporation; Director of Fortune Tobacco at the University of the Philippines and her Corporation, AlliedBankers Insurance Corporation, Masters in Economics from the University of Allied Leasing and Finance Corporation and Solar California, Los Angeles, where she topped the Holdings Corporation; Former President of Air Masters Comprehensive Examination. She is a Life Philippines Corporation, Former Senior Vice President Sustaining Member of the Bankers Institute of the for Production of Fortune Tobacco Corporation and Philippines (BAIPHIL) and the Financial Executive Former Director of Allied Savings Bank. Mr. Ong Institute (Finex), a Trustee of Finex Foundation, graduated from the Mapua Institute of Technology TSPI Development Corporation, Kilosbayan and with a degree in Chemical Engineering. the Summer Institute of Linguistics (SIL). She was formerly an Independent Director of the Philippine Antonino L. Alindogan, Jr. is an Independent Depository and Trust Corporation, the Philippine Director of the Company. He is also the Chairman Dealing and Exchange Corporation and the of the Board of An-Cor Holdings Inc. He serves Philippine Dealing System Holding Corporation. Ms. as Chairman/President of Landrum Holdings Inc.; Tarriela was a former Undersecretary of Finance, Independent Director of Philippine Airlines Inc., and an alternate Member of the Monetary Board Eton Properties Philippines Inc., Rizal Commercial of the BSP, Land Bank of the Philippines and the Banking Corp., PAL Holdings, Inc., House of Philippine Deposit Insurance Corporation. She was Investments Inc., Great Life Financial Assurance formerly Deputy Country Head, Managing Partner Corp., and Bankard Inc. He is the Former President of and the first Filipino lady Vice President of Citibank C55 Inc.; Former Chairman of the Board of Directors N. A., Philippine Branch. of Development Bank of the Philippines (DBP); Former Consultant for Microfinance of DBP; Former Robin C. Sy is an Independent Director of the Member of the Monetary Board of Bangko Sentral ng Company. He is the President of Asian Shipping Pilipinas (BSP) where he contributed his efforts and Corporation, Independent Non-executive Director insights on a wide range of concerns, such as the of Dynamic Holdings Limited, Honorary President of pursuit of good governance, strengthening inflation Federation of Filipino-Chinese Chamber of Commerce 30 31

ANNUAL REPORT 2015 and recommendationsordecisions are made. are distilled and discussed,proposals are evaluated governance. Throughthe Committees, complex issues invaluable vehicle in the exercise of good corporate The Board Committees with its oversight functions are BOARD COMMITTEES the Philippines. well as heavy constructionequipment trading fieldin engaged in shipbuilding andrepairing business as and Management Corporation. His companies are Corporation andFormer Director of Zuma Holdings and IndustryInc., Former Director of Air Philippines In 2015, the Committee convened twice to pass upon In 2015, the Committee convened twiceto pass upon succession planning. necessary, replaces key executives andoversees It selects, compensates, monitors andwhen a formal and transparent Board nomination process. The Committeemeetsatleast once a year, ensuring Nomination andRemuneration Committee 2. Any undertaking by a subsidiary of new 1. Any requested by a subsidiary of capital funding Material issues include, but shall not be limited to: material issue before it ispresentedto the Board. The Committeeinitiallyevaluates any important or between theregularmeetings of the Board. important urgentmatters to discuss and decide upon It isspecificallycalled toconvene wherethereare communication on important organizational matters. the By-Laws, indecision-making,oversight, and to engage, within thelimits set by Board policyand The Executive Committeeiscreated with authority Laws andthemembersarederived from the Board. The Executive Committeeisprovided by theBy- Executive Committee CORPORATE GOVERNANCEREPORT Robin C.Sy Tarriela Florencia G. Sanchez Wilfrido E. Alindogan, Jr. Antonino L. Peter Y. Ong Sycip Washington Z. Juanita Tan Lee Joseph T. Chua Lucio K.Tan, Jr. Michael G.Tan Harry C.Tan Carmen K.Tan Lucio C.Tan Name presented to the Committee. subject to a certain threshold, should also be investments, outside regular capex projects, some form of corporate guarantee. Further, capital with a termof at leastfive (5) years or will require businesses andkey assets, and corporate debts acquisitions, joint ventures, divestment of existing business ventures, corporate mergers and from the Company; and Compensation Nomination and √ √ √ √ √ C Management and Risk Audit √ √ √ √ √ C Executive √ √ √ √ √ √ √ C Governance Corporate √ √ √ √ C worked with one of the biggest international banks worked with one of the biggest internationalbanks Board of the Bangko Sentral ngPilipinas and has Government, an alternate member of the Monetary Undersecretary of Finance of thePhilippine Chairwoman of a bank. She was formerly the Independent Director, who is currentlythe The Committeeis ably headedby a female guidelines. compliance with corporate governance principles and pertaining to the evaluation of the Company’s all Departments to submit reportstotheCommittee of Directors, Management, Board Committees, and necessary; and the authority to requiretheBoard attend theCommittee meetings as itmay deem Executive Managementor such otherperson to require any or all membersof the Board of Directors, Management. Itspowersincludetheauthority to governance and its guidelines by the Board andthe faithful observance oftheprinciples of goodcorporate The Committeemeetsevery quarterto assess the Corporate Governance Committee well as the Audit Plan. examinations of theCompany and itssubsidiaries as their findingsandrecommendationsregarding auditors discusswith the Audit andRisk Committee of the Company and the subsidiaries. The external performance of the internal andexternal auditors The Audit and RiskCommitteeoversees the recommendation to the Board. External Auditors and makes the corresponding the Committeereviews the performance of the prejudiced in any of the transactions. Lastly, shareholders and stakeholders arenotunduly related party transactions to ensure that minority The Committeelikewise reviews and assesses for theCompany and itssubsidiaries. Statements for theperiodending December 31, 2014 financial reportsandthe Audited Financial 2015, whichtook up among others, the quarterly There were seven meetings of the Committee in graduated MagnaCumLaude. in AccountingfromDeLaSalleCollegewherehe Bachelor ofScienceinCommercedegreeMajor is alsoaCertifiedPublicAccountantandholds owned bankandotherfinancialinstitutions.He Pilipinas, andformerlyaChairmanofstate- of theMonetaryBoardBangko Sentral ng Director asChairman,whowas formerlyamember directors andisheadedby anIndependent The Committeeiscomposedofnon-executive and itsown code of corporate governance. for monitoringcompliancewith laws and regulations financial risk,audit process and Company’s process system ofinternalcontrolandmanagement Company. Itreviews the financial reportingprocess, overseeing the financialandoperational issues of the The Committeeprimarily assists the Board in Audit andRiskManagementCommittee key positionsin the Company. qualifications of candidates nominated for Board and in the country. She obtained her Bachelor of Science The Company has been faithfully reporting any in Business Administration major in Economics major and market sensitive information such as from the University of the Philippines and Masters dividend declaration and other information that in Economics from the University of California, Los may affect the decision of the investing public Angeles. immediately after its approval or confirmation by the Board. The Company and its Board of Directors and Management, guided by its Corporate Governance The Minutes of the Stockholders’ Meeting is uploaded Committee, have fully complied with the requirements in the Company website within five days from the of the Revised Corporate Governance Manual for 2014. date of the meeting.

MANAGEMENT The Annual Report (SEC Form 17-A) together with the consolidated audited financial statements for The Management is headed by Dr. Lucio C. Tan as 2015 was submitted to the SEC on April 14, 2016. the Chairman and CEO and by Mr. Michael G. Tan as President and COO. Their roles are complementary The Audited Financial Statements for 2015 to each other to ensure timely and efficient contained in the Definitive Information Statements implementation of strategies of the business. were submitted to the SEC and PSE on April 14, 2016, more than two months before the Annual On critical or sensitive issues, the President Stockholders’ Meeting. coordinates closely with the Chairman/CEO for directions and confirmation of decision on the matter The interim or quarterly financial statements and at hand. The President also continuously initiates results of operations were submitted to the regulators discussions with Management on its business in accordance with the prescribed period or within performances and initiatives to grow the Company. 45 days from the end of the financial period. The financial statements were likewise submitted or made In the course of performing its functions, available to the stock market through the analyst Management and the Board adhere to the principles briefings held regularly or as soon as the financial of good corporate governance throughout the results have been submitted to the regulators. In the organization, and they ensure that the structure and briefings, members of Management were present to mechanism for its observance are securely in place. answer questions posed by the analysts. The financial The President/COO, members of the Board and statements may also be accessed through the Members of Management Committees attended the Company website. annual stockholders’ meetings. Ownership Structure DISCLOSURE AND TRANSPARENCY The Company’s outstanding common shares held by UNSTRUCTURED DISCLOSURES record owners of more than 5% are as follows: The Company, has among other things, disclosed the following in 2015. Title of Name of No. of Percent Class Record Owner Citizenship Shares of Class • The appointment of Mr. Joseph T. Chua to the Common Tangent Filipino 8,046,318,193 74.36% Executive Committee. Holdings Corporation • The declaration and distribution of regular Common PCD Nominee Non-Filipino 1,882,780,236 17.40% Corporation Cash Dividend of Php0.15 per share to all stockholders of record which had a payout date of June 10, 2015. COMPENSATIONS OF DIRECTORS AND EXECUTIVE OFFICERS • The endorsement by the Nomination and Remuneration Committee of the nominees to the The Directors of the Company receive an allowance Board of Directors for the year 2015-2016. of Php30,000 a month and a per diem of Php25,000 for every Board meeting and Php15,000 for every • The election of Directors and Officers for Committee meeting attended. Other than the 2015-2016 and the appointment of the members stated allowance and the per diem of the Directors, for each Board Committee. there are no other standard arrangements to which the Directors of the Company are compensated, DISCLOSURE AND TIMING or are to be compensated, directly or indirectly, The Company ensures that material information for any services provided as a Director, including relating to the actions or decisions of the Board any additional amounts payable for Committee affecting the Company are disclosed to the participation or special assignments, for the last investing public. The financial information and completed fiscal year and the ensuing year. comprehensive disclosures are filed with the SEC and the Philippine Stock Exchange (PSE). Since 2012, the Directors and Executive Officers These disclosures may be accessed through the of the Company have been receiving the following Company’s website: www.ltg.com.ph. compensation: 33 32

ANNUAL REPORT 2015 before the financials are disclosed to the public: (1) before the financials are disclosedtothepublic: (1) The Company observes the following blackout period the sharesof the Company. of material facts regarding mattersthat may affect consultants and employees whomay have knowledge trading which covers directors, officers,advisers, The Company has approved a policyoninsider officers. shareholdings thereinof, itsdirectors and principal disposal of Company sharesby, or any change inthe within three (3) trading days any acquisition or practices, undertakes to report to the PSE and SEC The Company, inline with goodcorporate governance violations of thegovernment rules on insider trading. ensure compliancewith disclosures rulesandprevent the policy on insider trading stock transactions to The Company has adopted and strictly enforces the year 2015. There was no tax consultancyobtainedfrom SGV for 2015 -PHP1,500,000.00 2014 –PHP1,500,000.00 2013 –PHP1,500,000.00 AUDIT andAUDIT RELATED FEES: the entire group of companies. well as updatesonPhilippineReporting Standards for regulations from the Bureau of Internal Revenue, as Company with updates on latest rulings or revenue in-charge since 2012. TheSGVhas provided the Co., (SGV) with JosephineEstomoas the partner- The external auditorof LT Group, Inc. is SGV& EXTERNAL AUDITOR 4. Ms. Juanita Tan Lee is theTreasurer 3. Atty. Ma.Cecilia Pesayco is the Corporate 2. Mr. MichaelG. Tan is the President. 1. Dr. Lucio C.Tan is the Chairman of the Board consolidated basis): a most highlycompensatedExecutive Officers (on The following constitute the Company’s four (4) *Others –includesper diem of directors COMPENSATION SUMMARY COMPENSATIONSTABLE:ANNUAL CORPORATE GOVERNANCEREPORT unnamed as a group directors officers and All other below) officers (see executive compensated most highly Four (4) Secretary. of Directors and Chief Executive Officer (CEO). 2014 2015 (Estimate) 2016 2014 2015 (Estimate) 2016 YEAR DEALINGS INSECURITIES TRADING BLACKOUTS Php 2,760,000 Php 2,619,150 Php 2,881,065 Php 9,169,800 Php 6,980,000 Php 7,678,00 SALARY Php 230,000 Php 218, 263 Php 240,095 Php 764,150 Php 595,000 Php 654,000 BONUS Php 7,100,000 Php 7,695,000 Php 8,464,500 Php 2,290,000 Php 2,805,000 Php 3,085,500 OTHERS*

its dealings with its stakeholders. its dealings with itsstakeholders. continuously and consciously exercised the same in the foundationof any long-term relationship and has in thehonoredprinciplesof fairness and integrity as that the Company aspires for. The Company believes trade partnersaredirectlybenefitted in the growth where thestockholders, employees, customers and Company seeks to attain thelevel of relationship Consistent with its Vision/Mission statements, the the year 2015. There had beennoinstancesof trading by insiders for disclosure, for the year-end financials. and (2)onemonth or thirty (30)days before two weeksbefore disclosure, for quarterly reports; the Office of the Corporate Secretary their proposed the Officeof the Corporate Secretarytheir proposed The stockholdersarealso encouraged to send shareholder to one vote. outstanding common share entitles theregistered Secretary time to validate theproxies. Each meeting inorderto accord the Office of theCorporate which is atleast five days prior tothedateof the be submittedtotheOffice of the Corporate Secretary, personally present,andthedatethatitisexpectedto requirement of a Proxy if theStockholder cannotbe Stockholders Meeting. The Notice alsoindicatesthe Shareholders to ask questions during the Annual the Stockholders.The Company encourages the the year whicharesubject to the confirmation of indicates the major actions taken by the Board during regard thereto. The Definitive Information Statement during theprioryear and ask the questions if any, in the performances of the Board and Management afford all stockholders the opportunity toreview Statement accompaniessaidNotice in order to stockholders’ meeting, the Definitive Information Agenda of the meeting and if it is an annual The Notice to the Stockholders contains the to the Stockholders’ Meeting. the NoticesbeginningMay 27, 2015 or 27days prior date of the meeting. In 2015, the Management sent Stockholders’ Meetingsat least 21 days prior to the the Company strives to sendtheNotices to the sent atleast 15 days prior to thedateof themeeting, that notices to any Stockholders meetings shall be Even whiletheBy-Laws of theCompany provides STAKEHOLDERS RELATIONS AND VOTINGPROCEDURES SHAREHOLDERS’ MEETING nominees to the Board for proper consideration by understanding of the Company. Reports to the SEC the Nomination Committee during its meeting held and PSE are disclosed on time, and are available for not later than the end of April. viewing and downloading in the Company’s website, www.ltg.com.ph. DIVIDENDS The Company conducts meetings regularly with Over the past years, the Company has consistently investors and analysts to keep them updated on developments with LTG and its subsidiaries. LTG declared Dividends in accordance with the policy also arranges teleconferences and plant visits, set by the Board, of a 20% payout rate. On May and participates in non-deal roadshows and 12, 2015, the Company declared a cash dividend conferences in various locations arranged by of Php0.15 per share, or a total of Php1.623 several stockbrokerages. During these activities, billion, equivalent to 36.8% of the previous year’s investors and analysts have access to Senior attributable net income. The Dividends declared Management. The Company also communicates benefitted all common stockholders of record as of through emails and telephone calls. May 27, 2015 and the same were paid as of June 10, 2015, 29 days after it was approved and disclosed. In 2015, LTG attended conferences and a non- The Company adheres strictly to the guidance of good deal roadshow with different brokers in Manila (3), corporate governance to distribute the Dividend within Singapore (3), Hong Kong (1), London (1) and 30 days from the time it is approved and declared. New York (1). LTG had 176 meetings with different funds during these conferences and roadshows. The Company also had 42 one-on-one meetings EMPLOYEE RELATIONS and 18 conference calls with several funds. Furthermore, during the year, personnel from 26 The Company is committed to the safety and well- local and foreign funds visited the plant facilities being of its employees and keeps open the lines of of LTG’s subsidiaries, specifically Asia Brewery and communications. The Company and its subsidiaries Tanduay Distillers. have provided company-wide health insurance to its employees, scholarship benefits to the children and LTG had four (4) Analyst Briefings during the beneficiaries of the employees and further training and 2015 calendar year, for Full Year 2014 Results, learning opportunities for those that aspire and are First Quarter 2015, First Half and Nine-Month determined to undertake such opportunities. There are Results. The briefing for Full Year 2015 Results numerous scholarship programs and study grants that was held on March 11, 2016. Aside from analysts employees can apply for and qualify in the group. of stockbrokerages, analysts from local funds also regularly attend LTG’s briefings. Moreover, an Employee Mode of Conduct or LTG issues Press Releases which are distributed Personnel Policies are in place in all subsidiaries, to the media and disclosed to the PSE. These which are observed and implemented throughout statements cover, but are not limited to, quarterly the Company. The Company also subscribes to the financial results and major events that have a “Whistle Blowing Policy” which has been adopted in significant impact on the operations or future the operating companies. prospects of the Company. Immediately after the Annual Stockholders’ Meetings, the Company holds INVESTOR RELATIONS a press briefing where members of the media have access to LTG’s Senior Management. LTG maintains open communications with the investing community to promote greater 34 35

ANNUAL REPORT 2015 INC. FOUNDATION, TAN YAN KEE CORPORATE SOCIALRESPONSIBILITY environmental advocacies. in education,healthandsocial welfare, and The Foundation andits partners pursue projects causes andphilantropicactivitiessinceits inception. has donated over Php1.5 billion tovarious social Governed by a15-manboard, the Foundation education, perseverance and benevolence. patriarch whoinstilled in his children the values of named inhonor of the late Tan Yan Kee, thefamily majority-owned by thefamily. The Foundation was of theLT Group, Inc. (LTG) and other companies his family pursue the corporate socialresponsibility which hefounded withhissiblingsin 1986, Dr. Tan and Through theTan Yan Kee Foundation, Inc.(TYKFI) empower thepoor and marginalized. social welfare and development projectsthatseekto now, Dr. Tan hasactively pursuedandfundedvarious with thoseinneed.Hence, for morethan 50 years World War and henever forgot to share hisblessings and generosity of othersespecially during the Second labor. He himself was a beneficiaryof the kindness believed in the value of sharing the fruits of one’s Even as a young man, Dr. Lucio C. Tan has always For the year 2015, the following were TYKFI’s key Asia Brewery Medical Specialty contributions: Scholarship Program Founded more than 20 years ago, the Asia Brewery Education Medical Specialty Scholarship Program supports sub-specialty training for Filipino physicians. Scholarships Focus areas vary from year to year, but priority University of the East-Tan Yan Kee Scholarship is given to special medical fields where Filipinos Program still lack expertise. For 2015-2016, Dr. Jeremy For School Year 2015-2016, there were 79 new James Munji was the latest scholar who qualified scholars and grantees at the University of the East for post graduate studies on clinical fellowship and one at the UE Ramon Magsaysay Memorial training in Shoulder Arthroscopy and Shoulder Medical Center. The latest batch joins 191 Replacement Surgery at the Alps Surgery Institute continuing scholars and grantees. Since its creation in Annecy, France. Since its inception, the program in 1998, the UE-TYKFI Scholarship Program has has supported the sub-specialty training of more benefited more than 1,300 scholars including 18 than 100 Filipino physician-scholars and dental faculty members and 98 grantees. To date, the practitioners who are currently practicing and program has spent more than Php300 million sharing their expertise in the Philippines. in tuition and other school fees, books, uniform subsidy, monthly stipends and transportation School Infrastructure allowances. Supporting government efforts to improve the quality of education, the Foundation completed PNB-Tan Yan Kee Scholarship Program the construction of the Chua King Ha Educational For School Year 2015-2016, there were 162 Center in Leyte province consisting of a five- scholars under this scholarship program enrolled in classroom building in Alangalang I Central School various colleges and universities. In March 2015, and a four-classroom school building at the Sulpa twelve graduated from their respective courses. National High School. Both schools suffered major To date, more than 1,000 scholars have benefited damage during the onslaught of Super Typhoon from this scholarship. Yolanda (Haiyan).

Brigada Eskwela Continuing its support to the Department of Education’s (DepEd) Brigada Eskwela program, TYKFI assisted in the maintenance of three schools in Sta. Cruz, Ilocos Sur, namely: Babayoan Elementary School, Nagtenga Elementary School and Sidaoen Elementary School. The Foundation donated paint for the roof, painting tools, glass for windows and furniture repair kits to spruce up the facilities in time for school opening.

Tan Yan Kee Library Children ages 10 to 16 had a memorable summer as they joined the Tan Yan Kee Library Summer Cultural Classes from May 29 to June 7, 2015. Lessons in Chinese History, Culture and Literature were taught to improve the children’s knowledge of history, communication skills and personality. Activities included reading and storytelling; understanding history and idioms; learning, understanding and appreciating Tang poetry; singing Chinese inspirational songs; art; composition writing, acting short plays, reporting, narrating poems and song interpretation; and learning and improving Mandarin and Fookien. 36 37

ANNUAL REPORT 2015 Development Authority (TESDA), theFoundation In partnershipwiththeTechnical Education and Skills Motorcycle RepairLivelihoodTraining Program skills prior tograduation. was an actual demonstration of theirnewlyacquired and Salon Management. Part of their11-day workshop lessons in Basic Facial Cleaning, Basic Hair Relaxing, trainees were given lectures and beauty enhancement Ang Hortaleza Training Center inValenzuela City, the group of17trainees from Nueva Vizacaya. Held at the Hanapbuhay Ko livelihood training program for a TYKFI conductedthe second part of the Ganda Mo, In partnershipwiththeAng Hortaleza Foundation, Workshop ‘Ganda Mo, Hanapbuhay Ko’ Livelihood Training Workshops Development Center Tan YanKeeFoundation, Inc.Manpower CORPORATE SOCIALRESPONSIBILITY • Since1993,FUSE has been training thousands • On April 27to May 1,2015,88publicelementary support from TYKFI in 2015. established by Dr. Tan in1993,continued to receive FUSE, anon-profit,non-governmental organization Teacher Training the StandardofEducation, Inc.(FUSE) Partnership with theFoundation for Upgrading first collaboration between TYKFI and CCF. electrical safety principles and practices. Thisisthe use basic electrical measuring instruments andapply to interpret lighting and power schematic diagrams, Meralco Foundation, Inc. toprovide them with skills females, weregiven 60hoursof training atthe (CCF), nineout-of-school youth, includingtwo In partnershipwithChrist’s Commission Fellowship Electrical Installationand Maintenance Course actual repair jobs. the-job-training to hone theirskillspriortoperforming Graduates of the course must undergo a 40-houron- that wouldenabletrainees to earn adecent living. is to provide technicalskillsinsmall engine servicing servicing training in Tacloban City. The workshop’s goal Sulpa National HighSchoolfor a15-day motorcycle of Alangalang, Leyte and two teachers from the carefully picked 18 poor andunemployed residents and Physics. It also produced, in cooperation with and Physics. Italsoproduced,incooperation with better English,Math, Elementary Science, Chemistry of publicandprivate school teachershowto teach schools. teachers whentheyreturntotheirrespective teacher trainors would beabletoguidefellow skills andtechniquestotheK-12 program sothat program’s goalistoimprove andalignteaching Elementary ScienceandMathematics.The Program tohonetheirskillsinEnglish, in Region Iunderwenta“Train theTrainors” school teachersfromvarious schooldistricts

DepEd and other higher education institutions, the in Barangay Lasip, Lingayen, Pangasinan, the Php3.8 Continuing Education via Technology (Constec) million Lasip Small Farm Reservoir is capable of storing video-courses. At the core of FUSE initiatives in 2015 350,000 cubic meters of water that can irrigate 50 is the government’s K-12 program. FUSE seeks to hectares of cultivated land. align its teacher-training programs and supplemental materials with the 12-year basic education Since 2005, the Foundation has been constructing curriculum. In so doing, FUSE can ensure that its and rehabilitating small water impounding dams programs to raise the level of teaching and learning that store irrigation water which enable farmers to in Science, Mathematics and English effectively plant crops even during the long dry months. To complement the K-12 curriculum. date, the Foundation has constructed and repaired 10 small water-impounding ponds at a cost of Health Services about Php23 million.

In 2015, the Foundation continued to sponsor and Dr. Lucio C. Tan Building – Barangay Holy Child Multi- hold the monthly Asia Brewery Medical Forum. In Purpose Hall partnership with Asia Brewery, Inc. (ABI) and the Pursuing its three-year Rebuilding the Community Association of Asia Brewery Medical Scholars, the Project in Alangalang, Leyte, the Foundation officially medical forum covered various topics that provide turned over to the residents of Barangay Holy Child laymen with better health information and the latest II, a multi-purpose edifice that would serve as their medical options. Some of the major topics discussed barangay hall, day care facility and health clinic. in 2015 were: Breast conservation surgery for early Named after Dr. Lucio Tan, the barangay hall is part breast cancer; updates on Allergic Rhinitis; Approach of the Foundation’s plan to help revive communities on Diabetic Foot; Overcoming barriers and optimizing devastated by Super Typhoon Yolanda. Aside from the care for children with ADHD and autism; Dengue barangay hall and school buildings in Alangalang, the Myocarditis; and Allergic Rhinitis, Asthma and Sinusitis Foundation also built 57 housing units for more than and how they are linked. 300 residents of Barangay 89 in Tacloban City.

On April 11, 2015, more than 1,000 residents of Sta. Legacy Forest Project Fe, Nueva Vizcaya availed of free medical services In pursuit of the Dr. Lucio C. Tan Legacy Forest project, from the TYKFI’s medical team and local volunteers. the Foundation and some partners planted 1,000 The Foundation also distributed free reading glasses, mangrove seedlings in Boracay Island last May 2015. vitamins, antibiotics and medicines for pulmonary This is part of a bigger undertaking to plant 15 million ailments, hypertension, fever and infections. trees in 10 years. Nurseries were set up in the Laguna- Quezon land grants of UP Los Baños, where seeds and Social Welfare wildlings were collected, sowed and germinated. The seedling inventory totals approximately 1.1 million. Small Water Impounding Project (SWIP) In June 2015, the Foundation finished construction of its tenth small water-impounding project. Located 39 38

ANNUAL REPORT 2015 Signed this12 Chief FinanceOfficer Jose GabrielD. Olives President Michael G.Tan Chairman andChiefExecutive Officer Lucio C.Tan Signed underoathby thefollowing: fairness ofpresentationuponcompletionsuchexamination. Standards onAuditing andinitsreporttothestockholders,hasexpressedopinionon examined theconsolidatedfinancialstatementsofCompany inaccordancewithPhilippine SyCip GorresVelayo &Co., theindependentauditors,appointedby thestockholders,has submits thesametostockholders. The BoardofDirectorsreviewsandapproves theconsolidatedfinancialstatementsand estimates thatarereasonableinthecircumstances. fraud orerror, selectingandapplyingappropriateaccountingpolicies,making consolidated financialstatementsthatarefreefrommaterialmisstatement,whetherdueto and implementinginternalcontrolsrelevant tothepreparation andfair presentationof with thePhilippineFinancialReporting Standards.Thisresponsibility includesdesigning December 31,2015,includingtheadditionalcomponentsattachedtherein,inaccordance of theconsolidatedfinancialstatementsforeachthree years intheperiodended The managementofLT Group, Inc.isresponsibleforthepreparation andfairpresentation

STATEMENT OFMANAGEMENT’SRESPONSIBILITY th day ofApril2016 FOR FINANCIALSTATEMENTS INDEPENDENT AUDITOR’S REPORT

SyCip Gorres Velayo & Co. Tel: (632) 891 0307 BOA/PRC Reg. No. 0001, 6760 Ayala Avenue Fax: (632) 819 0872 December 14, 2015, valid until December 31, 2018 1226 Makati City Philippines ey.com/ph SEC Accreditation No. 0012-FR-4 (Group A), November 10, 2015, valid until November 9, 2018 

The Stockholders and the Board of Directors LT Group, Inc.

We have audited the accompanying consolidated financial statements of LT Group, Inc. (a subsidiary of Tangent Holdings Corporation) and its subsidiaries, which comprise the consolidated balance sheets as at December 31, 2015 and 2014, and the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for each of the three years in the period ended December 31, 2015, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of LT Group, Inc. and its subsidiaries as at December 31, 2015 and 2014 and their financial performance and their cash flows for each of the three years in the period ended December 31, 2015, in accordance with Philippine Financial Reporting Standards.

SYCIP GORRES VELAYO & CO.

Josephine H. Estomo Partner CPA Certificate No. 46349 SEC Accreditation No. 0078-AR-3 (Group A), February 14, 2013, valid until April 30, 2016 Tax Identification No. 102-086-208 BIR Accreditation No. 08-001998-18-2015, February 27, 2015, valid until February 26, 2018 PTR No. 5321634, January 4, 2016, Makati City

April 12, 2016 40 41

ANNUAL REPORT 2015

(Amounts in Thousands) (Amounts CONSOLIDATED BALANCESHEETS SUBSIDIARIES AND of (A Subsidiary Tangent HoldingsCorporation) LT GROUP, INC. Total CurrentLiabilities(CarriedForward) Liabilities ofdisposalgroupclassified as heldforsale(Note37) Other currentliabilities(Notes20and38) parties(Note22) Due torelated Short-term andlong-termdebts-current(Note19) Income taxpayable andaccruedexpenses(Note18) Accounts payable (Note17) Bills andacceptancespayable Financial fairvaluethroughprofitorloss(Notes16and21) liabilitiesat Deposit liabilities(Note15) Current Liabilities LIABILITIES ANDEQUITY TOTAL ASSETS Total NoncurrentAssets Other noncurrentassets(Note14) Deferred incometaxassets(Note29) Investment properties(Note13) At cost values At appraised Property, plantandequipment(Note12): andajointventure(Note11) Investments inassociates investments(Notes7and10) Held tomaturity AFS investments(Notes7and17) Loans andreceivables-netofcurrentportion(Notes817) Noncurrent Assets Total CurrentAssets Assets ofdisposalgroupclassified asheldforsale(Note37) Other currentassets(Notes7and10) Inventories (Note9) parties(Note22) Due fromrelated Loans andreceivables(Notes817) Available forsaleinvestments(Notes7and17) Financial fairvaluethroughprofitorloss(Notes6and21) assetsat Cash andcashequivalents(Note5) Current Assets ASSETS December31 P436,362,854 P749,552,502 P137,556,341 474,872,597 496,325,218 379,290,871 206,782,709 370,261,631 346,734,874 172,140,625 21,452,621 13,249,643 17,079,820 22,231,525 39,538,145 11,761,290 23,096,473 66,649,517 23,526,757 14,024,047 1,876,015 5,836,839 3,380,244 5,299,731 8,841,923 1,593,034 2,915,170 9,663,734 294,581 126,075 551,237 46,770 2015 P411,391,378 P696,833,208 P147,275,490 469,146,463 469,146,463 356,697,126 187,438,860 340,136,082 340,136,082 143,653,521 18,310,229 15,785,151 10,837,220 27,197,933 38,470,525 12,297,509 22,895,493 60,039,059 22,811,921 12,936,865 5,806,123 6,640,221 3,665,132 3,975,397 7,886,609 1,797,390 3,774,286 326,282 717,218 49,859 2014 – – December 31 2015 2014 Total Current Liabilities (Brought Forward) P496,325,218 P469,146,463 Noncurrent Liabilities Deposit liabilities - net of current portion (Note 15) 39,793,338 23,468,731 Financial liabilities at fair value through profit or loss (Notes 16 and 21) 9,118 24,805 Bills and acceptances payable (Note 17) 19,915,383 12,409,837 Long-term debts - net of current portion (Note 19) 10,706,431 11,291,321 Accrued retirement benefits (Note 23) 3,900,926 3,776,261 Deferred income tax liabilities (Note 29) 1,182,976 1,355,247 Other noncurrent liabilities (Note 20) 7,961,017 12,638,349 Total Noncurrent Liabilities 83,469,189 64,964,551 Total Liabilities 579,794,407 534,111,014 Equity Attributable to equity holders of the Company (Notes 1, 7, 12, 23, 24, 30 and 36): Capital stock 10,821,389 10,821,389 Capital in excess of par 35,906,231 35,906,231 Preferred shares of subsidiaries issued to Parent Company 18,060,000 18,060,000 Other equity reserves 804,095 790,136 Reserves of disposal group classified as held for sale (Note 37) 335,000 – Other comprehensive income, net of deferred income tax effect 3,116,572 4,582,667 Retained earnings 59,855,195 54,079,986 Shares of the Company held by subsidiaries (22,464) (12,518) 128,876,018 124,227,891 Non-controlling interests (Notes 1, 7, 12 and 30) 40,882,077 38,494,303 Total Equity 169,758,095 162,722,194 TOTAL LIABILITIES AND EQUITY P749,552,502 P696,833,208

See accompanying Notes to Consolidated Financial Statements. 43 42

ANNUAL REPORT 2015 (Amounts in Thousands, ExceptforBasic/DilutedEarningsPer Share) CONSOLIDATED STATEMENTS OFINCOME SUBSIDIARIES AND of (A Subsidiary Tangent HoldingsCorporation) LT GROUP, INC. See accompanying Notes to Consolidated Financial NotestoConsolidated Statements. See accompanying Property development Tobacco (Note11) Distilled spirits Beverage Banking REVENUE (Note24) EQUITY INNETEARNINGSOFASSOCIATES (Note11) GROSS INCOME COST OFSALESANDSERVICES(Note24) Others -net(Note28) Finance income(Note27) Finance costs(Note27) Foreign exchangegains-net OTHER INCOME(CHARGES) OPERATING INCOME expenses(Note26) General andadministrative Selling expenses(Note25) OPERATING EXPENSES Non-controlling interests Equity holdersoftheCompany NET INCOMEATTRIBUTABLE TO: NET INCOME NET INCOMEFROMDISCONTINUEDOPERATIONS (Note37) NET INCOMEFROMCONTINUINGOPERATIONS Deferred Current PROVISION FORINCOMETAX (Note29) INCOME BEFORETAX (Note31) AttributabletoEquityHoldersoftheCompany Basic/Diluted EarningsPer Share fromContinuingOperations(Note31) AttributabletoEquityHoldersoftheCompany Basic/Diluted EarningsPer Share P26,600,160 P9,496,654 P9,496,654 12,002,266 13,286,994 29,493,501 24,880,372 54,373,873 30,682,475 23,452,411 20,808,315 11,717,545 2,484,453 1,188,974 3,257,223 1,322,400 7,230,064 2,644,096 2,897,619 6,599,035 9,138,723 2,578,822 2,359,527 4,487,481 (202,518) 110,376 357,931 219,295 P0.61 P0.58 2015 – Years EndedDecember31 (As restated, Note37) P24,210,181 11,919,131 13,288,369 26,956,903 24,739,378 51,696,281 P6,472,206 27,851,458 23,814,718 21,068,078 P6,472,206 2,278,600 3,805,059 1,347,704 4,036,740 2,746,640 2,061,976 4,410,230 6,208,042 2,645,647 2,276,204 8,853,689 4,816,949 (454,855) 894,555 119,041 264,164 369,443 P0.41 P0.39 2014 –

(As restated, Note37) P28,560,739 P11,475,064 P11,475,064 10,425,603 12,701,784 29,809,529 25,687,269 55,496,798 33,513,646 10,339,383 23,174,263 20,397,317 11,278,384 13,356,771 3,656,950 3,704,117 2,103,605 1,255,582 2,776,946 2,805,844 8,669,220 2,078,387 2,479,063 3,017,388 (480,892) (400,676) 151,722 139,093 196,680 P0.85 P0.83 2013

LT GROUP, INC. (A Subsidiary of Tangent Holdings Corporation) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands)

Years Ended December 31 2015 2014 2013 NET INCOME P9,496,654 P6,472,206 P11,475,064 OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income (loss) to be reclassified to profit or loss in subsequent periods: Net changes in fair value of AFS investments (Note 7) (1,098,424) 551,055 (5,561,739) Income tax effect 3,311 1,383 84,034 (1,095,113) 552,438 (5,477,705) Translation adjustments 662,775 (275,448) 1,607,973 Net other comprehensive income (loss) to be reclassified to profit or loss in subsequent periods (432,338) 276,990 (3,869,732) Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent periods: Re-measurement gains on defined benefit plans (Note 23) (50,010) (1,047,515) (369,329) Income tax effect 7,679 (53,628) 24,318 (42,331) (1,101,143) (345,011) Share in re-measurement gain on defined benefit plans of an associate (Note 11) – – 27,453 Revaluation increment (decrement) on property, plant and equipment (Note 12) (518,611) – 1,300,593 Income tax effect 158,448 – (390,178) (360,163) – 910,415 Net other comprehensive income (loss) not to be reclassified to profit or loss in subsequent periods (402,494) (1,101,143) 592,857 OTHER COMPREHENSIVE LOSS, NET OF TAX (834,832) (824,153) (3,276,875) TOTAL COMPREHENSIVE INCOME P8,661,822 P5,648,053 P8,198,189 TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Equity holders of the Company P6,266,724 P3,816,532 P6,702,822 Non-controlling interests 2,395,098 1,831,521 1,495,367 P8,661,822 P5,648,053 P8,198,189

See accompanying Notes to Consolidated Financial Statements. 44 45

ANNUAL REPORT 2015

LT GROUP, INC. (A Subsidiary of Tangent Holdings Corporation) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 and 2013 (Amounts in Thousands)

Attributable to Equity Holders of the Company (Notes 1, 7, 12, 24, 30 and 36) Other Comprehensive Income (Loss)

Revaluation Increment on Property Re- Preferred Reserves of Re- Revaluation Plant and measurement Total Other Shares of Disposal Net Measurement Increment Equipment Gains on Comprehensive Non- Deposit for Subsidiaries Group Changes Gains (Losses) on Property Transferred Defined Income (Loss), controlling Capital Future Issued Other Classified as Accumulated in AFS on Defined Plant and to Associate Benefit Plans Net of Deferred Shares of the Interests Capital in Excess Stock to Parent Equity Held for Translation Investments Benefit Plans Equipment (Notes 2, 11 of an Associate Income Tax Retained Company Held (Notes 1, 7, Stock of Par Subscription Company Reserves Sale Adjustments (Note 7) (Note 23) (Note 12) and 12) (Note 11) Effect Earnings by Subsidiaries Total 12 and 30) Total BALANCES AT DECEMBER 31, 2012 P8,981,389 P1,173,772 P– P– P987,057 P– (P397,679) P2,087,609 (P606,696) P6,810,285 P1,363,643 P– P9,257,162 P42,268,202 (P12,518) P62,655,064 P31,051,046 P93,706,110 Net income for the year – – – – – – – – – – – – – 8,669,220 – 8,669,220 2,805,844 11,475,064 Other comprehensive income (loss) – – – – – – 696,922 (2,963,582) (217,159) 490,083 – 27,338 (1,966,398) – – (1,966,398) (1,310,477) (3,276,875)

Total comprehensive income (loss) for the year – – – – – – 696,922 (2,963,582) (217,159) 490,083 – – (1,966,398) 8,669,220 – 6,702,822 1,495,367 8,198,189 Issuance of capital stock 1,840,000 35,880,000 – – – – – – – – – – – – – 37,720,000 – 37,720,000

Issuance of preferred shares of subsidiaries – – 6,048,534 7,405,000 – – – – – – – – – – – 13,453,534 – 13,453,534 Stock issue costs – (1,147,541) – – – – – – – – – – – – – (1,147,541) – (1,147,541) Acquisition of shares of subsidiaries from the Controlling Shareholders – – – – (196,921) – – – – – – – – – – (196,921) – (196,921) Business combination adjustments – – – – – – – – – – – – – (29,094) – (29,094) (247,112) (276,206) Cash dividends declared – – – – – – – – – – – – – (1,622,349) – (1,622,349) (64,216) (1,686,565) Transfer of portion of revaluation increment on property, plant and equipment realized through depreciation and disposal – – – – – – – – – (922,180) (297,785) – (1,219,965) 1,219,965 – – – –

BALANCES AT DECEMBER 31, 2013 10,821,389 35,906,231 6,048,534 7,405,000 790,136 – 299,243 (875,973) (823,855) 6,378,188 1,065,858 27,338 6,070,799 50,505,944 (12,518) 117,535,515 32,235,085 149,770,600 Net income for the year – – – – – – – – – – – – – 4,410,230 – 4,410,230 2,061,976 6,472,206 Other comprehensive income (loss) – – – – – – (155,545) 125,559 (563,712) – – – (593,698) – – (593,698) (230,455) (824,153)

Total comprehensive income (loss) for the year – – – – – – (155,545) 125,559 (563,712) – – – (593,698) 4,410,230 – 3,816,532 1,831,521 5,648,053 Issuance of preferred shares of subsidiaries – – (6,048,534) 10,655,000 – – – – – – – – – – – 4,606,466 – 4,606,466 Capital contribution of non-controlling interest – – – – – – – – – – – – – – – – 4,427,697 4,427,697 Cash dividends declared – – – – – – – – – – – – – (1,730,622) – (1,730,622) – (1,730,622) Transfer of portion of revaluation increment on property, plant and equipment realized through depreciation and disposal – – – – – – – – – (596,649) (297,785) – (894,434) 894,434 – – – –

BALANCES AT DECEMBER 31, 2014 P10,821,389 P35,906,231 P– P18,060,000 P790,136 P– P143,698 (P750,414) (P1,387,567) P5,781,539 P768,073 P27,338 P4,582,667 P54,079,986 (P12,518) P124,227,891 P38,494,303 P162,722,194 Attributable to Equity Holders of the Company (Notes 1, 7, 12, 24, 30 and 36) Other Comprehensive Income (Loss) Revaluation Increment on Property Re-measure- Preferred Reserves of Re- Revaluation Plant and ment Total Other Shares of Disposal Net Measurement Increment Equipment Gains on Comprehensive Non-con- Deposits for Subsidiaries Group Changes Gains (Losses) on Property Transferred Defined Income (Loss), trolling Capital Future Issued Other Classified as Accumulated in AFS on Defined Plant and to Associate Benefit Plans Net of Deferred Shares of the Interests Capital in Excess Stock to Parent Equity Held for Translation Investments Benefit Plans Equipment (Notes 2, of an Associate Income Tax Retained Company Held (Notes 1, 7, 12 Stock of Par Subscription Company Reserves Sale Adjustments (Note 7) (Note 23) (Note 12) 11 and 12) (Note 11) Effect Earnings by Subsidiaries Total and 30) Total BALANCES AT DECEMBER 31, 2014 (BROUGHT FORWARD) P10,821,389 P35,906,231 P– P18,060,000 P790,136 P– P143,698 (P750,414) (P1,387,567) P5,781,539 P768,073 P27,338 P4,582,667 P54,079,986 (P12,518) P124,227,891 P38,494,303 P162,722,194 Net income for the year – – – – – – – – – – – – – 6,599,035 – 6,599,035 2,897,619 9,496,654 Other comprehensive income (loss) – – – – – – 379,660 (348,779) (3,029) (360,163) – – (332,311) – – (332,311) (502,521) (834,832) Total comprehensive income (loss) for the year – – – – – – 379,660 (348,779) (3,029) (360,163) – – (332,311) 6,599,035 – 6,266,724 2,395,098 8,661,822 Stock issue cost – – – – – – – – – – – – – (213) – (213) – (213) Acquisition of shares of subsidiaries from the Controlling Shareholders – – – – 14,502 – – – – – – – – – – 14,502 – 14,502 Acquisition of non-controlling interest – – – – (543) – – – – – – – – – – (543) – (543) Acquisition of shares by subsidiary – – – – – – – – – – – – – – (9,946) (9,946) – (9.946) Cash dividends declared – – – – – – – – – – – – – (1,622,397) – (1,622,397) (7,324) (1,629,721) Reserves disposal group classified as held for sale – – – – – 335,000 – (348,786) 13,786 – – – (335,000) – – – – – Transfer of portion of revaluation increment on property, plant and equipment realized through depreciation and disposal – – – – – – – – – (501,001) (297,783) – (798,784) 798,784 – – – – BALANCES AT DECEMBER 31, 2015 P10,821,389 P35,906,231 P– P18,060,000 P804,095 P335,000 P523,358 (P1,447,979) (P1,376,810) P4,920,375 P470,290 P27,338 P3,116,572 P59,855,195 (P22,464) P128,876,018 P40,882,077 P169,758,095

See accompanying Notes to Consolidated Financial Statements. 46 47

ANNUAL REPORT 2015 Receivables Financial fairvaluethroughprofitorloss assetsat Decrease (increase)in: incomebeforechangesinworkingcapital Operating Movementinaccruedretirementbenefits(Note23) Dividendincome(Note28) Finance income(Note27) Finance costs(Note27) at fairvaluethroughprofitorloss(Note28) Marked-to-marketgainonfinancialassets Gainondisposalof: Provisionforlosses(Note8) (Notes12, andamortization Depreciation 13and14) Adjustments for: Income beforeincometax (Note37) Income beforeincometaxfromdiscontinuedoperations Income beforeincometaxfromcontinuingoperations CASH FLOWSFROMOPERATING ACTIVITIES Financial fairvaluethroughprofitorloss liabilitiesat Depositliabilities Increase (decrease)in: Othercurrentassets Inventories Shareinlossesofjointventure(Notes10and28) (Note11) Equityinnetearningsofassociates Cash generated from(usedin)operations Cash generated Othercurrentandnoncurrentliabilities andaccruedexpenses Accounts payable Otherassets(Notes12and13) Dividends received(Notes11, 22and28) Availment (payment)ofshort-termdebts(Note19) CASH FLOWSFROMFINANCINGACTIVITIES Net cashfrom(usedin)investingactivities (Note22) Advances grantedtoaffiliates AFS investments(Note7) Proceeds fromsaleof: Return ofinvestmentfromajointventure(Note11) Software(Note14) Investmentproperties(Note13) (Note11) Sharesandconvertiblenotesofanassociate Property, plantandequipment(Note12) investments Heldtomaturity activities Net cashfrom(usedin)operating Income taxespaid, including creditablewithholdingandfinaltaxes Interest received Proceeds from (payments of) bill and acceptance payable (Note17) Proceeds from(paymentsof)billandacceptancepayable AFS investments(Note7) Acquisition of: CASH FLOWSFROMINVESTINGACTIVITIES Net cashfrom(usedin)financingactivities Payment parties(Note22) ofduetorelated (Note22) Advances fromaffiliates Dividends paid(Note30) Proceeds fromsaleofnon-controllinginterest(Note30) Acquisition ofnon-controllinginterest(Note30) contributionofnon-controllinginterest (Note30) Capital Payment ofstockissuecosts(Note30) Proceeds fromissuanceofshares(Note30) Payment offinancecost Payments oflong-termdebts(Note19) Availments oflong-termdebts(Note19) NET INCREASE(DECREASE)INCASH AND CASHEQUIVALENTS CASH AND CASHEQUIVALENTS AT END OF YEAR (Note5) CASH AND CASHEQUIVALENTS AT BEGINNING OF YEAR CASH INDISPOSALGROUPCLASSIFIED AS HELDFORSALE(Note37) (Amounts in Thousands) (Amounts CONSOLIDATED STATEMENTS OFCASH FLOWS SUBSIDIARIES AND of (A Subsidiary Tangent HoldingsCorporation) LT GROUP, INC. See accompanying Notes to Consolidated Financial NotestoConsolidated Statements. See accompanying Otherassets(Notes12, 13and28) AFS investments(Notes7and28) P137,556,341 (49,118,548) (12,399,131) (15,078,720) P11,717,545 147,275,490 (1,019,885) (1,562,020) (2,299,582) (1,188,974) (2,337,872) (5,036,289) (1,470,378) (3,105,763) (1,629,721) (5,000,000) (9,076,605) 13,881,452 12,119,781 41,296,083 3,452,518 2,956,106 4,747,325 1,515,018 8,320,764 1,718,432 1,100,000 1,502,928 3,454,866 6,702,164 (110,376) (125,447) (124,176) (540,417) (132,340) (601,772) (802,545) (642,544) (22,464) 202,518 865,889 402,236 102,623 (2,928) (3,089) Years EndedDecember31 83,058 42,383 27,157 94,872 2,067 2015 – – – – – – – P147,275,490 (44,955,219) (10,255,769) (34,763,627) (34,863,865) (65,693,182) (41,044,172) 188,319,662 (1,889,744) (2,247,938) (2,656,906) (4,285,023) (2,608,825) (6,666,993) (2,534,580) (3,615,343) (2,684,943) (1,730,622) (1,623,537) P8,853,689 14,379,574 63,499,326 2,081,913 2,207,864 9,161,024 8,718,031 3,554,992 2,787,130 3,752,493 2,434,543 3,371,564 4,427,697 2,000,841 (119,041) (245,216) (894,555) (419,809) (772,864) (571,602) (402,750) (10,912) 454,855 307,335 143,541 486,686 500,000 32,351 46,043 2014 – – – – – – – – – (122,879,759) P188,319,662 (33,367,165) P13,356,771 135,126,488 126,620,890 (1,323,412) (3,704,117) (2,250,568) (1,755,327) (3,706,501) (3,081,169) (3,013,291) (1,320,000) (5,270,255) (1,147,541) (9,223,000) (1,685,349) (5,193,900) 13,583,894 13,965,768 47,394,292 36,664,113 37,746,053 37,720,000 16,531,165 61,698,772 2,584,199 4,034,210 1,748,626 7,953,877 3,956,509 3,980,680 7,421,554 2,490,120 (451,688) (139,093) (528,632) (290,505) (238,687) (572,048) (19,123) (41,504) 979,839 480,892 227,123 114,551 733,138 20,091 2013 – – – – – – – – LT GROUP, INC. increase in operational efficiency and rationalization of operations, (A Subsidiary of Tangent Holdings Corporation) and at the same time offer the investing public the opportunity AND SUBSIDIARIES to participate in LTG’s growth. In December 2011, Tangent sold NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the said shares, thereby reducing its ownership interest in LTG (Amounts in Thousands, Except for Par Value Per Share and Basic/ from 97% to 86%. In accordance with the Subscription Tranche, Diluted Earnings per Share) Tangent agreed to subscribe to 398,138,889 new common shares from LTG’s unissued capital stock for a total consideration of P1,639.4 million. On May 2, 2012, LTG’s BOD and stockholders 1. Corporate Information, Corporate Restructuring, and approved the conversion of the deposit for future stock subscription Authorization for Issue of the Consolidated Financial into issued common shares of LTG, which resulted to an increased Statements ownership of Tangent in LTG, from 86% to 87% as of that date. Corporate Information LT Group, Inc. (“LTG” or the “Company”) was incorporated in the Philippines On July 27, 2012, LTG’s BOD and stockholders approved the amendments and registered with the Philippine Securities and Exchange Commission in the Articles of Incorporation to reflect the increase in LTG’s authorized (SEC) on May 25, 1937 under the name “The Manila Wine Merchants, Inc.” capital stock from P5.0 billion divided into 5,000,000,000 shares with a to engage in the trading business. On November 17, 1947, the Company’s par value of P1.00 per share to P25.0 billion divided into 25,000,000,000 shares of stock were listed in the Philippine Stock Exchange (PSE). The shares with a par value of P1.00 per share. On the same date, LTG’s BOD Company’s corporate life is 50 years from the date of incorporation and stockholders also approved the issuance of 5,000,000,000 shares and was extended for another 50 years from and after May 27, 1987. to Tangent in support of the increase in authorized capital stock and the On September 22, 1995, the Philippine SEC approved the change in waiver of rights/public offering in relation to the said shares to be issued Company’s name to “Asian Pacific Equity Corporation” and the change to Tangent. On September 28, 2012, upon approval by the SEC of the in its primary purpose to that of a holding company. On July 30, 1999, increase in authorized capital stock, Tangent increased its ownership the Company acquired Twin Ace Holdings Corp., now known as Tanduay interest to 95.25%. Distillers, Inc. (TDI), a producer of distilled spirits, through a share swap with Tangent Holdings Corporation (“Tangent” or the “Parent Company”). In December 2012, Tangent sold 508,544,100 shares to the public, thus, The share swap resulted in LTG wholly owning TDI and Tangent decreasing its ownership interest to 89.59% as of December 31, 2012. increasing its ownership in LTG to 97.0%. On November 10, 1999, the Philippine SEC approved the change in the Company’s corporate name On September 24, 2012, LTG’s stockholders approved the 2-tranche from “Asian Pacific Equity Corporation” to “Tanduay Holdings, Inc”. On Placement and Subscription Transaction involving the sale by Tangent September 24, 2012, LTG’s stockholders approved the amendment of up to, but not exceeding 3,000,000,000 common shares of LTG in its Articles of Incorporation and By-Laws to reflect the change in registered in its name to investors by way of a follow-on offering at its corporate name from “Tanduay Holdings, Inc.” to “LT Group, Inc.” a placing price to be determined through a book building exercise to which was approved by the Philippine SEC on September 28, 2012. The be hereafter conducted (the “Placing Tranche”) and the subsequent Company’s primary purpose is to engage in the acquisition by purchase, subscription by Tangent using the proceeds of the Placing Tranche exchange, assignment, gift or otherwise; and to hold, own and use for (net of expenses incurred in the Placing Tranche) to new shares of investment or otherwise; and to sell, assign, transfer, exchange, lease, LTG in an amount equivalent to the number of shares sold during the let, develop, mortgage, enjoy and dispose of, any and all properties Placing Tranche at an issue price equivalent to the placing price (the of every kind and description and wherever situated, as to and to the “Subscription Tranche”). The total number of the shares subject of extent permitted by law. the Placing Tranche shall be determined based on investor demand as determined through a book building exercise, provided the same After a series of restructuring activities in 2012 and 2013, LTG shall not exceed 3,000,000,000 shares and the total number of has expanded and diversified its investments to include the subscription shares shall not exceed the shares sold in the Placing beverages, tobacco, property development and banking businesses, Tranche. The BOD was granted authority to determine such other all belonging to Mr. Lucio C. Tan and his family and assignees terms and conditions of the transaction as may be most beneficial (collectively referred to as the “Controlling Shareholders”). These to LTG, including (but not limited to) the timing of the same and total business segments in which LTG and subsidiaries (collectively funds to be raised therefrom. Further, the subscription shares shall referred to as “the Group”) operate are described in Note 4 to the be listed with the PSE. consolidated financial statements. In April 2013, Tangent sold 1.84 billion shares to the public and agreed As of December 31, 2015 and 2014, LTG is 74.36%-owned by its ultimate to subscribe to the same number of shares newly issued by LTG. The parent company, Tangent, which is also incorporated in the Philippines. entire proceeds from the sale of LTG’s shares was used by Tangent as The official business address of the Head Office is 11th Floor, Unit 3 payment for the subscription to new shares amounting to P36.6 billion, Bench Tower, 30th St. Corner Rizal Drive Crescent Park West 5, Bonifacio net of stock issuance costs (see Note 30). As a result of the placing Global City, Taguig City. and subscription transaction, Tangent’s ownership in LTG decreased to 74.36%. Capital Raising of LTG On October 26, 2011, LTG’s Board of Directors (BOD) approved a capital Corporate Restructuring raising exercise via the 2-tranche Placing and Subscription Transaction Consolidation of Businesses under LTG involving (i) the sale by Tangent of 398,138,889 shares in LTG to the In preparation for, and prior to the completion of the capital raising public at an offer price of P4.22 each (the “Placing Tranche”) and (ii) the exercise approved by the stockholders on September 24, 2012 as subscription at a price equivalent to the offer price offered to the public discussed above, the Group has undergone certain transactions to at the Placing Tranche, as maybe adjusted to account for the expenses transfer certain businesses of the Controlling Shareholders to LTG. This of the Placing Tranche (the “Subscription Tranche”). restructuring exercise was approved by LTG’s BOD on July 31, 2012. In support of LTG’s restructuring activities, Tangent subscribed in cash The capital raising exercise in 2011 was intended to fund to 5,000,000,000 common shares on the increase in LTG’s authorized LTG’s expansion of its distilled spirits segment’s plant capacity, capital. 49 48

ANNUAL REPORT 2015 b. Acquisition ofFortune Tobacco (FTC) Corporation a. businessandacquisitionof ofthebeverage Consolidation Asia • • Acquired subscriptionrightsto453,500,000sharesofShareholdings, FTC to99.58%throughthefollowing: In February 2013, LTG interest in increased its effective ownership equity interestsinFTC. As ofDecember31, 2012, LTG 82.66%ofFTC. owns On October30, 2012, LTG’s the acquisition ofup to 100% of BODapproved from 98.0%to17.33%. interestofShareholdingsinFTC to 82.32%whiledilutingownership stock.capital Thus, LTG interestinFTC increaseditsdirectownership of thePhilippineSECFTC’s toincreaseitsauthorized application share, which was issued to LTG on October 10, 2012 upon approval 1,300,000,000 commonsharesofFTCwithaparvalueP1.00per On September28, 2012, LTG subscribed in cashanadditional of LTG inFTC. by LTG intheamountofP346.5millionresulting49.5%interest of FTCwithaparvalueP1.00pershare, whichwaspaidincash On September 26, 2012, LTG subscribed to 346,489,828 new shares (PMPMI) Inc. Manufacturing, Philippines Morris Philip (see Note11). and FTC by thecombinedbusinessescontributed Philippines whichoperates PMFTC, Inc. (PMFTC), anddomiciledinthe incorporated acompany itsparvalueofP1.00pershare.at in FTChas49.6%ownership 83.0% of FTC through a cash subscription to 1,646,489,828 shares On July 31, 2012, LTG’s least the acquisition of at BOD approved LTG’s interestin ownership ABI to99.99%. Controlling Shareholders, and certain stockholders, thus, increasing by Shareholdings, Inc. (Shareholdings), belongingtothe acompany December 2012, LTG acquired the shares of ABI which are owned stock, thus, increasingLTG’s interestin ownership ABI to90.0%. In SEC approved ABI’s toincreaseitsauthorizedcapital application thus, making subsidiary.ABI an80.0%-owned OnOctober 10, 2012, stocktoLTG,issued theremainingauthorizedbutunissuedcapital stockwithparvalueofP1.00pershare.capital In August 2012, ABI 1,000,000,000 shares from the proposed increase in its authorized shares to LTG stock and from its authorized but unissued capital On July19, 2012, ABI’s BODauthorized ABI toissue800,000,000 subsidiariesof wholly-owned ABI. July 25, 2012. Thus, Waterich, InterbevandPackageworld became of assignment ABI’s advancestoPackageworld andInterbevon deeds ofsaleshares Waterich onJune24, 2012andthedeeds transactions, ABI andtheControlling Shareholders executed the by theControllingShareholders, respectively. To effectthebuyout interestsinInterbevandPackageworld owned remaining ownership shares of (Waterich)Waterich andthe ResourcesCorporation theresolutionstobuyout100.0%ofoutstanding BOD approved interests, respectively. OnJune24, 2012andJuly19, 2012, ABI’s of InterbevandPackageworld with80.0%and33.3%ownership stock, fortheincreaseincapital application ABI becameastockholder bythePhilippineSECofInterbev’supon approval andPackageworld’s par valuepersharethroughcashinfusion. EffectiveJune29, 2012, 125,000,000 sharesofPackageworld, Inc. P1.00 (Packageworld) at Interbev. Onthesamedate, ABI’s theacquisitionof BODapproved share by way of conversion of ABI advances to equity investment in shares ofInterbevPhilippines, Inc. P1.00parvalueper (Interbev)at On May24, 2012, ABI’s thesubscriptionto400,000,000 BODapproved Brewery, (ABI) Incorporated equivalent to 15.71% indirect ownership interestin FTC; equivalent to15.71%indirectownership interest inShareholdingsor which represents90.70%ownership d. Bank(PNB)and Merger ofPhilippineNational Allied Banking c. Acquisition ofEtonPropertiesPhilippines, Inc. (Eton) • interest in FTC through Acquired additional 0.34% direct ownership • Assumed certainliabilitiesofShareholdingsfromControlling issued to ABC shareholders 130 PNB common shares for every a share-for-share entity. exchange with PNB as the surviving PNB amended terms,Under the approved the merger was effected via theamendedtermsofPlanMerger ofPNBwith approving ABC. On March6, 2012, PNBheldaSpecialStockholders’Meeting (ABC)andacquisitionofBankHoldingCompanies. Corporation Eton increasedfrom99.3%to99.6%in2015. and 42.7%, respectively, thusLTG’s interestin effectiveownership Paramount interestto56.9% resultingintheincreaseofownership and beensubscribedbySaturn 750,000,000 commonshareshave share, stockor least25%oftheincreaseinauthorizedcapital at shares to8.0billioncommonwithaparvalueof1.00per stock of Eton from 5.0 billion common increase in authorized capital On September30, 2015, bythePhilippineSECof uponapproval interestinEtonto99.3%. effective ownership interest from 55.07% to 56.86%,ownership thus, increasing LTG’s shares ofEtontradedinthePSEresultingincreaseits On December8, 2012, Paramount madeatenderoffertobuyback LTG. Thus, subsidiariesof Paramount becamewhollyowned andSaturn remaining issuedandoutstandingsharesofthesaidcompanies. with theControllingShareholdersofParamount forthe andSaturn On October30, 2012, LTG enteredintodeedsofsaleshares in Eton. interests, respectively, thus, givingLTG a98.0%effective ownership became subsidiaries of LTG with 98.18% and 98.99% ownership Upon SEC’s on October 10, approval 2012, Paramount and Saturn and million P1,350.8 LTG’sPhilippine SECinordertoaccommodate investment. to amounting withthe forincreaseinauthorizedcapital application filedits Saturn Saturn and P490.0 million, respectively. Onthe samedates, Paramount and Paramount to subscription infullbywayofconversionintoequityLTG’s advances Paramount’s andSaturn’s stock. authorizedcapital LTG paidthe P1.00 per share and will be issued to LTG out of an increase in common sharesofSaturn, respectively, withaparvalueof 1,350,819,487 common shares of Paramount and 490,000,000 On September25and26, 2012, LTG subscribedto P1,350.8 millionandP521.3million, respectively. from Penick Group Ltd., also a BVI-based company, amounting to and BillingeInvestmentsLtd., BVI-basedcompanies, andSaturn LTG ofcertainliabilitiesParamount Co. fromStepDragon Ltd. On September17, 2012, LTG’s theassumptionby BODapproved development. inrealestate registered withthePhilippineSECandisprimarilyengaged and 42.39%, respectively, inEton, and incorporated alistedcompany Holdings,and Saturn Inc. interestof55.07% ownership have (Saturn) Prior torestructuringin2012, Paramount Landequities, Inc. (Paramount) Controlling Shareholders. purchase ofFTC’s 104,330,633outstandingsharesheldbythe inFTC); ownership interest inShareholdingsto97.68%(equivalent1.21%indirect stockofShareholdingstherebyincreasingtheownership capital payment for the subscription of 1,500,000,000 out of the unissued Shareholders amountingtoP1.5billion, whichwasusedas

ABC common share and 22,763 PNB common shares for every ABC preferred share. As of January 17, 2013, PNB received all the necessary approvals from SEC and foreign regulatory agencies to effectuate the merger. On February 9, 2013, PNB completed its planned merger with ABC (the merger of PNB and ABC is referred to herein as “Merged PNB”) as approved and confirmed by the BOD of PNB and ABC on January 22 and January 23, 2013, respectively.

The merger of PNB and ABC was accounted for using the pooling of interests method by the Company since both entities are under the common control of Mr. Tan.

On February 11, 2013, LTG’s BOD approved the acquisition of indirect ownership interest in the Merged PNB through the investment in the 27 holding companies which have collective ownership interest in the Merged PNB of 59.83% (collectively referred to as “Bank Holding Companies”). LTG’s acquisition of the Bank Holding Companies was effected by way of subscription to the increase in authorized shares of the Bank Holding Companies and acquisition of the Bank Holding Companies’ shares owned by the Controlling Shareholders. On November 8, 2013, LTG obtained the requisite regulatory approval from the Hongkong Monetary Authority (HKMA) to become a majority shareholder controller of ABC (Hongkong) Limited (ABCHK) and the HKMA took note of the plan of LTG to acquire or increase its shareholdings in PNB up to 59.83%.

In various dates in February, March and December 2013, upon approval of the Philippine SEC for the increase in authorized capital stock of certain Bank Holding Companies, LTG acquired between 80% to 100% ownership of these Bank Holding Companies. The transactions were consummated through conversion of LTG’s advances from the Bank Holding Companies in exchange for the shares acquired. As of December 31, 2015 and 2014, LTG indirectly owns 56.47% of PNB through the 59.83% collective ownership of the Bank Holding Companies.

These business combinations were accounted for using pooling of interests method. Accordingly, LTG recognized the net assets of the acquired subsidiaries equivalent to their carrying values.

Authorization for Issue of the Consolidated Financial Statements The consolidated financial statements as at December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 were authorized for issue by the BOD on April 12, 2016.

2. Summary of Significant Accounting and Financial Reporting Policies

Basis of Preparation and Statement of Compliance The consolidated financial statements have been prepared under the historical cost basis, except for financial assets and liabilities at fair value through profit or loss (FVPL), AFS financial assets, land and land improvements, plant buildings and building improvements, and machineries and equipment that have been measured at fair value. The consolidated financial statements are presented in Philippine peso (Peso), the functional and presentation currency of LTG. All values are rounded to the nearest Peso, except when otherwise indicated.

The consolidated financial statements of LTG have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). 50 51

ANNUAL REPORT 2015 (5) (4) (3) (2) (1) include financialstatements ofLTGThe consolidated thefinancialstatements subsidiaries: andthefollowing Basis ofConsolidation As ofDecember31, 2015and2014, direct theBankHoldingCompaniesconsistof27entitieswith aggregate On August 4, 2014, segment’s theBeverage shareof thesubscriptionofone(1)ordinary BODapproved Asia On February 3, 2014, segment’s the Beverage the subscription of the 124,999,995 shares BOD approved interestofLTGRepresents theeffectiveownership oftheBankHolding throughthecollective ownership onMay6,Incorporated 2003tohandlethemarketingof TDI’s productsintheexportmarket, TBI hasnotyet TDI andsubsidiaries Distilled Spirits Absolut Distillers, Inc. (ADI) Allied LeasingandFinance (ALFC) Corporation Leasing) (Japan-PNB -PNBLeasingandFinance Japan Corporation Shareholdings Tobacco Asia Pacific BevPTE PNB Capital and Investment Corporation (PNBCapital) andInvestmentCorporation PNBCapital ABI andsubsidiaries Beverages PNBandSubsidiaries Asian (AAC) Alcohol Corporation (HongKong)Allied BankingCorporation Limited(ABCHKL) -PNB EquipmentRentalsCorporation Japan FTC PNBSecurities, Inc. (PNBSecurities) Agua Vida Systems, Inc. Tanduay BrandsInternational, Inc. (TBI) ACR NomineesLimited Bank PNBSavings Saturn Property Development PNBForex, Inc. Interbev OceanicHoldings(BVI)Ltd. (OHBVI) Allied BankPhilippines(UK)Plc(ABUK) Paramount andsubsidiaries PNB Holdings Corporation (PNBHoldings) PNBHoldingsCorporation Waterich Allied CommercialBank Eton PNBGeneralInsurers, Inc. (PNBGen) Packageworld PNBLifeInsurance, Inc. (PLII) BeltonCommunities, Inc. (BCI) PNB Corporation –Guam(PNBGuam) PNBCorporation AB NutribevCorp. EtonCity, Inc. (ECI) PNB International Investments Corporation (PNBIIC) InvestmentsCorporation PNBInternational FirstHomes, Inc. (FHI) PNBRemittanceCenters, Inc. (PNBRCI) Eton Properties Management Corporation (EPMC) Corporation EtonPropertiesManagement PNBRCIHoldingCo. Ltd. PNBRemittanceCo. (Canada) Bank HoldingCompanies(Note23) Banking PNBEuropePLC PNBGlobalRemittance&Financial Co. (HK)Ltd. (PNBGRF) PNBItalySpA(PISpA) companies are incorporated intheBritish companies areincorporated Virgin Islands(seeNote23). interestof59.83%inPNB,ownership inthePhilippinesandseven(7) ofwhich20companiesareincorporated Pacificat $1pervalueshare. BevPTE of AB NutribevCorp. 1.00pervalueshare. at started commercialoperations. (2) (3) (5) (6) (4) (7) (1) 80.0-100.0 Direct 100.0 100.0 100.0 100.0 97.7 99.9 82.7 2015 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Indirect 45.2 99.9 99.9 56.5 95.0 32.3 50.8 56.5 96.0 28.8 50.8 16.9 56.5 99.9 28.8 56.5 56.5 99.9 15.7 56.5 56.5 99.9 55.9 99.6 56.5 99.9 99.6 56.5 99.6 56.5 99.6 56.5 56.5 99.6 56.5 56.5 56.5 – – – – – – – – (7) (6) Percentage ofOwnership BeginningDecember18, 2015, assetsandliabilitiesofPNBLIIasDecember31, beenreclassified 2015have OnNovember19, 2014, PISpAwasliquidated. Bank, respectively, priortothemerger. Companies inthemergedPNB. SubsidiariesofMergedPNBpertaintothe18subsidiariesand Allied PNB’s interest in PNBLIIto BODdisposing51.00%ofitsownership Allianz SE(seeNote37). period endedDecember31, beenreclassified 2015have as discontinuedoperations,approval of the following as disposalgroupclassified foreachofthethreeyearsin asheldforsaleandtheresultsofitsoperations 80.0-100.0 100.00 Direct 100.0 100.0 100.0 97.7 99.9 82.7 2014 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Indirect 45.2 56.5 99.9 99.9 56.5 95.0 32.3 50.8 56.5 96.0 28.8 50.8 16.9 56.5 99.9 28.8 56.5 56.5 99.9 15.7 56.5 56.5 99.9 50.8 99.3 56.5 99.9 99.3 56.5 99.3 56.5 99.3 56.5 56.5 99.3 56.5 56.5 56.5 – – – – – – – 80.0-100.0 Direct 100.0 100.0 100.0 100.0 97.7 99.9 82.7 2013 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Indirect 45.2 56.5 56.5 95.0 32.3 50.8 56.5 96.0 28.8 50.8 16.9 56.5 99.9 28.8 56.5 56.5 99.9 15.7 56.5 56.5 99.9 50.8 99.3 56.5 99.9 99.3 56.5 99.3 56.5 99.3 56.5 56.5 99.3 56.5 56.5 56.5 – – – – – – – – – United States of United States America (USA) People’s RepublicofChina United Kingdom United Kingdom Incorporation Country of Country Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Hong Kong Philippines Philippines Philippines Hong Kong Philippines Philippines Philippines Philippines Philippines Philippines Philippines Hong Kong Singapore Canada Various Italy USA USA USA USA Subsidiaries are entities over which the Company has control. When a business is acquired, the financial assets and financial Specifically, the Group controls an investee if and only if the Group has: liabilities assumed are assessed for appropriate classification and designation in accordance with the contractual terms, economic • Power over the investee (i.e., existing rights that give it the current circumstances and pertinent conditions as at the acquisition date. This ability to direct the relevant activities of the investee) includes the separation of embedded derivatives in host contracts by • Exposure, or rights, to variable returns from its involvement with the acquiree. the investee, and • The ability to use its power over the investee to affect its returns If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group When the Group has less than a majority of the voting or similar rights of as an acquirer shall report in its consolidated financial statements an investee, the Group considers all relevant facts and circumstances in provisional amounts for the items for which the accounting is assessing whether it has power over an investee, including: incomplete. During the measurement period, the Group as an acquirer shall retrospectively adjust the provisional amounts recognized at the • The contractual arrangement with the other vote holders of the investee acquisition date to reflect new information obtained about facts and • Rights arising from other contractual arrangements circumstances that existed as of the acquisition date and, if known, • The Group’s voting rights and potential voting rights would have affected the measurement of the amounts recognized as of that date. During the measurement period, the Group as an acquirer The Group re-assesses whether or not it controls an investee if facts shall also recognize additional assets or liabilities if new information and circumstances indicate that there are changes to one or more of is obtained about facts and circumstances that existed as of the the three elements of control. Consolidation of a subsidiary begins acquisition date and, if known, would have resulted in the recognition when the Group obtains control over the subsidiary and ceases when of those assets and liabilities as of that date. The measurement period the Group loses control of the subsidiary. Assets, liabilities, income ends as soon as the Group as an acquirer receives the information and expenses of a subsidiary acquired or disposed of during the year it was seeking about facts and circumstances that existed as of the are included or excluded in the consolidated financial statements from acquisition date or learns that more information is not obtainable. the date the Group gains control or until the date the Group ceases to However, the measurement period shall not exceed one year from the control the subsidiary. acquisition date.

Consolidated financial statements are prepared using uniform If the business combination is achieved in stages, the acquisition date accounting policies for like transactions and other events in similar fair value of the acquirer’s previously held equity interest in the acquiree circumstances. Adjustments, where necessary, are made to ensure is remeasured to fair value as at the acquisition date through profit or consistency with the policies adopted by the Group. loss. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes Inter-company transactions, balances and unrealized gains on to the fair value of the contingent consideration which is deemed to transactions between group companies are eliminated. Unrealized be an asset or liability will be recognized in accordance with PAS 39, losses are also eliminated but are considered as an impairment Financial Instruments: Recognition and Measurement either in profit or indicator of the assets transferred. loss or as a charge to other comprehensive income. If the contingent consideration is classified as equity, it shall not be remeasured until it is Non-controlling interest finally settled within equity. Goodwill is initially measured at cost being Non-controlling interest represents equity in a subsidiary not attribut- the excess of the aggregate of the consideration transferred and the able, directly or indirectly, to the equity holders of LTG and subsidiaries. amount recognized for non-controlling interest over the fair values of net Non-controlling interest represents the portion of profit or loss and the identifiable assets acquired and liabilities assumed. If this consideration net assets not held by the Group. Transactions with non-controlling in- is lower than the fair value of the net assets of the subsidiary acquired, terest are accounted for as equity transactions. the difference is recognized in profit or loss.

Non-controlling interest shares in losses even if the losses exceed the After initial recognition, goodwill is measured at cost less any non-controlling equity interest in the subsidiary. accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition A change in the ownership interest of a subsidiary, without a loss of con- date, allocated to each of the Group’s cash-generating units (CGU) that trol, is accounted for as an equity transaction. If the Group loses control are expected to benefit from the combination, irrespective of whether over a subsidiary, it derecognizes assets (including goodwill) and liabilities other assets or liabilities of the acquiree are assigned to those units. of the subsidiary, the carrying amount of any non-controlling interest and the cumulative translation differences recorded in equity; recognizes the Where goodwill forms part of a CGU and part of the operation within that fair value of the consideration received, the fair value of any investment unit is disposed of, the goodwill associated with the operation disposed retained, and any surplus or deficit in profit or loss; and reclassifies the of is included in the carrying amount of the operation when determining parent’s share of components previously recognized in other comprehen- the gain or loss on disposal of the operation. Goodwill disposed of in this sive income to profit or loss or retained earnings, as appropriate. circumstance is measured based on the relative values of the operation disposed of and the portion of the CGU retained. Business Combination and Goodwill Business combinations are accounted for using the acquisition method. A CGU to which goodwill has been allocated shall be tested for As of the acquisition date, the acquirer shall recognize, separately from impairment annually, and whenever there is an indication that the goodwill, the identifiable assets acquired, the liabilities assumed and unit may be impaired, by comparing the carrying amount of the unit, any non-controlling interest in the acquiree. The cost of an acquisition is including the goodwill, with the recoverable amount of the unit. If measured as the aggregate of the consideration transferred, measured the recoverable amount of the unit exceeds the carrying amount at acquisition date fair value, and the amount of any non-controlling of the unit, the unit and the goodwill allocated to that unit shall be interest in the acquiree. For each business combination, the acquirer has regarded as not impaired. If the carrying amount of the unit exceeds the option to measure the non-controlling interest in the acquiree either the recoverable amount of the unit, the Group shall recognize the at fair value or at the proportionate share of the acquiree’s identifiable impairment loss. Impairment losses relating to goodwill cannot be net assets. Acquisition-related costs are expensed as incurred. reversed in subsequent periods. 53 52

ANNUAL REPORT 2015 no impact on the consolidated financialstatements.no impactontheconsolidated financial statements. These amendments are either not relevant or have theseamendmentsforthefirsttimein Group’sapplied consolidated These improvements are effective from July 1, 2014 and the Group has Annual ImprovementstoPFRSs(2010-2012cycle) orthirdparties.benefit planswithcontributionsfromemployees defined This amendment is not relevant to the Group since it does not have rendered, thecontributionstoperiodsofservice. insteadofallocating is costintheperiod in whichtheservice as areductionintheservice years ofservice, anentityispermittedtorecognizesuchcontributions that, iftheamountofcontributionsisindependentnumber benefit. asanegative to periodsofservice Theseamendments clarify Where thecontributionsarelinkedtoservice, theyshouldbeattributed or third parties when accounting for defined benefit plans.employees from (Amendments) PAS 19requiresanentityto consider contributions PAS • 19, Benefits -DefinedBenefitPlans: Employee Contributions Employee and impact of eachnew standard and amendmentisdescribedbelow: nature 1,are effectiveforannualperiodsbeginningonorafterJanuary 2015. The forthefirsttimecertainstandardsandamendments, The Groupapplied which Changes in Accounting Policies andDisclosures • As apolicy, arepresentedasifthe entitieshad comparatives • ofincomereflectstheresults statement The consolidated • No newgoodwillisrecognizedasaresultofthecombination. The • The assets and liabilities of the combining entities are reflected in guidance: the following Financial,Common ControlinConsolidated Statements whichprovides the Pooling ofEntitiesunder ofInterestMethodforBusinessCombinations Committee Q&A No.Interpretations 2012-01, PFRS 3.2 - thepoolingofinterestmethod,In applying thePhilippine theGroupfollows using thepoolingofinterestmethod. commercial substance, isaccountedfor thebusinesscombination interest, shallbeconsidered. Incaseswherethetransactionhasno other thanthecombiningentitiessuchasnon-controlling andtheinvolvementofpartiespurpose ofthebusinesscombination hassubstance,business combination factorssuchastheunderlying perspective ofthereportingentity. Indeterminingwhetherthe is used, substancefromthe ifthetransactionwasdeemedtohave Control BusinessCombinations. The purchasemethodofaccounting CommitteeQ&ANo.Interpretations 2011-02, PFRS3.2Common in accordancewiththeguidanceprovidedbyPhilippine control”), theGroupaccountsforsuchbusinesscombinations undercommon (“businesscombinations the controlisnottransitory andthatShareholders) beforeandafterthebusinesscombination parent(i.e., controlledbythesameultimate ultimately Controlling are involvingentitiesthat Where therearebusinesscombinations Common controlbusinesscombinations goodwillmaybeimpaired. that circumstances indicate December31orearlierwhenevereventschangesin basis every The Groupperformsitsimpairmenttestofgoodwillonanannual always beencombined. always tookplace. combination combining entitiesforthefullyear, irrespectiveofwhenthe distribution ofequity. within equityasotherreserve, i.e., eithercontributionor paidortransferredandtheequityacquiredisreflected consideration to eitherofthecombiningentities. differencebetweenthe Any existinggoodwillrelating isrecognizedany only goodwillthat accounting policies. aremadethoseadjustmentstoharmonize adjustments that new assetsorliabilities, ofthecombination. thedate at The only No adjustmentsaremadetoreflectfairvalues, orrecognizeany amounts.at theircarrying financialstatements the consolidated Application of of Application

•2, PFRS • PFRS 8, Segments- Operating Segments ofOperating Aggregation PFRS 3, - BusinessCombinations • Accounting forContingentConsideration • PAS24, • PAS 16, Property, PlantandEquipment, andPAS 38, Intangible Assets •3, PFRS • AnnualImprovementstoPFRSs(2011-2013cycle) •13, PFRS obntos o wih h aqiiin ae s n r after consider thisamendmentforfuturebusinesscombinations. or on Financial Instruments: Recognition and Measurement. The Group shall is date profit orlosswhethernotitfallswithinthescopeof PAS 39, acquisition classifiedat fairvaluethrough asequityissubsequentlymeasured the which July 1, 2014. is not It clarifies that a contingent consideration that for combinations ,in aBusinessCombination prospectivelyforbusiness isapplied • If thecounterparty, regardlessofthereason, ceasestoprovide • A performanceconditionmaybeamarketornon-market • oractivities totheoperations A performance targetmayrelate • A performancetargetmustbemetwhilethecounterpartyis • condition A performanceconditionmustcontainaservice conditions, including: conditionswhicharevesting definitions ofperformanceandservice prospectivelyandclarifiesapplied tothe variousissuesrelating • ofsegmentassetstototalisonly The reconciliation • An entitymustdisclose in thejudgmentsmadebymanagement the Entity’s Assets, retrospectivelyandclarify isapplied that: ofthe and Reconciliation Total oftheReportableSegments’ Assets to difference between the gross and carrying amountsoftheasset. difference betweenthegrossandcarrying In addition, isthe oramortization depreciation theaccumulated amount. oneitherthegrossor net carrying data the observable in PAS 16andPAS theassetmayberevaluedbyreferenceto 38that ,and Amortization retrospectivelyandclarifies isapplied Depreciation of Restatement Method-Proportionate - Revaluation Accumulated material impact totheGroup.material They include: 1,for annualperiodsbeginningonorafterJanuary no 2015andhave The Annual ImprovementstoPFRSs(2011-2013cycle) areeffective services.expenses incurredformanagement entityisrequiredtodisclose usesamanagement an entitythat the party disclosures. party subject to the related is a related In addition, personnelservices, provideskeymanagement which isanentitythat retrospectivelyandclarifiesentity, amanagement is applied that • onlytothe accounting inthe This scopeexceptionapplies • Joint arrangements, notjustjointventures, areoutsidethescope regarding thescopeexceptionswithinPFRS3: Arrangements, prospectivelyandclarifies isapplied thefollowing to othercontractswithinthescopeofPAS 39(orPFRS9, asapplicable). notonlytofinancialassetsand liabilities,be applied butalso prospectively andclarifies theportfolioexceptioninPFRS13can that satisfied. duringthevestingperiod,service conditionisnot theservice of anentity, ortothoseofanotherentityinthesamegroup rendering service segment liabilities. decisionmaker,operating similartotherequireddisclosure for required tobedisclosed isreportedtothechief ifthereconciliation to assesswhetherthesegmentsare ‘similar’. the economic characteristics (e.g., sales and gross margins) used and beenaggregated have segmentsthat description ofoperating criteriainthestandard, theaggregation applying including abrief financial statements ofthejointarrangementitself. financial statements of PFRS3. Share-based Payment -Definitionof Vesting Condition,is Related PartyRelated Disclosures Personnel - Key Management , Business Combinations -ScopeExceptionsfor Joint Business Combinations Fair Value Measurement-Portfolio Exception , isapplied • PAS 40, Investment Property, is applied prospectively and clarifies • PAS 27, Separate Financial Statements - Equity Method in Separate that PFRS 3, and not the description of ancillary services in PAS 40, Financial Statements (Amendments). The amendments will allow is used to determine if the transaction is the purchase of an asset or entities to use the equity method to account for investments in business combination. The description of ancillary services in PAS 40 subsidiaries, joint ventures and associates in their separate financial only differentiates between investment property and owner-occupied statements. Entities already applying PFRS and electing to change property (i.e., property, plant and equipment). to the equity method in its separate financial statements will have to apply that change retrospectively. For first-time adopters of New Accounting Standards, Interpretations and Amendments to Existing PFRS electing to use the equity method in its separate financial Standards Effective Subsequent to December 31, 2015 statements, they will be required to apply this method from the The Group will adopt the standards, amendments and interpretations date of transition to PFRS. The amendments are effective for annual enumerated below when these become effective. Except as otherwise periods beginning on or after January 1, 2016, with early adoption indicated, the G roup does not expect the adoption of these new changes permitted. These amendments will not have an impact on the in PFRS to have a significant impact on the consolidated financial consolidated financial statements. However, in the separate financial statements. The relevant disclosures will be included in the notes to statements, the Company will continue to account for its investments consolidated financial statements when these become effective. in associates and joint venture using the cost method.

Deferred • PFRS 11, Joint Arrangements - Accounting for Acquisitions of Interests in Joint Operations (Amendments). The amendments to PFRS 11 • Philippine Interpretation IFRIC 15, Agreements for the Construction require that a joint operator accounting for the acquisition of an of Real Estate, covers accounting for revenue and associated expenses interest in a joint operation, in which the activity of the joint operation by entities that undertake the construction of real estate directly or constitutes a business must apply the relevant PFRS 3 principles for through subcontractors. The Philippine SEC and the FRSC have business combinations accounting. The amendments also clarify that deferred the effectivity of this interpretation until the final Revenue a previously held interest in a joint operation is not remeasured on the standard is issued by the IASB and an evaluation of the requirements acquisition of an additional interest in the same joint operation while of the final Revenue standard against the practices of the Philippine joint control is retained. In addition, a scope exclusion has been added real estate industry is completed. The Group is currently assessing to PFRS 11 to specify that the amendments do not apply when the the impact of IFRS 15 and plans to adopt the new standard on the parties sharing joint control, including the reporting entity, are under required effective date once locally adopted. common control of the same ultimate controlling party.

• Amendments to PFRS 10 and PAS 28 - Sale or Contribution of The amendments apply to both the acquisition of the initial interest Assets between an Investor and its Associate or Joint Venture. These in a joint operation and the acquisition of any additional interests in amendments address an acknowledged inconsistency between the same joint operation and are prospectively effective for annual the requirements in PFRS 10 and those in PAS 28 in dealing with periods beginning on or after January 1, 2016, with early adoption the sale or contribution of assets between an investor and its permitted. The Group will consider these amendments for future associate or joint venture. The amendments require that a full transactions. gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss • PFRS 14, Regulatory Deferral Accounts. PFRS 14 is an optional standard is recognized when a transaction involves assets that do not that allows an entity, whose activities are subject to rate-regulation, constitute a business, even if these assets are housed in a subsidiary. to continue applying most of its existing accounting policies for On January 13, 2016, the FRSC postponed the original effective date regulatory deferral account balances upon its first-time adoption of of January 1, 2016 of the said amendments until the International PFRS. Entities that adopt PFRS 14 must present the regulatory deferral Accounting Standards Board has completed its broader review accounts as separate line items on the statement of financial position of the research project on equity accounting that may result in and present movements in these account balances as separate line the simplification of accounting for such transactions and of other items in the statement of profit or loss and other comprehensive aspects of accounting for associates and joint ventures. The Group income. The standard requires disclosures on the nature of, and risks will consider these amendments for future sale or contribution of associated with, the entity’s rate-regulation and the effects of that assets of the Group to its associates and joint venture. rate-regulation on its financial statements. PFRS 14 is effective for annual periods beginning on or after January 1, 2016. Since the Effective on January 1, 2016 Group is an existing PFRS preparer, this standard would not apply.

• Amendments to PFRS 10, Consolidated Financial Statements, • Amendments to PAS 1, Presentation of Financial Statements - Disclosure PFRS 12, Disclosure of Interests in Other Entities and PAS 28, Initiative Investments in Associates and Joint Ventures - Investment Entities: The amendments to PAS 1 clarify, rather than significantly change, Applying the Consolidation Exception existing PAS 1 requirements. The amendments clarify: The amendments address issues that have arisen in applying the investment entities exception under PFRS 10. The amendments to • The materiality requirements in PAS 1 PFRS 10 clarify that the exemption from presenting consolidated • That specific line items in the statement(s) of profit or loss and OCI financial statements applies to a parent entity that is a subsidiary of and the statement of financial position may be disaggregated an investment entity, when the investment entity measures all of its • That entities have flexibility as to the order in which they present subsidiaries at fair value. the notes to financial statements • That the share of OCI of associates and joint ventures accounted for Furthermore, the amendments to PFRS 10 clarify that only a subsidiary using the equity method must be presented in aggregate as a single of an investment entity that is not an investment entity itself and that line item, and classified between those items that will or will not be provides support services to the investment entity is consolidated. All subsequently reclassified to profit or loss other subsidiaries of an investment entity are measured at fair value. The amendments to PAS 28 allow the investor, when applying the equity Furthermore, the amendments clarify the requirements that apply method, to retain the fair value measurement applied by the investment when additional subtotals are presented in the statement of financial entity associate or joint venture to its interests in subsidiaries. position and the statement(s) of profit or loss and OCI. 54 55

ANNUAL REPORT 2015 Applicability ofthe PFRS 7-Applicability Amendments toPFRS7CondensedInterim • • PFRS 7,• PFRS PFRS 5, • Non-current Assets HeldforSaleandDiscontinuedOperations impactontheGroup. amaterial expected tohave They include: 1,for annualperiodsbeginningonorafterJanuary 2016andarenot The Annual ImprovementstoPFRSs(2012-2014cycle) areeffective Annual ImprovementstoPFRSs(2012-2014cycle) • PAS 16, Property, PlantandEquipment, andPAS 41, Agriculture •16, PAS reported inthemostrecentannualreport. totheinformation report unlesstheyprovideasignificant update financial liabilitiesarenotrequiredinthe condensedinterimfinancial and clarifies the disclosures that onoffsettingoffinancialassetsand Financial. Statements retrospectively This amendmentisapplied as it does not have any bearerplants. any as itdoesnothave impacttotheGroup any amendments arenotexpectedtohave 1,after January 2016, withearlyadoptionpermitted. These plants, retrospectively effectiveforannualperiodsbeginningonor bearer to related of Government Assistance, willapply. The amendmentsare grants government For PAS 20, Accounting forGovernmentGrantsandDisclosure sell. to costs remain in the scope of PAS fair value less 41 measured at onbearerplantswill grows produce that also require that model(aftermaturity).model orrevaluation The amendments and using either the cost cost (before maturity) accumulated at initial recognition, bearerplantswillbemeasuredunderPAS 16 be withinthescopeofPAS 41. Instead, PAS 16willapply. After meetthedefinitionofbearerplantswillnolongerassets that definition ofbearerplants. Undertheamendments, biological meettheaccounting requirementsforbiologicalassetsthat -Bearer Plants(Amendments). The amendmentschangethe entity first applies theamendments. entity firstapplies periodbeginningbeforetheannualinwhich for any However, disclosures comparative arenotrequiredtobeprovided continuing involvementwillneedtobedoneretrospectively. contractsconstitute theassessmentofwhichservicing that disclosures are required. suchThe amendment is to be applied the guidanceinPFRS7ordertoassesswhethertheagainst asset. ofthefee andarrangementAn entitymustassessthenature includes afeecanconstitutecontinuinginvolvementinfinancial entirety. contractthatThe amendmentclarifies aservicing that isderecognizedinitsinvolvement inatransferredassetthat PFRS 7requiresanentitytoprovidedisclosures continuing forany the disposal method does not change the date ofclassification.the disposalmethoddoesnotchangedate requirements in PFRS 5. The amendment also clarifies changing that original plan. There is, therefore, ofthe nointerruptionoftheapplication considered tobeanewplanofdisposal, ofthe itisacontinuation rather andvice-versashouldnotbe a disposalthroughdistributiontoowners prospectively andclarifies changingfromadisposalthroughsaleto that - ChangesinMethodsofDisposal. The amendmentisapplied assets. itsnon-current it doesnotusearevenue-basedmethodtodepreciate impact to the Group since any amendments are not expected to have 1,on orafterJanuary 2016, withearlyadoptionpermitted. These amendments areeffectiveprospectivelyforannualperiodsbeginning limitedcircumstancestoamortizeintangibleassets.used invery The property,be usedtodepreciate plantandequipmentmayonlybe through useofthe asset. As aresult, a revenue-based method cannot areconsumed thantheeconomicbenefitsthat asset ispart)rather abusiness(ofwhichthe fromoperating aregenerated benefits that in PAS 16andPAS ofeconomic revenuereflectsapattern 38that (Amendments).Amortization The amendmentsclarify theprinciple ofAssets -Clarification and AcceptableMethodsofDepreciation Financial Instruments: Disclosures Contracts. -Servicing Property, PlantandEquipment, andPAS 38, Intangible • PFRS 16, • Leases. The newstandardintroducesmajorchangesinlease Effective in2019 • FinancialInternational ReportingStandard(IFRS)15, Revenue PFRS 9, • Financial Instruments. InJuly2014, thefinalversionofPFRS9, Effective in2018 •34, PAS •19, PAS standard. The Group is currently assessing the impact of adopting this classification andmeasurementoftheGroup’s financial liabilities. forfinancialassets,methodology noimpactonthe butwillhave and measurementoftheGroup’s financialassetsandimpairment aneffectontheclassificationThe adoptionofPFRS9willhave February 1, 2015. isbefore ofinitialapplication versions ofPFRS9ispermittedifthedate isnotcompulsory. information comparative ofprevious Earlyapplication permitted. isrequired,early application Retrospectiveapplication but 1,effective for annual periods beginning on or after January 2018, with and measurement, impairment, andhedgeaccounting. PFRS9is of PFRS9. The standardintroducesnewrequirementsforclassification Instruments: RecognitionandMeasurement, andallpreviousversions the financialinstrumentsprojectandreplaces PAS 39, Financial Financial Instruments, wasissued. PFRS9reflectsallphasesof from theserequirements. or lessforwhichtheunderlyingasset is oflow value are exempted liabilities intheirprofitorloss. Leaseswithatermof12months theleasedassetsandrecognizeinterest ontheleasedepreciate for most leases ontheir balance sheets, andsubsequently, will this model, liabilities lesseeswillrecognize theassetsandrelated Leases. Rather, thesingle-assetmodel. lesseeswillapply Under orfinanceleasesinaccordancewithPASleases asoperating 17, accounting. UnderPFRS16, lesseeswillnolongerclassify their once adoptedlocally.date IFRS 15andplanstoadoptthenewstandardonrequiredeffective adoption permitted. The Groupis currentlyassessingtheimpactof 1,for annualperiodsbeginningonorafterJanuary 2018withearly IFRS. is required application Either a full or modified retrospective supersede allcurrentrevenuerecognitionrequirementsunder toallentitiesandwill The newrevenuestandardisapplicable recognizing revenue. tomeasuringandIFRS 15provideamorestructuredapproach toacustomer.transferring goodsorservices The principlesin to which an entity expects to be entitled in exchange for reflectstheconsideration anamountthat is recognizedat arising fromcontractswithcustomers. UnderIFRS15revenue to revenue will apply and establishes a new five-step model that from ContractswithCustomers. IFRS15wasissuedinMay2014 risk report). interim financialreport(e.g., or commentary inthemanagement andwherevertheyareincludedstatements withinthegreater bycross-referencebetweentheinterimfinancialincorporated disclosures or musteitherbeintheinterimfinancialstatements retrospectivelyandclarifiesis applied therequiredinterim that “Elsewhere intheInterimFinancialamendment Report”. The bond rates mustbeused.bond rates currency, bondsinthat market forhighqualitycorporate government islocated. wheretheobligation the country When thereisnodeep on thecurrency isdenominated, inwhichtheobligation than rather bondsisassessedbased market depth ofhighquality corporate that .Discount Rate prospectivelyandclarifiesThis amendmentisapplied Employee Benefits - Regional Market Issue Regarding Employee Interim Financial Reporting-Disclosure ofInformation

The accounting by lessors is substantially unchanged as the new standard Non-current Assets and Disposal Group Classified as Held for Sale and carries forward the principles of lessor accounting under PAS 17. Lessors, Discontinued Operations however, will be required to disclose more information in their financial The Group classifies non-current assets and disposal group as held statements, particularly on the risk exposure to residual value. for sale if their carrying amounts will be recovered principally through a sale transaction. Such non-current assets and disposal groups PFRS 16 will replace PAS 17 and supersede the related interpretations. are measured at the lower of their carrying amount and fair value Earlier application is not permitted until the FSRC has adopted the less costs to sell. Costs to sell are the incremental costs directly new revenue recognition standard. attributable to the sale, excluding the finance costs and income tax expense. The Group is currently assessing the impact of PFRS 16. The criteria for held for sale classification is regarded as met only when The Group continues to assess the impact of the above new and amended the sale is highly probable and the asset or disposal group is available accounting standards and interpretations effective subsequent to 2015 on the for immediate sale in its present condition. Actions required to complete Group’s consolidated financial statements in the period of initial application. the sale should indicate that it is unlikely that significant changes to Additional disclosures required by these amendments will be included in the the sale will be made or that the decision to sell will be withdrawn. consolidated financial statements when these amendments are adopted. Management must be committed to the sale expected within one year from the date of the classification. Significant Accounting Policies Applicable to the Group Assets and liabilities of disposal group classified as held for sale are Investments in Associates and a Joint Venture presented separately in the consolidated statements of financial Investment in associates pertains to entities over which the Group has position. significant influence but not control. Investment in a joint venture pertains to the Group’s interest in a joint venture, which is a jointly controlled entity, The Group accounts for any investment to be retained over the disposal whereby the venturers have a contractual arrangement that establishes group at cost and presents it as part of ‘Investment in subsidiaries’ in joint control over the economic activities of the entity. The joint venture the consolidated balance sheet. arrangement requires unanimous agreement for financial and operating decisions among the venturers. The Group recognizes its investments in A disposal group qualifies as discontinued operation if it is a component associates and a joint venture using the equity method. of an entity that either has been disposed of, or is classified as held for sale, and: Under the equity method, the investments in associates and a joint venture are carried in the consolidated balance sheet at cost plus • Represents a separate major line of business or geographical area post-acquisition changes in the Group’s share of the net assets of the of operations associate and joint venture. The Group’s share in the associates’ and • Is part of a single co-ordinated plan to dispose of a separate major line joint venture’s post-acquisition profits or losses is recognized in the of business or geographical area of operations, or consolidated statement of income, and its share of post-acquisition • Is a subsidiary acquired exclusively with a view to resale movements in the associates’ and joint venture’s equity reserves is recognized directly in other comprehensive income. When the Discontinued operations are excluded from the results of continuing Group’s share of losses in the associate and joint venture equals or operations and are presented as a single amount as profit or loss after tax exceeds its interest in the associates and joint venture, including any from discontinued operations in the statement of income. other unsecured receivables, the Group does not recognize further losses, unless it has incurred legal or constructive obligations or made Fair Value Measurement payments on behalf of the associate and joint venture. Profits and losses The Group measures certain financial instruments and nonfinancial resulting from transactions between the Group and the associates and assets at fair value at each balance sheet date. Also, fair values of joint venture are eliminated to the extent of the interest in the associates financial instruments measured at amortized cost and investment and joint venture. properties carried at cost are disclosed in Note 34.

Where necessary, adjustments are made to the financial statements of Fair value is the price that would be received to sell an asset or paid to the associates and a joint venture to bring the accounting policies used transfer a liability in an orderly transaction between market participants in line with those used by the Group. at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability For additional acquisitions resulting to a significant influence over an takes place either: associate whose original investments were previously held at fair value through other comprehensive income, the changes in fair value previously • In the principal market for the asset or liability, or recognized are reversed through equity reserves to bring the asset back to • In the absence of a principal market, in the most advantage for the its original cost. The difference between the sum of consideration and asset or liability the share of fair value of net assets at date the investment becomes an associate is recognized as goodwill which is retained in the carrying The principal or the most advantageous market must be accessible to value of the investment or a gain in consolidated net income under by the Group. “Equity in net earnings of associates”. The fair value of an asset or a liability is measured using the Upon loss of significant influence over the associate or upon loss of assumptions that market participants would use when pricing the joint control on the jointly controlled entity, the Group measures and asset or liability, assuming that market participants act in their recognizes any retained investment at its fair value. Any difference economic best interest. between the carrying amount of the associates and joint venture upon loss of significant influence and the fair value of the retained investment A fair value measurement of a non-financial asset takes into account and proceeds from disposal is recognized either in profit or loss or other a market participant’s ability to generate economic benefits by using comprehensive income in the consolidated statement of comprehensive the asset in its highest and best use or by selling it to another market income. participant that would use the asset in its highest and best use. 56 57

ANNUAL REPORT 2015 for financial instruments at FVPL,for financialinstruments theinitialmeasurementoffinancial at fairvalue.All financialinstrumentsareinitiallyrecognized Except Initial recognitionoffinancialinstruments to theborrowers. loans arerecognizedwhencashisreceivedbytheGrouporadvanced purchase orsell). Deposits, amountsduetobanksandcustomers basis (i.e.,recognized on trade date the Group commits to that the date marketplace arerecognizedonsettlementdate. are Derivatives orconventioninthe within thetimeframeestablishedbyregulation ofassets requiredelivery Purchases orsalesoffinancialassetsthat ofrecognition Date Financial Instruments are subjecttoaninsignificantriskofchangesinfairvalue. ofplacementsandthat ofthreemonthsorlessfromdates maturities amountsofcash, areconvertibletoknown to resellthat withoriginal banks, interbank loans receivable and securities held under agreements cash andotheritems(COCI), amountsduefromBSPandother For purposesofreportingcashflows, cashandequivalentsinclude change invalue. ofacquisition,dates aresubjecttoaninsignificantriskof andthat ofthreemonthsorlessfrom amounts ofcashwithoriginalmaturities term, arereadilyconvertibletoknown highlyliquidinvestmentsthat Cash includes cashonhandandinbanks. Cashequivalentsareshort- Cash andEquivalents other relevantdocuments. tocontractsand computation inthevaluation theinformation agreeing by valuation applied inthelatest verifiesthemajor inputs management re-assessed aspertheGroup’s accountingpolicies. For thisanalysis, values ofassetsandliabilitieswhicharerequiredtobere-measuredor At eachreportingdate, analysesthemovementsin management techniques andinputstouseforeachcase. after discussions with the Group’s external valuers, which valuation whether professionalstandardsaremaintained. decides, Management criteria include marketknowledge, reputation, independence and bytheauditcommittee.after discussionwithandapproval Selection is decideduponannuallybytherespectivesegmentmanagement as propertiesand AFS investments. Involvementofexternalvaluers ofsignificantassets,External valuersareinvolvedforvaluation such reporting period. at theendofeach significant tothefairvaluemeasurementasawhole) is levelofinputthat (basedonthelowest re-assessing categorization occurred between levels in the hierarchy by whether transfers have onarecurringbasis,financial statements theGroupdetermines For arerecognizedintheconsolidated assetsandliabilitiesthat • Level3- levelofinputthat Valuation techniquesforwhichthelowest • Level2- levelofinputthat Valuation techniquesforwhichthelowest • Level 1-Quoted(unadjusted)marketpricesinactivemarketsfor issignificanttothefairvaluemeasurementasawhole: that value hierarchy, describedasfollows, levelofinput basedonthelowest withinthefair arecategorized financialstatements in theconsolidated All assetsandliabilitiesforwhichfairvalueismeasuredordisclosed inputs. minimizing theuseofunobservable fair value, inputsand maximizingtheuseofrelevantobservable available tomeasure are circumstances andforwhichsufficientdata inthe areappropriate techniquesthat The Groupusesvaluation is significant to the fair value measurement is unobservable is significanttothefairvaluemeasurementunobservable observable is significanttothefairvaluemeasurementdirectlyorindirectly identical assetsorliabilities agreements) contracts.agreements) includeThese embeddedderivatives credit receivables) and non-financial (such aspurchase orders and service in hostfinancial(suchasstructurednotes, debtinvestments, andloans The Group’s areembedded that bankingsegment hascertainderivatives Embedded derivatives negative. when thefairvalueispositiveandasliabilities under “Revenue -banking” account. are carriedasassets Derivatives and areincluded in “Trading andinvestmentsecuritiesgains-net” ofincome statement aretakendirectlytotheconsolidated derivatives fair value. gainsorlosses arisingfromchangesinfairvaluesof Any contractisenteredintoandaresubsequentlyremeasuredat derivative whichthe at fairvalueonthedate instruments areinitiallyrecordedat exposures, as well as for trading purposes. financial Such derivative their respective foreign exchange and interest rate or managing tocustomersandas ameansofreducing are enteredintoasaservice currency and warrants. swaps, swaps interest rate These derivatives contracts,counterparties to derivative such as currency forwards, are The Group has subsidiaries in the banking segment that FVPL recordedat Derivatives methodofrecognizingthe the appropriate ‘Day 1’differenceamount. instrument isderecognized. For eachtransaction, theGroupdetermines orwhenthe ofincomewhentheinputsbecomeobservable statement transaction price andmodelvalueisonlyrecognized in theconsolidated asset. isnotobservable, Incaseswheredata thedifferencebetween gains -net” unlessitqualifiesforrecognitionassomeothertypeof ofincomein statement consolidated “Trading andinvestment securities between the transaction price andfair value (a ‘Day 1’ difference) in the market, fromobservable only data theGrouprecognizesdifference technique whose variables includeinstrument or based on a valuation currentmarkettransactionsinthesame fair valuefromotherobservable Where thetransactionpriceinanon-activemarketisdifferentfrom ‘Day 1’difference adjusttheEIRprospectively.of cashflows the reclassificationdetermined at date. Further increases inestimates assets reclassified are toloansandreceivablesHTMcategories aresubsequentlymade.date (EIR)forfinancial Effectiveinterestrates no reversalsoffairvaluegainsorlossesrecordedbeforereclassification Fair valuebecomesthenewcostoramortizedasapplicable, and Reclassificationsat fairvalueasofthereclassificationdate. aremade ability toholdthefinancialinstrumentsmaturity. investments when there is achange of intention and theGroup has the The Groupmayalsoreclassify certain AFS investmentstoHTM ofreclassification. thedate at the foreseeablefutureoruntilmaturity the Grouphasintentionandabilitytoholdthesefinancialassetsfor loans andreceivablesoutoftheHFTor if AFS investmentscategories choose toreclassify wouldmeetthedefinitionof financialassetsthat highly unlikelytorecurinthenearterm. Inaddition, theGroupmay isunusualand in rarecircumstancesarisingfromasingleeventthat is nolongerheldforpurposesofsellingitintheneartermandonly asset outoftheheld-for-trading ifthefinancialasset (HFT)category The Group may choose to reclassify trading financial a non-derivative Reclassification offinancialassets at amortizedcost. FVPLandotherfinancialliabilities at reporting date. Financial liabilities are classified into financial liabilities every at andappropriate, suchdesignation where allowed re-evaluates determines the classificationat initialrecognition and, of itsinvestments acquired andwhethertheyarequotedinanactivemarket. Management classification dependsonthepurposeforwhichinvestments were HTM investments, AFS investments, andloansreceivables. The categories:financial assets in the following at FVPL, financial assets instruments includes transactioncosts. The Groupclassifies its default swaps (which are linked either to a single reference entity or Loans and receivables also include receivables arising from transactions a basket of reference entities); conversion options in loans receivables; on credit cards issued directly by PNB. Furthermore, ‘Loans and call options in certain long-term debt, and foreign-currency derivatives receivables’ include the aggregate rental on finance lease transactions in debt instruments, purchase orders and service agreements. and notes receivables financed by Japan - PNB Leasing and Allied Embedded derivatives are bifurcated from their host contracts and Leasing and Finance Corporation (ALFC). Unearned income on finance carried at fair value with fair value changes being reported through lease transactions is shown as a deduction from ‘Loans and receivables’ profit or loss, when the entire hybrid contracts (composed of both the (included in ‘Unearned interest and other deferred income’). host contract and the embedded derivative) are not accounted for as financial assets at FVPL, when their economic risks and characteristics After initial measurement, the ‘Loans and receivables’, ‘Due from are not closely related to those of their respective host contracts, and BSP’, ‘Due from other banks’, ‘Interbank loans receivable’, ‘Securities when a separate instrument with the same terms as the embedded held under agreements to resell’ and ‘Receivable from SPV’ are derivative would meet the definition of a derivative. The Group assesses subsequently measured at amortized cost using the effective interest whether embedded derivatives are required to be separated from the method, less allowance for credit losses. Amortized cost is calculated host contracts when the Group first becomes a party to the contract. by taking into account any discount or premium on acquisition and Reassessment of embedded derivatives is only done when there are fees that are an integral part of the EIR. The amortization is included changes in the contract that significantly modifies the contractual cash in ‘Interest income’ in the consolidated statement of income. The losses flows. arising from impairment are recognized in ‘Provision for impairment and credit losses’ in the consolidated statement of income. Other financial assets or financial liabilities held-for-trading Other financial assets or financial liabilities held for trading (classified as AFS investments “Financial assets at FVPL’ or ‘Financial liabilities at FVPL”) are recorded AFS investments are those which are designated as such or do not in the consolidated balance sheet at fair value. Changes in fair value qualify to be classified as “Financial assets at FVPL”, “HTM investments” relating to the held-for-trading positions are recognized in “Trading or “Loans and receivables”. They are purchased and held indefinitely, and investment securities gains - net”. Interest earned or incurred is and may be sold in response to liquidity requirements or changes in recorded in ‘Interest income’ or ‘Interest expense’, respectively, while market conditions. They include debt and equity instruments. dividend income is recorded in ‘Miscellaneous income’ when the right to receive payment has been established. After initial measurement, AFS investments are subsequently measured at fair value. The effective yield component of AFS debt securities, as Included in this classification are debt and equity securities which have well as the impact of restatement on foreign currency-denominated AFS been acquired principally for the purpose of selling or repurchasing in debt securities, is reported in the consolidated statement of income. the near term. The unrealized gains and losses arising from the fair valuation of AFS investments are excluded, net of tax, from reported income and Designated financial assets or financial liabilities at FVPL are reported as “Net changes in fair value of AFS investments” in the Financial assets or financial liabilities classified in this category are consolidated statement of comprehensive income. designated by management on initial recognition when any of the following criteria are met: The losses arising from impairment of AFS investments are recognized as “Provision for impairment and credit losses” in the consolidated statement • The designation eliminates or significantly reduces the inconsistent of income. The impairment assessment would include an analysis of the treatment that would otherwise arise from measuring the assets or significant or prolonged decline in fair value of the investments below liabilities or recognizing gains or losses on them on a different basis; or its cost. The Group treats “significant” generally as 20% or more and • The assets and liabilities are part of a group of financial assets, “prolonged” as greater than 12 months for quoted equity securities. financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk When the security is disposed of, the cumulative gain or loss previously management or investment strategy; or recognized in other comprehensive income is recognized as “Trading • The financial instrument contains an embedded derivative, unless the and investment securities gains - net” under the “Banking revenue” while embedded derivative does not significantly modify the cash flows or recognized in profit or loss for the other operating segments in the consolidated it is clear, with little or no analysis, that it would not be separately statement of income. Interest earned on holding AFS debt investments are recorded. reported as ‘Interest income’ using the EIR. Dividends earned on holding AFS equity investments are recognized in the consolidated statement of income as Designated financial assets and financial liabilities at FVPL are recorded “Others - net” when the right of the payment has been established. in the consolidated balance sheet at fair value. Changes in fair value are recorded in “Trading and investment securities gains – net” under HTM investments “Revenue - banking” account. Interest earned or incurred is recorded HTM investments are quoted non-derivative financial assets with fixed in “Interest income” or “Interest expense”, respectively, while dividend or determinable payments and fixed maturities for which the Group’s income is recorded in “Others - net” according to the terms of the management has the positive intention and ability to hold to maturity. contract, or when the right of payment has been established. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and would have to be Loans and receivables reclassified as AFS investments. Once tainted, the Group is prohibited Significant accounts falling under this category are loans and receivables, from classifying investments under HTM for at least the following two amounts due from BSP and other banks, interbank loans receivable, financial years. After initial measurement, these HTM investments are securities held under agreements to resell, and receivable from Special- subsequently measured at amortized cost using the effective interest purpose vehicle (SPV) (included under ‘Other noncurrent assets’). method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees These are non-derivative financial assets with fixed or determinable that are an integral part of the EIR. The amortization is included in payments and fixed maturities and are not quoted in an active market. “Interest income” in the consolidated statement of income. The losses They are not entered into with the intention of immediate or short-term arising from impairment of such investments are recognized in the resale and are not classified as financial assets at FVPL or designated consolidated statement of income under “Provision for impairment, as AFS investments. credit and other losses”. 59 58

ANNUAL REPORT 2015 delinquency ininterestorprincipalpayments, they theprobabilitythat isexperiencingsignificant financialdifficulty,of borrowers defaultor oragroup of impairmentmayinclude theborrower that indications can bereliablyestimated.the groupoffinancialassetsthat Evidence ofthefinancialassetor futurecashflows an impactontheestimated the asset (an incurred loss event (or events) has ‘loss event’) and that hasoccurredaftertheinitialrecognitionof one ormoreeventsthat if, andonlyif, thereisobjectiveevidenceofimpairmentasaresult A financialassetoragroupofassetsisdeemedtobeimpaired afinancialassetorgroupofassetsisimpaired.evidence that whetherthereisobjective eachreportingdate The Groupassessesat Impairment ofFinancial Assets ofincome. statement recognized intheconsolidated new liability, amountsis andthedifference intherespectivecarrying as aderecognitionoftheoriginalliabilityandrecognition substantially modified, is treated such an exchange or modification substantially differentterms, orthetermsofanexistingliabilityare financial liabilityisreplacedbyanotherfromthesamelenderon liability is discharged or cancelled or has expired. Where an existing underthe A financialliabilityisderecognizedwhentheobligation Financial liability could berequiredtorepay. theGroup that of theassetandmaximumamountconsideration amount oforiginalcarrying thelower transferred assetismeasuredat takestheformofaguaranteeover Continuing involvementthat to theextentofGroup’s continuinginvolvementintheasset. asset nortransferredcontrolovertheasset, theassetisrecognized transferred norretainedsubstantiallyalltherisksandrewardsof asset orhasenteredintoapass-througharrangement, andhasneither froman Where theGrouphastransferreditsrightstoreceivecashflows • from the the Group has transferred its rights to receive cash flows • fromtheasset, the Groupretainsrighttoreceivecashflows but expired; fromtheassethave • therightstoreceivecashflows of agroupfinancialassets)isderecognizedwhen: A financialasset(or,applicable apartoffinancialassetor where Financial asset Derecognition ofFinancial Assets andLiabilities are anintegralpartoftheEIR. discountorpremiumontheissueandfeesthat taking intoaccountany using theeffective interest method. by Amortized cost is calculated amortizedcost FVPLaresubsequentlymeasuredat at not designated After initialmeasurement, otherfinancialliabilitiesnotqualifiedasand ofissue. component onthedate determinedasthefairvalueofliability the amountseparately the residualamountafterdeductingfrominstrumentasawhole accounted forseparately, withtheequitycomponentbeingassigned containbothliabilityandequityelementsare financial instrumentsthat own equityshares.for afixednumberof Thecomponentsofissued by the exchange of a fixed amount of cash or another financial asset financial assettotheholder, otherthan theobligation ortosatisfy either to deliver cash or another an obligation in theGrouphaving accounts, wherethesubstanceofcontractualarrangementresults financialliability term andlong-termdebtsotherappropriate acceptances payable, and accrued expenses, accountspayable short- FVPL, at designated are classified asdeposit liabilities, billsand Issued financial instruments or their components, which are not Other financialliabilities and rewardsoftheassetbuthastransferredcontroloverasset. rewards oftheasset, or(b)hasneithertransferrednorretainedtherisk asset and either (a) has transferred substantially all the risks and to athirdpartyunder “pass-through” arrangement;or delay topaytheminfullwithoutmaterial has assumedanobligation to the “Provision forimpairmentandcreditlosses” account. recovered,write-off is later amounts formerlychargedarecredited any account.loss isreducedbyadjustingtheallowance Ifafuture impairment wasrecognized, thepreviouslyrecognizedimpairment impairment loss decreases because of an event occurring after the has been realized. If subsequently, the amount of the estimated andallcollateral when thereisnorealisticprospectoffuturerecovery accounts, allowance together with the associated arewritten off based ontheoriginalEIRofasset. Loansandreceivables, of income.statement Interest income continues to be recognized account andtheamountoflossischargedtoconsolidated amountoftheassetisreducedthrough useofanallowance The carrying and actuallossexperience. differencesbetweenlossestimates regularly bytheGrouptoreduceany arereviewed futurecashflows and assumptionsusedforestimating of incurredlossesintheGroupandtheirmagnitude). The methodology in propertyprices, paymentstatus, areindicative orotherfactorsthat fromperiodto(suchchanges data observable changes inrelated reflect,changes in future cash flows andare directionally consistent with donotexistcurrently.conditions inthehistoricalperiodthat of Estimates the historicallossexperienceisbasedandtoremoveeffectsof didnotaffecttheperiodonwhich the effectsofcurrentconditionsthat toreflect data experience isadjustedonthebasisofcurrentobservable credit riskcharacteristicssimilartothoseintheGroup. Historicalloss onthebasisofhistoricallossexperienceforassetswith estimated forimpairmentare arecollectivelyevaluated of financialassetsthat type,collateral andterm. past-duestatus inagroup Future cash flows are groupedonthebasisofsuchcreditriskcharacteristicsasindustry, For ofimpairment, thepurposeofacollectiveevaluation financialassets impairment. to be, recognizedarenotincluded inacollectiveassessmentfor for impairmentandwhichanlossis, orcontinues the assets being evaluated. are individually assessedAssets that ability topayallamountsdueaccordingthecontractualtermsof ofthedebtors’ forgroupsofsuchassetsbybeingindicative flows offuture cashThose characteristicsare relevant to the estimation credit riskcharacteristicsandcollectivelyassessesforimpairment. or not, itincludes theassetinagroupoffinancialassetswithsimilar exists forindividuallyassessedfinancialasset, whethersignificant noobjectiveevidenceofimpairmentIf theGroupdeterminesthat foreclosure isprobable. less costsforobtainingandsellingthecollateral, whetherornot that mayresultfromforeclosureflows financial assetreflectsthecash ofacollateralized futurecashflows present valueoftheestimated adjusted fortheoriginalcreditriskpremium. ofthe The calculation impairmentlossisthecurrentEIR, formeasuringany the discountrate the financialasset’s originalEIR. Ifaloanhasvariableinterestrate, at isdiscounted futurecashflows The presentvalueoftheestimated (excluding notbeenincurred).cash flows have futurecreditlossesthat asset’s future amountandthepresentvalueofestimated carrying the amountoflossismeasuredasdifferencebetween animpairmentlosshasbeenincurred,If thereisobjectiveevidencethat arenotindividually significant. or collectivelyforfinancialassetsthat areindividuallysignificant,exists individuallyforfinancialassetsthat SPV, theGroupfirstassesseswhetherobjectiveevidenceofimpairment receivable, toresellandreceivablefrom securitiesheldunderagreements HTM investments, duefromBSPandotherbanks, interbankloans Forat amortizedcostssuchasloansandreceivables, financialassetscarried Financial amortizedcost assetsat withdefaults. correlate conditions that futurecashflows,estimated suchaschangesinarrears oreconomic thereismeasurabledecreaseinthe that indicate data observable will enterbankruptcy orotherfinancialreorganization, andwhere

Restructured loans that are expected to be realized for no more than 12 months after the Where possible, the Group seeks to restructure loans rather than to reporting period are classified as current assets, otherwise, these are take possession of collateral. This may involve extending the payment classified as other noncurrent assets. arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past Property, Plant and Equipment due. Management continuously reviews restructured loans to ensure Property, plant and equipment, other than land and land improvements, that all criteria are met and that future payments are likely to occur. The plant buildings and building improvements, and machineries and loans continue to be subject to an individual or collective impairment equipment, are stated at cost less accumulated depreciation and assessment, calculated using the loan’s original EIR. The difference amortization and any impairment in value. between the recorded value of the original loan and the present value of the restructured cash flows, discounted at the original EIR, is recognized The initial cost of property, plant and equipment consists of its purchase in “Provision for impairment and credit losses” in the consolidated price and any directly attributable costs of bringing the asset to its statement of income. working condition and location for its intended use and any estimated cost of dismantling and removing the property, plant and equipment AFS investments item and restoring the site on which it is located to the extent that the For AFS investments, the Group assesses at each reporting date Group had recognized the obligation of that cost. Such cost includes whether there is objective evidence that a financial asset or group of the cost of replacing part of the property, plant and equipment if the financial assets is impaired. In case of equity investments classified recognition criteria are met. When significant parts of property, plant as AFS investments, this would include a significant or prolonged and equipment are required to be replaced in intervals, the Group decline in the fair value of the investments below its cost. Where recognizes such parts as individual assets with specific useful lives there is evidence of impairment, the cumulative loss - measured as and depreciation, respectively. Likewise, when a major inspection is the difference between the acquisition cost and the current fair value, performed, its cost is recognized in the carrying amount of property, less any impairment loss on that financial asset previously recognized plant and equipment as a replacement if the recognition criteria are in the consolidated statement of income - is removed from equity and satisfied. All other repair and maintenance costs are expensed in the recognized in the consolidated statement of income. Impairment losses consolidated statement of income as incurred. Borrowing costs incurred on equity investments are not reversed through the consolidated during the construction of a qualifying asset is likewise included in the initial cost of property, plant and equipment. In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at Land and land improvements, plant buildings and building improvements, amortized cost. However, the amount recorded for impairment is the and machineries and equipment are stated at revalued amounts based cumulative loss measured as the difference between the amortized cost on a valuation performed by professionally qualified, accredited and and the current fair value, less any impairment loss on that investment independent appraisers. Revaluation is made every three to five years previously recognized in profit or loss. Future interest income is based such that the carrying amount does not differ materially from that which on the reduced carrying amount and is accrued based on the rate of would be determined using fair value at the end of reporting period. interest used to discount future cash flows for the purpose of measuring For subsequent revaluations, the accumulated depreciation at the date impairment loss. Such accrual is recorded as part of ‘Interest income’ in of revaluation is restated proportionately with the change in the gross the consolidated statement of income. If subsequently, the fair value of carrying amount of the asset so that the carrying amount of the asset a debt instrument increased and the increase can be objectively related after revaluation equals the revalued amount. Any resulting increase in to an event occurring after the impairment loss was recognized in the the asset’s carrying amount as a result of the revaluation is credited consolidated statement of income, the impairment loss is reversed directly to “Revaluation increment on property, plant and equipment, through the consolidated statement of income. net of related deferred income tax effect” (presented as part of “Other comprehensive income” in the equity section of the consolidated Offsetting of Financial Instruments balance sheet). Any resulting decrease is directly charged against any Financial instruments are offset and the net amount reported in related revaluation increment to the extent that the decrease does not the consolidated balance sheet if, and only if, there is a currently exceed the amount of the revaluation increment in respect of the same enforceable legal right to offset the recognized amounts and there is asset. Further, the revaluation increment of depreciable property, plant an intention to settle on a net basis, or to realize the asset and settle and equipment is transferred to retained earnings as the asset is used the liability simultaneously. The Group assesses that it has a currently by the Group. The amount of the revaluation increment transferred enforceable right of offset if the right is not contingent on a future event, would be the difference between the depreciation and amortization and is legally enforceable in the normal course of business, event of based on the revalued carrying amount of the asset and depreciation default, and event of insolvency or bankruptcy of the Group and all of and amortization based on the asset’s original cost. In case the asset the counterparties. is retired or disposed of, the related remaining revaluation increment is transferred directly to retained earnings. Transfers from revaluation Other Current Assets increment to retained earnings are not made through profit or loss. Prepayments are expenses paid in advance and recorded as asset before they are utilized. This account comprises mainly of prepaid importation As discussed in Note 1, certain assets and liabilities of FTC were charges and excise tax, prepaid rentals and insurance premiums and transferred by the Group as capital contribution to PMFTC. Such other prepaid items, and creditable withholding tax. Prepaid rentals and properties transferred include revaluation increment on depreciable insurance premiums and other prepaid items are apportioned over the property, plant and equipment amounting to P4.6 billion. Thus, the period covered by the payment and charged to the appropriate accounts carrying value of the net assets transferred to PMFTC, including the in the consolidated statement of income when incurred. revaluation increment, plus the fair value adjustment at the date of transfer, was deemed as the historical cost of such assets for PMFTC. Prepaid importation charges are applied to respective asset accounts, i.e., inventories and equipment, as part of their direct cost once Upon transfer in 2010, the Group realized through retained earnings importation is complete. Prepaid excise taxes are applied to inventory portion of its share in the net appraisal increase from the previous as part of its cost once related raw material item is consumed in the revaluation of FTC’s property, plant and equipment amounting to production. Creditable withholding tax is deducted from income tax P1.9 billion and transferred the unrealized portion amounting to payable on the same year the revenue was recognized. Prepayments P1.9 billion to “Revaluation increment on property, plant and equipment 60 61

ANNUAL REPORT 2015 and amortization ischargedtocurrentoperations. and amortization accounts untiltheyarenolongerinuse andnofurtherdepreciation propertyandequipment are retainedintheFully depreciated ofincome. statement in theconsolidated accounts, gainorlossresultingfromtheirdisposalisrecognized andany impairmentinvalueareremovedfromthe andany and amortization When assetsaresoldorretired, depreciation their costandaccumulated theitemisderecognized. and thedate PFRS 5, Noncurrent Assets HeldforSaleandDiscontinuedOperation isclassifiedin adisposalgroupthat asheldforsale)inaccordancewith theitemisclassified that earlier ofthedate asheldforsale(orincluded the intended bymanagement. ceasesat oramortization Depreciation in the manner of operating for it to be capable and condition necessary foruse,begins whenitbecomesavailable i.e., whenitisinthelocation ofanitemproperty, oramortization Depreciation plantandequipment of economicbenefitsfromitemsproperty, plantandequipment. areconsistentwiththeexpectedpattern andamortization depreciation theperiodsandmethodof are reviewedperiodicallytoensurethat method andamortization usefullivesanddepreciation The estimated method over the following estimated usefullivesoftheassets: estimated method overthefollowing arecomputedusingthestraight-line andamortization Depreciation separately. tothetotalcostofitemisdepreciated significant inrelation Each partofanitemproperty, is plantandequipmentwithacostthat expenses” balancesheet. accountintheconsolidated of “Trade accountspayable” under andaccrued “Accounts payable Deposit value for the containers loaned to customer is included as part ofcomprehensiveincome. statement the consolidated returnable containers is included under “Selling expenses” account in offixedandvariablelaboroverheadcost.allocation of Amortization usedandapplicable of manufacturedcontainerscomprisesmaterials impairmentinvalue. andany depreciation cost lessaccumulated Cost Returnable containers(i.e., at arestated returnablebottlesandcrates) use.relevant assetsarecompletedandputintooperational the until such time that Construction in progress is not depreciated includes costofconstructionandequipment, andotherdirectcosts. recognizedimpairmentloss. costlessany are carriedat This purposes,construction forproductionoradministrative which Construction in progress consists of properties in the course of based ontheassets’originalcost. amountoftheassetsanddepreciation based ontherevaluedcarrying to retainedearningsismadeforthedifferencebetweendepreciation changes in equity. reserve An annual transfer from the asset revaluation of statement balance sheet and consolidated in the consolidated transferred toanassociate, deferredincometaxeffect” netofrelated Leasehold improvements buildings Office andadministration At Cost: Machineries andequipment improvements Plant buildingsandbuilding Land improvements Values:At Appraisal Furniture, fixturesandotherequipment Returnable containers Transportation equipment 3 -30orleaseterm, whichever isshorter Number of YearsNumber 20 -40 5 -30 8 -50 5 -15 3 -20 5 -7 2 -5 amounts. recoverable amount, totheirrecoverable theassetsarewrittendown valuesexceedtheestimated exists andwherethecarrying valuemaynotberecoverable.the carrying such indication Ifany thatimpairment wheneventsorchangesincircumstancesindicate valuesofotherproperties acquiredarereviewedforThe carrying acquired. ofeconomicbenefitsfromitemsotherpropertiesexpected pattern areconsistentwiththethe periodandmethodofdepreciation methodarereviewedperiodicallytoensurethat the depreciation usefullifeoffiveyears.the estimated usefullifeand Theestimated acquired. iscomputedonastraight-linebasisover Depreciation thecostmodelinaccountingforotherpropertiesThe Groupapplies impairment invalue. recognitiondate, andany fair valueat depreciation lessaccumulated in settlementofloanreceivables. cost,These arecarriedat whichisthe Other propertiesacquiredinclude propertiesacquired mortgage chattel Properties Acquired Other development withaviewtosale. by commencementofowner-occupation orcommencementof property when, andonlywhen, thereisachangeinuse, evidenced lease to another party. Transfers are made from investment construction ordevelopment, orcommencementofanoperating ofowner-occupationchange inuseevidencedbycessation orof Transfers are made to investment property only when there is a “Others -net” intheyearofretirementordisposal. of income in statement property are recognized in the consolidated gains or losses on the retirement or disposal of an investment Any fromuseandnofuturebenefitisexpecteditsdisposal.withdrawn disposed oforwhentheinvestmentpropertiesarepermanently eitherbeen Investment properties are derecognized when theyhave 50 years. which generally include building and improvements ranges from 5 to usefullifeofthedepreciableinvestmentpropertiesThe estimated useful lifefromthetimeofacquisitioninvestmentproperties. onastraight-linebasisusingtheestimated iscalculated Depreciation impairment invalue. accumulated andany depreciation costlessaccumulated at are stated Subsequent toinitialrecognition, depreciableinvestmentproperties incurred. intheperiodwhichcostsare currentoperations charged against into operations, suchasrepairsandmaintenancecosts, arenormally beenput Expenditures incurredaftertheinvestmentproperties have c. oftheDeedDacionincasepaymentkind(dacion notarization b. execution oftheSheriff’s ofSaleincaseextra-judicial Certificate a. ofjudgmentincasejudicialforeclosure; entry under “Investment properties” upon: ofincome. statement consolidated Foreclosed propertiesareclassified exchange of assets” and presented in the “Others -net” account inthe gain orlossontheexchangeisrecognizedin “Net gainonsaleor the assetreceivednorgivenupisreliablymeasurable. Any the exchangelackscommercialsubstanceorfairvalueofneither fairvalueunless assetexchangeismeasuredinitiallyat nonmonetary certain transaction costs. Investment properties acquired through a cost,Investment properties are initially measured at including Investment Properties en pago). foreclosure; or Intangible Assets cannot exceed the carrying amount that would have been determined, Intangible assets acquired separately are measured on initial net of accumulated depreciation and amortization, had no impairment recognition at cost. The cost of intangible assets acquired in a business loss been recognized for the asset in prior years. Such reversal is combination is its fair value as at the date of acquisition. Following initial recognized in the consolidated statement of income unless the asset recognition, intangible assets are carried at cost less any accumulated is carried at a revalued amount, in which case the reversal is treated amortization and any accumulated impairment losses. Internally as a revaluation increase. After such a reversal, the depreciation or generated intangible assets, excluding capitalized development costs, amortization expense is adjusted in future years to allocate the asset’s are not capitalized and expenditure is reflected in the consolidated revised carrying amount, less any residual value, on a systematic basis statement of income in the year in which the expenditure is incurred. over its remaining life.

The useful lives of intangible assets are assessed to be either finite Goodwill or indefinite. Intangible assets with finite lives are amortized over Goodwill is reviewed for impairment, annually or more frequently if the useful/economic life and assessed for impairment whenever events or changes in circumstances indicate that the carrying value there is an indication that the intangible assets may be impaired. The may be impaired. amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of the Impairment is determined for goodwill by assessing the recoverable reporting period. Changes in the expected useful life or the expected amount of the cash-generating unit (or group of cash-generating units) pattern of consumption of future economic benefits embodied in to which the goodwill relates. Where the recoverable amount of the cash- the asset is accounted for by changing the amortization period generating unit (or group of cash-generating units) is less than the carrying or method, as appropriate, and treated as changes in accounting amount of the cash-generating unit (or group of cash-generating units) to estimates. The amortization expense on intangible assets with finite which goodwill has been allocated (or to the aggregate carrying amount lives is recognized in the consolidated statement of income in the of a group of cash-generating units to which the goodwill relates but expense category consistent with the function of the intangible cannot be allocated), an impairment loss is recognized immediately in the asset. consolidated statement of income. Impairment losses relating to goodwill cannot be reversed for subsequent increases in its recoverable amount in Software costs future periods. The Group performs its annual impairment test of goodwill Software costs, included in “Other noncurrent assets”, are capitalized at the end of the reporting period. on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortized over five years on a straight-line Revenue basis. Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Costs associated with maintaining the computer software programs are The Group assesses its revenue arrangement against specific criteria recognized as expense when incurred. in order to determine if it is acting as principal or agent. The Group has concluded that it is acting as principal in all its revenue arrangements Impairment of Noncurrent Nonfinancial Assets except for their brokerage transactions. Refer to the significant accounting Property, plant and equipment, investment properties, other properties, policies generally applicable to the consumer products, banking and investments in associates and a joint venture, and software costs property development for the specific recognition criteria that must also At each reporting date, the Group assesses whether there is any be met before revenue is recognized. indication that its nonfinancial assets may be impaired. When an indicator of impairment exists or when an annual impairment testing for Costs and Expenses an asset is required, the Group makes a formal estimate of recoverable Costs and expenses are recognized in the consolidated statement amount. Recoverable amount is the higher of an asset’s (or cash- of income when a decrease in future economic benefits related to a generating units’) fair value less costs to sell and its value in use and is decrease in an asset or an increase of a liability has arisen that can be determined for an individual asset, unless the asset does not generate measured reliably. cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is assessed as Selling and general and administrative expenses part of the cash-generating unit to which it belongs. Where the carrying Selling expenses are costs incurred to sell or distribute merchandise, amount of an asset (or cash-generating unit) exceeds its recoverable it includes advertising and promotions and freight and handling, amount, the asset (or cash-generating unit) is considered impaired and among others. General and administrative expenses constitute costs is written down to its recoverable amount. In assessing value in use, of administering the business. Selling and general and administrative the estimated future cash flows are discounted to their present value expenses are expensed as incurred. using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash- Taxes and licenses generating unit). Taxes and licenses include all other taxes, local and national, including gross receipts taxes (GRT), documentary stamp taxes, real estate taxes, An impairment loss is charged to operations or to the revaluation licenses and permit fees and are recognized as costs and expenses increment for assets carried at revalued amount, in the year in which when incurred. it arises. Retirement Benefits An assessment is made at each reporting date as to whether The net defined benefit liability or asset is the aggregate of the present there is any indication that previously recognized impairment value of the defined benefit obligation at the end of the reporting losses may no longer exist or may have decreased. If such period reduced by the fair value of plan assets (if any), adjusted for indication exists, the recoverable amount is estimated. A any effect of limiting a net defined benefit asset to the asset ceiling. previously recognized impairment loss is reversed only if there The asset ceiling is the present value of any economic benefits has been a change in the estimates used to determine the available in the form of refunds from the plan or reductions in asset’s recoverable amount since the last impairment loss was future contributions to the plan. The cost of providing benefits recognized. If that is the case, the carrying amount of the asset under the defined benefit plans is actuarially determined using is increased to its recoverable amount. That increased amount the projected unit credit method. 63 62

ANNUAL REPORT 2015 the termsofinstrumentsusing the effectiveinterestmethod. FVPL)aredeferred andamortizedover at instruments designated connection withtheissuanceofdebt instruments(otherthandebt Issuance, expensesincurredin underwritingandotherrelated Debt IssueCosts are expensedasincurred. regarded asanadjustmenttointerestcosts. costs All otherborrowing used to finance these projects,borrowings they are to theextent that funds, aswellexchangedifferences arisingfromforeigncurrency of charges andothercostsincurredinconnectionwiththeborrowing an impairmentlossisrecognized. costsinclude Borrowing interest amountoftheassetexceedsits recoverableamount,resulting carrying fortheirintendeduse. untiltheassetisavailable are capitalized Ifthe costsarebeingincurred.expenditures andborrowing costs Borrowing topreparetheassetforintended useareinprogressand necessary costscommenceswhentheactivities ofborrowing Capitalization the acquisition, constructionorproductionofaqualifyingasset. to iftheyaredirectlyattributable costsarecapitalized Borrowing Costs Borrowing uptotheendofreportingperiod. employees renderedby of theannualreportingperiodisrecognizedforservices expectedtobesettledwhollybeforetwelvemonthsaftertheend leave when theyareaccruedtotheemployees. The undiscountedliabilityfor arerecognizedasaliability entitlementstoannualleave Employee entitlement leave Employee virtually certain. fairvaluewhenandonlyreimbursementis assetat separate isrecognizedasa required tosettleadefinedbenefitobligation The Group’s righttobereimbursedofsomeoralltheexpenditure obligations). expected perioduntilthesettlementofrelated ofthoseassets(or,expected disposaldate nomaturity, iftheyhave the or withtheplanassetsandmaturity reflects boththeriskassociated that usingadiscountrate by discountingexpectedfuturecashflows no marketpriceisavailable, thefair valueofplanassetsisestimated Fair value of planassets is based on marketpriceinformation. When the creditorsofGroup, norcantheybepaiddirectlytotheGroup. fund orqualifyinginsurancepolicies. to Planassetsarenotavailable benefit areheldbyalong-termemployee Plan assetsarethat periods. Re-measurements arenotreclassified toprofitorlossinsubsequent in othercomprehensiveincometheperiodwhichtheyarise. net interest on defined benefit liability) are recognized immediately changeintheeffectofassetceiling(excludingplan assetsandany Re-measurements comprising actuarial gains and losses, return on recognized asexpenseorincomeinprofitloss. or asset. Netinterestonthenetdefinedbenefitliabilityorassetis basedongovernmentbondstothenetdefinedbenefitliability rate thediscount oftimewhichisdeterminedbyapplying from thepassage arises during theperiodinnetdefinedbenefitliabilityorassetthat Net interestonthenetdefinedbenefitliabilityorassetischange periodically byindependentqualifiedactuaries. amendment orcurtailmentoccurs. These amountsarecalculated expense inprofitorloss. costsarerecognizedwhenplan Past service and gains or losses on non-routine settlements are recognized as costs which include costs,Service current service costs past service •Re-measurementsofnetdefinedbenefitliabilityorasset •Netinterestonthenetdefinedbenefitliabilityorasset cost •Service Defined benefitcostscomprisethefollowing: the endofleaseterm. by theGroupwill obtainownership there isnoreasonablecertaintythat usefullivesoftheassetsor therespectiveleaseterms,estimated if over theshorterof leasedassetsaredepreciated Capitalized Finance chargesarechargeddirectlyto ‘Interest expense’. of interest on the remaining balance of the liability.a constant rate finance chargesandreductionoftheleaseliabilitysoastoachieve liabilities” account. betweenthe Leasepaymentsareapportioned with the corresponding liability to the lessor included in “Other payments andincluded in “Property, plantandequipment” account property or, iflower, thepresentvalueofminimumlease at thefairvalueofleased theinceptionofleaseat at capitalized oftheleaseditem,risks andbenefitsincidentaltoownership are Finance leases, whichtransferto the Groupsubstantiallyall the The Groupaslessee ofincome. statement penalty isrecognizedunder “Other income” account intheconsolidated expired, paymentrequiredto bemadetothelessorbywayof any beforetheleaseperiodhas leaseisterminated When anoperating terms oftheleasecontract. the rentalincome. Variable rentisrecognizedasincomebasedonthe leased assetandrecognizedovertheleasetermonsamebasisas amountofthe leasesareaddedtothecarrying operating negotiating balancesheet.rent intheconsolidated Initialdirectcostsincurredin amount actuallyreceivedortobeisrecognizedasdeferred lease term. rental income and difference between the calculated Any of income on a straight-line basis over the statement in consolidated leases. Fixed leasepaymentsfornoncancellablearerecognized ownership oftheassetare and benefitsofthe classified asoperating Leases wheretheGroupdoesnottransfersubstantiallyallrisks of income. receivable isincluded in statement ‘Interest income’intheconsolidated net investment(assetcost)inthelease. All incomeresultingfromthe account. anamountequivalenttothe A leasereceivableisrecognizedat included balancesheetunder intheconsolidated ‘Loans andreceivables’ ownership oftheleaseditemtolessee,benefits incidentalto are Finance leases, wheretheGrouptransferssubstantiallyallrisksand The Groupaslessor renewal orextensionperiodforscenario(b). the reassessmentforscenarios(a), (c)or(d)above, of thedate andat rise to when the change in circumstances gave cease from the date Where areassessmentismade, leaseaccountingshallcommenceor applies: one ofthefollowing the asset. A reassessmentismadeafterinceptionoftheleaseonlyif of aspecificassetorassetsandthearrangementconveys aright touse of whetherthefulfillmentarrangementisdependent ontheuse based onthesubstanceofarrangementandrequiresanassessment ofwhetheranarrangementis,The determination orcontainsaleaseis Leases balance sheet. valueofthedebtinstrumentsinconsolidated carrying the related Unamortized debtissuancecostsareincluded inthemeasurementof d. thereisasubstantialchangetotheasset. c. ofwhetherfulfillment there isachangeinthedetermination b. a renewaloptionisexercisedorextensiongranted, unlessthat a. there isachangeincontractualterms, otherthanarenewal is dependentonaspecifiedasset;or is term; oftherenewalorextensionwasinitially included inthelease term or extensionofthearrangement; Leases where the lessor retains substantially all the risks and benefits Deferred income tax liabilities are not provided on non-taxable of ownership of the asset are classified as operating leases. Fixed lease temporary differences associated with investments in domestic payments for noncancellable lease are recognized as an expense in the subsidiaries, associates and interest in joint ventures. With respect consolidated statement of income on a straight-line basis over the lease to investments in other subsidiaries, associates and interests in joint term while the variable rent is recognized as an expense based on terms ventures, deferred income tax liabilities are recognized except when of the lease contract. the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the Foreign Currency-denominated Transaction and Translation foreseeable future. The Group’s consolidated financial statements are presented in Philippine peso, which is also LTG’s functional currency. Each of the The carrying amount of deferred income tax assets is reviewed at the subsidiaries determines its own functional currency and items included end of each reporting period and reduced to the extent that it is no in the consolidated financial statements of each entity are measured longer probable that sufficient future taxable profits will be available using that functional currency. to allow all or part of the deferred income tax assets to be utilized. Unrecognized deferred income tax assets are reassessed at each Transactions in foreign currencies are initially recorded by the individual reporting period and are recognized to the extent that it has become entities in the Group in their respective functional currencies at the probable that sufficient future taxable profits will allow the deferred foreign exchange rates prevailing at the dates of the transactions. income tax assets to be recovered. It is probable that sufficient future Outstanding monetary assets and liabilities denominated in foreign taxable profits will be available against which a deductible temporary currencies are translated using the closing foreign exchange rate difference can be utilized when there are sufficient taxable temporary prevailing at the reporting date. All differences are charged to profit or difference relating to the same taxation authority and the same taxable loss in the consolidated statement of income. entity which are expected to reverse in the same period as the expected reversal of the deductible temporary difference. In such circumstances, Nonmonetary items that are measured in terms of historical cost in a the deferred income tax asset is recognized in the period in which the foreign currency are translated using the exchange rate as at the dates deductible temporary difference arises. of initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date Deferred income taxes relating to items recognized directly in OCI are when the fair value was determined. also recognized in OCI and not in the consolidated statement of income.

FCDU and Overseas Subsidiaries Deferred income tax assets and deferred income tax liabilities are As of reporting date, the assets and liabilities of foreign subsidiaries, with measured at the tax rates that are expected to apply to the period when functional currencies other than the functional currency of the Company, the asset is realized or the liability is settled, based on tax rates (and are translated into the presentation currency of the Group using the tax laws) that have been enacted or substantively enacted at the end closing foreign exchange rate prevailing at the reporting date, and their of reporting period. respective income and expenses are translated at the monthly weighted average exchange rates for the year. The exchange differences arising Deferred income tax relating to items recognized directly in equity is on the translation are recognized in other comprehensive income. On recognized in equity and not in profit or loss. Deferred tax items are disposal of a foreign operation, the component of other comprehensive recognized in correlation to the underlying transaction either in other income relating to that particular foreign operation shall be recognized comprehensive income or directly in equity. in profit or loss. Provisions and Contingencies Taxes Provisions are recognized when the Group has a present obligation Current income tax (legal or constructive) as a result of a past event, it is probable that an Current income tax assets and liabilities for the current and prior periods outflow of resources embodying economic benefits will be required to are measured at the amount expected to be recovered from or paid to settle the obligation and a reliable estimate can be made of the amount the taxation authorities. The tax rates and tax laws used to compute the of the obligation. If the effect of the time value of money is material, amount are those that are enacted or substantively enacted at the end provisions are determined by discounting the expected future cash of reporting period. flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the Deferred income tax liability. Deferred income tax is recognized on all temporary differences at the end of reporting period between the tax bases of assets Where discounting is used, the increase in the provision due to the and liabilities and their carrying amounts for financial reporting passage of time is recognized as interest expense. When the Group purposes. expects a provision or loss to be reimbursed, the reimbursement is recognized as a separate asset only when the reimbursement is Deferred income tax assets are recognized for all deductible temporary virtually certain and its amount is estimable. The expense relating to differences, carryforward benefits of unused tax credits from excess of any provision is presented in the consolidated statement of income, net minimum corporate income tax (MCIT) over regular corporate income tax of any reimbursement. (RCIT) and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient future taxable profits will be available against Contingent liabilities are not recognized in the consolidated financial which the deductible temporary differences, carryforward benefits of statements. They are disclosed unless the possibility of an outflow unused tax credits from excess of MCIT over RCIT and unused NOLCO of resources embodying economic benefits is remote. Contingent can be utilized. Deferred income tax liabilities are recognized for all assets are not recognized in the consolidated financial statements but taxable temporary differences. disclosed when an inflow of economic benefits is probable. Contingent assets are assessed continually to ensure that developments are Deferred income tax, however, is not recognized when it arises from appropriately reflected in the consolidated financial statements. If it has the initial recognition of an asset or liability in a transaction that is not a become virtually certain that an inflow of economic benefits will arise, business combination and, at the time of the transaction, affects neither the asset and the related income are recognized in the consolidated the accounting profit or loss nor taxable profit or loss. financial statements. 64 65

ANNUAL REPORT 2015 effects of any dilutiveshares. effects ofany of commonsharesoutstandingduring theperiodadjustedfor number tocommonshareholdersbytheweighted average attributable of netincome bydividingtheaggregate Diluted EPSiscalculated exercised duringtheperiod, ifany. giving retroactive effect to stockdividendsdeclared andstockrights numberofcommonsharesoutstandingduringtheperiodafter average tocommonshareholdersbytheweighted for theperiodattributable Basic earningspershare(EPS)iscomputedbydividingnetincome Earnings Per Share Otherwise, thedepositis classified asaliability. and (2)theproposedincreasewasfiledwithPhilippineSEC. stockforwhichadepositwasreceived,increase inauthorizedcapital the deposit, aproposed approved (1)theBOD and stockholdershave stockisinsufficienttocovertheamountof unissued authorizedcapital stock,if thereissufficientunissuedauthorizedcapital orifincasethe Company’s equityinstruments. own Itisclassified asanequityitem aspaymentinexchangeforafixednumberofthe will beapplied Deposit forstocksubscriptionrepresentstheamountreceivedwhich totheequityholdersofGroup. equity attributable income tax effect,transactions costs and the related is included in received, consideration incremental any directlyattributable netofany or disposed of. Where suchshares are subsequently sold orreissued, taxes), is deducted from equity until the shares are cancelled, reissued paid, including incrementalcosts(netofrelated directly attributable any stock (presented as “Shares held by a subsidiary”), the consideration memberoftheGrouppurchasesCompany’sWhere any capital Treasury arereacquired. equityinstrumentsthat sharesareowned dividenddeclaration. forany therefore isnotavailable portionwhichhasbeenrestrictedand retained earningsrepresentthat fordividenddeclaration.which areconsiderednotavailable Appropriated unrealizeditems dividends tostockholdersafteradjustmentsforany portionwhichcanbedeclaredretained earningsrepresentthat as adjustments. in accountingpoliciesandothercapital Unappropriated dividend distributions, priorperiodadjustments, effectsofthechanges balanceofnetincomeorloss,Retained earningsrepresentthecumulative and equipmentshareinothercomprehensiveincomeofassociates. (losses) ondefinedbenefitplans, increment in property, revaluation plant net changes in fair values of AFS investments, re-measurement gains income (loss)oftheGroupincludesadjustments, translation cumulative of incomefortheyearinaccordancewithPFRS. Othercomprehensive statement arenotrecognizedintheconsolidated changes inequity)that (including of statement itemspreviouslypresentedundertheconsolidated Other comprehensiveincome(loss)comprisesitemsofandexpense under commoncontrolandothergrouprestructuringtransactions. interest and equity adjustments arising from business combination includeOther equityreserves effectoftransactionswithnon-controlling Tangent (seeNote30). areissuedto equity instrumentsbytheBankHoldingCompaniesthat Preferred sharesofsubsidiariesissuedtoParent areowned Company value. excess overtheparorstated representing inexcessofparistheportionpaid-incapital Capital proceeds, netoftax. inequityasadeductionfromthe issuanceofnewsharesareshown shares issued. to Incrementalcostsincurreddirectlyattributable account ismaintainedforeachclass ofstockandthenumber Group. When theGroupissuemorethanoneclass ofstock, aseparate parvalueforallsharesissuedbythe stockismeasuredat Capital Equity • Fee incomefromprovidingtransactionservices areprovidedoveracertain • Fee that incomeearnedfromservices twocategories: following itprovidestoitscustomers.services Fee incomecanbedividedintothe The Groupearnsfeeandcommissionincomefromdiverserangeof feesandcommissionincome Service amount. tothenewcarrying be recognizedusingtheoriginalEIRapplied been reducedduetoanimpairmentloss, interestincomecontinuesto recorded valueofafinancialassetorgroupsimilarassetshas amountisrecordedasinterestincome.change incarrying Oncethe basedontheoriginalEIR. amountiscalculated adjusted carrying The and areanintegralpartoftheEIR, butnotfuturecreditlosses. The to the instrument are directly attributable fees or incremental costs that financial instrument(forexample, prepaymentoptions), includes any liability. takesintoaccountallcontractualtermsofthe The calculation appropriate,amount of the financial assetorfinancial tothe net carrying expected lifeofthefinancialinstrumentorashorterperiod, where futurecashpaymentsorreceiptsthroughthe discounts estimated theEIR,interest incomeisrecordedat exactly that whichistherate bearing financialinstruments classified asHFTand AFSinvestments, Forat amortizedcostandinterest- allfinancialinstrumentsmeasured Interest income Banking Revenue Significant Accounting Policies GenerallyApplicabletoBanking statements. financial segmentsispresentedinNote4totheconsolidated operating differentmarkets.products andserves Financial on information offersdifferent businessunitthat segment representingastrategic provided, oftheproductsandservices according tothenature witheach The Group’s separately segmentsareorganizedandmanaged operating Segment Reporting statements. if any, are disclosed financial to the consolidated when material arenotadjustingevents,Events aftertheendofreportingperiodthat financialstatements.(adjusting event)arereflectedintheconsolidated abouttheGroup’sinformation theendofreportingperiod position at providesadditional Events aftertheendofreportingperiodthat Events aftertheReportingPeriod of reportingperiod. reporting periodaredealtwithasanon-adjustingeventaftertheend stock.capital aftertheendof areapproved Dividendsfortheyearthat astransfersfromretainedearningsto Stock dividendsaretreated bytheBODofCompany.deducted fromequitywhenapproved Cash dividendsoncommonsharesarerecognizedasaliabilityand Dividends onCommonShares remittance fees, fees, brokerage andothercredit- deposit-related These fees include underwriting fees, finance fees, corporate performance arerecognizedafterfulfilling thecorrespondingcriteria. transaction. Fees arelinkedtoacertain orcomponents offeesthat of businesses-arerecognizedoncompletiontheunderlying acquisition ofsharesorothersecuritiesthepurchasesale of atransactionforthirdparty-suchasthearrangement Fees inthenegotiation orparticipating arisingfromnegotiating recognized asanadjustmenttotheEIRofloan. incrementalcosts)and aredeferred(togetherwithany down drawn However, arelikelytobe loancommitment feesforloansthat trust fees, fees, portfolio and other management fees. andadvisory custodian fees, fees, fiduciary commissionincome, fees, credit-related period.accrued over that These fees include investment fund fees, Fees overaperiodoftimeare earnedfortheprovisionofservices period oftime

related fees. Loan syndication fees are recognized in the consolidated Premiums revenue statement of income when the syndication has been completed and Gross insurance written premiums comprise the total premiums the Group retains no part of the loans for itself or retains part at the receivable for the whole period cover provided by contracts entered same EIR as for the other participants. into during the accounting period. Premiums include any adjustments arising in the accounting period for premiums receivable in respect Interchange fee and awards revenue on credit cards of business written in prior periods. Premiums from short-duration Discounts lodged under ‘Interchange fees’ are taken up as income upon insurance contracts are recognized as revenue over the period of the receipt from member establishments of charges arising from credit contracts using the 24th method except for the marine cargo where availments by the Group’s cardholders. These discounts are computed the provision for unearned premiums pertains to the premiums for the based on certain agreed rates and are deducted from amounts remitted last two months of the year. The portion of the premiums written that to the member establishments. relate to the unexpired periods of the policies at end of reporting period are accounted for as provision for unearned premiums and presented The Group operates a loyalty points program which allows as part of “Other liabilities” in the consolidated balance sheet. The customers to accumulate points when they purchase from member related reinsurance premiums ceded that pertain to the unexpired establishments using the issued card of the Group. The points can periods at the end of the reporting periods are accounted for as deferred then be redeemed for free products subject to a minimum number of reinsurance premiums shown as part of “Other noncurrent assets” in points being obtained. Consideration received is allocated between the consolidated balance sheet. The net changes in these accounts the discounts earned, interchange fee and the points earned, with the between end of the reporting periods are credited to or charged against consideration allocated to the points equal to its fair value. The fair the consolidated statement of income for the year. value is determined by applying statistical analysis. The fair value of the points issued is deferred and recognized as revenue when the Other income points are redeemed. Income from sale of services is recognized upon rendition of the service. Income from sale of properties is recognized upon completion of the Commissions earned on credit cards earning process and the collectibility of the sales price is reasonably Commissions earned are taken up as income upon receipt from assured. member establishments of charges arising from credit availments by credit cardholders. These commissions are computed based on certain Product Classification agreed rates and are deducted from amounts remittable to member Insurance contracts are those contracts where the Group (the establishments. insurer) has accepted significant insurance risk from another party (the policyholders) by agreeing to compensate the policyholders if a Purchases by the credit cardholders, collectible on installment basis, specified uncertain future event (the insured event) adversely affects the are recorded at the cost of the items purchased plus certain percentage policyholders. As a general guideline, the Group determines whether it of cost. The excess over cost is credited to “Unearned and other has significant insurance risk, by comparing benefits paid with benefits deferred income” account and is shown as a deduction from “Loans payable if the insured event did not occur. Insurance contracts can also and receivables” in the consolidated balance sheet. The unearned and transfer financial risk. other deferred income is taken up to income over the installment terms and is computed using the effective interest method. Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even Commission earned on reinsurance if the insurance risk reduces significantly during this period, unless all Reinsurance commissions are recognized as revenue over the rights and obligations are extinguished or expire. Investment contracts period of the contracts. The portion of the commissions that can, however, be reclassified as insurance contracts after inception if relates to the unexpired periods of the policies at the end of insurance risk becomes significant. the reporting period is accounted for as ‘Other liabilities’ in the consolidated balance sheet. Insurance and investment contracts are further classified as being with or without discretionary participation features (DPF). Dividend income Dividend income is recognized when the Group’s right to receive DPF is a contractual right to receive, as a supplement to guaranteed payment is established. contracts, additional benefits that are likely to be a significant portion of the total contractual benefits, whose amount or timing is contractually Trading and investment securities gains - net at the discretion of the issuer, and that are contractually based on the Trading and investment securities gains - net includes results arising performance of a specified pool of contracts or a specified type of from trading activities and all gains and losses from changes in fair contract, realized and or unrealized investment returns on a specified value of financial assets and financial liabilities at FVPL and gains and pool of assets held by the issuer, or the profit or loss of the company, losses from disposal of AFS investments. fund or other entity that issues the contract.

Income on direct financing leases and receivables financed Investment contracts are those contracts that transfer significant Income of the Group on loans and receivables financed is recognized financial risk. Financial risk is the risk of a possible future change in using the effective interest method. one or more of a specified interest rate, security price, commodity price, foreign currency exchange rate, index of price or rates, a credit rating Unearned discounts included under “Unearned and other deferred or credit index or other variable, provided in the case of a non-financial income” which are amortized over the term of the note or lease using variable that the variable is not specific to a party to the contract. the effective interest method consist of: Repurchase and Reverse Repurchase Agreements • Transaction and finance fees on finance leases and loans and Securities sold under agreements to repurchase at a specified future date receivables financed with long-term maturities; and (‘repos’) are not derecognized from the consolidated balance sheet. The • Excess of the aggregate lease rentals plus the estimated residual corresponding cash received, including accrued interest, is recognized value of the leased equipment over its cost. in the consolidated balance sheet as a loan to the Group, reflecting the economic substance of such transaction. 66 67

ANNUAL REPORT 2015 of the reinsured business. Reinsurance liabilities represent balances balances of thereinsuredbusiness.represent Reinsuranceliabilities considered direct business, taking into account the product classification expenses inthesamemannerastheywould beifthereinsurancewere and claims onassumed reinsurancearerecognizedasincomeand in thenormalcourseofbusinessforinsurancecontracts. Premiums topolicyholders.obligations The Groupalsoassumesreinsurancerisk Ceded reinsurance arrangements do not relieve the Group from its ofincome. statement reliably. theconsolidatedThe impairmentlossischargedagainst theGroupwillreceivefromreinsurercanbemeasuredthat under thetermsofcontractandwhenimpactonamounts theGroup may not recover outstanding amountsevidence existsthat during the reporting year. Impairment occurs when objective ofimpairmentarisesperiod ormorefrequentlywhenanindication eachendofthereportingAn impairmentreviewisperformedat contract. outstanding claims provision and are in accordance with the reinsurance inamannerconsistentwiththe Recoverable amountsareestimated Reinsurance assetsrepresentbalancesduefromreinsurancecompanies. The Groupcedesinsuranceriskinthenormalcourseofbusiness. R values onwhichtheloansaremade. unpaid balances plus accrued interest and are fully secured by the policy Policy loansincluded their underloansandreceivablesarecarriedat Policy Loans as explainedabove. and risksoftheassetorliabilitylevelfairvaluehierarchy classes ofassetsandliabilitiesonthebasisnature, characteristics For thepurposeoffairvaluedisclosures, theGrouphasdetermined relevant externalsourcestodeterminewhetherthechangeisreasonable. compares eachchangeinthefairvalueofassetandliabilitywith Management, inconjunctionwith theGroup’s externalvaluers, also has expired. commission income’, whentheguaranteeisdischarged, cancelledor of income in statement recognized in the consolidated fees and ‘Service and creditlosses”’. financialguaranteeliabilityremainingis Any of income in statement to the consolidated “Provision for impairment tofinancialguaranteesistaken increaseintheliabilityrelating Any arising asaresultoftheguarantee. financialobligation oftheexpenditurerequiredtosettleany estimate commission income”, overthetermofguarantee, andthebest ofincomein statement feesand the feeinconsolidated “Service less, to recognize calculated when appropriate, amortization cumulative thehigherofinitialfairvalue guarantees areeachmeasuredat Subsequent toinitialrecognition, theGroup’s liabilitiesundersuch at fairvalueunder in thefinancialstatements ‘Otherliabilities’. and acceptances. Financial guaranteesareinitiallyrecognized guarantees consistingofletterscredit, lettersofguarantees, courseofbusiness,In theordinary theGroupgivesfinancial Financial Guarantees method. usingtheeffectiveinterest and isaccruedoverthelifeofagreement as interest income between thepurchasepriceand resale price is treated to resell”, andisconsideredaloantothecounterparty. The difference balance sheet as on the consolidated “Securities held under agreements The correspondingcashpaid, including accruedinterest, isrecognized ofthecollateral.the securitiesinabsenceofdefaultbyowner balancesheet.consolidated The Groupisnotpermittedtosellorrepledge (‘reverserepos’)arenotrecognizedinthe specified futuredate Conversely, a toresellat securitiespurchasedunderagreements einsurance balance sheet under “Other liabilities-Insurance contractliabilities”. contract claims forms part of the liability section of the consolidated payable years.included of incomeinlater statement intheconsolidated Policy and andsubsequentrevisionssettlements are thereportingdate at historical data. Differencesbetweentheprovisionforoutstandingclaims basedonthePNBLII’suntil afterthereportingdate experienceand Provision isalsomadeforthecostofclaims incurredbutnot reported time. less reinsurance recoveries, the date at available usingtheinformation cost ofallclaimsat thereporting anddividendsnotifiedbutnotsettled For unpaidclaims andbenefits, aprovisionismadefortheestimated contract isissued. the time the areestablishedat and investmentincomeassumptions that assumptionsused.valuation The liabilityisbased on mortality, morbidity wouldberequiredtomeetthebenefitsbasedon premiums that benefit paymentslesstheexpecteddiscountedvalueoftheoretical The liabilityisdeterminedastheexpecteddiscountedvalueof Insurance contractswithfixedandguaranteedterms existing regulations. arecompliantwith with generallyacceptedactuarial methods that assumptionsinaccordance basedonprudentstatutory are calculated contracts issuedbyPNBLII. forlifeinsurance contracts The reserves arisingfrompolicy arerecognizedduetotheobligations segment that Life insurance liabilities refer to liabilities of the Group’s banking Life insuranceliabilities Life InsuranceContractLiabilities when thelesseedecidestobuyleasedasset. theguarantydepositoflessee against asset isgenerallyapplied lease term. At theendofleaseterm, theresidualvalueofleased theendof proceedsfromthesaleofleasedassetat estimated theinceptionoflease,guaranty depositpaidbythelesseeat isthe The residualvalueofleasedassets, theamountof whichapproximates Residual Value ofLeased Assets andDepositsonFinance Leases also consideredintheliabilityadequacy testforeachreportingperiod. ofincome. statement loss ischargedtotheconsolidated The DACis totherecoverableamountandimpairment value iswrittendown ofimpairmentarises.more frequentlywhenanindication The carrying eachendofthereportingperiodor An impairmentreviewisperformedat balancesheet. assets sectionoftheconsolidated as acquisition costsareshown “Deferred acquisitioncosts” inthe ofincome. statement charged totheconsolidated The unamortized the commissionsforlasttwomonthsofyear. is Amortization the 24thmethodexceptformarinecargowhereDACpertainsto Subsequent to initial recognition, these costs are amortized using costs arerecognizedasanexpensewhenincurred. they are recoverable out of future revenue margins. All other acquisition tosubsequentfinancialperiods,relates aredeferredtotheextentthat contracts and/orrenewingexistinginsurancecontracts, butwhich tosecuringnewinsurance withandarerelated vary period that Commission andotheracquisitioncostsincurredduringthefinancial Deferred Acquisition Cost(DAC) to anotherparty. rights areextinguished or expiredwhenthecontractistransferred Reinsurance assetsorliabilitiesarederecognizedwhenthecontractual assumed reinsurance. Premiums andclaims arepresentedonagrossbasisforbothcededand reinsurancecontract. consistent withtheassociated due tocedingcompanies. inamanner areestimated Amounts payable The aggregate reserve for life policies represents the accumulated certainty at the end of the reporting period. The liability is total liability for policies in force on the reporting date. Such reserves not discounted for the time value of money and includes provision are established at amounts adequate to meet the estimated future for IBNR. No provision for equalization or catastrophic reserves is obligations of all life insurance policies in force. The reserves are recognized. The liability is derecognized when the contract has calculated using actuarial methods and assumptions in accordance with expired, discharged or cancelled. statutory requirements and as approved by the Insurance Commission (IC), subject to the minimum liability adequacy test. Liability Adequacy Test Liability adequacy tests on life insurance contracts are performed Unit-linked insurance contracts annually to ensure the adequacy of the insurance contract liabilities. PNB LLI issues unit-linked insurance contracts. Considerations received In performing these tests, current best estimates of future contractual from unit-linked insurance contracts, in excess of the portion that is cash flows, claims handling and policy administration expenses are placed under a withdrawable segregated account, are recognized as used. Any deficiency is immediately charged against profit or loss revenue. initially by establishing a provision for losses arising from the liability adequacy tests. PNB LLI’s revenue from unit-linked contracts consists of charges deducted from the policyholder’s separate account, in accordance For nonlife insurance contracts, liability adequacy tests are performed with the unit-linked policy contract. Since the segregated fund assets at the end of each reporting date to ensure the adequacy of insurance belong to the unit-linked policyholders, corresponding segregated contract liabilities, net of related DAC assets. The provision for unearned fund liabilities are set-up equal to the segregated fund assets less premiums is increased to the extent that the future claims and expenses redemptions outside the segregated funds. The segregated fund in respect of current insurance contracts exceed future premiums plus assets are valued at market price. Changes in the segregated fund the current provision for unearned premiums. assets due to investment earnings or market value fluctuations result in the same corresponding change in the segregated fund liabilities. Reserve for Policyholders’ Dividends Such changes in fund value have no effect in the consolidated A number of insurance contracts are participating and contain a DPF. statement of income. This feature entitles the policy holder to receive, as a supplement to guaranteed benefits, annual policy dividends that are credited at Collections received from unit-linked policies are separated to each policy anniversary, as long as the policy is in force. These annual segregated fund assets from which PNB LLI withdraws administrative policy dividends represent a portion of the theoretical investment and and cost of insurance charges in accordance with the policy provisions underwriting gains from the pool of contracts. Policy dividends are not of the unit-linked insurance contracts. After deduction of these charges, guaranteed and may change based on the periodic experience review the remaining amounts in the segregated fund assets are equal to the of the Group. Further, in accordance with regulatory requirements, surrender value of the unit-linked policyholders, and are withdrawable dividends payable in the following year are prudently set-up as a liability anytime. in the consolidated balance sheet.

The equity of each unit-linked policyholder in the fund is monitored Local statutory regulations and the terms and conditions of these contracts through the designation of outstanding units for each policy. Hence, the set out the bases for the determination of the annual cash dividends at the equity of each unit-linked insurance contract in the fund is equal to the time the product is priced. The Group may exercise its discretion to revise total number of outstanding units of the policyholder multiplied by the the dividend scale in consideration of the emerging actual experience on net asset value per unit (NAVPU). The NAVPU is the market value of the each block of participating policies. Reserve for dividends to policyholders fund divided by the total number of outstanding units. on contracts with DPF is shown in the consolidated balance sheet under “Other noncurrent liabilities”. Nonlife Insurance Contract Liabilities Provision for unearned premiums Fiduciary Activities The proportion of written premiums, gross of commissions payable Assets and income arising from fiduciary activities together with related to intermediaries, attributable to subsequent periods or to risks that undertakings to return such assets to customers are excluded from the have not yet expired is deferred as provision for unearned premiums. financial statements where the Group acts in a fiduciary capacity such as Premiums from short-duration insurance contracts are recognized as nominee, trustee or agent. revenue over the period of the contracts using the 24th method except for marine cargo where the provision for unearned premiums pertains Significant Accounting Policies Generally Applicable to Consumer to the premiums for the last two months of the year. The portion of the Products premiums written that relate to the unexpired periods of the policies at the end of reporting period are accounted for as provision for unearned Sale of Consumer Goods premiums and presented as part of “Insurance contract liabilities” in the Revenue from the sale of goods is recognized when goods are delivered liabilities section of the consolidated balance sheet. The change in the to and accepted by customers. Revenue is measured at fair value of the provision for unearned premiums is taken to the consolidated statement consideration received or receivable, excluding discounts, returns and of income in the order that revenue is recognized over the period of risk. value-added tax (VAT). Further provisions are made to cover claims under unexpired insurance contracts which may exceed the unearned premiums and the premiums Cost of Consumer Goods Sold due in respect of these contracts. Cost of sales is recognized as expense where the related goods are sold.

Claims provision and incurred but not reported (IBNR) losses Consumer Goods Inventories Outstanding claims provisions are based on the estimated Inventories are valued at the lower of cost and net realizable value ultimate cost to all claims incurred but not settled at the end of (NRV). Costs incurred in bringing the inventory to its present location the reporting period, whether reported or not, together with and condition are accounted for as follows: related claims handling costs and reduction for the expected value of salvage and other recoveries. Delays can be experienced Finished goods and work in process include direct materials, direct labor, in the notification and settlement of certain types of claims, and manufacturing overhead costs. Raw materials include purchase therefore the ultimate cost of which cannot be known with cost. The cost of these inventories is determined using the following: 69 68

ANNUAL REPORT 2015 properties. oftheinvestmenton thepropertyleasedtotenantsand depreciation to the leasing activities,selling expenses allocated rental expense activities oftheGroup. This includes general, and administrative totheleasingCost ofrentalincomeisrecognizedinrelation Cost ofRentalIncome ofcompletionusedforrevenuerecognitionpurposes. the percentage sizeandtakesintoaccount tosaleableareabasedonrelative allocated determined withreferencetothespecificcostsincurredonproperty, recognizedin profitorlossondisposalis The costofinventory determined bytheGroup’s in-housetechnical staff. costs, whichinclude costsforfuturedevelopmentworks, estimated as the basisofacquisitioncostlandplusitsfulldevelopment units soldbeforethecompletionofdevelopmentisdeterminedon recognition methodapplied. Costofsubdivisionlandandcondominium salesisrecognizedconsistentwiththerevenue Cost ofrealestate Sales Cost ofRealEstate receivable. becomes account isrecognizedintheperiodwhichcompensation Income arisingfromexpensesrechargedtotenantsin “Other income” Charges andexpensesrecoverablefromtenants under thetermsofleasecontract. of the gross revenue of the tenants,certain percentage as provided of incomeonastraight-linebasisovertheleaseterm, orbasedona statement investment propertiesisrecognizedintheconsolidated Rental incomeundernoncancellableandcancellableleaseson Rental income and thedepositaspartofliabilities “Customers’ deposits”. Group’s inventories balancesheetaspartofrealestate consolidated is notrecorded. continuestobereportedinthe inventory The realestate this method, revenueisnotrecognizedandthereceivablefrombuyer recognition, thesaleisaccounted for underthedeposit method. Under doesnotmeettherequirementsforincome When asaleofrealestate completionofaphysicalproportionthecontractwork.the estimated arefulfilled, obligations the related measuredprincipallyonthebasisof can bemeasuredreliably. Underthismethod, revenueisrecognized as arefinished),building foundation andthecostsincurredortobe contracts execution, siteclearance andpreparation, andthe excavation (i.e., stage beyond preliminary engineering, designwork, construction the equitableinteresthasbeentransferredtobuyer, constructionis the sales contract to complete the project after the property is sold, under obligations from salesofprojectswheretheGrouphasmaterial methodisusedtorecognizeincome The percentage-of-completion sales Real estate Property DevelopmentRevenue Development Significant Accounting Policies GenerallyApplicabletoProperty andsupplies,materials NRV iscurrentreplacementcost. tomakethesale. costsnecessary estimated For and materials raw costsofcompletionandthe sellingpricelessestimated estimated costs ofmarketinganddistribution. NRVofworkinprocessisthe sellingpricelesstheestimated NRV offinishedgoodsistheestimated andsupplies andmaterials materials Raw Finished goods Consumer goods: Work inprocess Distilled Spirits Moving-average Moving-average Moving-average the circumstances. arebelievedto bereasonableunder offutureeventsthat expectations and arebasedonhistoricalexperience andotherfactors, including andjudgmentsarecontinuallyevaluated Accounting estimates determinable. astheybecomereasonably financialstatements the consolidated arereflectedin changeinaccountingestimates The effectsofany tochange. theaccountingestimates assumptions usedinarrivingat contingent liabilities. Futureevents mayoccurwhichwillcausethe income and expenses and disclosure of contingent assets and affectthereportedamountsofassets,assumptions that liabilities, Group toexercisejudgments, anduse make accountingestimates requiresthe financialstatements oftheconsolidated The preparation 3. Management’s UseofSignificantJudgments, Accounting revenueisrecognized. income intheperiodrelated used, of statement commissionsarerecognizedintheconsolidated earned. Accordingly, ofcompletionmethodis whenthepercentage revenueisrecognizedas expense intheperiodwhichrelated isreasonablyexpectedandchargedto commissions whenrecovery unitsareinitiallydeferredandrecordedasprepaid completed realestate onthesaleofpre- Commissions paidtosalesormarketingagents Commissions “Rental income” ofincome. statement accountintheconsolidated balance sheet, and amortized using the straight-line method under the included in the “Other noncurrent liabilities” account in the consolidated The differencebetweenthecashreceivedanditsfairvalueisdeferred, method. amortizedcostusingtheeffectiveinterest subsequently measuredat balance sheet,consolidated fair value and are are measured initially at “Other noncurrentliabilities” accountsintheliabilitiessectionof Security deposits, included inthe “Other currentliabilities” and Security Deposits on therevenuerecognitionpolicy oftheGroup. collections overtherecognizedcontractsreceivables, whichisbased contracts receivables. This accountalsoincludes theexcessof the related against development segment which will be applied Customers’ depositsrepresentpaymentsfrombuyersofproperty Receivables Customers’ Depositsincluding ExcessofCollectionsoverRecognized costsofsale. completion andtheestimated the reporting date,based on market prices at costs of less estimated courseof the business, sellingpriceintheordinary NRV istheestimated costs. overheads andotherrelated site preparation, professionalfees, propertytransfertaxes, construction costs,for construction;(c)borrowing planninganddesigncosts, costsof value (NRV). Costincludes: (a) landcost; (b) amountspaid to contractors ofcostandnetrealizable thelower andismeasuredat held asinventory of business, appreciation, thantobeheldforrentalorcapital is rather course Property acquiredorbeingconstructedforsaleintheordinary Inventories Real Estate Estimates andAssumptions Beverage Moving-average Weighted-average Weighted-average Tobacco First-in first-out First-in first-out Moving-average Judgments Classification of financial instruments In the process of applying the Group’s accounting policies, The Group exercises judgment in classifying financial instruments in management has made the following judgments, apart from those accordance with PAS 39. The Group classifies a financial instrument, involving estimations, which have the most significant effects on or its components, on initial recognition as a financial asset, a financial amounts recognized in the consolidated financial statements: liability or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a financial asset, a Determination of functional currency financial liability or an equity instrument. The substance of a financial Judgment is exercised in assessing various factors in instrument, rather than its legal form, governs its classification in the determining the functional currency of each entity within the Group’s consolidated balance sheets. Group, including prices of goods and services, competition, cost and expenses and other factors including the currency The Group’s Bank Holding Companies have redeemable preferred shares in which financing is primarily undertaken by each entity. which can be redeemed at the option of the Bank Holding Companies after seven years from the date of issuance. The Group classified these Additional factors are considered in determining the functional currency redeemable preferred shares amounting to P18.1 billion as equity as of of a foreign operation, including whether its activities are carried as an December 31, 2015 and 2014 (see Note 30). extension of that of a parent company rather than being carried out with significant autonomy. Revenue recognition on real estate sales Selecting an appropriate revenue recognition method for a particular Each entity within the Group, based on the relevant economic substance real estate sale transaction requires certain judgments based on, of the underlying circumstances, have determined their functional among others, the buyer’s commitment on the sale which may be currency to be Philippine peso except for the following entities with ascertained through the significance of the buyer’s initial investment functional currency other than the Philippine Peso: and stage of completion of the project. Based on the judgment of the Group, the percentage-of-completion method is appropriate in Subsidiary Functional Currency recognizing revenue on real estate sale transactions in 2015, 2014 and 2013. PNB Guam United States Dollar PNB IIC -do- Operating lease commitments - the Group as lessor The Group has entered into commercial property leases on its investment PNB RCI -do- properties and certain motor vehicles and items of machinery. Nevada -do- PNB RCI Holding Co. Ltd. -do- The Group has determined, based on an evaluation of the terms and conditions of the lease agreements (i.e., the lease does not transfer ACB -do- ownership of the asset to the lessee by the end of the lease term, the Oceanic Holding (BVI) Ltd. -do- lessee has no option to purchase the asset at a price that is expected ABUK Great Britain Pound to be sufficiently lower than the fair value at the date the option is exercisable and the lease term is not for the major part of the asset’s PNB Europe PLC -do- economic life), that it retains all the significant risks and rewards of Canada Canadian Dollar ownership of these properties and so accounts for these leases as PNB GRF Hongkong Dollar operating leases (see Note 38). ABCHKL -do- Operating lease commitments - the Group as lessee ACR Nominees Limited -do- Currently, the Group has land lease agreements with several non- related and related parties. Based on an evaluation of the terms and Assessment of control over the entities for consolidation conditions of the arrangements, management assessed that there is no The Group has majority-owned subsidiaries discussed in Note 2. transfer of ownership of the properties by the end of the lease term and Management concluded that the Group controls these majority-owned the lease term is not a major part of the economic life of the properties. subsidiaries arising from voting rights and, therefore, consolidates Thus, the Group does not acquire all the significant risks and rewards of the entity in its consolidated financial statements. In addition, the ownership of these properties, thus, accounts for the lease agreements Group accounts for its investments in OHBVI as a subsidiary although as operating leases (see Note 38). the Group holds less than 50.00% of OHBVI’s issued share capital. Management concluded that the Group has the ability to control the Classification of properties relevant activities and to affect its returns in OHBVI on the basis of the The Group determines whether a property is classified as real estate combined voting rights of 70.56% arising from its direct ownership of inventory, investment property or owner-occupied property. In making 27.78% and assigned voting rights of 42.78% by certain stockholders its judgment, the Group considers whether the property generates cash to the Group. flow largely independent of the other assets held by an entity.

Significant influence on investee even if the Group holds less than Real estate inventory comprises of property that is held for sale 20% of voting rights on acquisition date in the ordinary course of business. Principally, this is residential The Group considers that it has a significant influence in property that the Group develops and intends to sell before or on Victorias Milling Company (VMC) when the Group increased completion of construction. Investment property comprises land and its ownership interest to 17.5% in April 2014. Management buildings (principally offices, commercial and retail property) which assessed that even if the ownership interest as of the acquisition are not occupied substantially for use by, or in the operations of date is below 20%, the Group has board representation which the Group, nor for sale in the ordinary course of business, but are allows the Group to participate in the financial and operating held primarily to earn rental income and for capital appreciation. policy decisions of VMC. As of December 31, 2015 and 2014, the Owner-occupied properties classified and presented as property, ownership of the Group in VMC is 22.5% and 20.2%, respectively, plant and equipment, generate cash flows that are attributable not after a series of conversions of the mandatorily convertible notes only to property but also to the other assets used in the production (see Note 11). or supply process. 70 71

ANNUAL REPORT 2015 as heldforsale, refertoNote37. For moredetailsonthe assetsandliabilitiesofdisposalgroupclassified • and thesaleis The actionstocompletethesalewereinitiated saleandcan besoldinits forimmediate • PNBLIIsharesareavailable • Allianz SEwillacquire12,750sharesrepresenting51.00% reasons: sale forthefollowing disposal isconsideredtomeetthecriteriabeclassified asheldfor acquire 51.00%ofPNBLII, ofPNB. thelifeinsurancesubsidiary The partnership with to Branch)andforthelatter Allianz SE(Singapore On December21, 2015, PNBenteredintoa15-yearexclusive classified asheldforsale ofwhethertheassetsandliabilitiesdisposalgroupare Determination classified asinsurancecontracts. andtreated at issue.to thesignificantinsurancerisk AlloftheGroup’s productsare The Groupclassified itsunit-linkedproductsasinsurancecontractsdue ofbank’sClassification product hasaclosederivative tothehostcontract. economicrelationship accounted forseparately. This includes assessingwhethertheembedded and shouldbebifurcated whethertheembeddedderivative Group evaluates Where ahybridinstrumentisnotclassified atFVPL, asfinancialassets the ofembeddedderivatives Bifurcation stock amountedtoP1.2billionandP1.0billion, respectively(seeNote7). As ofDecember31, 2015and2014, investmentinunquotedsharesof impairmentinvalue. costlessany instruments aremeasuredat cannotbereasonablyassessed.the variousestimates Therefore, the issignificantandtheprobabilitiesof of reasonablefairvalueestimates value ofthese instruments cannotbemeasuredreliablysince the range December 31, 2015and2014, thefair assessedthat management The Grouphas AFS investmentsinunquotedequitysecurities. As of occurring markettransactionsonanarm’s lengthbasis. available, andwhetherthoseprices representactualandregularly onwhetherquotedpricesarereadilyandregularly the determination onwhetherafinancialassetisquotedinanactivemarket evaluation whether theassetisquotedornotinanactivemarket. Included inthe The Groupclassifies financialassetsbyevaluating, amongothers, offairvaluefinancialassetsnotquotedinanactivemarket Determination derivatives. forlongerdated andvolatility as correlation The judgmentsinclude ofliquidityandmodel inputssuch considerations feasible, adegreeofjudgmentisrequiredinestablishingfairvalues. marketswherepossible,taken fromobservable butwherethisisnot include models. theuseofmathematical The inputtothesemodelsis active markets, techniquesthat theyaredeterminedusingvaluation balancesheetcannotbederivedfrom recorded intheconsolidated Where thefairvaluesoffinancialassetsandliabilities offairvaluefinancialinstruments Determination inmakingitsjudgment. property separately does not qualify as investment property. The Group considers each aproperty aresosignificantthat services determining whetherancillary purposes. orforadministrative in or services Judgmentisapplied insignificant portionisheldforuseintheproductionorsupplyofgoods date, thepropertyisaccountedforasinvestmentonlyifan asofthefinancialreporting If theseportionscannotbesoldseparately purposes. orforadministrative production orsupplyofgoodsservices isheldforuseinthe andanotherportionthat appreciation capital isheldtoearnrentalsorfor Some propertiescompriseaportionthat expected tobecompletedby2016. current condition, areusualandcustomary; subject to termsthat PNBLII; control over management stockholdings of PNBLIIand willhave instrument isreliablymeasurableif: (a)thevariabilityinrangeof ofsuchanunquotedequity linked toandmustbesettledbydelivery are that a quoted market price in an active market and derivatives donothave The fairvalueofinvestmentsinequity instrumentsthat Valuation ofequity-linkedfreestanding derivatives respectively (seeNote7). investments amountingtoP998.7millionandP929.9million, respectively, forimpairmentlosseson net ofallowance AFS equity AFS financialassetsamountedtoP69.6billionandP63.8billion, As of December 31, 2015 and 2014, value of the Group’s the carrying than 12monthsforquotedequitysecurities. greater Group treats “significant” generallyas20%ormoreand “prolonged” as or prolongeddecline itscost. infairvalueoftheinvestmentsbelow The the impairment assessment would include an analysis of the significant affecttherecoverabilityofGroup’sfactors that investments. Further, issuer’s performance, framework, industry legal and regulatory and other instruments, theGroupexpandsitsanalysistoconsiderchangesin financial healthoftheissuer, amongothers. Inthecaseof AFSequity significant judgment. Inmakingthisjudgment, the the Groupevaluates when there is an objective evidence of impairment, which involves discountrate.the selectionofanappropriate An impairmentissuearises and ofthepresentvalueexpectedfuturecashflows estimation fortheimpairmentof The computation AFS financialassetsrequiresan Impairment of AFS financialassets SPV, respectively. valuesofloansandreceivablesfrom for thecarrying underlying propertyprices, amongothers. RefertoNotes8 and 14 and flows incash identified structuralweaknesses ordeterioration risk,in country industry, andtechnologicalobsolescence, aswell was grantedoramended, deterioration andsuchotherfactorsasany fromthetimeaccount intheloanorinvestmentrating deterioration originally granted. any takesintoconsideration This collectiveallowance requiring a specific allowance, riskof default than when agreater have exposureswhich,against althoughnotspecificallyidentifiedas receivables, theGroupalsomakesacollectiveimpairmentallowance against individuallysignificantloansand In additiontospecificallowance the allowance. of factorsandactualresultsmaydiffer, resultinginfuturechangesto allowance. arebasedonassumptionsaboutanumber Suchestimates whendeterminingthelevelofrequired and timingoffuturecashflows oftheamount isrequiredintheestimation judgment bymanagement ofincome. statement be recordedintheconsolidated Inparticular, to assess whether additional provision for credit losses should date eachreporting The Groupreviewsitsimpairedloansandreceivablesat forcreditlossesonloansandreceivables ofallowance Estimation 2013, respectively(seeNote24). amounting toP1.0billion, P1.3billionandP2.5in2015, 2014and P1.3 billion, sales P1.5billionandP3.2costofrealestate salesamountingto The Grouprecognizedrevenuefromrealestate completionofaphysicalproportionthecontractwork. the estimated ofcompletionwhichismeasuredprincipallyonthebasis percentage salesarerecognizedbasedonthe revenue andcostofrealestate may affectthereportedamountsofrevenueandcosts. The Group’s andassumptionsthat tomakeuseofestimates require management The Group’s sales revenueandcostrecognitionpoliciesonrealestate sales Revenue andcostrecognitiononrealestate of assetsandliabilitieswithinthenextfinancialyearareasfollows: amounts adjustmenttothecarrying significant riskofcausingamaterial the end of reporting period, uncertainties at estimation a have that The keyassumptionsconcerningthefutureandothersourcesof and Assumptions Estimates reasonable fair value estimates is not significant for the instrument; the end of the period to the extent that such events confirm conditions or (b) the probabilities of the various estimates within the range can existing at the end of the period. A new assessment is made of NRV be reasonably assessed and used in estimating fair value. If the range in each subsequent period. When the circumstances that previously of reasonable fair value estimates is significant and the probabilities caused inventories to be written down below cost no longer exist or of the various estimates cannot be reasonably assessed, the Group is when there is a clear evidence of an increase in NRV because of change precluded from measuring the instrument at fair value. in economic circumstances, the amount of the write-down is reversed so that the new carrying amount is the lower of the cost and the revised In 2010, the Group has concluded that the put option cannot be NRV. measured at fair value as the put option is linked to and settled by the delivery of unquoted equity instruments whose fair value cannot be With respect to the Group’s real estate inventories, the Group adjusts the reasonably assessed. In 2013, the put option was cancelled following cost of its real estate inventories to NRV based on its assessment of the the termination of the Exit Rights Agreement (see Note 11). recoverability of cost of the inventories. NRV for completed real estate inventories is assessed with reference to market conditions and prices Fair values of structured debt instruments and derivatives existing at the reporting date and is determined by the Group in the light The fair values of structured debt instruments and derivatives that are of recent market transactions. NRV in respect of real estate inventories not quoted in active markets are determined using valuation techniques. under construction is assessed with reference to market prices at the Where valuation techniques are used to determine fair values, they are reporting date for similar completed property, less estimated costs to validated and periodically reviewed by qualified personnel independent complete construction and less estimated costs to sell. The amount of the area that created them. All models are reviewed before they are and timing of recorded expenses for any period would differ if different used, and models are calibrated to ensure that outputs reflect actual judgments were made or different estimates were utilized. data and comparative market prices. The Group’s inventories carried at cost as of December 31, 2015 and To the extent practicable, models use only observable data, however, 2014 amounted to P13.4 billion and P12.3 billion, respectively. Certain areas such as credit risk (both own and counterparty), volatilities and materials and supplies amounting to P0.6 billion and P0.7 billion as correlations require management to make estimates. Changes in of December 31, 2015 and 2014, respectively, are carried at NRV assumptions about these factors could affect reported fair value of (see Note 9). financial instruments. Refer to Note 34 for information on the fair values of these instruments. Valuation of property, plant and equipment under revaluation basis The Group’s land and land improvements, plant buildings and Aggregate reserves for life insurance building improvements, and machineries and equipment are In determining the aggregate reserves for life policies estimates are made carried at revalued amounts, which approximate their fair values as to the expected number of deaths, illness or injury for each of the at the date of the revaluation, less any subsequent accumulated years in which PNB LII is exposed to risk. These estimates are based depreciation and amortization and accumulated impairment losses. on standard mortality and morbidity tables as required by the Insurance The valuations of property, plant and equipment are performed by Code (IC or the Code). The estimated number of deaths, illness or injury independent appraisers. Revaluations are made every three to five determines the value of possible future benefits to be paid out, which years to ensure that the carrying amounts do not differ materially will be factored into ensuring sufficient cover by reserves, which in from those which would be determined using fair values at the end return is monitored against current and future premiums. Estimates of reporting period. are also made as to future investment income arising from the assets backing life insurance contracts. These estimates are based on current Property, plant and equipment at appraised values amounted to market returns, as well as expectations about future economic and P39.5 billion and P38.5 billion as of December 31, 2015 and 2014, financial developments. The carrying values of aggregate reserves for respectively (see Note 12). life insurance policies of the Group presented under “Insurance contract liabilities” in “Other Liabilities” amounted to P4.7 billion and P11.5 billion Estimation of useful lives of property, plant and equipment and as of December 31, 2015 and 2014, respectively (see Note 20). investment properties The Group estimates the useful lives and residual values of property, Valuation of insurance contracts plant and equipment and investment properties based on internal Estimates have to be made both for the expected ultimate cost of claims technical evaluation and experience with similar assets. Estimated reported at reporting date and for the expected ultimate cost of IBNR at useful lives and residual values of property, plant and equipment the reporting date. It can take a significant period of time before the and investment properties are reviewed periodically and updated if ultimate claim costs can be established with certainty. Nonlife insurance expectations differ from previous estimates due to physical wear and contract liabilities are not discounted for the time value of money. tear, technical and commercial obsolescence and other limits on the use of the assets. It is possible, however, that future results of operations The main assumption underlying the estimation of the claims provision could be materially affected by changes in the amounts and timing of is that a company’s past claims development experience can be used recorded expenses brought about by changes in the factors mentioned to project future claims development and hence ultimate claims costs. above. A reduction in the estimated useful life of any item of property Historical claims development is mainly analyzed by accident years as and equipment and investment properties would increase the recorded well as by significant business lines and claim types. Large claims are depreciation expenses and decrease the carrying value of property, usually separately addressed, either by being reserved at the face value plant and equipment and investment properties. In 2015 and 2014, of loss adjuster estimates or separately projected in order to reflect their there were no significant changes made in the useful lives and residual future development. values of the property, plant and equipment and investment properties (see Notes 12 and 13). Measurement of NRV of inventories The Group’s estimates of the NRV of its consumer goods inventories The total carrying amount of depreciable property, plant and equipment and materials and supplies are based on the most reliable evidence as of December 31, 2015 and 2014 amounted to P24.9 billion and available at the time the estimates are made, of the amount that the P23.7 billion, respectively (see Note 12). The carrying amount of depreciable inventories are expected to be realized. These estimates consider the investment properties as of December 31, 2015 and 2014 amounted to fluctuations of price or cost directly relating to events occurring after P6.6 billion and P6.8 billion, respectively (see Note 13). 73 72

ANNUAL REPORT 2015 2014 isnotimpaired(seeNote14). amounting toP163.7millionasof December31, 2015and those cashflows. thegoodwill determinedthat Management the present value of in order to calculate discount rate fromtheCGUandalsotochooseasuitablefuture cashflows oftheexpected tomakeanestimate requires management to whichthegoodwillisallocated. valueinuse Estimating ofthevalueinuseCGUThis requiresanestimation itmaybeimpaired. that or changesincircumstancesindicate December31,annual basisevery ormorefrequently, ifevents The Groupdetermineswhethergoodwillisimpairedonan Impairment ofgoodwill amounting toP20.2million(seeNote28). In 2013, theGroupreversedimpairment losspreviouslyrecognized areasfollows: external indicators) than expectedeconomicperformance, adropinrevenuesorother significant changestothemannerinwhichassetisused, worse arepresent(suchasobsolescence,indicators physicaldamage, aresubjecttoimpairmenttestingwhen Assets that PFRS. values andmayleadtofutureadditionalimpairmentchangesunder affect its assessment of recoverable these assumptions may materially andreasonable,assumptions areappropriate significantchangesin judgment andestimations. its While theGroupbelievesthat involvessignificant futurecashflows ofestimated The preparation oftheGroup. condition andresultsofoperations adverseimpactonthefinancial amaterial impairment losscouldhave thesenonfinancialassetsareimpaired. that could indicate resulting Any financialstatements. affect the consolidated materially Futureevents such assets, can andassumptionsthat requirestheuseofestimates dispositionof fromthecontinueduseandultimate to begenerated below, expected offuturecashflows whichinvolvesthedetermination Determining the recoverable amounts of the nonfinancial assets listed the presentvalueofthosecashflows. inordertocalculate discountrate unit andalsotochooseanappropriate fromthecashgenerating oftheexpectedfuturecashflows estimate thevalue-in-use,In estimating theGroupisrequiredtomakean fairvalueindicators.be basedonquotedpricesorotheravailable less coststosell, modelisused, valuation anappropriate whichcan value lesscoststosellanditsvalue-in-use. Indeterminingfairvalue recoverable amount of the asset, which is the higher of an asset’s fair be impaired. exists, Ifsuchindication the theentityshallestimate may thenonfinancialassetslistedbelow that indication there isany theendofeachreporting period whether The Groupassesses at recoverable amount of Assessment ofimpairmentnonfinancialassetsandestimation Other noncurrentassets(except Investment properties(Note13) Property, plantandequipment(Note12) Investments in associates andajoint Investments inassociates Other currentassets(except assets (Note14) deposits, goodwillandretirementplan refundable andothersecurity venture (Note11) investments) (Note10) cash itemsandheldtomaturity miscellaneous cashandother P8,670,082 22,231,525 44,837,876 11,761,290 (In Thousands) 2,800,283 2015 P7,160,508 27,197,933 42,445,922 12,297,509 2,938,318 2014

• Banking, to providesfullrangeofbankingandotherfinancialservices DecisionMaker(CODM),its ChiefOperating areasfollows: groups, whichareconsistentwiththe segmentsreportedtoLTG’s BOD, The Group’s segments identifiedoperating classified asbusiness differentmarkets. offers differentproductsandserves provided, businessunitthat witheachsegment representingastrategic oftheproductsandservices accordingtothenature separately The Group’s businessesareorganizedandmanaged operating 4. SegmentInformation and 2014(seeNote29). 2015 31, December differences totaling to P4.7 billion as of temporary on theseNOLCO, excessMCIToverRCITandotherdeductible itcannotrecognizethedeferredincometaxassetsdetermined that as deferredincometaxassets. Onthisbasis, theGrouphas differencesexcess MCIToverRCITandotherdeductibletemporary could partlysupporttherecognitionoftheseNOLCO, that available tax planning opportunities difference nor wasany taxable temporary income elsewhereintheGroup. anyThe subsidiariesneitherhave of losses and may not be used to offset taxable a history have differences,temporary tocertainsubsidiariesthat whichrelate The GrouphasNOLCO, excessMCIToverandotherdeductible tax assetstobeutilized. allorpartofthedeferredincomefuture taxableincometoallow sufficient theGroupwillgenerate there isnoassurancethat expenses aswellfuturetaxplanningstrategies. However, Group’s onrevenuesand pastresultsandfutureexpectations the subsequentreportingperiods. This forecastisbasedonthe is basedonthelevelandtimingofforecastedtaxableincome differencesdeferred incometaxassetsondeductibletemporary to beutilized. The Group’s assessmentontherecognitionof allorpartofthedeferredincometaxassets toallow available sufficientfuturetaxableprofitswillbeno longerprobablethat it isbalance of deferred income tax assets to the extent that theendofeachreportingperiodandadjusts tax assetsat amountsof the deferredincomeThe Groupreviews the carrying Recognition ofdeferredincometaxassets as ofDecember31, 2015and2014, respectively(seeNote38). Provision for legalclaims amounted to P898.7million and P1.6billion totheseproceedingsandassessments. relating effectiveness ofthestrategies or affectedbychangesintheestimates performance couldbematerially financialstatements.consolidated Itispossible, however, futurefinancial that adverseeffectonthe amaterial not believetheseproceedingswillhave and isbasedupontheanalysisofpotentialresults. The Groupcurrentlydoes withthelegalcounselshandlingdefenseinthesematters consultation the probablecostsforresolutionoftheseclaims hasbeendevelopedin The Groupiscurrentlyinvolvedinvariouslegalproceedings. of The estimate Provisions andcontingencies December 31, 2015and2014, respectively(seeNotes14and23). retirement benefitsamountedtoP3.9billionandP3.8asof amounted to P255.7 million and P264.1 million, respectively. Accrued Net retirementplanassetsasofDecember31, 2015and2014 perannum. and discountrate annual increase in salary, of return on plan assets expected annual rate computed. This entailsusingcertainassumptionswithrespecttofuture The Group’s retirementbenefitscostandliabilityisactuarially ofretirementbenefitscostandliability Estimation Government (NG), localgovernmentunits(LGUs)andgovernment- corporate, middle-marketandretailcustomers, theNational owned and controlled corporations (GOCCs) and various government segment revenues and segment expenses are consistent with agencies, including deposit-taking, lending, bills discounting, foreign the consolidated statements of income. Finance costs (including exchange dealing, investment banking, fund transfers or remittance interest expense) and income taxes are managed per business servicing and full range of retail banking and trust services and other segment. insurance services. The Group conducts its banking business through PNB and its consolidated subsidiaries. The Group’s assets are located mainly in the Philippines. The Group operates and derives principally all of its revenue from domestic • Distilled Spirits, which is involved in manufacturing, compounding, operations. The Group’s banking segment operates in key cities in the bottling, importing, buying and selling of rum, spirit beverages, and USA, Canada, Western Europe, Middle East and Asia. The distribution of liquor products. The Group conducts its distilled spirits business assets and revenues of the banking segment outside the Philippines through TDI and its consolidated subsidiaries. constitute 8.0% and 3.8% as of December 31, 2015, and 4.7% and 4.2% as of December 31, 2014 of the Group’s consolidated assets and • Beverage, which is engaged in brewing and soft drinks and bottled revenues, respectively. water manufacturing in the Philippines. It also operates other plants, which includes commercial glass division and corrugated cartons and Further, the measurement of the segments is the same as those metal closures production facility, to support the requirements of its described in the summary of significant accounting and financial brewing, bottled water and non-beer products operations. The Group reporting policies. TDI’s investment property is adjusted at the conducts its beverage business through ABI and its consolidated consolidated level to carry it at cost in accordance with the Group’s subsidiaries. policy. Certain assets and liabilities of PNB are also adjusted at the consolidated level of LTG to reflect the original carrying values prior to • Tobacco, which is a supplier and manufacturer of cigarettes, casings, the merger of PNB and ABC. tobacco, packaging, labels and filters. The Group conducts its tobacco business through FTC’s interest in PMFTC. Segment assets are resources owned and segment liabilities are obligations incurred by each of the operating segments excluding • Property Development, which is engaged in ownership, development, intersegment balances which are eliminated. leasing and management of residential properties, including but not limited to, all kinds of housing projects, commercial, industrial, Segment revenue and expenses are those directly attributable to urban or other kinds of real property; acquisition, purchasing, the segment except that intersegment revenue and expense are development and selling of subdivision lots. The Group conducts its eliminated only at the consolidated level. Transfer prices between property development business through Eton and its consolidated operating segments are on an arm’s length basis in a manner similar to subsidiaries. transactions with third parties.

• Others, consist of various holding companies (LTG, Paramount, The components of capital expenditures reported to the CODM Saturn, Shareholdings, TBI and Bank Holding Companies) that provide are the acquisitions of property, plant and equipment during the financing for working capital and capital expenditure requirements of period. the operating businesses of the Group. The Group’s distilled spirits segment derives revenue from two major The BOD reviews the operating results of the business units to distributors which averaged 90%, 89% and 94% of the segment’s total make decisions on resource allocation and assesses performance. revenue in 2015, 2014 and 2013, respectively. The other segments of Segment revenue and segment expenses are measured in the Group have no significant customer which contributes 10% or more accordance with PFRS. The presentation and classification of of their segment revenues.

The following tables present the information about the Group’s operating segments:

For the year ended December 31, 2015: Eliminations, Property Adjustments and Banking Distilled Spirits Beverage Tobacco Development Others Total (In Thousands) Segment revenue: External customers P26,600,160 P12,002,266 P13,286,994 P– P2,484,453 P– P54,373,873 Inter-segment 10,150 115,079 1,011,781 – – (1,137,010) – 26,610,310 12,117,345 14,298,775 – 2,484,453 (1,137,010) 54,373,873 Cost of sales and services 4,807,242 9,831,228 10,261,942 – 1,179,549 (1,199,589) 24,880,372 Gross profit 21,803,068 2,286,117 4,036,833 – 1,304,904 62,579 29,493,501 Equity in net earnings of associates – – - 974,543 – 214,431 1,188,974 21,803,068 2,286,117 4,036,833 974,543 1,304,904 277,010 30,682,475 Selling expenses – 939,453 1,675,683 – 42,382 (13,422) 2,644,096 General and administrative expenses 18,449,228 653,396 833,069 141,260 588,292 152,482 20,817,727 Operating income 3,353,840 693,268 1,528,081 833,283 674,230 137,950 7,220,652 Foreign exchange gains - net 1,207,840 1,609 – 95,618 3,746 13,587 1,322,400 Finance costs – (57,969) (2,439) – (175,787) 33,677 (202,518) Finance income – 154 19,572 92,549 50,830 (52,729) 110,376 Others - net 3,393,380 28,066 13,521 71,785 10,620 (250,737) 3,266,635 Income before income tax 7,955,060 665,128 1,558,735 1,093,235 563,639 (118,252) 11,717,545 Provision for income tax 1,543,789 243,043 459,466 53,229 250,358 28,937 2,578,822 (Forward) 75 74

ANNUAL REPORT 2015 Depreciation and amortization expense and amortization Depreciation Non-controllinginterests EquityholdersoftheCompany attributable to: Segment profit Segment profit Discontinuedoperations Continuingoperations Segment profitfrom: Cost ofsalesandservices For theyearendedDecember31, 2014(Asrestated, Note37): Currentassets Assets: segmentsasofDecember31, oftheoperating Other financialinformation 2015isasfollows: Finance costs Finance income Others -net Gross profit Segment revenue: Noncurrentassets Income beforeincometax Currentliabilities Liabilities: Provision forincometax Equity innetearningsofassociates Noncurrentliabilities Segment profitfrom: Selling expenses General and administrative expenses General andadministrative

Operating income Operating andajointventure Investments inassociates EquityholdersoftheCompany to: Equity attributable Segment profit Foreign exchangegains-net Non-controllinginterests Segment profit attributable to: Segment profit Property, plantandequipment Additions tononcurrentassets: Depreciation and amortization expense andamortization Depreciation Investmentproperties Long-term debts Short-term debts Continuing operations Discontinued operations Equity holdersoftheCompany Non-controlling interests Inter-segment External customers

P331,611,312 P666,531,909 P494,826,886 P574,205,705 P24,210,181 334,920,597 24,945,565 20,567,198 20,567,198 18,693,960 P5,897,907 P3,673,284 P6,769,202 79,378,819 P6,411,271 50,946,819 P3,117,161 41,379,385 4,378,367 4,038,751 7,254,185 1,620,442 1,873,238 1,342,196 2,780,746 1,137,939 9,986,426 5,633,743 4,166,428 1,168,620 3,095,918 735,384 505,262 Banking Banking 264,164 357,931 Banking P– – – – – – Distilled Spirits Distilled Spirits Distilled Spirits P10,040,792 P16,708,569 P11,919,131 12,020,517 14,008,783 P2,044,210 P2,580,749 9,819,049 2,201,468 2,201,468 (418,214) 6,667,777 P427,930 P422,085 P422,085 P100,715 101,386 173,505 957,664 665,807 577,997 119,037 539,345 350,000 536,539 100,715 P99,668 559,956 551,339 15,506 72,790 (1,883) (5,845) 1,047 99 P– – – – – – P11,368,663 P24,662,682 P13,288,369 14,322,270 10,238,090 19,940,119 P3,443,633 P4,722,563 13,294,019 P1,099,269 P1,099,269 P1,099,269 P1,121,880 P1,121,880 1,033,901 4,084,180 1,607,405 1,649,833 4,084,180 1,610,000 1,675,598 1,400,000 1,278,930 1,121,880 1,860,257 1,549,879 Beverage Beverage Beverage (11,892) 485,525 824,347 P19,900 (9,219) 18,516 – – – – – – – – – (In Thousands) (In Thousands) (In Thousands) P22,578,425 P10,289,586 22,047,721 P9,975,983 P1,035,563 P1,040,006 P1,040,006 12,602,442 P319,367 P432,826 P148,355 P147,731 108,825 205,733 480,031 331,676 515,112 515,112 356,238 158,874 Tobacco Tobacco 113,459 148,355 Tobacco 97,878 10,983 22,337 11,975 6,599

4,443 624 P– – – – – – – – – – – Development Development Development P14,774,964 P26,097,181 P10,168,286 15,897,492 P7,045,991 P2,278,600 11,322,217 2,278,600 1,582,589 1,464,695 1,196,020 3,122,295 P312,091 P313,281 P313,281 P119,865 P118,966 Property (49,317) 201,990 696,011 696,011 155,052 427,417 113,542 174,001 Property 119,865 151,693 Property 42,037 96,882 82,125 (1,154) 31,403 31,552 1,190 899 P– – – – – –

Adjustments and (P11,354,869) (P12,315,722) Adjustments Eliminations, Eliminations, (P7,510,083) (P7,026,264) Eliminations, Adjustments (1,870,671) (1,870,671) (1,278,717) P1,451,804 and Others (P147,189) (P147,189) (P916,516) (P195,176) (721,340) and Others (745,626) (350,000) (198,087) (542,594) (863,427) (591,954) (212,511) (296,911) 6,035,084 (960,853) (366,238) (916,516) (50,436) (15,909) 379,443 100,309 483,819 P50,898 24,568 53,089 17,126 19,012 Others 1,946 6,788 P– – – –

P370,261,631 P749,552,502 P496,325,218 P579,794,407 P11,761,290 P51,696,281 379,290,871 128,876,018 P9,138,723 51,696,281 24,739,378 26,956,903 27,851,458 21,068,078 11,182,446 P6,599,035 P9,496,654 83,469,189 P6,472,206 P4,410,230 40,882,077 2,897,619 1,347,704 3,805,059 8,853,689 2,645,647 2,746,640 4,036,740 2,061,976 3,554,992 1,400,000 3,452,518 (454,855) 6,208,042 6,647,318 1,603,719 119,041 894,555 357,931 264,164 Total Total Total – Other financial information of the operating segments as of December 31, 2014 is as follows:

Eliminations, Property Adjustments Banking Distilled Spirits Beverage Tobacco Development and Others Total (In Thousands) Assets: Current assets P298,568,066 P10,219,418 P10,004,167 P10,012,580 P14,777,806 (P3,445,955) P340,136,082 Noncurrent assets 313,673,332 6,600,617 13,588,070 13,304,339 8,915,819 614,949 356,697,126 P612,241,398 P16,820,035 P23,592,237 P23,316,919 P23,693,625 (P2,831,006) P696,833,208 Liabilities: Current liabilities P466,229,722 P6,443,588 P2,959,227 P385,588 P12,925,809 (P19,797,471) P469,146,463 Noncurrent liabilities 59,837,726 540,528 1,492,193 75,038 2,686,229 332,837 64,964,551 P526,067,448 P6,984,116 P4,451,420 P460,626 P15,612,038 (P19,464,634) P534,111,014 Investments in associates and a joint venture P– P– P49,125 P11,011,011 P– P1,237,373 P12,297,509 Equity attributable to: Equity holders of the Company 47,360,474 9,710,664 19,140,817 22,745,969 8,051,375 17,218,592 124,227,891 Non-controlling interests 38,813,476 125,255 – 110,324 30,212 (584,964) 38,494,303 Additions to noncurrent assets: Property, plant and equipment 1,051,647 365,947 1,041,141 8,893 16,777 9,639 2,494,044 Investment properties 1,283,966 – – 929,071 395,788 – 2,608,825 Short-term debts – – 300,000 – – – 300,000 Long-term debts 9,969,498 4,998,008 2,902 – 1,829,938 (2,902) 16,797,444

For the year ended December 31, 2013 (As restated, Note 37):

Eliminations, Property Adjustments Banking Distilled Spirits Beverage Tobacco Development and Others Total

(In Thousands) Segment revenue: External customers P28,560,739 P10,425,603 P12,701,784 P151,722 P3,656,950 P– P55,496,798 Inter-segment – 114,240 683,493 – – (797,733) – 28,560,739 10,539,843 13,385,277 151,722 3,656,950 (797,733) 55,496,798 Cost of sales and services 5,786,346 8,293,157 9,738,942 153,366 2,680,123 (964,665) 25,687,269 Gross profit 22,774,393 2,246,686 3,646,335 (1,644) 976,827 166,932 29,809,529 Equity in net earnings of an associate – – – 3,704,117 – – 3,704,117 22,774,393 2,246,686 3,646,335 3,702,473 976,827 166,932 33,513,646 Selling expenses – 648,619 1,783,513 – 365,764 (20,950) 2,776,946 General and administrative expenses 17,849,937 894,020 743,202 121,121 515,967 273,070 20,397,317 Operating income 4,924,456 704,047 1,119,620 3,581,352 95,096 (85,188) 10,339,383 Foreign exchange gains - net 1,162,228 2,248 – 67,975 3,853 19,278 1,255,582 Finance costs – (416,999) (37,107) – (35,736) 8,950 (480,892) Finance income – 404 5,940 116,227 42,833 (26,311) 139,093 Others - net 1,148,913 75,428 285,366 345,256 159,603 89,039 2,103,605 Income before income tax 7,235,597 365,128 1,373,819 4,110,810 265,649 5,768 13,356,771 Provision for income tax 1,197,630 179,757 330,337 174,278 160,575 35,810 2,078,387 Segment profit from: Continuing operations 6,037,967 185,371 1,043,482 3,936,532 105,074 (30,042) 11,278,384 Discontinued operations 196,680 – – – – – 196,680 Segment profit P6,234,647 P185,371 P1,043,482 P3,936,532 P105,074 (P30,042) P11,475,064 Segment profit attributable to: Equity holders of the Company P3,435,032 P196,463 P1,043,482 P3,919,999 P104,286 (P30,042) P8,669,220 Non-controlling interests 2,799,615 (11,092) – 16,533 788 – 2,805,844 Depreciation and amortization expense 1,608,859 547,071 1,713,053 16,414 132,433 16,380 4,034,210 77 76

ANNUAL REPORT 2015 Segregated fundassets(Notes16and37) Segregated Unitinvestmenttrustfund FVPL: at Designated debtsecurities Private assets(Notes21and33) Derivative Equitysecurities Governmentsecurities Heldfortrading: orloss(FVPL): Financial fairvaluethroughprofit assetsat Interbankloansreceivable Duefromotherbanks DuefromBangkoSentralngPilipinas(BSP) Cash equivalents: Cash andothercashitems b. amountofequitysecurities includesThe carrying unrealizedlossof a. As of December 31, 2015 and 2014, unrealized loss on government Financial fairvaluethroughprofitorlossconsistof: assetsat 6. Financial Assets atFair Value throughProfitorLoss Interest earnedoncashandotheritemsequivalents c. b. DuefromBSPiscomposedofinterest-bearingshort-termplacements a. Cashandothercashitemsconsistofonhandinbanks Cash andcashequivalentsconsistof: 5.Cash andCashEquivalents operations ofPNB. operations with BSPandademanddepositaccounttosupporttheregular requirements oftheGroup. cash periodsdepending on theimmediate made forvarying rates. Shortterminvestmentsrepresentmoneymarketplacements short terminvestments. bankdeposit Cashinbanksearninterestat respectively. P53.4 millionandP17.3asofDecember 31, 2015and2014, 8.88% to 2.75% from and and 10.63% debtsecurities,4.25% to7.38%fortheprivate respectively. million to P261.5 2.13% for thegovernmentsecurities, and from 4.80%to7.38%and to from range amounted rates securities debt P216.2 million, respectively. In2015and2014, theeffectiveinterest private and respectively (seeNotes24and27). are presented under “Finance income” and “Banking revenue”, P137,556,341 P17,555,206 P9,663,734 P4,039,612 20,350,383 18,287,308 81,363,444 5,099,052 4,564,682 143,800 181,348 199,922 (In Thousands) 2015 (In Thousands) 2015 – P147,275,490 P22,811,921 P18,238,962 105,773,685 P6,598,386 10,654,770 15,591,406 4,922,351 7,234,800 7,671,437 289,313 136,551 210,550 2014 2014 d. FVPL asfinancialassetat fundassets designated Segregated c. in2014,In variousdates theGroupinvestedinPNBInstitutional (Launched in2015) True North Summit Peso andDollar Variable Unit-Linked Dollar IncomeOptimizer Summit Select Asian Summit Equity-linked notes o Ast o dsoa gop lsiid s ed o sl” (see sale” for held as equity-linked notes: classified group disposal Note 37). fundassetsincludeThe segregated thefollowing of “Assets to fundsamountingtoP13.6billionwerereclassifiedsegregated peso anddollarfundsamountingtoP10.7billion. In2015, the As ofDecember31, 2014, fundassetsconsistof thesegregated funds. segregated market valueoftheunderlyingassetscorresponding value perunitmayincreaseordecreasedependingonthe thetimeofcontribution. tothemarketvalueat relation The policyholder, correspondingtothenetamountdepositedin is determinedbyassigninganumberofunitstoeach equity of each policyholder fundassets inthesegregated orinvestmentstrategy.documented riskmanagement The onafairvaluebasis,are evaluated inaccordancewitha andtheirperformances FVPLsincetheyaremanaged at asfinancial assets andliabilitiesfund liabilities are designated fund assets and the corresponding segregatedSegregated linked insuranceproducts, respectively. PNBLII’sapproved licensetosellsingle-payandregular-pay unit- On March15, 2005andJune17, 2005, theInsuranceCommittee(IC) funds(Note37). contracts investedbyPNBLIIindesignated receivedfromunit-linkedinsurancerefer totheconsiderations P7.0 millionin2014(seeNote27). under financeincomeamountedtoP22.4millionin2015and 2014. Realizedgainsfromredemptionofinvestmentpresented FVPL amountedtoP99.1millionandP32.4in2015 period of30days. Marktomarketgainsonfinancialassetsat trust fund(UITF). The investmentissubjecttoaminimumholding Money MarketFundwhichisamoneymarketunitinvestment on UBS A.G. on nocreditdefaulteventoccurs and providedthat equivalent principalamount, if heldtomaturity, redemption valueequivalentto90.00%ofthePHP T5”) issuedbyUBS A.G.. Itprovidesaminimum UBS Multi Asset Portfolio T5 Index(the “UBS MAP A fundinvestedina5-yearUBSNotelinkedto ING ASEAN Equities VT 10.00%index. traded fundsof ASEAN membercountriesviathe portfolio ofsix(6)equally-weightedexchange inarisk-managed the opportunitytoparticipate (5)-Year provide linkedlifeinsuranceplanthat single-payfive A pesoanddollardenominated appreciation. potential forcapital high qualityglobalfundschosentoofferincomeand which islinkedtotheperformanceofabasket charges, intoUBSseven(7)-Year StructuredNote invests thesinglepremium, netofpremium A single-payvariablelifeinsuranceproductwhich VT 10.00%Index. performance ofINGEmergingMarketsConsumption USD Participation Notewhichislinkedtothe premium charges, intoafive(5)-Year PHP-Linked which investsthesinglepremium, netof A single-payvariablelifeinsuranceproduct performance ofabasketfive Asianequityindices. USD Participation Notewhichislinkedtothe premium charges, intoafive(5)-Year PHP-Linked which investsthesinglepremium, netof A single-payvariablelifeinsuranceproduct Description

7. Available for Sale and Held to Maturity Investments 2015 2014 (In Thousands) Available for Sale Investments Attributable to: Available for sale investments consist of: Equity holders of the Company*** (P1,099,193) (P750,414) Non-controlling interests (1,157,536) (411,202) 2015 2014 (P2,256,729) (P1,161,616) * Net of deferred income tax effect amounting to P2.9 million and P1.4 million in 2015 and 2014, respectively. (In Thousands) ** Included in “Trading and securities gains” under “Banking revenue”. *** Including accumulated fair value gain .amounting to P348,786 and nil as at December 31, 2015 and 2014, Government securities (Note 17 ) P45,802,968 P37,211,623 respectively in disposal group Other debt securities 22,252,980 23,708,156 g. The movements in allowance for impairment losses of AFS Equity securities: investments follow: Quoted 1,329,564 2,817,198 Unquoted 1,177,924 1,006,249 2015 2014

70,563,436 64,743,226 (In Thousands) Allowance for impairment losses (998,749) (929,881) Balance at beginning of year P929,881 P928,408 69,564,687 63,813,345 Provisions during the year 32,995 1,234 Noncurrent portion (66,649,517) (60,039,059) Disposals, transfers and others 68,638 239 P2,915,170 P3,774,286 Transfer to disposal group classified as a. As of December 31, 2015 and 2014, the fair value of the AFS held for sale (Note 37) (32,765) – investments in the form of government and private bonds pledged to fulfill its collateral requirements with securities sold under repurchase Balance at end of year P998,749 P929,881 agreements transactions with the foreign banks amounted to P8.5 billion (see Notes 17 and 33). The counterparties have an obligation to return Reclassification of Financial Assets the securities to the PNB once the obligations have been settled. In On October 12, 2011, PNB had identified a clear change of case of default, the foreign banks have the right to hold the securities intent to exit or trade in the short term its HTM investments and sell them as settlement of the repurchase agreement. rather than to hold them until maturity, when it disposed of more than an insignificant amount of its HTM investments. b. Included in AFS investments are pledged securities for the Surety This disposal necessitated the reclassification of the Bond with fair value of P800.0 million issued by PNB Gen. As remaining HTM investments to AFS securities in accordance of December 31, 2015 and 2014, the carrying value of these with PAS 39. As of the date of reclassification, the amortized pledged securities amounted to P873.0 million and P903.9 million, cost of HTM investments reclassified to AFS investments respectively. amounted to P32.5 billion. Reclassified AFS investments are initially measured at their fair value amounting to P35.7 billion. c. Other debt securities consist of notes issued by private entities. Any difference between the amortized cost of HTM investments and their fair value at reclassification date is recognized in OCI. d. No impairment loss has been recognized on unquoted debt securities for the years ended December 31, 2015 and 2014. Beginning 2014, the Group is already allowed to classify investments as HTM as the tainting period, required by PAS 39, e. As of December 31, effective interest rates for the AFS investments has lapsed. On March 3 and March 5, 2014, the Group reclassified follow: certain AFS investments with fair values of P15.9 billion and 2015 2014 P6.8 billion, respectively, back to its original classification, as HTM Peso-denominated 1.03% to 5.62% 2.58% to 5.62% investments, as management has established that it continues to have the positive intention and ability to hold these securities to Foreign-currency denominated 1.10% to 5.39% 2.06% to 5.83% maturity. The reclassification was approved by the BOD of PNB on February 28, 2014. The previous fair valuation gains amounting f. Presented below are the movements in the net changes in fair values of to P2.7 billion that have been recognized in OCI shall be amortized AFS financial assets: to profit or loss over the remaining life of the HTM investments 2015 2014 using effective interest rates ranging from 3.60% to 5.64%. (In Thousands) Balance at beginning of year (P1,161,616) (P1,714,054) Held to Maturity Investments Net changes in fair value of AFS As of December 31, 2015 and 2014, HTM investments of the Group investments during the year*: comprise of government securities amounting to P23.2 billion and Fair value changes during the year P22.9 billion, respectively, including current portion of P68.2 million on AFS investments (313,048) 1,344,819 and P11.4 million, respectively. Reversal of fair value gain on AFS investments reclassified to As of December 31, 2015 and 2014, the fair value of the HTM investment in associate (Note 11) – 238,186 investments in the form of Republic of the Philippines bonds pledged to Realized gains**(Note 24) (782,065) (1,030,567) fulfill its collateral requirements with securities sold under repurchase (1,095,113) 552,438 agreements transactions with BSP amounted to P7.5 billion and Balance at end of year (P2,256,729) (P1,161,616) P8.9 billion, respectively (see Note 17). (Forward) 78 79

ANNUAL REPORT 2015 Noncurrent portion forcredit losses Allowance Other receivables Trade receivables Finance receivables(Notes17and22) Unquoted debtsecurities Billspurchased(Note20) lettersofcreditandtrustreceipts Customers’liabilitiesonacceptances, Loansanddiscounts Receivables fromcustomers: Noncurrent portion forcreditlosses Allowance Unearned andotherdeferredincome Miscellaneous Salescontractreceivables Accrued interestreceivable Accounts receivable Other receivables: Finance leasereceivables Creditcardreceivables b. UnquotedDebtSecurities a. Transactions withMaybankPhilippines, Inc. (Maybank) which consistof: Finance receivablespertaintoofthebankingsegment Finance Receivables Loans andreceivablesconsistof: 8. LoansandReceivables received byPNBfromSpecialPurpose Vehicle (SPV)Companieson Unquoted debtinstrumentsinclude thezero-couponnotes Maybank wassoldinJune2000(seeNote38). and 2014. ofPNBin The remaining40.00%equityownership credit lossesamountingtoP262.5millionasofDecember31, 2015 for over thetransferredliabilitiesisfullycoveredbyanallowance P1.6 billion, respectively. The excessofthetransferredreceivables banks” and amountedtoP1.8billionand “Accrued interestpayable”) transferred liabilities(included under toBSPandlocal “Bills payable amounted toP3.7billionandP3.6billion, respectively, whilethe As ofDecember31, 2015and2014, thebalanceofthesereceivables sale ofPNB’s 60.00%equityinMaybank. under “Finance receivables”)andliabilitiesinconnectionwiththe assignment transferring toPNB certain Maybank assets (included On November27, 1997, MaybankandPNBsignedadeedof (206,430,391) P335,352,183 P157,843,033 (206,782,709) P172,140,625 P380,207,907 (15,934,483) (15,977,755) 359,416,501 364,273,424 380,207,907 382,044,214 378,923,334 394,901,089 (1,836,307) 11,079,224 18,382,644 12,288,478 4,428,062 5,150,502 8,374,156 4,245,069 3,686,790 5,439,554 3,858,750 2,404,704 429,924 (In Thousands) (In Thousands) 2015 2015 (186,830,742) P278,897,612 P129,455,991 (187,438,860) P143,653,521 P328,416,192 (12,129,459) 303,072,788 316,286,733 328,416,192 329,576,892 (12,189,786) 331,092,381 343,282,167 (1,160,700) 11,594,378 18,459,832 11,885,157 4,267,338 4,756,699 8,993,706 8,044,272 3,311,150 4,390,966 4,878,682 2,980,818 442,089 2014 2014

Lease receivables Contract receivables Consumer goods Allowance forcreditlosses Allowance Noncurrent portionofcontractreceivables c. Finance LeaseReceivable Trade receivablesconsistof: Trade receivables d. Interestincomeonloansandreceivablesconsistsof(seeNote24): Total financeleasereceivable fiveyears Duebeyondoneyearbutnotover Duewithinoneyear Residual valueofleasedequipment Duebeyondfiveyears fiveyears Duebeyondoneyearbutnotover Duewithinoneyear receivables Gross investmentinfinancelease n nlss f h Gops iac lae eevbe asof receivables lease finance Group’s the of December 31ispresentedasfollows: analysis An recoverable values(seeNote37). December 31, 2015and2014, their thenotesarecarriedat andsecurityinterestovertheNSCPlant mortgage Assets. As of (NSC) of P5.3 billion. The notes are secured by a first ranking SteelCorporation for theoutstandingloansreceivablefromNational P3.4 billion(Tranche ineight(8)yearsexchange BNote)payable at theprincipalamountof infive(5)yearsand A Note)payable October 15, 2004, theprincipalamountofP803.5million(Tranche at agn fo 33 t 2.% n fo 51 t 2.% s of and P289.1millionin2013. as 21.0% Group amounted to P217.0 million in 2015, P274.8 million in 2014 to 5.1% Interest incomeaccruedonimpairedloansandreceivableofthe from and 21.0% to December 31, 2015and2014, respectively. 3.3% from ranging perannum Sales contractreceivablesbearfixedinterestrate receivables. 2014 and0.3%to24.4%in2013forpeso-denominated receivables, andfrom 0.5% to 15.3%in2015, from 0.03% to23.0% in and from4.8%to9.0%in2013forforeigncurrency-denominated rangingfrom1.1%to7.0%in2015,rates from2.5%to9.0%in2014 interest repricing. annualfixedinterest Remainingreceivablescarry oftheGroupweresubjectto of thetotalreceivablefrom customers As ofDecember31, 2015and2014, 82.8%and75.7%, respectively, Unquoted debtsecurities receivables andsalescontract Receivable fromcustomers P17,144,366 P17,080,888 63,478 2015 P11,904,128 P3,686,790 P1,428,528 P9,383,633 12,288,478 12,256,446 2,974,469 1,498,041 (As Restated, P15,226,938 P14,705,383 2,875,514 (352,318) (In Thousands) 712,321 486,731 225,590 (32,032) (In Thousands) 47,900 29,331 2015 Note 37) 521,555 2015 2014 (As Restated, P13,792,962 P13,539,406 P11,222,226 P3,311,150 P1,319,896 P9,026,828 11,885,157 11,830,344 2,748,118 1,369,711 2,667,862 (608,118) Note 37) 253,556 563,032 425,014 138,018 (54,813) 190,467 58,511 2014 2013 2014

a. Trade receivables on consumer goods pertain to receivables from 9. Inventories various customers of distilled spirits, beverages and tobacco segments, which are noninterest-bearing and generally have 30 to 90 days’ terms. Inventories consist of: b. Contracts receivables of the property development segment consist of revenues recognized to date based on percentage of completion 2015 2014 less collections received from the respective buyers. Interest income (In Thousands) from interest-bearing contracts receivables amounted to P34.6 million, At Cost: P37.5 million and P39.4 million in 2015, 2014 and 2013 respectively. Consumer goods: c. The Group assigned certain contracts receivables to Banco de Oro Alcohol P2,387,930 P2,383,195 Unibank, Inc. (BDO) on a with recourse basis. The total assigned Beverage 1,887,224 2,028,689 contracts receivables amounted to P133.4 million and P257.6 million as of December 31, 2015 and 2014, respectively (see Note 19). 4,275,154 4,411,884 Real estate inventories: Other Receivables Other receivables are due and demandable and include accrued interest Condominium and residential units for sale 3,978,857 3,524,882 receivable pertaining to interest earned on cash and cash equivalents Subdivision land under development 3,370,090 2,315,704 and unpaid utility charges to tenants and receivables from sale of various Land held for future development 1,137,156 1,408,237 assets. 8,486,103 7,248,823

Movements of Allowance for Credit Losses Fuel, materials and supplies 613,024 624,150 Details and movements of allowance for credit losses, determined using 13,374,281 12,284,857 individual and collective assessment follow: At NRV - Materials and supplies 649,766 652,008

P14,024,047 P12,936,865 December 31, 2015 Finance Trade Other Receivables Receivables Receivables Total Allowance for inventory obsolescence on materials and supplies amounted to P7.0 million, and P25.2 million as of December 31, 2015 (In Thousands) and 2014, respectively. Balance at beginning of year P12,129,459 P54,813 P5,514 P12,189,786 Provisions during the year a. Components of the consumer goods inventories are as follows: (Note 26) 860,163 − 5,726 865,889 Accounts charged off, transfers and others 2,944,861 (22,781) − 2,922,080 2015 2014 Balance at end of year P15,934,483 P32,032 P11,240 P15,977,755 (In Thousands) Finished goods P729,321 P561,011 December 31, 2014 Work in process 1,008,228 1,022,742 Finance Trade Other Receivables Receivables Receivables Total Raw materials 2,537,605 2,828,131 (In Thousands) P4,275,154 P4,411,884 Balance at beginning of year P17,165,122 P32,590 P5,514 P17,203,226 Provisions during the year (Note 26) 1,712,279 22,223 − 1,734,502 Cost of consumer goods inventories recognized as expenses under cost of sales amounted to P12.7 billion, P12.5 billion and P10.8 billion in Accounts charged off, transfers and others (6,747,942) − − (6,747,942) 2015, 2014 and 2013 respectively (see Note 24). Balance at end of year P12,129,459 P54,813 P5,514 P12,189,786 b. Movements in real estate inventories are set out below: Below is the breakdown of provision for (reversal of) credit losses by type of loans and receivables. 2015 2014 (In Thousands) 2015 2014 Balance at beginning of year P7,248,823 P4,932,871 (In Thousands) Land acquired during the year – 328,580 Individual assessment Construction/development costs incurred 2,208,321 3,127,713 Finance receivables: Transfer from (to) investment property (80,236) – Receivable from customers P487,496 P2,153,083 Borrowing costs capitalized (Note 19) 61,856 163,393 Unquoted debt securities (166,627) (336,475) Disposals (recognized as cost of real estate Other receivables 69,304 (164,331) sales, Note 24) (952,661) (1,303,734) Trade receivables from customers of consumer Balance at end of year P8,486,103 P7,248,823 goods and other receivables 5,726 22,223 395,899 1,674,500 Parcels of land acquired in 2014 will be used for development of Collective assessment condominium units for sale and development as part of the consolidation Finance receivables: of properties in Eton City, one of the major projects of the Group’s property Receivables from customers 434,960 59,930 development segment. Other receivables 35,030 72 469,990 60,002 The average capitalization rates used to determine the amount of P865,889 P1,734,502 borrowing costs eligible for capitalization is 4.5% and 5.0% in 2015 and 2014. 80 81

ANNUAL REPORT 2015 Creditable withholdingtaxes(CWT) Miscellaneous cashandotheritems ABI Pascual Holdings VMC PMFTC Details ofinvestmentinPMFTCareasfollows: Investment inPMFTC joint ventureareaccountedforusingtheequitymethodofaccounting. which isajointcontrolledentity. The Group’s and investments initsassociates 50.0% interestin ABI Pascual Limited(ABIPascual HoldingsPrivate Holdings), respectively, whichdonotconstitutecontrolorjointcontrol. The Groupalsohas decisions inPMFTCand VMC, associate, anda22.5%-owned a49.6%-owned policy inthefinancialandoperating toparticipate The Grouphasthepower Investments in andaJoint Associates Venture 11. Subsidiaries, AssociatesandJointVenture e. Prepaid expensesinclude chargesamounting prepaidimportation d. progressbillingpayment Advances tocontractorsarerecoupedevery c. material Advances to suppliers pertain to deposits made for raw b. ExcisetaxpertainstoadvancepaymentstheBureauofInternal a. CWTs pertainmainlytotheamountswithheldfromincomederived 10. OtherCurrentAssets Excise tax Equityinnetearnings beginningof year Balanceat equityinnet earnings(loss):Accumulated Acquisition cost Cashdividends(Note22) comprehensiveincome shareinother Accumulated endofyear Balance at Advances tosuppliers Input VAT Prepaid expenses Advances tocontractors Stationeries, officesuppliesandstampsonhand Deferred rent Deferred reinsurancepremiums Deferred charges Others raw materials by the distilled spirits and beverage businesses. bythedistilledspiritsandbeverage materials raw respectively. chargespertaintothepurchasesof Prepaidimportation to P72.9millionandP80.8asofDecember31, 2015and2014, cycle.completed withinthenormaloperating package. The activitiestowhichtheseadvancespertainwillbe ofaccomplishmenteachcontract based onthepercentage inventories. oftherelated upondelivery purchases andareapplied (see Note38). Revenue (BIR)onsaleofalcoholicbeverages Group towhichtheCWTsrelate. inthe incometaxliabilityofacompany any against can beapplied inventories.from saleofconsumergoodsandrealestate The CWTs 50.0% 22.5% 49.6% 2015 Ownership P13,483,541 P10,298,585 (2,499,984) (3,221,410) (1,695,969) 974,543 (In Thousands) 50.0% 20.2% 49.6% 27,454 2014 2015 (In Thousands) P8,841,923 3,409,032 P103,668 P10,289,585 P11,761,290 P13,483,541 P11,011,011 959,654 985,053 802,637 468,587 326,188 300,156 161,592 287,139 271,257 766,960 (2,499,984) (3,168,550) (In Thousands) 1,451,805 2015 153,454 515,112 19,900 27,454 2015 2014 Amount P11,011,011 P12,297,509 P13,483,541 P13,664,449 P7,886,609 (3,953,220) 2,738,802 1,008,484 1,237,373 3,704,117 P714,726 964,567 827,684 371,466 367,221 129,721 673,237 402,557 153,454 90,701 49,125 27,454 2014 2014 2013 – – Equity Noncurrent liabilities Current liabilities Noncurrent assets below (Inthousands): below valuesofthecontributedassetsareindicated Details ofthecarrying earnings. equipment amountingtoP1.9billionwastransferredretained incrementonFTC’sportion oftherevaluation property, plantand earnings” intheseperiods. Further, asaresultofthetransfer, P2.0 billionin2010,of whichareincluded inthe “Equity innet P293.0 million each yearstarting2011 and an outright loss disposed orsettled. FTCrecognizedthegainofaround assetsandliabilitiesarerealized,recognized oncetherelated to P5.1 billion in 2010. toFTCisbeingThe portionattributable to the interests of PMPMI amountingloss which is attributable Venturers, portionofthegainor whereFTCrecognizedonlythat Contributionsby JointlyControlledEntities-Non-Monetary 13, Committee(SIC)Interpretationon StandingInterpretations accounted for similar to a contribution in ajoint venture based FTC, netofunrealizedgainP5.1billion. The transaction was representing thefairvalueofnetassetscontributedby billion, P13.5 FTC initiallyrecognizedtheinvestmentamountingto As aresultofFTC’s divestmentofitscigarettebusinesstoPMFTC, PMFTC. FTCconsidersPMFTCasanassociate. andhasmajoritymembersoftheBOD,operations ithascontrolover economic interestinPMFTC. theday-to-day SincePMPMImanages in the Philippines.of tobacco growing FTC and PMPMI hold equal and procurement, andthefurtherdevelopmentadvancement ofmanufacturing,synergies fromtheresultingintegration distribution from their respective, brand portfolios as well as cost complementary PMPMI. FTCandPMPMItobenefit The establishmentofPMFTCallows Purchase Agreement (APA) partiesand betweenFTCanditsrelated liabilities toPMFTCinaccordancewiththeprovisionsof Asset bytransferringselectedassetsand domestic businessoperations On February 25, 2010, FTCandPMPMIcombinedtheirrespective statements, aresetoutbelow: ofPMFTC,Summarized financialinformation basedonitsfinancial Termination Agreement. entered intowithPMIandconfirmedtheexecutionof PMPMI, to the waiver by FTC of its rights under the Exit Rights Agreement PMFTC in upon value. OnDecember10, 2013, theBODofLTG approved interest its February 25, 2015throughFebruary 24, 2018, anagreed- at option) (put except incertaincircumstances, duringtheperiodfrom sell to right Also, asaresultofthetransaction, FTChasobtainedthe Deferred incometaxliability Loans payable Trade andotherpayable Other currentassets Property, plantandequipment Inventories Cash Current assets P41,833,272 30,720,734 21,944,755 20,760,591 31,592,808 (In Thousands) 2015 (19,000,000) P41,868,305 31,380,156 34,231,463 (1,818,551) (2,707,797) 32,390,102 P8,405,963 19,084,092 8,646,788 4,382,894 8,432,235 P33,090 2014

Summarized statements of income of PMFTC are as follows: The summarized financial information of VMC as of and for the year ended November 30, 2015 and as of November 30, 2014 and for the 2015 2014 2013 six months period from June 1, 2014 to November 30, 2014 follows: (In Thousands) Revenue P115,220,990 P98,384,104 P89,623,792 2015 2014 (One year) (Six months) Cost of sales (101,462,725) (86,919,392) (67,456,713) (In Thousands) General and administrative expenses (12,656,463) (12,394,813) (12,652,233) Current assets P2,896,521 P2,399,263 Others - net 845,105 1,494,706 585,702 Noncurrent assets 5,660,979 5,571,438 Income before income tax 1,946,907 564,605 10,100,548 Current liabilities 581,440 1,322,438 Provision for income tax (533,067) (116,876) (2,970,655) Noncurrent liabilities 1,816,696 1,564,532 Net income 1,413,840 447,729 7,129,893 Revenue 5,034,302 1,352,346 Other comprehensive income (loss) 96,932 (93,233) 55,350 Income before income tax 1,593,950 386,628 Provision for income tax (483,712) (120,357) Total comprehensive income P1,510,772 P354,496 P7,185,243 Net income 1,110,238 266,271 Group’s share of income for the year P698,884 P222,043 P3,535,947 Other comprehensive income 2,648 – Total comprehensive income 1,112,886 266,271 Investment in VMC Details of investment in VMC are as follows: Investment in a Joint Venture On February 15, 2012, ABI and Corporation Empresarial Pascual, S. L. 2015 2014 (CEP), an entity organized and existing under the laws of Spain, agreed (In Thousands) to form ABI Pascual Holdings, a jointly controlled entity organized and Acquisition cost domiciled in Singapore. In accordance with the Agreement, ABI and Balance at beginning of year P616,441 P498,629 CEP (the “venturers”) will hold 50% interest in ABI Pascual Holdings. Further, the arrangement requires unanimous agreement for financial Additions 124,087 117,812 and operating decisions among venturers. Balance at end of year 740,528 616,441 Accumulated equity in net earnings: On November 21, 2012, ABI Pascual Holdings created ABI Pascual Foods Balance at beginning of year 379,443 – Incorporated (ABI Pascual Foods), an operating company, incorporated Equity in net earnings 196,838 44,635 and domiciled in the Philippines, that will develop a business of Excess of fair value of net assets of associate marketing and distributing certain agreed products. As part of the joint over cost of investment 17,593 334,808 venture agreement, the venturers also agreed to execute a product Balance at end of year 593,874 379,443 distribution agreement. Balance of convertible notes 117,403 241,489 P1,451,805 P1,237,373 As of December 31, 2012, ABI has an investment in ABI Pascual Holdings amounting to P20.1 million, while ABI Pascual Holdings has an In December 21, 2007, the Company acquired 170.1 million investment in ABI Pascual Foods amounting to P40.2 million. The joint shares representing 10.67% ownership in the shares of stock venture has started operations in September 2013. of VMC for P85.1 million presented as AFS investments as of December 31, 2013. Total assets, liabilities and capital deficiency of ABI Pascual Holdings amounted to P71.5 million, P164.8 million and P93.3 million, respectively, On various dates in April and May 2014, LTG acquired shares of as of December 31, 2015 and P54.2 million, P146.3 milion and P92.1 million, stock of VMC amounting to P413.6 million, which increased its respectively, as of December 31, 2014. In 2015 and 2014, ABI Pascual ownership interest to 17.5%, and convertible notes amounting to Holdings incurred net losses of P4.1 million and P23.1 million, respectively. P359.3 million, which would increase LTG’s interest to 23.5% upon The Group recognized share in net loss of ABI Pascual Holdings to the extent conversion. In 2014, portion of the convertible notes amounting of the carrying value of the investment amounting to P20.1 million in 2013 to P117.8 million was converted to shares of stock of VMC (see Note 28). As at December 31, 2013, the Group’s share in losses which resulting in an increase in LTG’s ownership interest to 20.2% as of has not been equity accounted for amounted to P14.4 million. In 2014, the December 31, 2014. The cost-based approach was applied Group determined that its advances to ABI Pascual Foods amounting to in accounting for the step acquisition of VMC as an associate. P95.2 million to support its operations represent the Group’s long-term Accordingly, LTG reclassified the original cost of its AFS investments interest in ABI Pascual Holdings and its subsidiary that, in substance, form to investment in an associate and derecognized the net changes in part of the Group’s net investment in the joint venture. The Group’s share fair value of AFS investments amounting to P238.2 million (presented in loss of the joint venture in 2015 and 2014 amounted to P2.1 million and in other comprehensive income) (see Note 7). The difference of P46.1 million, respectively (see Note 28). P334.8 million between the sum of the consideration for the 17.5% ownership interest amounting to P498.7 million and the share in fair Disclosures on Subsidiary with Material Non-controlling Interest value of net assets of VMC at the date the investment becomes an Following is the financial information of PNB, which has material associate amounting to P833.5 million was recognized as part of the non-controlling interests of 43.53% as of and for the years ended equity in net earnings of VMC in 2014. December 31:

In 2015, portion of the convertible notes amounting to P124.1 million 2015 2014 2013 was converted to shares of stock of VMC resulting to an increase in (In Thousands) LTG’s ownership interest to 22.5% as of December 31, 2015. The Accumulated balances of material difference of P17.6 million between the sum of the consideration for non-controlling interest P38,103,827 P35,600,617 P28,844,411 the additional 2.3% ownership interest amounting to P124.1 million and Net income allocated to material the share in fair value of net assets of VMC at the date of the conversion non-controlling interest 2,860,406 2,507,994 2,647,901 amounting to P141.7 million was recognized as part of the equity in net Total comprehensive income allocated to material non-controlling interest 2,503,210 2,328,509 959,404 earnings of VMC in 2015. 83 82

ANNUAL REPORT 2015 Non-controllinginterest EquityholdersoftheCompany to: Equity attributable Noncurrent liabilities Current liabilities Financing Noncurrent assets Investing Current assets Operating Non-controllinginterests Equityholders to: attributable Total comprehensiveincome Non-controllinginterests Equityholders to: Net incomeattributable Total comprehensiveincome Other comprehensiveincome(loss) Net income Net incomefromdiscontinuedoperations Net incomefromcontinuingoperations Provision forincometax Income beforeincometax Other income-net Foreign exchangegains-net expenses General andadministrative Cost ofservices Revenue ofCashFlows: Statements Balance Sheets: ofComprehensiveIncome: Statements inter-company eliminations. ofPNBpreparedunderpoolinginterestmethodbeforetheGroup’s financialstatements isbasedontheamountsinconsolidated PNB below of PNBthroughtheBankHoldingCompaniesareaccountedforunderpoolinginterestmethod. Thus, of thesummarizedfinancialinformation with ABC undertheacquisitionmethodofPFRS3. IntheLTG financial statements, consolidated themergerofPNBand ABCandtheacquisition As discussed in Note 1, on February 9, 2013, PNB acquired 100.00% of the voting common stock of ABC. PNB accounted the business combination (18,449,228) P26,610,310 (1,543,789) (4,807,242) P3,673,284 P8,150,073 2,695,099 5,454,974 3,095,918 1,380,871 6,769,202 6,411,271 7,955,060 3,393,380 1,207,840 (P7,621,904) (P2,263,547) (10,634,340) 357,931 5,275,983 2015 2015 (In Thousands) (In Thousands) P331,611,312 (18,693,960) P24,945,565 494,826,885 334,920,597 (As restated, (1,620,442) (4,378,367) P3,117,161 P5,434,447 41,379,385 50,946,819 79,378,820 (P44,774,748) (P61,400,140) 2,579,003 2,855,444 2,780,746 5,897,907 5,633,743 7,254,185 4,038,751 1,342,196 (463,460) Note 37) 264,164 17,168,222 (In Thousands) (542,830) 2014 2015 2014

P298,568,066 P111,644,855 (17,849,937) P28,560,739 466,045,382 313,673,332 P48,744,659 (As restated, (3,500,920) (1,197,630) (5,786,346) P3,435,032 P2,733,727 38,813,476 47,360,474 60,022,066 (7,555,741) 70,455,937 1,275,665 1,458,063 2,799,615 6,234,647 6,037,967 7,235,597 1,148,913 1,162,228 Note 37) 196,680 2013 2014 2013

12. Property, Plant and Equipment

December 31, 2015

At Appraised Values At Cost Plant Office and Furniture, Buildings and Administration Fixtures and Land and Land Building Machineries Buildings and Transportation Returnable Other Construction Improvements Improvements and Equipment Subtotal Improvements Equipment Containers Equipment in progress Subtotal Total (In Thousands) Cost Balance at beginning of year P17,733,967 P19,982,538 P27,125,256 P64,841,761 P3,944,254 P1,718,288 P6,628,513 P9,241,275 P386,422 P21,918,752 P86,760,513 Additions/transfers (Note 13) 2,270,088 736,586 518,931 3,525,605 179,355 88,292 505,223 1,204,136 1,144,707 3,121,713 6,647,318 Disposals/transfers/others (Note 28) 202,772 (742,145) (3,136,042) (3,675,415) 216,784 (15,010) (13,715) (384,348) (409,151) (605,440) (4,280,855) Balance at end of year 20,206,827 19,976,979 24,508,145 64,691,951 4,340,393 1,791,570 7,120,021 10,061,063 1,121,978 24,435,025 89,126,976 Accumulated Depreciation, Amortization and Impairment Losses Balance at beginning of year 909,980 8,380,263 17,080,993 26,371,236 3,330,800 1,398,039 5,480,748 7,733,768 − 17,943,355 44,314,591 Depreciation and amortization 23,519 591,716 839,602 1,454,837 181,337 138,217 573,090 611,059 − 1,503,703 2,958,540 Disposals/transfers/others (Note 28) 20,090 (2,745,867) 53,510 (2,672,267 ) 2,445 (14,618) – (299,591) – (311,764) (2,984,031) Balance at end of year 953,589 6,226,112 17,974,105 25,153,806 3,514,582 1,521,638 6,053,838 8,045,236 − 19,135,294 44,289,100 Net Book Value P19,253,238 P13,750,867 P6,534,040 P39,538,145 P825,811 P269,932 P1,066,183 P2,015,827 P1,121,978 P5,299,731 P44,837,876

December 31, 2014

At Appraised Values At Cost Plant Office and Furniture, Buildings and Administration Fixtures and Land and Land Building Machineries Buildings and Transportation Returnable Other Construction Improvements Improvements and Equipment Subtotal Improvements Equipment Containers Equipment in progress Subtotal Total (In Thousands) Cost Balance at beginning of year P17,485,783 P19,165,903 P26,606,458 P63,258,144 P1,392,401 P1,810,316 P6,245,290 P9,069,144 P498,684 P19,015,835 P82,273,979 Additions/transfers 8,553 506,914 674,795 1,190,262 120,685 112,851 383,223 580,392 106,631 1,303,782 2,494,044 Disposals/transfers/others (Note 28) 239,631 309,721 (155,997) 393,355 2,431,168 (204,879) − (408,261) (218,893) 1,599,135 1,992,490 Balance at end of year 17,733,967 19,982,538 27,125,256 64,841,761 3,944,254 1,718,288 6,628,513 9,241,275 386,422 21,918,752 86,760,513 Accumulated Depreciation, Amortization and Impairment Losses Balance at beginning of year 872,143 8,199,888 16,351,586 25,423,617 975,719 1,468,153 4,913,232 6,811,879 − 14,168,983 39,592,600 Depreciation and amortization 37,837 635,666 958,132 1,631,635 126,517 131,264 567,516 621,635 − 1,446,932 3,078,567 Disposals/transfers/others − (455,291) (228,725) (684,016) 2,228,564 (201,378) – 300,254 − 2,327,440 1,643,424 Balance at end of year 909,980 8,380,263 17,080,993 26,371,236 3,330,800 1,398,039 5,480,748 7,733,768 − 17,943,355 44,314,591 Net Book Value P16,823,987 P11,602,275 P10,044,263 P38,470,525 P613,454 P320,249 P1,147,765 P1,507,507 P386,422 P3,975,397 P42,445,922 84 85

ANNUAL REPORT 2015 Movements oftheGroup’s (inthousands): investmentpropertiesareasfollows 13. InvestmentProperties amountwouldbeasfollows: carrying and machineries andequipment were measured usingcostmodel, the If land and improvements, plantbuildingsand building improvements, net ofdeferredincometaxeffect, areasfollows: December 31, 2011(seeNote34). increment, Movementsinrevaluation 1, wereJanuary valuations 2015and appraisal ofthelatest The dates replacementcost.and equipmentwerederivedusingthedepreciated fair valuesforlandimprovements, plantbuildings, andmachineries market evidenceandthe basedonavailable approach the marketdata independent appraisers. The fairvalueofthelandwasdeterminedusing performed by SEC accredited and are determined based on valuation buildings and building improvements, and machineries and equipment The correspondingfairvaluesoflandandimprovements, plant Machineries andEquipment ofLandandImprovementsPlantBuildings Revaluation Net revaluation decrease Netrevaluation beginningofyear Balanceat andequipment, netofdeferredincometaxeffect: incrementontheproperty,Revaluation plant through depreciation anddisposal throughdepreciation onproperty, plantand equipmentrealized Transfer increment ofportionrevaluation Non-controllinginterests EquityholdersoftheCompany Attributable to: endofyear Balanceat Plant buildingsandimprovements Land andlandimprovements Cost Plant buildingsandimprovements depreciation Accumulated Machineries andequipment Machineries andequipment Balance at beginningofyear Balance at Cost Additions Disposals/transfers/others Balance at endofyear Balance at Balance at beginningofyear Balance at Accumulated Depreciation Depreciation Provision forimpairmentlosses Balance at endofyear Balance at Disposals/transfers/others Net BookValue (P5,124,987) (15,560,490) (10,435,503) P29,181,866 P8,121,362 P7,249,395 P4,920,375 P7,249,395 P9,514,421 44,742,356 20,145,218 15,082,717 2,329,020 (360,163) (511,804) (In Thousands) (In Thousands) P23,541,887 P15,320,127 (6,178,060) 2015 2015 18,703,010 1,339,183 3,248,922 3,382,883 133,961 Land (P4,509,751) (14,105,652) P26,868,580 (9,595,901) P8,963,164 P8,121,362 P5,781,539 P8,121,362 P7,244,333 40,974,232 19,383,768 14,346,131 2,339,823 (841,802) – – 2014 2014 − Improvements Buildings and P10,064,779 P6,620,594 is asfollows: ofproperty,Depreciation plantandequipmentchargedtooperations Depreciation for capitalization were 4.5%and5.0%in20152014,for capitalization respectively. costseligible usedtodeterminetheamountofborrowing rates capitalization P13.8 millionasofDecember31, 2015and2014, respectively. The average costsamounted to P13.2million and borrowing Unamortized capitalized Costs Borrowing December 31, 2015and2014, respectively. amountedtoP2.7billionandP2.9asofused inoperations property,Fully depreciated arestill plantandequipmentthat December 31, 2015and2014, respectively. and of P180.8millionandP117.8aretemporarilyidleas million P78.1 amountCertain propertyandequipmentoftheGroupwithcarrying 2014, and 2015 in respectively. additions total P32.5 million remain to be unpaid as of December 31, 2015 and 2014, the of Out to becompletedin2016. manufacturing plant. expenditureprojectsareexpected These capital ofplantfacilities,major rehabilitation and ABI’s constructionofnew to theconstructionof TDI’s warehouseandbottlesortingfacility, AAC’s progress” underthe “Property, plantandequipment” accountpertains As ofDecember31, 2015and2014, theGroup’s “Construction in Cost of sales and services (Note24) Cost ofsalesandservices General andadministrative Selling expenses(Note25) 9,714,260 3,298,790 3,093,666 (568,771) (309,718) (265,209) expenses (Note26) 218,252 369,803 December 31, 2015 Residential P7,620 7,620 7,620 7,620 Unit P– – – – – – P1,286,665 P2,958,540 1,029,952 641,923 Construction 2015 in Progress P138,979 P290,804 105,541 290,804 46,284 (In Thousands) P1,420,117 P3,078,567 1,064,665 – – – – – 593,785 2014 P33,753,265 P22,231,525 (6,641,290) 28,715,694 1,603,719 6,555,332 6,484,169 (175,757) (265,209) P1,298,012 P3,285,649 369,803 1,269,830 717,807 Total 2013 December 31, 2014 Buildings and Residential Construction Land Improvements Unit in Progress Total Cost Balance at beginning of year P22,127,318 P9,421,946 P7,620 P1,331,690 P32,888,574 Additions 1,891,277 535,809 – 181,739 2,608,825 Disposals/transfers/others (476,708) 107,024 – (1,374,450) (1,744,134) Balance at end of year 23,541,887 10,064,779 7,620 138,979 33,753,265 Accumulated Depreciation and Impairment Losses Balance at beginning of year 3,336,107 3,357,250 7,620 – 6,700,977 Depreciation – 315,189 – – 315,189 Provision for impairment losses 453,462 16,324 – – 469,786 Disposals/transfers/others (540,647) (389,973) – – (930,620) Balance at end of year 3,248,922 3,298,790 7,620 – 6,555,332 Net Book Value P20,292,965 P6,765,989 P– P138,979 P27,197,933

The Group’s investment properties consist of parcels of land for Depreciation of investment properties charged to operations follows: appreciation, residential and condominium units for lease and for sale, and real properties foreclosed or acquired in settlement of loans which 2015 2014 2013 are all valued at cost. Foreclosed investment properties still subject to redemption period by the borrowers amounted to P150 million and (In Thousands) P141.5 million as of December 31, 2015 and 2014, respectively. The Cost of rental income (Note 24) P130,493 P145,680 P94,223 Group is exerting continuing efforts to dispose these properties. General and administrative expenses (Note 26) 239,310 169,509 370,467 In 2015, investment properties with carrying value of 2.2 billion were P369,803 P315,189 P464,690 converted as branches and head offices of PNB’s subsidiaries and were transferred to property, plant and equipment (see Note 12).

As of December 31, 2015 and 2014, the Group’s “Construction in 14. Other Noncurrent Assets progress” under the “Investment properties” account pertains to the contruction of building intended for leasing and which is expected to Other noncurrent assets consist of: be completed in 2016. 2015 2014 Out of the total additions in 2015 and 2014, P1,063.3 million and P1,127.8 million remain to be unpaid as of December 31, 2015 and (In Thousands) 2014, respectively. Deferred input VAT P378,486 P352,657 Deferred reinsurance premiums 499,148 738,685 Fair Values of Investment Properties Deferred charges 129,974 236,773 Below are the fair values of the investment properties which were determined by professionally qualified, accredited and independent Deposit for future investments 348,511 357,489 appraisers based on market values: Other investments 19,861 19,357 Refundable and security deposits 160,510 298,961 2015 2014 Software costs 1,131,041 667,364 (In Thousands) Goodwill 163,735 163,735 Land P30,136,203 P36,107,990 Chattel properties - net 2,107 49,549 Buildings and improvements 8,517,345 6,025,335 Receivable from SPV - net 500 500 P38,653,548 P42,133,325 Net retirement plan assets (Note 23) 255,716 264,118 The fair value of investment properties of the Group was arrived at Others - net 290,655 515,944 using various acceptable valuation approaches and both observable P3,380,244 P3,665,132 and unobservable inputs (see Note 34). a. Deferred input VAT arises mainly from the acquisition of capital goods. Rent Income and Direct Operating Expenses of Investment Properties Rental income and direct operating expenses arising from the b. Refundable deposits consist principally of amounts paid by the property investment properties of property development segment amounted to development segment to its utility providers for service applications P1,172.5 million and P226.9 million in 2015, P740.3 million and and guarantee deposit to Makati Commercial Estate Association P278.9 million in 2014, and P448.7 million and P190.3 million in 2013, for plans processing, monitoring fee and development charge respectively (see Note 24). of the Group’s projects. These refundable deposits amounting to P145.4 million and P173.3 million as of December 31, 2015 and Rental income of the banking segment on its investment properties is 2014, respectively, will be refunded upon termination of the service presented under “Other income (charges) - net” (see Note 28). contract and completion of the projects’ construction. 86 87

ANNUAL REPORT 2015 g. Security fundamountingtoP0.2millionand0.15(includedg. under f. The GrouphasreceivablefromSPV, OPII, whichwasdeconsolidated e. As ofDecember31, 2015and2014, on depreciation accumulated d. The Grouprecognizedgoodwillwhichpertainsmainlyto ADI and c. Movementsinsoftwarecostsareasfollows: (charges) (seeNote28). and P266.0million, respectivelyare recordedpartof “Other income in 2015, 2014and2013amounting toP353.0million, P27.0million, debtsecurities.equity securitiesandsubordinated CollectionfromOPII Star Equities.Dragon OPIIhasbeenfinancedthroughtheissuanceof manage, and resolve the non-performing assets sold to Golden service executed onDecember 19, 2006. OPIIwasspecificallyorganizedtohold, PNB, Star Equities andOPIIforthesale of theNPAs Golden Dragon were respectively. (ASPA)The assetsaleandpurchaseagreements between pool andsecondofitsNPAs inDecember2006andMarch2007, StarEquitiesanditsassignee,Dragon OPII, tothesaleoffirst relative notes received by PNB from Golden fully provisioned subordinated As ofDecember31, 2015and2014, receivablefromSPVrepresents upon adoptionofPFRS10. (see Note37). reclassified to “ Assetsofdisposalgroup classified asheld forsale” insolvent companies.against In 2015, the security fund was by anddepositedwiththeICforpaymentofbenefit claims and 2014, respectively. The amountofsuchfundisdetermined 365 and367oftheInsuranceCodeasDecember31, 2015 “Others -net”)ismaintainedbyPNBLIIincompliancewithSections amounted toP36.5millionandP80.0million, respectively. properties acquiredbyPNBinsettlementofloans mortgage chattel value. higher thanitscarrying of December31, 2015and2014, therecoverableamountof ADI is exceed its recoverable amount, which is based on value in use. As valueof the abovekeyassumptionswouldcausecarrying ADI to of noreasonablypossiblechangeinany believesthat Management operates. in which for the industry growth ADI is comparable with the average of December31, 2014. rate thisgrowth assessedthat Management the five-yearperiodis6.0%asofDecember31, 2015and5.5%as ofuntilbeyond thecashflows usedtoextrapolate rate The growth projection is9.7%in2015and 2014. tothe cash flow applied rate price increaseandcostexpensesincrease. The pre-taxdiscount products basedon TDI’s projectedsalesvolumeincrease, selling to reflectthe increase indemand for beenupdated have cash flows coveringafive-yearperiod. bymanagement approved Theprojected projectionsfromfinancialbudgets usingcashflow use calculations The recoverableamountof ADI isdeterminedbasedonvaluein respectively. million, P19.0 to impairment testingofgoodwillrelated ADI, aCGU. and million P144.7 As ofDecember31, 2015and2014, theGroupperformeditsannual to amounting Eton P161.2 millionin2014andP236.72013(seeNote26). amountedtoP124.2millionin2015,Software costamortization Additions Balance at endofyear Balance at (Note26) Amortization Other adjustments Disposals beginningofyear Balance at P1,131,041 (124,175) P667,364 587,390 (In Thousands) 2015 462 – (161,236) P425,928 P667,364 (17,137) 419,809 2014 –

November 18, 2011 October 21, 2013 December 12, 2014 August 5, 2013 Demand Certificates ofCertificates Time Deposits(LTNCDs): Time depositoftheGroupincludes Long-termNegotiable thefollowing ofLong-term NegotiableCertificates Time Deposits P68.2 billion, respectively. bookedunder reserves ‘Due from BSP’ amountedto P74.3 billionand and 8.00%, respectively. As ofDecember31, 2015and2014, available and 2014 equivalentto20.00% Bankaresubjecttoreserves and PNBSavings 27, March Under existingBSPregulations, non-FCDU depositliabilities of PNB last 832 and requirementsofuniversalandcommercialsbanks.in thereserve 830 Nos. May 8, 2014, respectively, increase the 1-point percentage to approve Circular issued BSP compliance, requirementratios. andreductionintheunifiedreserve requirement cash anddemanddepositsaseligibleformsofreserve requirement, oftheunifiedreserve remuneration exclusion ofvault requirement, andliquidityreserve non- ofthestatutory the unification On March29, 2012, BSPissuedCircularNo. 753whichprovidesfor oftheremainingdepositliabilitiesfollow: Annual interestrates non-interest bearingasofDecember31, 2015and2014, respectively. Of the total deposit liabilities of PNB, P23.8 billion and P24.8 billion are d. The LTNCDs constitutedirect, unconditional, unsecured, and c. Unless earlierredeemed, theLTNCDs shallberedeemedbyPNBon b. The LTNCDs perannumonitsprincipalamount bearinterestrate a. 100.00%oftheface valueofeachLTNCD. Issuepriceat Other significanttermsandconditionsoftheabove LTNCDs follow: Issue Date 15. DepositLiabilities depositliabilities Foreign-currency denominated Savings liabilities Peso-denominated deposit Time Presented asnoncurrent Presented ascurrent Interest Period. and willbepaidinarrearsquarterlyonthelastdayofeachsuccessive Interest inrespectoftheLTNCD onanannual basis willbecalculated these Terms and Conditions, all times rank and shall at of PNB, obligations unsubordinated enforceable according to thereon. The LTNCDs theoptionofholders. maynotberedeemedat issuepricethereof, the aggregate accruedandunpaidinterest plusany an amountequaltoonehundredpercent(100%)of at date maturity (asthecasemaybe). Date orMaturity Early RedemptionDate from andincluding thereof, theIssueDate uptobutexcluding the February 17, 2017 February 5, 2019 June 12, 2020 April 22,April 2019 Maturity Date Maturity 0.00% to2.25% 0.05% to5.00% (In Thousands) P7,000,000 Face Value 3,100,000 5,000,000 4,000,000 2015 P113,168,584 P436,362,854 (39,793,338) 302,476,256 476,156,192 60,511,352 0.02% to2.26% 0.05% to6.11% (In Thousands) Carrying ValueCarrying P6,958,411 (In Thousands) 3,094,836 4,979,615 3,981,365 2015 2014 Coupon Rate 0.02% to3.80% 0.00% to8.40% 5.18% 3.00% 3.25% 4.13% P411,391,378 P88,898,863 293,201,308 (23,468,731) 434,860,109 pari passu 52,759,938 Repayment Quarterly Quarterly Quarterly Quarterly Interest 2014 2013 Terms

and without any preference or priority among themselves and at least 17. Bills and Acceptances Payable pari passu with all other present and future direct, unconditional, unsecured, and unsubordinated obligations of the Issuer, except for Bills and acceptances payable consists of: any obligation enjoying a statutory preference or priority established under Philippine laws. 2015 2014 e. Subject to the “Events of Default” in the Terms and Conditions, the (In Thousands) LTNCDs cannot be pre-terminated at the instance of any CD Holder before Maturity Date. In the case of an event of default, none of the Bills payable to: CD Holders may accelerate the CDs on behalf of other CD Holders, and BSP and local banks (Note 22) P17,580,304 P16,393,373 a CD Holder may only collect from PNB to the extent of his holdings in the CDs. However, PNB may, subject to the General Banking Law of Foreign banks 7,676,238 1,027,442 2000, Section X233.9 of the Manual of Regulations for Banks, Circular Others 150,864 1,262,389 No. 304 Series of 2001 of the BSP and other related circulars and issuances, as may be amended from time to time, redeem all and not 25,407,406 18,683,204 only part of the outstanding CDs on any Interest Payment Date prior to Maturity Date, at an Early Redemption Amount equal to the Issue Acceptances outstanding 344,816 366,854 Price plus interest accrued and unpaid up to but excluding the Early 25,752,222 19,050,058 Redemption Date. Presented as noncurrent (19,915,383) (12,409,837) f. The LTNCDs are insured by the PDIC up to a maximum amount of Presented as current P5,836,839 P6,640,221 P0.5 million subject to applicable laws, rules and regulations, as the same may be amended from time to time. Annual interest rates are shown below: g. Each Holder, by accepting the LTNCDs, irrevocably agrees and acknowledges that: (a) it may not exercise or claim any right of set- 2015 2014 2013 off in respect of any amount owed to it by the PNB arising under or Foreign currency-denominated in connection with the LTNCDs; and (b) it shall, to the fullest extent borrowings 0.01% to 2.50% 0.03% - 2.50% 0.12%-0.99% permitted by applicable law, waive and be deemed to have waived all such rights of set-off. Peso-denominated borrowings 0.38% to 0.88% 0.63% - 2.00% 1.09%-3.50%

Interest expense on deposit liabilities presented under “Cost of banking PNB’s bills payable to BSP includes the transferred liabilities from services” amounted to P3.0 billion, P2.9 billion and P3.9 billion in 2015, Maybank Philippines, Inc. (Maybank) amounting to P1.8 billion as of 2014 and 2013, respectively (see Note 24). December 31, 2015 and 2014 (see Note 8).

In 2015, 2014 and 2013, interest expense on LTNCDs for the As of December 31, 2015, bills payable with a carrying amount of Group includes amortization of transaction costs amounting to P12.8 billion is secured by a pledge of certain AFS with carrying P16.9 million, P22.8 million and P19.4 million, respectively. value and fair value of P8.5 billion and HTM investments with Unamortized transaction costs of the LTNCDs amounted to carrying value and fair value of P7.0 billion and P7.5 billion, P85.8 million and P102.7 million as of December 31, 2015 and respectively (see Note 7). 2014, respectively. As of December 31, 2014, bills payable with a carrying value of P14.1 billion is secured by a pledge of certain AFS and HTM investments

with fair value of P8.5 billion and P8.9 billion, respectively (see Note 7). 16. Financial Liabilities at Fair Value through Profit or Loss (FVPL) Following are the significant terms and conditions of the repurchase Financial liabilities at fair value through profit or loss consist of: agreements entered into by PNB:

2015 2014 a. Each party represents and warrants to the other that it is duly (In Thousands) authorized to execute and deliver the Agreement, and to perform its Derivative liabilities (Notes 21 and 33) P135,193 P44,903 obligations and has taken all the necessary action to authorize such execution, delivery and performance; Designated at FVPL - segregated fund liabilities – 10,817,122 b. The term or life of this borrowing is up to three years; c. Some borrowings bear a fixed interest rate while others have floating 10,862,025 135,193 interest rate; Presented as noncurrent (9,118) (24,805) d. PNB has pledged its AFS and ATM investments, in form of ROP Global Presented as current P126,075 P10,837,220 bonds, in order to fulfill its collateral requirement; e. Haircut from market value ranges from 15.00% to 25.00% depending In 2015, the segregated fund liabilities of PNB LII amounting to on the tenor of the bond; P13.7 billion were reclassified as part of “Liabilities of disposal group f. Certain borrowings are subject to margin call up to USD 1.4 million; classified as held for sale” (see Note 37). As of December 31, 2014, the and balance of segregated fund liabilities consists of (in thousands): g. Substitution of pledged securities is allowed if one party requested and the other one so agrees. Segregated funds (Note 6) P10,654,770 Interest expense on bills payable is included under “Cost of banking Additional subscriptions 162,352 services” amounting to P1.0 billion, P0.9 billion and P1.1 billion in 2015, Segregated fund liabilities P10,817,122 2014 and 2013, respectively (see Note 24). 89 88

ANNUAL REPORT 2015 lump-sum after60days. in Banco de Oro (BDO) amounting to P1,100 million which are payable banks. In2015, theGroupobtained additionalshort-termloansfrom bytheGroupandcounterparty and subjecttorenewaluponagreement 2015 and2014, withinoneyear lumpsumonvariousdates arepayable rangingfrom3.3%to3.5%in loans aresubjecttoannualinterestrates debts amountedtoP1,400millionandP300.0million, respectively. The As ofDecember31, 2015and2014, outstandingunsecured short term Short-term Debts 19. Short-termandLong-termDebts include, butnotlimited toadvertisingandfreightcompanies. which materials otherthantosuppliersofraw inventories andpayable includeOther payables tohaulersassecurity for cashbondpayable Other Payables ofEton. services the contractorwhichwillbepaiduponcompletionofcontracted istheamountdeductedfromtotalbillingof Retention payable Retention Payable significant astoamounts. services, fuelandoil, andprofessionalfeeswhichareindividuallynot Other accruedexpensesconsistofaccrualsforcommission, outside Accrued Expenses projects. of realestate Property Development segment in thedevelopment and construction Accued projectdevelopmentcostsrepresentincurredbythe Accrued ProjectDevelopmentCosts equipment andspareparts. purchases,materials aswelloccasional acquisitionsofproduction Trade alsoinclude toraw payables chargesrelated importation for useinmanufacturingandotheroperations. (i.e., and indirect materials materials and supplies, materials) packaging of thebankinggroupandpurchasesinventories, whichinclude raw 30-to-60 day terms. Trade arise mostly from trade purchases payables Trade arenon-interestbearingandnormallysettledon payables Trade Payables Accounts payable andaccruedexpensesconsistof: Accounts payable 18. AccountsPayable andAccruedExpenses Trade payables Nontrade payables Interest Accrued expenses: PDICinsurancepremiums Projectdevelopmentcosts premium Reinstatement Taxes andlicenses Information technology-related expenses technology-related Information Rentandutilitiespayable Advertising andpromotionalexpenses Purchase of materials andsuppliesothers Purchaseofmaterials Retention payable Due togovernmentagencies Output valueaddedtax Other payables

P17,079,820 P8,785,564 2,085,701 1,932,508 377,087 470,701 374,908 194,974 103,043 284,281 759,244 690,714 275,757 661,368 (In Thousands) 83,970 2015 - P15,785,151 P9,510,729 2,070,730 1,037,881 323,957 133,580 479,910 332,559 225,623 103,690 243,946 710,107 267,486 136,138 110,566 98,249 2014 ulcofrn ujc otepoiin fBPCrua o 280 a publicofferingsubjecttotheprovisions ofBSPCircularNo. Lower Tier uptothemaximumamountofP5.0billionthrough 2capital raisingactivity by wayofissuance toconductcapital management On July25, 2007, andauthorizedthe the BODofPNBapproved Notes 7.13% P4.5billionSubordinated (see Note24). to “Cost of banking services” of income statements in the consolidated P16.9 million, P15.8million, andP14.8million, respectively, werecharged In 2015, 2014and2013, oftransactioncostsamounting to amortization debtamountedtoP13.6millionandP30.5respectively.subordinated As ofDecember31, 2015and2014, theunamortizedtransactioncostof 2. Each noteholder, by accepting the 2011 Notes, irrevocably agrees 1. of6.75%perannumfrom therate The 2011Notesbearinterestat notesfollow: Significant termsandconditionsofthesubordinated EIR onthisnoteis6.94%. qualifyasLower notesofP6.5billionthat subordinated Tier 2capital. On May15, 2011, PNB’s theissuanceofunsecured BODapproved Notes 6.75% 6.5BillionSubordinated 2. Each noteholder, by accepting the 2012 Notes, irrevocably agrees 1. of5.88%perannumfrom therate The 2012Notesbearinterestat notesfollow: Significant termsandconditionsofthesubordinated EIR onthisnoteis6.04%. qualifyasLower notesofP3.5billionthat subordinated Tier 2capital. On May9, 2012, PNB’s theissuanceofunsecured BODapproved Notes 5.875% 3.5BillionSubordinated PNB’s Debts Subordinated Long-term Debts Noncurrent portion Less currentportion Notes payable Unsecured termloan Subordinated debts Subordinated Bonds payable Bonds payable connection withthe2011Notes. byPNBarisingunderorin amountowed set-off inrespectofany it may not exercise or claim that right of and acknowledges any on commencing year, each call optiondate. of price equalto100.00%oftheprincipalamountonJune16, 2016, June and June 15, 2011, aredemption unlessthe2011Notesareredeemedat March December, quarterlyinarrearsonthe15thofSeptember,will bepayable and including June15, 2011tobutexcluding June15, 2021. Interest connection withthe2012Notes. byPNBarisingunderorin amountowed set-off inrespectofany it may not exercise or claim that right of and acknowledges any 100.00% oftheprincipalamountonMay10, 2017, calloptiondate. aredemptionpriceequalto unless the2012Notesareredeemedat February and May of each year, commencing on May 9, 2012, quarterlyinarrearsonthe9thof will bepayable August, November, and including May9, 2012tobutexcluding May9, 2022. Interest P10,706,431 P9,986,427 11,182,446 (476,015) 476,015 720,004 (In Thousands) 2015 – P11,291,321 (5,506,123) P9,969,498 16,797,444 4,998,008 1,321,823 508,115 2014 and BSP Memorandum to all banks and financial institutions dated all bondholders and the bondholders shall not be obliged to sell. February 17, 2003. Any bonds so purchased shall be redeemed and cancelled and may not be re-issued. The issuance of the foregoing subordinated debt was approved by the MB in its Resolution No. 98 dated January 24, 2008. Unsecured term loans of Eton Relative to this, on March 6, 2008, PNB issued P4.5 billion, 7.13% On January 28, 2013, Eton entered into an unsecured term loan Subordinated Notes due on 2018, callable with step-up in 2013. Among agreement with BDO to finance the construction of its projects. the significant terms and conditions of the issuance of the subordinated The term loan, which has a face value of P2,000.0 million, was notes are: availed by Eton at a discount for total proceeds amounting to P1,987.3 million. The term loan bears a nominal interest rate of 1. Issue price is at 100.00% of the Principal amount. 5.53% and will mature on January 26, 2018. Principal repayments will start one year from the date of availment and are due annually The Subordinated Notes bear interest at 7.13% per annum, while interest payments are due quarterly starting April 28, 2014. payable to the noteholder for the period from and including Effective on October 28, 2013, ETON and BDO agreed to the new the issue date up to the maturity date if the call option is not interest rate of 4.75%. exercised on the call option date. Interest shall be payable quarterly in arrears on March 6, June 6, September 6 and Notes payable of Eton December 6 of each year, commencing June 6, 2008. The Subordinated Notes will mature on March 6, 2018, if not Notes payable include various notes from BDO which arose from redeemed earlier. assigning the Groups’ contracts receivables on a with recourse basis in 2015 and 2014 (see Note 8). These notes bear interest 2. The Subordinated Notes will constitute direct, unconditional, based on Philippine Dealing System Treasury Fixing (PDSTF) unsecured and subordinated obligations of PNB. The Subordinated rate for one year plus 1.5% net of gross receipts tax, which Notes will, at all times, rank pari passu and without any preference ranges from 5.10% to 6.66% in 2015 and from 6.00% to 6.66% among themselves, but in priority to the rights and claims of holders in 2014 subject to annual repricing. Interest is due monthly in of all classes of equity securities of PNB, including holders of arrears during the first two years of the term and thereafter, preferences shares. interest shall be collected with the principal covering the term

of three years or the term of the contracts to sell, whichever 3. PNB may redeem the notes in whole, but not in part, at a redemption comes first. In February 2015, the Group executed a promissory price equal to 100.00% of the principal amount of the Notes note amounting to P369.0 million in relation to its purchase of together with accrued and unpaid interest at first banking day land located at Meralco Avenue, Pasig City with a total purchase after the 20th interest period from issue date subject to at least price of P410.0 million. In December 2015, the Group executed 30-day prior written notice to noteholders and prior promissory note amounting to P754.0 million in relation to approval of the BSP, subject to the following conditions: (i) its purchase of land with a total purchase price amounting to the capital adequacy ratio of PNB is at least equal to the P984.0 million. required minimum ratio; and (ii) the Subordinated Note is simultaneously replaced with the issues of new capital which Interest on loans payable from general borrowings capitalized as are neither smaller in size nor lower in quality than the part of investment properties and real estate inventories amounted Subordinated Notes. to nil and P61.9 million in 2015, and P30.0 million and P163.4 million in 2014, and P34.7 million and P68.4 million in 2013, respectively. 4. The Subordinated Note shall not be redeemable or terminable at the Capitalization rates were 4.5% in 2015, 5.00% in 2014 and 4.51% in instance of any noteholder before maturity date. 2013, respectively. On March 6, 2013, the 2018 Notes were redeemed by PNB at par/face value. Interbev’s term loan facility agreement with BDO

As of December 31, 2015 and 2014, the unamortized transaction cost of On June 24, 2011, Interbev entered into a Facility Agreement subordinated debt amounted to P13.6 million and P30.5 million, respectively. with BDO for a term loan facility amounting to P1,200.0 million to In 2015, 2014 and 2013, amortization of transaction costs amounting to refinance its short-term loans and to finance its capital expenditure P16.9 million, P15.8 million, and P14.8 million, respectively, were charged requirements for capacity expansion of its Davao and Cagayan de to “Cost of banking services” in the consolidated statements of income Oro plants and establishment of new bottling lines in San Fernando, (see Note 24). Pampanga.

TDI’s 5.0 billion bonds payable In accordance with the Facility Agreement, Interbev was subjected to certain conditions which were not met in 2013. Accordingly, the term On November 24, 2009, TDI’s and LTG’s BOD approved facility agreement was terminated. and confirmed the issuance of the retail bonds amounting to P5.0 billion due in 2015 at 8.6% per annum, payable quarterly, Finance costs to be used for general corporate purposes, including debt Interest recognized in profit or loss on short-term and long-term debts, refinancing. On February 12, 2010, TDI completed the bond except for subordinated debts, are presented under “Finance costs” in offering and issued the Retail Bonds with an aggregate principal the consolidated statements of income (see Note 27). Interest costs amount of P5.0 billion, which matured and were redeemed on from subordinated debts are included in the “Cost of banking services” February 13, 2015. (see Note 24).

The bond provides that TDI may at any time purchase any of the Compliance with debt covenants bonds at any price in the open market or by tender or by contract at As of December 31, 2015 and 2014, the Group has complied with the any price, without any obligation to purchase bonds pro-rata from covenants of its long-term debts. 90 91

ANNUAL REPORT 2015 “Rental income” in the ofincome(seeNote14). statements consolidated deposits overitsfairvalue. ofdeferredcreditsisincluded Amortization in Deferred creditsrepresenttheexcessof principalamountofthesecurity theendofleasetermdepending ontheleasecontract.the beginningorat receivableseitherat against to depositsfromtenantswhichwillbeapplied theendofleaseterm.which isrefundableat Advance rentals pertain the inception of thelease pertain to the amounts paid by the tenantsat deposits, advancerentalsandother deferredcredits. Securitydeposits Other liabilitiesofthepropertydevelopmentsegmentinclude tenants’ rental Deposits andOtherDeferredCredits 2015, 2014and2013, respectively(seeNotes12, 13and27). portion amountingtoP52.6million, P81.5 millionandP63.3in to P55.3millionin2015, andnilin 2014 and2013, netofcapitalized notesamounted tothesepromissory Interest expenserecognizedrelated notewere extendedbeyond2015. of thepromissory price of P1.3 billion. On November 30, 2015, the terms and conditions withtotalpurchase inLaguna toitspurchaseoflandlocated relation ofPDSTF3years+0.50%,interest rate in tovariouslandowners In 2014, note, EtonexecutedaP992.9millionpromissory subjectto the thirdyearfromitsexecutiondate. total purchasepriceofP1,000.0million. noteisdueon The promissory + 0.50%, inQuezonCitywith toitspurchaseoflandlocated inrelation amounting to P740.0 million, of PDSTF 3 years subject to interest rate In November2012, notetoalandowner Etonexecutedapromissory price ofP742.4million. In2015, wasfullypaid. thepromissory Citywithtotalpurchase inMakati toitspurchaseoflandlocated relation ofPDSTF3years+1.00%,subject tointerestrate in toalandowner In September2012, note, EtonexecutedaP556.8millionpromissory Payables toLandowners of December31, 2015and2014, respectively. the recognizedreceivablesamountingtoP1.4billionandP2.0as policy of the Group. This account includes the excess of collections over receivables whicharerecognizedbasedontherevenuerecognition thecorrespondingcontracts against units whichwillbeapplied Customers’ depositsrepresentpaymentsfrombuyersofresidential Customers’ Deposits 20. OtherLiabilities Bills purchased-contra(Note8) Insurance contractliabilities(Note37) Presented ascurrent Presented asnoncurrent Others Due toBSP Transmission liability Advanced rentals Margin depositsandcashlettersofcredit Tenants’ rentaldeposits Payment orderpayable Due to Treasurer ofthePhilippines Other dormantcredits Deposit onleasecontracts Provisions (Note38) checksanddemanddraftsoutstanding Managers’ forunearnedpremiums Reserve Customers deposits Payable tolandowners P13,249,643 (7,961,017) P4,719,336 21,210,660 3,418,002 3,440,631 1,168,011 1,191,405 1,426,649 1,732,923 207,470 182,640 306,524 407,196 438,943 753,338 854,817 937,799 24,976 (In Thousands) 2015 – (12,638,349) P18,310,229 P11,507,852 30,948,578 4,230,348 4,341,804 2,016,058 1,030,298 1,056,794 2,017,398 2,289,708 101,172 268,805 312,144 366,841 549,149 651,371 76,893 45,800 86,143 2014 Warrants (Php) Interest rateswaps HKD AUD SGD CAD EUR GBP JPY USD SELL: AUD HKD CAD GBP EUR JPY USD BUY: forwards Currency derivatives: Freestanding b. therollforwardanalysis ofnetderivatives shows The tablebelow a. As ofDecember31, 2015and2014, PNBholds306,405sharesof equivalent toUSDamount. * The notional amounts pertain to the original currency except for the embedded derivatives, which represent the revenues” ofincome(seeNote24). statements intheconsolidated and investmentssecuritiesgains-net” presentedaspartof “Banking are includedThe changesinfairvalueofthederivatives in “Trading average forward rate). average of eithermarketriskorcredit(amountsinthousands, except outstanding asofDecember31, 2015and2014arenotindicative measured. thevolumeoftransactions The notionalamountsindicate are and isthebasisuponwhichchangesinvalueofderivatives the amountofaderivative’s underlying asset, orindex reference rate FVPL”)at , togetherwiththenotionalamounts. The notionalamountis liabilities(includedor derivative under “Financial assetsandliabilities instruments entered into by the Group, assets recorded as derivative financial thefairvaluesofderivative show The tablesinthenextpage 21. Derivative FinancialInstruments credit andduetoBSP. and demanddraftsoutstanding, margindepositsandcashlettersof liabilities, accountspayable, billspurchased-contra, checks managers’ Other liabilitiesofthebankingsegmentinclude insurancecontract Banking SegmentLiabilities Balance at endofyear Balance at Availments (settlements) Changes infairvalue beginningofyear Balance at assets (liabilities): US$1.6 million, respectively. ROP Warrants theirfairvalueofUS$1.3millionand SeriesB1at P181,348 63,332 49,444 66,932 Assets P42 411 520 455 122 86 – – – – – – – 4 Liabilities P135,193 December 31, 2015 P5,210 42,567 86,305 184 149 190 139 170 168 34 11 66 – – – – – Forward Forward Average P47.37 47.31 Rate 7.75 0.72 1.41 0.72 1.10 1.49 0.39 7.75 0.72 1.36 1.09 – – – –

4,492,495 P155,521 Amount* Notional Notional 374,421 (In Thousands) 63,733 13,012 4,600 3,444 2,200 5,700 1,385 1,104 450 898 – – – –

P136,551 71,160 42,407 P5,620 Assets (583,375) 4,378 2,152 6,809 1,686 P46,155 P91,648 537,882 531 449 634 539 (In Thousands) 83 81 13 − 3 6 2015 December 31, 2014 Liabilities P44,903 24,805 15,717 P2,246 275 532 535 567 96 66 17 47 − − − − − − Forward Average P44.81 44.78 7.76 0.82 1.32 1.16 1.56 0.37 0.82 7.75 1.16 1.56 7.75 0.37 Rate 1.3 − − (109,192)

P91,648 P95,596 105,244 Amount* 713,228 208,510 P77,300 312,776 Notional Notional 14,100 82,156 82,156 2014 6,611 2,195 1,797 4,250 1,614 800 200 150 − −

22. Related Party Transactions Parent Company, Subsidiaries, Entities Under Common Control Associate and Joint Venture The Company has transacted with its subsidiaries, associates and other Leadway Holdings, Inc. Billinge Investments Limited related parties as follows: Multiple Star Holdings Corp. Step Dragon Co. Limited Pioneer Holdings & Equities, Inc. High Above Properties Ltd. Donfar Management Ltd. Penick Group Limited Parent Company, Subsidiaries, Entities Under Common Control Fast Return Enterprises Ltd. In Shape Group Ltd. Associate and Joint Venture Mavelstone International Ltd. Hibersham Assets Ltd. Parent Company Ascot Holdings, Inc. Uttermost Success, Ltd. Orient Legend Developments Ltd. Tangent Pol Holdings, Inc. Ivory Holdings, Inc. Complete Best Development Ltd. Sierra Holdings & Equities, Inc. Merit Holdings & Equities Corp. Cormack Investments Ltd Subsidiaries Grand Cargo and Warehousing Services., Inc. True Success Profits Ltd. Link Great International Ltd. Key Landmark Investments Ltd. Bright Able Holdings Ltd. TDI and Subsidiaries Northern Corporation Tobacco Redrying Co., Inc. Fragile Touch Investments Ltd. ADI Basic Holdings Corporation Caravan Holdings, Corp. AAC Dominium Realty & Construction Corp Solar Holdings Corp. TBI Foremost Farms Inc. All Seasons Realty Corp. ABI and Subsidiaries Grandspan Development Corp. Dynaworld Holdings Inc. Agua Vida Himmel Industries Inc. Fil-Care Holdings Inc. Interbev Lapu Lapu Packaging Kentwood Development Corp. Waterich Lucky Travel Corporation La Vida Development Corp. Packageworld Philippine Airlines, Inc. Profound Holdings Inc. AB Nutribev Rapid Movers & Forwarders Co. Inc. Purple Crystal Holdings, Inc. Asia Pacific Bev PTE Upright Profits Ltd. Safeway Holdings & Equities Inc. FTC Dyzum Distillery Inc. Society Holdings Corp. Shareholdings Parity Packaging Corp. Total Holdings Corp. Saturn Heritage Holdings Corp. PNB and Subsidiaries Paramount and Subsidiaries Maxell Holdings, Corp. Eton Networks Holdings & Equities, Inc. Associates BCI Cube Factor Holdings, Inc. PMFTC ECI Trustmark Holdings Corporation VMC FHI Polima International Limited EPMC Cosmic Holdings Corp. Joint Venture Bank Holding Companies:(1) Negros Biochem Corporation ABI Pascual Holdings Allmark Holdings Corp. Grandway Konstruct, Inc. ABI Pascual Foods Dunmore Development Corp. Harmonic Holdings Corp. (1) In various dates in 2013, LTG acquired these holding companies through subscription of the increase in Kenrock Holdings Corp. Proton Realty & Development Corporation authorized capital stock of the holding companies.

The consolidated statements of income include the following revenue and other income-related (costs and other expenses) account balances arising from transactions with related parties:

Nature 2015 2014 2013 (In Thousands) Dividend income P1,695,969 P3,168,550 P3,953,220 Associates Sales – – 4,372 Purchases of inventories 1,203,300 812,405 1,060,622 Banking revenue - interest on loans and receivables 337,899 153,707 184,370 Sales of consumer products 24,519 21,011 21,117 Interest income on loans and advances – 16,806 39,556 Rent income 27,861 30,942 16,830 Other income 136,908 52,938 7,672 Freight and handling (4,716) (7,772) (5,364) Entities Under Purchases of inventories – (160,914) (53,145) Common Control Cost of banking services - interest expense on deposit liabilities (23,461) (14,898) (18,831) Cost of sales and services (26,296) (25,864) (35,168) Management and professional fee (527,279) (335,016) (422,866) Outside services (59,400) (57,150) (41,672) Rent expense (58,710) (31,054) (5,298) Key Management Short-term employee benefits (716,317) (588,709) (450,881) Post-employment benefits (62,633) (62,097) (60,368) 93 92

ANNUAL REPORT 2015 • LTG assigned to Tangent itsexistingliabilitiestoBillinge, Penick Group • InMay2013, LTG assumedvariousadvancesmadebyFTCto Tangent Transactions with Tangent, parentcompany and transactionsareasfollows: partybalances totheaboverelated Other termsandconditionsrelated partiesoperate.parties andthemarketinwhichtheserelated financial yearthroughexaminingthepositionofrelated parties. byrelated amounts owed This assessmentisundertakeneach to impairmentofreceivablesrelating The Grouphasnotrecordedany are unsecuredandsettlementoccursincash, unlessotherwiseindicated. As ofDecember31, 2015and2014, partybalances theoutstandingrelated Stockholders Common Control Entities Under Associate Parent Company The consolidated balancesheetsinclude parties: The consolidated asset(liability)accountbalanceswithrelated thefollowing amounting toP10.8billion. dates in2013,dates LTG paidP7.0billionto Tangent. InJuly2013, allthe of to ABI andSaturn Tangent amountingtoP7.4billion. Invarious amountingtoP1.9billionandassumed theliabilities and StepDragon Due to related parties Due torelated Other payables Due to related parties Due torelated andotherliabilitites Account payable Bills payable Deposit liabilities Advances tocontractors Advances tosuppliers Due from related parties Due fromrelated Other receivables Trade receivables Finance Receivables andotherliabilities Account payable Trade receivables dividends Other receivables- parties Due torelated Account Financial Statement On demand;non-interestbearing bearing 30 to90daysterms;non-interest On demand;non-interestbearing bearing 30 to90daysterms;non-interest of181days;nocollateral term of1.77%andmaturity rate withfixedannualinterest payable; Foreign currency-denominated bills from30daystoone(1)year ranging to1.73%andmaturity rangingfrom0.38% With annualrates bearing 30 to60daysterms;non-interest bearing 30 to60daysterms;non-interest On demand;non-interestbearing bearing 30 to60daysterms;non-interest bearing 30 to60daysterms;non-interest and chattel mortgages andchattel bankdeposithold-out, realestate includes to25years;Collateral termsrangingfromone(1)month from0.5%to16.5%andmaturity ranging Loans withinterestrates bearing 30 to60daysterms;non-interest bearing 30 to90daysterms;non-interest bearing 30 to90daysterms;non-interest On demand;non-interestbearing Terms andConditions • On March20, 2013,• therespectiveBOD’s of Tangent andtheBank Holding • On 8,April 2014andJune19, 2013, LTG declared dividendsto • OnMay12, 2015, theCompany’s BODandstockholders, respectively, for theassignmentofdebtaspayment forthesubscription. into Deedsof Assignment withtheBankHoldingCompanies latter’s preferredshares. Onthesamedate, Tangent entered Bank HoldingCompaniestoequityby wayofsubscriptiontothe aresolutiontoconvertthedebtof Companies approved Tangent. stockholders, ofwhichP1.3 billionandP1.2werepaidto settled itsoutstandingliabilitiesto Tangent amountingtoP1.2billion. with theexisting advances from Tangent. In2014, fully theCompany existing advancesto Tangent amountingtoP11.0 billionwereoffset of May27, thanJune10, 2015andtobe paidnotlater 2015. per shareoratotalofP1,623.2milliontoallstockholdersrecordas the declarationapproved and distribution of cash dividends of P0.15 1,203,300 1,695,969 (204,356) 136,908 673,566 337,899 Amount/Volume 24,519 23,461 17,590 (269) 3,089 2015 P– – – – – (P2,301,805) 3,168,550 (691,610) (383,138) (914,164) 617,770 (13,777) 812,405 153,707 (In Thousands) 31,706 (1,164) 14,898 16,806 21,011 2014 – – (7,418,850) 18,168,623 1,593,034 (P41,975) Outstanding Balance (160,393) 228,017 (4,339) (4,795) (4,990) 47,401 17,771 9,469 2015 – – – – (11,136,419) 14,455,539 1,797,390 (331,866) (P41,975) (38,354) 165,753 (4,496) (7,884) 47,670 3,175 7,957 2014 181 – – – In various dates in October, November and December 2013, Transactions with Entities under Common Control the Philippine SEC approved the increase in authorized capital stock of certain Bank Holding Companies and the subscription of • Due to related parties include cash advances provided to the Group to Tangent to all the outstanding preferred shares of these companies support its working capital requirements. (see Note 30). • Several subsidiaries of the Group entered into management services Transactions with an Associate agreements with Basic Holdings Corporation for certain considerations. Management fees are recorded under “Outside services” in “Cost of goods • Dividend income from PMFTC amounted to P1.7 billion in 2015, sold” and “Professional fees” in the “General and administrative expenses”. P3.2 billion in 2014 and P4.0 billion in 2013 (see Note 11). Dividends receivable from PMFTC as of December 31, 2015 and 2014 are • The property development segment purchases parcels of land from presented as part of nontrade receivables. other related parties for use in its various projects. • Several entities under common control maintain peso and foreign Transaction with Joint Venture currency denominated deposits and short term and long term loans • On February 15, 2012, ABI entered into an agreement with a food with PNB. Interest income and financing charges related to these company for a joint venture. The parties agreed that their ownership transactions are reported under “Banking revenue” and “Cost of will be fifty percent (50%) each (see Note 11). banking services”, respectively (see Note 24).

The following are the transactions among related parties which are eliminated in the consolidated statements of income:

Costs and Revenue and expenses other income Nature recognized by: recognized by: 2015 2014 2013 (In Thousands) Purchase/Sale of commercial bottles and packaging materials FTC/TDI ABI/PWI P1,011,781 P1,033,901 P683,493 Purchase/Sale of raw materials ABI/Interbev TDI/ADI 115,079 101,386 114,241 Royalty fees ABI TDI 13,421 15,909 20,949 Management fees TDI LTG 16,000 48,000 48,000 Interest on loans Eton LTG 4,413 4,563 4,563

ABI/ Bank Holding Interest on promissory note from sale of property Eton Companies/ Paramount 19,114 20,005 4,387 All entities other Interest on cash and cash equivalents PNB than PNB 72,729 166,931 166,931 Interest on short term and long term loans ABI/Interbev/ Eton PNB 10,150 – – ABI/ Bank Holding Gain on sale of property Eton Companies/ Paramount 369,084 175,673 288,407

The following are the balances among related parties which are eliminated in the consolidated balance sheets: December 31 Assets Liabilities Nature recognized by: recognized by: 2015 2014 (In Thousands) LTG/FTC Bank Holding Companies P153,255 P145,315 ABI Eton 444,000 444,000 LTG Eton – 400,000 FTC ABI/Eton/LTG 525 525 Due from/to related parties LTG TBI/Paramount/Saturn 12,838 638 TDI TBI 16,571 18,507 LTG TDI – 3,880 HOLCOS Eton 185,597 185,597 PLI Eton 30,367 30,367 TDI/ADI ABI/Interbev 31,103 85,759 Trade receivables/ payables ABI/PWI FTC/TDI 568,427 416,604 Cash and cash equivalents/ All entities other deposit liabilities than PNB PNB 9,737,169 12,662,177 Obligations under finance lease PNB ABI/Interbev – 2,902 94 95

ANNUAL REPORT 2015 Ending balance Experienceadjustments Demographic assumptions Demographic Financial assumptions arisingfromchangesin: comprehensiveincome-actuarialchanges Re-measurement losses(gains)inother Ending balance Others arisingfromexperienceadjustments comprehensiveincome-actuarialchanges Re-measurement losses(gains)inother Benefits paidoutofretirementfund Plan assetsreturnedtotheGroup Benefits paid Benefits paid Contributions Contributions Past cost service Curtailmentgain Net interestcost Netinterestcost Current service cost Current service Net retirementbenefitscostinprofitorloss: Current service cost Currentservice Net retirementbenefitscostinprofitorloss: Change in status ofretirementplan Change instatus Change in status ofretirementplan Change instatus Beginning balance Beginning balance Accrued retirementbenefits: Net retirementplanassets: ofcomprehensiveincome. statements consolidated balance sheets, ofincomeandtheremeasurementlosses(gains)recognizedin statements thenetbenefitexpensesrecognizedinconsolidated tablessummarizethecomponentsofnetretirementplanassetsandaccruedbenefitsrecognizedinconsolidated The following Details oftheGroup’s netretirementplanassetsandliabilitiesareasfollows: December 31, 2015and2014, theGroupisincompliancewith Article 287oftheLaborCode, asamendedbyRepublic Act No. 7641. The Grouphasfunded, definedbenefitretirementplans, noncontributory administeredbyatrustee, coveringallofitspermanentemployees. Asof 23. RetirementBenefits Net retirementplanassets: Accrued retirementbenefits: DefinedBenefit Defined Benefit Obligations Obligations P9,666,274 P9,290,310 (527,023) 1,239,958 (387,861) P161,701 (471,608) P131,057 (18,453) 343,297 (12,523) 889,132 (5,510) (3,642) 21,343 29,759 18,453 83,262 69,366 7,529 4,107 AAC FTC LTG Eton and ADI TDI ABI andsubsidiaries PNB LTG 485 (23) – – – (P5,765,348) Fair Value of (P5,514,049) Fair Value of Plan Assets Plan Assets 2015 2015 (P417,417) (P395,175) (996,283) (165,172) (165,172) 337,657 337,726 527,023 (15,112) (15,112) (11,392) 11,392 (5,084) 34,084 5,704 3,642 (69) – – – – – – – Net Retirement Plan Assets P3,900,926 Retirement P3,776,261 (P255,716) (P264,118) (996,283) 1,074,786 (471,677) Benefits (12,523) 178,125 Accrued (50,204) (11,005) 420,988 103,450 889,132 (7,061) (5,084) 29,759 7,529 6,231 7,061 485 (23) 194 – – – (In Thousands) DefinedBenefit Defined Benefit P9,290,310 P7,992,151 Obligations Obligations 1,105,630 (593,393) P131,057 (102,968) 981,537 124,093 888,890 (55,899) 281,403 561,720 (16,757) 102,970 P75,033 45,767 25,710 18,037 7,673 – – – – – – – P3,900,926 P2,955,003 (In Thousands) (In Thousands) P227,524 P255,716 861,051 (P5,514,049) (P3,645,889) 19,347 46,941 37,931 Fairof Value Fairof Value 2014 (2,447,710) 2014 Plan Assets Plan Assets (P395,175) (P318,826) 8,845 2015 593,393 (86,831) (86,831) (10,726) (10,726) (81,708) (8,720) (8,720) 81,708 16,757 (1,201) – 529 – – – – – – – – – Net Retirement P3,776,261 (2,447,710) P4,346,262 Plan Assets Retirement (P264,118) (P243,793) 1,096,910 972,817 124,093 802,059 194,572 561,720 (21,260) (55,370) Accrued Benefits 45,767 (1,201) 14,984 (3,053) 18,037 21,262 – – – – – – – DefinedBenefit Defined Benefit P7,992,151 P7,578,184 Obligations Obligations (603,258) (541,545) 186,667 789,925 768,845 (70,880) 306,585 533,140 P3,776,261 P2,841,883 P75,033 P63,651 (3,936) P223,083 P264,118 6,050 9,268 3,276 5,992 877,195 41,035 38,392 11,730 – – – – 7,061 – – – – – 2014 – (P3,645,889) (P2,220,168) (P1,236,724) Fairof Value 2013 Fairof Value (1,987,230) 2013 Plan Assets Plan Assets (P318,826) (119,111) (119,111) 139,075 139,075 541,545 940,820 (64,395) (64,395) 37,537 3,936 – – – – – – – – – – – Net Retirement (P1,173,073) P4,346,262 (1,987,230) P5,358,016 Retirement Plan Assets (P243,793) (603,258) 325,742 929,000 649,734 (70,880) 187,474 533,140 Accrued Benefits 940,820 (55,127) (61,119) 43,587 5,992 – – – – – – – – – The fair value of plan assets as of December 31 is as follows: 1% decrement in the discount rate and a 10% improvement in the employee turnover rate. The results also provide a good estimate of the 2015 2014 sensitivity of the defined benefit obligation to a 1% decrement in salary (In Thousands) increase rate, 1% increment in the discount rate and a 10% increase in the employee turnover rate but with reverse impact. Cash and cash equivalents P2,184,326 P2,221,155 Investments in government securities 442,391 613,605 The Group employs asset-liability matching strategies to maximize Equity investments: investment returns at the least risk to reduce contribution Financial institutions 1,694,001 1,106,063 requirements while maintaining a stable retirement plan. Retirement Other 39,466 26,719 plans are invested to ensure that liquid funds are available when Receivables 1,813,219 1,675,151 benefits become due, to minimize losses due to investment pre- Others 9,362 266,531 terminations and maximize opportunities for higher potential returns at the least risk. Fair value of plan assets P6,182,765 P5,909,224

The major categories of plan assets as a percentage of the fair value of The current plan asset of the Group is allocated to cover benefit total plan assets are as follows: payments in the order of their proximity to the present time. Expected benefit payments are projected and classified into short-term or long- term liabilities. Investment instruments that would match the liabilities 2015 2014 are identified. This strategy minimizes the possibility of the asset- Cash and cash equivalents 37% 38% liability match being distorted due to the Group’s failure to contribute in Receivables 26% 27% accordance with its general funding strategy. Equity investments 29% 18% Investments in government securities 7% 11% The Group expects to contribute P1.6 billion to the defined benefit Others 1% 6% pension plan in 2016. Fair value of plan assets 100% 100% The average duration of the defined benefit obligations at the end of the reporting period range from 14 to 21 years as of December 31, 2015 The overall investment policy and strategy of the Group’s defined benefit and from 14 to 23 years as of December 31, 2014. plans is guided by the objective of achieving an investment return which, together with contributions, ensures that there will be sufficient Transactions with Retirement Plans assets to pay pension benefits as they fall due while also mitigating the Management of the retirement funds of the banking segment various risk of the plans. The plan assets have diverse investments and is handled by the PNB Trust Banking Group (TBG). As of do not have concentration risk. December 31, 2015 and 2014, the retirement fund of the Group includes 9,008,864 shares of PNB classified under HFT. No limitations The Group’s defined pension plan are funded through the contributions and restrictions are provided and voting rights over these shares are made by the Group to the trust. exercised by a trust officer or any of its designated alternate officer of TBG. The principal assumptions used in determining pension benefit obligations for the Group’s plans as of January 1 are shown below: As of December 31, 2015 and 2014, AFS and HTM investments include government and private debt securities and various funds. Deposits with 2015 2014 2013 other banks pertain to Special Deposit Accounts (SDA) placement with Discount rate 4%-5% 5%-6% 5%-7% BSP. Future salary increases 5%-10% 5%-10% 5%-10% The retirement funds of the other companies in the Group are As of December 31, 2015 and 2014, the discount and future salary maintained by PNB, as the trustee bank. PNB’s retirement funds have no increase rates are 4-5% and 5-10%, and 5-6% and 5-10%, respectively. investments in debt or equity securities of the companies in the Group.

The sensitivity analysis below has been determined based on FTC’s Retirement Plan reasonably possible changes of each significant assumption In 2013, as a result of management’s assessment of the status of FTC’s on the defined benefit obligations as of the end of the reporting retirement fund, management has decided to withdraw funds in excess period, assuming if all other assumptions were held constant (in of the amount actuarially determined to cover the benefits of all its thousands): employees.

2015 2014 Increase Increase 24. Revenue and Cost of Sales and Services (Decrease) (Decrease) in Present in Present Revenue consists of: Value of Defined Value of Defined Increase Benefit Increase Benefit (Decrease) Obligations (Decrease) Obligations 2014 2013 Discount rates +0.5% (P774,421) +0.5% (P37,971) (As restated, (As restated, 2015 Note 37) Note 37) -0.5% 901,270 -0.5% 42,358 (In Thousands) Future salary increases +1.0% 920,284 +1.0% 81,802 Banking revenue (Note 5) P26,600,160 P24,210,181 P28,560,739 Sale of consumer goods 25,289,260 25,207,500 23,279,109 -1.0% (794,886) -1.0% (66,950) Real estate sales 1,311,914 1,538,260 3,208,225 Full actuarial valuations were performed to test the sensitivity of the Rental income 1,172,539 740,340 448,725 defined benefit obligation to a 1% increment in salary increase rate, P54,373,873 P51,696,281 P55,496,798 96 97

ANNUAL REPORT 2015 Cost of banking services consist of: Cost ofbankingservices are individuallynotsignificantastoamounts. Other expensesinclude insurance, which utilitiesandoutsideservices consistsof:Cost ofsalesandservices Sale ofconsumergoodsconsistsof: Banking revenueconsistsof: Depositliabilities Interest expenseon: Loans andreceivables Interest incomeon: Interbank loansreceivable Deposits withbanksandothers Trading andinvestmentsecurities Trading andsecuritiesgains income feesandcommission Service Gross sales andallowances Less salesreturns, discounts ininventories(Note9) usedandchanges Materials Cost ofconsumergoodssold: borrowings andother Billspayable Taxes andlicenses expense feesandcommission Services (Note12) andamortization Depreciation Personnel costs Outsideservices Fuelandpower Communication, lightandwater Repairsandmaintenance Freight andhandling Others Cost ofbankingservices Cost of real estate sales Cost ofrealestate Cost ofrentalincome Cost ofsalesandservices P17,144,366 P26,600,160 P26,787,233 P25,289,260 P12,662,514 P24,880,372 21,708,563 18,966,309 3,742,036 4,312,899 P2,987,670 P4,734,514 1,497,973 1,363,543 1,286,665 4,734,514 1,029,995 785,414 578,698 779,378 674,371 672,009 641,942 442,599 118,121 325,167 952,661 226,888 36,747 716,849 2015 2015 2015 2015 (In Thousands) (In Thousands) (In Thousands) (In Thousands) P15,226,938 P24,210,181 P25,207,500 P26,660,735 P12,473,921 P24,739,378 (As restated, (As restated, (As restated, 20,158,463 18,921,853 P2,894,689 P4,234,936 1,919,443 2,992,864 3,418,646 1,453,235 1,448,239 1,420,117 4,234,936 1,303,734 Note 37) 633,072 Note 37) 718,407 624,678 779,778 610,569 460,735 293,792 278,855 Note 37) 856,926 483,321 19,218 91,617 2014 2014 2014 2014

P10,764,864 P25,687,269 P13,792,962 P28,560,739 P23,279,109 P24,390,891 (As restated, (As restated, (As restated, 19,104,791 P3,862,813 P5,619,415 17,387,731 1,622,102 3,649,031 5,987,103 3,468,845 1,121,503 1,610,239 1,298,012 5,619,415 2,489,830 1,111,782 Note 37) Note 37) 635,099 522,526 775,870 922,159 682,938 390,720 124,090 296,313 190,293 Note 37) 40,696 2013 2013 2013 2013

Others Travel andtransportation Commissions Repairs andmaintenance Materials andconsumables Materials Outside services Personnel costs Freight andhandling Depreciation and amortization (Note12) andamortization Depreciation 26. GeneralandAdministrativeExpenses as toamounts. membership andsubscriptiondues, whichareindividuallynotsignificant Others include occupancy fees, fuelandoil, insurance, donations, 25. SellingExpenses which areindividuallynotsignificantas toamounts. Others include tobankingoperations, expenseitemsmainlyrelating Advertising andpromotions

Others Fuel andoil Freight andhandling Repairs andmaintenance Materials andconsumables Materials Litigation Litigation Communication, lightandwater Travel andtransportation (Notes12, 14and38) andotherlosses-net Provision for(reversalof)legalcases Information technology Information Marketing andpromotional andprofessionalfees Management, consulting Provision forcreditlosses(Note8) Insurance (Notes12, 13and14) andamortization Depreciation Outside services Occupancy Taxes andlicenses Personnel costs P20,808,315 P2,644,096 P1,125,810 P8,821,940 1,089,818 1,393,437 1,306,491 1,451,117 2,251,590 (292,643) 112,307 134,071 379,732 641,923 524,985 193,715 206,417 235,526 274,578 286,568 489,036 764,767 826,478 865,889 99,186 21,001 22,730 47,674 59,662 36,751 81,855 2015 2015 (In Thousands) (In Thousands) P21,068,078 (As restated, P2,746,640 P1,242,980 P7,944,923 1,734,502 1,381,371 1,181,840 1,483,130 2,216,654 138,877 119,341 125,915 369,263 593,785 Note 37) 447,106 185,178 244,477 229,886 243,063 278,840 473,362 407,074 708,999 800,322 964,466 36,755 25,806 62,713 31,205 66,519 76,366 2014 2014

P20,397,317 (As restated, P6,847,315 P2,776,946 P1,258,520 1,909,021 1,082,625 1,619,244 2,375,917 Note 37) 926,552 141,846 193,687 308,763 281,825 292,247 285,989 394,361 976,040 719,452 911,690 944,261 305,201 122,140 717,807 98,242 88,240 61,441 41,122 63,888 60,711 91,410 54,706 2013 2013

27. Finance Costs and Finance Income 2014 2013 (As restated, (As restated, 2015 Note 37) Note 37) Details of finance costs and finance income (other than the banking (In Thousands) segment) are as follows: Collections from asset pool 1 accounts (Note 38) P– P– P306,094 2015 2014 2013 Others 177,917 652,409 278,809 (In Thousands) P3,257,223 P3,805,059 P2,103,059 Finance costs (Note 19): Short-term debts P– P10,523 P18,353 a. Net gains on sale or exchange of assets include sale of investment Unsecured term loan and notes properties of the banking segment in 2015, 2014 and 2013 amounting payable (Note 20) 144,549 26,118 45,540 to P1,435.8 million, P1,072.7 million and P26.8 million, respectively. Bonds payable 55,957 402,750 402,750 Amortization of bond issue costs 2,012 15,464 14,249 b. Others include income and expense items mainly relating to banking P202,518 P454,855 P480,892 operations, which are individually not significant as to amounts. Finance income:

Cash and other cash items (Note 5) P71,345 P91,371 P84,908 29. Income Taxes Interest-bearing contracts receivable (Note 8) 34,618 24,670 39,385 AFS investments (Note 7) 4,413 3,000 14,800 Income taxes include the corporate income tax, discussed below, and P110,376 P119,041 P139,093 final taxes paid which represents final withholding tax on gross interest income from government securities and other deposit substitutes and income from the FCDU transactions. These income taxes, as well as the deferred tax benefits and provisions, are presented as ‘Provision for income tax’ in the statements of income. 28. Other Income (Charges) - Net Under Philippine tax laws, PNB and its certain subsidiaries are subject to 2014 2013 percentage and other taxes (presented as “Taxes and Licenses” in the (As restated, (As restated, statements of income) as well as income taxes. Percentage and other 2015 Note 37) Note 37) taxes paid consist principally of gross receipts tax and documentary (In Thousands) stamp tax. Net gains on sale or exchange of assets P1,562,020 P1,889,744 P528,632 Recovery of insurance claims (Note 38) 709,160 – – Rental income and dues (Note 13) 565,083 805,235 469,538 FCDU offshore income (income from non-residents) is tax exempt while Recoveries from charged off assets 162,430 117,520 91,125 gross onshore income (income from residents) is generally subject to Mark-to-market gain on financial assets 10% income tax. In addition, interest income on deposit placement designated at FVPL 42,383 32,351 − with other FCDUs and offshore banking units (OBUs) is taxed at 7.50%. Dividend income 22,464 10,912 19,123 RA No. 9294 provides that the income derived by the FCDU from foreign Gain on retirement 12,523 – 70,880 currency transactions with non-residents, OBUs, local commercial Gain on disposal of AFS investments 2,928 245,216 290,505 banks including branches of foreign banks is tax-exempt while interest Referral, processing and trust fees 2,382 97,715 68,444 income on foreign currency loans from residents other than OBUs Share in net losses of joint venture or other depository banks under the expanded system is subject to (Note 11) (2,067) (46,043) (20,091) 10.00% income tax. (Forward) a. Details of the Group’s deferred income tax assets and liabilities as of December 31 follow:

2015 2014 Net Net Net Net Deferred Deferred Deferred Deferred Income Tax Income Tax Income Tax Income Tax Assets(1) Liabilities(2) Assets(3) Liabilities(4) (In Thousands) Recognized directly in the consolidated statements of income: Deferred income tax assets on: Allowance for impairment loss on: Receivables P4,854,631 P14,035 P4,851,051 P12,524 Inventories – 1,681 – 5,392 Property, plant and equipment – 54,725 – 66,660 Accumulated depreciation on investment properties 603,158 – – – Net retirement benefits liabilities 26,595 258,683 29,139 231,132 Unamortized past service cost – 1,140 5 1,110 Accrued expenses 34,328 11,095 43,235 12,276 Reserve for unearned premiums – – 8,248 – Deferred rent expense 37,384 – – – Advance rental income 26,005 – Provision for losses – – 18,000 16,329 (Forward) 99 98

ANNUAL REPORT 2015 Revaluation incrementonproperty,Revaluation plantandequipment Change in AFS Change Re-measurement gainsondefinedbenefitplans Deferred incometaxliabilitieson: Re-measurement lossesonretirementbenefits Deferred incometaxassetson: Recognized directlyinequity:

Others estate transactions estate Difference betweentaxandbookbasisofaccountingforreal Deferred rentalincome Unrealized foreignexchangegains Net retirementplanassets Net changesinfairvaluesofFVPLfinancialassets Fair valuegainoninvestmentproperties group classified asheldforsale Temporary withinvestmentsindisposal differenceassociated Borrowing cost capitalized toproperty, costcapitalized Borrowing plant, andequipment and equipmentacquiredthroughbusinesscombination valuesofproperty,Excess offairvaluesovercarrying plant Revaluation incrementonproperty,Revaluation plantandequipment Deferred incometaxliabilitieson:

Reserves, excessMCITandothers NOLCO estate andbankingtransactions estate Difference betweentaxandbookbasisofaccountingforreal Saleofpropertytoasubsidiary Inventoriesonhand c. As ofDecember31, 2015and 2015, theGrouphasnotrecognized (4) (3) (2) (1) b. Provisionforcurrentincometaxconsistsof: Foreign exchange Unrealized losseson: Pertain toSaturn, PLI, AAC, ADI, PWI, TDI, ABI, FTCandIPI Pertains toLTG, EtonandPNB Pertain toLTG, Saturn, PLI, AAC, ADI, PWI, TDI, ABI, FTCandIPI Pertains toEtonandPNB differences such asNOLCO, excessMCITandother items based on deferred income tax assets on certain deductible temporary income tax Provision forcurrent Final tax MCIT RCIT P2,359,527 P1,769,395 575,860 14,272 2015 (In Thousands) (As restated, P2,276,204 P1,555,343 Note 37) 696,899 23,962 2014 (As restated, P2,479,063 P1,620,958 Note 37) 813,482 44,623 2013 Income Tax (5,190,233) (1,593,081) (2,641,023) 5,753,983 (208,205) (579,661) Deferred P551,237 Assets (12,513) (12,513) (12,513) (47,006) (29,958) (91,299) 563,750 59,788 94,914 17,180 Net P– Others liabilities Derivative Accrued expenses Unearned income cost Unamortized pastservice Accrued retirementbenefits obsolescence forinventory Allowance forcreditlosses Allowance NOLCO 2015 (1) – – – – – – – – – allow thedeferredincometaxassetstobeutilizedasfollows: allow availableto sufficienttaxableprofitwillnotbe the assessmentthat (P1,182,976) Liabilities Income Tax (1,064,620) (492,455) (480,539) (499,904) (702,437) (309,110) (562,197) Deferred 362,183 (31,519) (87,192) (24,370) (16,760) (33,472) 13,240 (2,895) (4,554) (In Thousands) 19,365 1,187 4,529 1,868 Net P– (2) – – – – – (5,095,920) (3,559,833) (1,102,033) Income Tax 5,852,882 P717,218 (379,538) Deferred (39,744) (40,574) (40,574) 756,962 (35,258) (18,661) 597,608 278,279 Assets 27,273 (597) 830 P44 1,813,269 Net P802,203 2014 426,911 112,500 631,977 786,600 (3) – – – – – – – – (In Thousands) 60,730 40,503 18,314 2015 (P1,355,247) (1,367,389) (1,738,810) (1,314,352) Liabilities Income Tax 2,250,081 P667,353 (297,111) Deferred 233,770 436,037 112,500 100,865 874,760 (10,658) (10,658) (79,285) (18,213) (29,846) 371,421 13,279 12,142 22,800 20,041 7,489 5,491 2014 P466 Net (3) (4) – – – – – – – – – Details of the Group’s NOLCO follow (in thousands): Details of the Group’s MCIT follow (in thousands):

Year Incurred Amount Applied Expired Balance Expiry Year Year Incurred Amount Applied Expired Balance Expiry Year 2012 P266,575 P– (P266,575) P– 2015 2012 P21,024 P– (P21,024) P– 2015 2013 616,862 – – 616,862 2016 2013 32,173 – – 32,173 2016 2014 231,270 – – 231,270 2017 2014 8,053 – – 8,053 2017 2015 314,584 – − 314,584 2018 2015 14,272 – – 14,272 2018 P1,429,291 P– (P266,575 ) P1,1,62,716 P75,522 P– (P21,024) P54,498 d. A reconciliation of the Group’s provision for income tax computed based on income before income tax at the statutory income tax rates to the provision for income tax shown in the consolidated statements of income is as follows:

2015 2014 2013 (In Thousands) Provision for income tax at statutory income tax rate from: Continuing operations P3,515,263 P2,656,107 P4,007,031 Discontinued operations 120,671 92,201 68,137 3,635,934 2,748,308 4,075,168 Adjustments resulting from: NOLCO and other deductible temporary differences for which no deferred income tax assets were recognized 2,683 349,209 187,626 Application of NOLCO and other deductible temporary differences for which no deferred income tax assets were recognized in prior years (153,656) (665,685) (10,157) Nontaxable income (553,381) (861,891) (2,030,276) Difference of itemized deduction against 40% of taxable income (30,229) (4,685) 19,832 Income subjected to final tax (700,972) − (23,474) Equity in net earnings of an associate (356,692) (154,534) (1,111,235) Non-deductible expenses 779,440 1,278,096 1,001,346 Provision for income tax P2,623,127 P2,688,818 P2,108,830 Provision for income tax from continuing operations P2,578,822 P2,645,647 P2,078,387 Provision for income tax from discontinued operations 44,305 43,171 30,443 Provision for income tax P2,623,127 P2,688,818 P2,108,830

c. In April 2013, LTG issued 1,840.0 million shares for P37.7 billion, 30. Equity where excess over par value amounting to P35.9 billion was recorded as capital in excess of par. Stock issue costs amounting to P1.1 billion Capital Stock were charged against capital in excess of par in 2013. Other offering Authorized and issued capital stock of the Company are as follows: related expenses amounting to P59.0 million were charged directly to “General and administrative expenses”. 2015 2014 Number of shares Retained Earnings and Dividends Authorized capital stock at 1 par value: a. On April 8, 2014, the LTG’s BOD and stockholders, respectively, Balance at beginning and end of year 25,000,000,000 25,000,000,000 approved the declaration and distribution of cash dividends of P0.16 (In Thousands) per share or a total of P1,731.4 million to all shareholders of record Issued capital stock at 1 par value: as of July 3, 2014 and to be paid out not later than May 22, 2014. At beginning and end of year P10,821,389 P10,821,389 b. On May 12, 2015, the LTG’s BOD and stockholders, respectively, a. Capital stock is held by a total of 376 and 375 stockholders as of approved the declaration and distribution of cash dividends of P0.15 December 31, 2015 and 2014, respectively. per share or a total of P1,623.2 million to all stockholders of record as of May 27, 2015 and to be paid not later than June 10, 2015. b. Track record of registration: c. Retained earnings include undistributed earnings amounting to P47.0 billion in 2015, P42.1 billion in 2014 and P36.9 billion in 2013, Number of Shares Date Licensed Issue/Offer Price representing accumulated earnings of subsidiaries and equity in net August 1948 100,000 P1.00 earnings of associates, which are not available for dividend declaration until received in the form of dividends from the combining entities and associates. November 1958 500,000 1.00 December 1961 1,000,000 1.00 Retained earnings are further restricted for the payment of dividends March 1966 2,000,000 1.00 to the extent of the cost of the shares held in treasury (shares of March 1966 6,000,000 1.00 the company held by subsidiaries), unrealized foreign exchange October 1995 247,500,000 1.00 gains except those attributable to cash and cash equivalents, fair October 2011 398,138,889 4.22 value adjustment or gains arising from mark-to-market valuation, April 2013 1,840,000,000 20.50 deferred income tax assets recognized that reduced the income tax 100 101

ANNUAL REPORT 2015 Other equity reserves consistof: Other equityreserves Other EquityReserves the BankHoldingCompaniesaftersevenyearsfromissuancethereof. theoptionof period ofsevenyearsfromtheissuanceandredeemableat as to dividends, and non-participating cumulative non-redeemable for a features: thefollowing The preferredshareshave non-voting, non- issuedtoParent amountedtoP18.1billion. subsidiary Company to Tangent. As ofDecember31, 2015and2014, preferredsharesof the advances topreferredsharesduringtheyearofP4.7billionwereissued the remainingpreferredsharesofP6.0billionandadditionalconversion December 31, 2013. in2014, oftheSEConvariousdates Uponapproval the SECarepresentedunder “Deposit forfuturestocksubscription” asof of preferred sharesamountingtoP6.0billionwhicharependingapproval issuedtoParentsubsidiary Company” wereissuedto Tangent. Unissued shares amountingtoP7.4billionpresentedunder “Preferred sharesof inOctober,various dates NovemberandDecember2013, preferred stockofBankHoldingCompaniesin the increaseinauthorizedcapital Bank HoldingCompanies(seeNote22). oftheSEC Uponapproval Tangent throughconversionofitsadvancesintoinvesmentsincertain par valueof1.00pershare. The preferredsharesweresubscribedby stockscomprisingofcommonsharesandpreferredwith capital theincreaseintheirauthorized Bank HoldingCompaniesapproved On March20, 2013, therespectiveBOD’s andstockholdersofvarious Preferred sharesofsubsidiariesissuedtoParent Company Below are thechangesinnon-controllinginterests: Below Non-controlling Interests to P193.2millionispresentedasanadditiontootherequityreserves. sharesamounting excess ofthesellingpriceovercosttreasury weresoldto by Saturn Tangent P4.50pershare. at As aresult, the as ofDecember31, 2011. OnJuly25, 2012, thesharesofstocksowned amountingtoP150.9million bySaturn and 76.5millionsharesowned Seasons amountingtoP12.5millionasofDecember31, 2015and2014 Shares heldbysubsidiariesinclude by 4.9millionsharesowned All Shares HeldbySubsidiaries (Forward) Dividends received andequipment(Note12) increment onproperty, Revaluation plant definedbenefitplans(Notes2and23) Remeasurementgains(losses)on adjustments translation Accumulated (Note7) Netchangesin AFS financialassets netofdeferredincometaxeffect: Share inothercomprehensiveincome, interests to non-controlling Net incomeattributable 1 Balance asofJanuary Effect ofsaledirectinterestinasubsidiary toparentcompany Effect ofsaleasubsidiary Effect oftransactionwithnon-controllinginterest heldbyasubsidiary Equity adjustmentsfromsaleofCompany’s shares undercommoncontrol(Note1) Equity adjustmentsarisingfrombusinesscombination unrealized gainsoradjustmentsasofDecember31, 2015and2014. expense andincreasednetincomeretainedearnings, andother P38,494,303 2,897,619 (746,334) (39,302) 283,115 (7,324) 2015 – (In Thousands) P32,235,085 P445,113 P804,095 193,212 2,061,976 (119,903) (537,431) (In Thousands) 99,655 66,658 426,879 (543) 2015 2014 – – P31,051,046 (2,514,123) 2,805,844 P445,113 P790,136 (127,737) 193,212 (64,216) 420,332 911,051 99,655 52,156 2014 2013 − oftheCompany toequityholders Net incomeattributable oftheCompany toequityholders attributable Net incomefromcontinuingoperations Basic/diluted earnings per share were calculated asfollows: Basic/diluted earningspersharewerecalculated earnings persharecomputations: usedinthe tablesreflectthenetincomeandsharedata The following 31. Basic/DilutedEarningsPer Share 1, positionunderBASELIIIstandardseffectiveJanuary capital 2014. refocus PNBSB’s lendingbusiness. The offeralsosthrengthenPNBSB’s Bank(PNBSB)tobuildand injectiontoPNBSavings was usedascapital P4.4 billion, respectively, net of stock issue cost. Part of the proceeds and billion P6.9 and thenon-controllingshareholdersofPNBsubscribed The offerraisedgrossproceedsofP11.6billionforPNB, outofwhichLTG theofferpriceofP17.00perRightshare. at held asoftherecorddate 100existingcommonshares proportion of15Rightssharesforevery a of 162,931,262PNBRightshareswereissuedtoitsstockholdersat theclosurefollowing oftheofferperiodonFebruary 3, 2014. A total gross proceedsfromPNB’s stockrightofferingofcommonshares contributionofnon-controllinginterestin2014pertainstothe Capital the fundsandfinancialtransactionsof theGroup. theserisks.policies formanaging closely Management monitors of thevariouscompaniescomprising the Groupreviewandapprove companies withintheGroup. The Group’s and theBOD management a group-widebasis, sidebywiththose oftheotherrelated The Group’s arehandledon strategies financialriskmanagement 32. FinancialRiskManagementObjectives andPolicies earnings persharein2015, 2014and2013. There arenopotentialcommonshareswithdilutveeffecton continuing operations: toequityholdersoftheGroupfrom Earnings pershareattributable interest duringtheyear contributionofnon-controlling Capital Balance asofDecember31 interest Changes inownership ofshares number Divided byweighted-average ofshares number Divided byweighted-average oftheCompany toequityholders attributable Basic/diluted EPSfornetincome toequityholdersoftheCompany attributable continuingoperations Basic/diluted EPSfornetincomefrom P40,882,077 P6,599,035 10,821,389 P6,312,690 10,821,389 P0.61 2015 2015 P0.58 2015 P– – (In Thousands) (In Thousands) (In Thousands) (As restated, P38,494,303 P4,410,230 10,821,389 (As restated, P4,427,697 P4,198,899 10,821,389 Note 37) Note 37) P0.41 2014 P0.39 2014 2014 −

h basic the P32,235,085 (As restated, (As restated, P8,511,876 10,208,056 P8,669,220 10,208,056 (247,112) Note 37) Note 37) P0.83 P0.85 2013 2013 2013 P−

Financial Risk Management Objectives and Policies of the Banking • Documented credit policies and procedures: sound credit granting Segment process, risk asset acceptance criteria, target market and approving authorities; Risk Management Strategies • System for administration and monitoring of exposure; The Group’s banking activities are principally related to the development, • Pre-approval review of loan proposals; delivery, servicing and use of financial instruments. Risk is inherent • Post approval review of implemented loans; in these activities but it is managed through a process of ongoing • Work out system for managing problem credits; identification, measurement and monitoring, subject to risk limits and • Regular review of the sufficiency of valuation reserves; other controls. This process of risk management is critical to the Group’s • Monitoring of the adequacy of capital for credit risk via the Capital continuing profitability. • Adequacy Ratio (CAR) report; • Monitoring of breaches in regulatory and internal limits; The Group monitors its processes associated with the following overall • Credit Risk Management Dashboard; risk categories: • Diversification; • Internal Risk Rating System for corporate accounts; • Credit Risk • Operational Risk • Credit Scoring for retail accounts; and • Market Risk • Information Security and Technology Risk • Active loan portfolio management undertaken to determine the quality • Liquidity Risk of the loan portfolio and identify the following: a. portfolio growth Further, the Group is also cognizant of the need to address various other b. movement of loan portfolio (cash releases and cash collection for risks through the primary divisions presented above. The following the month) are also taken into consideration as part of the overall Enterprise Risk c. loss rate Management (ERM) Framework: d. recovery rate e. trend of nonperforming loans (NPLs) • Counterparty Risk • Reputational Risk f. concentration risk (per classified account, per industry, clean • Business Risk • Concentration Risk exposure, large exposure, contingent exposure, currency, security, • Strategic Risk • Country Risk facility, demographic, etc. • Compliance Risk • Risks arising from the Group’s • Legal Risk shareholdings and equity interests The banking segment has moved one step further by collecting data on risk rating of loan borrowers with an asset size of 15.0 million and Managing the level of these risks as provided for by the banking segment’s above as initial requirement in the banking segment’s model for internal ERM framework is critical to its continuing profitability. The Risk Oversight Probability of Default (PD) and Loss Given Default (LGD). Committee (ROC) of the banking segment’s BOD determines the risk policy and approves the principles of risk management, establishment of limits for Credit-related commitments all relevant risks, and the risk control procedures. The ROC of the banking The exposures represent guarantees, standby letters of credit (LCs) segment is also responsible for the risk management of the banking segment. issued by the banking segment and documentary/commercial LCs which are written undertakings by the banking segment. To mitigate The RMG provides the legwork for the ROC in its role of formulating this risk the banking segment requires hard collaterals, as discussed the risk management strategy, the management of regulatory capital, under Collateral and other credit enhancement, for standby LCs lines the development and maintenance of the internal risk management while commercial LCs are collateralized by the underlying shipments of framework, and the definition of the governing risk management goods to which they relate. principles. Derivative financial instruments The mandate of the RMG involves: Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded in the balance • Implementing the risk management framework of identifying, measuring, sheet. controlling and monitoring the various risk taking activities of the Group, inherent in all financial institutions; Collateral and other credit enhancement • Providing services to the risk-taking units and personnel in the As a general rule, character is the single most important consideration in implementation of risk mitigation strategies; and granting loans. However, collaterals are requested to mitigate risk. The • Establishing recommended limits based on the results of its analysis loan value and type of collateral required depend on the assessment of of exposures. the credit risk of the borrower or counterparty. The banking segment follows guidelines on the acceptability of types of collateral and Credit Risk valuation parameters. For the banking segment, credit risk is the non-recovery of credit exposures (on-and-off balance sheet exposures). Managing credit risk The main types of collateral obtained are as follows: also involves monitoring of migration risk, concentration risk, country risk and settlement risk. The banking segment manages its credit risk • For corporate accounts - cash, guarantees, securities, physical at various levels (i.e., strategic level, portfolio level down to individual collaterals (e.g., real estate, chattels, inventory, etc.); as a general transaction). rule, commercial, industrial and residential lots are preferred • For retail lending - mortgages on residential properties and vehicles The credit risk management of the entire loan portfolio is under the direct financed oversight of the ROC and Executive Committee. Credit risk assessment • For securities lending and reverse repurchase transactions - cash or of individual borrower is performed by the business sector and remedial securities sector. Risk management is embedded in the entire credit process, i.e., from credit origination to remedial management (if needed). The disposal of the foreclosed properties is handled by the Asset Management Sector which adheres to the general policy of Among the tools used by the banking segment in identifying, assessing disposing assets at the highest possible market value. Management and managing credit risk include: regularly monitors the market value of the collateral and requests 103 102

ANNUAL REPORT 2015 mitigate riskconcentration,mitigate thebankingsegmentconstantlychecks and receivables(2)tradingfinancial investmentsecurities. To purposes, into(1)loans thefinancialassetsarebroadlycategorized buckets, currency, termandsecurity. For monitoring riskconcentration borrowe, groupofaccounts, related industry, geographic, internalrating toanindividual banking segmentanalyzesthecreditriskconcentration similarcharacteristics. have a significantnumberofborrowers The The bankingsegment’s canarisewhenever creditriskconcentration Excessive riskconcentration disclosed inNote38tothefinancialstatements. commercial lettersofcredit, outstandingguaranteesandothersas the balance sheet plus commitments to customers such asunused and netting agreements, collateral of any is limited to the amounts on The maximumcreditrisk, without taking intoaccountthefairvalue * Receivablesfromcustomersexclude residualvalueoftheleasedasset. * Receivablesfromcustomersexclude residualvalueoftheleasedasset. receivables: toresellandloans securitiesheldunderagreements following valueofitsfinancialassetsexceptforthe risk isequaltothecarrying The bankingsegment’s maximumexposuretoon-balancesheetcredit ofthecollateral. absence ofdefaultbytheowner held overloansandadvancestocounterpartybanksBSPinthe The banking segment is not permitted to sell or repledge the collateral reverse repurchaseagreements. isnotheldoverloansandadvancestobanksexceptfor collateral review oftheadequacy forcreditlosses. oftheallowance Generally, isconsideredduringthe The existingmarketvalueofthecollateral in accordance with theunderlying agreement.additional collateral Consumers Businessloans Receivablefromcustomers*: Loans andreceivables: to resell Securities heldunderagreements GOCCsandNGAs Consumers Businessloans Receivablefromcustomers*: Loans andreceivables: LGUs Fringe benefits Unquoteddebtsecurities Otherreceivables Fringe benefits LGUs (NGAs) Government Agencies GOCCsandNational Unquoteddebtsecurities Otherreceivables Maximum Maximum P241,963 P328,126 Exposure Exposure P392,991 P14,550 290,095 20,441 30,254 18,460 33,616 23,038 19,102 8,397 8,044 Gross Gross 7,793 4,245 567 552 Fairof Value Fair Value of P152,970 P202,904 Collateral Collateral P354,776 40,459 P14,516 251,693 1,059 3,728 3,543 (In Millions) (In Millions) 46,756 27,561 223 922 1,431 8,554 3,435 2015 2014 830 P180,555 P240,978 Exposure Exposure P274,642 20,226 12,792 15,203 232,050 7,687 4,317 15,652 14,857 7,051 3,941 198 Net P34 810 247 Net Collateral P118,350 Financial Collateral Effect of Financial P14,516 P61,408 P87,149 Effect of 58,046 19,097 17,964 17,462 3,435 4,245 3,728 3,257 742 305 215 710 369

Middle East United Kingdom USA andCanada Other EuropeanUnionCountries Asia (excluding thePhilippines) Philippines c. byIndustry Concentration *** Otherfinancialassetsinclude financialassets: thefollowing ‘DuefromBSP’, ‘Duefromotherbanks’, ‘Interbank ** Othersinclude sectors-Othercommunity, thefollowing socialandpersonalservices, household, private hotel * Loansandreceivablesexclude residualvalueoftheleasedasset. b. Concentration Geographic a. LimitperClientorCounterparty breaches inlimits. authoritytoregularizeandmonitor approving covered byappropriate and overrideproceduresareinplace, excessinlimitsare wherebyany and internal limits.for breaches in regulatory process Clear escalation Financial intermediaries targetindustry:Primary Electricity, gasandwater Wholesale andretail Manufacturing andcommunication Transport, storage anddefense Publicadministration andforestry Agriculture, hunting Government targetindustry: Secondary andbusinessactivities Realestate, renting Construction Others** enhancements: held or other creditaccount the fair value of the loan collateral segment’s amountsbeforetakinginto financialassetsat sectoranalysisofthebanking theindustry show The tablebelow Assets’ loans receivable’, toresell’and otherfinancialassetsbookedunder‘Securities heldunderagreements ‘Other and restaurant, education, miningandquarrying, andhealthsocialwork. location: or othercreditenhancements, bygeographic categorized exposures, held collateral beforetakingintoaccountany thebankingsegment’s shows The tablebelow creditrisk ratings. issues andsecuritiesissuedbyentitieswithhigh-qualityinvestment investment securities, the Group limits investments to government CRR5. below 1 toCRR5or50.00%ofSBLifrated For tradingand borrower’s (CRR) limit(SBL)forloanaccountswithcreditriskrating for group exposures which is equivalent to 100.00% of the single For loans and receivables, the banking segment sets an internal limit receivables* Loans and P365,013 P38,776 49,527 50,576 40,697 28,873 25,294 43,751 11,517 69,380 5,996 626 Trading and investment securities P96,085 P8,420 72,458 1,800 5,489 7,885 (In Millions) 2015 31 P521,074 P581,280 – – – – 2 44,699 1,316 6,813 7,365 (In Millions) 2015 assets*** P120,185 financial 13 P24,088 95,913 Other 145 28 – – – – 4 6 1 P581,283 P515,058 P549,184 P71,284 168,997 19,439 51,331 50,582 40,728 28,876 25,294 49,268 11,517 77,410 2,481 7,676 4,456 5,996 2014 Total 74 2014 • CRR 3 - Prime Trading and Other Under normal economic conditions, borrowers in this rating have good Loans and investment financial access to public market to raise funds and face no major uncertainties receivables* securities assets*** Total which could impair repayment. (In Millions) Primary target industry: • CRR 4 - Very Good Financial intermediaries P38,125 P6,168 P23,263 P67,556 Loans receivables rated as very good include borrowers whose Electricity, gas and water 43,519 3,147 – 46,666 ability to service all debts and meet financial obligations remain Wholesale and retail 43,900 – – 43,900 unquestioned, but current adverse economic conditions or Manufacturing 39,526 197 – 39,723 changing circumstances have minimal impact on payment of Transport, storage obligations. and communication 19,274 – – 19,274 Public administration and defense 23,425 – – 23,425 • CRR 5 - Good Agriculture, hunting and forestry 6,062 – – 6,062 Loans receivables rated as good include borrowers with good Secondary target industry: operating history and solid management, but payment capacity could Government 4,904 66,196 105,774 176,874 be vulnerable to adverse business, financial or economic conditions. Real estate, renting and business activities 39,119 7,813 – 46,932 Standard Construction 8,503 – – 8,503 • CRR 6 - Satisfactory Others** 49,332 19,892 1,045 70,269 These are loans receivables to borrowers whose ability to service all P315,689 P103,413 P130,082 P549,184 debt and meet financial obligations remains unquestioned, but with * Loans and receivables exclude residual value of the leased asset. somewhat lesser capacity than in CRR 5 accounts. ** Others include the following sectors - Other community, social and personal services, private household, hotel and restaurant, education, mining and quarrying, and health and social work. *** Other financial assets include the following financial assets: ‘Due from BSP’, ‘Due from other banks’, ‘Interbank • CRR 7 - Average loans receivable’, ‘Securities held under agreements to resell’ and other financial assets booked under ‘Other Assets’. These are loans receivables to borrowers having ability to repay the loan in the normal course of business activity, although may not be The internal limit of the banking segment based on the Philippine strong enough to sustain a major setback. Standard Industry Classification (PSIC) sub-industry is 12.00% for priority industry, 8.00% for regular industry and 30.00% for power • CRR 8 - Fair industry, versus total loan portfolio. These are loans receivables to borrowers possessing the characteristics of borrowers rated as CRR7 with slightly lesser quality in financial The banking segment’s policies and procedures include specific strength, earnings, performance and/or outlook. guidelines to focus on maintaining a diversified portfolio. In order to avoid excessive concentrations of risks, identified concentrations of Sub-standard Grade credit risks are controlled and managed accordingly. • CRR 9 - Marginal These are performing loans receivables from borrowers not qualified Credit quality per class of financial assets as CRRs 1-8. The borrower is able to withstand normal business The credit quality of financial assets used by the banking segment cycles, although any prolonged unfavorable economic and/or market is assessed and managed using external and internal ratings. For period would create an immediate deterioration beyond acceptable receivable from customers classified as business loans, the credit levels. quality is generally monitored using the 14-grade Credit Risk Rating (CRR) System which is integrated in the credit process particularly in • CRR 10 - Watchlist loan pricing and allocation of valuation reserves. The model on risk This rating includes borrower where the credit exposure is not at ratings is assessed and updated regularly. risk of loss at the moment but the performance of the borrower has weakened and, unless present trends are reversed, could eventually Validation of the individual internal risk rating is conducted by the Credit lead to losses. Management Division to maintain accurate and consistent risk ratings across the credit portfolio. The rating system has two parts, namely, the • CRR 11 - Special Mention borrower’s rating and the facility rating. It is supported by a variety of These are loans that have potential weaknesses that deserve financial analytics, combined with an assessment of management and management’s close attention. These potential weaknesses, if left market information such as industry outlook and market competition to uncorrected, may affect the repayment of the loan and thus increase provide the main inputs for the measurement of credit or counterparty credit risk to the Banking segment. risk. • CRR 12 - Substandard The CRRs of the banking segment’s receivables from customers (applied These are loans or portions thereof which appear to involve a substantial to loans with asset size of P15.0 million and above) are defined below: and unreasonable degree of risk to PNB because of unfavorable record or unsatisfactory characteristics. • CRR 1 - Excellent Loans receivables rated as excellent include borrowers which are • CRR 13 - Doubtful significant in size, with long and successful history of operations, an These are loans or portions thereof which have the weaknesses industry leader, with ready access to all equity and debt markets and inherent in those classified as CRR 12 with the added characteristics have proven its strong debt service capacity. that existing facts, conditions and values make collection or liquidation in full highly improbable and in which substantial loss • CRR 2 - Super Prime is probable. Loans receivables rated as super prime include borrowers whose ability to service all debt and meet financial obligations remains • CRR 14 - Loss unquestioned. These are loans or portions thereof which are considered uncollectible or worthless. 104 105

ANNUAL REPORT 2015 Total Fringe benefits GOCCs andNGAs LGUs Business loans Consumers net ofresidualvaluesleasedassets. deferred income, foreachCRRasofDecember31, 2015and2014, but customers, forcreditlossesandunearnedother grossofallowance the banking segment’s shows The table below receivable from onhouseorvehiclesand exposureissecuredbymortgage financed. deductions Fringe salary benefitloansarerepaidthroughautomatic vehicles financed andguarantees fromHome Guaranty Corporation. inresidentialpropertiesand Consumer loansarecoveredbymortgages LGU loansarebacked-upbyassignmentofInternalRevenue Allotment. • “Purpose” test-theloanmustbeobtainedforapurposeconsistent • “Means” resourcesorrevenuesofits musthave test-theborrower topassthetwomajorparameters, have borrowers namely: using the GOCCs and LGUs are rated “means and purpose” test whereby futureobligation. topayforany oftheborrower the financialcapability P15.0million. withassetssizebelow borrowers Creditscoringdetails The bankingsegmentisusingtheCreditScoringforevaluating somewhat greater.somewhat Aaa to creditrisk, low appears Aa3 -fixedincomearejudgedto be ofhighqualityandaresubjecttovery buttheirsusceptibilitytolong-termrisks Moody’s asfollows: InvestorsService) In ensuringqualityinvestmentportfolio, institutions(i.e. ofeligibleexternalcreditrating basedontheexternal ratings PNBusesthecreditriskrating Trading andInvestmentSecuritiesOtherFinancial Assets 1–Excellent Customers Rated Receivable from 2-SuperPrime 3-Prime 4- Very Good 5–Good 6-Satisfactory 7- Average 8-Fair 9-Marginal 10- Watchlist 11-SpecialMention 12-Substandard 13–Doubtful 14-Loss BusinessLoans Customers Unrated Receivable from (Forward) with theborrower’s generalbusiness. itsdebtobligations. sufficienttoservice own Neither Past Individually Impaired 314,963 Due nor P4,090 65,178 55,510 29,060 53,998 31,701 19,304 24,465 18,885 15,144 9,847 2,312 613 Less than 30 days – – P233 P172 Individually Impaired 60 Past Due and not – – 1 1,364 1,683 (In Millions) 192 151 P– 2015 88 26 – – – – – 8 1 2 2 Individually 31 to90 Impaired P107 days P96 1,306 2,264 4,719 11 2015 139 148 648 – – – P– 76 86 49 46 – – – – 3 More than 321,365 P4,090 65,178 55,510 29,060 54,074 31,795 19,305 24,606 18,888 15,341 90 days 9,898 2,548 1,453 1,332 3,628 P2,932 P1,184 Total 1,712 27 – 9 impaired loansandreceivablesperclass. analysis ofthebankingsegmentpastduebutnot theaging shows failed tomakeapaymentwhencontractuallydue. The tablebelow Under PFRS7, afinancialassetispastduewhencounterpartyhas Consumers 1-Excellent Customers Rated Receivable from LGUs 2-SuperPrime GOCCsandNGAs 3-Prime Fringe Benefits 4- Very Good 5-Good 6-Satisfactory 7- Average 8-Fair 9-Marginal 10- Watchlist 11-SpecialMention 12-Substandard 13-Doubtful 14-Loss BusinessLoans Customers Unrated Receivable from Consumers LGUs GOCCsandNGAs Fringe Benefits P3,272 P1,452 1,783 (In Millions) Total 10 27 – Less than 30 days P1,756 1,564 P130 62 – – Neither Past Individually Neither Past Individually P348,722 P290,039 Impaired Impaired 252,495 Due nor Due nor P7,944 P3,658 54,762 44,607 12,837 33,759 28,228 42,311 24,744 22,581 10,362 10,194 18,324 37,544 7,697 2,455 5,355 1,870 1,180 8,142 519 352 532 90 days – – P233 31 to 159 P73 Individually 2014 Individually – – 1 Impaired Past Due Past Due Impaired and not and not P1,399 P3,271 P3,717 1,588 2,288 1,429 283 188 182 386 272 167 138 217 353 622 625 169 P– 2015 2014 27 11 99 11 – – – 3 2 More has 90 days P1,727 Individually 1,125 Individually P480 Impaired 110 Impaired 10 P4,935 P9,127 2 1,985 1,290 2,318 5,995 1,071 1,796 3,132 P32 216 128 162 P– 65 47 26 92 68 64 10 40 79 24 – – – – P356,928 P302,883 260,778 P3,716 P9,375 P3,658 54,762 44,610 12,837 35,563 28,511 42,591 25,054 23,035 10,471 11,887 19,111 42,105 2,848 7,789 2,502 5,691 2,077 3,303 1,507 2,671 8,390 2,150 P683 Total Total Total 172 556 567 11 2 A1 to A3 - fixed income obligations are considered upper-medium December 31, 2014 grade and are subject to low credit risk, but have elements Rated present that suggest a susceptibility to impairment over the long Baa1 and 6/ term. Aaa to Aa3 A1 to A3 below Subtotal Unrated Total (In Millions) Due from BSP 1/ P− P− P10,358 P10,358 P95,416 P105,774 Baa1 and below - represents those investments which fall under any of Due from other banks 2,488 3,971 4,687 11,146 4,445 15,591 the following grade: Interbank loans receivables 2,295 3,569 1,557 7,421 250 7,671 Financial assets at FVPL: • Baa1, Baa2, Baa3 - fixed income obligations are subject to moderate Held-for-trading: credit risk. They are considered medium grade and as such protective Government securities − − 5,712 5,712 419 6,131 elements may be lacking or may be characteristically unreliable. Private debt securities − − − − 210 210 • Ba1, Ba2, Ba3 - obligations are judged to have speculative elements Derivative assets2/ 1 43 11 55 234 289 and are subject to substantial credit risk. Equity securities − − − − 210 210 • B1, B2, B3 - obligations are considered speculative and are subject Designated at FVPL: to high credit risk. Segregated fund assets − 10,655 − 10,655 − 10,655 • Caa1, Caa2, Caa3 - are judged to be of poor standing and are subject Loans and receivables: 4/ to very high credit risk. Unquoted debt securities − − 349 349 4,076 4,425 Others5/ 4 2 201 207 15,249 15,456 • Ca - are highly speculative and are likely in, or very near, default, with AFS investments6/: some prospect of recovery of principal and interest. Government securities 1,450 83 34,886 36,419 1,264 37,683 • C - are the lowest rated class of bonds and are typically in default, Other debt securities 691 1,058 3,267 5,016 18,971 23,987 with little prospect for recovery of principal or interest. Quoted equity securities 40 − 163 203 2,532 2,735 Unquoted equity securities − − − − 338162 338162 Below are the financial assets of the banking segment, excluding HTM investments receivables from customers, which are monitored using external Government securities – 4 22,827 22,831 – 22,831 ratings. Other debt securities – 50 – 50 90 140 Miscellaneous COCI – – – – – –

December 31, 2015 1/ ‘Due from BSP’ is composed of interest-earning short-term placements with the BSP and a demand deposit account to support the regular operations of PNB. Rated 2/ Derivative assets represent the value of credit derivatives embedded in host contracts issued by financial intermediaries and the mark-to-market valuation of freestanding derivatives (see Note 21). Aaa to Baa1 and 3/ Unquoted debt securities represent investments in bonds and notes issued by financial intermediaries, Aa3 A1 to A3 below Subtotal Unrated6/ Total government and private entities that are not quoted in the market, net of allowances. 4/ Loans and receivables - Others is composed of accrued interest receivable, accounts receivable, sales contracts (In Millions) receivable and other miscellaneous receivables, net of allowances (see Note 8) 5/ AFS investments are presented net of allowances (Note 7). Due from BSP1/ P– P– P– P– P81,363 P81,363 6/ As of December 31, 2014, financial assets that are unsecured are neither past due nor impaired. Due from other banks 5,974 3,771 7,701 17,446 842 18,288 Interbank loans receivables 1,814 3,525 461 5,800 – 5,800 Impairment assessment The Group recognizes impairment or credit losses based on the results of Securities held under – – – – 14,550 14,550 agreements to resell specific (individual) and collective assessment of its credit exposures. A possible impairment has taken place when there are presence of known Financial assets at FVPL: difficulties in the payment of obligation by counterparties, a significant credit Held-for-trading: rating downgrade takes place, infringement of the original terms of the Government securities – – 3,795 3,795 245 4,040 contract has happened, or when there is an inability to pay principal or interest Private debt securities – – 113 113 31 144 overdue beyond a certain threshold (e.g., 90 days). These and other factors, either singly or in tandem with other factors, constitute observable events and/ Derivative assets2/ 12 10 35 57 123 180 or data that meet the definition of an objective evidence of impairment. Equity securities – – – – 200 200 Designated at FVPL: The two methodologies applied by the Group in assessing and Investment in Unit measuring impairment or credit losses include: Investment Trust Funds (UITFs) a. Specific (individual) assessment AFS investments5/: The Group assesses each individually significant credit exposure or Government securities 1,829 – 28,626 30,455 14,806 45,261 advances for any objective evidence of impairment. Private debt securities 3,321 397 10,939 14,657 7,596 22,253 Among the items and factors considered by the Group when assessing Quoted equity securities – – 203 203 451 654 and measuring specific impairment/credit allowances are: Unquoted equity securities – – 1 1 173 174 • the going concern of the borrower’s business; HTM investments • the ability of the borrower to repay its obligations during financial Government securities 94 5 23,066 23,165 – 23,165 crises; Loans and receivables: • the projected receipts or expected cash flows; • the availability of other sources of financial support; Unquoted debt securities3/ – – 75 75 550 625 • the existing realizable value of collateral; and 4/ Others – – – – 15,923 15,923 • the timing of the expected cash flows. 1/ ‘Due from BSP’ is composed of interest-earning short-term placements with the BSP and a demand deposit account to support the regular operations of PNB. The impairment or credit allowance, if any, are evaluated every quarter 2/ Derivative assets represent the value of credit derivatives embedded in host contracts issued by financial intermediaries and the mark-to-market valuation of freestanding derivatives (see Note 21). or as the need arises in view of favorable or unfavorable developments. 3/ Unquoted debt securities represent investments in bonds and notes issued by financial intermediaries, government and private entities that are not quoted in the market, net of allowances. 4/ Loans and receivables - Others is composed of accrued interest receivable, accounts receivable, sales contracts b. Collective assessment receivable and other miscellaneous receivables, net of allowances (see Note 8) 5/ AFS investments are presented net of allowances (Note 7). Loans and advances that are not individually significant (e.g., credit 6/ As of December 31, 2015, financial assets that are unrated are neither past due nor impaired. cards, housing loans, car loans, development incentives loans, fringe 106 107

ANNUAL REPORT 2015 COCI Financial Assets asset portfolio composed substantially of deposits in primary andasset portfoliocomposedsubstantiallyofdepositsinprimary through a ofliabilities, ofactivemanagement combination aliquid market conditions. The bankingsegmentseekstoensureliquidity or capital by customer behavior events created or unanticipated levels duetochangesinthebankingsegment’s businessoperations inassetandliability fluctuations toaccommodate funding capacity The Banking segment’s involves maintaining liquidity management Liquidity RiskandFundingManagement credit lossesonloansandreceivablesotherfinancialassets. for ontheallowance See Notes 7 and8formoredetailed information Due fromBSPandotherbanks Interbank loansreceivable Securities held under agreements toresell Securities heldunderagreements Governmentsecurities Held-for-trading: Financial FVPL: assetsat Equitysecurities Private debtsecurities Private Grosscontractualreceivable assets: Derivative Grosscontractualpayable InvestmentinUITFs FVPL: at Designated Governmentsecurities AFS investments: Private debtsecurities Private Equitysecurities Governmentsecurities HTM investments: Receivablesfromcustomers Loans andreceivables: Unquoteddebtsecurities Otherreceivables Other receivables Total financialassets • losses whicharelikelytooccurbuthasnotyetoccurred;and • directimpact have current adverseeconomicconditionsthat • historicallossesoftheportfolio; information: following the bytakingintoconsideration Impairment lossesareestimated allowances. quarter todetermineitscorrespondingappropriate assessed forimpairment. A particularportfolioisreviewedevery evidenceofindividualimpairmentarecollectively there isnoapparent benefit loans)andindividuallysignificantloansadvanceswhere expected receiptsandrecoveriesonceimpaired. on theportfolio; P209,907 (16,753) P15,221 Up to1 99,654 14,583 16,818 66,383 Month 5,384 3,979 1,059 2,726 200 144 184 180 128 65 17 – – expected date theassetswillberealized. expected date orifearlier, date of thereportingperiodtocontractualmaturity the groupingisbasedontheremainingperiodfromend into maturity be realizedandtheliabilitywillsettled. For otherassets, theanalysis onwhichtheassetwill basedontheexpecteddate categorized flows whichincludesfinancial liabilities’liquidityinformation coupon cash the banking segment’s shows The table below financial assets and the MCOundernormalandstressedscenarios. the Treasury Group. Likewise, liquidityvia theRMGmonitorsstatic Liquidity ismonitoredbythebankingsegmentonadailybasisthrough determine sufficiency ofliquidassetsoverdepositliabilities. set bytheBOD. Furthermore, hasbeensetto aninternalliquidityratio iscomparedtotheacceptableMCOlimit outflow 12-month cumulative liquid assets. The MCOfocusesona12-monthperiodwhereinthe (MCO)report, outflow cumulative available aswellananalysisof ofrelevantassetsandliabilitiesreflectedinthemaximum maturities analysisof Liquidity riskismonitoredandcontrolledprimarilybyagap liquidity situations. unexpectedthe maintenanceofrepurchasefacilitiestoaddressany reserves,secondary andthesecuringof money marketlinesand 1 Monthto More than 3 Months P54,826 (2,040) 52,578 2,059 416 521 534 181 574 P– 19 – – – – – – – 1 2 3 Monthsto More than 6 Months P17,529 14,540 1,452 (In Millions) (19) 952 307 259 P– 2015 28 – – – – – – – 2 9 7 1 6 Monthsto More than P24,326 22,197 1 Year 1,001 (27) 678 346 P– 41 14 12 77 – – – – – – – – 1 P414,546 271,348 Beyond 56,959 27,717 38,629 14,761 1 year 4,179 (275) 349 828 P– 74 51 – – – – – – – P721,134 (19,114) P15,221 427,046 99,654 14,583 19,295 60,492 28,754 39,927 19,859 5,802 3,979 4,264 Total 200 144 181 828 183 17 2015 More than More than More than Up to 1 1 Month to 3 Months to 6 Months to Beyond Month 3 Months 6 Months 1 Year 1 year Total (In Millions) Financial Liabilities Deposit liabilities: Demand P110,030 P– P– P– P– 110,030 Savings 260,880 25,251 11,251 5,732 13,746 316,860 Time 14,064 9,319 6,450 3,815 27,445 61,093 Financial liabilities at FVPL: Derivative liabilities: Gross contractual payable 5,543 2,891 255 41 284 9,014 Gross contractual receivable (5,500) (2,830) (246) (27) (275) (8,878) 43 61 9 14 9 136 Bills and acceptances payable 4,075 1,437 90 538 20,204 26,344 Subordinated debt – 161 161 103 10,103 10,528 Accrued interest payable and accrued other expenses payable 1,019 159 18 23 1,565 2,784 Other liabilities 16,995 336 397 127 1,433 19,288 Total financial liabilities P407,106 P36,724 P18,376 P10,352 P74,505 P547,063

2014 More than More than More than Up to 1 1 Month to 3 Months to 6 Months to Beyond Month 3 Months 6 Months 1 Year 1 year Total (In Millions) Financial Assets COCI P14,628 P– P– P– P– P14,628 Due from BSP and other banks 123,894 – – – – 123,894 Interbank loans receivable 7,407 86 179 – – 7,672 Financial assets at FVPL: Held-for-trading: Government securities 4 27 253 243 7,889 8,416 Equity securities 211 – – – – 211 Private debt securities – 1 2 6 271 280 Derivative assets: Gross contractual receivable 4,094 145 62 – 566 4,867 Gross contractual payable (4,075) (139) (58) – (461) (4,733) 19 6 4 – 105 134 Designated at FVPL Segregated fund assets – – – – 10,655 10,655 AFS investments: Government securities 131 587 1,313 1,087 44,142 47,260 Private debt securities 17 268 132 2,305 26,317 29,039 Equity securities – – – – 2,238 2,238 HTM investments: Government securities 17 163 221 627 35,937 36,965 Private debt securities – – – – 50 50 Loans and receivables: Receivables from customers 61,248 42,705 8,992 14,040 253,798 380,783 Unquoted debt securities 8 3,557 11 20 830 4,426 Other receivables 2,364 568 1,492 369 10,667 15,460 Other assets 944 – – – 102 1,046 Total financial assets P210,892 P47,968 P12,599 P18,697 P393,001 P683,157 Financial Liabilities Deposit liabilities: Demand P101,561 P– P– P– P– P101,561 Savings 210,067 33,072 16,375 13,484 22,428 295,426 (Forward) 108 109

ANNUAL REPORT 2015 Total financialliabilities Other liabilities Accrued interest payable andaccruedotherexpensespayable Accrued interestpayable Subordinated debt Subordinated Bills andacceptancespayable Grosscontractualreceivable Grosscontractualpayable liabilities: Derivative FVPL: at Designated Financial FVPL: liabilitiesat a. ofthe Objectivesandlimitations VaR methodology limits. ofthe and limitations VaR methodology, VaR assumptionsand VaR therobustnessof to validate VaR model. aretheobjectives Below ROC meetingarenotedbytheBOD. The VaR figuresare backtested Committee (ROC)onamonthlybasis. All riskreportsdiscussedinthe taking personnelonadailybasisandtothe ALCO andRiskOversight The RMGreportsthe VaR andbreachestolimitstherisk utilization forarolling260-dayperiod.monthly andarebasedonhistoricaldata VaR) tomeasurePNB’s tradingmarketrisk. Volatilities areupdated equity pricerisks VaR risk andtendayholdingperiodforinterestrate (with 99%confidencelevel, andonedayholdingperiodforFX segment adoptstheParametric Value-at-Risk (VaR) methodology ofmarketopportunities.well asfromtakingadvantage The banking exposed totradingmarketriskinthecourseofmakingas as interestrates, andequityprices. foreignexchangerates PNBis such its tradingpositionsaresensitivetochangesinmarketrates Trading marketriskexistsinthebankingsegmentasvaluesof Trading marketrisk risk ontheBankingsegment’s tradingandstructuralportfolios. The succeedingsectionsprovidediscussionontheimpactofmarket rate, foreignexchangeandequitymarkets. Risk arisesfrommarketmaking, dealing, andpositiontakingininterest products, andtransactionsinaninstitutions’overallportfolio. Market affectthemarketvalueofinstruments,movements infactorsthat arisingfromadverse Market Riskistherisktoearningsorcapital Market Risks Time the 99.00%confidencelevel. day, mayoccurbeyond lossesthat anditdoesnotaccountforany thecloserepresents theriskofportfoliosat ofeachbusiness Even thoughpositionsmaychangethroughouttheday, the VaR only betweensuchfactorsforspecificinstruments.and therelationship or over- duetotheassumptionsplacedonriskfactors estimated with thenormaldistributionassumption. VaR mayalsobeunder- if changes in risk factors fail to alignmoves may be under estimated oftheriskfactors,modifications theprobabilityoflargemarket andmaynotclearlyinformation predictthefuturechangesand Due tothefactthat toprovideVaR onhistoricaldata reliesheavily distribution. astatistical future pricemovementswillfollow that inmarketpricesandassumesit isbasedonhistoricalvolatilities anormal distribution.follow The useof VaR because haslimitations in theriskfactorsaffectingnormalmarketenvironmentwill market environment. changesoccurring any The modelsassumethat The VaR modelsaredesignedtomeasuremarketriskinanormal P346,183 Up to1 17,900 (6,811) P8,103 Month 7,713 6,828 822 17 – Lowest Highest Daily Average December 31, 2014 Lowest Highest Average Daily December 31, 2015 Lowest Highest Daily Average End ofyear c.Limits VaR b.assumptions/parameters VaR losses in the event that unexpected movementsarise. losses intheeventthat increase asaresultofsuchchangesbut maybereducedorcreate arekeptwithinacceptablelimits.interest rates Interestmarginsmay in exposuretofluctuations The bankingsegmentseekstoensurethat risk Interest rate Non-trading MarketRisk Structural MarketRiskoftheBankingSegment theinterestrate shows The tablebelow VaR for AFS investments: ** forthetotalportfoliomaynotequalsumofindividualcomponentsashighsandlows The highandlow * FX VaR isthebankwideforeignexchangerisk Trading Portfolio of the individual trading portfolios may have occurredondifferenttradingdays of theindividualtradingportfoliosmayhave 1 Monthto More than the correlation effectsofthethreetradingportfolios. the correlation an undiversifiedbasis;hence, thebankingsegmentdoesnotconsider ofthebankingsegment.tolerable riskappetite VaR iscomputedon the against VaR limitsaremonitored. Limitsarebasedonthe financial tradingactivitiesandexposures. Calculated VaR compared management, VaR beenestablishedannuallyforall limitshave Since VaR isanintegralpartofthebankingsegment’s marketrisk onehundreddays. than onceevery losses exceeding the VaR figure shouldoccur,average, on notmore of a99.00%confidencelevelmeansthat, withinaonedayhorizon, at99.00%. specifiedtimehorizonandlevelofconfidence a Theuse VaR thepotentiallossoncurrentportfolioassuming estimates 3 Months P45,608 P10,787 457 (54) 134 160 997 55 1 3 Monthsto More than 6 Months P23,323 P5,149 1,335 300 161 (21) 23 2014 1 2 Exchange* Foreign 103.36 P54.51 P1.99 49.60 14.52 6 Monthsto 8.56 0.92 3.67 More than P19,875 P5,628 1 Year (290) 408 322 291 31 1 1 P296.83 P180.25 Interest 307.42 188.39 144.96 420.79 306.33 76.55 Rate P1,303.05 1,444.14 1,249.75 797.87 P74,469 P24,290 Beyond (In Millions) 10,497 2015 1 year 6,700 1,555 8,974 (465) Equities 490 25 12.60 P8.81 P7.76 Price 6.43 8.73 7.19 10.5 8.99 Total VaR** P509,458 P53,957 2,631.36 1,416.60 P812.47 P307.63 P242.52 25,765 (7,641) 11,140 19,050 160.66 349.12 246.50 170.35 392.93 318.99 812.47 2,513 7,687 Total 2014 46 Repricing mismatches will expose the banking segment to interest occurs when the amount of interest rate sensitive assets exceeds rate risk. PNB measures the sensitivity of its assets and liabilities the amount of interest rate sensitive liabilities. to interest rate fluctuations by way of a “repricing gap” analysis using the repricing characteristics of its financial instrument During a period of rising interest rates, a company with a positive gap is better positions tempered with approved assumptions. To evaluate positioned because the company’s assets are refinanced at increasingly higher earnings exposure, interest rate sensitive liabilities in each time interest rates increasing the net interest margin of the company over time. band are subtracted from the corresponding interest rate assets During a period of falling interest rates, a company with a positive gap would to produce a “repricing gap” for that time band. The difference show assets repricing at a faster rate than one with a negative gap, which may in the amount of assets and liabilities maturing or being repriced restrain the growth of its net income or result in a decline in net interest income. over a one year period would then give the banking segment an indication of the extent to which it is exposed to the risk of For risk management purposes, the repricing gap covering the one year potential changes in net interest income. A negative gap occurs period is multiplied by an assumed change in interest rates to yield an when the amount of interest rate sensitive liabilities exceeds the approximation of the change in net interest income that would result amount of interest rate sensitive assets. Vice versa, positive gap from such an interest rate movement.

The banking segment’s BOD sets a limit on the level of earnings at risk (EaR) exposure tolerable to the banking segment. Compliance to the EaR limit is monitored monthly by the RMG. This EaR computation is accomplished monthly, with a quarterly stress test.

The following table sets forth the repricing gap position of the banking segment:

December 31, 2015 More than More than More than Up to 1 1 to 3 3 to 6 6 to 12 Beyond Month Months Months months 1 year Total (In Millions) Financial Assets* Due from BSP and other banks P23,069 P2,140 P442 P415 P227 P26,293 Interbank loans receivable 5,251 158 391 – – 5,800 Receivable from customers and other receivables - gross** 119,503 54,698 7,568 2,524 51,382 235,675 Total financial assets P147,823 P56,996 P8,401 P2,939 P51,609 P267,768 Financial Liabilities* Deposit liabilities: Savings P82,042 P26,460 P18,737 P19,105 P12,365 P158,709 Time 19,330 8,793 6,358 3,958 3,099 41,538 Bills and acceptances payable 3,850 1,081 1,006 1,141 18,674 25,752 Total financial liabilities P105,222 P36,334 P26,101 P24,204 P34,138 P225,999 Repricing gap P42,601 P20,662 (P17,700) (P21,265) P17,471 P41,769 Cumulative gap 42,601 63,263 45,563 24,298 41,769 –

*Financial instruments that are not subject to repricing/rollforward were excluded. **Receivable from customers excludes residual value of leased assets.

December 31, 2014 Up to 1 1 to 3 3 to 6 6 to 12 Beyond Month Months Months months 1 year Total

(In Millions) Financial Assets* Due from BSP and other banks P114,062 P5,180 P1,436 P235 P452 P121,365 Interbank loans receivable 7,585 86 – – – 7,671 Receivable from customers and other receivables - gross** 109,682 52,668 10,239 10,042 30,296 212,927 Total financial assets P231,329 P57,934 P11,675 P10,277 P30,748 P341,963 Financial Liabilities* Deposit liabilities: Savings P80,240 P28,456 P16,173 P20,476 P9,503 P154,848 Time 13,973 6,782 5,620 4,134 3,375 33,884 Bills and acceptances payable 7,574 682 422 669 13,618 22,965 Total financial liabilities P101,787 P35,920 P22,215 P25,279 P26,496 P211,697 Repricing gap P129,542 P22,014 (P10,540) (P15,002) P4,252 P130,267 Cumulative gap 129,542 151,556 141,016 126,014 130,266 – *Financial instruments that are not subject to repricing/rollforward were excluded. **Receivable from customers excludes residual value of leased assets. 110 111

ANNUAL REPORT 2015 -100bps +100bps -50bps +50bps Philippine pesoequivalent). amounts, carrying bycurrencyliabilities at categorized (amountsin risk.exchange rate Included inthetablearefinancialassetsand summarizesthebankingsegment’sThe tablebelow exposuretoforeign is involved. inthetypeofbusinesswhichbankingsegment institution engaged limits for afinancial on its assets and liabilities is within conservative itsprofileofforeigncurrencybanking segmentbelievesthat exposure guidelines.within acceptable limits andwithinexistingregulatory The The bankingsegment’s policy istomaintain foreigncurrency exposure its foreignbranchnetwork. the FCDU, PNB hasadditionalforeigncurrency assets andliabilitiesin onallforeigncurrencyreserve liabilitiesheldthroughFCDUs. Outside held throughFCDUs. Inaddition, theBSPrequiresa30.00%liquidity theforeigncurrencymatch liabilitieswiththeforeigncurrency assets investment portfoliointheFCDU. BanksarerequiredbytheBSPto generally usedtofundPNB’s foreigncurrency-denominated loanand intheregularbooksofPNB.appearing Foreign currency depositsare accounts withPNBandforeigncurrency-denominated borrowings benefit orfortheofathirdparty, foreigncurrency deposit andoverseasFilipino workerswhoretainfortheirownexpatriates from remittances tothe Philippines byFilipinowhich are generated deposits in PNB’s FCDU books, accounts made in the Philippines or Foreign currency liabilitiesgenerallyconsistofforeigncurrency on itsfinancialsandcashflows. intheprevailingforeigncurrencyeffects offluctuations exchangerates in foreignexchangerates. The bankingsegmenttakesonexposureto Foreign arising from changes exchange is the risk to earnings or capital Foreign currency risk currentlyused. earnings approach riskinthebankingbookstocomplement measuring theinterestrate in banking segmenthassettheadoptionofeconomicvalueapproach process,As oneofthelong-termgoalsinriskmanagement the rates onthebankingsegment’srates fortheyearsendedDecember31: repricinggap tablesetsforth,The following fortheyearindicated, theimpactofchangesininterest COCI andduefromBSP Assets Due fromotherbanks agreements toresell agreements and securitiesheldunder Interbank loansreceivable Financial FVPL assetsat Loans andreceivables AFS investments Other assets Total assets Deposit liabilities Liabilities Bills andacceptancespayable other expenses Accrued taxes, interestand Other liabilities Total liabilities Net Exposure Income Before Income Tax P23,457 P7,691 P9,889 14,468 13,568 (716) (358) P358 6,934 3,430 1,589 P259 December31, 2015 USD 716 673 525 598 858 2015 – P18,959 P13,224 P4,892 Others 9,467 1,006 6,682 5,735 P220 927 657 258 555 30 – Equity (In Millions) (716) (358) P358 716 P42,416 P12,583 P23,113 16,401 21,150 19,303 1,679 1,452 1,255 3,688 1,619 1,413 (In Millions) P479 Total – Income Before Income Tax P12,637 P1,961 P3,772 1,491 2,044 7,173 1,484 2,977 1,570 2,357 8,865 P236 USD December 31, 2014 118 91 (496) (248) P248 496 2014 P6,744 P2,937 P3,526 Others 3,301 1,934 3,218 P300 432 688 113 144 35 54 24 P19,381 Equity P4,898 12,083 P7,298 (496) (248) P248 4,792 2,476 7,861 3,418 3,090 1,594 2,501 P536 496 Total 153 145 for doubtfulaccounts. been provided with allowanceare long-outstanding and have collectible. Lastly, “Impaired financialassets” arethosethat of frequentdefault, nevertheless, theamountduearestill instruments. “Past duebutnotimpaired” areitemswithhistory withthefinancial oruncertaintyassociated cashflows erratic financialassetas not regardany “high grade” inviewofthe defaults. low other counterpartieswithrelatively The Groupdid grade” accounts, ontheotherhand, arefinancialassetsfrom trusted parties with good financial condition. “Substandard “Standard grade” accountsconsist offinancialassetsfrom Credit qualityperclass offinancialassets • Tobacco andpropertydevelopmentsegments arenotexposedto • segmentannualsalespertainmainlyto13partieswith Beverage • Distilled spiritssegment’s pertainsmainly saleofalcoholicbeverage risk perbusinesssegmentcouldariseonthefollowing: Group’s financialstrengthandunderminepublicconfidence. Concentration properly managed, the couldthreaten maycausesignificantlossesthat location. orgeographical Suchcreditriskconcentrations,industry ifnot sensitivity oftheGroup’s performancetodevelopmentsaffectingaparticular economic, politicalorotherconditions. therelative indicate Concentrations tobesimilarlyaffectedbychangesin ability tomeetcontractualobligations wouldcausetheir that similareconomicfeatures business activitieshaving insimilar arisewhenanumberofcounterpartiesareengaged Concentrations risk Concentration the contractprice. this arrangementistransferredtothebuyersonlyuponfullpaymentof becausethecorrespondingtitletopropertysoldunder mitigated buyer topayontimethecontractsreceivablesdue. This riskisfurther and cantakepossessionofthesubjectpropertyincaserefusalby court action right to cancel the sales contract without the risk for any as the Group has the credit risk for contracts receivables is mitigated primarily throughanalysisofreceivablesonacontinuousbasis. The In addition, creditriskofpropertydevelopmentsegmentismanaged Group. closelyManagement monitorsthefundandfinancialconditionof theGroup’sthe resultthat exposuretobaddebtsisnotsignificant. addition, receivablebalancesaremonitoredonanon-goingbasiswith The Grouptradesonlywithrecognized, creditworthythirdparties. In of goodfinancialconditionandselectinginvestmentgradesecurities. itscreditriskbytransactingwithcounterparties The Groupmanages Credit Risk riskandequitypricerisk). interest rate risk, liquidityriskandmarketrisks(consistingofforeignexchangerisk, The mainrisksarisingfromtheuseoffinancialinstrumentsarecredit operations. its from andaccruedexpenseswhicharisedirectly payable financial assetsandliabilitiessuchasreceivablesaccounts requirementswhenneeded.operational The Grouphasvariousother for-sale thesetomeetvarious financialassetswithaviewtoliquidate expansion. andcapital operations Excessfundsareinvestedinavailable- fundsfortheGroup’sof thesefinancialinstrumentsistoensureadequate long-term debtsandcashotheritems(COCI). The mainpurpose The Group’s principalfinancialinstrumentscompriseofshort-termand Strategies Risk Management in theGroupotherthanBankingSegment Financial RiskManagementObjectivesandPolicies oftheCompanies contained inNote21. tothebankingsegment’s relating Information currency is derivatives concentration riskbecauseithasdiversebaseofcounterparties.concentration sales.sales tothemcomprisingabout100%ofthetotalbeverage sale. total alcoholicbeverage to twotrustedpartieswithsalesthemcomprisingabout90%of The tables below show the credit quality of financial assets and an aging analysis of past due but not impaired accounts of the Group except for the banking segment:

December 31, 2015:

Neither past due nor impaired Past due but not impaired Sub- Over Impaired Standard standard 31 to 61 to 91 to 120 Financial Grade Grade 60 days 90 days 120 days Days Assets Total (In Millions) Loans and receivables: Cash and other cash items P2,331 P− P− P− P− P− P− P2,331 Trade receivables 2,910 − 3,143 1,354 3,267 607 623 11,904 Other receivables 839 2 2 6 1 80 9 939 Due from related parties 1,593 − − − − − − 1,593 Refundable deposits 145 − − − − − − 145 Financial assets at FVPL 5,082 − − − − − − 5,082 AFS investments 541 − − − − − − 541 P13,441 P2 P3,145 P1,360 P3,268 P687 P632 P22,535

December 31, 2014:

Neither past due nor impaired Past due but not impaired Sub- Impaired Standard standard 31 to 61 to 91 to Over 120 Financial Grade Grade 60 days 90 days 120 days Days Assets Total (In Millions) Loans and receivables: Cash and other cash items P3,607 P− P− P− P− P− P− P3,607 Trade receivables 5,962 − 3,213 1,983 1,382 − 29 12,569 Other receivables 2,702 167 2 7 5 91 6 2,980 Due from related parties 1,353 − − − − 444 − 1,797 Refundable deposits 173 − − − − − − 173 Financial assets at FVPL 4,922 − − − – − − 4,922 AFS investments 570 52 − − − − 2 624 P19,289 P219 P3,215 P1,990 P1,387 P535 P37 P26,672

Liquidity Risk and Funding Management financial liabilities (undiscounted amounts of principal and related Liquidity risk is generally defined as the current and prospective risk to interest) as well as the financial assets used for liquidity management earnings or capital arising from the Group’s inability to meet its obligations (in millions): when they come due without incurring unacceptable losses or costs. 2015 2014 The Group’s objective is to maintain a balance between continuity of funding 1 to less 1 to less and sourcing flexibility through the use of available financial instruments. Less than than Less than than one year 3 years Total one year 3 years Total The Group manages its liquidity profile to meet its working and capital Cash and other cash expenditure requirements and service debt obligations. As part of the items P2,331 P− P2,331 P3,607 P− P3,607 liquidity risk management program, the Group regularly evaluates and Trade receivables 11,282 − 11,282 12,569 − 12,569 considers the maturity of its financial assets (e.g., trade receivables, other Other receivables 922 8 930 2,980 − 2,980 financial assets) and resorts to short-term borrowings whenever its available Due from related parties 1,149 444 1,593 1,797 − 1,797 cash or matured placements is not enough to meet its daily working capital Refundable deposits 145 − 145 173 − 173 requirements. To ensure availability of short-term borrowings, the Group Financial assets at FVPL 5,082 − 5,082 4,922 − 4,922 AFS investments − 615 615 1,672 − 1,672 maintains credit lines with banks on a continuing basis. P20,911 P1,067 P21,978 P27,720 P− P27,720 Short term debts P− P− P− P300 P− P300 The Group relies on budgeting and forecasting techniques to monitor Accounts payable and cash flow concerns. The Group also keeps its liquidity risk minimum by other liabilities* 8,658 − 8,658 7,263 − 7,263 prepaying, to the extent possible, interest bearing debt using operating Long-term debts 2,226 822 3,048 15,475 1,322 16,797 cash flows. Due to related parties 47 − 47 50 − 50 Other liabilities 1,081 2,203 3,284 2,640 − 2,640 P12,012 P3,025 P15,037 P25,728 P1,322 P27,050 The following tables show the maturity profile of the Group’s other * Excluding non-financial liabilities amounting to 128.2 million and 132.6 million as of December 31, 2015 and 2014. 113 112

ANNUAL REPORT 2015 * Included balancesheet intheconsolidated inbillsandacceptancespayable Derivative assets(Notes6and21) Total of reportingperiodbytype Financial end assetsrecognizedat Financial liabilities of reportingperiodbytype Financial assetsrecognizedatend Financial assets arrangements. The effectsofthesearrangementsaredisclosed inthesucceedingtables. agreements orsimilar postingrequirements)forfinancialinstrumentsunderanenforceablemasternetting arrangements (suchascollateral The amendmentstoPFRS7, 1, whichiseffectiveJanuary 2013, requiretheGrouptodisclose aboutrightsofoffsetandrelated information 33. OffsettingofFinancialAssetsandLiabilities as aresultofchangesinthelevelsequityindicesandvalue thefairvalueofequitieswilldecreaseEquity priceriskisthethat Equity pricerisk considers tobereasonablypossible. factor, theGroup what withadjustments beingmadetoarriveat foreachmarket equity priceriskarebasedonthehistoricalvolatility exchange risk, risk, interestrate cashflow riskand priceinterestrate oftheriskexposures.quantification providedforforeign Estimates identify theriskpositionofGroupaswellprovideanapproximate monitoring itsmarketrisks. to Sensitivityanalysisenablesmanagement sensitivityanalysisinassessingand The Groupgenerallyapplies of financial market riskisa key priority forthe Group.Management activities. andfinancingthese risksprimarilythroughitsregularoperating Group. For thisreason, andcontrol theGroupseekstomanage in significantequity, risksforthe andprofitvolatility cashflow rates. inthesevariablesmayresult Increasingmarketfluctuations andinterestdirectly affectedbychangesinforeignexchangerates The Group’s operating, investing, andfinancingactivitiesare Market RisksoftheGroupotherthanBankingSegment torepurchase(Note17)* Securities soldunderagreements end ofreportingperiodbytype Financial assetsrecognizedat (Notes16and21) liabilities Derivative Derivative assets(Notes6 and21) Derivative Gross carrying Amounts carrying Gross (before offsetting) Amounts (before Amounts (before Gross carrying P10,038,319 P13,023,135 Gross carrying Gross carrying 12,806,499 P14,550,000 offsetting) P216,636 offsetting) [a] [a] [a] with theoffsettingcriteria offset inaccordancewith Gross amountsoffsetin in accordancewiththe the offsettingcriteria Gross amountsoffset offsetting criteria Gross amounts P9,981,741 accordance December 31, 2015 December 31, 2015 December 31, 2014 [b] [b] P– – – [b] P– presented inbalance transactions. foreign currency risksincetheGrouphasnosignificantforeigncurrency The non-bankingsegmentoftheGroupisnotsignificantlyaffectedby Foreign currency risk ofthreemonthsorsixmonths. interval instruments ismostlyat risk. interestrate rate financial subject tocashflow Repricingoffloating financialinstrumentsare rate riskwhilefloating fair valueinterest rate fixedrates.issued at financialinstrumentsaresubjectto Fixed rate sincethedebtsare exposed totheriskinchangesmarket interest rates As ofDecember31, 2015and2014, theGroup’s long-termdebtsarenot fromfinancialinstruments. affectfuturecashflows would unfavorably changesininterestrates riskarisesfromthepossibilitythat Interest rate risk Interest rate same amount. decreaseequitybythechange intheoppositedirectionwouldhave million, respectively, ifequitypriceswillincreaseby5.2%. An equal constant, willincreaseprofitbyP42.1million, P39.7millionand43.8 possible changeinequityinterest, withallothervariablesheld equity instrumentsheldas AFS equityinstrumentsduetoareasonable individual stocks. In2015, 2014and2013, changesinfairvalueof n balancesheet balance sheet P13,023,135 12,806,499 Net amount presented in Net amount P14,550,000 sheet [a-b] Net amount presented P216,636 P56,578 (In Thousands) (In Thousands) (In Thousands) [a-b] [a-b] [c] [c] [c] Effect ofremainingrightsset-off(including rights to set off financial collateral) that donotmeet that to setofffinancialcollateral) PAS rights to set off financial collateral) that donot that rights tosetofffinancialcollateral) Effect ofremainingrightsset-off(including Financial instruments Effect ofremainingrightsset-off (including rightstosetofffinancial collateral) thatdonotmeetPAS 32 meet PAS 32offsettingcriteria instruments instruments 32 offsettingcriteria Financial Financial offsetting criteria P465 P465 P597 P– – [d] [d] [d] Fair value ofFinancial Fair valueofFinancial P16,191,973 P14,516,223 15,941,143 of Financial P250,830 Fair value collateral collateral collateral P− Net exposure [c-d] Net exposure[c-d] Net exposure[c-d] P33,777 P55,981 [e] P– P– [e] [e] – December 31, 2014 Effect of remaining rights of set-off (including rights to set off financial collateral) that do not Gross amounts Net amount presented in meet PAS 32 offsetting criteria Financial assets recognized at end of Gross carrying Amounts offset in accordance with balance sheet Financial Fair value of reporting period by type (before offsetting) the offsetting criteria [a-b] instruments Financial collateral Net exposure [c-d] [a] [b] [c] [d] [e] (In Thousands) Derivative liabilities (Notes 16 and 21) P10,962,654 (P10,919,189) P43,465 P− P− P43,465 Securities sold under agreements to repurchase (Note 17)* 14,085,961 − 14,085,961 − 17,448,561 − Total P25,048,615 (P10,919,189) P14,129,426 P− P17,448,561 P43,465 * Included in bills and acceptances payable in the consolidated balance sheet

The amounts disclosed in column (d) include those rights to set-off December 31, 2015 December, 31, 2014 amounts that are only enforceable and exercisable in the event of Fair Market Carrying Fair Market default, insolvency or bankruptcy. This includes amounts related to Carrying Value Value Value Value financial collateral both received and pledged, whether cash or non- Unquoted debt securities P625,803 P648,046 P4,425,005 P6,013,057 cash collateral, excluding the extent of over-collateralization. P349,765,081 P352,274,584 P300,797,074 P322,499,792 Financial Liabilities: Financial liabilities at 34. Fair Value Measurement amortized cost: Deposit liabilities - The Group has assets and liabilities that are measured at fair value Time deposits P60,511,353 P60,762,710 P52,759,938 P55,296,115 on a recurring and non-recurring basis in the consolidated balance Bills payables 25,407,406 25,033,940 18,683,204 18,340,370 sheets after initial recognition. Recurring fair value measurements are Long term debts: those that another PFRS requires or permits to be recognized in the Subordinated debt 9,986,427 10,241,659 9,969,498 10,593,485 consolidated balance sheets at the end of each reporting period. These Unsecured term loan 720,004 720,004 1,321,823 1,337,684 include financial assets and liabilities at FVPL and AFS investments. Bonds payable - - 4,998,008 5,048,551 Non-recurring fair value measurements are those that another PFRS Notes payable 476,015 470,370 508,115 502,089 requires or permits to be recognized in the consolidated balance sheet Other liabilities: in particular circumstances. These include land and land improvements, Payable to landowners 1,723,923 1,803,770 2,289,708 2,226,042 buildings and building improvements and machineries and equipment Tenants’ rental deposits 306,524 351,781 268,805 323,236 measured at revalued amount and investment properties measured at Advance rentals 207,470 186,687 45,800 41,212 cost but with fair value measurement disclosure. P99,339,122 P99,570,921 P90,844,899 P93,708,784

The Group’s management determines the policies and procedures for The methods and assumptions used by the Group in estimating the fair both recurring and non-recurring fair value measurement. value of the financial instruments are:

External valuers are involved for valuation of significant assets, such as Cash equivalents - Carrying amounts approximate fair values due to the investment properties, land and land improvements, plant buildings and relatively short-term maturity of these investments. building improvements and machineries and equipment. Involvement of external valuers is decided upon annually by management. Selection Debt securities - Fair values are generally based upon quoted market criteria include market knowledge, reputation, independence and prices. If the market prices are not readily available, fair values are whether professional standards are maintained. Management decides, obtained from independent parties offering pricing services, estimated after discussions with the Group’s external valuers, which valuation using adjusted quoted market prices of comparable investments or techniques and inputs to use for each case. using the discounted cash flow methodology.

At each reporting date, management analyses the movements in the Equity securities - fair values of quoted equity securities are based on values of assets and liabilities which are required to be re-measured or quoted market prices. While fair values of unquoted equity securities are re-assessed as per the Group’s accounting policies. For this analysis, the same as the carrying value since the fair value could not be reliably management verifies the major inputs applied in the latest valuation by determined due to the unpredictable nature of future cash flows and the agreeing the information in the valuation computation to contracts and lack of suitable methods of arriving at a reliable fair value. other relevant documents with relevant external sources to determine whether the change is reasonable. Loans and receivables - For loans with fixed interest rates, fair values are estimated by discounted cash flow methodology, using the Group’s As of December 31, 2015 and 2014, the carrying values of the Group’s current market lending rates for similar types of loans. For loans financial assets and liabilities approximate their respective fair values, with floating interest rates, with repricing frequencies on a quarterly except for the following financial instruments: basis, the Group assumes that the carrying amount approximates fair value. Where the repricing frequency is beyond three months, the fair December 31, 2015 December, 31, 2014 value of floating rate loans is determined using the discounted cash flow methodologies. The discount rate used in estimating the fair Fair Market Carrying Fair Market Carrying Value Value Value Value value of loans and receivables is 2.75% in 2015 and 3.2% in 2014 (In Thousands) for peso-denominated receivables. For foreign currency-denominated Financial Assets: receivables, discount rate used is 1.5% in 2015 and 2014. Loans and receivables: Liabilities - Except for time deposit liabilities, subordinated debt, bonds Receivables from customers P349,139,278 P351,626,538 P296,372,069 P316,486,735 payable, unsecured term loans, notes payable, payable to landowners, (Forward) tenants’ rental deposits and advance rentals, the carrying values 114 115

ANNUAL REPORT 2015 2014, respectively. of December31, 2015andfrom2.75%to5.07%asofDecember31, of instruments. usedrangefrom2.67%to3.89%as The discountrates forsimilartypes applicable risk-freerates usingthe future cashflows methodbasedonthediscountedvalueof the discountedcashflow rental depositsandadvancerentals-Fair using valuesareestimated Unsecured termloans, notespayable, tolandowners, payable tenants’ December 31, 2015and2014, respectively. and timedepositsranges, from2.66%to3.77%and1.0%3.9%asof debt thefairvaluesofsubordinated usedinestimating discount rate - Fair methodology. valueisdeterminedusingthediscountedcashflow The Time debtincluding FVPL deposit liabilities and subordinated at designated models. prices oracceptablevaluation instruments-FairDerivative basedonquotedmarket valuesareestimated oftheseliabilities. short-termmaturities or therelatively fairvaluesduetoeitherthepresenceofademandfeature approximate Financial FVPL: assetsat Financial Assets Assets measuredatfair value: AFS investments: Assets ofdisposalgroupclassified asheldforsale: AFS investments: Property, plantandequipment*** Non-financial assets Financial FVPL: liabilitiesat Financial liabilities Liabilities measuredatfair value: Financial Assets Assets forwhichfair values aredisclosed: Loans andreceivables: Investment properties*** Non-financial Assets (Forward) Held-for-trading: Designated at FVPL: at Designated Private debtsecurities Private Government securities Equity securities** Financial FVPL: assetsat Land andlandimprovements Plant buildingsandbuildingimprovements Machineries andequipment Designated at FVPL: at Designated HTM investment Land Buildings andimprovements Government securities Private debtsecurities Private Equity securities Segregated fundliabilities* Segregated Derivative liabilities Derivative Receivables fromcustomers Unquoted debtsecurities Assets ofdisposalgroupclassified asheldforsale Derivative assets Derivative Government securities Private debtsecurities Private Equity securities Investment inUITFs Segregated fundassets* Segregated Segregated fundassets Segregated P55,674,387 P15,323,103 P18,661,871 P19,998,685 P2,707,811 P3,051,363 P7,854,450 P7,945,084 P7,945,084 21,614,280 33,499,835 2,485,902 3,604,065 1,378,686 1,336,814 143,800 199,752 560,272 Level 1 level infairvaluehierarchy: costbutwhichfairvaluesaredisclosedand at andtheircorresponding fair value assets and liabilities measured at The Group held the following Level 3: asignificanteffecton techniqueswhichuseinputshave Level 2: asignificant other techniquesforwhichallinputshave Level 1: quoted(unadjusted)pricesinactivemarketsforidenticalassets areusedtodeterminethefairvalueandcanbesummarizedin: the inputsthat technique.value ofassetsandliabilitiesbyvaluation These levelsarebasedin hierarchyfordetermininganddisclosingThe Groupusesthefollowing thefair Fair valuehierarchy theendofreportingperiod. price at -FairBonds payable transaction valueisdeterminedbyreferencetolatest P− P− P− P− − − − − − – – – – the recorded fair value that are not based on observable marketdata. arenotbasedonobservable the recordedfairvaluethat or indirectly effect ontherecordedfairvalueareobservable, eitherdirectly or liabilities P12,492,921 P1,331,801 P1,467,248 P5,887,982 P7,224,796 11,760,562 1,336,814 December 31, 2015 P135,193 (In Thousands) 118,016 638,700 135,193 Level 2 17,261 93,659 170 P− P− P− P− P– P– P– − − − − − – – – – – P352,274,584 P19,253,238 P39,538,145 P30,136,203 P38,653,548 351,626,538 P5,780,237 P5,780,237 P5,780,237 P5,780,237 13,750,867 6,534,040 8,517,345 P63,332 648,046 Level 3 63,332 P– P– P– − – – – – – – – – – – – P379,498,065 P68,167,308 P13,634,687 P21,103,340 P19,253,238 P13,725,321 P39,538,145 P13,860,514 P24,549,853 P30,136,203 P38,653,548 351,626,538 P4,039,612 P4,581,943 45,260,397 22,252,980 13,750,867 2,485,902 3,604,065 1,378,686 6,534,040 2,673,628 8,517,345 181,348 143,800 199,922 653,931 135,193 648,046 17,261 Total – December 31, 2015 Level 1 Level 2 Level 3 Total (In Thousands) Liabilities for which fair values are disclosed: Financial liabilities Financial liabilities at amortized cost: Deposit liabilities: Time deposits P− P− P60,762,710 P60,762,710 Long term debts: Subordinated debt − − 10,241,659 10,241,659 Bills payable − − 25,033,940 25,033,940 Unsecured term loan – – 720,004 720,004 Notes payable – – 470,370 470,370 Other liabilities: Payable to landowners – – 1,803,770 1,803,770 Tenants’ rental deposits – – 351,781 351,781 Advance rentals – – 186,687 186,687 P− P− P99,570,921 P99,570,921 * Excludes cash component *** Based on the fair values from appraisal reports which are different from their carrying amounts ** Excludes unquoted available-for-sale securities which are carried at cost.

December 31, 2014 Level 1 Level 2 Level 3 Total (In Thousands) Assets measured at fair value: Financial Assets Financial assets at FVPL: Held-for-trading: Government securities P3,802,179 P2,329,099 P− P6,131,278 Private debt securities − 65,391 71,160 136,551 Derivative assets 218,193 − − 218,193 Equity securities 210,674 160 − 210,834 Designated at FVPL: Segregated fund assets* 5,386,302 − 5,268,468 10,654,770 P9,617,348 P2,394,650 P5,339,628 P17,351,626 AFS investments: Government securities P25,983,779 P11,161,671 P− P37,145,450 Other debt securities 21,377,038 2,331,118 − 23,708,156 Equity securities** 2,074,200 − − 2,074,200 P59,052,365 P15,887,439 P5,339,628 P80,279,432 Non-financial assets Property, plant and equipment*** Land and land improvements P− P− P16,832,987 P16,832,987 Plant buildings and building improvements − − 11,602,275 11,602,275 Machineries and equipment − − 10,044,263 10,044,263 P− P− P38,479,525 P38,479,525 Liabilities measured at fair value: Financial liabilities Financial liabilities at FVPL: Designated at FVPL: Segregated fund liabilities* P5,308,303 P− P5,346,467 P10,654,770 Derivative liabilities − 44,903 − 44,903 P5,308,303 P44,903 P5,346,467 P10,699,673 Assets for which fair values are disclosed: Financial Assets HTM investment P20,584,890 P3,983,878 P− P24,568,768 Loans and receivables: Receivables from customers − − 316,486,735 316,486,735 Unquoted debt securities − − 6,013,057 6,013,057 P20,584,890 P3,983,878 P322,499,792 P347,068,560 Non-financial Assets Investment properties*** Land P− P− P36,107,990 P36,107,990 Buildings and improvements − − 6,025,335 6,025,335 P− P− P42,133,325 P42,133,325 Liabilities for which fair values are disclosed: Financial liabilities Financial liabilities at amortized cost: Deposit liabilities: Time deposits P– P– P55,296,115 P55,296,115 Bills payables – – 18,340,370 18,340,370 Long term debts: Subordinated debt – – 10,593,485 10,593,485 Unsecured term loan – – 1,337,684 1,337,684 Bonds payable 5,048,551 – − 5,048,551 Notes payable – – 502,089 502,089 Other liabilities: Payable to landowners – – 2,226,042 2,226,042 Tenants’ rental deposits – – 323,236 323,236 Advance rentals – – 41,212 41,212 P5,048,551 P– P88,660,233 P93,708,784 * Excludes cash component ** Excludes unquoted available-for-sale securities *** Based on the fair values from appraisal reports which are different from their carrying amounts which are carried at cost. 116 117

ANNUAL REPORT 2015 Balance at endofyear Balance at orloss Add (deduct)totalloss(gain)recordedinprofit beginningofyear Balance at Financial liabilities endoftheyear Balance at assetsandotheradjustments valueofdisposed/transferred Net carrying andamortization Depreciation decrementduringtheyear Revaluation Additions duringtheyear beginningofyear Balance at Nonfinancial assets endofyear Balance at orloss Add (deduct)totalgain(loss)recordedinprofit beginningofyear Balance at Financial assets constant, theimpacttoprofitandlossfollows: showing possible movementinthesignificantinputs withallothervariablesheld as ofDecember31, 2015and2014isperformedforthereasonable The sensitivityanalysisofthefairmarket valueofthestructurednotes Structured Notes techniquesareasfollows: Description ofvaluation issuances). (for theUSD-denominated (for thePeso-denominated issuances) andROP (IRS) rates CDS rates swap including thecounterparty’s (CDS), creditdefaultswap PHPinterestrate spread oftheIssuer. inputs The modelalso usedcertainmarketobservable to makecertainassumptionsaboutthemodelinputsparticularlycredit option pricingmodels, asapplicable. requires management The valuation and has beencomputedbycounterpartiesusingpresentvaluecalculations components andoptionscomponents. The fairvalueof structured notes The structured Variable Unit-LinkedNotescanbedecomposedintobond Assets’ under “Financial FVPL”.Assets at as Equity and/orCredit-LinkedNotesareshown Fund ‘Segregated at fairvalue: of Level3financialassetsandliabilitieswhicharerecorded ofthebeginningandclosing areconciliation tableshows amount The following out oflevel3fairvaluemeasurements. Level 1and2fairvaluemeasurements, andnotransfersinto As ofDecember31, 2015and2014, therewerenotransfersbetween respectively. 3.25% andfrom1.33%to3.72%asofDecember31, 2015and2014, FVPL,at rangingandfrom1.26%to theGroupuseddiscountrates analysis todeterminethefairvalueoffinancialliabilitiesdesignated currently noactivemarket. thediscountedcashflow Inapplying Instruments included inLevel3include thoseforwhichthereis models. exist andotherrevaluation prices comparison tosimilarinstrumentsforwhichmarketobservable techniques. Valuation techniquesinclude netpresentvaluetechniques, For allotherfinancialinstruments, fairvalueisdeterminedusingvaluation Level 1ofthehierarchy. deduction fortransactioncosts, theinstrumentsareincluded within quoted marketpricesorbindingdealerpricequotations, withoutany are based onas publicly the reporting date at traded derivatives When fair values of listed equity and debt securities, as well Peso-denominated Dollar-denominated Valuation Methods Simulation DCF Method/MonteCarlo Simulation DCF Method/MonteCarlo Inputs Significant Unobservable Issuer’s CDSasproxy Issuer’s / Fundingrate Issuer’s CDSasproxy Issuer’s / Fundingrate P39,538,145 P38,470,525 (1,290,186) P5,780,237 P5,346,467 P5,843,569 P5,339,628 3,525,605 (639,640) (528,159) 433,770 503,941 (In Thousands) 2015 Inputs Significant Observable PHP IRS ROP CDS/USDIRS P38,470,525 P37,834,527 (1,631,635) P5,346,467 P5,380,053 P5,339,628 P5,545,916 1,077,371 1,190,262 (206,288) (33,586) 2014 − denominated Dollar- denominated Peso- Investments Structured inputs: Sensitivity ofthefairvaluemeasurementtochangesinobservable ifchangedmaycausethevaluetofalloutofrange based onassumptionsthat * The sensitivityanalysisisperformedonlyonthefixedincomeportionofNote, thusare and equipmentinvestmentpropertiesheldbytheGroup: foreachtypeofproperty, inputsvaluation significant unobservable plant techniques used and the summarizes the valuation The table below disclosureto complywiththerelated requirements. information quantitative PFRS 13nolongerrequiresanentitytocreate totheGroup.broker werenotmadeavailable Undersuchinstance, whichweredevelopedanddeterminedbythethird-party valuation imputed by the Group. model and inputs used in the The valuation pricingadjustments received fromathird-party broker withoutany beendeterminedusingpricequotes The fairvaluesofwarrantshave ifchangedmaycausethevaluetofallout ofrange based onassumptionsthat * The sensitivityanalysisisperformedonlyonthefixedincomeportionofNote, thusare Investments Structured denominated Peso- inputs: Sensitivity of the fair value measurement to changes in unobservable improvements Landandland equipment: Property, plantand denominated Dollar- Building improvements building Plantbuildingsand Input Unobservable Significant Bank CDSLevels Bank CDSLevels ROP CDS(5Y) PHP IRS(3Y) Input Observable Significant Techniques Valuation Approach Market Data Approach Asset Valuation Replaceable Fixed of Input* Range 93.27 bps 47.28 - 76.344 bps 40.719 - 193.33 bps 126.15 - 355.00 bps 180.25 - Input* Range of 2015 Value** the InputtoFair Sensitivity of 65,500,462 the noteby market valueof increase inthe a (decrease)/ would resultin change inputs (decrease) in 50 bpsincrease/ 41,710,217 the noteby market value of increase inthe a (decrease)/ would resultin change inputs (decrease) in 50 bpsincrease/ 2015 P28,095,617 of thenoteby market value increase inthe a (decrease)/ would resultin change inputs (decrease) in increase/ 50 bps P65,500,462 of thenoteby market value increase inthe a (decrease)/ would resultin change inputs (decrease) in increase/ 50 bps Fair Value** the Inputto Sensitivity of Inputs Unobservable Significant meter Price persquare area floor Estimated total Replacement cost of Input Range 44.00 -95.67bps 35.21 -78.08bps 150.94 bps 79.31 - 375.00 bps 142.00 - Range ofInput Range ofEstimates 6,000-6,200 24-1548 sq.m 4,287- 10,000 2014 Input toFair Value* Sensitivity ofthe 90,838,042 note by market valueofthe increase inthe in a(decrease)/ inputs wouldresult (decrease) inchange 50 bpsincrease/ 41,710,217 note by market valueofthe increase inthe in a(decrease)/ inputs wouldresult (decrease) inchange 50 bpsincrease/ 2014 P41,710,217 the noteby market valueof increase inthe a (decrease)/ would resultin change inputs (decrease) in increase/ 50 bps P90,838,042 the noteby market valueof increase inthe a (decrease)/ would resultin change inputs (decrease) in increase/ 50 bps Value* the InputtoFair Sensitivity of Significant Description Valuation Unobservable Techniques Inputs Range of Estimates Valuation Techniques Building Replaceable Fixed Replacement cost 2.8 million-26.5 Market Data Approach A process of comparing the subject property being improvements Asset Valuation Estimated number of million appraised to similar comparable properties recently sold or Approach components being offered for sale. 315-723 components Corner influence Bounded by two (2) roads. Machineries Replaceable Fixed Replacement cost 3,200-8.6 million and equipment Asset Valuation Estimated number of Approach components 465-1,162 components 35. Notes to Consolidated Statements of Cash Flows Investment properties: Non-cash Investing Activities Land Market Data Price per square 800- 100,000 Approach meter, a. As of December 31, 2013, due from related parties include accrued size, location, shape, interest receivable amounting to P24.5 million. time element and corner influence b. As of December 31, 2015 and 2014, unpaid additions to property, Land and building Market Data New Reproduction Approach and Cost plant and equipment amounted to P37.8 million and P65.4 million, Replacement Cost respectively, which is included as part of “Accounts payable and Approach accrued expenses”.

Significant favorable (unfavorable) adjustments to the aforementioned c. In 2015, the Group reclassified cost of land, which was previously factors based on the professional judgment of the independent recognized as real estate inventory amounting to P1,106.9 million, to appraisers would increase (decrease) the fair value of land. Significant investment property in view of management’s plan to develop thereon increases (decreases) in the current replacement cost would result additional buildings to be held for lease. in significantly higher (lower) appraised values whereas significant increase (decrease) in the remaining useful life of the property, plant d. In 2015, the Group transferred investment properties with a carrying and equipment over their total useful life would result in significantly value of P2,000.0 million and P1,200.0 million to inventories, respectively. higher (lower) appraised values. e. In 2015, the Group classified PNB LII as disposal group held for sale Description of the valuation techniques and significant unobservable and as discontinued operations and classified assets, liabilities and inputs used in the valuation of the Group’s property, plant and equipment equity and reserves of PNB LII amounting to P23,526.8 million, and investment properties are as follows: P21,452.6 million and P593.2 million, respectively.

Description f. Construction costs of building intended for leasing amounting to Valuation Techniques P105.5 million under real estate inventory, which were still under construction as of December 31, 2015, were transferred to investment Market Data Approach A process of comparing the subject property being appraised to similar comparable properties recently sold or properties. being offered for sale. Replaceable Fixed Asset This method requires an analysis of the buildings and other g. On December 4, 2012, the Group assumed certain receivables Valuation Approach land improvements by breaking them down into major components. Bills of quantities for each component using of Tangent from various holding companies amounting to P9.9 billion, the appropriate basic unit are prepared and related to thereby increasing its payable to Tangent by the same amount. the unit cost for each component developed on the basis of current costs of materials, labor, plant and equipment prevailing in the locality to arrive at the direct costs of Non-cash Financing Activities the components. Accrued depreciation was based on the a. In July 2013, all the existing advances to Tangent amounting to observed condition. P11.0 billion were offset with the existing advances from the Tangent. Replacement Cost Approach It is an estimate of the investment required to duplicate the property in its present condition. It is reached by estimating the value of the building “as if new” and then deducting the b. As of December 31, 2015 and 2014, accrued interest payable depreciated cost. Fundamental to the Cost Approach is the amounted to P2,071 million and P22.9 million, respectively. Finance estimate of Reproduction Cost New of the improvements. costs and cost of hauling services include amortization of bond issue Reproduction Cost New The cost to create a virtual replica of the existing structure, employing the same design and similar building materials. costs and unamortized transaction cost of subordinates debt amounting to P18.0 million and P16.8 million in 2015 and P15.6 million and P15.8 million Size Size of lot in terms of area. Evaluate if the lot size of property or comparable conforms to the average cut of in 2014, respectively. the lots in the area and estimate the impact of lot size differences on land value. c. As discussed in Note 30, LTG issued additional common shares to Shape Particular form or configuration of the lot. A highly Tangent amounting to P5.4 billion upon conversion of its irregular shape limits the usable area whereas an ideal lot configuration maximizes the usable area of the lot which is deposit for future stock subscription of P1.6 billion resulting associated in designing an improvement which conforms in an increase in additional paid in capital of P1.2 billion. with the highest and best use of the property. Transactions costs incurred for the share issuance in 2012 Location Location of comparative properties whether on a main road, or secondary road. Road width could also be a amounted to P67.5 million which are deducted from additional consideration if data is available. As a rule, properties paid in capital. located along a main road are superior to properties located along a secondary road.

Time Element “An adjustment for market conditions is made if general property values have appreciated or depreciated since the 36. Capital Management transaction dates due to inflation or deflation or a change in investors’ perceptions of the market over time”. In which case, the current data is superior to historic data. The main thrust of the Group’s capital management policy is to ensure Discount Generally, asking prices in ads posted for sale are that the Group complies with externally imposed capital requirements, negotiable. Discount is the amount the seller or developer maintains a good credit standing and has a sound capital ratio to be is willing to deduct from the posted selling price if the able to support its business and maximize the value of its shareholders transaction will be in cash or equivalent. 119 118

ANNUAL REPORT 2015 Debt-to-equity ratio Debt ratio Total liabilitiesandequity Total equity Total liabilities not meet the eligibility criteria for capital instruments under the revised instrumentsundertherevised not meettheeligibilitycriteriaforcapital Further, instruments as of December 31, existing capital 2010 which do alltimes. shallbemaintainedat these ratios existing requirementfor Total 10%and CARremainsunchangedat bufferof2.5%comprisedCET1capital. conservation The BSP’s of 6.0% and Tierof 7.5%. ratio 1 capital It also introduces a capital The CircularsetsoutaminimumCommonEquity Tier 1(CET1)ratio Basel IIIstandards. 1,The circulariseffectiveonJanuary 2014. banks and quasi-banks,well as their subsidiary in accordance with the disclosure requirementsforuniversalbanksandcommercial banks, as adequacycapital and frameworkparticularlyontheminimumcapital provides theimplementingguidelinesonrevisedrisk-based Requirements,Implementing GuidelinesonMinimumCapital which 15,On January 2013, theBSPissuedCircularNo. 781, BaselIII requirementthroughout theyear.with allexternallyimposedcapital complied have subsidiaries/operations PNB anditsindividuallyregulated the MBofBSP. covered bymargindepositsandothernon-riskitemsdetermined of deposits, loansoracceptancesunderlettersofcredittotheextent on hand, duefromBSP, loanscoveredbyhold-outonorassignment BSP regulations. Risk-weightedassets consistoftotalassetslesscash andrisk-weightedassetsarecomputedbasedon Qualifying capital financial allied undertakings but excluding insurance companies). in basis(parentbankandsubsidiariesengaged and consolidated be lessthan10.00%forbothsolobasis(headofficeandbranches) torisk-weightedassets, ofqualifyingcapital percentage shouldnot In addition, ofabank, ratio therisk-basedcapital expressed asa from PFRSinsomerespects. policies,which is determined on the basis of regulatory which differ PNB’s networth)reportedtotheBSP,“unimpaired capital” (regulatory is based on the amount of requirements and ratios with regulatory Under existingBSPregulations, ofPNB’s thedetermination compliance fortheBankingSegment QualifyingCapital Regulatory oftheGroup: ratios theleverage shows The tablebelow balancesheets. intheconsolidated pertains tototalequityasshown equity). Included asdebtaretheGroup’s totalliabilitieswhileequity (totaldebt/total debt/total equityandtotaldebt)debt-to-equityratio adequacycapital ratios, by using leverage specifically, (total debt ratio sheets asitscapital. andtheGroup’sThe Groupmonitorsitsuseofcapital balance The Groupconsidersitstotalequityreflectedintheconsolidated or processesin2015and2014. issue newshares. Nochangesweremadeintheobjectives, policies dividend paymenttoshareholders, toshareholdersor returncapital conditions. To structure, maintainoradjustcapital theGroupmayadjust structure and makes adjustment to it, in light of changes in economic requirements.earnings andoperating itscapital The Groupmanages The Group’s dividenddeclarationof isdependentontheavailability and covenants in 2015and2014. comply with certain loanagreements equity. to The Groupisalsorequiredtomaintaindebt-to-equityratios (In Thousands, exceptratios) P749,552,502 P579,794,407 169,758,095 3.42:1 0.77:1 2015 P696,833,208 P534,111,014 162,722,194 3.28:1 0.76:1 2014 operations. fromthe continued separately thediscontinuedoperations to show beenre-presentedcomprehensive incomein2014and 2013 have in 2015, of income and statement consolidated the comparative disclosure. With PNBLIIbeingclassified asadiscontinuedoperation previously presented in the ‘Others’ section of the business segment life insurancebusinessuntilDecember21, 2015. PNBLIIwas The businessofPNBLIIrepresentedtheentiretyPNB’s balancesheet.consolidated of disposalgroupclassified asheldforsale’, respectively, inthe2015 to ‘Assets ofdisposalgroupclassified asheldforsale’and ‘Liabilities a result, theGroupreclassified alltheassetsandliabilitiesofPNBLII operations, tobeclassified fromcontinuingoperations. separately As requires assetsandliabilitiesofPNBLII, togetherwiththeresultsof PFRS 5, Non-current , Assets HeldforSaleandDiscontinuedOperations disposal groupheldforsaleandasdiscontinuedoperation. completed by2016. As ofDecember31, 2015, PNBLIIwasclassified as The acquisition of the shares of PNB LII by Allianz SE is expected to be • whichwillprovide A 15-yeardistributionagreement Allianz an • underthenameof willoperate The newjointventurecompany • Allianz SEwillacquire12,750sharesrepresenting51.00% approvals: subject toregulatory partnership with arrangements,Allianz SEunderthefollowing On December21, 2015, PNBenteredintoa15-yearexclusive forSale 37. AssetsandLiabilitiesofDisposalGroupClassifiedasHeld ICAAP.submission ofupdated 1 andPillar2risks. The Bankcomplieswiththerequiredannual identifiedPillar processforassessingandmanaging collaborative involvesa frameworkthat Bank hasinplaceariskmanagement withriskmanagement. management planning/strategic capital The of itsbusiness. The ICAAPprocesshighlightsclose of integration itmayencounterinthecourse risksthat will alsocoverallmaterial willnotonlymeettheBSPCARrequirementbut levelthat capital profile. InlinewithitsICAAPprinciples, theBankshallmaintaina toitsrisk tomeetitsbusinessobjectiveandcommensurate capital levelandqualityof alltimesanappropriate the Bankmaintainsat toeffectivelyruntheBank’sabout how byensuringthat operations ICAAPisbeyondcompliance, recognized that Management i.e., it is live ICAAPDocumentfor2011to2013. However, theBODand In compliancewithBSPCircular639, PNB(theBank)hasadoptedits Internal Capital Adequacy Assessment Process (ICAAP) Implementation aremaintainedonanongoingbasis.level andqualityofcapital theappropriate requirements on the banking segment to ensure that theimpactofforegoing The Grouphastakenintoconsideration ofqualifyingcapital. adjustments inthecalculation requirements,minimum capital thisCircularalsorequiresvariousregulatory untilDecember31,as qualifyingcapital 2015. Inadditiontochangesin 2011 andbeforetheeffectivityofBSPCircularNo. 781, shallberecognized particularly onHybrid Tier 1andLower Tier 2capitals), 1, startingJanuary Nos. 709and716(thecircularsamendingthedefinitionofqualifyingcapital effectivity ofBaselIII. instrumentsissuedunderBSPCircular Capital uponthe frameworkshallnolongerberecognizedascapital capital exclusive ofPNB. accesstothemorethan660branchesnationwide “Allianz PNBLifeInsurance, Inc.”; new jointventurecompany; controloverthe management stockholdings ofPNBLIIandwillhave

The results of operation of PNB LII are presented below: Assets Other receivables Accounts receivable 277,479 Years Ended December 31 Accrued interest receivable 101,925 2015 2014 2013 Sales contract receivable 57,806 (In Thousands) Property and equipment – net 29,546 Interest Income on Other assets 44,719 Loans and receivables P20,343 P18,707 P13,880 Assets of disposal group classified as held for sale P23,526,757 Trading and investment securities 443,116 396,586 269,429 Deposits with banks and others 3,504 324 10,072 Liabilities 466,963 415,617 293,381 Financial liabilities at fair value through profit or loss Interest Expense on Segregated fund liabilities P13,725,321 Bills payable and other borrowings – – 5,417 Accrued taxes, interest and other expenses 161,817 Net Interest Income 466,963 415,617 287,964 Other liabilities Net Service Fees and Commission Insurance contract liabilities 6,837,144 Expense (281,639) (335,635) (329,249) Accounts payable 74,303 Net insurance premiums P1,716,308 P1,604,500 P1,444,719 Retirement benefit liability 21,822 Net insurance benefits and claims (1,290,439) (1,191,359) (1,032,953) Withholding taxes payable 10,139 (Forward) Miscellaneous liabilities 622,075 Net Insurance premiums 425,869 413,141 411,766 Liabilities of disposal group classified as held for sale P21,452,621 Other Income (Charges) Reserves Trading and investment securities gains Net unrealized gain on AFS investments P617,649 - net 20,874 14,661 1,750 Remeasurement losses on retirement plan (24,412) Foreign exchange gains (losses) - net 11,806 (1,999) 5,317 Reserves of disposal group classified as held for sale P593,237 Miscellaneous 149,061 101,111 100,317 Total Operating Income 792,934 606,896 477,865 Attributable to: Operating Expenses Equity holders of the Company P335,000 Compensation and fringe benefits 223,322 166,757 114,799 Non-controlling interests 258,237 Taxes and licenses 39,570 36,544 26,666 P593,237 Provision for impairment, credit and other losses 32,765 – – Depreciation and amortization 10,704 14,039 15,147 Occupancy and equipment-related costs 9,764 9,196 13,101 Miscellaneous 74,573 73,025 81,029 38. Commitments, Provision and Contingencies and Other Matters Total Operating Expenses 390,698 299,561 250,742 Income from Discontinued Operations Commitments Before Income Tax 402,236 307,335 227,123 Operating lease commitments - the Group as lessor Provision for income tax The Group entered into lease agreements with third parties covering its Regular 5,839 5,083 3,584 investment property portfolio. These leases generally provide for either (a) Final 38,466 38,088 26,859 44,305 43,171 30,443 fixed monthly rent, or (b) minimum rent or a certain percentage of gross Net Income from Discontinued Operations P357,931 P264,164 P196,680 revenues, whichever is higher. The Group records rental income on a Attributable to: straight-line basis over less noncancellable lease term. Any difference Equity holders of the Company P161,699 P119,339 P88,852 between the calculated rental income and amount actually received is Non-controlling interests 196,232 144,825 107,828 recognized as “Deferred rent” (see Note 8). P357,931 P264,164 P196,680 The Group has security deposits and advance rentals which are Earnings per share attributable to equity holders of the Company from presented under “Other noncurrent liabilities.” Security deposits pertain discontinued operations are computed as follows: to the amounts paid by the tenants at the inception of the lease which is refundable at the end of the lease term. Advance rentals pertain to 2015 2014 2013 deposits from tenants which will be applied against receivables either at a) Net income attributable to equity holders of the banking segment P161,699 P119,339 P88,852 the beginning or at the end of lease term depending on the lease contract. b) Weighted average number of common Security deposits and advance rentals amounted to P387.6 million shares for basic earnings per share 10,821,389 10,821,389 10,208,056 and P145.6 million as of December 31, 2015 and P349.9 million and c) Basic earnings per share (a/b) P0.02 P0.01 P0.01 P33.5 million, as of December 31, 2014, respectively. The net cash flows directly associated with disposal group follow: Future minimum rental receivables under noncancellable operating leases as of December 31 are as follows: 2015 2014 2013 (In Thousands) 2015 2014 Net cash provided by operating activities P1,210,588 P1,535,951 P101,961 (In Thousands) Net cash used in investing activities (903,161) (1,395,508) (8,030) Within one year P1,179,758 P981,662 The major classes of assets and liabilities of PNB LII classified as After one year but not more than five years 2,508,002 2,393,116 disposal group held for sale as of December 31, 2015 are as follows: More than five years 264,551 315,105 P3,952,311 P3,689,883

Assets Cash and other cash items P642,544 Operating lease commitments - the Group as lessee Financial assets at fair value through profit or loss The future aggregate minimum lease payments under several operating Segregated fund assets 13,634,687 leases of the Group are as follows: AFS investments Government securities 2,485,902 2015 2014 Private debt securities 3,604,065 (In Thousands) Equity securities 1,378,686 Within one year P487,388 P772,888 HTM investments Within two to five years 856,828 1,651,825 Government securities 1,269,398 More than five years 1,526,715 1,555,153 (Forward) P2,870,931 P3,979,866 120 121

ANNUAL REPORT 2015 Present valueofminimumleasepayments Less amountsrepresentingfinancecharges Total More thanfiveyears Beyond oneyearbutnotmorethanfive years Within oneyear were inarrears, executed invokingunderaninstallmentagreement pre-closing dispute the assertions that banks and the Liquidator taxes NSC’s Plant Assets freefrom allliensandencumbrances. However, the 14, 2004)dueontheNSCPlant Assets andtodeliverthemtitles duty tosettlepre-closing taxes(taxesdueasofOctober realestate breacheda the consortiumofbanks(thebanks)andLiquidator claimed andasuspensionofpaymentsonthegroundthat damages International Centre(“SIAC”).Arbitration Mainly, theSPVcompanies the SPVcompaniesfiledaNoticeof withtheSingapore Arbitration inthePhilippinecourtsforinjunctiverelief,denial oftheirapplication provisions ofRANo. 9182. OnOctober10, 2008, simultaneous to the receivable ofP5.3billionfromNSCtoSPVcompaniesunderthe As discussedinNote8, in2004, PNBsoldtheoutstandingloans (NSC)Loan Steel Corporation National payment thereof. might potentially bar the between PNB and Ever Gotesco Group that the insuranceclaims ofPNB, aftertheCourtcleared thelegalissues by fire on March 19, 2012, which justified the payment by PNB Gen of was insured with PNB Gen.mortgagee) The Insured Property was razed .certain creditaccommodations The insurableinterestofPNB(as and EverEmporium, Inc. (collectively ‘Ever GotescoGroup’)tosecure toPNBbyGotescoInvestment,Property’) whichwasmortgaged Inc. PNB from PNB Gen involving the Ever Gotesco Grand Central (‘Insured ‘Other income(charges)’arisingfromthefireinsurance claims of In 2015, PNBrecognizedincomeamountingtoP716.2millionunder Claim fromPNBGen on thefinancialstatements. adverse effect a material are not specifically provided for will not have lossesarisingfromthesecontingencieswhich any counsel believethat Contingent Liabilitiesand Assets. The Groupanditslegal Such exemption from disclosures under PAS is allowed 37, Provisions, Group’s positionwiththeotherpartieswhomitisindispute. suchspecific disclosuresare made because any wouldprejudice the unsettled. Nospecificdisclosures onsuchunsettledassetsand claims includingfinancial statements severalsuitsand claims whichremain arenotpresentedinthe and incurscertaincontingentliabilitiesthat In thenormalcourseofbusiness, theGroupmakesvariouscommitments Provisions andContingencies capital. constitutes20.00%ofitsregulatory surplusreserve related trust, businessuntilsuch andotherfiduciary investmentmanagement to 10.00%ofthenetincomerealizedinprecedingyearsfromits and 9.5millionin2015, 2014and2013, respectively, whichcorrespond theamountsof16.6million,surplus toreserves 13.6million In compliancewithexistingbankingregulations, PNBtransferred from with trustregulations. December 31, 2015and2014aredepositedwiththeBSPincompliance and billion amounting toP0.7billion, (included P78.7 under ‘AFS investments’) as of of value a connection withthetrustfunctionsofPNB, governmentsecurities at carried were trust P65.8 billionasofDecember31, 2015and2014, respectively. In in held assets Such offinancialpositionsincethesearenotassetsPNB.statements its customersarenotincluded intheaccompanying for capacities agency or Securities andotherpropertiesheldbyPNBinfiduciary Trust Operations Future minimumleasereceivablesunderfinanceleasesareasfollows: P3,624,585 P1,654,119 3,686,791 1,984,772 62,206 47,900 2015 P2,405,420 P1,358,383 2,795,438 1,378,555 390,018 58,500 2014 sums ofmoneybywaydamages. rendered the Bank Consortium/Secured Creditors not liable for certain portionsofthe settingasidethemonetary Arbitral Award that i.e., a DecisionupholdinginparttheearlierofHighCourt, High Court. OnMarch31, 2015, Court of theSingapore issued Appeal Arbitral Tribunal. theDecisionofSingapore GlobalSteelappealed HighCourtsetasideinitsentiretythe The Singapore Award ofthe of aNoticeof Appeal Appeal. 26, OnJanuary 2015, thecasewasheard. September 1, 2014, Court theSPVcompaniesfiledbeforeSingapore of thebankconsortiumsettingaside Arbitral Award initsentirety. On On July31, 2014, HighCourtissuedaJudgmentinfavor theSingapore Panel, whichPetition ispendingtodate. Court aPetition toSet Aside thePartial Award renderedbythe Arbitration On July9, 2012, High thebankconsortiumfiledwithSingapore for thesame. the claim, provision reserve setasidetheappropriate andhasalready members oftheconsortium, holdsaforty-onepercent(41%)interestin oftheSPVcompanies. infavor the NSCLiquidator PNB, oneofthe the plantassetsundernameofNSCbybankconsortium and as paymentofacertainsummoneyandtransferclean titleson a Partial oftheSPVcompanies,Award in favor including suchreliefs the Panel.Arbitration OnMay9, 2012, the PanelArbitration issued Agreement, andsuspensionofpaymentswereheardbefore damages Consequently, themainissuesforalleged breach ofthe Asset Purchase theinjunctionorder,to vary norulingwasmadebythe Panel.Arbitration HighCourt. of theinjunctionissuedbySingapore Ontheapplication Panel PNB’sArbitration issuedarulingdenying foradischarge application theinjunction. to discharge orvary application On July7, 2010, the In 2010,April the Arbitral Panel wasconstituted. PNBfiledthereinan resort tothesamereliefsbefore Panel.Arbitration was alsodeniedonSeptember11, 2009, withoutprejudice, however, to totheCourtof of Credit)waselevated butthesame ofSingapore Appeals Court. (theP1.0billionStandbyLetter The denialofthesecondvariation wasdeniedonMarch5, but thisapplication High 2009bytheSingapore they likewise undertook to provide under the Asset Purchase Agreement, companies toissueanotherStandbyLetterofCreditP1.0billionwhich 26,On January 2009, foranOrdertocompeltheSPV PNBapplied proceedings. fromthearbitration an award set-offpending theamountshallnotbesubjecttoany the conditionthat remitted companies SPV undertook toprovideunderthe Asset Purchase Agreement, subjectto the court, High Singapore P750.0 millioncashinplaceoftheStandbyLetterCreditwhichthey the of order an and Thereafter, oftheinjunction byPNBforavariation uponapplication theSIACissettled. proceedingat arbitration SPV companiesindefaultanddeclaring allinstallmentsdueuntilthe Shareholders, jointlyandseverally, substantiallyfromdeclaring the restrained theNSCLiquidator, theNSCSecuredCreditorsand October 14, 2008, HighCourtgrantedthepetitionand theSingapore proceedingsunderSIACwillnotberenderedmoot.the arbitration On NSC Liquidator, NSCSecuredCreditors, andNSCStockholderssothat measure, the apetitionforinjunctivereliefagainst as apreservatory before the arbitral panel was constituted, the SPV companies filed, On October13, 2008, but afterthecommencementofarbitration basisonDecember18, beenpaidinaccelerated have 2008. Consequently, allpre-closing taxesdueontheplantassets realestate thepost-closingupdating taxes(taxesdueafterOctober14, 2004). taxes,estate whiletheSPV companiesassumedtheresponsibilityof responsibility ofsettlingandpayingthePlant Assets’ pre-closing real to selltheplantassetsSPVcompanies, assumed theLiquidator andtheCityofIligan.between theLiquidator As partoftheagreement Movements of provision for legal claims included in “Other liabilities” whichever is earlier but in no case earlier than the date of registration. in the consolidated balance sheets for the Group are as follows (see The ITH shall be limited only to the revenue generated from this project. Note 20): Revenue with selling price exceeding P3.0 million shall not be covered 2015 2014 by ITH. Likewise, on September 23, 2008, two other projects of the (In Thousands) Group namely, OAP and EEL, were registered with the BOI as a new Balance at beginning of year P1,640,648 P1,582,081 developer of low-cost housing project on a Non-Pioneer status. These Provisions (reversals) during the year (Note 26) (741,911) 58,567 two projects shall enjoy the same benefits as BP. Balance at end of year P898,737 P1,640,648 Distilled Spirits’ Clean Development Mechanism Project (CDM) Excise Tax Refund Claim On June 30, 2006, the DENR approved the implementation of a The new excise tax law or RA 10351 became effective on January 1, 2013, greenhouse gas (GHG) reducing project at the ADI’s plant in Lian, and increased the excise tax rates of, among others, distilled spirits. Batangas. The project is a joint undertaking between TDI (through ADI) Another change that was brought in by the new law is the shift in the and Mitsubishi Corporation (MC) and involves the construction of a waste tax burden of distilled spirits from raw materials to the finished product. water treatment digestor and methane gas collector in accordance with the CDM of the 1997 Kyoto Protocol. To implement the said law, the Secretary of Finance issued Revenue Regulations No. 17-2012 (RR 17-2012), which, in one of its transitory In accordance with Certified Emission Reductions Purchase Agreement provisions, disallowed the tax crediting of the excise taxes that were (CERPA), ADI agreed to sell and MC to purchase any and all the CERs already paid under the old law on the raw materials inventory by end of generated by the Project up to 480,000 CERs. As of December 31, 2009, the year 2012 or by the effectivity of RA 10351 in favor of the excise taxes MC made US$1.6 million advance payment or equivalent to P70.9 million. due on the finished goods inventory. ADI completed the construction and installation of the anaerobic digester and mixing tanks which were put into operation in 2009. The Commissioner of Internal Revenue issued on January 9, 2013 Revenue Memorandum Circular (RMC) No. 3-2013 This RMC sought In August 2010, initial validation of CERs was made; however, as of to clarify further certain provisions of RR No. 17-2012 but in effect March 4, 2013, no certification on the generated CERs has been issued extended the imposition of the excise tax on both the (1) ethyl alcohol yet. Since the first CERs generation period has ended on December 31, 2012, as raw materials in the production of compounded liquors and (2) the ADI’s obligation to operate the project regardless of whether there were manufactured finished product. Per the RMC, both ethyl alcohol and CERs certified was deemed fulfilled, thus, ADI recognized the deposit for compounded liquor are considered as distinct distilled spirits products CERs amounting to P70.9 million as income in 2012. and are thus separate taxable items under the new law. This interpretation of the law was however modified with the issuance of RMC No. 18-2013. On October 27, 2014, ADI and Mistubishi agreed to terminate the CDM The new RMC allowed the non-payment of excise tax on ethyl alcohol project due to unfavorable market for CERs. that were purchased after the issuance of RMC No. 3-2013 to be used as raw materials in the manufacture of compounded liquors provided Effluent Supply Agreement certain requirements such as posting of surety bonds are complied with. On September 26, 2013, ADI and Aseagas Corporation (Aseagas) entered RMC No. 18-2013, however, still maintained that taxes previously paid into an effluent (wastewater) supply agreement wherein ADI will supply on the raw materials, i.e., ethyl alcohol/ethanol inventory, at the time of effluent to Aseagas to be used in the generation of liquid bio-methane for the effectivity of the new excise tax law are still not subject to refund/tax a period of 20 years (delivery period) from the date Aseagas notifies ADI credit to the manufacturers. that the liquid bio-methane plant to be constructed by Aseagas becomes ready for commercial operations. The delivery period is renewable for Under RR No. 17-2012, the amount of excise tax that was disallowed another ten (10) years upon mutual agreement of both parties. As of for tax credit was P725.8 million (included under “Other current assets”). April 12, 2016, the liquid bio-methane plant is still under construction. Said amount represented taxes paid previously on raw materials and were not allowed to be deducted from the excise taxes that became Distilled Spirits’ Solar Energy Project due on the finished goods as taxed under the new law. TDI is contesting On January 19, 2015, ADI started the construction of the first two- the disallowance of the tax credit and is undertaking appropriate legal megawatt solar power plant in Batangas. As of December 31, 2015, the measures to obtain a favorable outcome. construction of the solar power plant has been substantially completed.

TDI has paid a total of P45.9 million (included under “Other current assets”) in excise taxes for the raw materials that were purchased/imported for 39. Events After Reporting Date purposes of compounding during the subsistence of RMC No. 3-2013. TDI also would claim this amount on the basis that the RMC was issued without On January 21, 2016, the Group entered into an agreement with Ayala Land, basis and beyond the authority granted by law to the administrative agency. Inc. (ALI) to jointly develop a project along C5 corridor. The project is envisioned to be a township development that spans portion of Pasig City and Quezon City. Other Matters Property development tax incentives On February 18, 2016, the Group purchased 131,863,677 shares of VMC a. The Group’s projects namely, Eton Cyberpod Corinthian and Eton at a price of P5.0 per share. This resulted an increase in the Group’s Centris, were registered with PEZA on August 27, 2008 and September effective ownership in VMC to 30.12%. 19, 2008, respectively, as non-pioneer “ecozone developer/operator”. The locations are created and designated as Information Technology Park. b. The property development segment has three Board of Investment (BOI)-registered projects namely, Belton Place (BP), Eton Emerald Lofts (EEL) and One Archers Place (OAP). BP is registered with BOI as a new developer of low-cost housing project on a Non-Pioneer status under the Omnibus Investments Code of 1987 (Executive Order No. 226) on September 15, 2008. This registration entitles the Group to four years ITH from November 2008 or actual commercial operations or selling, 123 122

ANNUAL REPORT 2015 President &ChiefOperatingOfficer MICHAEL G.TAN BOARD OFDIRECTORS Advisor JOHNIP G.CUA BOARD OFADVISORS Chief FinanceOfficer OLIVES JOSE GABRIEL D. EXECUTIVE OFFICERS Director /Treasurer JUANITA T. TAN LEE Deputy ChiefFinanceOfficer NESTOR C.MENDONES Assistant CorporateSecretary Atty. MARIVICT. MOYA Chairman &ChiefExecutiveOfficer DR. LUCIOC.TAN Chief LegalCounsel Atty. ERWINC.GO Corporate Secretary PESAYCO Atty. MA.CECILIAL. ANTONINO L. ALINDOGAN, JR. JOSEPH T. CHUA PETER Y. ONG WILFRIDO E. SANCHEZ Independent Director Director Director Independent Director

ROBIN C. SY WASHINGTON Z. SYCIP CARMEN K. TAN HARRY C.TAN Independent Director Director Director Director

LUCIO K. TAN, JR. FLORENCIA G.TARRIELA Director Independent Director 124

ANNUAL REPORT 2015 Makati City 2nd Floor Allied Bank Center, 6754 Ayala Avenue, Lucio Tan Groupof Companies Office of the Legal Counsel Atty. Erwin C.Go Legal Counsel Website: www.tanduay.com Facsimile: +63 2 816 5101 Tel.: +632816 5523 Sala, Cabuyao ,Laguna Head Office: Km. 43 NationalHighway, Barangay Tanduay Distillers,Inc. www.pnb.com.ph Facsimile: +63 2 573 4580 Tel: +63 2 573 8888; Pasay City President DiosdadoMacapagalBoulevard, Head Office:PNBFinancialCenter Philippine National Bank Website: www.pmi.com Facsimile: +63 28898004 Tel: +63 2 886 5901; City 6766 Ayala Avenue cornerPaseo de Roxas, Makati Head Office: 27thFloor Tower 1 TheEnterprise Center PMFTC Inc. Website: www.eton.com.ph Facsimile: +63 2 887 1549 Tel: +63 2 845 3866; Ayala Avenue, MakatiCity Head Office:8thFloorAlliedBankCenter, 6754 Eton PropertiesPhilippines,Inc. Website: www.asiabrewery.com.ph Facsimile: +6328104041 Tel: +6328163421to40; Ayala Avenue, MakatiCity Head Office:6thFloorAlliedBankCenter, 6754 Asia Brewery,Inc. Business Groups: Website: www.ltg.com.ph Facsimile: +6328698336 Tel: +6328081266; Bonifacio GlobalCity, Taguig City Rizal Drive, CrescentPark West 5 11th FloorUnit3BenchTower, 30thStreetcorner LT Group,Inc. INFORMATION INVESTOR or +63 2 816 5131;

Macapagal Blvd., Pasay City Address: 3/F PNB Financial Center, PresidentDiosdado or Ms. Emylyn P. Audemard Attention: Ms. JoannaMarieL.Aviles (Corporate Services) Philippine National Bank-TrustBanking Group of address, please write or call: status, lostor damaged stockcertificates orchange For matters concerning dividendpayments, account Stockholder ServicesandAssistance 6760 Ayala Avenue, MakatiCity SyCip Gorres Velayo & Co. External Auditor Email: [email protected] or [email protected] Tel: +63 2 8081266 LT Group, Inc. Ms. Annabelle Arceo Please write or call: analysts and the financial community. LTG welcomes inquiries from institutional investors, Investor Relations com.ph or [email protected] Email: [email protected] or audemardep@pnb. Tel: +63 2 5263131or +632 891 6040local2307

Annual Report 2015

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