Corporate Profile China Banking Corporation (China Bank), stock symbol CHIB, commenced business on August 16, 1920 as the first privately-owned local commercial bank in the Philippines catering initially to the needs of Chinese-Filipino businessmen. It played a key role in post- World War II reconstruction and economic recovery through its support to businesses and entrepreneurs in critical industries. China Bank was listed on the local stock exchange by 1947, and acquired its universal banking license in 1991. The Bank serves the corporate, commercial, middle, and retail markets with a wide range of domestic and international banking services. It is one of the largest universal banks in the country in terms of assets, capital base, and market value. 20 12ANNUAL REPORT About the Cover At China Bank, we have always been driven by our commitment to be a catalyst of w e a l t h c r e a ti o n , d e v e l o p i n g o u r p r o d u c t s a n d s e r v i c e s , a n d s h a p i n g o u r o peratins around the needs of our customers, shareholders, and the communities we serve. In 2012, we continued to live up to this commitment, adapting to the changing times and approaching challenges and opportunities confidently while remaining true to our mission—“your success is our business.” Corporate Profile China Banking Corporation (China Bank), stock symbol CHIB, commenced business on August 16, 1920 as the first privately-owned local commercial bank in the Philippines catering initially to the needs of Chinese-Filipino businessmen. It played a key role in post- World War II reconstruction and economic recovery through its support to businesses and entrepreneurs in critical industries. China Bank was listed on the local stock exchange by 1947, and acquired its universal banking license in 1991. The Bank serves the corporate, commercial, middle, and retail markets with a wide range of domestic and international banking services. It is one of the largest universal banks in the country in terms of assets, capital base, and market value. Vision Drawing strength from our rich history, we will be the best, most admired and innovative financial services institution, partnering with our customers, employees, and shareholders in wealth creation. Mission We will be a leading provider of quality services consistently delivered to institutions, entrepreneurs, and individuals, here and abroad, to meet their financial needs and exceed their rising expectations. We will be a primary catalyst in the creation of wealth for our customers, driven by a desire to help them succeed, through a highly motivated team of competent and empowered professionals, guided by in-depth knowledge of their needs and supported by leading-edge technology. We will maintain the highest ethical standards, sense of responsibility and fairness with respect to our customers, employees, shareholders, and the communities we serve. Core Values • Integrity • High Performance Standards • Commitment to Quality • Customer Service Focus • Concern For People • Efficiency • Resourcefulness/Initiative Contents 2 Financial Highlights 4 Letter to Stockholders 9 Operating Highlights 23 Corporate Social Responsibility 25 Corporate Governance 40 Board of Directors 46 Management Committee 48 China Bank and Subsidiary Senior Officers 50 Management Directory 52 Financial Statements 138 Branches 149 Off-Branch ATM Locations 153 Business Centers 154 Subsidiaries and Affiliates 158 Products and Services Financial Highlights 323,645 6 – – 20 350 – 200 – 190,145 5,033 5,008 5,003 271,977 300 – 262,213 5 – 257,379 15.37% 145,238 233,865 14.49% –15 150 – 4,102 13.72% 250 – 216,133 213,041 12.39% 4 – 208,376 193,290 117,185 110,839 173,779 110,219 11.98% 200 – 2,917 3 – – 10 100 – 75,547 72,472 150 – 66,431 61,191 2 – 56,065 100 – – 5 50 – 1 – 50 – 0 – – 0 0 – 0 – 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Net Income Return on Equity Total Resources Total Deposits Loans Securities In Million Pesos In Percent In Million Pesos In Million Pesos In Million Pesos In Million Pesos 45 – – 20 1.8 – 75 – 42,291 70,863 39,289 40 – 1.6 – 1,541 35,453 1,415 16.34% 16.26% 35 – 16.00% 1.4 – –15 1,287 30,197 13.49% 12.80% 1,179 1,170 30 – 1.2 – 1,156 50 – 25,706 1,072 1,063 46,959 975 25 – 1.0 – 46,551 886 36,078 – 10 35,014 20 – 0.8 – 15 – 0.6 – 25 – – 5 10 – 0.4 – 5 – 0.2 – 0 – – 0 0 – 0 – 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Stockholders’ Equity Total CAR Cash Dividends Paid Stock Dividends Paid Market Capitalization In Million Pesos In Percent In Million Pesos In Million Pesos In Million Pesos LOAN PORTFOLIO BY 2011 INDUSTRY CLASSIFICATION 2012 18.73% Real Estate, Renting & Business Services 25.99% 17.46% Manufacturing 17.24% 15.09% Wholesale & Retail Trade 14.69% 3.47% Financial Intermediaries 12.51% 7.76% Transportation, Storage & Communication 7.53% 6.70% Electricity, Gas & Water 5.68% 2.96% Agriculture 2.51% 1.39% Construction 1.99% 1.13% Mining & Quarrying 0.78% 25.31% Others 11.08% 2 Consolidated Performance Highlights 2010 2011 2012 For the Year (In Pesos) Gross Revenues 17,899,646,723 16,868,396,443 19,048,331,525 Gross Expenses 12,895,825,097 11,859,509,434 14,014,384,207 Net Interest Income 8,632,967,105 8,551,739,056 8,062,340,832 Non-Interest Income 4,686,355,072 4,191,798,474 5,897,461,844 Provision for Impairment & Credit Losses 495,830,652 155,097,500 236,756,182 Operating Expenses 7,128,871,373 7,032,144,807 8,266,810,560 Net Income 5,003,821,626 5,008,887,009 5,033,947,318 At Year End (In Pesos) Total Resources 257,379,313,993 262,213,686,304 323,645,464,402 Loan Portfolio(Net) 117,185,910,049 145,238,662,573 190,145,335,762 Investment Securities 75,547,613,507 61,191,602,901 66,431,281,463 Total Deposits 213,041,609,453 216,133,713,301 271,977,239,870 Stockholders’ Equity 35,453,284,587 39,289,324,696 42,291,394,432 Number of Branches 269 293 316 Number of ATMs 431 475 511 Number of Employees 4,325 4,633 5,198 Key Performance Indicators (in %) Return on Average Equity 15.37 13.72 12.39 Return on Average Assets 2.10 2.04 1.72 Net Interest Margin 3.97 3.76 2.90 Cost to Income Ratio 53.52 55.18 59.22 Liquid Assets to Total Assets 48.79 38.43 36.53 Loans to Deposit Ratio 55.01 67.20 69.91 Non-Performing Loans Ratio 3.89 2.93 2.07 NPL Cover 134.17 143.90 143.19 Capital Adequacy Ratio (Tier 1) 15.41 15.48 15.15 Capital Adequacy Ratio (Total CAR) 16.26 16.34 16.00 Shareholder Information Market Capitalization (In Pesos) 46,551,107,778 46,959,091,864 70,863,932,958 Earnings Per Share (In Pesos)* 3.86 3.86 3.89 Cash Dividends Paid (In Pesos) 1,170,105,264 1,287,127,404 1,415,852,016 Cash Dividends Per Share (In Pesos) 12 12 12 Cash Payout Ratio (In %) 28.52 25.72 28.27 Cash Dividend Yield (In %)* 2.76 3.02 2.20 Stock Dividends Paid (In Pesos) 975,184,500 1,072,705,100 1,179,975,500 2012 ANNUAL REPORT ANNUAL 2012 Stock Dividends Per Share (in %) 10 10 10 | Market Value Per Share (In Pesos)* 43.40 39.80 54.60 Book Value Per Share (In Pesos) 27.30 30.25 32.58 Price to Book Ratio (x) 1.59 1.32 1.68 *Adjusted for the 10-for-1 stock split BANK CHINA 3 Letter to Stockholders China Bank ended the year with a net income of ₱5.0 billion which corresponded to a return on shareholders’ equity of 12.39% and return on assets of 1.72% . We note that China Bank managed to sustain its profit levels despite the contraction of net margins and the cost load of its network expansion strategy, which saw a doubling of the size of the branch network. 4 Philippine economy performs well Again, the banking sector was a catalyst for domestic growth by mobilizing liquidity into working capital for the private The year 2012 was a period of transition for the Philippine and government sectors. The funding glut led to a borrowers’ economy which grew by 6.6% from a vibrant and rapidly market, as competition drove loan and bond yields closer to the expanding domestic sector despite the subdued outlook for risk-free rates. The BSP cut the reserve requirement by 3% but the US and Europe, which were beset by chronic fiscal deficits stopped paying interest on deposit reserves starting April 2012. and weak fundamentals. While apprehensions over the future Aggregate loans of the banking system grew 16.2% year-on- cohesion of the European coalition have abated somewhat, year. To comply with prudential limits on large exposures, banks the prospects for a broad-based recovery among its member vied for SME, retail and consumer borrowers, which further nations remained bleak. The impasse among the members intensified the price competition in these segments.