about the cover We seize every moment and every opportunity each day to be better in all respects: financial, customer service, operational efficiency and products. We have a clear Vision of what TOMORROW will be and should be for PNB. In every action we take TODAY, we always have in mind the core of our existence—our Customers and Stakeholders. We strive to make sure that the possibilities we create for them TODAY will lead to a better and more successful TOMORROW. table of contents Consolidated Financial Highlights 1 Our Report to Our Shareholders 2 Operational Highlights 6 Corporate Social Responsibility 18 Corporate Governance 19 Risk Management 22 Our Board of Directors 28 Our Senior Management Team 32 Products and Services 36 The Bank’s Congenerics 39 Financial Statements 40 Management Directory 131 Directory of Branches and Offices 133 consolidated financial highlights December 31 2011 2010 Results of Operations Gross Income 22,174,665 21,722,241 Total Expenses 18,302,113 19,030,513 Net Income 3,872,552 2,691,728 Financial Condition Total Assets 316,284,286 302,133,360 Loans and Receivables 126,249,035 110,315,478 Total Liabilities 277,062,560 268,661,824 Deposit Liabilities 237,533,938 226,435,884 Total Equity 39,221,726 33,471,536 Per Share1 Basic/Diluted Earnings Per Share 5.83 4.03 Book Value Per Share 59.15 50.31 1/ attributable to equity holders of the Parent Company PHILIPPINE NATIONAL BANK 2011 ANNUAL REPORT 1 2 TODAY, WE START ON YOUR TOMORROW our report to our shareholders midst a global economic slowdown, the Philippines accounting standards. However, when based on Philippine held its own. External forces posed challenges as Financial Reporting Standards (PFRS), net income should be well as opportunities for the domestic economy. The P4.7 billion vs. the P3.5 billion reported in 2010. AEurozone continued to grapple with issues on debt, fiscal imbalance and lack of confidence in their financial systems. Return on average equity crossed the double digit mark at The awaited recovery of the United States economy was 11%, up 8% year-on-year and the highest in 5 years. Return slow and fragile. Other external negative developments such on average assets improved from 0.9% to 1.3%. Earnings as natural and man-made calamities caused supply chain per share grew 45% to P 5.83. Book value per share stood at disruptions slowing down growth prospects. However, this P59.15 per share. external environment allowed emerging markets like the Philippines to benefit from strong capital inflows as investors A Balancing Act, Sustaining Values looked for better yields and some measure of stability. The growth in the bottomline is a testament of your Bank’s improved capability to ensure a steady stream of income from The Philippine economy registered a 3.7% growth in real its core businesses amidst stiff competition; and to have a Gross Domestic Product for the full year 2011. Growth was keen eye for opportunities to make gains in a relatively volatile generally propelled by strong domestic consumption and the environment. Lending was challenged by the generally low– increase in investments. The major production sectors such as interest rate scenario which squeezed margins, more so for prime agriculture, industry and service also provided a boost to the corporates and high-ticket loans. PNB balanced its firm hold over economy. Average inflation in 2011 inched slightly year-on- the large corporate segment with an aggressive push to grow the year to a manageable 4.7%. The peso appreciated against the middle market and consumer loans portfolio. Net loans and US Dollar by 4.0% with an average P/$ exchange rate during receivables excluding loans to BSP and other banks grew by 14% the year of P43.31/US$1. to P126.2 billion. Net interest margin was stable at 3%. The Philippine banking industry provided a strong support Trading gains significantly increased as PNB took advantage of platform for the economy. In 2011, it sustained its growth opportunities in the financial market. As a result, net gains from trajectory. Continuous financial reforms, adherence to the trading, investment securities and foreign exchange was up 23%. highest standards of corporate governance, and compliance Net fees and commission income increased slightly with the with international standards and best practices made the reduction in service expenses and an improvement in remittance banking system stronger, more stable and resilient to negative and trust fees. PNB’s trust assets nearly doubled in 2011. Its shocks from external forces. Improvements were seen across remittance business likewise registered a 21% growth in business all key performance indicators. Total resources of the banking volume which outperformed the industry’s growth of 7%. system rose by 5.7% to P7.6 trillion. Through the years, PNB has stayed committed to be cost- With these as backdrop, the five-year (2011-2015) strategic efficient in its operations. In 2011, in spite of critical roadmap of your Bank which sought to fast-track its investments made to support business initiatives, its cost transformation into a first-rate institution got off the ground efficiency ratio improved to 61% coming from 76% four to a good start and proved to be on the right path. In 2011, years ago. Operating expenses were lower by 10% or P1.2 Philippine National Bank (PNB) posted unprecedented billion. Provisions for impairment and credit losses booked record income of P3.9 billion, up 44% vs. the comparable during the year amounted to P860.4 million compared to P2.4 adjusted 2010 net income and the highest ever in five years. billion in 2010. As a result of the conservative provisioning This reported income follows Bangko Sentral ng Pilipinas’ made in previous years, the Bank saw no need to increase requirement to deduct the amortizations on deferred SPV its provisions beyond reflected levels. This was made possible losses against current operations instead of charging the same with improved customer and credit risk-modeling capabilities against surplus as done in previous years in line with financial adopted across the organization which included among others PHILIPPINE NATIONAL BANK 2011 ANNUAL REPORT 3 our report to our shareholders the rapid portfolio review of accounts by lending centers and Common Shares. Likewise, the branch network contributed the development of risk asset acceptance criteria for identified significantly in the sale and distribution of other product lines industry segments. such as consumer loans, bancassurance, trust, fixed-income securities, and credit cards. Asset quality further improved with non-performing loans ratio dropping from 4.5% to 3.1% by the close of 2011. NPL cover Trust assets under management (AUM) grew 82%. The Bank’s stood at 78.4% in 2011 compared to 67.2% of the previous roster of trust products includes retail unit investment trust year. PNB was successful in disposing a substantial number of funds (UITF), two of which have delivered top performance foreclosed assets which generated P3.8 billion from the sale in 2011 — the Mabuhay Prestige Fund & the Mabuhay Prime of 1,595 properties. Capital Adequacy Ratio was 21.7%, up Peso money market fund. Likewise, for the 2nd year in a from 19.4% a year ago, and more than twice the 10% statutory row, PNB received recognition from Mastercard’s Hall of requirement of the BSP. Fame Awards, besting top banks in the Asia-Pacific region and winning more awards than any other local bank. Its Mabuhay In 2011, PNB’s balance sheet remained strong with total Miles Mastercard Elite Program was awarded best activation consolidated resources of P316.3 billion, up by 5% or P14.2 campaign and best in class finalist. With year-round acquisition billion. Total deposits grew another P11.1 billion to end the and utilization promotions, there were 60,000 PNB Mastercard year with P237.5 billion. With the continuous focus on new cards-in-force by year-end. customer acquisition, cross-selling and relationship-building, the Bank’s distribution network once again proved its capability PNB also ranked amongst the top 5 in the Philippine Dealing to generate funds. A number of branches were relocated to Exchange Broker Sales Industry. Through the Treasury maximize market potential and cover areas where competitors Group, the distribution of fixed-income securities and foreign were not present, thus making financial services accessible to exchange was focused on corporate, institutional and high net the “unbanked.” The Bank opened 10 new branches bringing worth investors. With these as primary markets, volume went the total network to 331 by year-end. up by 180% year-on-year. A Notch Higher PNB’s institutional banking arm figured prominently in the In recent years, the Bank made significant headway in its major financing requirements of prime corporate names such sales and service capabilities. Customers have noticed the as SMART, MNTC, Beacon, Rockwell and PSALM totaling P21 change; and have embraced the “new PNB”: more efficient, billion. It fortified its middle market lending capabilities with less queues, more customer-friendly processes, aggressive in the refinement of its SME strategies and sales organization. sales acquisition, more innovative offerings; and a revitalized It launched a comprehensive “Kabuhayan” Loan Program as image. In 2011, it further stepped-up efforts to improve on its bid to capture a significant share of the SME market. The its successes and fast-track the changes which will ultimately Bank formally kicked-off the program in the market by being make the Bank a first-rate organization. a major sponsor in the annual International Convention of the Philippine Franchise Association. The Bank’s corporate loan The Bank continued to evolve its sales infrastructure to be portfolio grew 24% year-on-year.