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DE LA SALLE UNIVERSITY - MANILA Graduate School of Business

BANCO DE ORO UNIBANK INC.

Term Paper In Partial Fulfillment of the Course Requirements of

Strategic Management 1st Term, AY 2011 - 12

Submitted to: Prof. Elfren S. Cruz

Submitted by: John Paul F. Udarbe 10981241

August 15, 2011


De La Salle University Graduate School of Business

Executive Summary This term paper on Banco de Oro Unibank Inc. (BDO) is composed of seven modules, each contributing into the proposed strategic management process and execution of the firm.

MODULE ONE contains the Table of Contents, Acknowledgements and Introduction of the proponent of this paper.

MODULE TWO highlights the Industry Definition, Analysis of Present Task Environment thru the use of Five-Forces Model of Industry Competition by Michael Porter, Analysis of Potential Changes in the Macroenvironment, Identification of Threats and Opportunities to the Financial Services Industry, Industry Competitive Analysis and Broader Societal Expectations.

Results based on Five-Forces Model Five Forces Threat of Entry

Evaluation LOW

Intensity of Rivalry Among Existing Competitors

HIGH

Threat of Substitute Products

LOW

Bargaining Power of Suppliers

MODERATE

Bargaining Power of Buyers

LOW

Identified Threats and Opportunities to the Industry Threats Increasing inflation and interest rates

Opportunities Stringent government regulation

Customers‘ greater access to information through

High GDP growth

the Internet and electronic banking channels Lingering challenges in the Philippine political

Launching of the PPP programs

system Moratorium on establishment of new banks /

Use of Internet and mobile technology as

branches for universal banks

alternative distribution channels

Adverse effects of Global Warming

Thrust for sustainable energy projects Emergence of SMEs in the Philippine economy

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MODULE THREE discusses the company‘s identified Strengths, Weaknesses (through the use of the Value Chain Analysis and Financial Ratios frameworks) and Personal Values. Identified Company Strengths and Weaknesses Strengths Nationwide branch and ATM network

Weaknesses Limited functionalities in alternative banking channels (Internet banking, mobile banking, phone banking)

Strong Alliance with other members of the SM

Low capital adequacy ratio (CAR)

Group Alliance with the International Finance Corporation

Low return on equity (ROE) and return on asset

(IFC)

(ROA)

Branches have long banking hours and are open

High NPA and NPL coverage ratio

on weekends and most holidays Continuous improvement in internal Credit Approval System Aggressive advertising and promotional campaigns Improving profitability

MODULE FOUR details the proposed Strategic Plan for BDO Unibank Inc. This section includes the identification of the Vision and Corporate Objectives, evaluation of existing Actual Strategies, proposal of new Corporate Strategies and Competitive Advantages using the Wharton Model.

MODULE FIVE, on the other hand, involves the identification of strategies for each functional area of BDO, namely, Marketing, Operations, Finance, Information Systems and Human Resources.

MODULE SIX discusses the capability of BDO to execute the proposed strategies, using the 7-S and 8SIT frameworks as guidelines for analysis.

MODULE SEVEN shows the projected financial statements for BDO for 2012 to 2016, based on the conclusions arrived from the analysis in the previous modules.

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MODULE ONE 1.1 Table of Contents Executive Summary .................................................................................................................. 1 Table of Contents ..................................................................................................................... 3 Acknowledgements ................................................................................................................. 5 Introduction .............................................................................................................................. 6 MODULE TWO – External Environment Analysis ....................................................................... 7 2.1 Definition of Industry ............................................................................................................. 7 2.2 Analysis of Present Task Environment ................................................................................ 11 Analysis of Potential Changes in the Macro Environment ......................................................... 18 Threats and Opportunities .......................................................................................................... 39 Industry & Market analysis ......................................................................................................... 41 Strategic Map ......................................................................................................................... 41 Market Definition .................................................................................................................... 43 Market Size ............................................................................................................................ 43 Broader Societal Expectations ................................................................................................... 45 Corporate Social Responsibility ............................................................................................. 45 MODULE THREE – Analysis of Internal Environment .............................................................. 48 Overview of company ................................................................................................................. 48 Financial Analysis....................................................................................................................... 52 Financial Ratios ...................................................................................................................... 52 Value Chain Analysis ................................................................................................................. 55 Strengths and Weaknesses ....................................................................................................... 59 Personal Values of the Key Implementers ................................................................................. 63 MODULE FOUR – Strategic Plan ................................................................................................ 67 Vision ......................................................................................................................................... 67 Objectives – Financial, Strategic and Social .............................................................................. 69 Evaluation of Present Corporate Strategies .............................................................................. 72 Proposed Corporate Strategies .................................................................................................. 77 Competitive Advantage .............................................................................................................. 89 Present Competitive Advantages ........................................................................................... 89 Proposed Competitive Advantages........................................................................................ 89 MODULE FIVE – Functional Area Strategies ............................................................................. 91 Marketing .................................................................................................................................... 91 Marketing Segments .............................................................................................................. 91 Marketing Objectives.............................................................................................................. 91 Marketing Plan ....................................................................................................................... 91

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Operations .................................................................................................................................. 93 Objectives .............................................................................................................................. 93 Plan ........................................................................................................................................ 93 Finance ....................................................................................................................................... 94 Objectives .............................................................................................................................. 94 Plan ........................................................................................................................................ 94 Information Management ........................................................................................................... 94 Objectives .............................................................................................................................. 94 Plan ........................................................................................................................................ 94 Human Resources...................................................................................................................... 95 Objectives .............................................................................................................................. 95 Plan ........................................................................................................................................ 95 MODULE SIX – Implementation .................................................................................................. 97 Analysis Of Company‘s Capabilities To Implement ................................................................... 97 Managing Internal Organization For Strategy Execution ......................................................... 100 Managing Strategic Change ..................................................................................................... 105 MODULE SEVEN – Financial Projections ................................................................................ 106 Bibliography ............................................................................................................................... 116

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1.2 Acknowledgements I would like to express my deepest gratitude to the following persons who have been instrumental in helping me complete this paper:

To my family: Thank you for your unending understanding, support and concern. This paper will never come into fruition without you;

To Ms. Meredith Verena Tabin: Thank you for providing the needed inspiration to complete this study, and for always giving me the will to strive to be the best that I could be;

To Prof. Elfren Cruz: Thank you for giving us the necessary motivation to study for this course, and for constantly reminding us on how to become competent Christian managers and professionals.

To my STRAMA classmates/groupmates: Jer, Rica, Jason, Mai, Dame, Kath, Mia, Joe, Veron, Lito and Kim: Thank you for sharing your ideas and the bonding moments that we shared inside and outside the classroom.

To my BDO IBG-Combank Luzon 4B family: Thank you for the trust & moral support that you have given while I‘m busy preparing this study.

And lastly, this paper would never come into being without the guidance and wisdom of Almighty God, from Whom all knowledge emanates.

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1.3 Introduction The proponent of this term paper is a student under the MBA program of De La Salle University. He is currently affiliated with Banco de Oro Unibank, Inc. (BDO), the largest universal bank in the Philippines in terms of assets. The main objective of this paper is to recommend strategies and improvements in BDO‘s strategy formulation and execution using the frameworks learned in Strategic Management course. Strategic Management delves on the managerial process consisting five interrelated tasks. Initially, the organization should be able to develop a strategic vision and business mission. Corporate objectives should then be set in line with the path the organization envisions. In order to attain these objectives, management should be able to formulate strategies, using as basis the company‘s strengths and weaknesses, industry threats and opportunities, broader societal expectations and personal values of key implementers. Proposed strategies should also help the company attain a distinct competitive advantage over its rivals. Lastly, it is imperative to determine if the firm will be capable of executing strategies, using the 7-S and 8-SIT models as frameworks. The proponent used the above-mentioned methodology in order to propose strategies and assess the capability of execution for BDO. Being the present biggest commercial financial institution in the country; it is essential that the company has the capability to protect its leadership standing by remaining competitive against its industry rivals. The recommendations in this paper outline how BDO can attain these corporate objectives and retain market leadership.

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MODULE TWO – External Environment Analysis 2.1 Definition of Industry Industry is a group of firms producing products that are close substitutes for each other (Porter, 1980). The subject of this paper, Banco de Oro Unibank, Inc., belongs to the Financial Services industry. This industry satisfies the need of customers for delivery of financial services, which include traditional banking, foreign exchange, investment, insurance, intermediation/advisory, credit cards and private equity services. There are four primary needs that participants of the financial services industry satisfy. 1. Access to Credit - Individuals, businesses, financial institutions and government agencies need access to credit facilities in order to finance various undertakings (e.g. working capital requirements, purchases, construction, investment, etc.). The cost of borrowing is more commonly known as interest expense to an individual or a firm. 2. Safety of Deposits – Saving is both an essential need and function by both individuals and institutions (known as savers). In this regard, the role of the financial system is to act as a balancing mechanism between savers and borrowers. Savers lend their surplus funds to borrowers and earn income in the form of interest, dividends, capital gains, and so forth. When borrowers need additional funds, the financial system sends out a signal to savers in the form of higher interest rates, encouraging savings-surplus units to save more and consume less. On the other hand, when borrowers require fewer funds, interest rates tend to fall and the flow of savings is reduced. 3. Venue for Payments - Over the years, the financial industry has developed various payment channels, the most basic of which is in the form of currency and checks. Technological breakthroughs enabled the institutions to expand the payment system, which now include phone and mobile payment, automated teller machines (ATMs), debit and credit cards, etc. The industry is now gearing to a paperless system, with electronic banking as the future direction for payment services. 4. Outlet for Investments – The financial industry now offers various products for money growth, such as investment securities and asset management services. Philippine Banking Sector A major part of the country‘s financial services industry is comprised of the Philippine Banking Sector. As of March 31, 2011, the sector is composed of 746 banks, 6,516 non-bank financial institutions, and 5 offshore banking units (summarized in the following table):

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De La Salle University Graduate School of Business Table 1: No. of Participants in the Philippine Banking Sector

Total Banks

746

-

Universal

19

-

Commercial

19

-

Thrift

73

-

Rural/Cooperative

635

Non-Bank Financial Institutions -

With quasi banking functions

-

Without quasi banking functions

6,516 15 6,501

Offshore banking units

5

Total

7,267

In 2010, total resources of banks grew by 12.64%, from PhP5.82 Trillion in 2009 to PhP6.56 Trillion. It is noteworthy that the increase in assets in the previous year is PhP736 Billion, which is close to the $18.8 Billion worth of OFW remittances and nearly half of the PhP1.96-Trillion national government budget. Key indicators for 2010 are as follows (Bangko Sentral ng Pilipinas - Philippine Banking System, 2010): Table 2: Summary of Key Indicators for Banking Sector

Amount in Million Pesos

Total

Resources

6,564,785.36

Investment Securities

1,554,618.91

Deposit Liabilities

4,816,929.23

Loan Portfolio

2,589,972.84

Non-Performing Loans (NPL)

85,720,.76

Non-Performing Assets (NPA)

173,672.65

Equity

641,494.31

The General Banking Act of 2000 defines the various classification and inherent powers of banks in the Philippines (Bangko Sentral ng Pilipinas - General Banking Law of 2000): (a) Universal banks are commercial banks, which are allowed to undertake functions of an investment house such as underwriting, securities dealership and equity investments operations. Universal banks are also allowed to establish subsidiaries engaging in non-allied undertakings. BDO Unibank, Inc. is classified under this category. (b) Commercial banks are corporations that are allowed to carry on the business of commercial banking, which include the following: 1. Accepting drafts and issuing letters of credit;

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2. Discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; 3. Accepting or creating demand deposits; 4. Receiving other types of deposits and deposit substitutes; 5. Buying and selling foreign exchange and gold or silver bullion; 6. Acquiring marketable bonds and other debt securities; and 7. Extending credit. (c) Thrift banks include savings and mortgage banks, private development banks, and stock savings and loans associations that are organized for the following purposes: 1. Accumulating the savings of depositors and investing them, together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds and other forms of security or in loans for personal or household finance, whether secured or unsecured, or in financing for homebuilding and home development; in readily marketable and debt securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board of the Bangko Sentral ng Pilipinas may determine as necessary in the furtherance of national economic objectives; 2. Providing short-term working capital, medium- and long-term financing, to businesses engaged in agriculture, services, industry and housing; and 3. Providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals. (Bangko Sentral ng Pilipinas - Thrift Banks Act of 1995) (d) Rural and cooperative banks are countryside banks engaged in the promotion and expansion of the rural communities by providing basic financial services (Bangko Sentral ng Pilipinas - Rural Act of 2002). Rural and cooperative banks help farmers through the stages of production, from buying seedlings to marketing of their produce. The 2 banks, however, are differentiated from each other by ownership. While rural banks are privately owned and managed, cooperative banks are organized/owned by cooperatives or federation of cooperatives. (e) Islamic banks as defined in Republic Act No. 6848, otherwise known as the "Charter of Al Amanah Islamic Investment Bank of the Philippines"; and, (f)

Other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas.

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Non-Bank Financial Institutions Aside from banks, the Financial Services industry also includes non-bank financial institutions (NBFI‘s). These organizations are engaged in the borrowing of funds from 20 or more lenders for the borrower's own account through issuances, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of re-lending or purchasing receivables and other obligations (Bangko Sentral ng Pilipinas - Circular No. 255 Series of 2000). NBFI‘s are also under the monitoring and supervision of the Bangko Sentral ng Pilipinas. Included in this category are the following: 1. Pawnshops; 2. Investment Houses; 3. Financing Companies; 4. Non-stock savings and loan associations.

Insurance Companies In the Philippines, the operations of the insurance sector of the financial services industry are supervised and regulated by the Insurance Commission. This sector can be classified into 4 categories, namely: 1. Life Insurance companies – financial intermediaries that share the financial risk of untimely death of their policyholder; 2. Non-Life Insurance companies – insurance companies that sell insurance other than life insurance cover; 3. Composite – insurance companies that are accredited to offer both life and non-life insurance products; 4. Professional Reinsurer – companies who sell insurance cover to other insurance companies. For the year 2011, 30 companies are accredited to provide life insurance while 84 are registered to provide non-life insurance services. National Reinsurance Corporation of the Philippines is the sole accredited professional reinsurer in the country (Insurance Commission - Statistics).

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2.2 Analysis of the Present Task Environment All companies do not operate in a vacuum; rather, their existence is a function of their interactions with its external environment. Figure 1 shows the different layers of environment for a company like Banco de Oro Unibank, Inc.: Figure 1. Levels of Environment for BDO

BDO

Task Environment Industry Environment Relevant Environment Macroenvironment

The broadest level of environment affecting the organization is the macroenvironment. This layer encompasses demographic, economic, political, social, technological, infrastructural, ecological, and legal segments (Narayanan & Fahey, 1986). On the other hand, relevant environment defines the boundaries of the general environment for analytical purposes. Industry environment surrounds the task environment and covers factors that affect all segments of a specific industry. Lastly, the task environment includes the set of customers, suppliers, and competitors that constitute the firm‘s immediate environment. Majority of the day-to-day operations of a company involve activities or decisions related to its task environment. The task environment is more or less specific to a firm, and is not necessarily shared by its competitors. The environmental analysis for this term paper is limited only to the 2 levels, namely: macroenvironment and task environment. Michael Porter stated that the essence of formulating competitive strategy is relating a company to its environment. Although the relevant environment is very broad, it is still in the industry level where the key aspects of a firm‘s environment lie. The structure of the industry plays a big role in determining the level of competition and the strategies available for a specific organization. Forces outside the industry are significant since these affect all firms in the industry; and it is crucial to know how firms have differing abilities in dealing with these forces (Porter, 1980).

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The intensity of industry competition is rooted in the underlying economic structure. Further, the state of competition depends on the collective strengths of five basic competitive forces, as depicted in Figure 2. Figure 2. Five Competitive Forces that Drive Industry Competition

A competitive strategy, therefore, should enable a firm to find a position in the industry where it can best defend itself against the 5 competitive forces or influence them into their favor. It is also important for a business to not just identify the apparent effects of each of the forces; it should also analyze the sources of the forces in developing a competitive strategy. Understanding the sources of competitive forces (known as Structural Analysis) highlights the following: (1) company‘s critical strengths and weaknesses; (2) positioning in the industry; (3) areas where strategic changes may yield greatest payoff; (4) areas where industry trends can be either opportunities or threats; and (5) potential areas for diversification. The following section shows the detailed structural analysis of BDO‘s task environment. Summary Five Forces Affecting the Industry Threat of Entry

Present Task Environment Low

Intensity of Rivalry among Existing Competitors

High

Threat of Substitutes

Low

Bargaining Power of Buyers

Moderate

Bargaining Power of Suppliers

Low

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Threat of Entry The threat of entry into an industry depends on the present barriers to entry, coupled with the reaction from existing competitors that the entrant can expect. Further, the level of threat is determined by the height of the barrier to entry into an industry. If barriers are high and/or the newcomer can expect sharp retaliation from existing competitors, the threat of entry is low. Consequently, if the barrier is low and the existing firms in the industry will not put up a challenge to the new entrant, the threat will be high. For the Financial Services Industry, the threat of new entrants is considered low due to the following effects on the barriers to entry: 

Economies of Scale (High) – Universal banks usually enjoy scale economies, especially in its lending function. These large banks can offer relatively lower interest rates for their loan products compared with rural or thrift banks. This capability stems from its larger pool of funds, which in turn, bring down their cost of funding. 

Product Differentiation (Moderate - High) - Established firms in the financial services industry enjoy brand identification and customer loyalties, which emanate from advertising efforts, customer service, product differences, or simply being first into the industry. Differentiation centers on the perceived value that a customer gets in buying a product or service. Product differentiation may not be considerably high for deposit-taking services offered by banks (e.g. depositors may value high interest rates of rural banks over the perceived value of long-term stability of a large bank). However, this barrier to entry may be high if the existing banks have already developed a trusted name in a particular financial service (e.g. Metrobank‘s tagline of ―You‘re in good hands‖ suggests perceived stability and reliability). 

Capital Requirements (High) – One considerable barrier to entry is the need to invest large financial resources in order to compete with existing firms in an industry. The strength of this barrier is more pronounced in the financials services industry since a new bank should be adequately capitalized primarily to comply with the stringent regulatory requirements of BSP. Further, high capital requirements are also required for new banks in order to ensure continuous fiduciary operations. 

Switching Costs (Moderate - High) - Another barrier to entry is known as switching costs, that is, one-time costs facing the buyer of switching from one supplier‘s product to another‘s. In the Financial Services Industry, a new entrant may find it hard to convince customers to switch due to the high challenge of providing major improvement in cost (i.e. lower service charges, accessibility of branches) or performance (i.e. customer service, convenience brought about by Internet banking facilities, etc.).

Access to Distribution Channels (High) - A barrier to entry can be created by the new entrants need to secure distribution for its product. New entrants need to invest heavily in accessing a distribution channel, which come in the form of discounts, advertising allowances, etc. This can be highly evident in the positioning of ATM‘s/branches by new entrants in high traffic areas such

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as malls. Large malls such as SM (BDO/Chinabank) and Ayala Malls (BPI) are affiliated with the large banks in the country, thus, ATM‘s/branches of other banks may have a difficult time of being established.  

Cost Disadvantages Independent of Scale (High) – Aside from economies of scale, there are other cost advantages that established firms enjoy which may not be replicable by potential entrants. These include proprietary product technology, favorable access to raw materials, favorable locations, government subsidies and learning/experience curve. For entrants in the financial services industry, favorable locations may not be available upon market entry since established firms may have already cornered these areas. Further, the cost advantage derived from learning curve (i.e. employees having greater efficiency due to internally developed methodologies; better branch layout which minimizes queues). 

Government Policy (High) – The government plays a very significant role in limiting the entry into the financial services industry through stringent controls such as capitalization requirements (particularly capital adequacy ratios), strict regulatory policies and limits on establishment of branches in metropolitan areas. The Bangko Sentral ng Pilipinas (BSP) is the lead regulator of financial institutions in the Philippines. Moreover, entrants to the industry should also comply with ordinances of local government agencies and rules of Securities and Exchange Commission prior to putting up the business. Among the 7 barriers to entry, government policy is considered to be as the highest barrier to entry into the Financial Services industry. Considering the identified barriers to entry, threat of new entrants is deemed LOW. Threat of Entry Identified Barrier to Entry Economies of Scale

Level of Barrier to Entry High

Product Differentiation

Moderate – High

Capital Requirements

High

Switching Costs

Moderate – High

Access to Distribution Channels

High

Cost Disadvantages Independent of Scale

High

Government Policy

High

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Intensity of Rivalry among Existing Competitors As described by Porter, rivalry among existing competitors takes the familiar form of jockeying for position - using tactics like price competition, advertising battles, product introductions, and increased customer service or warranties. Rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve position. Firms are deemed to be mutually dependent. In most industries, competitive moves by one firm have noticeable effects on its competitors and thus may incite retaliation (Porter, 1980). The determinants for intensity of rivalry among existing competitors in the financial services industry are described below: 

Numerous or equally balanced competitors (High) – As of March 2011, the BSP reported a total of 38 universal/commercial banks in the Philippine financial banking sector. Aside from local banks, the industry is also affected by the presence of foreign competitors with offshore banking operations in the country. In an industry comprised of numerous firms, there is a high likelihood of mavericks and some firms may habitually believe that they can make moves without being noticed. Moreover, the industry‘s competitors, with perceived balance in size and resources, are prone to fight each other to corner market share.

Slow Industry Growth (Low) – Intensity of competition is deemed strong in an industry experiencing slow growth since firms go into a market share game in order to seek expansion. The financial services industry, however, is characterized by high growth in terms of loans receivables and deposits for 2009-2010.

High Strategic Stakes (High) – A number of firms in the financial services industry have high stakes in achieving success in order to further its overall corporate strategy. Most of the major financial institutions such as BDO, BPI, and Metrobank belong to diversified groups of companies, and strong performance of these banking arms is essential to improve access to financial markets, widen marketing ability through the banks‘ distribution outlets, and higher prestige value among its customers.

Diverse Competitors (High) – Rival companies in the financial services industry are characterized as diverse in strategies, origins, personalities, and relationships, thus resulting into differing goals and strategies for how to compete in the market. The presence of foreign financial institutions in the industry also adds a great deal of diversity since their overall corporate strategy may be different with local banking and non-bank financial organizations. In summary, key determinants show that intensity of rivalry among competitors in the financial

services industry is HIGH.

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Intensity of Rivalry among Competitors Identified Determinant Numerous or equally balanced competitors

Level of Determinant High

Slow Industry Growth

Low

High Strategic Stakes

High

Diverse Competitors

High

Threat of Substitute Products or Services Substitutes generally limit the potential returns of an industry by placing a ceiling on the prices firms in the industry can profitably charge. It is in this regard that all firms in an industry are competing with industries producing substitute products. The more attractive the price-performance alternative offered by the substitute product, the lower the potential for industry profits. In identifying substitute products/services, it is important to search for other products that can perform the same function as the product of the industry (Porter, 1980). For the financial services industry, the threat of substitute product/services is LOW given the breadth of financial services presently being offered by the industry. Substitute products/services would involve informal credit system (i.e. loan sharks), which is still prevalent in lower economic segments in both urban and rural areas in the country. The load wallet services of telecommunications companies are also considered as substitute, although penetration of these services is minimal.

Bargaining Power of Buyers Buyers exert force in the industry by bargaining lower prices, higher quality, more services, and playing competitors against each other. These actions often have a direct effect of lower profitability for all industry participants. The following analyzes the effect of the bargaining power of buyers to the financial services industry: 

The products it purchases from the industry are standard or undifferentiated. (Moderate) – In an environment where buyers can always find alternative suppliers, it is plausible that they can play one company against one another. For deposit and foreign exchange services (which are considered to be standard in the industry), customers have more flexibility to transact with any financial institution to get the desired interest rate or foreign exchange rate. In the case of lending and trust services, however, products are customized and differentiation in terms of relationship management limits the bargaining power of the clientele.

It faces few switching costs. (Low) - The buyer‘s power is enhanced if the seller faces switching cost. Vice versa, switching costs lock the buyer to particular sellers. In this industry under study, switching cost is low since buyers can easily shift from one financial institution to another in terms of financial package/service.

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Price sensitivity (High) - Buyers in the financial services industry are generally price-sensitive since they want to maximize the value for their money in terms of getting higher interest rates, competitive foreign exchange rates, etc.

The buyer has full information. (Low) – Full information includes demand, actual market prices and supplier costs. If buyers would have knowledge of this information, they would have greater bargaining leverage than when information is poor. Cost of funding and market prices are usually not readily available to customers of financial institutions. Considering the above determinants, the effect of bargaining power of buyers to the industry is

deemed to be MODERATE. Bargaining Power of Buyers Identified Determinant Products are standard or undifferentiated

Level of Determinant Moderate

Few switching costs

Low

Price sensitivity

High

Buyer has full information

Low

Bargaining Power of Suppliers Suppliers often exert bargaining power over industry participants by raising prices or reducing the quality of purchased goods or services. Similarly, these actions will ultimately affect overall industry profitability (Porter, 1980). In the case of the financial services industry, bargaining power of suppliers is deemed LOW. 

It is dominated by a few companies and is more concentrated than the industry it sells to. (Low) – The financial services industry is supported by a fragmented, broad group of suppliers who are deemed to exert minimal influence in terms of price, quality and terms.

The industry is not obliged to contend with other substitute products for sale to the industry (Low). – The financial services industry does not heavily contend with substitute products/services such as informal credit facilities in order to boost industry profitability.

The supplier group’s products are differentiated or it has built up switching cost. (Low) – Participants of the financial services industry generally have sufficient financial resources and thus have leverage to negotiate with suppliers for better price/quality of products. Bargaining Power of Suppliers Identified Determinant Dominated by few suppliers

Level of Determinant Low

Industry is not obliged to contend with substitutes

Low

Supplier‘s products are differentiated

Low

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2.3 Analysis of Potential Changes in the Macroenvironment Macroenvironmental analysis, as explained by Narayanan and Fahey, aims to provide an understanding of both current and potential changes taking place in an industry‘s external environment. Further, the results of the analysis aim to provide critical inputs in strategic management and facilitate strategic thinking in organizations (Narayanan & Fahey, 1986). To better understand and analyze the macroenvironment surrounding the Financial Services Industry, this study will identify key changes in the 8 major segments. Figure 3: Key factors of Macroenvironmental Analysis

Economic The economic environment involves the general set of economic conditions facing all industries. Economic activity is reflected in levels and patterns of industrial output, consumption, income and savings, investment and productivity. Gross Domestic Product Philippine GDP grew by 7.3% in 2010, surpassing the government‘s initial target of 5% - 6%. The economy weathered the 2008-09 global recession and amidst a challenging global environment caused by a weak US recovery, lingering European sovereign debt crisis, rising global inflation pressures, as well as capital inflows from the impact of Quantitative Easing (QE2) of the United States and other Central Banks to stimulate the economy (Euromonitor International, 2011). Consumption spending in 2010 rose 5.3% on the back of low inflation and interest rates, higher remittances from Overseas Filipino Workers and steady revenues from the Business Process Outsourcing (BPO) sector. Starting last year, fixed investments in the construction and durable goods

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sectors increased by 17% which is triggered by the renewed investor confidence following the election of President Benigno S. Aquino III. In 2010, election spending created demand for campaign-related goods and services, generating seasonal jobs and additional income for Filipinos. Further, government spending was scheduled at the 1

st

half of the year to rebuild areas damaged by typhoons Ondoy and Pepeng that hit the Philippines in late 2009. Moreover, exports grew by 26% in 2010 as foreign companies restocked their inventories due to increasing demand following the global recession in 2008-09. Broad-based demand showed favorable performance in the services and mining sectors. Manufacturing and mining sectors grew significantly last year, rising at 12.3% and 18.4%, respectively. Also, the services sector rose by 7.1%, with support coming from real estate, trade and private sector. The United Nations forecasts economic growth of the country will likely slow to 4.6% in 2011 before picking up to 5.1% in 2012 as a global deceleration continues to be a factor. The country forecasts, contained in the UN‘s World Economic Situation and Prospects 2011 report released on Tuesday, are lower than the government‘s 7-8% target and the 5% assumed in this year‘s budget (ABSCBN News - UN Forecasts Philippine Growth). On the other hand, the World Bank raised its growth forecast to 4.4% for the Philippines, higher than its original forecast of 3.5%. For 2011 and 2012, the bank is forecasting a 4% GDP growth for the country. The World Bank has forecast global GDP in 2010 to rise by 3.1%, and by 3.3% in 2011. It said global growth will strengthen between 3.2% and 3.6% in 2012, reversing the 2.1% decline in 2009. On the other hand, The Development Budget Coordination Committee (DBCC) approved a GDP growth target for 2012 of 5.5-6.5%, for government budgeting activities. In nominal terms, 2012 GDP is seen to be at Php10.3Bn, with growth rate target at 7-8% (BPI Express Online - Economic Updates). On a study made by Euromonitor International, long-term real GDP is expected to grow at between 4.5% and 4.7% per year between 2010 and 2020, which will be supported by the steadily increasing per capita annual disposable income and per capita consumer expenditure rates. Per capita disposable income is predicted to rise by a total of 33.3% in real terms over 2010-2020, with a steady annual growth rate of 3.0% in real terms. Similarly, per capita consumer expenditure is expected to hike 33.1% over 2010-2020, with the annual growth rate mostly just below 3.0%. The projected increase is expected to come on the back of remittances and improvements in the labor market (Euromonitor International, 2011). Fiscal Performance Budget deficit for 2010 is at PhP314.4 Billion, equivalent to 3.7% of the country‘s GDP. This is considerably lower than the projected target of 3.9% of GDP (PhP325 Billion), as the Aquino administration reined in government spending. Total revenues grew by 7.5% in 2010 but fell short of the target by 6.7%. This is primarily due to the underperformance of 2 major revenue-collecting agencies, the Bureau of Internal Revenue and Bureau of Customs, and lower asset sales. In order to mitigate the

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shortfall in revenues in the 1 half of the year, the Aquino administration controlled its expenditures and in turn, experienced budget surpluses in August and November. Expected budget deficit by the DBCC is at PhP270 Billion for next year, equivalent to 2.6% of GDP. For 2013, target budget deficit is pegged at 2% of GDP (Euromonitor International, 2011).

Disposable Income and Savings Disposable income per capita rose 16.5% in real terms over the period 2005-2010, amounting to PhP67,270 (US$1,482) in 2010, largely on the back of expansive economic growth and higher employment levels. The Philippines' savings ratio remained low over 2005-2010. From a record high of 3.4% of disposable income in 2005, the savings ratio fell to 2.7% in 2006. It rebounded to 3.1% in 2007, before leveling out at 3.0% from 2008 to 2010. Per capita annual savings stood at PhP1,997 (US$44) in 2010, a 1.0% rise in real terms over 2005-2010 (Euromonitor International, 2011). The reasons identified for the low savings ratio for Filipinos are the relatively low interest rates and expectations of continuing growth in income, though a high proportion of Filipinos do consider building up their savings. Little change is predicted over 2010-2020, with the savings ratio expected to stay at 3.0% until 2016, before dipping to 2.9% through to 2020. This low savings rate makes average Filipinos vulnerable in the event of food and fuel price rises.

Inflation Average inflation rate was 3.8% for 2010 versus 3.2% in 2009. Inflation rate is at the low end of BSP‘s inflation target of 3.5% to 5.5%. From a high of 4.4% in April and May 2010, headline inflation rate settled at 3% in November and December due to stable food prices, power rate cuts, and price rollbacks for kerosene, LPG and petroleum. Peso appreciation also tempered the impact of imported inflation despite rising global inflationary pressures. The BSP expects inflation to rise but move within 3%-5% inflation rate range for the next 5 years (Inquirer.net - BSP to release new inflation forecast).

Foreign Exchange The Philippine peso strengthened to PhP43.88/US$1 by year-end from the P46.36/US$1 yearend rate in 2009. On an average basis, the peso appreciated by 5.6% from PhP47.64/US$1 in 2009 to PhP47.64/US$1 in 2009. Its strong performance is supported by the rising OFW remittances, which jumped by 8.2% to US$18.8 Billion, higher BPO revenues at US$9.0 Billion, and increased export earnings from US$38.4 Billion in 2009 to US$51.4 Billion. Investment inflows to the country in 2010 also contributed to the appreciation of the Philippine currency, from US$388 Million in 2009 to US$4.6 Billion. Foreign capital inflows were triggered by the shift of investment funds from safe markets such as US, Japan and Europe (with near-zero interest rate) to emerging markets like the Philippines.

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The Bangko Sentral ng Pilipinas has revised its forecast on the average peso-dollar exchange rate for the year. It now expects a stronger range of PhP42 to PhP45 against the US dollar, from the previous range of PhP45 to PhP47/US$1, as foreign capital inflows are expected to remain robust .It also changed its inflation forecasts for this year and the next (Euromonitor International, 2011).

Interest Rates With inflation rates at manageable levels, the BSP was able to keep key policy rates unchanged at 4% for overnight borrowing rate and 6% for overnight lending rate in 2010 (Bangko Sentral ng Pilipinas - Philippine Banking System, 2010). The benchmark 91-day Treasury bill rate ranged from 3.74% to st

3.97% in the 1 10 months of 2010, yielding an average rate of 3.7% for the year. This is lower than average 91-day T-bill rate of 4.2% in 2009. The high liquidity in domestic markets is buoyed by the inflows of foreign investments.

Economic Outlook In view of the solid economic performance of the country in 2010, the Philippines secured several credit rating upgrades from various international credit ratings agencies. The Philippines stands at a rating of Ba2 with Moody‘s and at BB with the other agencies (Standard and Poors/Fitch). The ratings agencies cited the resilience of the financial system and of the external payments position during the global recession. The goal of the Philippine Government is to attain a rating two levels higher (Moody‘s Baa3, S&P/Fitch BB) because if they achieve these levels, then Philippine debt would be considered as investment grade, which would attract additional investors in the Philippines. One positive result for the credit upgrades is that borrowing costs for external debt have broadly declined to levels before the Asian financial crisis. In 2011–2012, Philippine economic growth is expected to normalize in line with the moderation of global economic pace and absence of one-off growth stimulus provided by the elections and government rebuilding efforts. Future economic growth will be driven by continued robust consumption spending and material investments on Public-Private Partnerships (PPP) initiated by the government. PPP aims to upgrade the country‘s infrastructure, which in turn, invite more investments in other sectors and ultimate yield sustainable growth. Investments in PPP initiatives are seen to jumpstart infrastructure spending without putting a strain on the government‘s fiscal position. Identified projects of the government for the PPP include airports, expressways, and railway expansion (Inquirer.net - Bidding for 9 PPP projects set in Q4).

Emergence of Micro, Small and Medium Enterprises (MSMEs) As defined by the Department of Trade and Industry (DTI), micro, small, and medium enterprises (MSMEs) are any business activity/enterprise engaged in industry, agri-business/services, whether single

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proprietorship, cooperative, partnership, or corporation whose total assets, inclusive of those arising from loans but exclusive of the land on which the particular business entity's office, plant and equipment are situated, must have value falling under the following categories: By Asset Size Micro: Small: Medium: Large:

Up to P3,000,000 P3,000,001 - P15,000,000 P15,000,001 - P100,000,000 above P100,000,000

Alternatively, MSMEs may also be categorized based on the number of employees: Micro: Small: Medium: Large:

1 - 9 employees 10 -- 99 employees 100 -- 199 employees More than 200 employees

MSMEs ensure a more equitable income distribution in both rural and urban areas through its creation of wealth, employment, and income generation. These companies also provide the economy with a continuous supply of ideas, skills, and innovations necessary to promote competition and the efficient allocation of scarce resources. In the previous years, this sector accounted for about 99.6% of the registered businesses in the country by which 63% of the labor force earn a living. Moreover, around 35.7% of the total sales and value added in the manufacturing come from MSMEs. In 2009, there were 780,437 business enterprises operating in the Philippines and 99.6% (777,357) of these belong to the MSME segment. Of the total number of MSMEs, 91.4% (710,822) are micro enterprises, 8.2% (63,529) are small enterprises, and 0.4% (3,006) are classified as medium enterprises. Majority of the 777,357 MSMEs in the wholesale and retail trade industries with 3385,610 business establishments; followed by manufacturing with 111,987; hotels and restaurants with 97,298; real estate, renting, and business activities with 47,654; and other community, social, and personal services with 44,313. These industries accounted for about 88.4% of the total number of SME establishments (DTI Website - Micro, Small and Medium Enterprises). Concentration of the active MSMEs in 2009 is situated in the National Capital Region (NCR), with 210,648 business establishments; Region 4-A (CALABARZON) with 114,676; Region 3 (Central Luzon) with 79,445; Region 7 (Central Visayas) with 45,427; and Region 6 (Western Visayas) with 45,382. These top five (5) locations accounted for about 63.7% of the total number of MSME establishments in the country. MSMEs generated a total of 3,595,641 jobs in 2009 versus 2,094,298 for the large enterprises. This indicates that MSMEs contributed almost 63.2% of the total jobs generated by all types of business establishments that year. Of these, 30.4% or 1,731,082 jobs were generated by micro enterprises; 25.5% or 1,449,033 by small enterprises; and 7.3% or 415,526 by medium enterprises.

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Demographic The Philippines currently ranks as the 12

th

world‘s most populous nation, with an estimated

population of about 94 million as of 2010 projections made by the National Statistics Office (2000-based). As of latest Census of Population (POPCEN 2007) conducted by NSO in 2007, the Philippine population is placed at 88,574,614 persons. Sex ratio is at 1.02, with males outnumbering females, 44,757,788 against 43,788,299 (NSO Website - Key Statistics). Figure 4: Population Distribution by Gender and Age Group (2007 Philippine Census)

Average population growth rate is at 2.04%, while population density is at 295 persons per square kilometer. Thirty-five percent (35.47%) fall within the range of 0-14 years of age, sixty percent (60.38%) in the 15-64 years bracket or the working class and four percent (4.14%) fall in the 65 years of age and above. Average household size is at 4.8 persons per household. On a regional scale, POPCEN 2007 shows that Region IV-A (known as CALABARZON area) has the highest population at 11,757,755. National Capital Region is a close 2

nd

at 11,547,949 persons in the

region. The region with the lowest population is CAR, with 1,520,847 persons, followed by Region XIII at 2,293,346. Seven regions had average household sizes higher than the national figure, namely: the Autonomous Region in Muslim Mindanao (ARMM), 5.8 persons; Region XIII (Caraga), Region IX (Zamboanga Peninsula), and Region V (Bicol), each with 5.0 persons per household; and Region X (Northern Mindanao), Region VI (Western Visayas), and Region VIII (Eastern Visayas), each with 4.9 persons per household. Meanwhile, NCR had the lowest average household size of 4.4 persons.

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De La Salle University Graduate School of Business Figure 5: Population Distribution by Region (2007 Philippine Census)

Life expectancy (in years; using the medium assumption) is placed at 68.81 for males and 74.34 for females. Total fertility rate for 2015-20 is expected to be at 2.76 children per woman. Using medium estimates, Philippine population is projected to reach 141.7 million in 2040, or additional 47.7 million added to the nation's population between 2010 and 2040.

Social The social segment includes lifestyles and social values. An analysis of this segment considers shifts in the structure and mobility of the population, lifestyle variations and social values transformations. Changes in the social environment directly affect total market potential for many products, especially consumer goods. Lifestyle / Consumer Spending In 2010, the poorest 10% of households devoted 80.3% of their total consumer spending to food and non-alcoholic beverages and housing. On the other end of the spectrum, the top 10% spends 45.8% on both of these essentials in the same year. Spending patterns in the Philippines vary considerably across income brackets. The poverty across the country obliges low-earning households to devote the majority of their income to essentials: food and housing. High-income households enjoy a measure of greater discretionary spending, which include a higher proportion of spending on household goods and services, transport, hotels and catering, and leisure and recreation in their budgets. Least discretionary categories include health goods and medical services and housing. In 2009, in the wake of the global economic downturn, majority of the Filipinos reduced their spending. However, growth rebounded strongly in 2010, and robust spending rises across all social classes are expected between 2010 and 2015.

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Based on the 2010 Labor Force Survey, the annual employment rate (or the percentage of the labor force employed in 2010 was 92.7 percent). This rate was calculated using the average estimates of employed persons and persons in the labor force from the four rounds of the quarterly Labor Force Survey (LFS) conducted in 2010. Employment rate was 92.5 percent in 2009 (NSO Website - Sector Data/Details). Among regions, Cagayan Valley, Zamboanga Peninsula and Autonomous Region in Muslim Mindanao (ARMM) posted employment rates of more than 96 percent. The National Capital Region (NCR) registered the lowest employment rate of 88.5 percent. Of the estimated 36.0 million employed persons in 2010, more than half (51.8%) were engaged in services and about one-third (33.2%) were in agriculture. Most of those who worked in the services sector were into wholesale and retail trade, repair of motor vehicles, motorcycles and personal and household goods (19.5% of the total employed). Of the total employed persons, the laborers and unskilled workers comprised the largest group (32.3%). This was followed by farmers, forestry workers and fishermen (16.0%); officials of government and special interest organizations, corporate executives, managers, managing proprietors and supervisors (13.8%); and service workers, shop and market sales workers (10.6%). The rest of the major occupation groups each comprised less than 10 percent ranging from 0.4 percent to 7.7 percent. The majority (54.4%) of the employed were wage and salary workers, most of whom were in private establishments (40.4% of the total employed). Thirty percent were self-employed without any paid employee, four percent were employer in own family-operated business or farm while nearly 12 percent worked without pay in own family-operated farm or business. More than half (63.5%) of the total employed were full time workers or have worked for at least 40 hours per week. On the average, employed persons worked 41.7 hours a week in 2010. The number of underemployed workers in 2010 was 6.8 million, representing an annual underemployment rate of 18.7 percent. Underemployed workers are persons who express the desire to have additional hours of work in the present job, or to have an additional job, or to have a new job with longer working hours. The lowest underemployment rate was observed in Central Luzon (9.1%) while the highest was noted in Bicol Region (36.8%). About 2.9 million Filipinos were unemployed in 2010 representing an unemployment rate of 7.3 percent for the year. The unemployed persons who have attained high school accounted for 45.2 percent of all unemployed. The proportion of unemployed males was greater than that of their female counterparts (63.3% compared to 36.7%). The labor force population or those who are either employed or unemployed reached 38.9 million resulting to an annual labor force participation rate (LFPR) of 64.1 percent. Among regions, Northern Mindanao had the highest annual LFPR of 69.8 percent (NSO Website - Sector Data/Details).

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Political The political segment includes all electoral processes as well as the administrative, regulatory, and judicial institutions that make and execute society‘s laws, regulations, and rules. Political risks are moving higher as a result of negative impact that rising rice and other food prices are likely to have on society. Although corruption is a major problem in a number of Asian countries, it is more politicized in the Philippines than in most. The government of the Philippines is subdivided into three branches, namely: (1) executive, (2) legislative and (3) judiciary. The President of the country heads the executive branch of the government and the Malacañang Palace is the official residence. He also functions as both the head of state and the head of government besides being the Commander-in-Chief of the Armed Forces of the Philippines. The president of the Filipino political system is elected by popular vote for a term of 6 years (Wikipedia Philippines). The legislative branch is the law-making arm of the government. It is composed of the Senate serving as the upper house with 24 senators, one-half elected every three years by popular vote to serve a term of six-years; and the House of Representatives serving as the lower house with 250 members elected by popular vote to serve three-year term. Out of these 206 members represents the districts plus 20 are chosen through sectorial representation. The Supreme Court heads the judicial branch of the government of Philippines, with the Chief Justice as its presiding officer and fourteen other associate justices. The President appoints the justices from nominations presented by the Judicial and Bar Council. The Philippines's political system is separated into three geographical areas, the Visayas, Luzon and Mindanao. They are further divided into 17 regions, 81 provinces, 117 cities, 1,501 municipalities, and 41,982 barangays. Despite the reforms being instituted in recent years, the country‘s political system continues to face several challenges. Continued graft and corruption in key agencies, and the lack of transparency and accountability in governance are still key issues that remain unresolved by the present administration. Electoral processes have been converted from manual counting to automation, however, allegations of massive cheating, manipulation of results, political dynasties and traditional politics pose considerable questions to the integrity of the institution. Armed conflicts in Muslim Mindanao and in rural areas infested with NPA and MILF insurgents continuously weaken peace and order and business stability. The country‘s human rights situation, particularly extra-judicial killings of journalists and activists, has placed the nation in the global spotlight and exposing the need for permanent safeguards to uphold human rights.

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Technological The technological segment refers to the level and direction of technological progress or advancements taking place in a society including new products, processes, or materials; general level of scientific activity; and advances in fundamental science. The Philippine financial services industry has utilized emerging technology in delivering services to its clients. An automated teller machine is described as a computerized telecommunications device that provides the clients of a financial institution with access to financial transactions in a public space without the need for a cashier, human clerk or bank teller. As of March 2011, total automated teller machines (ATM‘s) in the system reached 9,592 units (Bangko Sentral ng Pilipinas - Philippine Banking System, 2010). Further, electronic banking (or Internet banking) allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society. The services incorporated in this alternative banking channel can be classified as transactional (e.g. bills payments, funds transfers, loan applications, etc.) and non-transactional (e.g. online statements, online viewing of checks). The BSP has approved electronic banking licenses for 102 financial institutions. Gartner, the world‘s leading information technology research and advisory company, identified the top 10 strategic technologies for 2011, as follows (Gartner.com - Gartner Identifies the Top 10 Strategic Technologies for 2011): 1.

Cloud Computing. - Gartner expects large enterprises to have a dynamic sourcing team in place by 2012 that is responsible for on-going cloud sourcing decisions and management.

2.

Mobile Applications and Media Tablets. – With an estimated 1.2 billion people (as of 2010) carrying handsets, businesses can utilize this medium by harnessing mobile gadgets in e-commerce. Companies can now interact directly with clients by analyzing their behavior as manifested by location, motion and other applicable contexts

3.

Social Communications and Collaboration. - It is estimated that by 2016, social technologies will be integrated with most business applications. Companies should bring together their social CRM, internal communications and collaboration, and public social site initiatives into a coordinated strategy. This can be divided into: (a) Social networking — social profile management products, such as MySpace, Facebook, LinkedIn and Friendster as well as social networking analysis (SNA) technologies that employ algorithms to understand and utilize human relationships for the discovery of people and expertise. (b) Social collaboration — technologies, such as wikis, blogs, instant messaging, collaborative office, and crowdsourcing. (c) Social publishing — technologies that assist communities in pooling individual content into a usable and community accessible content repository such as YouTube and Flickr. (d) Social feedback - gaining feedback and opinion from the community on specific items as witnessed on YouTube, flickr, Digg, Del.icio.us, and Amazon.

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4.

Video. - Technology trends in digital photography, consumer electronics, the web, social software, unified communications, digital and Internet-based television and mobile computing are all reaching critical tipping points that bring video into the mainstream. Over the next three years Gartner believes that video will become a commonplace content type and pictures, video or audio will dominate interaction model for most users, and by 2013, more than 25 percent of the content that workers see in a day.

5.

Next Generation Analytics. - It is becoming possible to run simulations or models to predict the future outcome, rather than to simply provide backward looking data about past interactions, and to do these predictions in real-time to support each individual business action. While this may require significant changes to existing operational and business intelligence infrastructure, the potential exists to unlock significant improvements in business results and other success rates.

6.

Social Analytics. - This describes the process of measuring, analyzing and interpreting the results of interactions and associations among people, topics and ideas. Social network analysis tools are useful for examining social structure and interdependencies as well as the work patterns of individuals, groups or organizations. Social network analysis involves collecting data from multiple sources, identifying relationships, and evaluating the impact, quality or effectiveness of a relationship.

7.

Context-Aware Computing. - Context-aware computing centers on the concept of using information about an end user or object‘s environment, activities connections and preferences to improve the quality of interaction with that end user. The end user may be a customer, business partner or employee. A contextually aware system anticipates the user's needs and proactively serves up the most appropriate and customized content, product or service.

8.

Storage Class Memory. - Gartner sees huge use of flash memory in consumer devices, entertainment equipment and other embedded IT systems. It also offers a new layer of the storage hierarchy in servers and client computers that has key advantages — space, heat, performance and ruggedness among them.

9.

Ubiquitous Computing. – New technological developments are expected to incorporate computing systems into operational technology.

10.

Fabric-Based Infrastructure and Computers. - A fabric-based computer is a modular form of computing where a system can be aggregated from separate building-block modules connected over a fabric or switched backplane.

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Legal Legal factors include laws and regulations can affect how a company or industry operates, its costs, and the demand for its products.

Moratorium on Establishment of New Branches In December 2005, the Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, has approved the phased liberalization of bank branching policy. This new policy effectively lifted the existing moratorium on the establishment of branches and other banking offices. These were also aimed primarily at enhancing competition, lower the cost of banking services, broaden customer access and improve quality of services. Under the BSP guidelines, banks that meet the qualification requirements may now establish branches anywhere in the Philippines except in the cities of Makati, Mandaluyong, Manila, Parañaque, Pasay, Pasig and Quezon, and San Juan, in Metro Manila which will remain covered by branch moratorium. BSP studies indicated that these areas are presently adequately served by existing banking offices. Nevertheless, this still represents a significant liberalization since the rest of NCR will be open for branching as well as all of Metro Cebu and Metro Davao. Despite the relaxing of the branching regulation, banks should still satisfy the following: minimum capital requirements, risk-based capital adequacy ratio of not lower than 12%, CAMELS composite rating of at least ―3‖ with Management score also of at least ―3‖, appropriate risk management system in place and no major supervisory concerns on safety and soundness. Further, the proposed branch should be at least 200 meters away from an existing banking office but the distance requirement shall not apply in shopping malls or commercial center complexes, including special export processing zones, public markets, fish ports, livestock/agricultural trading centers, BIR collection offices and industrial/technological parks. A limit of two (2) banking offices shall be imposed in 4th to 6th class municipalities (Bangko Sentral ng Pilipinas - Publications (2006)). In June 2011, the Monetary Board has approved the lifting of the branching restriction in the eight (8) ―restricted areas‖ of Metro Manila, i.e., Cities of Makati, Mandaluyong, Manila, Parañaque, Pasay, Pasig, Quezon, and San Juan, under a two-phased liberalization approach. Under Phase 1 of the liberalization, second-tier private domestically incorporated universal and commercial banks (U/KBs) and thrift banks (TBs), defined as banks that have less than 200 branches in the ―restricted areas‖ as of December 31, 2010, shall be given a time-bound window until June 30, 2014 to apply for and establish branches in the said ―restricted areas‖. Under Phase 2 of the liberalization which will start on July 1, 2014, branching in said areas will be open to all banks (except rural banks and cooperative banks which are generally not allowed to establish branches in Metro Manila). In order to qualify for restricted area branches, a bank must have combined capital accounts of at least P10 billion for a universal/commercial bank and at least P3 billion for a thrift bank. In addition, neither the applicant bank nor any of its subsidiary banks should be under Prompt Corrective Action

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(PCA) or if under PCA, it should be compliant with PCA resolution guidelines. Approved branches shall not be allowed to be opened until the applicant bank has met the capital requirement and/or until the bank‘s PCA status is lifted. The objective of the new policy, just like the 2005 memorandum, is to further improve the competitive environment and eventually translate to better financial services for the public. The new liberalization policy also aims to encourage banks to further scale up and improve their operations (Bangko Sentral ng Pilipinas - Monetary Board Approves Phased Lifting of Branching Restriction).

Implementation of Basel Accords In 1995, BSP recognized that there is a growing risk exposure in the system brought about by derivatives activities of banks. In order to mitigate this, the BSP issued Circular No. 102 which prescribed the minimum standards for risk management of derivatives. In 1997, BSP shifted its banking supervision thrust to focus more on the measurement and management of banks‘ risk exposures, instead of just mainly performing financial audit and compliance review. The BSP‘s new supervisory approach favors a supervisory assessment of the quality of risk management practices and generally allows banks to take risks so long as the banks demonstrate the ability to manage, absorb and price for those risks. Bank supervisors, including the BSP, imposed minimum capital regulations as banks may try to economize on capital that is not commensurate to the risks that they take. The Basel Accords became the global framework in determining the minimum requirements for banks in terms of risk and capital. Basel Committee on Banking Supervision (BCBS 1) in the mid-80s saw the need to align regulatory capital regulations across countries so as to have comparable measurement of financial strength especially for banks that operate across jurisdictions. Thus in 1988 the BCBS issued the original ―International Convergence of Capital Measurement and Capital Standards‖, now known as Basel I. Basel I was the first international supervisory effort to relate capital requirements to, initially, credit risk. In 1996, the BCBS issued an amendment to the Basel Capital Accord to incorporate capital requirements for market risk. In 2001 the BSP issued Circular No. 280 which served as the implementing guidelines for Basel Capital Accord in the Philippines. This was followed in 2002 with the issuance of Circular No. 360 which adopted the 1996 amendments for market risk. Basel I was eventually revised since the assignment of risk weights in this framework is rather crude and not based on any measurement, whether quantitative or qualitative, of probability of default. For example, all corporate loans – whether loans to a blue-chip company or to a fledgling enterprise – are all given a risk weight of 100%. In addition, Basel I only accounts for credit risk and market risk but not other forms of risk that may also be important. In 1999, the Basel II proposals were initiated. Basel II is a set of proposals that aim to revise Basel I to make regulatory capital requirements more risk sensitive and reflective of all, or at least most of

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the risks banks are exposed to. In addition, Basel II also puts emphasis on banks‘ own risk assessment, supervisory review, and the important role that disclosures play. As such, Basel II is structured as a three-pillar approach that transcends regulatory capital requirements. That is, Basel II not only prescribes a risk-based capital framework, but an entire risk-based supervisory framework (Cao, 2011). Figure 6: Structure of Basel II Capital Accord

These three pillars are based on the principles that, (1) banks should have capital appropriate for their risk-taking activities, (2) banks should be able to properly assess the risks they are taking and supervisors should be able to evaluate the soundness of these assessments, and (3) banks should be disclosing pertinent information necessary to enable market mechanism to complement the supervisory oversight function. Capital Adequacy Ratio (CAR) is the measure used in order to assess if a financial institution has sufficient capital appropriate for its risk-taking activities. CAR is computed by dividing the bank‘s Qualified Capital (Tier 1 and Tier 2) by the Risk Weighted Assets. BSP has mandated that the minimum ratio for banks should be at least 10% while the Basel Accords require at least 8%. As of 2010 year-end, the Philippine banking system averaged CARs of 16.02% on solo basis and 16.97% on a consolidated basis as of end-December 2010. Similarly, the Tier 1 (T1) capital ratios of the banking system remained high at 13.64% and 13.69% on solo and consolidated bases, respectively. On the other hand, U/KB sector's CAR decreased only by 0.06 percentage point and 0.05 percentage point from the previous quarter's CARs of 16.29% and 17.32% on solo and consolidated bases, respectively. The increase in the industry's capital base was attributed to banks' robust net profits of PhP21.3 th

Billion for the 4 quarter of 2010 and the P3.3 Billion additional issuances of common shares by one (1)

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KB and one (1) foreign bank subsidiary. On the other hand, the increase in risk-weighted assets was due to the general expansion of assets, with much coming from loans granted to various unrated counterparties (Bangko Sentral ng Pilipinas - Philippine Banks' CAR Remains Above the Minimum Regulatory and International Standard Ratios, 2011). Ecological Ecological factor is any variable of the environment that impacts the life of one or more organisms. This segment is concern that affects the firm‘s production processes, customer‘s buying habits and customer‘s perception of the company or product.

Global Warming By the year 2100, nations in Southeast Asia will face debilitating economic loss due to global warming, according to a study from the Asian Development Bank. The study found that Indonesia, Philippines, Thailand, and Vietnam could suffer an annual loss of 6.7 percent (equivalent to $230 Billion dollars) in combined Gross Domestic Product (GDP) by 2100, more than double the global average which is estimated at a loss of 2.6 percent. Rice yields, the agricultural staple of Southeast Asia, will be hit particularly hard with the region suffering a 50% decline in rice yields by 2100. The Philippines would see the worst decline with a 75% loss in its rice fields (Hance, 2009). The study also states that Southeast Asia is particularly susceptible to extreme weather, higher temperatures, and rising sea levels due to its extensive coastlines, economies dependent on agriculture, and rampant large-scale deforestation. Annual mean temperatures are expected to rise by an average of 4.8 degrees Celsius in the region by century‘s end, if greenhouse gas emissions are not regulated.

Energy Conservation The national government, through the Department of Energy, promotes the judicious conservation and efficient utilization of energy resources through adoption of the cost-effective options toward the efficient use of energy to minimize environmental impact. The primary goal of the government towards energy efficiency and conservation is to make it a way of life, increase awareness and the attainment of 229 MMBFOE (million barrels of fuel oil equivalent) total energy savings from the implementation of energy efficiency and alternative fuels programs for the period 2005-2014. It is projected that about 50.9 million tons carbon dioxide (CO2) equivalent greenhouse gas emissions will be avoided for the same period (Department of Energy - Energy Efficiency). The strategies to achieve these goals include: the aggressive promotion of energy conservation and energy efficient technology to effect higher energy savings both for the consumer and producer through information, education and communication campaigns; intensify collaboration effort with the private sector in implementing energy efficiency programs through voluntary agreements; continuous implementation and expansion of the appliance and equipment energy standards and labeling

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implementation of building energy usage standards; integration of energy efficiency concepts in the procurement practices of the government; the provision of technical assistance in identifying, implementing and evaluating effective measures to improve energy use efficiency; the use of alternative fuel to reduce dependence on imported oil; and periodic program monitoring and evaluation to assess the effectiveness of the energy efficiency and conservation plan.

Social Environmental Management Systems ISO 14001 is the internationally recognized standard for the environmental management of businesses. It prescribes controls for those activities that have an effect on the environment. These include the use of natural resources, handling and treatment of waste and energy consumption. The ISO 14000 family addresses various aspects of environmental management. The very first two standards, ISO 14001 and ISO 14004 deal with environmental management systems. ISO 14001 provides the requirements for an environmental management system while the ISO 14004 gives the general guidelines. The ISO 14001 aims to: 

identify and control the environmental impact of its activities, products or services,



improve its environmental performance continually,



implement a systematic approach to setting environmental objectives and targets, to achieving these and to demonstrating that they have been achieved. Implementing an Environmental Management System is a systematic way to discover and control

the effects your company has on the environment. Cost savings can be made through improved efficiency and productivity. These are achieved by detecting ways to minimize waste and dispose of it more effectively and by learning how to use energy more efficiently (International Organization for Standardization - ISO 14001). Infrastructural This segment focuses on both the physical and intellectual infrastructure and all the institutions associated with it. The physical infrastructure includes both transportation (e.g. road, rail, and water systems) and communication (such as the mail, phone, and other electronic systems). The intellectual infrastructure

comprises

scientific

enterprises,

universities,

and

other

intelligence-generation

organizations.

Public-Private Partnerships The centerpiece of the infrastructure development plan of the Philippine government under the administration of President Benigno S. Aquino III is the rollout of the public-private partnership (PPP) programs. PPP is defined as contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of transportation projects. Previously known as Build-Operate-Transfer (BOT) Program, PPP has been

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expanded to include joint venture agreements, concession arrangements, lease and affermage, among others. With the PPP programs, the government aims to foster an environment conducive for private sector entrepreneurial initiatives. Before rolling out the PPP, the government made economic structural adjustments geared towards opening the economy to competition and leveling the playing field of enterprise. Second, a clear policy and institutional framework has been put in place to permit unencumbered flow of private resources into the government‘s development program, especially for the infrastructure sector. The Philippine Public-Private Partnership Center will be the lead government agency for the PPP Program. It is equipped with the technical know-how and extensive experience in project development, provides various services and assistance to implementing agencies (IAs), government-owned and controlled corporations (GOCCs), state universities (SUCs) and local government units (LGUs) as well as to the private sector in the development and implementation of critical infrastructure projects (Philippines - Public-Private Partnerships (Programs and Projects), 2011). The Aquino administration has identified 11 PPP projects worth approx. USD2.54 Billion (PhP109 Billion) that are for immediate rollout in the next 12 months: 1. NAIA Expressway Phase II Estimated Project Cost: PhP 10.59 Billion (USD235.33 Million) Target Bid Date: September 2011 Detail Design and Construction: October 2011 - September 2014 Description: The project will link Skyway and Manila-Cavite Coastal Expressway. It will provide vital access to NAIA Terminals 1, 2 and 3. Economic zones in Cavite province will benefit through easier and faster transportation of products to NAIA as well as Manila port through this link and the NLEx – SLEx Expressway. The project has a total length of 5.19 kilometers with four (4) lanes. 2. NLEX – SLEX Connector Estimated Project Cost: PhP 21 Billion (USD477 Million) Announcement of Winning Bid: December 2011 Description: The project involves the construction of 13.4 km. 4-lane elevated expressway over the Philippine National Railway (PNR) right-of-way which starts at Caloocan City and ends at Makati City. The project aims to close the gap and complete the north-south Luzon industrial beltway transport axis by connecting NLEx and SLEx. The project will contribute to decongest Metro Manila traffic, particularly EDSA and provide a 24-hour access to Manila ports by providing faster, safer and comfortable means of transport facility. 3. Privatization of LRT 1 and MRT 3 Operation and Maintenance Estimated Project Cost: USD62.8 Million Contract Award: August 2011 Service contract administration: September 2011 – September 2016

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Description: The project aims to privatize the operation and maintenance of LRT Line 1 and MRT 3 for a period of 5 years under a service contract (including repair and rehabilitation of rolling stocks). 4. Daang Hari – SLEX Link Road Estimated Project Cost: Php1.40 Billion (USD31.11 Million) Announcement of Winning Bid: November 16, 2011 Contract Execution: December 3, 2011 Description: The project is a new 4 kilometer, 4-lane paved toll road that will pass through the New Bilibid Prison reservation that will connect Bacoor, Cavite to the South Luzon Expressway near the Susana Heights area. The proposed new linkage will complement the Cavite – Laguna – East – West highway and will address the for additional access between Metro Manila and Cavite where rapid urbanization and consequent worsening of traffic situation is being experienced. The project components include two (2) overpasses, four (4) local roads, one (1) undercrossing, one (1) rotunda and drainage structures. 5. LRT Line 2 East Extension Estimated Project Cost: USD250 Million Concession contract administration: April 2012 – March 2032 Description: The project involves the expansion and maintenance of existing LRT Line 2. Expansion covers the construction of a 4 kilometer eastern extension of LRT Line 2 from Santolan in Pasig City to Masinag Junction in Antipolo, Rizal with additional 2 passenger stations to be located at Sta. Lucia Mall and at Masinag. 6. MRT/LRT Expansion Program: LRT 1 South Extension (Cavite) Estimated Project Cost: USD850 Million Concession contract administration: January 2012 – December 2042 Description: The project involves the extension of the existing 15-kilometer LRT Line 1 system southward to Bacoor, Cavite by additional 12 kilometers and integration of MRT 3 with LRT 1 with seamless operation of both lines. The project will have 8 passenger stations with provision for additional future passenger stations, a satellite depot for light maintenance to be maintained at the southern end of the proposed line, and intermodal facilities installed at high-demand stations, including the provision of additional rolling stocks to meet the current demand and additional loan requirements once the MRT Line 3 and

LRT Line 1 are

integrated. 7. CALA Expressway – Cavite Side Section (27.5 Km) Estimated Project Cost: USD233.33 Million Target Bid Date: April 2012 Detailed design and construction: July 2012 – June 2016 Description: The project will provide vital access between various economic zones in Cavite province and NAIA, Manila Port and Batangas Port, and contribute to the economic development and

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decongestion of traffic along Cavite roads, particularly Aguinaldo Highway. This is the extension of the ongoing Manila-Cavite Coastal Expressway Extension and ends in Silang, Cavite. It is an at-grade expressway. The project has a total length of 27.5 kilometers with six (6) lanes. 8. New Bohol Airport Development Estimated Project Cost: USD151 Million Concession contract administration: March 2012 – February 2032 Description: The project involves the construction of a new airport of international standards in Panglao Island to replace the existing Tagbilaran Airport. It will have a 2,500m x 45m runway, taxiway, apron and provision for air traffic control and navigational equipment and landslide facilities. The project proponent will finance, construct the extension, operate and maintain the airport for a period of 20 years. 9. Puerto Princesa Airport Development Estimated Project Cost: USD92 Million Concession contract administration: January 2012 – March 2032 Description: The project involves the rehabilitation/improvement of the existing Puerto Princesa Airport to meet the standards of the International Civil Aviation Organization (ICAO), through the construction of new landslide facilities in the north western side of the existing runway. It also involves the construction of new apron and connecting taxiways, upgrading of the existing 2.6km runway and its strip, and the provision of new navigational and traffic control equipment. 10. New Legaspi (Daraga) Airport Development Estimated Project Cost: USD153 Million Concession contract administration: February 2012 – February 2032 Description: The project involves the construction of a new airport in Daraga, Albay that will replace the existing Legaspi Airport. It will have a new 2,100m x 45m runway and other airside and landside facilities. The landside facilities include Passenger terminal, Cargo building, Control tower, Administration building, Vehicle parking area (VPA), and other site development. The airside facilities include the Runway Strip/Runway, Taxiway, Apron, and Air Traffic/Navigation Equipment. 11. Privatization of Laguindingan Airport operation and Maintenance Estimated Project Cost: USD10-15 Million per year Concession contract administration: February 2012 – January 2032 Description: The project involves the privatization of the operation and maintenance of the Laguindingan Airport to reduce government expenditure and increase current and future service levels of the airport. The operation and maintenance through concession covers the newly constructed airport on a 393-hectare property complete with facilities of international standards. The airport can accommodate 1.2 million passengers per year based on its master plan. Aside from the 11 projects identified by the government for immediate rollout, the National Government is lining up 35 PPP projects for medium term rollout (for the next 3- 5 years). In order to sustain the program, future PPP projects will be developed for other departments and local government

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units, and these are all under the conceptual stage (Philippines - Public-Private Partnerships (Programs and Projects), 2011): 1. Department of Agriculture – 5 projects (e.g. organic rice farming, integrated agri-food park, contract farming); 2. Department of Health – 4 projects (e.g. air ambulance, sanitariums in Visayas region); 3. Department of Energy – 28 projects (e.g. construction of power plants harnessing coal, wind, biomass, hydro, and geothermal energy); 4. Various projects for Iloilo; Laoag, Ilocos Norte; Legaspi, Albay; Tanauan, Batangas; Davao del Norte; Olongapo;

Public Works and Highways Guided by President Benigno S. Aquino III‘s ―Tuwid na Landas‖ directive, current Department of Public Works and Highways (DPWH) Secretary Singson declared the Department‘s goal that ―by 2016, the national road network of the country shall have an International Roughness Index (IRI) of 2.0 or below 3 to be at par with Malaysia road network.‖ The DPWH basic mandate is the design, construction and maintenance of national roads and bridges and flood control systems in major and principal rivers. As of December 28, 2010, the Philippines have 31,242.38 kilometers of road network. In the 2010 DPWH road data released by DPWH, only 7,645.72 kilometers of roads are classified to be in good condition. Roads in fair condition totaled 10,155.74 kilometers (Department of Public Works and Highways - 2010 DPWH road Data). The rest of the road network is classified as poor (6,172 kms.), bad (6,505.21 kms.), or not assessed (763.45 kms.). DPWH targets to pave 100% of the national arterial road network by 2016 (from 86% in 2009), which will require the paving of 2,206 kms. and the rehabilitation / widening / upgrading / construction of 3,626 kms. On the other hand, DPWH targets to pave 93% of the national secondary roads by 2016 (from 63% in 2009), which will entail paving of 2,040 kms. and the rehabilitation of 2,212 kms. Along the national road network, there are 8,180 bridges in the total length of 334,325 lineal meters, which are classified as either permanent or temporary. The government aims to make all temporary bridges permanent by 2016 through various bridge programs for 100% by 2016 (from 93% in 2009). This will involve the replacement of 12,410 lineal meters of temporary bridges, reconstruction of 4,229 lineal meters and rehabilitation of 4,978 lineal meters of existing bridges. DPWH will also construct new 2,154-lm. bridges by 2016. The Department of Public Works and Highways have also identified major flood control projects that will be undertaken in the next 6 years (Department of Public Works and Highways - YEAR-END REPORT (ACCOMPLISHMENT OF THE AQUINO ADMINISTRATION IN 2010)): 

Flood Risk Management Project along Principal Rivers.

Valenzuela-Obando-Meycauayan (VOM) Area Drainage System Improvement Projects

Cavite Lowland Retarding Pond Project.

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Study on Flood Mitigation Plan for Metro Manila and Sub-Urban

Areas under World Bank (Pasig-Marikina-Laguna Lake Basin)

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2.4 Threats and Opportunities Threats Increasing inflation and interest rates Basis: Change in Economic Segment Determinant: Decreases industry growth Competitive Force: Increases intensity of rivalry among existing competitors A projected increase in inflation rates in the years 2012 -2014 (moving at the upper range of 3 – 5%) will slow down growth in the financial services industry as BSP is committed to maintain low and stable prices. Part of BSP monetary tools to control inflation is to increase interest rates, which in turn reduce the banks‘ propensity to lend its funds to the public. Customers’ greater access to information through the Internet and electronic banking channels Basis: Changes in Technological Segment Determinant: Increases buyer information Competitive Force: Increases bargaining power of buyers Greater access to the Internet and electronic banking has enabled the customers to have better information on different products of several financial institutions.

Lingering challenges in the Philippine political system Basis: Change in Political Segment Determinant: Decreases industry growth Competitive Force: Increases intensity of rivalry among existing competitors Graft and corruption, lack of transparency and armed conflicts in Mindanao and in the countryside limit the establishment of branches of financial institutions in the areas under conflict.

Moratorium on establishment of new banks/branches for universal banks Basis: Change in Legal Segment Determinant: Limits the number of competitors Competitive Force: Increases intensity of rivalry among existing competitors The existing moratorium for universal banks to establish branches in identified restricted areas such as Makati, Mandaluyong, Manila, Parañaque, Pasay, Pasig and Quezon, and San Juan limits the number of competing branches in highly urbanized areas.

Adverse effects of Global Warming Basis: Changes in Ecological Segment Determinant: Decreases industry growth Competitive Force: Increases intensity of rivalry among existing competitors

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By 2100, Southeast Asia nations will face debilitating economic loss due to global warming. The study conducted by ADB found that Indonesia, Philippines, Thailand, and Vietnam could suffer an annual loss of 6.7 percent ($230 billion dollars) in combined GDP, more than double the global average which is estimated at a loss of 2.6 percent.

Opportunities Stringent government regulation Basis: Changes in Legal Segment Determinant: Increases capital requirements Competitive Force: Reduces threat of new entrants The Bangko Sentral ng Pilipinas has instituted increase in capital requirements for industry participants in order to comply with the Basel Accords and international best practices. BSP encourages mergers and acquisitions in order to strengthen the financial system.

High GDP growth and Emergence of MSMEs Basis: Changes in Economic Segment Determinant: Increases industry growth Competitive Force: Reduces intensity of rivalry among existing competitors The economy of the Philippines is estimated to grow by 4-5% (in terms of GDP) in 2012 to 2014. High economic growth will improve demand for the financial sector as the industry serves as catalyst in the economic development. MSMEs also play a big role in uplifting the economy.

Launching of the PPP programs Basis: Changes in Infra-structural Segment Determinant: Increases industry growth Competitive Force: Reduces intensity of rivalry among existing competitors The Aquino administration has identified 11 PPP projects worth approx. USD2.54 Billion (PhP109 Billion) that are for immediate rollout in the next 12 months. This is an opportunity for industry growth as these projects will require financing from banks.

Use of Internet and mobile technology as alternative distribution channels Basis: Changes in Technological Segment Determinant: Access to distribution channels Competitive Force: Reduces threat of new entrants The use of the Internet, telephone and mobile technology has addressed the need for convenience of customers. Emerging technologies also became a barrier of entry to prospective entrants as these channels entail substantial investment.

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Thrust for sustainable energy projects Basis: Changes in Ecological Segment Determinant: Increases industry growth Competitive Force: Reduces intensity of rivalry among existing competitors Shift towards sustainable energy projects recognizes the need for development of alternative and renewable energy sources. The financial services industry will benefit from the increasing demand for sustainable energy projects since these will entail large-scale investments.

2.5 Industry and Competitive Analysis 2.5.1 Strategic Map A strategic map shows the grouping of industry participants with the same or similar strategy along the identified strategic dimensions. It is useful in structural analysis since it acts as an intermediate frame of reference between looking at the industry as a whole and considering each firm separately. Strategic groups are present for a wide variety of reasons, such as firms‘ differing initial strengths and weaknesses, differing times of entry into the business and historical accidents. The strategic map is also relevant for identifying a firm‘s market and major competitors, which are companies with similar strategies and markets (Porter, 1980). In preparing a strategic map for a given industry, it is essential to identify the key dimensions of competitive strategy: 1. Specialization - is the degree to which a company focuses its efforts in terms of the width of its line, the target customer segments and the geographic markets served. 2. Product Scope - the width of the company‘s product line. 3. Geographic Scope - the degree of the geographic markets served. 4. Brand identification - the degree to which a company seeks brand identification rather than competition based mainly on price or other variables. Brand identification can be achieved via advertising, sales force, or a variety of other means. 5.

Push versus pull - the degree to which a company seeks to develop brand identification with the ultimate customer directly versus the support of distribution channels in selling its product.

6. Channel selection - the choice of distribution channels. 7. Product quality - the level of product quality in terms of raw materials, specifications, adherence to tolerances, features and so on. 8. Technological leadership - the degree to which it seeks technological leadership versus following or imitation. 9. Vertical Integration - the extent of value added as reflected in the level of forward and backward integration adopted, including whether the firm has captive distribution, exclusive or owned retail outlets, an in-house service network

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10. Cost position - the extent to which it seeks the low-cost position in manufacturing or distribution through investment in cost-minimizing facilities and equipment. 11. Service-

the degree to which it provides ancillary services with its product line such as

engineering assistance, an in-house service network, credit and so forth. 12. Price Policy - the relative price position in the market. 13. Leverage - the amount of financial or operating leverage it bears. 14. Relationship with Parent Company - requirements on the behavior of the units based on the relationship between a unit and its parent company (refers to subsidiaries) 15. Relationship to home and host government - in international industries, the relationship of the firm has developed or is subject to with its home government as well as host governments in foreign countries where it is operating. For this paper, both product scope and geographic scope are the key dimensions that will be used in grouping the companies with same or similar strategies in the financial services industry. Figure 7: Strategic Map of the Financial Services Industry

10

F

9

Product Scope

8 7 6

C

5

E

4 3

A

2

B

D

1 City/Municipality

Provincial

Regional

Nationwide

Geographic Scope Strategic Groups: A – Cooperatives, Microfinance firms B – Rural banks C – Commercial and Thrift Banks, Citibank, HSBC D – Pawnshops, Insurance companies E - Land Bank, DBP F – BDO, Metrobank, BPI, PNB, RCBC BDO belongs in the same strategic group as other banks with universal banking licenses such as Metrobank, BPI, and PNB. Universal banks provide the widest array of financial services in the industry, and at the same time, cater to the broadest geographic scope with nationwide branch network.

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2.5.2 Market Definition A market can be defined as a group of consumers or organizations that is permitted by law & other regulations to acquire the products or services. The market of Banco de Oro can be defined as the following: a. All individuals and businesses with the need for credit/financing (measured by Total Loans); b. All individuals and business organizations with available funds for savings (measured by Total Deposit Liabilities); c.

All individuals and business organizations with available funds for investments (measured by Total Investment Securities).

2.5.3 Market Size With the above-mentioned market definition, the size of the potential markets of BDO can be estimated by using the recent industry reports from the Bangko Sentral ng Pilipinas (BSP). Market Size – Loan Portfolio (amounts in million pesos) December 2010

December 2009

Growth

2,589,972.89

2,384,236.28

8.63%

Gross Loan Portfolio

BDO‘s market size in terms of gross loan portfolio has increased by 8.63% in the past 2 years. Gross loan portfolio is sum of total loans and receivables and the specific provision for loan loss of banks. This excludes interbank loans, loans to BSP and credit cards receivables. BDO‘s market share is at 20% in 2010 (ranked number 1 among banks). Total loans in the Philippine banking system are expected to grow by 19% in the years 2012-16. This is consistent with the country‘s average 3-year historical loan growth rate and 2011 interim data from BSP and BAP (Manila Standard Today - PH to weather Euro crisis). Gross Loan Portfolio

2010

2011

2012

2013

2014

2015

2016

2,589,973

3,080,773

3,664,579

4,359,017

5,185,051

6,167,618

7,336,382

Market Size – Deposit Liabilities (amounts in million pesos)

Total Deposit Liabilities

December 2010

December 2009

Growth

4,816,929.23

4,370,846.43

10.21%

On the other hand, the size of BDO‘s market in terms of total deposit liabilities rose by 10.21% from 2009 to 2010. Euromonitor International estimated that per capita annual savings stood at PhP1,997.00 (US$44) in 2010, a 1.0% rise in real terms over 2005-2010. BDO‘s market share is at 16.22% in 2010 (ranked number 1 among banks).

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In the December 2010 report of the Philippine Deposit Insurance Corporation, total deposit accounts in the country‘s banking system is at 39.72 million (Philippine Deposit Insurance Corporation Domestic Deposit Liabilities by Size of Account).

Market Size – Investment Securities (amounts in million pesos)

Total Investment Securities

December 2010

December 2009

Growth

1,554,618.91

1,374,864.06

13.07%

BDO‘s market for investment securities soared by 13.07% from 2009 to 2010. The bank‘s market share is at 12.69% in 2010.

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2.6 Broader Societal Expectations 2.6.1 Corporate Social Responsibility The article Global Corporate Citizenship, Working with Government and Civil Society by Schwab highlights five core concepts of business engagement to society (Schwab, 2008): 1. Corporate governance means that a company complies with local and international laws, transparency and accountability requirements, ethical norms, and environmental and social codes of conduct. 2. Corporate philanthropy includes cash contributions; grants; donations, including salary sacrifice programs and the giving of products; services; and investments. Corporate philanthropy is an engagement that does not go beyond writing a check or handing out donated goods. 3. Corporate responsibility includes the obligations and responsibilities of the business to society, that in the pursuit of the profit motive, the basis for its corporate acts and strategies should include its commitment to protecting the environment, upholding the rights of its workers and contributing to the improvement of the quality of life of its community and society at large. 4. Corporate social entrepreneurship is strictly defined as the transformation of socially and environmentally responsible ideas into products or services. 5. Global corporate citizenship goes beyond the concepts of corporate philanthropy, including social investing; corporate social responsibility; and corporate social entrepreneurship in that it entails focusing on ―the global space, which is increasingly shaped by forces beyond the control of nation-states. In the recent years, Banco de Oro Unibank Inc. has instituted organization-wide changes in order to improve corporate governance and corporate social responsibility programs. Corporate Governance A Corporate Governance Committee headed by an independent director has been established in order to review and assess the Bank‘s corporate governance practices. Moreover, this committee recommends the applicable guidelines, monitors compliance, and suggests improvements to ensure effectiveness. It also provides oversight on the annual performance self-evaluation of the Board, its committees, and executive management. The Committee conducted four meetings in 2010. In 2010, the Corporate Governance Committee accomplished the following: 1. Updated and enhanced BDO‘s Corporate Governance Manual, a guide for the Bank‘s business and operations to be conducted in accordance with the principles and best practices of good corporate governance. 2. Improved the disclosures of the Bank‘s Corporate Governance policies and practices using the Scorecards of the Bangko Sentral ng Pilipinas (BSP), Securities and Exchange Commission (SEC) and Institute of Corporate Directors (ICD) Corporate Governance as reference.

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3. Conducted the annual performance evaluation of the board, its committees and senior management in compliance with SEC and BSP circulars. In order to ensure that BDO‘s Board and management adhere to the formulated corporate governance policies, the following units were established by the Bank. BDO‘s Internal Audit Division (reporting under the Audit Committee) provides independent and objective assurance services and continuously improves the Bank‘s internal control practices. External Audit involves the re-appointment of Punongbayan & Araullo as independent external auditor of BDO for 2010. Compliance Office, on the other hand, assists senior management in managing effectively the compliance risks confronted by the Bank. Lastly, the Anti-Money Laundering Unit handles the administration of the Bank‘s compliance with the Anti Money Laundering Act and its implementing rules and regulations.

Corporate Social Responsibility The Bank‘s CSR and corporate philanthropy activities are primarily handled by BDO Foundation, Inc. This institution is committed to help alleviate the lives of the underprivileged and conserve the environment. Among the programs that were instituted by the Bank in 2010 include (Banco de Oro Unibank Inc., 2010): 1. Donation of houses and lots in Calumpit, Bulacan. This project aimed to improve the site as relocation area for victims of typhoons. Total project cost reached about PhP20 Million and was turned over in October 2010. 2. Lecture series on Accounting for Non-Accountants and Financial Literacy Program for both CARD-MRI (microfinance institution) and Save the Children Foundation. Volunteers rendered 98 hours for this project. 3. Series of talks through the BDO Skills Trainers on Personality Development were initiated to teach account officers working with microfinance institutions. 4. Launched Share Gift Check project as outlet for the Bank‘s clients, suppliers, employees to create social value while doing business. Chosen advocacies include education, health and shelter. In 2011, BDO‘s on-going CSR projects include the following programs: 1. Construction of 105 transitory houses at Starville III in Baliwag, Bulacan for delivery by the third quarter of the year. Start of the second phase of the BDO Foundation-GK Community in D‘ Dreamland Ville, San Jose del Monte City, Bulacan where 21 homes are targeted for turnover by June 2011. 2. Development of the second BDO Volunteer Multi-purpose Hall in Starville III in Baliwag, Bulacan. 3. ―Go Green Program‖ was launched in order to raise awareness on environmental issues, promote good environmental practices in the workplace and mobilize volunteers for conservation initiatives.

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4. Energy Conservation - BDO has adopted environment-friendly and cost-saving solutions to power consumption in the country. The Bank updated all its signage installations and became the first bank in the Philippines to use Light Emitting Diode (LED) lights in all its branches and building signages. The switch from conventional fluorescent bulb to LED lights, which was made for both economic and environmental objectives, has resulted to reduction of expenses in lighting signages and reduction of emission of carbon dioxide in the generating plant due to the lower electric power demand to light up the signages.

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MODULE THREE – Analysis of Internal Environment 3.1 Overview of the Company Brief History Banco De Oro Unibank Inc. (BDO), originally known as Acme Savings Bank, was acquired by the SM Group in 1976. In December 1994, BDO became a commercial bank and was later renamed as Banco de Oro Commercial Bank. In September 1996, BDO became a universal bank, which led to the bank's name being changed to the current Banco de Oro Universal Bank. BDO‘s foray in insurance services started in 1997 by establishing a subsidiary called BDO Insurance Brokers Inc. In 1999, BDO expanded its insurance services through partnerships with Assicurazoni Generali s.p.a., one of the world's largest insurance firms, and Jerneh Asia Berhad, a member of Malaysia's Kuok Group. BDO listed its shares on the Philippine Stock Exchange (PSE) on May 21, 2002. On June 15, 2001, BDO merged with Dao Heng Bank's Philippine subsidiary, with BDO as the surviving entity. The merger boosted the number of BDO's branches from 108 branches before the merger to 120 after the merger. In late April 2005, United Overseas Bank sold 66 out of its Philippine subsidiary's 67 branches to BDO. In March 26, 2006, all UOB branches were integrated into the BDO network, increasing the number of Banco de Oro branches to 220. On August 5, 2005, Banco de Oro and an SM subsidiary, SM Investments, bought 24.76% of the shares of Equitable PCI Bank, the Philippines' third-largest bank, and 10% of an Equitable PCI affiliate, Equitable CardNetwork. BDO has also been offered a further 10% by another Equitable PCI affiliate, EBC Investments, and a deal is being made to buy the 29% stake of the Social Security System (SSS), the Philippines' pension fund. Subsequent acquisitions enabled the bank to acquire a 34% stake in Equitable PCI Bank (SM Investments Corporation). On December 1, 2005, Banco de Oro shares were listed as a component of the PSE Composite Index for the first time. On January 6, 2006, Banco de Oro, with the SM Group of Companies, submitted to Equitable PCI a merger offer with Banco de Oro as the surviving entity. Dubbed as a "merger of equals," BDO acquired EPCI in June 2007, creating the country's second biggest bank in terms of assets (P608 billion) second to Metrobank (P669.1 billion).

Organization Banco de Oro (along with Chinabank) belong to the financial services arm of the SM group. The SM Group is one of the largest conglomerates in the Philippines, with substantial interests in financial services, real estate development, and tourism and entertainment, founded around its core business in commercial centers and retailing. Although part of a family conglomerate, BDO's day-to-day operations are handled by a team of professional managers and bank officers.

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De La Salle University Graduate School of Business Figure 8: Snapshot of the SM Group

At present, BDO is the largest bank in the country in terms of assets, breaching the P1-Trillion mark in 2010. A product of a recent merger of two large financial institutions (BDO and Equitable-PCI Bank), Banco de Oro has established its capability to provide a complete array of industry-leading products and services to the retail and corporate markets including (BDO - About Us): 1. Lending (corporate, middle market,

8. Leasing and financing

SME and consumer) 2. Deposit-taking

9. Investment banking

3. Foreign exchange

10. Private banking

4. Brokering

11. Bancassurance

5. Trust and investments

12. Insurance brokerage

6. Credit cards

13. Stock brokerage services

7. Corporate cash management and remittances

These financial activities presently offered by the Bank can be classified into two categories, namely: intermediation and service-based. The performance of these various financial services in 2010 is summarized as follows:

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Intermediation Activities 1. Business Lending – BDO achieved a 12% increase in its total business lending portfolio, from P387 Billion in 2009 to P432 Billion in 2010. The growth was fueled by strong demand from clients belong to the SME and commercial banking segments. 2. Consumer Lending – Consumer loans grew 27% in 2010, which is supported by continuous growth in home loans (up 34%), auto loans (up 25%) and credit card (up 28%). 3. Branch Banking – In 2010, the Bank expanded its branch network from 707 in 2009 to 726 branches in the year. BDO also maintains a branch in Hong Kong. Total ATM network is at 1,430 nationwide. 4. Treasury – includes foreign exchange transactions and investments in trading securities (Banco de Oro Unibank Inc., 2010). Services – Based Activities 1. Trust and Investments – BDO grew its consolidated assets under management by 25% to P570 Billion. Moreover, total net asset value (NAV) of Unit Investment Trust Funds is at PhP61 Billion in 2010, 46% higher than 2009 NAV of PhP42 Billion. 2. Private Banking – BDO‘s wealth management arm‗s assets under management and net income increased by 29% and 53% in 2010, respectively. 3. Investment Banking – In 2010, subsidiary BDO Capital and Investment Corp. raised PhP243 Billion in the debt capital market. It was also instrumental in the underwriting of several stock rights issues for SM Development Corp., First Gen Corp., Semirara Coal Corp., and Interport Resources Corp. 4. Transaction Banking – This includes the Bank‘s cash management and electronic banking services. Total revenues for this segment grew by 21% in 2010. 5. Remittances – In order to beef up its wide remittance network, BDO established 3,000 remittance payment locations nationwide. Among the programs instituted by BDO include Easy Asenso, Instant Panalo – a year-long program that encouraged both OFW‘s and their beneficiaries to open an Asenso Kabayan Savings Account. 6. Insurance (Brokerage and Bancassurance) – Total insurance premiums generated in 2010 grew by 46% while commission income rose by 32% (Banco de Oro Unibank Inc., 2010).

Subsidiaries BDO's diverse subsidiaries and investments in allied undertakings provide an extensive range of banking and other financial services. The Company's subsidiaries are as follows: 1. BDO Capital & Investment Corporation (BDO Capital) 2. BDO Elite Savings Bank, Inc. (formerly GE Money Bank, Inc.) 3. BDO Insurance Brokers, Inc. (BDOI)

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4. BDO Leasing & Finance, Inc. 5. BDO Private Bank, Inc. (BDO Private) 6. BDO Strategic Holdings, Inc. (BDOSHI, formerly EBCII) 7. BDO Technology Center, Inc. (BDO Technology) 8. BDO Strategic Holdings Corporation (ESHC). 9. Equimark-NFC Development Corporation 10. Equitable Card Network, Inc. 11. PCIB Securities, Inc.

Foreign Offices As part of the company‘s aim to corner a larger market share in the OFW remittance business, Banco de Oro maintains several offices abroad. The Bank has 1 full-service branch in Hong Kong, 21 remittances offices (covering South East Asia, Middle East, Europe and North America) and hundreds of tie-ups with correspondent banks and designated agents (BDO - About Us). The biggest remittance offices are listed below: Figure 9: Distribution of BDO Foreign Offices

1. BDO Remit Ltd. 2. BDO Remit (Italia) S.p.A. 3. BDO Remit (Macau) Ltd. 4. BDO Remittance (USA) Inc. 5. Express Padala Frankfurt GmbH 6. Express Padala (Hong Kong) Ltd. Representative / Marketing Offices 1. Paris, France Representative Office 2. Taipei, Taiwan (Republic of China) Representative Office 3. Tel-Aviv, Israel Office

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3.2 Financial Analysis 3.2.1 Financial Ratios Financial Ratio analysis is a powerful tool used in evaluating the overall financial condition and performance of an organization. In this paper, financial ratios are used to pinpoint the strengths & weaknesses of the company. Banco de Oro‘s key financial ratios for 2009 and 2010 are discussed below:

Liquidity Ratios 2009 Current Ratio =

Quick Ratio =

Net Working Capital =

Current Assets

758,404

Current Liabilities

729,460

Quick Assets

758,404

Current Liabilities

729,460

Current Assets -

758,404

Current Liabilities

-729,460

2010 1.04

903,070

1.06

853,242 1.04

903,070

1.06

853,242 28,944

903,070

49,828

-853,242

Current Ratio is mainly used to determine the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. BDO reported improving current ratio from 1.04x in 2009 to 1.06x in 2010, which shows that the company can service short-term liabilities with its current assets. On the other hand, Net Working Capital measures a company's efficiency and its short-term financial health. Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory). In 2010, Banco de Oro‘s net working capital stood at PhP49.83 Billion.

Profitability Ratios Gross Profit Margin is a financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. BDO‘s gross profit margin is computed by dividing net interest income by the gross interest income. GPM improved from 61.83% in 2009 to 67.79% in 2010, as the bank focused on developing low-cost funding structure. 2009

Gross Profit Margin =

Net Interest Income

27,830

Interest Income

45,011

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2010 61.83%

31,554

67.79%

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Operating Profit Margin =

Net Profit Margin =

Return on Assets =

Gross Profit - OPEX

7,619

Gross Interest Income

45,011

Net Income

6,356

Gross Interest Income

45,011

Net Income

6,356

Average Total Assets

788,405

Net Income

6,356

Average equity

57,916

Net Profit - PS Dividends

6,272

No. Of Outstanding CS

2,315

Return on Equity =

Earnings per Share =

16.93%

9,730

20.90%

46,544 14.12%

8,433

18.12%

46,544 0.81%

8,433

0.95%

887,194 10.97%

8,433

11.62%

72,561 2.71

8,103

3.21

2,522

BDO‘s operating margin (a measurement of what proportion of a company's revenue is left over after paying for variable costs of operation such as wages, utilities, etc.) also improved in 2010, rising from 16.93% to 20.90%. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt and taxes. The company‘s net profit margin also rose from 14.12% in 2009 to 18.12% in 2010. NPM is a ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every peso of revenues/sales a company actually keeps in earnings. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Return on Assets (ROA) measures how well a company uses its capital resources to generate income. Although BDO‘s ROA is deemed low at less than 1%, the bank has shown improvement in the 2009-2010 period (from 0.81% to 0.95%). A more significant profitability ratio for banks, however, is the Return on Equity (ROE). It shows the amount of net income returned as a percentage of shareholders equity. ROE measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Banco de Oro‘s ROE is on an uptrend, from 10.97% in 2009 to 11.62% in 2010. Earnings per share (EPS) measures the portion of a company's profit allocated to each outstanding share of common stock. EPS is computed by first subtracting the dividends given to preferred shares from the after-tax net income, then dividing the result with the number of outstanding common shares. Earnings per share also improved in 2010 due to the bank‘s higher bottom-line, from P2.71/share in 2009 to P3.21/share.

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Leverage Ratios 2009 Debt to Equity Ratio =

Total Liabilities

752,612

Total Stockholder's Equity

62,572

Total Liabilities

752,612

Total Assets

815,184

Debt to Asset Ratio =

Capital Adequacy Ratio =

2010 12.03

876,394

10.62

82,549

Qualified Capital

66,847

Total RW Assets

640,458

0.92

876,394

0.91

959,203 10.44%

85,067

12.14%

700,510

A measure of a company‘s financial leverage is the Debt/Equity ratio. D/E ratio shows what proportion of equity and debt the company is using to finance its assets. Being a financial institution, Banco de Oro is expected to have a high leverage ratio. D/E ratio for 2010 is at 10.62x, which lower than the 12.03x posted in the previous year. The improvement in D/E ratio is due to issuance of additional 24 million shares (at PhP41.50/share) to foreign investor International Finance Corporation (IFC) in April 2010. Banco de Oro‘s Debt/Asset Ratio is almost unchanged at 0.91x in 2009-2010. This financial ratio indicates the percentage of a company's assets that are provided via debt. Aside from the commonly used leverage ratios, the Bangko Sentral ng Pilipinas (BSP) is now requiring banks to maintain at least 10% capital adequacy ratio (CAR). CAR is derived from dividing qualified capital with the bank‘s total risk-weighted assets. In 2010, CAR of Banco de Oro (parent company) is at 12.1%, well above the regulatory requirement. As a group, BDO‘s capital adequacy ratio is at 13.8% in 2010.

Asset Quality and Efficiency Ratios 2009

Assets Turnover Ratio =

Accounts Receivable Turnover Ratio = Accounts Payable Turnover Ratio =

Gross Interest Income

45,011

Average Total Assets

788,405

Gross interest income

45,011

Ave. Accounts Receivables

558,594

Interest Expense

17,181

Average Accounts Payables

641,386

2010 0.06

46,544

0.05

887,194 0.08

46,544

0.07

636,773 0.03

14,990

0.02

716,090

BDO‘s asset turnover ratio is at 0.05x in 2010, which is a measure of a firm's efficiency at using its assets in generating sales or revenue. Asset turnover ratio also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.

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Receivables turnover ratio measures a firm's effectiveness in extending credit as well as collecting debts. Banco de Oro‘s AR turnover ratio is at 0.07x, slightly lower than the 0.08x in 2009. Accounts payable turnover ratio liquidity measure used to quantify the rate at which a company pays off its suppliers. BDO‘s AP turnover ratio is significantly low at 0.02x, as the bank continues to expand deposit liability base in 2010. A relevant measure of asset quality for banks is the ratio of non-performing assets (NPA) in relation to its total assets and total loan portfolio. Non-performing assets refer to the sum of nonperforming loans (NPLs) and real and other properties owned and acquired (ROPOA). NPLs are any of the following: 1. Past due loan accounts whose principal and/or interest is unpaid for thirty (30) days or more after due date (applicable to loans payable in lump sum and loans payable in quarterly, semi-annual or annual installments), including the outstanding balance of loans payable in monthly installments when three (3) or more installments are in arrears, the outstanding balance of loans payable daily, weekly or semi-monthly installments when the total amount of arrearages reaches ten percent (10%) of the total loan receivable balance, 2. Restructured loans which do not meet the requirements to be treated as performing loans under existing rules and regulations, 3. All items in litigation (Bangko Sentral ng Pilipinas - Glossary). On the other hand, ROPOA is defined as real and other properties, other than those for banking purposes or held in the investment portfolio, acquired by the bank in settlement of loans and/or for other reasons. 2010 Figures

BDO

MBTC

BPI

2.90

Industry Average 2.65

Non-Performing Assets/ Total Assets (NPA ratio) Non-Performing Assets/ Loans (net) Classified Loans / Gross Loan Portfolio NPL Coverage Ratio

2.50

1.06

5.68

6.31

6.11

2.18

2.66

10.31

7.84

5.68

5.03

3.99

2.59

1.86

The table above shows the comparison between BDO‘s key asset quality ratios against the industry and peer competitor banks MBTC and BPI. It is notable that BDO has the highest NPA ratio at 2.90x, which means that the Bank has idle assets in its books that it needs to liquidate. Comparing NPAs with total loan portfolio, BDO‘s ratio of 5.68x is slightly better that the industry average and that of MBTC, however, BPI holds the edge at 2.18x in 2010. The classified loans to gross loan portfolio ratio show the loan quality of a Bank. BDO‘s existing loan portfolio is mostly in current status and with lower credit risk. Lastly, BDO has a high NPL Coverage ratio at 5.03x, which could be a good thing since the Bank has enough coverage for potential loan losses. However, loan loss provisions lower the Bank‘s overall profitability.

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3.3 Value-Chain Analysis A firm can be defined as a collection of activities that it internally performs. This collection of activities that a company performs is called a value chain – so called because the underlying content of a company‘s activities is to do things that ultimately create value for buyers. The value chain framework shown below consists of two broad categories of activities: (1) primary activities that involve the physical creation of the product and its sale and transfer to the buyer as well as after sale assistance; and (2) requisite support activities, which facilitate and enhance the performance of the primary activities. Figure 10: Sample Value Chain of a Firm

Although Banco de Oro performs a thousand activities, this paper only focused on several activities that have value to the customer. These activities are classified between primary and support activities.

Primary Activities rd

1. Supply Chain Management – BDO procures various equipment, supplies and 3 -party rd

software from 3 -party vendors. 2. Operations – As a universal bank, Banco de Oro‘s basic operations revolve around deposittaking from customers, lending of money to businesses and individuals, investing funds to financial products such as stocks and bonds, sending remittances to beneficiaries and trading currencies and securities in behalf of customers. The Bank is a pioneer in the industry in making branches open for longer banking hours (open until 7 pm for some branches) and accessible even on weekends and most holidays (for branches located in SM malls).

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De La Salle University Graduate School of Business Figure 11: Sample Value Chain of Banco de Oro Unibank Inc.

3. Distribution – The Bank‘s distribution network has different channels. BDO currently has 726 branches that are able to provide a wide array of services such as deposit-taking, withdrawal, bills payment, investing funds and other related services. Branches are strategically located in order to maximize its reach of its target market around the country. In recent years, BDO has shifted its focus in opening of branches from Metro Manila to provincial areas. Moreover, these branches were renovated to project an atmosphere of professionalism and customer orientation. In addition, Banco de Oro placed 1,430 automated teller machines (ATMs) in high traffic locations. These ATMs have become a useful alternative for customers in accessing the bank‘s deposit and withdrawal services without going to branches. In addition, customers can use the internet and phone banking channels to do simple transactions like bills payment and accessing the deposit account. 4. Sales and Marketing – BDO uses various advertising campaigns in order to drum up the company brand as the leading bank in the country. The bank uses TV and radio commercials, newspaper ads, corporate posters and flyers in advertising the bank‘s products and services. BDO, together with other firms, also sponsor events like movie premiers, concerts, beauty pageants and marathons. Moreover, cross-selling of financial products is

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encouraged within the organization in order to heighten customer awareness. Lastly, efforts to improve brand equity include CSR projects, which aim to provide sustainable development in identified advocacies. In 2007, BDO launched its own Rewards Program, a loyalty program aimed at rewarding BDO customers each time they avail of the Bank‘s services. Customers earn points whenever they perform qualified bank transactions and whenever they shop with SM and other Rewards partners. 5. Service – BDO handles customer complaints and inquiries through branch personnel and a customer service network. Customers can also use the corporate website to post inquiries and complaints regarding the Bank‘s services.

Support Activities 1. Product Research and Development, Systems Development – BDO constantly reviews and develops its financial products in order to address the needs of its customers. BDO continuously develops its cash management service with the aid of new technology available in the market. The Bank also employs the Six Sigma methodology as a way to improve the quality of its processes, especially in the operations. BDO is also upgrading its existing operating and IT systems in order to serve its customers efficiently and reduce the transaction cost for its clients. The continuous improvement in BDO‘s operating system has enabled the Bank to have longer banking hours and to have some branches open on weekends and even holidays. Banco de Oro is also in the process of improving its credit approval systems in order to fast-track loan approvals (through the use of credit scorecards) and improve overall credit quality of existing portfolio. 2. Human Resource Management – Banco de Oro‘s recruitment program ensures that the company hires skilled personnel fit to service the needs of its customers. Moreover, the Bank‘s personnel are exposed to training programs within and outside BDO in order to improve their capabilities required for their respective jobs. Branch tellers and marketing departments are continuously trained to develop customer service skills. Traders from Treasury and Trust divisions are required to undergo external seminars on asset management. Rank and file employees nominated for promotion are required to go through and Officer Development Program, aimed to improve people management and customer handling skills. A new training program, the Account Officer Training program, has been instituted in order to develop fresh graduates into future Account Officers assigned to handle the Bank‘s lending portfolio. 3. General Administration – Banco de Oro develops customer-related programs in collaboration with other members of the SM group. Synergies have been built between BDO and the SM group such as the placement of branches and ATMs in SM malls, and discounts in purchases

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in SM with the use of BDO credit cards. Part of the general administration activities of the Bank is the improvement of management information systems and corporate governance policies. In 2010, Banco de Oro has begun collaborating with the International Finance Corporation (IFC) to finance sustainable-energy projects in the Philippines. Coordination of lending programs between BDO and IFC is essential in order to bring down lending costs of potential borrowers since IFC will provide a 50% guarantee for loans drawn for sustainableenergy projects.

3.4 Strengths and Weaknesses Strengths: Strengths are internal capabilities which enhance the company‘s competitiveness in the industry. 

Nationwide branch and ATM network Basis: Value Chain – Distribution and Financial Ratios (Leverage Ratios) In 2010, Banco de Oro boasts of having 726 branches and 1,430 automated teller machines nationwide. In the past 5 years, the Bank has expanded its physical distribution channels in order to fully provide financial services to its market. Distribution of branches is now shifting to the provincial areas where growth is expected The wide network of branches and ATM‘s is also traceable to BDO‘s financial capability to fund acquisitions of other banks. From the year 2000, Banco de Oro completed acquisitions of financial institutions such as Equitable-PCI Bank, GE Money Bank, American Express Savings Bank, Dao Heng Bank (Philippine subsidiary), 1

st

e-Bank, Banco Santander, and United

Overseas Bank (Philippine branch). Market capitalization of the Bank (as of August 2011) stood at PhP149 Billion, which the company can use to acquire other smaller banks. 

Strong Alliance with other members of the SM Group Basis: Value Chain – General Administration Banco de Oro is a proud member of the SM Group, one of the largest business conglomerates in st

the Philippines. Started by Mr. Henry Sy, Sr. in 1972 (opening of his the 1 Shoemart Department Store), the SM Group has expanded operations into mall operations, retail, property development, financial services, and hotel and entertainment. The synergies achieved by BDO with other members of the SM Group through collaborative programs and activities have enabled the Bank to develop brand awareness and large customer base. Further, major acquisitions and mergers initiated by BDO in the past have been supported by the group, through SM Investments Corporation, with market capitalization of PhP328 Billion as of August 2011. 

Alliance with the International Finance Corporation (IFC) Basis: Value Chain – General Administration

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In 2010, Banco de Oro forged with the International Finance Corporation (IFC) a risk-sharing facility that aims to encourage private enterprises in the Philippines to invest in sustainableenergy projects and become more profitable, while addressing climate change. Coordination of lending programs between BDO and IFC is essential in order to bring down lending costs of potential borrowers since IFC will provide a 50% guarantee for loans drawn for sustainableenergy projects (Banco de Oro Unibank Inc., 2010). 

Branches have long banking hours and are open on weekends and most holidays Basis: Value Chain – Operations, System Development BDO is a pioneer in the financial services industry in making its branches open for longer banking hours and on weekends and most holidays. In order to achieve this, the Bank has developed its operating system by accommodating only the key transactions (deposit-taking, withdrawal, bills payment) during weekends. Market studies and test runs have been conducted in order to assess the appropriate banking schedule for a particular branch.

Improvements in internal Credit Approval System Basis: Value Chain – Operations, System Development The Bank started streamlining the internal loan approval system for small and medium enterprises (SMEs) through the use of credit scorecards. This development aims to hasten turnaround time in approving credit facilities, and at the same time, ensure that only those accounts with good credit quality will be granted loan facilities.

Improving profitability Basis: Financial Ratios – Profitability Ratios 2010

2009

Gross Profit Margin

67.79%

61.83%

Operating Profit Margin

20.90%

16.93%

Net Profit Margin

18.12%

14.12%

Looking at the gross, operating and net margins, the bank has become more profitable from the years 2009 - 10. These improving profitability ratios indicate that the Bank can pay off its expenses from its operating income. Profits can either be distributed to stockholders in the form of dividends or reinvested to the company in the form of improvements in operating / IT systems, branch layout and acquisition of branch licenses.

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Aggressive advertising and promotional campaigns Basis: Value Chain – Sales and Marketing Banco de Oro spent PhP1.95 Billion in advertising in 2010, 62% higher than the PhP1.21 Billion in the previous year. The amount was spent in the form TV commercials, radio and print ads, posters, fliers, brochures, Internet ads, and event sponsorships. BDO has been focusing its promotional efforts to the SME‘s and middle market accounts.

Weaknesses: 

Limited functionalities in alternative banking channels (Internet banking, mobile banking, phone banking) Basis: Value Chain – Systems Development At present, BDO‘s alternative banking channels such as Internet banking, mobile banking and phone banking have less functionality compared with the channels of other peer local universal rd

and foreign banks. BDO needs to improve the present IT system by purchasing 3 -party software or developing in-house systems. 

Low capital adequacy ratio (CAR) Basis: Financial ratio analysis Capital Adequacy Ratio is a measures the bank‘s capability to take on risk in relation to its capital. Banco de Oro‘s CAR in solo (parent bank only) and consolidated basis stood at 12.14% and 13.8% in 2010. Although the Bank has complied with the minimum CAR threshold of 10%, BDO still lags behind its close competitors such as Metrobank (group – 16.44%), BPI (group – 15.45%) and RCBC (group – 17.77%). 2010 Industry CAR average is at 17.72% for consolidated basis and 16.71% for parent banks.

Low return on equity (ROE) and return on asset (ROA) Basis: Financial ratio analysis 2010

2009

Return on Assets

0.95%

0.81%

Return on Equity

11.62%

10.97%

Both ROA and ROE show how well a company efficiently generates profits with respect to its resources and shareholders‘ equity. Although BDO‘s ROE may be higher than 2010 industry weighted average of 8.47%, the Bank has some room for improvement in this measure. Competitor banks that have higher ROE in 2010 include BPI (group – 15.92%), Landbank (16.63%) and RCBC (13.13%).

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High NPA and NPL coverage ratio Basis: Financial ratio analysis – Asset Quality 2010 Figures

BDO

Non-Performing Assets/ Total Assets (NPA ratio)

2.90

Non-Performing Assets/ Loans (net)

5.68

NPL Coverage Ratio

5.03

Compared with the peers in the industry, BDO has high NPA and NPL coverage ratios at 2.90x and 5.03x, respectively, in 2010. These ratios indicate the quality of assets maintained in the books of the bank. The lower the quality of the asset, the higher will be the loan loss provisioning that will be required, which has an effect in the company‘s overall profitability. Summary: Strengths Nationwide branch and ATM network

Weaknesses Limited functionalities in alternative banking channels (Internet banking, mobile banking, phone banking)

Strong Alliance with other members of the SM

Low capital adequacy ratio (CAR)

Group Alliance with the International Finance Corporation

Low return on equity (ROE) and return on asset

(IFC)

(ROA)

Branches have long banking hours and are open

High NPA and NPL coverage ratio

on weekends and most holidays Continuous

improvement

in

internal

Credit

Approval System Aggressive advertising and promotional campaigns Improving profitability

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3.5 Personal Values of Key Implementers Part of the basis for strategy is determining the personal values of the key implementers. Banco de Oro‘s key implementers are Mr. Henry Sy Sr. and his daughter Mrs. Teresita Sy-Coson. Henry Sy, Sr. was born in October 25, 1924, in the village of Ankhue, Fujian province, South China. Known as the ―Father of Philippine Retail,‖ Mr. Sy persevered from his humble beginnings to become the richest man in the Philippines, with estimated net worth of $5.8 Billion according to 2011 Forbes magazine list (Forbes Magazine - The World's Billionaires). Mrs. Teresita Sy-Coson, in one of her speeches in 2004, revealed Mr. Sy‘s 14 keys to his present success: 1. Leadership

8. Optimism

2. Integrity

9. Confidence

3. Vision

10. Discipline

4. Focus

11. Organization

5. Passion

12. Mission

6. Hard work

13. Social Responsibility

7. Perseverance

14. Recognition of opportunity

In a 2004 article of Time Magazine, the family of Henry Sy Sr. disclosed his hands-on, communal approach in managing the business. It was said that each week, Mr. Sy, sporting his trademark Hawaiian shirt, gathers his six children at the company's warehouse-style offices near Manila's waterfront, where they oversee nearly every aspect of the business. On Saturdays, family members fan out to conduct firsthand inspections of their SM malls, department stores and supermarkets. On Sundays, Mr. Sy Sr., insists that the family meet yet again, either at his $2 million luxury log cabin outside Manila or at the family home in Forbes Park district in Makati. Despite the success of the SM group, Sy's children realize that the all-in-the-family management style is becoming outdated. Like so many of Asia's big business clans, a generational shift and the stresses of running an increasingly complex company are forcing the insular Sys to open up more to outsiders. Mrs. Sy-Coson clearly describes his father‘s business outlook, "For my father, the organization is the family." However, professional managers are being gradually positioned within the companies under the SM group (Time Magazine - Henry Sy, SM Group). A useful guideline for personal values is the key principles of Catholic Social Teaching (Office for Social Justice - Key principles of Catholic Social Teaching). Catholic Social Teaching is a moral compass for men and women of the Catholic faith and all persons of good will for business practices and economic policies. It is composed of 10 values which businessmen can adhere to in making and implementing decisions. Human Dignity The Catholic Church proclaims that human life is sacred and that the dignity of the person is at the core of a moral vision for society. Our belief in the sanctity of human life and the inherent dignity of the human person is the foundation of all the principles of our social teaching.

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Community and the Common Good In a global culture driven by excessive individualism, our tradition proclaims that the person is not only sacred but also social. How we organize our society -- in economics and politics, in law and policy -directly affects human dignity and the capacity of individuals to grow in community. Our Church teaches that the role of the government and other institutions is to protect human life and human dignity and promote the common good. Rights and Responsibilities Catholic tradition teaches that human dignity can be protected and a healthy community can be achieved only if human rights are protected and responsibilities are met. Therefore, every person has a fundamental right to life and a right to those things required for human decency. Corresponding to these rights are duties and responsibilities -- to one another, to our families, and to the larger society. Option for the Poor and Vulnerable Catholic teaching proclaims that a basic moral test is how our most vulnerable members are faring. In a society marred by deepening divisions between rich and poor, our tradition recalls the story of the Last Judgment (Mt. 25) and instructs us to put the needs of the poor and vulnerable first. Participation All people have a right to participate in the economic, political, and cultural life of society. It is a fundamental demand of justice and a requirement for human dignity that all people be assured a minimum level of participation in the community. Conversely, it is wrong for a person or a group to be excluded unfairly or to be unable to participate in society. In the words of the U.S. bishops, "The ultimate injustice is for a person or group to be treated actively or abandoned passively as if they were nonmembers of the human race. To treat people this way is effectively to say they simply do not count as human beings." Dignity of Work and Rights of Workers In a marketplace where too often the quarterly bottom line takes precedence over the rights of workers, we believe that the economy must serve people, not the other way around. If the dignity of work is to be protected, then the basic rights of workers must be respected -- the right to productive work, to decent and fair wages, to organize and join unions, to private property and to economic initiative. Stewardship of Creation Catholic tradition insists that we show our respect for the Creator by our stewardship of creation. We are called to protect people and the planet, living our faith in relationship with all of God‘s creation. This environmental challenge has fundamental moral and ethical dimensions which cannot be ignored. Solidarity Catholic social teaching proclaims that we are our brothers' and sisters' keepers, wherever they live. We are one human family, whatever our national, racial, ethnic, economic, and ideological differences. Solidarity means that "loving our neighbor" has global dimensions in an interdependent world. Role of Government Because we are social beings, the state is natural to the person. Therefore, the state has a positive moral function. It is an instrument to promote human dignity, protect human rights, and build the common good. Its purpose is to assist citizens in fulfilling their responsibility to others in society. Since, in a large and complex society these responsibilities cannot adequately be carried out on a one-to-one basis, citizens need the help of government in fulfilling these responsibilities and promoting the common good. According to the principle of subsidiarity, the functions of government should be performed at the lowest level possible, as long as they can be performed adequately. If they cannot, then a higher level of government should intervene to provide help. Promotion of Peace Catholic teaching promotes peace as a positive, action-oriented concept. In the words of Pope John Paul II, "Peace is not just the absence of war. It involves mutual respect and confidence between peoples and

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nations. It involves collaboration and binding agreements.‖ There is a close relationship in Catholic teaching between peace and justice. Peace is the fruit of justice and is dependent upon right order among human beings (Office for Social Justice - Key principles of Catholic Social Teaching). Family Business Framework For a family business like Banco de Oro, it is important to know the status of the company in terms of ownership, family and business development. In the Generation to Generation: Life Cycles of the Family Business, a three-dimensional developmental model for family business was used as predictable framework to analyze the dynamics and challenges faced by a family business. There are three developmental dimensions and each has a progressing stages. Figure 12: Three Dimensional Development Model

1. The Ownership Developmental Dimension The first dimension describes the development of the ownership over time. a. Controlling Owner - (First Generation) stage, where one individual exercises total management control of the whole business. b. Sibling Partnership - (Second Generation) stage, in which two or more siblings of the controlling owner have more or less equal management control and ownership. c.

Cousin Consortium - (Third Generation) stage, in which cousins (the children of the siblings) exercise management control of the business, and ownership, is distributed in more than one generation.

2. The Family Developmental Dimension The second dimension describes the development of the family over time. a. Young Business Family - is a period of intense activity where parental generation is below 40, with young generation in below 18.

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b. Entering the Business - each generation is ten to fifteen years older than in the Young Business Family stage. This is the stage when families have to nurture the movement of the younger generation out of childhood and into productive lives as adults. c.

Working Together - when families are attempting to manage complex relations of parents, siblings, in-laws, cousins, and children of widely ranging ages.

d. Passing the Baton - when everyone is preoccupied with transition. 3. The Business Developmental Dimension The final dimension describes the development of the business over time. a. Start-Up - covers the founding of the company and the early years when survival is in question. The firm is characterized by informal organizational structure, one product, and the ownermanager at center of business. b. Expansion/Formalization - is characterized by increasing functional structure, multiple products or business lines, an evolving owner-manager by professionalizing the business and use of strategic planning. c.

Maturity - is characterized by an established organizational structure supporting stability, stable or declining customer base with modest growth, presence of divisional structure run by senior management team and a well-established organizational routine. BDO Unibank Inc. still falls under Controlling Owner stage as major ownership control is

consolidated in one individual, Mr. Henry Sy, Sr. Identified challenges at this stage include capitalization, balancing unitary control with input from key stakeholders and choosing an ownership structure for the next generation. On the Family Axis, BDO can be classified under the Working Together category. Mr. Sy‘s daughter, Mrs. Teresita Sy-Coson, now heads the company as Chairperson. The key challenges in this stage

are

fostering

cross-generational

cooperation

&

communication

(patriarch

and

children/grandchildren), encouraging productive conflict management and managing the three-generation working together family. For the Business Axis, BDO is still considered under the Expansion / Formalization Stage. The organization is characterized as having an informal organizational structure, with the family of Mr. Henry Sy, Sr. is still the center of ownership and management of the company. The key challenges here are survival, market entry, business planning & financing.

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MODULE FOUR – Strategic Plan 4.1 Vision and Mission Vision provides guidance about what core to preserve and what future to stimulate progress toward (Collins & Porras, 1994). A well conceived vision consists of two major components: core ideology and envisioned future. The framework for articulating a vision is the yin-yang, which connotes harmony and balance. Core Ideology provides the glue that holds an organization together as it grows, decentralizes, diversifies, expands globally & develops workplace diversity. It includes the company‘s core values and core purpose. Figure 13: Framework for Articulating a Vision

Core values are the essential & enduring tenets of the organization. BDO identified 4 tenets as part of its central philosophy: 1. Customer Focused ―We put our customers, whether internal or external, at the heart of all we do. We nurture relationships that enable us to grow with them.‖ 2. Out-of-the-box Thinking ―We are not constrained by traditional ways of doing things and apply a creative mindset that enables us to go the extra mile for our customers.‖ 3. Working with the Right attitude ―We think and act as one BDO, because it takes the whole team to deliver on a great customer experience. We work with integrity and a sense of ownership that drives us to not only complete the task, but to meet the objectives.‖ 4. Excellent Execution ―We act with a sense of urgency and efficiency, and are attentive to the details that are critical to doing things right.‖ (BDO - About Us) On the other hand, Core Purpose defines the organization‘s reason for being. Banco de Oro‘s core purpose is to provide convenience and commitment to deliver financial services to its customers. This is embodied in the company‘s ―We Find Ways‖ mantra,

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Banco de Oro‘s present vision/mission statement is shown below: ―To be the preferred bank in every market we serve by consistently providing innovative products and flawless delivery of services, proactively reinventing ourselves to meet market demands, creating shareholders value through superior returns, cultivating in our people a sense of pride and ownership, and striving to be always better than what we are today… tomorrow.‖ The other half of an articulated vision pertains to the Envisioned Future. It defines what the company aspire to become, to achieve, to create something that will require significant change and progress to attain. A vision should be characterized as BHAG (Big Hairy Audacious Goals) -- the firm‘s huge, daunting challenge that is clear and compelling which serves as a unifying focal point of effort and acts as a catalyst for team spirit. In the vision statement of BDO, the Bank aims ―to be the preferred bank in every market we serve.‖ The desired preferred bank status conforms to the BHAG requirement due to the compelling challenge that it drives on. A vision should have a Vivid Description; it should be vibrant, engaging, and specific description of what it will be like to achieve BHAG. This is satisfied by the promise of ―always better than what we are today…tomorrow.‖ Lastly, a company‘s mission statement (who we are and what we do) describes its present business scope – it generally describes an organization‘s present capabilities, customer focus, activities, and business makeup. Banco de Oro‘s mission is clearly embodied in the phrase ―by consistently providing innovative products and flawless delivery of services, proactively reinventing ourselves to meet market demands, creating shareholders value through superior returns, cultivating in our people a sense of pride and ownership.‖ Continuous improvement, focus on the customer, promotion of shareholder value, and employee empowerment are key philosophies that Banco de Oro exemplifies as its present business scope.

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4.2 Objectives – Financial, Strategic and Social Corporate objectives are specific, realistic and measurable goals which an organization plans to achieve within a given period of time. These objectives ultimately influence the direction of a company‘s strategies. The framework used in formulating objectives is called the SMART framework. This means objectives must be: S – Specific M – Measurable A – Attainable R – Result-focused T – Time Bound

Financial objective: 

Increase full-year 2011 net income of PhP10.16 Billion by the following: o

18.08% in 2012 - PhP12.72 Billion

o

18.40% in 2013 - PhP15.18 Billion

o

18.27% in 2014 - PhP17.78 Billion

o

17.68% in 2015 – PhP20.33 Billion

o

16.57% in 2016 - PhP22.53 Billion

Basis: 

Vision: ―To be the preferred bank in every market we serve by consistently providing innovative products and flawless delivery of services, proactively reinventing ourselves to meet market demands, creating shareholders value through superior returns, cultivating in our people a sense of pride and ownership, and striving to be always better than what we are today… tomorrow.”

The vision talks of creating shareholder value through superior returns, and one way to achieve this is by increasing the company‘s overall profitability. This is also aligned to core values of working with the right attitude and excellent execution, both of which contribute in reducing unnecessary costs.

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Strategic Objective: 

Achieve 20% market share (in terms of outstanding loans) in the industry for the years 2012 to 2016.

Total Outstanding Loans

2010 2,589,973

Market Share - BDO Outstanding Loans - BDO

2011 3,080,773

2012 3,664,579

2013 4,359,017

2014 5,185,051

2015 6,167,618

2016 7,336,382

19%

19%

20%

20%

20%

20%

20%

503,677

599,124

732,916

871,803

1,037,010

1,233,524

1,467,276

Basis: 

Vision: ―To be the preferred bank in every market we serve by consistently providing innovative products and flawless delivery of services, proactively reinventing ourselves to meet market demands, creating shareholders value through superior returns, cultivating in our people a sense of pride and ownership, and striving to be always better than what we are today… tomorrow.”

The vision discusses the Bank‘s aim to consistently provide innovative products and services, and meeting market demands. This is also aligned to core values of working with the right attitude and excellent execution, both of which contribute in reducing unnecessary costs.

The industry‘s gross loan portfolio is estimated to grow a natural rate of 19% in 2011 to 2016. The projected growth is on the bank of moderate GDP growth, robust OFW remittances and rollout of the PPP programs by the government.

In 2010, BDO registered a market share of 19% of the total loan portfolio of the industry.

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Social Objective: 

Finance at least 10 new sustainable energy projects each year, for the years 2012 -16.

Basis: 

Vision: ―To be the preferred bank in every market we serve by consistently providing innovative products and flawless delivery of services, proactively reinventing ourselves to meet market demands, creating shareholders value through superior returns, cultivating in our people a sense of pride and ownership, and striving to be always better than what we are today… tomorrow.”

One way of realizing BDO‘s vision of reinventing itself to meet market demands and creating shareholders value is by giving back to society through its CSR initiatives.

Part of corporate social responsibility function of the Bank is its commitment to support sustainable energy and energy conservation projects not only by the government but also by private businesses.

In 2010, Banco de Oro, approved the establishment of a Social Environment Management Systems Policy (SEMS Policy). This policy ensures that both environmental and social consciousness is incorporated in the daily operations of the Bank. Further, the policy mandates that the Bank will limit loan exposure to certain industries with adverse impact on human lives and the environment (e.g. hazardous chemicals, ammunitions, etc.)

BDO has also tied up with IFC for financing sustainable energy programs of borrowing clients.

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4.3 Evaluation of Present Corporate Strategies (Actual Company Strategy) There are five generic competitive strategies. Each of these generic approaches stakes out a different market position. A competitive strategy concerns the specifics of management‘s game plan for competing successfully and achieving competitive edge over rivals. According to Michael Porter, competitive strategy is about being different (Porter, 1980). It means deliberately choosing to perform activities differently or to perform activities significantly better than rivals to deliver a unique mix of value that buyers are willing to pay. Figure 14: Five Generic Strategies

Generic Strategy Employed: Broad Differentiation Strategy As defined, broad differentiation strategy seeks to differentiate the company‘s product offering from rivals in ways that will appeal to a broad spectrum of buyers. Differentiation strategies are advantageous whenever the customers‘ needs and preferences are too diverse to be fully satisfied by a standardized product by sellers with identical capabilities. Banco de Oro pursues differentiation by offering a full range of financial services and superior accessibility over its competitors. The present corporate strategies of Banco de Oro are evaluated using the dimensions of competitive strategy. 

Specialization The degree to which the company focuses its efforts in terms of the width of its line (all products in the line), target customer segments (all customers), and geographic markets (all geographic markets) served. As a universal bank, BDO offers a complete product line for its customers: facilities for deposits,

bills payments, credit cards, loans, investments, foreign exchange, and remittance. Aside from these basic products offered by universal banks, Banco de Oro also offers specialized products in the field of cash management, payroll, and electronic banking services. The company targets a wide range of customer segments and geographic markets, with branches distributed nationwide. Given the potential

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changes in macroenvironment, BDO should engage on specializing on financing PPP projects as a means to increase its loan portfolio in the next 3 years. Evaluation: Improve 

Brand identification The degree to which it seeks brand identification rather than competition based mainly on price or other variables. Brand identification can be achieved via advertising, sales force or a variety of other means. BDO continues to be the country's largest bank in terms of total assets, deposits and commercial st

loans. In 2010, the company reported total resources amounting to PhP1.01 Trillion, the 1 Philippine bank to reach the PhP1-Trillion mark. BDO was also number 1 in terms of deposits (PhP781.26 Billion) and loans (PhP544 Billion). The Bank has been very aggressive in its advertising and promotions campaign, spending almost P2 Billion in advertisements in 2010. BDO employs a total of 20,053 personnel, all committed on strengthening the BDO brand. Evaluation: Maintain 

Push versus pull (channel strategy) The degree to which it seeks to develop brand identification with the ultimate consumer directly versus the support of distribution channels in selling its product. BDO employs a push strategy in developing brand identification. Present marketing efforts are

aimed at directly creating awareness with the ultimate customer, rather than relying on the support of distribution channels. Evaluation: Maintain 

Channel Selection The choice of distribution channels from company owned channels to specialty outlets to broadline outlets. Aside from its own marketing force and branches, BDO also engages the services of personnel

within the SM group to market its credit cards, deposit and loan products. BDO‘s own sales force conducts marketing calls to potential valued customers. Evaluation: Maintain 

Product quality The level of product quality in terms of raw materials, specifications, adherence to tolerances, features, etc. BDO has multiple levels of product quality, since it has a broad target market and satisfies a wide

variety of needs for financial services. Evaluation: Maintain

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Technological Leadership The degree to which it seeks technological leadership versus following or imitation. It is important to note that a firm could be a technological leader but deliberately not produce the highest quality product in the market; quality and technological leadership do not necessarily go together. Banco de Oro seeks technological leadership to deliver electronic banking and cash management

services in the industry. However, the Bank is considered to be a follower in the technological segment. Technological leadership is shared by foreign and some local competitor banks. Evaluation: Improve 

Vertical Integration The extent of value added as reflected in the level of forward and backward integration adopted, including whether the firm has captive distribution, exclusive or owned retail outlets, and in-house service network, etc. (value or no value added and extent of value added, whether forward or backward integration) Banco de Oro adopts a forward integration approach. The Bank has captive distribution channels,

ATMs and branches that provide the services needed by its customers. It has a 24-hour call center service available to handle customer complaints and enquiries. Its branches are strategically located to be able to reach as much customers as possible. Evaluation: Maintain 

Cost position The extent to which it seeks the low cost position in manufacturing and distribution through investment in cost minimizing facilities and equipment. (Investment in cost-minimizing facilities and equipment versus seeking lower cost through labor intensity) In 2010, the Bank has focused on reducing its funding cost for its loan portfolio. BDO was able to

achieve this by expanding low-cost deposit base by targeting SMEs and retail deposits. This resulted in the significant improvement of net interest income in the recent year, from 61.83% in 2009 to 67.79%. Evaluation: Maintain 

Service The degree to which it provide ancillary services with its product line, such as engineering assistance, an in-house service network, credit, etc. This aspect of strategy could be viewed as part of vertical integration but is usefully separated for analytical purposes. (Ancillary, supplemental; not an intrinsic part of the product; whether it’s paid or not) The Customer Contact Center of BDO is a 24/7 operation that will handle any customer

complaints and inquiries. Moroever, BDO also has its online banking and phone banking service that lets customer transact any time of the day, making things more convenient for the customer. However, BDO has room for improvement in adding functionalities in its electronic and mobile banking. Evaluation: Improve

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Price policy The company’s relative price position in the market; price position will usually be related to such other variables as cost position and product quality, but price is a distinct strategic variable that must be treated separately. BDO is very competitive in terms of pricing for its loans. Interest rates are a major consideration

of potential borrowers before availing of a bank‘s loan products. Due to the bank‘s low funding-cost structure, Banco de Oro has been able to solicit loan availments from customers belonging in SME‘s and middle market segments. Evaluation: Maintain 

Leverage The amount of financial leverage and operating leverage the company bears. 2010

2009

Debt / Total Assets

0.91

0.92

Debt / Equity

10.62

12.03

Banco de Oro‘s financial leverage (debt-to-equity) is above the industry average of 9.23x in 2010. It means that the funding of its assets is financed more by its liabilities compared to the industry or the parent company. Increase in capitalization through selling of new shares may be imperative in order to bring down financial leverage level. Evaluation: Improve 

Geographic Scope This dimension refers to the range of regions, countries, or groups of countries in which a firm competes in with a coordinated strategy. As of 2010 yearend, Banco de Oro has strategically placed 726 branches in nationwide locations

in order to reach as much target markets as it could. With the gradual branch liberalization in Metro Manila, the Bank has expanded its reach to the emerging provincial areas with high potential for growth. The Bank also maintains satellite offices for its lending, treasury, remittance and leasing business in key cities across the country. Branch and ATM distribution for BDO in 2010 is as follows: 1. Metro Manila – 392 branches, 722 ATMs 2. Luzon – 200 branches, 457 ATMs 3. Visayas – 83 branches, 164 ATMs 4. Mindanao – 55 branches, 92 ATMs

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Although BDO has attained nationwide scope in branch and ATM distribution, the bank still needs to expand its network especially in Visayas and Mindanao regions where the potential for growth is high and the market is still not yet saturated. Evaluation: Improve 

Product Scope This dimension refers to the number of product lines that the company competes in. As a universal bank, Banco de Oro is empowered to provide a full array of products and services

than a commercial or a thrift bank. They following are the products and services currently offered by BDO. 1. Lending (corporate, middle market, SME

8. Leasing and financing

and consumer) 2. Deposit-taking

9. Investment banking

3. Foreign exchange

10. Private banking

4. Brokering

11. Bancassurance

5. Trust and investments

12. Insurance brokerage

6. Credit cards

13. Stock brokerage services

7. Corporate cash management and remittances Evaluation: Maintain Summary: Dimension of Strategy Specialization Brand Identification Push versus Pull Channel Selection Product Quality Technological Leadership Vertical Integration Cost Position Service Price Policy Leverage Product Scope Geographic Scope

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Evaluation Improve Maintain Maintain Maintain Maintain Improve Maintain Maintain Improve Maintain Improve Maintain Improve

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4.4 Proposed Corporate Strategies Proposed Corporate Strategy No. 1 (Dimension – Product Scope) 

Widen its product scope (lending) by developing a new project financing facility for the government’s public-private partnership (PPP) initiatives.

Description In 2010, Banco de Oro provided loans to 8 major sectors, namely: manufacturing (various industries), financial intermediaries, wholesale and retail trade, real estate, social and community activities, transportation and communication, agriculture and other industries. Breakdown of the bank‘s portfolio is as follows:

Manufacturing Financial intermediaries Wholesale and retail trade Real estate Social and community activities Transportation and communication Agriculture Others Total

86,861 78,142 75,211 53,887 39,291 33,845 8,254 151,462 526,953

16% 15% 14% 10% 7% 6% 2% 29% 100%

Six percent of the bank‘s loan portfolio (PhP33.845 Billion) was dedicated to the transportation and communication industry. A potential driver for the growth of BDO‘s loan portfolio in the next 5 years is the financing of the Aquino administration‘s identified public-private partnership (PPP) projects. These infrastructure programs that are ready for rollout are worth approx. USD2.54 Billion (PhP109 Billion) and are for immediate rollout in the next 12 months (2012): NAIA Expressway Phase II

New Bohol Airport Development Puerto Princesa Airport Development

235.33 477.00 62.80 31.11 250.00 850.00 233.33 151.00 92.00

New Legaspi (Daraga) Airport Development

153.00

NLEX – SLEX Connector Privatization of LRT 1 and MRT 3 Operation and Maintenance Daang Hari – SLEX Link Road LRT Line 2 East Extension MRT/LRT Expansion Program: LRT 1 South Extension (Cavite) CALA Expressway – Cavite Side Section (27.5 Km)

Privatization of Laguindingan Airport operation and Maintenance Total

10.00

2,545.57

Moreover, for the years 2013 to 2014, the National Government is lining up 35 PPP projects for medium term rollout (for the next 3- 5 years). In order to sustain the program, future PPP projects will be developed for other departments and local government units, and these are all under the conceptual stage:

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1. Department of Agriculture – 5 projects (e.g. organic rice farming, integrated agri-food park, contract farming); 2. Department of Health – 4 projects (e.g. air ambulance, sanitariums in Visayas region); 3. Department of Energy – 28 projects (e.g. construction of power plants harnessing coal, wind, biomass, hydro, and geothermal energy); 4. Various projects for local governments in Iloilo; Laoag, Ilocos Norte; Legaspi, Albay; Tanauan, Batangas; Davao del Norte; Olongapo; This strategy of developing a specialized project financing facility for PPP programs aims to contribute to the increase in the Bank‘s overall loan portfolio. A separate financing facility is proposed since the level of study for the PPP projects is more comprehensive compared with regular corporate loans. The proposed strategy would consequently grow the Bank‘s market share (in terms of outstanding loans) and gross interest income earned by BDO. In the identified Strategic Objective of growing loan market share from 19% to 20%, the Bank‘s loan portfolio should increase by PhP134 Billion in 2012, PhP139 Billion in 2013, PhP165 Billion in 2014, PhP197 Billion in 2015 and PhP234 Billion in 2016. This proposal will also assume that BDO would corner 20% of the total PPP financing requirements starting from PhP109 Billion in 2012 and increasing by 19% year-on-year. The remaining increase in loan portfolio will be sourced from growth in lending to SMEs and other sectors. Achievement of the target objective of increasing market share in terms of loans is feasible since the concentration ratio of loans for transportation/communications sector is only at 6%, with the remaining 94% coming from the other sectors. Strategy 1 Projected increase in outstanding loans Loans to finance PPP projects (20% of P109 Billion, increase by 19% yoy) Contribution to revenue

2012 133,792 21,800 1,596

2013 138,888

2014 165,207

2015 196,513

2016 233,753

25,942 1,899

30,871 2,260

36,736 2,689

43,716 3,200

The proposed widening of product scope is expected to improve the company‘s net income (the financial objective). For corporate loans, BDO sets a standard spread that the company should earn through interest rates. Interest rate spread used for the projection would be the conservative rate of 2.5%. These spreads already takes into consideration the cost of funding, as well as other direct costs. Spreads are determined by the credit risk rating of the borrower (denoted by ratings A, BBB, BB and B). Projected additional net income contribution of this strategy is as follows: Year 2012 2013 2014 2015 2016

Net Income 241.40 287.27 341.85 406.80 484.10

This strategy will also address the Social Objective to finance at least 10 sustainable energy projects each year, starting from 2012 -16. Aside from the 11 projects identified by the government for immediate rollout, the National Government is lining up 35 PPP projects for medium term rollout (for the

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next 3- 5 years). In order to sustain the program, future PPP projects will be developed for other departments and local government units, including the Department of Energy. At present, there are 28 projects that are in the conceptual stage. These include construction of power plants harnessing coal, wind, biomass, hydro, and geothermal energy. Banco de Oro can harness the strategic alliances with the SM group and the International Finance Corporation (IFC) in funding the loans for PPP proponents. SM Investments Corp., the major stockholder of BDO and investing arm of the Sy family, has total cash reserves of Php41.34 Billion and total market capitalization of PhP323 Billion as of August 2011. Further, BDO has forged a risk-sharing facility with IFC in 2010. Under this arrangement, IFC will provide a 50% guarantee for loans drawn for sustainable-energy projects. Figure 15: Generic PPP Project Sequence Framework

Target clients for this program would be the private company proponents for the PPP initiatives. In other countries where PPP‘s have been instituted, financing normally is sourced by the private

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organization. Although it is established that the government‘s cost of funding is typically lower than that of a private company, the usual downside is that public sector financing is usually scarce. This scarcity of government funds is actually one of the initial drivers for PPP. The higher cost of private financing is usually offset by the efficiency gains from PPP. Moreover, PPPs usually result into net savings and efficiency gains, with an ultimate benefit to consumers. Infrastructure PPP‘s typically require financing. External funds are required for the initial investment costs that are recovered over time from future revenue streams. The funds may be sourced from the public sector or the private sector. Based on the Generic PPP project sequence framework developed by the Asian Development Bank (ADB), the winning private company or consortium should have the financing in place upon the bid evaluation and award stage of the project (Asian Development Bank). The private operator will typically establish a project company for implementing the contract, often called special purpose vehicle (SPV). The company owners may be a consortium of companies or a single large company. Usually, the company owners will not finance all project requirements; instead, they will provide a proportion as equity and borrow the remainder of the required financing from financial institutions or place debt securities in the capital market.

Proposed BDO PPP Project Financing Program Banco de Oro should form a PPP Project Financing Desk that will be in charge of loan packaging, financial analysis and risk assessment of the PPP project and private proponent company. Based on the study made by ADB, perceived credit risk will come from the following sectors of particular PPP project: technical issues; legal, regulatory, and policy frameworks; institutional and capacity status; and commercial, financial, and economic issues. The creditworthiness of a project depends on a number of factors, some of which are within the control of the government when designing PPP. These include commercially attractive project design and tariffs (shorter payback and financing periods), strong off-take arrangements to reduce market/revenue risk (predictability of cash flows), together with the level of certainty and transparency of regulatory settings, which affect future cash flows. In general, infrastructure project financing, whether from banks or bond markets, faces a number of challenges, including (1) long-term debt maturities to match project cash flows, (2) limits to the availability of local currency debt financing to match local currency revenue streams, (3) limited available equity and resulting high degree of leverage, and (4) no security/guarantee except for project assets available (―nonrecourse financing‖). In determining the amount of debt finance the project can sustain, BDO should perform its own calculations related to project performance and cash flow. These include debt service cover ratios, loan life coverage ratios, and project life coverage ratios. Project financing requires a very thorough appraisal

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process because of the sole reliance on project cash flows. BDO should undertake due diligence exercises to make sure that the project assumptions and risks are reasonable. Due diligence procedures require that the bank performs its own financial analysis on the project. BDO should be able to gather the following data from the private company; namely, audited financial statements as well as any current financial reports (unaudited) and plans/budgets; tariff schedules— historical and current; employees—numbers and types (e.g., operating, administrative, permanent, contract); database of customers; debt schedule and cost of capital; schedule of operating assets (information regarding production capacities, historical production volumes, operating costs); and details of any ongoing and planned capital investment programs. In addition, the Bank should be able to determine the project‘s internal rate of return (IRR) and return on equity (ROE). IRR represents the return of the project while ROE shows the return to shareholders who are entitled to dividends. BDO should also determine if the project will be covered by (partial) credit guarantees from the government itself or from a development finance institution.

Objectives to be Attained: 1. Increase full-year 2011 net income of PhP10.16 Billion by the following: o

18.08% in 2012 - PhP12.72 Billion

o

18.40% in 2013 - PhP15.18 Billion

o

18.27% in 2014 - PhP17.78 Billion

o

17.68% in 2015 – PhP20.33 Billion

o

16.57% in 2016 - PhP22.53 Billion

2. Achieve 20% market share (in terms of outstanding loans) in the industry for the years 2012 - 2016. 3. Finance at least 10 new sustainable energy projects each year, starting from 2012 -16. Basis of Strategy: Threat to Address: Increasing inflation and interest rates Opportunities: High GDP growth, Launching of the PPP programs Strengths:

Strong Alliance with other members of the SM Group Alliance with the International Finance Corporation (IFC) Continuous improvement in internal Credit Approval System

Weaknesses:

Low capital adequacy ratio (CAR) High NPA and NPL coverage ratio

Broader Societal Expectations: To provide support for the government‘s initiatives for infrastructure and overall nation-building. Personal Values of Key Implementers Leadership, Focus, Optimism and Social Responsibility

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Proposed Corporate Strategy No. 2 (Dimension – Technological Leadership) 

Develop SME loan portfolio by creating an Internet-based facility to screen and solicit potential loan applications of SMEs (small and medium enterprises).

Description At present, the Bank employs traditional loan activities in order to solicit borrowing accounts in the SME (small and medium enterprises) sector. Normally, BDO‘s Institutional Banking Group (the Bank‘s marketing arm for loans) solicits referrals from existing branch accounts, personal contacts, business networks and walk-in applicants. Despite the wide network of branches (726 as of 2010 yearend), it could be said that the Bank‘s reach for SME clients is still limited, with total SME clients at approximately 8,00010,000 establishments and, comparing it with total business population of 777,357 (DTI Website - Micro, Small and Medium Enterprises). Further, SMEs only take up estimated 20-25% of the total loan portfolio of the Bank as of 2010, with the remaining balance coming from large commercial and corporate accounts. Thus, this strategy of using the technological leadership dimension is a means for BDO to reach out to more SME businesses that require access to credit. In the last five years, the MSME sector (micro, small, and medium enterprises) accounted for about 99.6% of the registered businesses in the country by which 63% of the labor force earn a living. Around 35.7% of the total sales and value added in the manufacturing come from SMEs. Through the use of the Internet, BDO can reach these potential clients in a faster and more efficient manner. SMEs are defined as any business activity/enterprise engaged in industry, agri-business/services, whether single proprietorship, cooperative, partnership, or corporation whose total assets, inclusive of those arising from loans but exclusive of the land on which the particular business entity's office, plant and equipment are situated, must have value falling under the following categories: By Asset Size: Small:

PhP3,000,001 - PhP15,000,000

Medium:

PhP15,000,001 - PhP100,000,000

Alternatively, SMEs may also be categorized based on the number of employees: Small:

10 -- 99 employees

Medium:

100 -- 199 employees

BDO’s SME Development Program Banco de Oro has recently made initiatives in the forefront of making the access of credit more accessible to the SME sector. Starting 2009, the Bank has been conducting a series of SME Forums in key business locations in the country. With the tagline ―Grow Your Business with BDO, the SME forums aim to support small and medium-sized businesses by offering free financial and entrepreneurial advice

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and offering BDO‘s wide-ranging loan and cash management products. BDO has successfully conducted these SME forums in the area of Batangas, Cavite, Cabanatuan, Davao, Cebu, and Lucena. Proposed Internet-Based Credit Scoring Facility

SME Questionnaire

The Bank recognizes the emergence of SME sector as an important player in the Philippine economy. With this regard, BDO should tap this segment as a means of growing its existing loan portfolio. In 2010, the company‘s gross loan portfolio rose by 12%, boosted by strong demand from clients in the SME and commercial banking segments. In order to achieve the identified objective of 21% market share in terms of total loans, BDO should harness its existing Internet capabilities and internal credit scoring process in order to grow its SME portfolio. The proposed strategy is to develop the SME loan portfolio by incorporating an Internetbased facility in its BDO website that can pre-screen the creditworthiness of a potential loan applicant. With 2010 total SME portfolio of PhP131.7 Billion, the Bank is expected to post average 21.5% annual growth in loan portfolio, and tapping additional 3,000-4,000 SME clients per year. The proposed strategy of implementing an Internet facility is expected to reduce operating costs since the credit approval time of a new account will be shorter by 1-2 weeks. This translates to an expected reduction in marketing and representation expense by 20% in the next 3 years. Further, improvement in NPL is expected to result from this program since accounts will be pre-screened by the scoring facility. However, additional costs will be incurred in developing the Internet-based facility, hiring new personnel and maintenance of the program. The facility will be in the form of a questionnaire, which the client will answer based on actual operations. A sample Business Information Questionnaire is attached as a guideline for the proposed Internet-based facility. The questionnaire has five major parts, namely, the Business Activity, Ownership

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and Management, Collaterals, Industry and Market Condition and Financial Consideration. These questions can still be consolidated and refined in order to improve its answerability. Each answer to the identified questions will be given an equivalent point and the overall credit score will be computed by the Internet facility. In the event that the score exceeds the desired passing mark (e.g. score of 70%), a notification will be sent to the Bank‘s Institutional Banking Group. The assigned Account Officer will then call the potential client and conduct a marketing call. The Credit Score will be attached in the credit proposal for approval by management.

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BUSINESS INFORMATION QUESTIONNAIRE A. Business Activity 1. Line of Business

13. Warehouse

a. TRADING

a. Owned

b. MANUFACTURING

b. Rented/Leased

c. SERVICE d. OTHERS 2. Number of Product a. One product only b. Multi product (3 product lines) c. Multi product (More than 5 product lines) 3. Sales Mix for Multi Product a. One major product contributes 80% or more than to total revenue b. One major product contributes 50% to less 79% to total revenue c. Products contributes less than 20% to 49% revenue 4. Seasonal Product or Services? a. Yes b. No 5. Length of conducting business whether

c. Not Applicable 14. If in the Service Sector, Location of services offered a. In the Country b. Outside the Country c. Not Applicable 15. Speciliazed Company or product? a. Yes b. No c. Not Applicable 16. Location of Warehouse a. Within marketing plant/office b. Outside of plant/office within 10km c. Outside of plant/office beyond 10km 17. High Professional/Technical People a. Key Position b. Key Position & Non Managerial Position 18. Current Employees

current or other business

a. More than 250 employees

a. 0 - 2 years

b. less than 100 employees

b. 3 - 6 years

c. less than 50 employees

c. 7 - 10 years

d. less than 10 employees

d. 11 - 20 years

19. Have Employees Union?

e. 20 or more years 6. Length of conducting current business a. 0 -2 years

a. Yes b. No 20. Classification of market/buyers

b. 3 - 6 years

a. Wide, with captive Market

c. 7 - 10 years

b. Wide but without captive Market

d. 11 - 20 years

d. Few (less than 5) buyers

e. 20 or more years 7. Product Line

c. Sole Customer 21. Major Buyers

a. Agricultural and Food Products

a. Local Buyers

b. Raw Materials for Production

b. Foreign Buyers based locally

c. Capital Equipment / Machineries & Equipments d. Real Estate e. Service/Utilities and Manpower f. Others 8. If in the Manufacturing Industry, have existing plant facilities?

c. Foreign Buyers based abroad 22. Location of Supplier/s a. Local b. Foreign 23. Classification of Supplier/s a. Wide, with captive market

a. Yes

b. Wide but without captive market

b. No

c. Sole supplier

c. Not Applicable 9. If Yes, Owned or Leased

d. Few (less than 5) 24. Site of Suppliers

a. Owned

a. Local Suppliers, Domestic

b. Leased

c. Foreign Suppliers with local officer/

c. Not Applicable 10. Location of Manufacturing Plant a. Metro Manila

Multinational's local office b. Foreign Suppliers, Foreign 25. Credit terms from suppliers

b. Luzon

a. None

c. Visayas / Mindanao

b. 30 days or less

d. Not Applicable

c. 90 days or less

11. Operating Rate of Operating Plant a. Full Capacity

d. 180 days or less 26. Inventory level policy

b. 75% - 90% Capacity

a. 1 month or less

c. 50% to 74% Capacity

b. 3 months or less

d. Below 50% Capacity e. Not Applicable 12. If in the Trading Sector, Type of goods traded a. Finished Goods, Perishable b. Finished Goods, Non Perishable c. Intermediate Goods used for production d. Not Applicable

c. No need for inventory 27. Have substitute or alternative products or services? a. Yes, A few ( 1 or 2) b. Yes, Several ( 2 or more) c. None 28. Major Competitors a. Local Players b. Foreign Players

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29. Number of Competitors

15. High Risk Occupation/Status

a. Up to 2

a. High Profile end

b. Between 2 to 20

b. Politicians

c. More than 20

c. Military and Enlisted Personnels

B. Ownership and Management

d. Lawyer/Judge

1. Age

e. Religious Personnels

a. 20 to 40 years old b. 41 to 60 years old c. 61 and up 2. Marital Status

f. OFW/s 16. High Risk Businesses/Activities a. Small Time Public Utility Operator b. Illegal Activities (Gambling, Casinos)

a. Single

c. Commission Based Industries

b. Widow

d. Business Involve Institution

c. Married

e. Business in Gun Trading

3. Number of Children a. None

f. NGO g. Foreign Owned Business

b. Less than 5

C. COLLATERALS

c. More than 5

1. Preferred type of collaterals to mortgage

4. Classification of Children's age

a. Bank Deposit

a. Adult (Above 18)

b. REM

b. Minor (Below 18)

c. CHM

c. Combination - Minor and Adult 5. Business start-up base a. Same business of Parents/Siblings

d. Bank Guarantee 2. Type of collateral deposits a. Type of Deposits

b. Same business of Relatives

CA/SA (Peso/Dollar)

(Other than letter A above)

Bank Funded High Cost

c. Pioneer

Trust Products

d. Allied to the business of your relatives Parents and Others 6. Succession a. No children/single

Government Securities b. REM NOT APPLICABLE Types of Acceptable Collateral

b. Key Officers

Commercials

c. Spouse/Children (Direct)

Industrial

7. History of Business

Agricultural

a. Inherited b. Pioneer/Start-Up

Agri-Industrial Ownership

c. Acquired

1st Party/Title is owned by the

8. Educational Background

Mortgagor

a. Undergraduate

3rd Party/Title not owned by

b. College Graduate c. Post Graduate

Mortgagor Location

9. Any Business or Personal Affiliations?

Located in Metro Manila

a. None b. Yes, Civil Organization

Not located in Metro Manila Right of Way Improvement

c. Yes, Business Organization

With road right of way

d. Yes, Religious Organization

Without road right of way

10. Hobbies

With Improvement

a. With b. Without

Without Improvement Type of Mortgage

11. Health Condition

3rd party REM whose mortgagor is

a. Under Medication

part owner of the business

b. Undergone Several Operations

3rd party REM whose mortgagor is

c. Recover from major illness

part not owner of the business

d. With major illness

1st party REM - Non Primary Asset

12. Other Business Interest

1st Party REM - Plant

a. Allied / Relative to core business

1st Party REM - Residence

b. Diversified / Not Related

c. CHM

c. Silent Investment in other Companies

NOT APPLICABLE

d. None 13. Number of other Businesses a. Less than 3 b. 4 to 6 c. more than 6 14. Location of other businesses

Movable Equipments Non Movable / Bolted to the ground d. Assignment of Receivables/P.O. SM (Valued Customer) Non SM g. Bank Guarantees

a. Within 10km radius

Correspondent Bank - Foreign

b. Beyond 10km radius

Local/Bank in Good financial standing

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De La Salle University Graduate School of Business 10. Type of Collateral a.Other Collateral (other than those listed below and deposit) b. Chattel on equipment/moving c. Assignment of prime receivables/blue chips shares d. 3rd part REM whose mortgagor is part owner of the business e. 3rd party REM whose mortgagor is part owner of the business

3. Owned Assets a. Real (Properties) b. Investment (Securities) c.Others (Jewelries, Leaseholds, Rights, etc.) 4. Existing Debts/Liabilities a. With BDO b. With Other Banks c. Other Private Lending Activities 5. Total Unutilized Credit Lines

f. 1st party REM - Non-Primary Asset

a. 10% of approved credit line

g. 1st party REM - plant

b. 20% of approved credit line

h. 1st party REM - residence

c. 50% of approved credit line

11. Collateral Cover a. Loan is Over 160% of AV

d. 100% of approved credit line 6. Total Sales or Credits x Declared Gross

b. Loan is Over 140% of AV

Margin Over Total Bank Borrowings

c. Loan is Over 120% of AV

a. <=50%

d. Loan is Over 100% of AV

b. >50% to 70%

e. >90% to 100% of AV

c. >70% to 75%

f. >80% to 90% of AV g. >70% to 80% of AV

d. Over 80% 7. CASA ADB to Loan Ratio (6 mos. CASA ADB

h. >60% to 70% of AV

with us and Other banks)

I. >50% to 60% of AV

a. <5% of Total Credit Facilities

j. <=50% of AV

b. >5% to 10% of Total Credit Facilities

INDUSTRY AND MARKET CONDITION

c. >10% to 15% of Total Credit Facilities

1. Stint in the business

d. >15% to 20% of Total Credit Facilities

a. More than 5 years

e. >20% to 30% of Total Credit Facilities

b. 3 - 5 years

f. >30% to 40% of Total Credit Facilities

c. 0 - 2 years

g. Over 40% of Total Credit Facilities

2. Share in the Local Market

8. Total Liabilities versus Net Sales (Based on

a. Top 5 market player

Loandex plus Loan to be Availed)

b. Average Player

a. Over 100% of Net Sales

c. Marginal Player

b. >75% to 100% of Net Sales

3. Share in the National Market a. Top 5 market player b. Average Player c. Marginal Player 4. Business Industry

c. 50% to 60% of Net Sales d. >25% to 50% of Net Sales e. <=25% Net Sales 9. Type of Property a. Home and Plant not owned

a. Boom

b. Own one and encumbered

b. Steady

c. Home and Plant owned and emcumbered

c. Sunset/Saturated Market

d. Own one and not emcumbered

d. Sunrise/Emerging Industry

e. Home and plant owned but not encumbered

5. Business Industry Alliances a. Allied with multinational/top 1000 domestic local companies b. Allied with local companies below the top 1000 rank c. No Significant Alliances 6. Classification of product

f. Home and Plant Owned not encumbered 12. Credit Experience (based on results if NFIS/checkings) a. Positive results based on NFIS and Loandex b. Positive results but enstablished c. Negative on NFIS and Loandex 13. Credit Experience with BDO a. With Real Past due experience

a. With No Substitute

b. Evergreen

b. With Available Substitute

c. With partial clean up/new account

c. Subject to Obsolescence

d. With full clean up

7. Industry Government Regulation a. Free Market

e. Net funder 14. Other Assets

b. Fairly Regulated

a. None

c. Heavy Regulated

b. More than amount of approved credit

FINANCIAL CONSIDERATION 1. Estimation of Required Capital a. Above 50M

line of O/S form c. Less than amount of approved credit line of O/S form

b. Between 10M and 1M c. Below 1M 2. Total Assets a. Below 10M

Total = Average =

b. Between 10M and 50M c. Between 10M and 100M

Overall Total =

d. Above 100M

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Objectives to be Attained: 1. Increase full-year 2011 net income of PhP10.16 Billion by the following: o

18.08% in 2012 - PhP12.72 Billion

o

18.40% in 2013 - PhP15.18 Billion

o

18.27% in 2014 - PhP17.78 Billion

o

17.68% in 2015 â&#x20AC;&#x201C; PhP20.33 Billion

o

16.57% in 2016 - PhP22.53 Billion

2. Achieve 20% market share (in terms of outstanding loans) in the industry for the years 2012 to 2016. 3. Finance at least 10 new sustainable energy projects each year, starting from 2012 -16. Basis of Strategy: Threats to Address: Customersâ&#x20AC;&#x2DC; greater access to information through the Internet and electronic banking channels Increasing inflation and interest rates Opportunities

:

High GDP growth Emergence of MSMEs in the Philippine economy Strengths: Continuous improvement in internal Credit Approval System Strong Alliance with other members of the SM Group Nationwide branch and ATM network Weaknesses: Limited functionalities in alternative banking channels (Internet banking, mobile banking, phone banking) Low capital adequacy ratio (CAR) High NPA and NPL coverage ratio Broader Societal Expectations: To provide support to emerging small and medium enterprises, which are part of the shareholders of the Bank. Personal Values of Key Implementers Focus, Optimism, Organization and Social Responsibility

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4.5. Competitive Advantage Competitive advantages give a company an edge over its rivals and an ability to generate greater value for the firm and its shareholders. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage. These competitive advantages may be on the firm's cost structure, product offerings, distribution network and customer support. Figure 16: Competitive Advantage Cycle

4.5.1 Present Competitive Advantages The Wharton model of Competitive Advantage cycle is used to determine BDO‘s present competitive advantages together with its performance rewards, the sources of advantages, and the emerging competitive dynamics that erode the advantages. Competitive Advantage: 

BDO‘s physical deposit and lending services are more accessible than its competitor banks, in terms of longer banking hours and open branches during weekends.

Performance Rewards: 

BDO has the highest market share in terms of deposit liabilities and gross loan portfolio.

The Bank‘s net profit increased from PhP6.356 Billion to P8.433 Billion in 2010.

Sources of Competitive Advantage: 

Superior Assets: Nationwide branch and ATM network; Improved credit approval system

Superior Capabilities: Longer banking hours and weekend banking; Strategic alliance with other members of the SM group.

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4.5.2 Proposed Competitive Advantages Competitive Dynamics Erode Advantages The present competitive advantage on the accessibility of BDO‘s deposit and lending services is slowly eroding due to emergence of alternative banking technology such as the Internet, mobile and phone banking channels. With greater access, customers now have more choices on where to source credit. Investment in Renewal Due to the erosion of its present competitive advantage, BDO should continue to renew its sources of advantage by improving its deposit and lending services through the proposed use of an Internet-based facility. This investment in renewal will target companies in the SME sector, where there is a high growth potential. Further, the bank should widen its product scope for project finance opportunities on the PPP program. Sources of Advantage BDO‘s new source of advantage will still be its technological capability to encourage and prescreen potential improved credit approval system. The Bank‘s aggressive advertising and marketing campaign (value chain: sales and marketing) and improved credit evaluation system (value chain: systems development) will also remain to be key sources of advantage for the Bank. Positional Advantages Realized The new positional advantage realized that BDO would be faster credit approval process and wider products scope (in terms of lending facilities) than its competitors. Still, this proposed positional advantage realized does not automatically transform to a competitive advantage if it doesn‘t have any value to its customers.

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MODULE FIVE – Functional Area Strategies The following Functional Strategies are based on the identified strategic plan and competitive advantages of BDO. 5.1 Marketing 5.1.1. Identified Target Market BDO‘s target market for its PPP financing program is private companies / conglomerates that have placed or has the capacity to place bids for the government‘s PPP projects. Among the potential private bidders for the PPP projects include San Miguel Corporation, First Pacific Holdings Inc., Ayala Group, Gokongwei Group, SM Group, Lopez Group and the Aboitiz Group. On the other hand, the primary target market for its internet-based credit scoring facility is the SME sector. This facility will not be available for micro industries since Key parameters of this target market include the following: Based on Asset Size: Small:

PhP3,000,001 - PhP15,000,000

Medium:

PhP 15,000,001 - PhP100,000,000

Based on number of Employees: Small:

10 -- 99 employees

Medium:

100 -- 199 employees

5.1.2. Marketing Objectives To achieve the following Gross Interest Income from loans (in billion pesos) for the years 2012 – 2016: o

29% increase in 2012 – PhP52.80 Billion

o

18% increase in 2013 – PhP62.42 Billion

o

19% increase in 2014 – PhP72.25 Billion

o

19% increase in 2015 – PhP88.31 Billion

o

19% increase in 2016 – PhP105.05 Billion

5.1.3. Marketing Plan The following list deatils the marketing plan for the new product offerings: Product

PPP Project Finance Facility: Project financing specially developed for PPP program of the Philippine government Features:  Available as term loan, with loan tenor extending up to 20 years  Required minimum equity of 30%  Loan may be against guarantee of Philippine government and/or the private company /conglomerate

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     

Option for balloon payment at maturity Term loan amortization to be patterned on projected cash flow of the project With grace period, subject to determination of project inception Interest rates may be variable or fixed, depending on the project proponent‘s requirements. Available in Philippine peso or in US dollar Staggered loan drawdowns allowed

For SME Internet Credit Scoring Facility: An Internet credit screening facility for SMEs with loan applications Features:  Comprehensive questionnaire that assesses the credit standing of an SME business  Fast-tracks loan applications  Existing loan applications may be viewed online using the facility Price

PPP Project Finance Facility:  Pricing of loans drawn against the PPP Project Finance Facility shall be based on the assigned risk rating of the project, as may be determined by BDO‘s credit committee. For SME Internet Credit Scoring Facility:  Access of the web-based facility shall be free for SMEs that are existing BDO depositors

Place – distribution – convenience to the customer

PPP Project Finance Facility:  The project finance facility for PPP projects shall be initially centralized in BDO‘s Makati Head Office. For SME Internet Credit Scoring Facility:  This will be available via BDO‘s corporate website, www.bdo.com.ph. Computer terminals shall be located in BDO‘s branches for easy access.

Promotion – communicating

PPP Project Finance Facility:  Marketing calls shall be scheduled with the identified top conglomerates in order to convey the product features of the financing facility.  Advertisements shall be proposed to be posted at the PPP Center‘s website, ppp.gov.ph. Brochures and posters shall also be placed in the government office.  BDO will sponsor a forum detailing the PPP projects of the government and the project finance program. For SME Internet Credit Scoring Facility:  Brochures and posters shall be placed in branches describing the SME Internet Credit Scoring facility of BDO.  Print and social media advertisements in high traffic websites such as Facebook.

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5.2 Operations 5.2.1 Objectives 1. Ensure overall accuracy and completeness of information for processed loans under the PPP financing program and the SME Internet-based facility, beginning 2012. 2. Improve turn-around time of processing loan applications by 50% through the Internet-based facility for SME clients for the years 2012-16.

5.2.2 

Plan Capacity: -

BDO‘s target capacity is 100% accuracy and efficiency on the project assessment and financing stages of the PPP programs. For the Internet credit-scoring facility, accuracy of the credit score generated from the program should be at the same optimal level.

-

Actual turnaround time to process loan applications for SME clients has been pegged at 1 month upon full submission of required documents. With the use of the Internet-based credit facility, average turn-around time is expected to go down to 2 weeks as most of the information required will be forwarded electronically.

Standards: -

For the PPP financing program, standards will come from regulatory agencies such as the government‘s PPP center, the Department of Finance and the international finance agencies such as ADB and IMF which previously conducted PPP financing abroad.

Inventory -

Internally developed standards shall be used for the Internet-based scoring facility.

Just-in-time procedures should be observed in implementing the proposed strategies.

Scheduling: -

The project schedule approved by the government for the PPP program would be the basis for the financing program monitoring.

-

On the other hand, planned maintenance schedules for the SME credit-scoring website should be observed in order to correct identified errors and upgrade the system.

Control: -

Monitor conformity with the set legal, technical, commercial and financial guidelines.

-

For the Internet scoring program, record customer feedbacks & suggestions for improvement.

-

Periodic internal audits shall be performed in related units to check discrepancies from set standards with actual operations.

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5.3 Finance 5.3.1 Objectives 1. Increase gross loan portfolio by 22% in 2012, 19% in 2013 to 2016; 2. Improve BDO‘s key profitability and NPL ratios: 

Net interest margin – from 67.79% in 2010 to 70% for the years 2012 -16

Return on Equity (ROE) - from 11.62% in 2010 to 14% in 2012 to 2016.

3. Improve the Bank‘s Non-performing asset (NPA) ratio – from 2.90% to 2.50% in 2012 -16; 4. Maintain Capital Adequacy Ratio (CAR) above 12%.

5.3.2 Plan 1. Maintain competitive interest rates in lending to PPP project proponents and SMEs. The Bank should continue having low-cost funding (by improving its retail deposit base) for its lending operations. 2. Provide additional budget for the bank‘s loan marketing and solicitation activities. Place emphasis on new accounts generated by marketing personnel 3. Perform due diligence through credit investigation, background checkings and financial assessment on borrowing accounts. 4. Require substantial collateral business in the form of bank deposits, placements and insurance from borrowing clients to improve profitability on the account. 5. Continuously improve credit granting procedures as this ensures lower risk of incurring NPL and NPA. 6. Closely monitor evergreen and potential non-performing accounts. Ensure that documents of the collateral properties for potential non-performing accounts are within the Bank‘s premises.

5.4 Information Management 5.4.1 Objectives 1. Enhance existing client database that will support processing of loans under PPP financing program by 2012; 2. Develop an information system for all existing and potential borrowing SME clients starting 2012.

5.4.2 Plan 1. Coordinate with the government agency PPP center for the projects for rollout. Monitor press releases and bulletins from newspapers and magazines of upcoming project bids, as an initial move to create relationship with them. 2. Utilize existing database of previous infrastructure projects per target company or conglomerate. Projects shall be classified as to the nature, amount, counterparty and feedback. The development of customer database will be processed by the Bank‘s IT Department.

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3. Create a database of all existing SME clients of the Bank. Development of information system rd

and website will be jointly performed with 3 -party IT developers. 4. Profile the SMEs based on level of business assets, industry segment and length of relationship with BDO. 5. Determine previous transaction behaviors of SME customers. This will determine the needs of the customers for loans, remittance, investment, or both. 6. Store the information and credit scores generated from accomplished questionnaires from the Internet-based facility. Ensure that existing IT infrastructure can handle connection to branch offices, and adequate capacity for web servers hosting the screening/application program. 7. Coordinate with government agencies such as DTI and other non-government organizations that have existing databases of SME companies.

5.5 Human Resources 5.5.1 Objectives 1. Recruit 8 Account Officers annually for the years 2012 to 14 to handle the PPP financing program and Internet scoring facility for SME‘s. 2. Ensure that performance of hired employees shall be regularly monitored and assessed through an organized evaluation system. 3. Ensure that performing personnel would be entitled to development programs and rewards.

5.5.2 Plan 1. Recruit 20-25 people internally and externally who will handle the PPP Project Financing program of the Bank. Preferably, new hires should have at least 5 years working experience on project financing. 2. Create a team of professionals who have the skills and experience to develop the Internet-based credit scoring facility. Teams of personnel with backgrounds in IT, marketing, credit and finance should be assembled. 3. Set performance standards by volume and amount of project finance loans processed every month. Turnaround times should be measured and documented. 4. Also, for the Internet scoring facility, performance standards by number of ―hits‖ handled every month. Conversion/success rate from scoring to loan approval should also be documented and measured. 5. BDO‘s performance evaluation for personnel involved in these key strategies should be based on quantified results such as number of accounts handled, loan ADB (average daily balance), new accounts generated, and net income per portfolio. 6. Performance evaluations are done every six months. Performance assessment shall be discussed to the employee and the team head, to cover justification of the rating gave and areas

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for improvement. The employee likewise should be allowed to give his/her comments on the assessment and rating made by the team leader. 7. Performance reward should emanate from the results of the evaluation system. Bonuses, promotions and merit increases should depend on the employeeâ&#x20AC;&#x2DC;s quantified performance results during the year. 8. Employees who have failed to meet the required standards for 3 consecutive evaluations will be subjected to a training program. Failure of the staff to perform after the program should be assessed if he/she can be relocated to another department.

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MODULE SIX - Implementation 6.1 Analysis of Company’s Capabilities to Implement In order to analyze the company‘s capabilities to implement strategies, the 7-S framework would be a useful tool for assessment. The model is helpful in starting change process by giving members of the organization direction. Figure 17: The 7-S Framework

Proposed Strategy 1 Strategy: Develop a special project financing facility for the government‘s identified public-private partnership (PPP) initiatives.

Structure: Form cross-functional teams composed of personnel with background in credit, finance, project engineering, and marketing to handle the PPP project financing facility. Since this is a key potential driver for loan growth, the cross-functional teams shall be directly reporting to the Group Head of Institutional Banking Group of BDO.

Systems: Bank policies and operating guidelines for PPP project financing should be documented in order to concretize the formal procedures of the program. These guidelines should be regularly updated as soon as there are substantial changes in market and regulatory conditions.

Style: Top management should place emphasis on this PPP financing program by regularly interacting with the assigned project finance teams of the Bank. Quarterly business reviews per team should be conducted with the President in order to address the challenges of the teams.

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Staff: BDO should prioritize development of its existing lending, credit and project finance in handling PPP funding requirements. In order to strengthen its existing personnel, the Bank should also be looking at hiring the best possible talent outside the organization.

Skills: All employees directly related with the proposed strategy should undergo training on the procedures and requirements of the new PPP project financing facility. Skill set required would center on determining the financial and commercial viability of the PPP projects.

Superordinate Goals: Both top management and employees should share the same passion and focus in retaining market leadership (in terms of loans) through BDOâ&#x20AC;&#x2DC;s PPP program.

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Proposed Strategy 2 Strategy: Develop SME loan portfolio by creating an Internet-based facility to screen and solicit potential loan applications of SMEs (small and medium enterprises).

Structure: Credit, marketing (loans) and systems functions are the primary project leads to execute the strategy. The marketing (loans) and credit functions should supply the necessary information to the systems personnel, who will be in charge of developing procedures and IT platform for the project.

Systems: A set of agreed guidelines and policies on the use of the Internet credit-scoring program should be developed and disseminated to the affected personnel.

Style: The President and other members of top management should regularly monitor the performance of the project through monthly reviews. All employees should continued demonstrating the â&#x20AC;&#x2022;We Find Waysâ&#x20AC;&#x2013; attitude in dealing with SME clients.

Staff: Employee development programs such as training (internal and external), career planning and mentoring should be afforded to key personnel. Recruitment of experienced staff from other financial institutions would also help in executing the proposed strategy.

Skills: All involved teams should be able to have technology-related skills as well as credit scoring capabilities. st

Superordinate Goals: Same with the 1 strategy, BDO employees should have the value of excellence and strive to retain leadership in the market by focusing on SMEs for loan growth.

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6.2 Managing Internal Organization for Strategy Execution The 8-SIT framework is used in order to determine the tasks necessary to the successful execution of the proposed corporate strategies. Figure 18: The 8-SIT Framework

1. Building an organization with the competencies, capabilities and resource strengths to execute strategy successfully. Key Implementers: Human Resources and Development (HRD) Division; Team Heads (TH), Unit Heads (UH) and Group Heads (GH) of Institutional Banking Group (IBG) a. HRD should put together a talented management team with the right mix of experiences, skills and abilities to get things done. b. HRD and the respective heads of IBG should spend considerable effort in screening and evaluating job applicants, selecting only those with suitable skills sets, energy, initiative, judgment, aptitudes for learning and personality traits that mesh well with the companyâ&#x20AC;&#x2DC;s work environment and culture. c.

HRD should put employees through training programs that continue throughout their careers.

d. All TH, UH and GH should give promising employees with challenging, interesting and skillstretching assignments. e. HRD and the respective heads of IBG should rotate people through jobs that not only have great content but also span functional and geographic boundaries. Providing people with

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opportunities to gain experience in a variety of international settings is increasingly considered an essential part of career development in multinational or global companies. f.

All TH, UH and GH should encourage employees to challenge existing ways of doing things, to be creative and innovative in proposing better ways of operating, and to push their ideas for new products or businesses. Progressive companies work hard at creating an environment in which ideas and suggestions bubble up from below and employees are made to feel that their views and suggestions count.

g. HRD should make the work environment stimulating and engaging such that employees will consider the company a great place to work. h. HRD and the respective heads of IBG should strive to retain talented, high performing employees via promotions, salary increases, performance bonuses, stock options and equity ownership, fringe benefit packages, and other perks. i.

All TH, UH and GH should coach average performers to improve their skills and capabilities, while weeding out underperformers and benchwarmers.

2. Marshaling sufficient money and people behind the drive for strategy execution. Key Implementers: Chief Finance Officer (CFO), Finance Department; Team Heads (TH), Unit Heads (UH) and Group Heads (GH) of Institutional Banking Group (IBG) a. The Finance Department and CFO must create a strategy driven budget that will determine what funding is needed to execute new strategic initiatives and to strengthen or modify the companyâ&#x20AC;&#x2DC;s competencies and capabilities. b. All TH, UH and GH of IBG are required to carefully screen requests for more people & new facilities equipment and must submit a written justification to be submitted to HRD.

3. Instituting policies and procedures that facilitate rather than impede strategy execution. Key Implementers: Team Heads (TH), Unit Heads (UH) and Group Heads (GH) of Institutional Banking Group (IBG) a. All TH, UH and GH of IBG should institute new policies and procedures that provide top-down guidance regarding how certain things now need to be done. b. Further, department heads should help enforce policies and procedures that promote needed consistency in how particular strategy-critical activities are performed in geographically scattered operating units. Well-conceived policies and procedures promote the creation of a work climate that facilitates good strategy execution.

4. Adopting best practices and pushing for continuous improvement in how value chain activities are performed. Key Implementers: President/Chief Executive Officer; Business Systems Division

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(BSD); Group Heads (GH) of Institutional Banking Group (IBG) Managerial efforts to identify and adopt best practices are a powerful tool for promoting operating excellence and better strategy execution. a. The President/CEO, BSD and GH of IBG should all participate in benchmarking to identify the best practice for performing the new PPP Project Finance activity. b. These implementers should adapt the best practice to fit the company‘s situation then implement it. At present, BDO is adopting the Six Sigma quality control system as its quality management tool for its business processes. Six Sigma consists of a statistics-based system aimed at producing not more than 3.4 defects per million iterations for any business process. The Six Sigma process of define, measure, analyze, improve and control (DMAIC) is an improvement system for existing processes falling below specification and needing incremental improvement. The improvement process is briefly defined below: 1. Define – Define what constitutes a defect. Defects are commonly a source of customer dissatisfaction. 2. Measure – Collect data to find out why, how, and how often this defect occurs. 3. Analyze – Identify and document a ―best practice.‖ 4. Improve – Implement the documented best practice as a standard way of doing things. 5. Control – Teach new and existing employees the best practice techniques. Over time, there‘s significant improvement in customer satisfaction and increased business. c.

The Six Sigma quality control should be implemented with the functions that will execute the proposed strategies. Key implementers should continue to benchmark company performance of the activity against best in industry or best in world performers.

d. Defects should be within the prescribed standard of 3.4 defects per million. With this, the company can move closer to operating excellence in performing the activity.

5. Installing information and operating systems that enable company personnel to carry out their strategic roles proficiently. Key Implementers: IT Division; Operations Division; Institutional Banking Group (IBG); Human Resources Division a. IBG will be in charge in updating customer data on a monthly basis for the PPP project finance facility and SME credit scoring program. Database would include details on prospective clients, owners, nature of business, previous projects made and financial capabilities. b. The IT and Operations Divisions will be responsible for consolidating all operations data of the company, setting up new databases for the new customers.

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c.

HRD will keep the employee data updated & monitor training needs.

6. Tying rewards directly to the achievement of strategic and financial targets and to good strategy execution. Key Implementers: Institutional Banking Group (IBG); Human Resources Division a. Both IBG and HRD should design attractive incentive compensation guidelines with the following as parameters: 1. Make the performance payoff a major, not minor, piece of the total compensation package. 2. Have the incentives that extend to all managers and all workers, not just top management. 3. Administer the reward system with scrupulous objectivity and fairness. 4. Tie incentives to performance outcomes directly linked to good strategy execution and financial performance. 5. Make sure that the performance targets each individual or team is expected to achieve involve outcomes that the individual or team can personally affect. b. Relying on promotion from within whenever possible. c.

Making sure that the ideas and suggestions of employees are valued and that those with merit are promptly acted on.

d. Creating a work atmosphere in which there is genuine sincerity, caring, and mutual respect among workers and between management and employees. e. Sharing information with employees about financial performance, strategy, operational measure, market conditions, and competitors‘ actions. f.

Having knockout facilities.

g. Being flexible in how the company approaches people management (motivation, compensation, recognition, recruitment) in multinational, multicultural environments.

7. Instilling a corporate culture that promotes good strategy execution Key Implementers: President/Chief Executive Officer; Human Resources Division; Team Heads (TH), Unit Heads (UH) and Group Heads (GH) of Institutional Banking Group (IBG) Corporate culture refers to the character of a company‘s internal work climate and personality, as shaped by its core values, beliefs, business principles, traditions, ingrained behaviors, work practices, and style of operating. a. All the key implementers should demonstrate and promote a culture of professionalism and the ―We Find Ways‖ philosophy. A good corporate culture should encourage actions, behaviors, and work practices supportive of good strategy execution not only provides

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company personnel with clear guidance regarding â&#x20AC;&#x2022;how we do things around hereâ&#x20AC;&#x2013; but also produces significant peer pressure from coworkers to conform to culturally acceptable norms. b. HRD should reinforce the existing culture by disseminating important newsletters via posters or emails. c.

Senior department heads should reiterate core values in daily conversations & pronouncement.

8. Exercising strong leadership to drive execution forward, keep improving on the details of execution, and achieve operating excellence as rapidly as feasible. Key Implementers: President/Chief Executive Officer; Group Heads (GH) of Institutional Banking Group (IBG) a. Key implementers should personally lead the implementation/execution process and driving the pace of progress by being role models. b. Senior Management should also conduct regular business reviews and consultations from the whole organization.

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6.3 Managing Strategic Change Letter to BDO‘s President, Mr. Nestor V. Tan, on the 8-steps framework for Leading Change: 15 August 2011 Mr. Nestor V. Tan President BDO Unibank Inc. Dear Mr. Tan: Thank you for giving me your support in creating this strategic management paper on BDO Unibank Inc. The strategies and frameworks mentioned in this paper outline specific changes that need to be done in relation to potential changes in the macro environment. In order for these changes to benefit the bank, they need to be effectively implemented by having the leadership that can steer the company in achieving the desired results needed. However, how experienced and highly skilled our leaders can be, changes, may they be on a few processes or system-wide change, because most managers are used to assuming the basic management tasks like planning, budgeting, organizing, staffing, controlling and problem solving. As a result, organizations experience the following pitfalls:    

Complacency. Underestimating the power of vision. Failure to create short-term wins. Failure to anchor change in the corporate culture.

To address these, Kotter created the eight success factors for leading change: 1. Create Urgency. A sense of urgency is required for change. The organization must gain the effort and commitment needed to create change. Convince management that status quo doesn‘t result in success in the long run. 2. Form a Powerful Coalition. Change requires a coalition of people who have the position, knowledge, reputations, and power to make change happen. Assemble a group with shared commitment, expertise, and power to lead the change effort. Encourage the group to work as a team outside their normal hierarchy. 3. Create a Vision for Change. Create a vision to direct the change effort and develop strategies out of that vision. 4. Communicate the Vision. Communicate the new vision to all members of the organization, together with the underlying strategies. Instill new behaviors as an example to motivate change. 5. Remove Obstacles. Remove or alter major barriers such as systems, structures, skills, and supervisors that do not share or personify the vision. Encourage risk and nontraditional ideas, behaviors, and actions.

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6. Create Short-term Wins. Define and direct visible short term performance improvements. Reward employees who contributed to the improvements. 7. Build on the Change. Use increased credibility from early wins to change systems, structures, and policies in relation to the vision. Hire, train and promote employees who can implement the vision. Continue the change process with new projects and new change agents. 8. Anchoring Change in the Corporate Culture. Articulate connections between new behaviors and corporate success. Create leadership development and succession plans consistent with the new approach. The above action plan for leaders has are outlined to effectively and successfully transform business. With this, I look forward that BDO would also take the challenge of adopting these strategies for change; thereby, achieving our goals and objectives.

Respectfully yours,

John Paul F. Udarbe Account Officer â&#x20AC;&#x201C; Manager 1 IBG â&#x20AC;&#x201C; Commercial Banking Luzon 4

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MODULE SEVEN â&#x20AC;&#x201C; Financial Projections Historical Financial Statements of BDO: Balance Sheet (2007-2010) BDO UNIBANK INC. STATEMENT OF FINANCIAL POSITION 2010 ASSETS Cash and Other Cash Items Due from Bangko Sentral ng Pilipinas Due from Other Banks Financial Assets at FV through Profit or Loss Available for Sale Financial Assets Held-to-Maturity Financial Assets Loans and Receivables - net Other Receivables Bank Premises, Furniture, Fixtures and Equipment - net Investment Properties Deferred Tax Assets Equity investments Goodwill Other Assets TOTAL ASSETS LIABILITIES AND EQUITY Liabilities Deposit Liabilities Demand Savings Time Bills Payable Subordinated Notes Payable Bills Purchased - Contra Manager's Checks Income Tax Payable Accrued Interest and Other Expenses Derivative Liabilities Other Liabilities TOTAL LIABILITIES Equity Capital Stock Capital Paid in excess of par value Surplus Reserves Surplus Free Net unrealized gains (losses) on available-for-sale financial assets Revaluation Increment Cumulative translation adjustments TOTAL EQUITY TOTAL LIABILITIES AND EQUITY

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2009

2008

2007

26,660 129,718 20,433 4,347 77,725 95,569 503,677 44,941

30,365 62,864 14,611 6,495 39,327 107,440 436,115 61,187

21,763 59,940 14,881 5,160 31,656 105,276 368,299 99,291

18,437 48,320 16,102 17,748 68,563 62,571 270,046 27,585

14,115 11,152 5,687 14,548 1,247 9,384 959,203

13,058 12,805 5,740 12,905 1,247 11,025 815,184

12,886 14,314 5,747 10,874 747 10,792 761,626

10,937 17,007 5,614 11,560 747 11,252 586,489

33,489 426,687 302,458 762,634 56,081 23,152 9,162 4,586 2 3,971 3,168 13,898 876,654

32,909 354,848 282,048 669,805 21,519 23,152 10,575 3,846 90 2,651 3,549 17,425 752,612

22,814 264,803 325,350 612,967 43,242 20,146 13,389 3,371 41 2,103 2,695 10,412 708,366

23,202 319,864 91,229 434,295 41,192 18,631 16,598 4,139 47 1,829 3,211 11,098 531,040

31,074 25,156 1,189 21,098

28,404 16,839 1,100 15,169

28,096 15,918 1,025 9,439

23,096 15,918 927 11,596

3,187 1,162 (317) 82,549 959,203

(116) 1,176 62,572 815,184

(2,520) 1,302 53,260 761,626

2,560 1,352 55,449 586,489

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Income Statement (2007-2010) BDO UNIBANK INC. STATEMENT OF INCOME 2010 INTEREST INCOME Loans and Receivables Trading and Investments Due from BSP and other banks INTEREST EXPENSE Deposit liabilities Bills payable and borrowings NET INTEREST INCOME Trading and securities gain/loss-net Service charges, fees and commissions Foreign exchange gain-net Trust fee income Dividend income Miscellaneous TOTAL OPERATING INCOME Compensation and fringe benefits Provision for impairment and credit losses Taxes and licenses Occupancy Security, clerical, messengerial and janitorial Insurance Repairs and maintenance Advertising Entertainment, amusement and recreation Power, light and water Traveling Miscellaneous TOTAL OPERATING EXPENSES INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX NET INCOME

2009

2008

2007

34,389 9,379 2,776 46,544

32,238 10,123 2,650 45,011

26,862 9,800 3,071 39,733

20,639 10,572 4,024 35,235

12,224 2,766 14,990 31,554 5,220 7,952 31 1,273 820 1,108 47,958 12,776 6,374 3,243 3,473 1,845 1,467 644 1,954 755 702 492 4,503 38,228 9,730 1,297 8,433

14,034 3,147 17,181 27,830 3,399 7,155 (71) 1,089 1,286 1,517 42,205 11,520 5,775 2,251 3,081 1,832 1,313 620 1,209 666 573 534 5,212 34,586 7,619 1,263 6,356

14,301 3,742 18,043 21,690 (2,710) 6,200 4,168 1,094 132 2,926 33,500 9,378 5,171 2,327 3,157 1,570 1,010 775 1,028 535 516 552 5,044 31,063 2,437 958 1,479

11,809 3,169 14,978 20,257 3,634 6,641 629 806 2,426 2,622 37,015 7,592 3,802 2,379 3,070 1,059 989 779 641 613 487 336 4,963 26,710 10,305 2,634 7,671

Statement of Cash Flows (2007-2010) BDO UNIBANK INC. STATEMENT OF CASH FLOWS CASH FLOW FROM OPERATING ACTIVITIES Income before income tax Adjustment for: Interest income Interest received Interest expense Interest paid Impairment losses Depreciation and amortization Fair value loss (gain) Operating profit bef. changes in operating resources and liabilities Decrease in financial assets at FV through profit or loss Increase in loans and other receivables Decrease in investment properties Decrease (increase) in other resources Increase in deposit liabilities Increase (decrease) in other liabilities Net Cash provided by operations Income taxes paid Net cash provided by operating activities

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2010

2009

2008

9,730

7,619

(46,544) 46,384 14,990 (15,291) 6,374 1,986 270 17,899 1,950 (66,108) 992 (31) 95,896 (5,507) 45,091 (1,329) 43,762

(45,011) 44,476 17,181 (16,341) 5,775 1,684 (1,663) 13,720 563 (48,417) 1,102 (1,494) 59,145 1,459 26,078 (1,253) 24,825

2007 2,437

(39,733) 37,877 18,043 (18,088) 5,171 1,902 2,226 9,835 10,890 (182,443) 2,526 3,399 182,459 (4,653) 22,013 (1,147) 20,866

10,305 (35,235) 35,823 14,978 (14,867) 3,802 1,690 750 17,246 11,873 (45,368) (502) 13,587 (26,525) 5,862 (23,827) (2,757) (26,584)

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De La Salle University Graduate School of Business CASH FLOWS FROM INVESTING ACTIVITIES Net acquisitions of bank premises, furniture, fixtures and equipment Additions to equity investments Net decrease (increase) in HTM investments Net decrease (increase) in AFS investments Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds (payments) of bills payable Proceeds from issuance of senior notes payable Proceeds from issuance of common shares Payments of cash dividends Proceeds from issuance of subordinated notes payable Proceeds from issuance of preferred shares Net cash used in financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR Cash and other cash items Due from Bangko Sentral ng Pilipinas Due from other banks Interbank loans receivable and securities purchased under resale agreements CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR Cash and other cash items Due from Bangko Sentral ng Pilipinas Due from other banks Interbank call loans receivable

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(2,105) (1,405) 19,074 (32,603) (17,039)

(1,623) (2,000) 5,747 (4,006) (1,882)

(3,569) (37,886) 33,464 (7,991)

(1,614) 923 22,355 (7,553) 14,111

20,564 13,105 10,994 (2,415) 42,248

(20,137) 1,299 (729) 3,000 (16,567)

(178) (3,683) 5,000 1,139

6,445 (770) 1,400 7,075

68,971

6,376

14,014

(5,398)

30,365 62,864 14,611

21,763 59,940 14,881

18,437 48,320 16,102

18,055 40,275 7,777

107,840

4,880 101,464

4,591 87,450

26,427 92,534

26,660 129,718 20,433 176,811

30,365 62,864 14,611 107,840

21,763 59,940 14,881 4,880 101,464

18,437 48,320 16,102 4,591 87,450

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Assumptions on 5-year Financial Projections: 1. To determine the level of gross interest income for BDO on 2012 â&#x20AC;&#x201C; 2016, projections were made based on the target market share of 20%. Interest rate used for projections is at 7.289% for 201216, in the assumption that the Bank will adjust interest charged on existing loans portfolio given the projected increase of 50 basis points in prevailing interest rates. 2. Total market and loan portfolio is expected to grow by 19% from 2012 to 2016. Total Outstanding Loans Market Share - BDO Outstanding Loans - BDO

2010 2,589,973 19% 503,677

2011 3,080,773 19% 599,124

2012 3,664,579 20% 732,916

2013 4,359,017 20% 871,803

2014 5,185,051 20% 1,037,010

2015 6,167,618 20% 1,233,524

2016 7,336,382 20% 1,467,276

3. Revenues from trading securities and revenues are expected to rise by 19% in 2012-16. Interest expense is expected to grow by the same rate. 4. Other income and variable expense accounts increase by 19% in 2012-16. Fixed expense accounts are projected to grow by 3-year annual growth. st

5. Effect of the 1 strategy on the companyâ&#x20AC;&#x2DC;s profitability is summarized below: Strategy 1 Projected increase in outstanding loans Loans to finance PPP projects (20% of P109 Billion, increase by 19% yoy) Contribution to revenue

2012 133,792 21,800 1,596

2013 138,888

2014 165,207

2015 196,513

2016 233,753

25,942 1,899

30,871 2,260

36,736 2,689

43,716 3,200

a. Interest income is computed based on the assumption that BDO can corner 20% of the total PhP109 Billion financial requirements of the PPP program on 2012. b. BDO will also generate income from service fees and miscellaneous items. c.

The Bank will incur additional expense in the form of salaries, impairment provisions, security, insurance, repairs, advertising, utilities, representation, travel and miscellaneous items. Initial advertising budget is estimated at PhP67 Billion.

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INTEREST INCOME Loans and Receivables Trading and Investments Due from BSP and other banks TOTAL INTEREST INCOME INTEREST EXPENSE Deposit liabilities Bills payable and borrowings TOTAL INTEREST EXPENSE NET INTEREST INCOME Trading and securities gain/loss-net Service charges, fees and commissions Foreign exchange gain-net Trust fee income Dividend income Miscellaneous TOTAL OPERATING INCOME Compensation and fringe benefits Provision for impairment and credit losses Taxes and licenses Occupancy Security, clerical, messengerial and janitorial Insurance Repairs and maintenance Advertising Entertainment, amusement and recreation Power, light and water Traveling Miscellaneous TOTAL OPERATING EXPENSES INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX NET INCOME

6. On the other hand, the effect of the 2

nd

2012

2013

2014

2015

2016

1,595.76 1,595.76

1,898.95 1,898.95

2,259.76 2,259.76

2,689.11 2,689.11

3,200.04 3,200.04

732.22 179.31 911.53 684.23 390.77 114.28 1,189.28 159.58 147.67 71.31 88.17 66.82 39.40 67.56 35.92 31.85 26.76 137.88 872.92 316.36 74.96 241.40

871.34 213.38 1,084.72 814.24 465.02 135.99 1,415.25 189.90 175.72 84.86 104.92 79.52 46.89 80.40 42.75 37.90 31.85 164.08 1,038.77 376.47 89.20 287.27

1,036.90 253.92 1,290.81 968.94 553.38 161.83 1,684.14 225.98 209.11 100.98 124.86 94.63 55.80 95.67 50.87 45.10 37.90 195.25 1,236.14 448.00 106.15 341.85

1,233.91 302.16 1,536.07 1,153.04 658.52 192.57 2,004.13 268.91 248.84 120.17 148.58 112.60 66.40 113.85 60.53 53.67 45.10 232.35 1,471.01 533.12 126.32 406.80

1,468.35 359.57 1,827.92 1,372.12 783.64 229.16 2,384.92 320.00 296.12 143.00 176.81 134.00 79.01 135.48 72.03 63.87 53.67 276.49 1,750.50 634.42 150.32 484.10

strategy on BDO‘s profitability is summarized below.

Interest income is computed based on the assumption that BDO can maintain 25% of its total loan portfolio for loans to SME sector. Normal growth of 19% is projected in the years 2012 – 16. BDO will also generate income from service feeS and miscellaneous items. The Bank will incur additional expense in the form of salaries, impairment provisions, security, insurance, repairs, advertising, utilities, representation, travel and miscellaneous items. Initial advertising budget is estimated at PhP67 Billion.

Strategy 2 SME portfolio (at 25% growth) Increase in SME Portfolio Contribution to revenue

Banco De Oro Unibank, Inc. UDARBE, John Paul F. - 10981241

191,689 26% 34,992 2,551

228,014 26% 36,325 2,648

271,222 26% 43,209 3,149

322,619 26% 51,397 3,746

383,755 26% 61,136 4,456

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INTEREST INCOME Loans and Receivables Trading and Investments Due from BSP and other banks TOTAL INTEREST INCOME INTEREST EXPENSE Deposit liabilities Bills payable and borrowings TOTAL INTEREST EXPENSE NET INTEREST INCOME Trading and securities gain/loss-net Service charges, fees and commissions Foreign exchange gain-net Trust fee income Dividend income Miscellaneous TOTAL OPERATING INCOME Compensation and fringe benefits Provision for impairment and credit losses Taxes and licenses Occupancy Security, clerical, messengerial and janitorial Insurance Repairs and maintenance Advertising Entertainment, amusement and recreation Power, light and water Traveling Miscellaneous TOTAL OPERATING EXPENSES INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX NET INCOME

2012

2013

2014

2015

2016

2,550.59 2,550.59

2,647.73 2,647.73

3,149.48 3,149.48

3,746.30 3,746.30

4,456.22 4,456.22

1,170.35 286.60 1,456.94 1,093.65 624.60 182.65 1,900.90 255.06 236.02 113.98 140.93 106.80 102.02 204.05 57.41 153.04 25.51 357.08 1,751.90 149.00 35.30 113.69

1,214.92 297.51 1,512.43 1,135.30 648.38 189.61 1,973.29 264.77 245.01 118.32 146.30 110.87 105.91 211.82 59.60 158.86 26.48 370.68 1,818.62 154.67 36.65 118.02

1,445.15 353.89 1,799.04 1,350.44 771.25 225.54 2,347.23 314.95 291.44 140.74 174.02 131.88 125.98 251.96 70.89 188.97 31.49 440.93 2,163.25 183.98 43.59 140.39

1,719.00 420.95 2,139.96 1,606.35 917.41 268.28 2,792.03 374.63 346.67 167.41 207.00 156.87 149.85 299.70 84.33 224.78 37.46 524.48 2,573.19 218.85 51.85 166.99

2,044.75 500.72 2,545.48 1,910.75 1,091.25 319.12 3,321.12 445.62 412.36 199.13 246.22 186.60 178.25 356.50 100.31 267.37 44.56 623.87 3,060.81 260.32 61.68 198.64

Projected Balance Sheet (2012 â&#x20AC;&#x201C; 2016) Assumptions: 1. Cash and other cash items balance is maintained at 3.13% of total assets (historical average). Cash generated by the business are plowed back to Due from Bangko Sentral ng Pilipinas account. 2. Due from other banks and Financial Assets (Available for Sale and Held to Maturity) are expected to grow by same rate as the income from trading and investments. 3. Other receivables-others is based on increase on interest income. 4. Advances to stockholders, Refund receivable, Account Receivable-documentations, & Salary loan receivables are based on prior years. Advances-others is equal to zero. 5. Additional capital expenditure of PhP4 Billion shall be made in 2012 in order to finance the 2 strategies. 6. Investment properties and other assets are expected to go down by 13% and 5.6% annually (historical average). 7. No additional goodwill is projected in 2012-16.

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8. Deposit liabilities, bills payable and accrued expenses are expected to grow by 19% for the next 5 years. 9. No additional subordinated notes payable shall be incurred in 2012-16. 10. Other liabilities are expected to grow by inflation rate of 5%. 11. No additional shares of common and preferred stock shall be issued in the next 5 years. 12. Cash dividends shall be declared paid in 2012-16, at a rate of 32% of income after tax. BDO UNIBANK INC. STATEMENT OF FINANCIAL POSITION

Projected Balance Sheet 2011

ASSETS Cash and Other Cash Items Due from Bangko Sentral ng Pilipinas Due from Other Banks Financial Assets at FV through Profit or Loss Available for Sale Financial Assets Held-to-Maturity Financial Assets Loans and Receivables - net Other Receivables Bank Premises, Furniture, Fixtures and Equipment - net Investment Properties Deferred Tax Assets Equity investments Goodwill Other Assets TOTAL ASSETS LIABILITIES AND EQUITY Liabilities Deposit Liabilities Demand Savings Time Bills Payable Subordinated Notes Payable Bills Purchased - Contra Manager's Checks Income Tax Payable Accrued Interest and Other Expenses Derivative Liabilities Other Liabilities TOTAL LIABILITIES Equity Capital Stock Capital Paid in excess of par value Surplus Reserves Surplus Free Net unrealized gains (losses) on available-for-sale financial assets Revaluation Increment Cumulative translation adjustments TOTAL EQUITY TOTAL LIABILITIES AND EQUITY

Banco De Oro Unibank, Inc. UDARBE, John Paul F. - 10981241

2012

2013

2014

2015

2016

35,279 150,834 24,305 3,215 92,454 113,679 599,124 53,457 13,497 9,692 5,712 15,783 1,247 8,858 1,127,137

41,494 150,331 28,911 2,378 109,974 135,222 732,916 63,587 18,723 8,422 5,737 17,124 1,247 9,610 1,325,676

48,911 175,131 34,389 1,759 130,814 160,846 871,803 75,637 20,024 7,320 5,763 18,578 1,247 10,426 1,562,647

57,741 204,611 40,906 1,301 155,603 191,326 1,037,010 89,971 21,443 6,361 5,788 20,155 1,247 11,312 1,844,775

68,234 239,224 48,658 962 185,090 227,583 1,233,524 107,020 22,990 5,528 5,814 21,867 1,247 12,272 2,180,013

80,678 279,252 57,879 711 220,165 270,710 1,467,276 127,300 24,678 4,804 5,839 23,724 1,247 13,314 2,577,578

39,835 507,544 359,774 907,153 66,708 23,152 10,898 5,455 2 4,724 3,220 15,794 1,037,106

47,384 603,724 427,951 1,079,059 79,350 23,152 8,947 5,724 2 5,619 3,272 17,949 1,223,073

56,363 718,129 509,048 1,283,540 94,386 23,152 7,345 6,006 2 6,683 3,325 20,398 1,444,838

67,044 854,215 605,512 1,526,771 112,273 23,152 6,030 6,301 2 7,950 3,379 23,182 1,709,040

79,749 1,016,089 720,257 1,816,094 133,548 23,152 4,950 6,612 2 9,456 3,434 26,344 2,023,594

94,861 1,208,638 856,745 2,160,244 158,856 23,152 4,064 6,937 2 11,248 3,490 29,939 2,397,933

31,074 25,156 3,244 25,977

31,074 25,156 4,517 36,612

31,074 25,156 6,035 49,496

31,074 25,156 7,813 64,676

31,074 25,156 9,846 82,164

31,074 25,156 12,099 101,743

3,791 1,106 (317) 90,031 1,127,137

4,509 1,052 (317) 102,603 1,325,676

5,364 1,001 (317) 117,809 1,562,647

6,380 952 (317) 135,735 1,844,775

7,589 906 (317) 156,419 2,180,013

9,028 862 (317) 179,645 2,577,578

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Projected Income Statement (2012 â&#x20AC;&#x201C; 2016)

INTEREST INCOME Loans and Receivables Trading and Investments Due from BSP and other banks TOTAL INTEREST INCOME INTEREST EXPENSE Deposit liabilities Bills payable and borrowings TOTAL INTEREST EXPENSE NET INTEREST INCOME Trading and securities gain/loss-net Service charges, fees and commissions Foreign exchange gain-net Trust fee income Dividend income Miscellaneous TOTAL OPERATING INCOME Compensation and fringe benefits Provision for impairment and credit losses Taxes and licenses Occupancy Security, clerical, messengerial and janitorial Insurance Repairs and maintenance Advertising Entertainment, amusement and recreation Power, light and water Traveling Miscellaneous TOTAL OPERATING EXPENSES INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX NET INCOME

Banco De Oro Unibank, Inc. UDARBE, John Paul F. - 10981241

2012 29% 52,800.24 13,270.44 2,204.85 68,275.53

2013 18% 62,418.42 15,785.19 1,964.99 80,168.60

2014 19% 74,245.22 18,776.49 1,751.21 94,772.92

2015 19% 88,312.90 22,334.63 1,560.70 112,208.23

2016 19% 105,046.08 26,567.04 1,390.91 133,004.03

18,073.69 4,379.27 22,452.96 45,822.57 7,385.31 12,265.94 43.86 1,801.05 1,160.14 1,864.54 70,343.41 18,491.53 9,402.33 4,316.93 3,784.13 2,839.61 2,100.84 715.96 4,467.29 980.09 1,083.99 748.40 4,742.31 53,673.42 16,669.99 3,949.14 12,720.85

21,511.99 5,165.67 26,677.65 53,490.95 8,784.51 14,495.48 52.17 2,142.28 1,379.94 2,190.20 82,535.53 21,957.13 11,148.40 4,866.67 3,950.00 3,356.42 2,399.32 695.46 6,440.33 1,063.37 1,214.30 886.38 4,659.78 62,637.55 19,897.98 4,713.85 15,184.12

25,817.39 6,144.47 31,961.86 62,811.06 10,448.80 17,242.04 62.05 2,548.15 1,641.38 2,605.24 97,358.71 26,118.10 13,261.11 5,505.52 4,123.14 3,992.52 2,758.32 694.33 9,356.71 1,163.27 1,385.63 1,054.36 4,642.39 74,055.41 23,303.30 5,520.58 17,782.72

30,984.73 7,308.74 38,293.47 73,914.76 12,428.41 20,509.01 73.81 3,030.91 1,952.36 3,098.92 115,008.17 31,067.60 15,774.20 6,228.96 4,303.86 4,749.16 3,171.38 700.37 13,614.94 1,273.60 1,581.69 1,254.18 4,647.66 88,367.60 26,640.57 6,311.19 20,329.39

37,186.60 8,693.62 45,880.23 87,123.81 14,783.07 24,394.99 87.79 3,605.14 2,322.24 3,686.15 136,003.19 36,955.04 18,763.54 7,048.32 4,492.51 5,649.20 3,646.69 714.53 19,836.53 1,395.61 1,806.13 1,491.87 4,679.13 106,479.10 29,524.09 6,994.30 22,529.79

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Projected Cash Flow Statements (2012 â&#x20AC;&#x201C; 2016)

BDO UNIBANK INC. STATEMENT OF CASH FLOWS CASH FLOW FROM OPERATING ACTIVITIES Income before income tax Adjustment for: Interest income Interest received Interest expense Interest paid Impairment losses Depreciation and amortization Fair value loss (gain) Operating profit bef. changes in operating resources and liabilities Decrease in financial assets at FV through profit or loss Increase in loans and other receivables Decrease in investment properties Decrease (increase) in other resources Increase in deposit liabilities Increase (decrease) in other liabilities Net Cash provided by operations Income taxes paid Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Net acquisitions of bank premises, furniture, fixtures and equipment Additions to equity investments Net decrease (increase) in HTM investments Net decrease (increase) in AFS investments Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds (payments) of bills payable Proceeds from issuance of senior notes payable Proceeds from issuance of common shares Payments of cash dividends Proceeds from issuance of subordinated notes payable Proceeds from issuance of preferred shares Net cash used in financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR Cash and other cash items Due from Bangko Sentral ng Pilipinas Due from other banks Interbank loans receivable and securities CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR Cash and other cash items Due from Bangko Sentral ng Pilipinas Due from other banks Interbank call loans receivable

Banco De Oro Unibank, Inc. UDARBE, John Paul F. - 10981241

Projected Cash Flows 2012

2013

2014

2015

2016

16,670

19,898

23,303

26,641

29,524

68,276 (67,471) 22,453 (22,245) 9,402 2,216 112 29,413 (133,792) 1,269 (2,118) 164,705 1,420 60,897 (3,949) 56,948

80,169 (79,224) 26,678 (26,430) 11,148 2,216 82 34,537 (138,887) 1,103 (2,295) 196,852 2,247 93,557 (4,714) 88,843

94,773 (93,656) 31,962 (31,665) 13,261 2,216 61 40,255

112,208 (110,886) 38,293 (37,938) 15,774 2,216 45 46,354

133,004 (131,436) 45,880 (45,454) 18,764 2,216 33 52,531

(165,207) 959 (2,488) 233,820 3,085 110,423 (5,521) 104,902

(196,514) 833 (2,698) 277,921 3,955 129,852 (6,311) 123,541

(233,752) 724 (2,925) 330,513 4,882 151,973 (6,994) 144,978

(6,228) (1,340) (21,542) (17,520) (46,631)

(3,228) (1,454) (25,624) (20,840) (51,147)

(3,228) (1,578) (30,480) (24,789) (60,075)

(3,228) (1,712) (36,256) (29,487) (70,683)

(3,228) (1,857) (43,127) (35,075) (83,286)

12,641 (4,037) 8,604

15,037 (4,819) 10,218

17,886 (5,643) 12,243

21,276 (6,451) 14,824

25,307 (7,150) 18,158

10,317

37,696

44,827

52,858

61,692

35,279 150,834 24,305 210,418

41,494 150,331 28,911 220,736

48,911 175,131 34,389 258,431

57,741 204,611 40,906 303,259

68,234 239,224 48,658 356,116

41,494 150,331 28,911 220,736

48,911 175,131 34,389 258,431

57,741 204,611 40,906 303,259

68,234 239,224 48,658 356,116

80,678 279,252 57,879 417,809

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