BPI 2012 sustainability report

2012 INTEGRATED ANNUAL AND SUSTAINABILIT Y REPORT

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WE BELIEVE in the central role that private enterprise plays in economic development.

WE BELIEVE that our corporate mission is to be the leading private financial institution in the Philippines in terms of professional competence, service quality, responsible corporate citizenry, and overall growth and stability; and to be an established ASEAN financial institution with a creditable worldwide outreach.

WE BELIEVE that we have a responsibility to manage the business for the maximum benefit of our customers while adopting the highest standard of integrity; to offer the widest possible range of financial services that is responsive to their needs; and to adopt an objective attitude towards change and innovation, ever mindful of improving service quality and operating efficiency.

WE BELIEVE that we have a responsibility to develop the potential of our employees to the fullest by providing an environment conducive to their personal and professional growth; and to foster a value system held in common throughout the institution in order that we may all share a coherent sense of purpose and direction.

WE BELIEVE that we have a responsibility to attain, over time and within exacting standards of prudent management, the highest possible return of investments of our shareholders.

This report of Bank of the Philippine Islands (BPI) combines our Annual Report to shareholders with our Sustainability Report.

It covers the financial year from January to December 2012.

This marks the second year since 2011 that we have published an integrated report that is intended primarily for institutional investors, our customers, non-government organizations, and anyone with an interest in both our financial and non-financial performance. The report presents a holistic view of our economic, financial, operational, social responsibility, environmental, and governance performance.

REPORTING PROCESS The content of this report has been determined based on: • Issues that are currently most important to our stakeholders and our business operations; • Consultations with our business units to identify which social, environmental and operational topics are most relevant to our business as a bank; • Sustainability issues, risks or opportunities as identified by the Bank’s Sustainability Office; • Performance indicators set by the Global Reporting Initiative (GRI G3.1) framework (www.globalreporting.org).

REPORTING STANDARDS On our fifth year of reporting our sustainability progress, we have managed to increase the number of GRI indicators we report to 39 from 33 previously, which are equivalent to a self-declared application level “B”. Despite the increase in the information we disclosed, there have been no significant changes from 2011 that would affect or alter our reporting.

SCOPE OF THE REPORT This report covers performances of the BPI Group of Companies which comprises BPI Parent and its subsidiaries. Data in this report were consolidated from our BPI Head Offices, domestic and international branches, satellite offices, and subsidiaries as follows:

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Type of Data

Data Sources

Economic

Audited Financial Statements (complies with Philippine Financial Reporting Standards)

Environmental, Social and Operational Performance

Management information systems and records of various BPI Group units

Collection of adequate data on our environmental and social performance remains a challenge. However, we continuously strive to enhance our data gathering mechanisms for a more encompassing, accurate, and relevant sustainability reporting.

ASSURANCE In 2012, we set up the BPI Sustainability Office (BSO) to effectively embed sustainability throughout our business groups. BSO is composed of a dedicated team that drives, monitors and measures our sustainability strategy. It will also closely track our sustainability performance and lay the groundwork for seeking external assurance in the near future.

FEEDBACK We welcome feedback from our various stakeholders to improve our integrated reporting process. A feedback form is published together with this report and also downloadable on our website: www.bpiexpressonline.com.

You may also contact: Corporate Reporting Corporate Planning Division 18th Floor BPI Building 6768 Ayala Avenue Makati City 0720, Philippines Tel. (632) 8455245, 8169753/9557 Email: gksinio@bpi.com.ph investorrelations@bpi.com.ph

Sustainability Reporting Sustainability Office 16th Floor BPI Building 6768 Ayala Avenue Makati City 0720, Philippines Tel. (632) 8169883 Email: fgmaranan@bpi.com.ph

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

SECTIONS PAGES

Overview About this Report 02 About BPI 04 Stakeholders 08 Financial Highlights 10 Economic Contributions 12 Significant Events 14 Executive Statements Message from the Chairman Message from the President Corporate Governance Board of Directors Senior Management

16 20 24 36 40

Shareholders Quality Sustainable Growth 46 Customers

Customer Experience Innovations 56 Widening Our Markets 60 Connecting with Our Customers 64 Caring for Our Customers 66 Environment Mitigating Environmental Risk 70 Greening our Products 72 Special Feature: Greening Ice 73 Greening our Workplace 74 Communities Corporate Social Responsibility 80 Our CSR Programs 82 Special Feature: Preserving Our History 84 People Workforce Profile 88 Workplace Policies 90 Special Feature: Proud to Serve 100 Annexes Audit Report to the Board of Directors 102 Financial Performance 104 Statement of Management Responsibility 105 Independent Auditor’s Report 106 Financial Statements 108 Products and Services 220 Remittance Centers 222 BPI Group Directory 224 GRI Index 226 Feedback Form BANK OF THE PHILIPPINE ISLANDS

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The Bank of the Philippine Islands (BPI) was established on August 1, 1851 as the El Banco EspaĂąol Filipino de Isabel II, named after the queen of Spain, Isabella II. The Bank served as the de facto central bank during the Spanish period as it then had the power to print Philippine currency.

Today, BPI is not only known as the oldest bank in the Philippines and in Southeast Asia, but is also an acknowledged leader in Philippine banking. Our head office is located at the BPI Building, 6768 Ayala Avenue, Makati City.

Its sustained growth over the years was made possible through a series of strategic acquisitions and organic growth. As of end-2012, it continued to rank as the country’s largest bank in terms of market capitalization and the most profitable.

It is also highly regarded for its sound corporate governance practices, having been recognized as one of the top-rated Publicly Listed Companies (PLCs) in the Corporate Governance (CG) Scorecard of the Institute of Corporate Directors (ICD).

OWNERSHIP Ayala DBS Holdings Inc.

Ayala Corp.

8.7%

8.5% 6.3% Public

4

33.4%

In addition to deposit taking and lending, BPI, as a universal bank with an expanded banking license and a special license for trust, operates asset management and trust, remittances, finance and operating lease, government securities dealership, securities distribution, and foreign exchange businesses.

Market Position

21.3% 21.8%

BPI serves a broad customer base, comprising of individuals and families; micro, small and medium enterprises; middle market; large corporations; institutions and governments.

AC International Finance Limited

Roman Catholic Archbishop of Manila Others

ASSETS

EARNINGS

985.1B

Php

3rd biggest

16.3B

Php

Most profitable

MARKET CAPITALIZATION

337.9B

Php

Highest

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

DELIVERY CHANNELS 831

812

813

819

2009

2010

2011

357

363*

820

TOTAL BRANCH NETWORK 2008

DOMESTIC Greater Manila Area 466

**

2008

451

453

2009

*

2010

2012

Provincial 452

*

2011

451

*

2012

358

362

2008

2009

2010

364*

2011

2012

* includes BPI-Globe BanKO Branches ** includes Pilipinas Bank

INTERNATIONAL Hong Kong 1 2008

Europe 1

1

1

2011

2012

1

2009

2010

2008

13

15

18

2011

2012

13

2009

2010

2008

2

2009

2010

3

4

2011

2012

21

2008

21

2009

23

2010

20

17

2011

2012

NUMBER OF EMPLOYEES

ATMs 1,556

2008

2

REMITTANCE CENTERS

BUSINESS CENTERS 13

2

1,566

1,656

2009

2010

1,868

2011

2,068

2012

total

12,089

12,155

12,035

12,355 12,406

BANKING SERVICES

11,448

11,549

11,704

12,011 12,046

641

606

331

344

360

2008

2009

2010

2011

2012

INSURANCE SERVICES

OTHER CHANNELS INTERNET BANKING

BANK OF THE PHILIPPINE ISLANDS

MOBILE BANKING

CALL CENTER

Remittance partnerships and tie-ups in the US, Europe, Asia and middle east

SOCIAL MEDIA

5

In keeping with BPI’s long tradition of excellence, BPI Asset Management was awarded for the second time the Best Asset Management Company in the Philippines by The Asset Triple A Investment Awards 2012.

CREDIT RATING RATINGS AGENCY Fitch Ratings

Moody’s Investor Service

Capital Intelligence Ltd.

6

RATING DATE May 2012

October 2012

November 2012

RATING

ISSUE Long-term Foreign Currency Issuer Default rating (IDR)

BB+

Long-term Local Currency IDR

BBB-

National Long-Term Rating

AAA (phl)

Subordinate Notes

AA+ (phl)

Bank Financial Strength Rating

D

Global Local Currency Deposits

Ba1

Foreign Currency Deposits

Ba1

Financial Strength

BBB

Long-Term Foreign Currency November 2012 Short-Term Foreign Currency November 2012

BB B

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

AWARDS Awarding body

INTERNATIONAL AWARDS

Alpha Southeast Asia

Best Trade Finance Bank Best Cash Management Bank Best SME Bank (6th Annual Best Financial Institution Awards in Southeast Asia) Best Senior Management IR Support (Phils.)

(2nd Annual Southeast Asia Institutional Investor Corporate Awards)

Asia Asset Management

Best Fund House

Asia Banking and Finance

Website of the Year - Philippines Philippine Domestic Trade Finance Bank of the Year

Asiamoney

Best Domestic Bank Best Cash Management Bank in the Philippines for Large and Small Corporates

Asian Investor

Best Fund House (Asian Investor’s Investment Performance Awards 2012)

Banking and Payments Asia

Product Excellence Award in Government Prepaid (through the Pantawid Pasada powered for the Department of Energy) Special Commendation: Channel Excellence in Internet Banking (through BPI Express Online) Special Commendation: Process Excellence in Customer Centricity (through BPI Express Assist (BEA)) (Banking and Payments Asia’s Trailblazer Awards for 2012)

Corporate Treasurer Alliance

Best Cash Management Bank in the Philippines

Finance Asia

#5 Best Managed Company #3 Best in Corporate Governance #8 Best Investor Relations #7 Best Corporate Social Responsibility #3 Most committed to a strong dividend policy

Global Trade Review

Best Trade Finance Bank in the Philippines

JP Morgan Chase Bank

Quality Recognition Award

Radar Global

Gold Medal for Overall Bank Reputation

Reader’s Digest

Bank Category (Gold Award) Credit Card Issuing Bank (Gold Award) Investment Fund Company (Gold Award) (Reader’s Digest Trusted Brands Gold Awards-Bank Category: Philippines 2012)

The Asian Banker

Best Cash Management Bank in the Philippines The Leading Counterparty Bank in the Philippines (The Asian Banker Transaction Banking Awards 2012)

The Asset Triple A

Best Domestic Bank Best MNC/Large Corporate Bank,Domestic,Phil Best E-Solutions Partner Bank, Philippines (The Asset Triple A Transaction Banking Awards 2012) Best Asset Management Company in the Philippines (The Asset Triple A Investment Awards 2012)

Awarding body

locAL AWARDS

Bangko Sentral ng Pilipinas

Outstanding Partner Bank-Commercial/Universal Banks for the BSP’s Clean Note Policy Campaign (2012 Awards Ceremony for BSP Stakeholders)

DigitalFilipino.com

Top Internet Domain, Banking Category (for BPI Express Online website) (5th Digital Filipino and Search Profile Index Web Awards)

Institute of Corporate Directors

Gold Awardee (2011 ICD Corporate Governance Scorecard for Publicly Listed Companies)

Management Association of the Philippines (MAP)

Pres. Aurelio R. Montinola III (MAP Management Man of the Year 2012)

Philippine Dealing System

Top Fixed-Income Dealing Participant 2011 Top 5 Philippine Domestic Dollar Transfer System (PDDTS)/Payment vs. Payment (PvP) Participant 2011 (ranking 2nd) (7th PDS Annual Awards)

Philippine Health Insurance Corporation (PhilHealth) People Management Association of the Philippines BANK OF THE PHILIPPINE ISLANDS

Best Collecting Agent for Electronic Payment Program of the Year for BPI Leadership Excellence Acceleration Program (BPI LEAP)

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Being a recognized leader and pioneer in the Philippine banking industry, BPI recognizes its bigger responsibility in developing and sustaining relationships with diverse stakeholder groups, both internal and external to the organization.

We categorize our stakeholders into two groups: those who are directly affected by our business operations and outcomes (namely, investors, clients, employees, suppliers, and the community at large) and those who guide and influence us in carrying out our business (specifically, government and regulatory agencies, non-government and civil society groups, and industry organizations).

Our engagement with stakeholders comes in various forms and is done through a range of activities that include communication, consultations and information disclosures. We conduct constant dialogues about our role in society, our products and services, our business performance and other issues.

This is done at both the business unit and Group levels.

This active stakeholder engagement benefits us as a bank and our stakeholders in various ways: • We are able to identify our most significant stakeholder groups and their specific interests, and determine the issues that are most significant to us from an economic, environmental and social sustainability perspective.

• We become more responsive in addressing various concerns — from customer service, financial solutions, systems, promotional campaignrelated complaints, shareholder return, operational strategies and outlook, to regulatory compliance, employees’ behavior, work pay and benefits, and financial assistance. To our stakeholders, it means interacting with the Bank that fulfills its brand promise of making things easy.

• We are also able to integrate the outcomes of our stakeholder engagement with our well-established risk management processes. This allows us to address potential risks and align the management of sustainable issues with our business processes and strategies.

• We are able to innovate on and/ or improve our products, services, systems, operational processes, and practices based on the feedback we received.

To continue to reap these benefits, we shall create more opportunities for actively engaging our stakeholders.

MEMBERSHIPS/PARTNERSHIPS INDUSTRY ORGANIZATIONS

Bankers Association of the Philippines (BAP), Chamber of Thrift Banks (CTB), Bank Marketing Assocation of the Philippines (BMAP), Bank Administration Institute of the Philippines (BAIPHIL), Makati Business Club (MBC), Philippine Society for Quality (PSQ)

NGO AND OTHER League of Corporate Foundations (LCF), Association of Foundations (AF), Philippine CIVIL SOCIETY Council for NGO Certification (PCNC), Corporate Network for Disaster Response GROUPS (CDNR), International Finance Corporation (IFC), WWF-Philippines, Habitat for

Humanity Philippines, Philippine Business for Education (PBEd), Philippine Business for the Environment (PBE)

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Meetings & Conferences Partnerships Sponsorships Forums

Membership Dialogues/Forums Sponsorships Events

BANK OF THE PHILIPPINE ISLANDS

iers

Ind

rs

Investo Em

BPI Express Online Stockholders’ Meetings Conferences One-on-One Meetings SEC/PSE Disclosures

plo yee s

Suppl

u

y str

ps

u gro

tom

NG so Os, c c Co iety ivil mm gro un ups itie s d n a t n e m Govern Agencies Regulatory

Cus

Memberships Volunteerism Dialogues/Forums Events BPI Foundation: • webpage in BPI Express Online • programs/projects • sponsorships/partnerships • volunteerism

ers

Relationship Managers Branch Service Officers BPI Customer Care Department BPI Express Online BPI Express Mobile BPI Contact Center BPI Facebook and Twitter BPI Bankers Online Brochures/Posters Surveys Print & TV Ads

Accreditation Vendor Selection Suppliers audit

Email Bulletins MyBPIOnline portal Meetings Trainings Surveys Quality Circles Labor Management Councils Performance Appraisal Planning Sessions Volunteerism

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Net Income

Revenues

16,291

in million Php

527.1%

12,822

38,407 34,395 29,784

8,516 6,423

09

10

513.5%

41,758

11,312

08

47,384

in million Php

11

08

12

09

10

11

12

CONSISTENT Total Assets in million Php

985,069

516.9%

878,146 842,616

666,612

10

09

in million Php

98,522

90,530 82,275

58.8%

67,765 63,872

724,420

08

Total Capital

10

11

12

08

09

10

11

12

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Total Loans

526,640

in million Php

515.9%

454,499

Total Trust Under Management

Total Deposits in million Php

802,274

in billion Php

517.8%

719,766

739

511.3%

681,101

378,728

664

579,471 540,352

327,474 320,216

435 480 290

08

09

10

11

12

Return on Equity in %

08

09

11

12

Return on Assets

17.5

in %

1.91

13.0

1.29

10.0

10

BANK OF THE PHILIPPINE ISLANDS

11

09

10

11

12

Net Interest Margin in %

1.53 3.76 3.72

1.06

09

08

1.62

15.6 15.2

08

10

12

08

09

10

11

12

08

09

3.55

10

3.67

11

3.57

12

11

CREATING Beyond delivering value to our shareholders, we are also mindful of the economic value we create and distribute throughout our supply chain. We view this as a useful measurement on how we create wealth for our stakeholders, in particular, and for our nation, in general.

36,422

Amount in million Philippine pesos of BPI’s total economic contributions in 2012

12

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

18%

Payment to suppliers and contractors

Ch a con ritab trib le uti ons

22%

Taxes paid to the government

31%

Dividends paid to stockholders

29%

Salaries and benefits paid to employees

Our Economic Contributions In million Php

10,401

11,380* 8,026

6,578

38 Salaries and benefits paid to employees

Taxes paid to the government

BANK OF THE PHILIPPINE ISLANDS

Amount paid to suppliers and contractors

Dividends paid to stockholders *

Charitable contributions

Declared in 2012 was Php8.2 billion

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Introduced BEA Online, an online branch transaction appointment system via BPI Express Online

Equity deal for Ayala Land Acted as Sole Domestic Coordinator for Php13.6-billion equity placement of Ayala Land, Inc., the largest private placement of a real estate company

Top website award

Invited Ms. Suze Orman, the World’s Most Listened to Personal Finance Expert and One of the World’s 100 Most Powerful Women to talk on financial advice for attaining financial freedom

BPI Express Online cited as Top Internet Domain under the banking category in the 5th Digital and Search Profile Index Web Awards

Social media engagement Launched a Twitter account and the firstever Facebook App called BPI Bankers Online for one-on-one financial advice

Centennial celebration in Zamboanga BPI Zamboanga Branch celebrated its 100th anniversary and formally opened BPI Museum Zamboanga to the public

MARCH

Suze Orman in Manila

SEPTEMBER

BEA Online launch

FEBRUARY

Launched the Jollibee Foods Corporation Happy Plus card, the first reloadable offline contactless card cum rewards in the country

AUGUST

JANUARY JULY 14

Cashless and offline payment

Internet banking award BPI Direct Savings Bank given the International Trophy For Quality by Global Trade Leaders’ Club, a Club mostly for companies on the internet

Credit facility for SMEs BPI Family Savings Bank and United States Agency for International Development (USAID) signed a USD5-million Credit Facility for eligible SME industries

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Opened BPI ADB Branch, the first Branch of the Future, the smallest, paperless, energy-saving branch, equipped with the First Digital Touchscreen Information Board Display

BANK OF THE PHILIPPINE ISLANDS

Best Fund House award

Signed a USD1.2-million Grant Agreement with International Finance Corporation for winning at the 2010 G20 SME Finance Challenge in Seoul, Korea

Awarded Best Fund House in the Philippines in the Asian Investor’s Investment Performance Awards for the third time in a row

Mobile wallet

Launched BPI Mobile Wallet, the country’s first bank-initiated contactless payment system running on a mobile platform

BPI-WWF study release Released together with World Wide fund for Nature (Philippines) the 2nd phase of study on climate adaptation for the cities of Cagayan de Oro, Dagupan, Laoag and Zamboanga

DECEMBER

‘Branch of the Future’

NOVEMBER

OCTOBER

Named the Best Collecting Agent for Electronic Payment by PhilHealth

IFC grant

JUNE

MAY

APRIL

Online payment award

Milan branch opening Opened a BPI Europe Plc branch in Milan, Italy

Award for BPI President

BPI President Aurelio R. Montinola III was bestowed the “MAP Management Man of the Year 2012” award by the Management Association of the Philippines

Gold Medal BPI and BPI Family Savings Bank were presented the Gold Medal award for Overall Bank Reputation by Radar Global, a Hong Kongbased business research agency

15

The positive operating environment ALLOWed the Bank of the Philippine Islands TO CREATE VALUE FOR ITS STOCKHOLDERS WHILE PARTICIPATING AND CONTRIBUTING TO THE COUNTRY’S GROWTH STORY. In 2012, our share price rose by 72% to Php95.00 from Php55.20 in end-2011.

This was equivalent to 3.5 TIMES our book value per share of Php27.30. BPI’s market capitalization REACHEd Php337.8 billion and remained the highest in the industry.

16

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Dear stakeholders: 2012 was a year of contrasting economic performance across the world.

On one side was the continuing economic recovery of the euro zone, coupled with a US economy that remained stagnant. As a result, global gross domestic product (GDP) slowed to 3.2%. GDP growth in other emerging markets also collectively slowed to 5.1% as growth in China and India decelerated to 7.8% and 4.5%, respectively.

At the other end of the spectrum was the resilient Philippine economic story. The domestic economy posted its fastest GDP growth of 6.6% since 1988 in a non-election year. This was the highest rate of expansion in Asia next to China. This exceptional performance was more clearly reflected in two economic indicators: per capita GDP, which surged to 4.8% from 2.2% in 2011, and the deficit-to-GDP ratio at 2.3%.

The country’s robust growth was largely driven by the services sector. The primary drivers were the business process outsourcing (BPO) industry, which contributed USD13 billion in revenues – surpassing India as the world’s top destination for BPO voice services – and overseas Filipino remittances, which hit an all-time high of USD21.39 billion, 6.3% higher than 2011 levels. These inflows continue to fuel domestic consumption and are reducing our vulnerability to slowing export receipts relative to most emerging markets. These flows have resulted in a strong external liquidity position which has pushed our country’s international reserves to a record USD 83.8 billion, equivalent to almost one year’s worth of imports.

The country’s strong economic performance was recognized by international credit rating agencies which, once again, raised our sovereign credit ratings to just a notch below investment grade in 2012. Confidence in the domestic market was also reflected in the equities market. Our Philippine Stock Exchange Index rose to its highest level, hitting 5,812.7, which was a 33.0% increase (in local currency terms) over 2011, making it one of the best performing stock markets in the region. Aside from higher share prices, Philippine companies also broadly benefited from record low interest rates and a benign inflation environment, both of which have contributed to stronger corporate earnings results.

BANK OF THE PHILIPPINE ISLANDS

Another banner year The positive operating environment allowed the Bank of the Philippine Islands to create value for its stockholders while participating and contributing to the country’s growth story. In 2012, our share price rose by 72.0% to Php95.00, from Php55.20 in end-2011.

This was equivalent to 3.5 times our book value per share of Php27.3. BPI’s market capitalization reached Php337.8 billion and remained the highest in the industry.

BPI also continued to lead in terms of profitability.

Our net income reached a record high of Php16.3 billion and produced a return on equity of 17.5%.

Our risk-based capital adequacy ratio (CAR), at 14.2%, remained robust and well above the regulatory minimum of 10.0%. Moreover, our tier one CAR stood at 12.8%, providing us with enough buffer to comply with the full adoption of Basel III which takes effect in January 2014.

Even as BPI retains its strong capitalization structure, we have submitted an application to the Bangko Sentral ng Pilipinas (BSP) in July 2012 for the implementation of the Foundation Internal Rate Based (IRB) approach on large corporate loans. On the risk management side, we conducted the validation of 21 Treasury and market risk models and two scoring models. To further enhance the Bank’s physical security, all our Cash Centers and 125 branches were connected to the Central Video Monitoring System of our Security Operations Centers. Both projects will continue through 2013 and the coming years to cover all market risk and credit models as well as all branches.

17

BPI has clearly delivered consistent growth in shareholder value. This is mainly driven by strategic plans that, beyond our internal business objectives, incorporate THE broader goal of contributing to the country’s growth agenda.

18

In addition, our Internal Audit Team maintained its ‘Generally Conforms’ overall rating on International Standards for Internal Auditing (IIA) Code of Ethics in the External Quality Assurance Review (QAR) by SGV & Co./ Ernst and Young.

As a validation of our corporate governance practices, we have been recognized as one of the top-rated Publicly Listed Companies in the Corporate Governance Scorecard of the Institute of Corporate Directors for 2011. BPI was awarded the Gold category for upholding shareholders’ rights, disclosure and transparency, and board responsibilities, among others.

Beyond the numbers BPI has clearly delivered consistent growth in shareholder value.

However, these financial metrics have been driven by strategic plans that, beyond our internal business objectives, incorporate the broader goal of contributing to the country’s growth agenda.

An integral component of this, given our role as bankers operating in an emerging market, is to ensure greater financial inclusion. We believe this to be a key component for building a stronger and a more empowered nation.

BPI Globe BanKO (BanKO), our mobile-based microfinance banking arm, serves as our platform for more inclusive banking.

In 2012, we doubled BanKO’s partner outlets to almost 2,000 and grew our account holder base to 280,000. We continued to offer affordable financial products such as PaniguroKO micro-insurance at lower premium rates. We also tied up with Alalay sa Kaunlaran Inc. (ASKI) and the International Rice Research Institute (IRRI) to provide farmer members of ASKI with bank accounts and microloans.

In 2012, we likewise made significant headway in integrating our environmental initiatives with our business operations.

BPI entered into a memorandum of understanding with Green Philippines Islands of Sustainability, a project funded by the European Union under the SWITCH-Asia Programme, which is geared towards the adoption of the “EcoSwitch” approach in greening the Bank’s supply chain.

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

We also embarked on the second phase of our Climate Risk Assessment study with WWF-Philippines to cover the cities of Cagayan de Oro, Dagupan, Laoag and Zamboanga.

This year also marks our fourth year of partnership with the International Finance Corporation (IFC) in providing loans to green projects under our Sustainable Energy Finance (SEF) Program. Our SEF initiatives were expanded to help raise energy and resource efficiency in the public sector.

We granted Php4.2 billion of loans through the SEF in 2012, which resulted in savings of 89,821 MWh per year of energy, production of 630,742 MWh per year of clean energy, and abated carbon emissions by 645,774 tons per year.

The challenges of sustainability The economic challenges of many developed economies will most likely persist in 2013. While this may continue to impact different parts of the world, including the Philippines, we believe BPI remains strongly positioned to seize opportunities that may arise, even within the framework of an unsettled global market.

280,000 BPI Globe BanKO’s total cardholder base

645,774 Tons of carbon emissions abated due to green projects funded through SEF

As one of the largest financial institutions in the country, we remain committed to our primary goal of making banking easy for our customers and contributing productively to the country’s economic and social development agenda.

We hope that we can continue to count on the trust and confidence of all our stakeholders as we move forward in our journey towards greater and broader financial reach in our nation.

JAIME AUGUST ZOBEL DE AYALA II Chairman

BANK OF THE PHILIPPINE ISLANDS

19

At BPI, we CONTINUED TO do what we do best: help the country, help the BSP, help our community, help our customers, help our employees, and in the process help ourselves.

We had the best year ever in 2012 with a loan growth of 16%, and a record high net profit of Php16.3 billion, 27.1% HIGHER THAN 2011, on our 161st anniversary.

20

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

In 2012, concerns on the global economy lingered around the sovereign debt problems in the euro zone and the persistent talk of a “fiscal cliff” in the United States. Global equity and currency markets exhibited higher volatility.

We started the year wondering whether the Philippine banking industry would decouple from the global banking woes. Instead, we saw a dramatic turnaround in Philippine economic growth as well as an appreciative financial market.

At BPI, we continued to do what we do best: help the country, help the BSP, help our community, help our customers, help our employees, and in the process help ourselves. We had the best year ever in 2012 with a loan growth of 16%, and a record high net profit of Php16.3 billion, 27.1% higher than 2011, on our 161st anniversary.

BPI innovating over the years BPI has always played an important role in the Philippine economy and has a history of many firsts dating back to 1851.

We are the first bank in the Philippines and in Southeast Asia which issued the first paper currency called pesos fuertes, and financed the first tram service, the first telephone system and the first electric power utility. As early as 1897, we started branching out by establishing the first branch in Iloilo in the Visayas, followed by the first branch in Mindanao in 1912 in Zamboanga.

Decades later, BPI embarked on a series of mergers and acquisitions, not only to expand our branch network, but also to diversify the markets we serve. We transformed ourselves from being a traditional corporate lender to a diversified and balanced market lender by adding the middle market and the consumer segment in the 1980s, and more recently, focusing on the small and medium-sized enterprises (SMEs) and the base of the pyramid.

Corollary to our market diversification, we introduced ‘anytime, anywhere banking’ with the first automated teller machine (ATM) in 1983, and cashless shopping with the first debit card system in 1987. This was followed through by phone banking in 1991, check-free bills payment in 1996 and online banking in 1999. The first decade of 2000 was the era of the evolving mobile banking technology, online and realtime stock trading, a new branch look and a revitalized brand, coupled with a ‘bank anywhere’ capability for our clients.

BANK OF THE PHILIPPINE ISLANDS

More important than the physical layout and image of the branch, our branches have been slowly configured to enhance our customer experience. We move out our backroom support and centralized such in cluster processing centers in the 1980s. We changed the mindset of the organization from being product-centric to customer-centric and deployed relationship managers to provide advice on appropriate financial solutions for our clients.

Under our ‘Let’s Make It Easy’ campaign, we provided paperless, pre-processing BPI Express Assist (BEA) machines at our branches and offered online investing.

Making it easier for our customers In 2012, we leveraged on technology to introduce breakthrough service and product innovations to enhance customer experience across a range of channels.

To solidify BPI’s online banking leadership in the country, we undertook two customer service initiatives in BPI Express Online (EOL). We launched the BEA Online facility, an online branch transaction appointment system, as well as the realtime EOL enrollment and services activation through the ATM. We gained several new awards in this field, to wit, the “Website of the Year - Philippines” award from the 2012 Asian Banking & Finance Retail Banking Awards, the “Special Commendation for Channel Excellence in Internet Banking” from Banking and Payments Asia, and the Top Internet Domain banking category from the 5th Digital Filipino and Search Profile Index Web Awards for pioneering features in the Philippine online banking landscape.

Our www.bpiloans.com website of BPI Family Savings Bank (BFSB) was further improved to include simplified application forms and a comprehensive list of cars, properties and businesses. Online loan applications thus increased by 187.7%.

We also brought our advocacy on financial literacy into the social media space. Facebook and Twitter users can gain access to BPI Bankers Online, a first-of-its-kind personal messaging application that dispenses sound financial advice and account information from a BPI professional.

One empowering innovation is a 9.56-square meter paperless, full-service branch at the Asian Development Bank headquarters. While it is considered the smallest physical branch in the country as we are still able to serve our customers with all their transactional needs and prove that function, not space, matters.

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We also pilot-tested a BPI Mobile Wallet that allows clients to turn their smartphones into a “virtual wallet” when buying items from our merchant partners.

With a strong Team BPI, we are confident that BPI will continue to move forward with quality sustainable growth.

For SMEs, our Ka-Negosyo with ATM product makes it easier to access emergency funds anytime. Pre-qualified SMEs can also avail of our zero collateral loans.

To make retail investing more inclusive, we made a bold move of removing the required holding period on all our unit investment trust products.

We also offer our insurance customers the flexibility to change their coverage to suit their changing protection needs through the Life Extreme Protect.

We also enhanced our almost 200 cash deposit machines, aptly named Express Deposit Machines, to process cash deposits in real time without a need for an ATM card. For more accessibility, we set up additional online banking kiosks, which now total 141.

Making it easier for a wider market We added about a million new customers in 2012 bringing our total customer base to about six million.

BFSB forged stronger partnerships with real estate organizations like the Philippine Association of Real Estate Boards (PAREB), Real Estate Brokers Association of the Philippines (REBAP), and Subdivision and Housing Developers Association (SHDA) to benefit homebuyers. We are also the sole bank partner in the 3rd Property Festival in Cagayan de Oro in December, and in the Singapore Property Expo in July for overseas Filipinos who are looking to invest in the Philippines.

Furthermore, our accredited franchisors increased to 61 from 19 in 2012, making our ‘BPI Ka-Negosyo Best List’ the roster of the country’s best and brightest franchise brands today. This program encourages startup franchisees and seasoned entrepreneurs to realize potential business growth. Hence, franchise loan portfolio grew by 309%.

BPI Globe BanKO extended wholesale loans to 55 microfinance institutions (MFIs) amounting to Php2.5 billion, and expanded our presence in more areas in the country through partner outlets.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

To reach out to more overseas Filipinos, we opened a new BPI Europe branch in Milan, Italy and a representative office in the United Arab Emirates, added tie-ups in East Asia and forged an alliance with Remitly.com in North America.

Remitly.com, an online money transfer service available in key US states, enables US-based Filipinos to send money home within minutes through its network of over 10,000 cash-out locations in the country.

Because People are Important We believe in the saying that, ‘If you focus on your customers and employees, the business results will follow’.

Over the last four years, we focused on democratizing senior management education. Among the various programs, the BPI Leadership Excellence Acceleration Program (BPI LEAP), a partnership with Harvard Business Publishing, stands out for its breadth and scope. As such, this was awarded “People Program of the Year” for 2012 by the People Management Association of the Philippines.

We are happy to note that in a survey conducted by Towers Watson, our employee engagement score ended higher at 82.0% as shown in 17 out of 18 indicators.

Best Practice Internationally With a strong Team BPI, we are confident that BPI will continue to move forward with quality sustainable growth.

I will be turning over the leadership of BPI to my successor, Cezar Consing, a competent professional with many years of experience in the international banking arena. I firmly believe that he will further take BPI to a new level beyond Philippine shores and position BPI among the best ASEAN banks.

In closing, I wish to thank the BPI Board and the BPI management for creating the governance structures, as well as the capability and team-oriented performance, to keep BPI as a beacon of financial stability for over 161 years, and as a banking trailblazer in the many years to come. To our other stakeholders, we give you our unwavering assurance that you will always be foremost in our goals as contained in our sustainability framework. We are most grateful for your continued support over the years.

BANK OF THE PHILIPPINE ISLANDS

AURELIO R. MONTINOLA III President

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At BPI, we have a strong commitment to good corporate governance and full and fair disclosure. We establish policies and standards, comply with applicable laws and regulations, and pursue best practices in risk management to ensure integrity in everything we do and across all our businesses.

Each year, we implement enhancements that will improve our governance and increase investor confidence. We regularly review and update our policies and procedures to conform with changes in the regulatory environment.

We measure our governance quality using the BSP Capital Adequacy, Asset Quality, Management Quality, Earnings, Liquidity and Sensitivity to Market Risk (CAMELS) rating and the Corporate Governance Scorecard prescribed by the Institute of Corporate Directors (ICD).

In 2012, we maintained our ranking as having one of the highest CAMELS rating among Philippine commercial banks. We also became a recipient of the ICD’s Gold award for Governance– a concrete testament to our strict adherence to governance quality standards.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Our Board of Directors Our highest governance body is the Board of Directors (Board), which ensures there is a strong and effective governance system in place throughout the Group. The Board is responsible for the long-term success of the Bank, having regard for the interests of all stakeholders. Its directive includes setting strategic business directions, appointing senior executive officers, confirming the appropriate organizational structures, approving major strategies and policies, overseeing major risk-taking activities, monitoring business and management performance, and generating a reasonable investment return to shareholders.

COMPOSITION COMPOSITION 15 Directors, of whom: • 5 are Independent Directors* • 14 are non-executive Officers of the Bank

QUALIFICATION SELECTION • Highly qualified business professionals who possess a broad range of experience and expertise required in the governance of a financial institution • Possess the qualifications required for a Director, as required in the BPI Corporate Governance Manual

SELECTION • Elected by BPI stockholders entitled to one vote per share at the annual stockholders’ meeting

COMPENSATION • Per diems for attendance in meetings of the Board and Board Committees, fixed by a resolution of the Board • Bonuses may be given as approved by stockholders during the annual stockholders’ meeting upon recommendation of the Personnel Committee * no interest or relationships with BPI at the time of election or appointment and/or reelection

BANK OF THE PHILIPPINE ISLANDS

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Board Committees and Memberships The Board carries out its various responsibilities through the Executive Committee and delegate specific responsibilities to other sub-committees for specialized areas of focus within the limits allowed by law. These Board committees are the following:

Executive COMPOSITION • exercises all the powers of the Board in the management and direction of the affairs of BPI subject to the provisions of the BPI By-Laws and the limitations prescribed by law • serves as the operating arm of the Board in all matters relating to corporate governance • may approve all major policies and oversees all major risk taking activities on a more detailed basis • functions as the Board’s committee for the approval of all major credit risks

Chairman: Jaime Augusto Zobel de Ayala Vice Chairman: Fernando Zobel de Ayala Members: Aurelio R. Montinola III Octavio V. Espiritu* Rebecca G. Fernando Xavier P. Loinaz* Chng Sok Hui Alternate Member Mercedita S. Nolledo Alternate for: Jaime Augusto Zobel de Ayala Fernando Zobel de Ayala Aurelio R. Montinola III

Nominations COMPOSITION COMPOSITION • ensures that the Board of Directors is made up of individuals of proven integrity and competence, and that each possesses the ability and resolve to effectively oversee the Bank • reviews and evaluates the qualifications of all persons nominated to positions in the Bank which require appointment of the Board

Personnel Compensation COMPOSITION • directs and ensures the development and implementation of long-term Human Resources Strategy/Plan based on the Board’s vision of the organization

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Chairman: Romeo L. Bernardo* Members: Jaime Augusto Zobel de Ayala Xavier P. Loinaz* Chng Sok Hui

COMPOSITION Chairman: Fernando Zobel de Ayala Members: Romeo L. Bernardo* Cezar P. Consing Oscar S. Reyes Chng Sok Hui

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

AUDIT COMPOSITION • monitors and evaluates the adequacy and effectiveness of the BPI Group’s internal control system • provides oversight on the overall management of operating risks, financial reporting and control, internal audit department and external auditors, quality of compliance with the Corporate Governance Manual and reviews conducted by the BSP

Risk Management COMPOSITION • nurtures a culture of risk management across the enterprise, proposes guidelines and reviews on a regular basis, risk management structures, limits, issues and measurements across the BPI Group to meet and comply with regulatory and international standards on risk measurement and management • supports technology and training for key personnel in risk management

Corporate GovernancE COMPOSITION • assists the Board in fulfilling its corporate governance responsibilities • ensures the Board’s effectiveness and due observance of sound corporate governance principles and guidelines

Chairman: Xavier P. Loinaz* Members: Octavio V. Espiritu* Khoo Teng Cheong Oscar S. Reyes

COMPOSITION Chairman: Octavio V. Espiritu* Members: Aurelio R. Montinola III Romeo L. Bernardo* Cezar P. Consing Khoo Teng Cheong Antonio Jose U. Periquet*

COMPOSITION Chairman: Artemio V. Panganiban* Members: Romeo L. Bernardo* Mercedita S. Nolledo Oscar S. Reyes Chng Sok Hui

TRUST COMPOSITION COMPOSITION • oversees the proper administration and management of the Bank’s trust and other fiduciary business and its investment management activities to ensure effective management of all risks inherent in the business

Retirement/Pension COMPOSITION • oversees the fiduciary, administrative, investment portfolio and other noninvestment aspects of the Retirement Plan

Chairman: Mercedita S. Nolledo Members: Fernando Zobel de Ayala Aurelio R. Montinola III Romeo L. Bernardo* Rebecca G. Fernando Antonio Jose U. Periquet* Maria Theresa M. Javier**

COMPOSITION Chairman: Mercedita S. Nolledo Members: Aurelio R. Montinola III Rebecca G. Fernando Fidelina A. Corcuera*** * Independent Director

BANK OF THE PHILIPPINE ISLANDS

** Trust Officer

***Human Resource Officer

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Operating Management The President and Chief Executive Officer is responsible for the overall management of the Bank and the implementation of all major business strategies. He is supported by the Chief Operating Officer and the senior management team.

Through a formal planning and budgeting process, management is able to pursue business goals and implement strategies. It lays down well-defined operating policies and procedures to ensure the accuracy of reports, the attainment of customer satisfaction, as well as our integrity, fairness and transparency, efficiency, and accountability in the conduct of our business.

Management is periodically reviewed and rewarded according to their performance relative to assigned targets.

Specific management committees ensure that major risks are identified, measured, and controlled against set appropriate limits. These management committees include: a. Credit Committee b. Finance and Risk Management Committee (FRMC) c. Operating Risk Management Committee (ORMC) d. Capital Management Committee (CMC) e. Asset and Liability Committee (ALCO) The members of these committees are composed of the Bank’s senior management, including representatives of business segments, the Risk Management Office (RMO), and other senior executives.

Risk Management We have a Risk and Capital Management Framework in managing all our risk exposures and in providing capital to cover risk exposures. This Framework follows BSP regulations and mandates us to implement an Internal Capital Adequacy Assessment Process (ICAAP).

The Board of Directors carries out the risk management function through the Risk Management Committee (RMC). Several committees and units manage our risk exposure at the management level. The Risk Management Office (RMO) recommends risk management policies and methodologies and promotes enterprise-wide risk appreciation and education.

Major risks in the Bank’s business are credit risk, market risk (liquidity risk and interest rate risk) and operational risk (physical security risk, legal risk, regulatory risk, and reputation risk, among others). Due to the significant size of our loan portfilio and financial assets, we give due attention to credit risk and market risk, respectively. We also closely monitor our operations risk due to its significant share in our total risk-weighted assets.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BOARD OF DIRECTORS OFFICE OF THE CHAIRMAN EXECUTIVE COMMITTEE CORPORATE SECRETARY & SEC registration liaison

president

internal audit

compliance

office of the president

security office

credit policy

corporate planning & accounting

risk management

SUSTAINABILITY OFFICE TOTAL QUALITY OFFICE BPI FOUNDATION

corporate banking group

ELECTRONIC CHANNELS group

BPI FAMILY SAVINGS BANK

coNSUMER banking group

centralized operations group

BPI CAPITAL CORPORATION

cARD banking group

INTEGRATED MARKETING group

BPI/MS, AYALA PLANS

asset management & trust group

information systems group

GLOBAL BANKING group

HUMAN RESOURCES management group

BANK OF THE PHILIPPINE ISLANDS

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Types of Risks Credit Risk The Credit Policy Group (CPG) is responsible for the overall management of the Bank’s credit risk anchored on a comprehensive set of policies and established underwriting processes.

CPG ensures that risk taken is consistent with the Bank’s acceptable parameters while complying with regulatory requirements. Except for agricultural/agrarian lending, we complied with the regulatory requirements on single borrower’s limit (SBL), directors, officers and related interest (DOSRI), real estate loans ceilings and mandatory lending to SMEs. Note 32 of the Audited Financial Statements presents details on related party transactions.

We continue to maintain a diverisified loan portfolio with no significant concentration in any sector. The manufacturing sector as a whole accounted for the largest exposure where risk was spread out among its sub-sectors, led by food and beverages manufacturing at less than 7.0% of the total portfolio. Commercial loans accounted for about 75.0% of the total portfolio and consumer loans for the balance of 25.0%. Large borrowers comprised approximately 80.0% of commercial loans and SMEs, the remaining 20.0%. In 2012, CPG reviewed 14 lending units with credit performance assessed to be generally acceptable. Even with the further expansion of our loan portfolios, asset quality has improved in terms of both non-performing loan (NPL) amounts and ratio. The gross 90-day ratio stood at 2.0%, the lowest in the last five years. Loan reserves cover improved further to over 96.0% from 88.0% in 2011.

We regularly monitor our scoring models as to their predictive power and model performance. Rating models for Head Office Home and Property Equity Loans, Business Center Home Loans, Auto Head Office Direct and Retail Marketing Loans maintained their acceptable performance in 2012 based on statistical measures. The processing and generation of daily ratings files for SME accounts under the existing scoring model were strengthened. For consumer loans, a more comprehensive suite of MIS for the credit card portfolio was created for a meaningful and pro-active portfolio management.

CPG plans to apply this to other consumer portfolios in auto, mortgage, retail SME and personal loans.

CPG continued to lead the Bank’s transition to the Basel Internal Ratings Based Approach. The new Internal Credit Risk Rating System (ICRRS) for large corporate borrowers that incorporates probability of default (PD) estimates was validated by an external party and approved by the Risk Management Committee the previous year, and implemented in March 2012. This was submitted to the BSP in July 2012 to obtain permission for its application in the Capital Adequacy Ratio(CAR) calculation for large corporate exposures.

Other milestones achieved during the year include the completion of housing loans PD (Probability of Default) and LGD (Loss Given Default) models, initiation of SME IRBA compliant CRR model development, and automation of IRBA CAR reports generation. These initiatives were accomplished within the overall Basel IRB Approach transition timeline.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Market Risk The FRMC is supported by the RMO’s Market Risk Management Unit (MRMU) that manages our exposures to market risk, liquidity risk, and interest rate risk in the banking book.

• committed business and project objectives were attained; • issues and problems encountered upon project implementation were resolved; and • lessons were obtained for application in future projects.

In 2012, we implemented significant improvements in risk measurement, particularly pre-settlement risk and value at risk (VaR) models for derivative instruments.

To ensure that risk exposures are accurately captured, reports were migrated to an automated market risk system, which is on a phased-in implementation. Together with models enhancement, we further improved on our policies and procedures resulting in a more comprehensive documentation.

Information Security and Technology Risk Management protects us against operating risks arising from the use of information technology in our business processes. It also promotes our competitiveness and long-term viability through the use of appropriate and cost-effective IT solutions. Systems Quality Assurance Management (SQM) ensures compliance of automated systems to information security polices and control standards.

The Risk Models Validation Unit (RMVU) was also established in 2012 to serve as the Bank’s model risk manager and conduct the independent validation of the Bank’s risk models. The validation of a model is governed by the Model Risk Management Policy and Governance Framework which aims to ensure an active and effective model risk management within BPI Group. We completed the validation, together with SGV & Co.-Ernst & Young (SGV-EY), of the quality of 21 Treasury/market risk models and two pricing models.

Operating Risk Line management is directly responsible for the management of operating risks in accordance with the risk appetite parameters that have been set forth in the Group’s policies and standards on transaction authority limits and key operational risk indicator limits.

The ORMC monitors operating risks by reviewing key risk indicators (KRIs), risk and control self-assessments (RCSA), and incidents management. The ORMC is supported by RMO’s Operating Risk Management Unit (ORMU) that oversees the implementation of our enterprise-wide operating risk management programs consisting of policy formulation processes, KRI monitoring processes, RCSAs, incident management processes, and risk management awareness and appreciation programs. RCSA includes scorecards and more business process specific assessment templates. Online views for end-to-end risk assessment by channels and products have also been made available.

Briefing and facilitation sessions were conducted by the ORMU with the Group’s compliance and risk officers whenever there are new or updated programs to be deployed. Risk appreciation courses are also made available on the eLearning platform for self-study and refresher training of the BPI Group personnel.

Product approval and project approval requirements have been established to ensure that operating risks are taken into consideration prior to investing in new products and projects. Regular project value realization reviews are conducted to assess whether: BANK OF THE PHILIPPINE ISLANDS

Business Continuity Management (BCM) ensures the recovery of critical customer service facilities in the event of unplanned business interruptions. To meet the increasing demand on Disaster Recovery Preparedness of our operations, we installed bigger and more robust BCP sites for critical head office services. We likewise continued to strengthen our employees’ awareness of our Business Continuity programs through training and activities.

Enterprise-wide testing of the critical application systems were conducted in 2012.

The Central Security Office (CSO) is responsible for the physical security of our facilities and the safety of our customers and employees. This is done using a three-tiered defence system of intelligence, target hardening and incident management.

We continually deploy closed-circuit TV (CCTV) cameras in the branches and connected all our Cash Centers and 127 branches to the CVAMS of our Security Operations Center.

Among its functions are the close monitoring of and speedy response to incidents, and extending assistance in the rescue of personnel in distress.

The Legal Services Division (LSD) oversees the Bank’s legal and tax risk exposure. It proactively issues legal and tax advisory bulletins (LABs and TABs), conducts training and lectures, provides documentation services, and litigates cases filed by or against BPI, as well as identifies and assesses areas where litigation can be prevented, proceedings expedited and litigation costs minimized.

Through the issuance of TABs, supplemented by the various tax briefings held for the BPI Group, the division was able to promote tax compliance awareness and deeper understanding of the different BIR regulations and circulars. In addition, a Tax Module on ‘Basic Tax Laws and Principles’ was introduced to form part of the Bank’s eLearning program.

In September 2012, the Automated Legal Management System (ALMS) was implemented for the monitoring

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and reporting of legal and tax cases of the BPI Group. The second phase of the system will be launched in 2013 to cover the updating of status of cases, including those handled by external and provincial/ local counsels.

The Legal Services Division (LSD) oversees the Bank’s legal and tax risk exposure. It proactively issues legal and tax advisories and bulletins (LABs and TABs), conducts training and lectures, provides documentation services, and litigates cases filed by or against BPI, as well as identifies and assesses areas where litigation can be prevented, proceedings expedited and litigation costs minimized.

In September 2012, the Automated Legal Management System (ALMS) was implemented for the monitoring and reporting of legal and tax cases of the BPI Group. The second phase of the system will be launched in 2013 to cover the updating of status of cases, including those handled by external and provincial/ local counsels.

Measurement of Risk Exposure

We use various methodologies to measure risk exposure. Our credit risk exposure is assessed using credit rating models which take into account our existing exposure to the counterparty, the counterparty’s probability of default, and the value recoverable from the counterparty in the event of default.

The models were developed internally using statistical analysis and credit judgment. Their predictive power and performance are validated regularly.

Credit risk exposures are classified according to rating grades and are monitored as they migrate between rating grades. Expected losses are constantly assessed and measured following internal and regulatory provisioning policy.

We also measure credit risk exposure in terms of regulatory capital requirement using the standardized approach. Under this method, our credit exposures are risk-weighted to reflect third-party credit assessment of the individual exposure from acceptable external credit rating agencies and allow the use of eligible collaterals to mitigate credit risk. All documentation used in the collateralized transactions and for guarantees are binding on all parties and legally enforceable in the relevant jurisdiction.

Using the regulatory standardized approach, our total credit risk-weighted assets amounted to Php539.0 billion, and is composed of on-books credit exposure after risk mitigation at Php529.6 billion, off-balance sheet items at Php6.2 billion and counterparty risk-weighted assets in the trading book of Php3.2 billion. Below is the summary table: CREDIT RISK-WEIGHTED ASSETS (In million Php)

Credit Risk-Weighted Assets Total Risk-Weighted On-Balance Sheet Assets (Schedule A) Total Risk-Weighted Off-Balance Sheet Assets (Schedule B) Total Counterparty Risk-Weighted Assets in the Trading Book (Derivatives and Repo-style Transactions) (Schedule C) Total Gross Risk-Weighted Assets Deductions TOTAL CREDIT RISK-WEIGHTED ASSETS

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AMOUNT 529,594.9 6,180.2 3,184.1 583,959.2 – 538,959.2

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

SCHEDULE A

ON-BALANCE SHEET ASSETS (In million Php)

Our total outstanding investments in structured products as

of end-2012 was USD238.1 million, composed of investments Total Credit Total Credit Risk Exposure after Risk Weighted in Credit-Linked Notes at 59.0% of total, Range Accrual and Assets Risk Mitigation Callable Range Accrual Notes were at 27.0%; Capped Floaters

Cash on Hand 22,949.7 Checks and Other Cash Items 860.9 Due from Bangko Sentral ng Pilipinas (BSP) 119,086.5 Due from Other Banks 6,914.8 Available-for-Sale (AFS) Financial Assets 104,131.9 Held-to-Maturity (HTM) Financial Assets 76,245.7 Unquoted Debt Securities Classified as Loans 698.0 Loans and Receivables 492,843.2 Loans and Receivables Arising from 38,137.6 Repurchase Agreements, Certificates of Assignment/Participation with Recourse, and Securities Lending and Borrowing Transactions Sales Contract Receivable (SCR) 698.2 Real and Other Properties Acquired 7,140.7 Total Exposures Excluding Other Assets 869,707.3 Other Assets 26,850.8 Total Exposures, Incuding Other Assets 896,558.1 Total Risk-weighted On-Balance Sheet Assets not covered by Credit Risk Mitigants Total risk-weighted On-Balance Sheet Assets covered by Credit Risk Mitigants

TOTAL RISK-WEIGHTED ON-BALANCE SHEET ASSETS

SCHEDULE B

7,140.7 854,793.8 26,850.8 881,644.6 529,134.4 460.5 529,594.9

Total Risk-Weighted Off-Balance Sheet Assets

Direct credit substitutes (e.g., general guarantees of indebtedness and acceptances) Transaction-related contingencies (e.g., performance bonds, bid bonds, warrantees and stand-by LCs related to particular transactions) Trade-related contingencies arising from movement of goods (e.g., documentary credits collateralized by the underlying shipments) and commitments with an original maturity of up to one year)

1,010.5

TOTAL RISK-WEIGHTED OFF-BALANCE SHEET ASSETS

6,180.2

SCHEDULE C

COUNTERPARTY ASSETS IN THE TRADING BOOKS (In million Php)

3,400.0

1,769.7

Total Counterparty Risk-Weighted Assets in

the Trading Book

Derivative Exposures Interest Rate Contracts Exchange Rate Contracts Total Counterparty Risk-Weighted Assets of Derivative Transactions

BANK OF THE PHILIPPINE ISLANDS

and Gold-Linked notes at 12.0% and 2.0%, respectively.

We manage the market risk exposures of both our trading and non-trading portfolios. Our assets in both on- and off-balance sheet trading portfolios are subject to trading gains and losses. Market risk exposure from these portfolios is measured by the respective VaR models. In terms of capital usage using the standardized approach, total market risk-weighted assets stood at Php29.3 billion in end-2012, of which foreign exchange exposure accounted for half, followed by interest rate exposures at 47.0% and equity exposure at 3.0%. Below is the summary table:

MARKET RISK WEIGHTED ASSET

143.6 3,040.5 3,184.1

Total Market Risk Weighted Asset

(In million Php)

Using Standardized Approach Interest Rate Exposures Equity Exposures Foreign Exposures TOTAL MARKET RISK-WEIGHTED ASSETS

OFF-BALANCE SHEET ASSETS (In million Php)

22,949.7 860.9 119,086.5 6,914.8 100,163.4 65,998.8 698.0 492,843.2 38,137.6

13,832.4 871.8 14,552.0 29,256.2

Liquidity risk is measured by cumulative liquidity gap analysis over the next three months for both on- and off-book positions in the trading and non-trading books.

Assets in the non-trading portfolio are exposed to interest rate risk or the volatility in net interest income as a result of fluctuations in interest rates. The main source of interest rate risk in the banking book is the repricing risk on our assets and liabilities as they mature or at contractual periods. Interest rate risk exposure on this is measured by: the Balance Sheet Value at Risk (BSVaR) or the impact on the economic value of the future cash flows in the banking book due to changes in interest rates; and by the Earnings-at-Risk (EAR) or the potential deterioration in net interest income over the next 12 months due to adverse movements in interest rates. As of end December, 2012, the BPI Group’s BSVaR level of Php1.4 billion was well within the Bank’s risk appetite of Php2.3 billion. In terms of EAR, the impact of the 52 basis points and 12 basis points simultaneous movements for Peso rates and USD rates, respectively, totalled Php708.8 million.

Exposure to operating risk are identified, assessed, and monitored as an integral part of the BPI Group’s business processes. We currently use the regulatory basic indicator approach to quantify our operational risk weighted assets by using the historical total annual gross income as the main measure of risk. For 2012, the total operating risk-weighted assets stood at Php70.7 billion.

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Capital Adequacy The Capital Management Committee (CMC) oversees the management of the capital and risk assets of the Bank and ensures compliance with the regulatory and internal minimum capital adequacy requirement, referred to as CAR and IMCAR, respectively.

As of end-2012, our total qualifying capital was at Php90.6 billion with Tier 1 capital accounting for 90.2% or Php81.7 billion and Tier 2 capital at 9.8% or AMOUNT (In million Php)

Gross Qualifying Capital Tier 1 Capital Tier 2 Capital Deductions from Tier 1 and Tier 2 Capital Investments in equity of unconsolidated subsidiary position of dealers/brokers, insurance companies, and non-financial allied understakings, after deducting related goodwill Net Tier 1 Capital Net Tier 2 Capital

83,125.0 10,284.7 2,755.3

81,747.3 8,907.1 90,654.4

TOTAL QUALIFYING CAPITAL

Php8.9 billion. Below is the composition of our qualifying capital: For the regulatory CAR, the total capital requirement for credit risk is at Php53.9 billion, Php7.1 billion for operating risk, and Php3.0 billion for market risk. Adhering to the regulatory directive for banks to conduct an Internal Capital Adequacy Assessment Process (ICAAP) following Basel II – Pillar II guidelines, we submitted our 2012 ICAAP to the BSP. This comprehensive evaluation of our material risks and capital adequacy reflected an IMCAR of 10.3% that is commensurate to the nature and extent for most of the risks we have taken. The capital buffer of 0.3% over the 10.0% regulatory CAR covers our exposure beyond Pillar I risks. For internal monitoring purposes, the RMC approved a CAR Management Action Trigger (MAT) of 11.0% at which management would review our capital level and undertake to shore up capital if required. Our end-2012 risk-based CAR was at 14.2%, well within the regulatory requirement of 10.0%, and compares favorably with our IMCAR and MAT targets. For the early local adoption of Basel III requirements. we participated as a member of the Bankers Association of the Philippines (BAP) Steering Committee in the industry comments on draft exposure of Basel III. We also performed a quantitative impact study on BPI and presented the results to the CMC and the BSP.

Compliance System

The Compliance Office upholds compliance with relevant laws and regulations of the BSP, Securities and Exchange Commission (SEC), Philippine Deposit Insurance Corporation (PDIC), and other regulatory agencies. This is done through effective liaison and dialogue with the regulators, as well as the prompt dissemination within the Bank of new developments affecting our operations. It oversees the implementation of the compliance system

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

throughout the organization. The compliance function is further strengthened by the formal designation of the major Group Compliance Coordinating Officers (GCCOs) who are responsible in coordinating the implementation of the compliance program within their respective business groups.

The Compliance Office promotes adherence and awareness to laws, rules and regulations by electronically posting these information in a compliance database. As a listed company, we have to comply with the Securities Act and our Compliance Office, Corporate Planning and Corporate Secretary jointly review our compliance with the SEC and the Philippine Stock Exchange (PSE).

The compliance to the Bank’s Corporate Governance Manual, policies, and code of conduct is enforced using a twopronged approach: through self-regulation within the work units and audit reviews of the Compliance Office, Internal Audit Office, and the external auditors.

Internal Audit

Internal Audit is an independent unit that reports directly to the Board through the Audit Committee and assists in the discharge of its oversight responsibilities. It is responsible for providing an independent reasonable assurance on the Bank’s system of risk management, controls and governance processes, as well as ensuring that operating and business units adhere to internal processes and procedures and to regulatory and legal requirements.

Aligned with best practices, Internal Audit has an established quality assurance and improvement program that covers all aspects of its audit activities. This includes periodic internal quality assurance reviews, self-assessments and auditees surveys. External quality assessments are also carried out at least once every five years by qualified professionals from an external organization. This is to ensure quality of audit service delivery and conformance with the International Standards for the Professional Practice of Internal Auditing.

In February 2012, Internal Audit Team was given a ‘Generally Conforms’ overall rating on International Standards for Internal Auditing (IIA) Code of Ethics, and the Definition of Internal Auditing based on the External Quality Assurance Review (QAR) report by SGV & Co./Ernst and Young.

The professional competence of our internal auditors is upgraded through training programs, conferences and seminars that provide updates on auditing techniques, regulations and banking products and services. Internal Audit also works closely with the RMO, Compliance Office, and external auditors for a comprehensive view of risks and compliance in the institution, and ensures that business units pro-actively manage risk and compliance exposures.

BANK OF THE PHILIPPINE ISLANDS

Conflict of Interest Policies

The Group adheres to strict conflict of interest policies which places the interest of the Bank above and ahead of the personal interest of directors and officers. These policies prohibit directors and officers from using their position of authority or rank to directly or indirectly derive personal gain or advantage.

Our employees are also guided by our Conflict of Interest and Whistleblower policies and guidelines which are included in the Management and Operating Manual (MOM) and Personnel Policy Manual. Aside from being electronically available to all employees, these policies are announced via our email facility, the Lotus Notes, to serve as reminders.

Anti-Money Laundering

The Anti-Money Laundering Unit (AMLU) is responsible for monitoring customer and counterparty transactions in compliance with the Anti-Money Laundering Law and various government regulations. Our Anti-Money Laundering Program covers all companies under the BPI Group.

We constantly review our program to ensure compliance with the latest legislative and regulatory developments. The program outlines the policies and procedures on enforcing rules for enhanced customer due diligence, detecting or countering acts of money laundering, as well as handling of suspicious transactions. AMLU’s specialized IT system captures the required information from our various application systems and analyzes these data for abnormal and suspicious transaction patterns.

Communication and Information

Management is primarily responsible to the Board for the adequate flow of information, such as but not limited to financial information. Any variance between projections and actual results requires management’s explanation to the Board.

The Board is committed to fully disclose at all times all material information about the Bank for the benefit of the shareholders. All material information that could potentially affect share price are publicly disclosed through the PSE and SEC. For more details on our corporate governance philosophy, policies and practices, please go to our website, www. bpiexpressonline.com.

35

JAIME AUGUSTO ZOBEL DE AYALA

Chairman of the Board of Directors of BPI since March 25, 2004.

Vice-Chairman from 1995 to March 2004 and director since 1994.

Chairman of the Board of Directors and Chief Executive Officer of Ayala Corporation; Chairman of Globe Telecom, Inc. and Integrated Microelectronics, Inc.; Co-Chairman of Ayala Foundation, Inc.; Vice Chairman of Ayala Land, Inc. and Manila Water Company, Inc.; Co-Vice Chairman of Mermac, Inc.; Director of Alabang Commercial Corporation, Ayala International Pte Ltd., and AC Energy Holdings, Inc.; Chairman of Harvard Business School Asia-Pacific Advisory Board, Children’s Hour Philippines, Inc.; Vice Chairman of the Asia Business Council, Makati Business Club, and Asia Society Philippine Foundation, Inc.; Member of The Asia Society, Eisenhower Fellowships, Harvard University Asia Advisory Committee, Harvard Business School Social Enterprises Initiative Advisory Board, Harvard Global Advisory Council, Mitsubishi Corporation International Advisory Committee, JP Morgan International Council, International Business Council of the World Economic Forum, Asia Pacific Basin Economic Council, Philippine Economic Society, World Wildlife Fund Philippine Advisory Council, Pacific Basin Economic Council and Toshiba International Advisory Group; and Philippine Representative for APEC Business Advisory Council.

36

AURELIO R. MONTINOLA III

President since 2005 and Director since 2004.

Chairman of BPI Direct Savings Bank, Inc., BPI-Philam Life Assurance Corporation, BPI Computer Systems Corporation, BPI/MS Insurance Corporation, Amanda Carina Holdings, Inc., Amon Trading Corporation, Armon Realty, Derrc, Inc., Desrey, Inc., Monti-rey, Inc., Seyrel Investment & Realty Corporation, and East Asia Educational Foundation; Chairman and Executive Director of BPI Europe Plc.; Vice-Chairman/Trustee of BPI Globe BanKO, Inc., Mastercard Incorporated Asia/Pacific Regional Advisory Board, LGU Guarantee Corporation, Philippine Business for Education, Inc., Far Eastern University and Lafarge Republic, Inc.; Senior Managing Director of Ayala Corporation; Director of BPI Family Savings Bank, Inc., BPI Capital Corporation, Ayala Land, Inc., Mere, Inc., and Western Resources Corporation; Vice-Chairman & President of BPI Foundation, Inc.; Member of the Board of Trustees of Ayala Foundation, Inc., Makati Business Club, Pres. Manuel A. Roxas Foundation, Philippine Trade Foundation, Inc., and Anita Magsaysay Ho Foundation; and Member of the Management Association of the Philippines.

CHNG SOK HUI

Director since April 2003. Director of Ayala DBS Holdings, Inc.; Managing Director and Chief Financial Officer of DBS Bank Ltd. (Singapore); Member of Housing & Development Board and Accounting Standards Council; and Supervisor in DBS China Ltd.

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

ARTEMIO V. PANGANIBAN

CEZAR P. CONSING

Director since April 15, 2010. Director from February 1995 to January 2000 and from August 18, 2004 to January 01, 2007. Independent Director of First Gen Corporation, CIMB Group Holdings Berhad, CIMB Group Sdn Bhd, and Jollibee Foods Corporation; Partner/Managing Director of TRG Management Hongkong Limited; Partner of The Rohatyn Group and Head of the Hong Kong office; Director and Non Executive Chairman of the Filgifts.com; Director of TRG Management Principals LP, TRG Allocation Principals LLC, Arch Capital Management Co., Ltd.; Arch Capital Asian Partners, G.P., Capital Advisors Partners Asia Sdn Bhd, Capital Asean Infrastructure Fund III (General Partner) Limited, and Capital Islamic Infrastructure Fund (General Partner), Limited; Board of Partners of TRG Management LP; and member of the Advisory Committee of CIMB Securities International Pte Limited.

REBECCA G. FERNANDO

Director from 1995 up to December 2007 and reelected in 2009. Director of BPI Family Savings Bank, Inc. and BPI Capital Corporation; Chairman of LAIKA Intertrade Corporation; Financial Consultant and Member of the Finance Board of The Roman Catholic Archbishop of Manila; and Member of the Finance Board of The Roman Catholic Archbishop of Antipolo.

BANK OF THE PHILIPPINE ISLANDS

Independent Director since April 15, 2010.

Independent Director of Manila Electric Company, Petron Corporation, First Philippine Holdings Corporation, Metro Pacific Investments Corporation, Metro Pacific Tollways Corporation, Robinsons Land Corporation, GMA Network, Inc., GMA Holdings, Inc., Tollways Management Corporation and Asian Terminals; Independent Adviser of Philippine Long Distance Telephone Company and Jollibee Food Corporation; Senior Adviser of V. Mapa Blue Falcon Honor Society and Metropolitan Bank and Trust Company; Chairman of the Board of Advisers of Metrobank Foundation, Inc. and Asian Institute of Management Ramon V. Del Rosario, Sr.- C.V. Starr Center for Good Governance; Chairman of the Board of Philippine Dispute Resolution Center, Inc.; President of Manila Metropolitan Cathedral – Basilica Foundation, Inc.; Member of the Board of Advisers of Dela Salle University College of Law and Johann Strauss Society; Member of the Advisory Board of The World Bank (Philippines); Chairman of the Board of Trustee of Foundation for Liberty and Prosperity; Member of Philippine National Committee of Asean Law Association; and Columnist in the Philippine Daily Inquirer.

FERNANDO ZOBEL DE AYALA

Director since 1994. Director, President and Chief Operating Officer of Ayala Corporation; Chairman of Ayala Land, Inc., Manila Water Company, Inc., AC International Finance Ltd., Ayala International Pte Ltd., Ayala DBS Holdings, Inc., Alabang Commercial Corporation, AC Energy Holdings, Inc., BPI Foundation, Inc. and Hero Foundation, Inc.; Co-Chairman of Ayala Foundation, Inc.; Co-Vice Chairman of Mermac, Inc.; Director of Globe Telecom, Inc., Integrated Micro-Electronics, Inc., LiveIt Investments, Ltd., Asiacom Philippines, Inc., AG Holdings Limited, Ayala International Holdings Limited, AI North America, Inc., Vesta Property Holdings Inc., Honda Cars Philippines, Inc., Isuzu Philippines Corporation, Pilipinas Shell Petroleum Corp., and Manila Peninsula; Member of The Asia Society, World Economic Forum, INSEAD East Asia Council, and World Presidents’ Organization; Chairman of Habitat for Humanity’s Asia-Pacific Capital Campaign Steering Committee; Vice Chairman of Habitat for Humanity International; and Member of the Board of Trustees of Caritas Manila, Pilipinas Shell Foundation, Kapit Bisig para sa Ilog Pasig Advisory Board and National Museum.

37

ANTONIO JOSE U. PERIQUET

ROMEO L. BERNARDO

Independent Director since August 2002. Director from February 1998 to April 2001. President and Managing Director of Lazaro Bernardo Tiu & Associates, Inc.; Independent Director of BPI Family Savings Bank, Inc., BPI Capital Corporation, BPI Direct Savings Bank, Inc., BPI/MS Insurance Corporation, BPI Globe BanKO, Inc., BPI-Philam Life Assurance Corporation, Philippine Investment Management, Inc., Aboitiz Power Corporation, National Reinsurance Corporation of the Philippines, Globe Telecom, Inc. and RFM Corporation; Chairman and Independent Director of ALFM Peso, Dollar, Growth, Money Market and Euro Bond Funds and Philippine Stock Index Fund, Inc.; ViceChairman and Founding Fellow of Foundation for Economic Freedom; Member of the Board of Trustees of Financial Executives Institute of the Philippines (FINEX) Foundation, Philippine Institute for Development Studies and Institute for Development & Econometric Analysis, Inc.; Advisor of Global Source/Latin Source; and Governor of Management Association of the Phils.

38

Independent Director since April 19, 2012. Independent Director of BPI Capital Corporation, BPI Family Savings Bank, Inc., ABS-CBN Holdings Corporation, Philippine Seven Corporation, Ayala Corporation and DMCI Holdings, Inc.; Chairman of Pacific Main Holdings, Inc., Campden Hill Group, Inc. and Regis Financial Advisers, Inc.; Director of The Straits Wine Co.; Member of the Board of Trustees of Lyceum University of the Philippines; and Member of the Board of Advisers of ABS-CBN Broadcasting Corporation.

OCTAVIO V. ESPIRITU

Independent Director since April 2000 and Independent Director since April 2002. Chairman of Delphi Group, Inc.; Chairman and President of MAROV Holding Company, Inc.; Director of International Container Terminal Services, Inc., Netvoice, Inc., Pueblo de Oro Golf and Country Club and SM Development

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

MERCEDITA S. NOLLEDO

Director since 1991. Chairman of BPI Investment Management, Inc. and AG Counselors Corporation; Director of BPI Family Savings Bank, Inc., BPI Capital Corporation, Ayala Land, Inc., Anvaya Cove Beach & Nature Club, Ayala Automotive Holdings, Inc., Honda Cars Cebu, Inc., Honda Cars Makati, Inc., Isuzu Automotive Dealership, Inc., and Isuzu Cebu, Inc.; Member of the Board of Trustees of Ayala Foundation, Inc. and BPI Foundation, Inc.; and President of Sonoma Properties, Inc.

OSCAR S. REYES

Director since April 2003. Chairman of Link Edge, Inc. and MRL Gold Philippines, Inc.; Independent Director of Ayala Land, Inc., Alcorn Gold Resources Corporation, Manila Water Company, Pepsi Cola Products Philippines, Inc., Basic Energy Corporation, Sun Life Financial Plans, Inc., Sunlife Prosperity Dollar Abundance Fund, Sunlife Prosperity Dollar Advantage Fund, Petrolift Corporation, Sun Life of Canada Prosperity Bond Fund, Inc., Sun Life Prosperity Money Market Fund, Inc., and Sun Life GS Fund, Inc.; Director of Philippine Long Distance Telephone Co., SMART Communications, Inc., and Mindoro Resources Ltd.; and Chief Operating Officer of Manila Electric Company.

TAN KONG KHOON

Director from August 17, 2011 up to October 18, 2012. Group Executive of DBS Bank Ltd. Consumer Banking Group and Director of Network for Electronic Transfers (Singapore) Pte Ltd.

KHOO TENG CHEONG

Director since June 16, 2010. Head and Managing Director of DBS Bank, Ltd., Planning Group since March 2011.

XAVIER P. LOINAZ

Director since 1982 and Independent Director since March 2009. Independent Director of BPI Family Savings Bank, Inc., BPI Capital Corporation, BPI Direct Savings Bank, Inc., BPI/MS Insurance Corporation, Ayala Corporation and Globe Telecom, Inc.; Chairman of Alay Kapwa Kilusan Pangkalusugan; and Member of the Board of Trustees of BPI Foundation, Inc., E. Zobel Foundation and PETA.

BANK OF THE PHILIPPINE ISLANDS

39

OFFICE OF THE CHAIRMAN JAIME AUGUSTO ZOBEL DE AYALA Chairman CARLOS B. AQUINO Corporate Secretary ROSEMARIE B. CRUZ Vice President SANTIAGO L. GARCIA, JR. Vice President MARITA SOCORRO D. GAYARES Vice President GERARDO I. RARELA Vice President SYLVIA P. SUMAGPANG Vice President OFFICE OF THE PRESIDENT AURELIO LUIS R. MONTINOLA, III President MA CORAZON G. GUZMAN Senior Vice President GERTIE K. SINIO Senior Vice President ROLAND GERARD R. VELOSO, JR. Senior Vice President DANIEL S. BABLES Vice President ROSARIO J. BENEDICTO Vice President GRACIA C. DE JESUS Vice President SUSAN L. ERGUIZA Vice President FLORENTINO T. GONZALEZ, III Vice President CONRADO E. LAZA Vice President

40

NICANOR A. MENDIOLA Vice President MELVIN M. MIRANDA Vice President MA CARMENCITA A. SAYO Vice President AURALYN S. TORRES Vice President OFFICE OF THE CHIEF OPERATIONS OFFICER FLORENDO G. MARANAN Vice President CARD BANKING GROUP MA CRISTINA L. GO Senior Vice President MIGUEL L. BERNABE Vice President JOSE M. DE VERA Vice President ANICETA P. DEL MUNDO Vice President CECILE CATHERINE A. DELA PAZ Vice President RICHMOND EZER O. ESCOLAR Vice President MA. ANGELICA G. FLORENTINO Vice President JESUS ANGELO O. GOMEZ Vice President ELAINE V. GUZMAN Vice President AILEEN S. LAMASUTA Vice President GENARO N. LUALHATI, IV Vice President

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

CONSUMER BANKING GROUP NATIVIDAD N. ALEJO Executive Vice President JOAQUIN MA. B. ABOLA Senior Vice President ESTELITO C. BIACORA Senior Vice President EMMANUEL G. HERBOSA Senior Vice President ANGELIE O. KING Senior Vice President SYLVIA P. YNGENTE Senior Vice President ROBERTO O. BAUTISTA Vice President IRENE R. BUENO Vice President CECIL C. CONANAN Vice President LUIS GEMINIANO E. CRUZ Vice President ARLENE S. DAYRIT Vice President BRENNO C. DYTOC Vice President

MARIA CONSUELO A. LUKBAN Vice President

REBECCA U. ANSELMO Vice President

GERARDO E. MAGPANTAY Vice President

DENNIS S. DAVID Vice President

CYNTHIA C. MANALASTAS Vice President

JO ANN B. EALA Vice President

MA. LOURDES B. MONTELIBANO Vice President

MA CRISTINA U. JAVIER Vice President MA. CONCEPCION Q. NARCISO Vice President

JOSEPH PHILIP ANTHONY S. PARUNGAO Vice President MA CRISTINA L. SAN DIEGO Vice President ENRICO A. SANTOS Vice President JOSE AUGUSTO G. SANTOS Vice President RUBY ROSARIO J. SEVERINO Vice President MA. DINA F. SORIANO Vice President WILFREDO T. TAN DI Vice President RICARDO U. TIN Vice President

ROSA MARIA L. GAYOS Vice President MA. FE C. GREGORIUS Vice President

CORPORATE BANKING GROUP

JENNY C. GUEVARA Vice President

REYMUNDO S. CASTRO Senior Vice President

CHARITO Y. JIMENEZ Vice President

MARIO B. PALOU Senior Vice President

DANILO L. KIMSENG Vice President

ANGELA C. SANTIANO Senior Vice President

AILEEN BERYL A. LIMKETEE Vice President

JUDY K. TECSON Senior Vice President

ALFONSO L. SALCEDO, JR. Executive Vice President

CRISTINA I. NATIVIDAD Vice President JOSE MARTIN S. SANGCO Vice President ELISA M. SILVA Vice President INFORMATION SYSTEMS GROUP PILAR BERNADETTE C. MARQUEZ Senior Vice President NAPOLEON I. CRUZ, JR. Vice President EDGARDO R. JIMENEZ Vice President AILEN C. KHO Vice President KIRK L. LIM Vice President ELECTRONIC CHANNELS GROUP MANUEL C. TAGAZA Senior Vice President EUGENIO P. MERCADO Senior Vice President JESUSA CAMILA V. GANGOSO Vice President

JOSEPH ANTHONY M. ALONSO Vice President

BANK OF THE PHILIPPINE ISLANDS

41

CENTRALIZED OPERATIONS GROUP

OVERSEAS BANKING GROUP

MARIA CORAZON S. REMO Senior Vice President

RAUL D. DIMAYUGA Senior Vice President

CHRISTINE GRACE A. BANDOL Senior Vice President

MARIE CHRISTINE O. LOPEZ Senior Vice President

NIEVES J. BASA Vice President

MELINDA V. DULAY Vice President

MARIA ANTONIA O. LEONG Vice President

ROY EMIL S. YU Vice President

IRMINGARDO O. LUDOVICE Vice President FRANCISCA ANN M. LUSTRE Vice President ELFRIDA S. NARBONETA Vice President ARMANDO T. NAVARRETE, JR. Vice President RAFAEL J. PERTIERRA Vice President CARMELITA N. SAN DIEGO Vice President CORAZON S. TUMBOCON Vice President FINANCIAL MARKETS GROUP ANTONIO V. PANER Executive Vice President MICHAEL D. CALLEJA Senior Vice President HENRY C. ARCEO Vice President

42

ANGEL MARIE L. PACIS Vice President CHRISTMAS G. SEVILLA Vice President CECILIA P. TANCHOCO Vice President HUMAN RESOURCE MANAGEMENT GROUP

ASSET MANAGEMENT AND TRUST GROUP

FIDELINA A. CORCUERA Senior Vice President

MARIA THERESA M. JAVIER Senior Vice President

JOCELYN C. ALVIAR Vice President

PAUL JOSEPH M. GARCIA Senior Vice President

MARIA ROSARIO F. CRISOSTOMO Vice President

MARIO T. MIRANDA Senior Vice President

ROBERTO E. GALVEZ Vice President

HOMER L. ANICETO Vice President

MARIAN T. KATIGBAK Vice President

BANDERA, RUTH B. Vice President

INTEGRATED MARKETING OFFICE

MIGUEL P. CERVANTES, JR. Vice President

MARIE JOSEPHINE M. OCAMPO Senior Vice President

SMITH L. CHUA Vice President YVETTE MARI V. DE PERALTA Vice President ODETTE S. DIAZ Vice President

RINALDO H. FERNANDEZ Vice President

IRENE A. DIOMAMPO Vice President MARIO GERARDO Z. EVARISTO Vice President

DONARBER N. PINEDA Vice President

MARIA PAZ A. GARCIA Vice President CARLOS A. JALANDONI Vice President

MARIJOY Y. KAWPENG Vice President

HEIDI P. VER Senior Vice President LILIA B. GOZAR Vice President ELIZABETH P. SANTAMARIA Vice President GLOBAL BANKING GROUP JAENA A. CEBRERO Vice President ARTHUR NOEL S. TAN Vice President

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BPI FAMILY SAVINGS BANK JOSE TEODORO K. LIMCAOCO President DAVID G. SARMIENTO, JR. Senior Vice President JOCELYN C. STA. ANA Senior Vice President

ERICK M. RAMOS Vice President MERCEDES D. ROCES Vice President

BPI FOREX CORPORATION

HERBERT D. TUASON Vice President

MANUEL C. SANCHEZ Vice President / Officer-in-Charge

BPI CAPITAL

OLGA S. ANG Vice President

CECILIA L. TAN President

LUISITO R. BALLELOS Vice President

BONIFACIO M. BANZON Vice President

ELMA S. CAPISTRANO Vice President

ARNOLD E. OLIVA Vice President

FELIPE P. CARLOS Vice President

JOSE EDUARDO A. QUIMPO, II Vice President

AMY BELEN R. DIO Vice President

MANUEL C. SAN DIEGO Vice President

RODOLFO B. FERNANDEZ Vice President

BARBARA ANN C. UNTALAN Vice President

EDWARD S. FONG Vice President

LUIS C. URCIA Vice President

CHARITO O. HITEROZA Vice President

BPI LEASING

MIRIAM JANE M. JACINTO Vice President

DANILO T. REYES President

MELECIO A. KIMPO Vice President

ANDRE ANGELO S. SANTOS Vice President

MA. CHRISTINA Z. SISON Vice President

SAMUEL C. TANG Vice President

MARIA S. MANANGHAYA Vice President

BPI DIRECT SAVINGS

BANK OF THE PHILIPPINE ISLANDS

VICTOR L. VITAL President

JOSE RAMON H. SANTOS Vice President

RAMON NOEL S. ALTAMIRANO Vice President

SUSAN E. PIMENTEL Vice President

BPI SECURITIES CORPORATION

BPI International Finance Ltd. SUSANA M. MANALO Managing Director

BPI MS / BBI TAKAAKI UEDA President LILIAN G. BELEN Vice President PERFECTO M. DOMINGO Senior Business Director MA. PERPETUA A. CUTIONGCO Business Director

AYALA PLANS, INC. ELIZABETH J. TAN ADI / Officer-in-Charge

MARIA CHRISTINE O. LOPEZ President VICTORIA LOUELLA G. MANGALINDAN Vice President

43

WE MAKE CREATING VALUE

BPI’s mission has always been to help the Customer, the Shareholders, the Community and the Country. As such, we conduct our business responsibly and pursue quality and sustainable growth.

44

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

for our shareholders

BANK OF THE PHILIPPINE ISLANDS

45

BPI further pulled ahead of the industry with a market capitalization of Php337.8 billion, 72.1% better than the Php196.3 billion at end 2011. The Bank’s share price ended at Php95.00 and traded at a premium of 3.5x its book value per share of Php27.30.

Our capital adequacy ratio (CAR) at 14.2% was slightly below the previous year’s 14.9%. This was due to the higher risk weighted assets brought about by the healthy loan growth. The ratio however remained comfortably above the regulatory minimum requirement of 10%.

Notwithstanding our total loan portfolio growth of 15.9% to Php526.6 billion, our asset quality improved with our nonperforming loans ratio at 1.5% from 1.9%, previously. We also retained our Capital Adequacy, Asset Quality, Management Quality, Earnings, Liquidity, and Sensitivity to Market Risks (CAMELS) in the latest BSP examination.

STRONG We generated record profits of Php16.3 billion, Php3.5 billion or 27.1% higher than the previous year’s Php12.8 billion. We exceeded our return on equity (ROE) goal of 15%, posting a higher 17.5% compared to 15.2% in 2011.

Our deposit base expanded by 17.8% to Php802.3 billion, but we managed to maintain our loan to deposit ratio at 67%. Our assets under management likewise rose 11.3% to Php739 billion, bringing our total intermediated funds to Php1.5 trillion.

We gained almost a million new customers bringing the total customer base that we serve to almost six million.

Given our record gains and the unabated fall in interest rates, our challenge for 2013 will be to sustain quality earnings growth that will continue to deliver value to our shareholders.

46

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Earnings per share

Cash Dividends Declared

in Php

in billion Php

8.18

4.58

in Php

6.40

3.61

2.3

6.12

3.38

Cash Dividends per share

5.84 5.84

1.8

1.8

1.8

1.8

08

09

10

11

2.62 1.98

08

09

10

11

12

08

09

10

11

12

12

G Stock Dividends Paid in million Php

Book Value per share in Php

27.30 25.07 20.57

5.41

95.00

22.78

19.39

08

0

0

0

0

09

10

11

12

BANK OF THE PHILIPPINE ISLANDS

Php 08

09

10

11

12

BPI share closing price at a premium of 3.5x its book value per share of Php27.30

47

Our record growth stems from a deep understanding of the needs of our customers. We not only offer the right financial solutions, but we also create innovative solutions to make banking easier for them.

Consumer Banking BPI ushered in yet another milestone in its history when it opened in 2012 its smallest full-service branch to date.

The branch occupies a barely 10-square meter space inside the Asian Development Bank (ADB) Headquarters in Ortigas, Pasig City. Packed with BPI’s innovative technology, the ADB branch can handle transactions and cross selling as any traditional branch ten times its size.

After only one month in operation, the branch was able to process about 500 transactions a day, more than half of which were completed online.

A showcase of BPI’s commitment to green banking, the ADB branch makes use of energy-saving equipment, promotes minimal use of paper and operates within a smaller footprint complemented by the strength of BPI’s electronic banking channels. This makes it easy for branch customers, made up of high net worth employees of ADB who are mostly expatriates, do routine banking transactions anytime and wherever they may be.

Electronic Banking Through BPI 24/7 Banking, our customers can avail of our products and services through devices that are available to them 24/7 such as landline telephone, mobile phone and any internet-enabled device.

As of end-2012, 31.6% of BPI’s 5.8 million individual customers are already enrolled in our electronic channels. On the corporate side, 18.4% of our 81,948 corporate customers now use BPI ExpressLink for their cash management needs.

48

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Card Banking Our Card Banking Group delivered a combination of healthy lending growth and a string of innovations aimed at displacing cash in 2012.

In Credit Cards, we remained to be one of the largest card issuer in the Philippines with a cardholder base of 1.1 million.

Our credit card usage and loans both grew by 19.0%.

Gaining greater momentum in 2012, our Personal Loans were offered to over 14,000 customers with an outstanding portfolio of Php1 billion, half of which were booked in the last seven months.

Our Debit and Prepaid business also made significant strides in 2012. Transactions processed through our

Express Payment System (EPS) facility increased by 16.0% in terms of count as more of our debit cardholders saw the convenience of paying with their ATM cards. Our prepaid card business has also seen dramatic shift in focus towards spending and bookings online at merchants with transaction volume increasing by 439.0% versus cash dispensing declining by 57.0% in withdrawals.

BPI also maintains the country’s largest self-service network of 24/7 ATMs and Express Deposit Machines, numbering 1,900 and 200, respectively. Transaction count made through these channels grew by 10.0%.

On the merchant acquiring side, we continued to be one of the leaders in terms of point of sale (POS) terminals distribution with over 24,000 installed all over the country.

Our smallest fullservice BPI Branch inside the ADB Headquarters serves as a showcase of our commitment to green banking.

ELECTRONIC BANKING bpi express online enrolleD customer FINANCIAL TRANSACTION COUNT NO. OF EOL USERS WHO REQUESTED FOR SOA SUPPRESSION

bpi express mobile enrolleD customer FINANCIAL TRANSACTION COUNT

BANK OF THE PHILIPPINE ISLANDS

% change 38 28 168 51 87

38%

Percentage of individual investment transactions done through EOL (vs. branch)

18%

Percentage of corporate customers enrolled in ExpressLink

49

Consumer Lending Our consumer lending arm, BPI Family Savings Bank (BFSB), sustained its leadership position in the industry in 2012. BFSB posted a doubledigit growth of 16.1% in its loan portfolio.

Faster loan approval process and wider provincial coverage due to the opening of new lending desks resulted in a 17.7% rise in retail mortgage loans and a 10.4% growth in auto loans.

Corporate Banking Our corporate loan portfolio grew by 14.4% to Php364.8 billion. Despite relatively moderate expansion, our asset quality remained significantly lower than the industry’s 2.15% with our non-performing loan (NPL) ratio at 1.3%.

To capitalize on two fast-growing segments, we created the Asian and PEZA Corporate Divisions in 2012. The combined performance of the two teams resulted in a year-on-year loan growth of 28.2%.

BPI Leasing Corp. and its wholly owned subsidiary BPI Rental Corporation continued to be the dominant industry player in this segment. Their lease portfolio reached Php10.0 billion in 2012, a 10.0% growth from 2011. A more active drive for business development, particularly in structuring leases for vehicle fleet, medical equipment, logistics and construction machines, largely contributed to new account acquisitions.

Growth in BPI Family Savings Bank’s loan portfolio in 2012 from year-ago levels

75%

Increase in trading income in 2012 from year-ago

50

14%

Expansion in BPI’s corporate loan portfolio in 2012 vs. 2011

BPI’s market share in remittances

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Suze Orman, personal finance expert and one of the world’s 100 Most Powerful Women, gave over 1,000 BPI clients sound advice on attaining financial freedom.

Our cash management business continued to thrive through our flagship one-stop shop web-based solution, BPI ExpressLink.

In 2012, BPI ExpressLink’s customer base grew by 19.2% while the volume of transactions rose by 3.9% than a year ago. We expanded our services to key cities such as Cebu, Davao, Lipa in Batangas and San Fernando, Pampanga.

Global Banking In a year marked with global market volatilities and domestic market opportunities, our Financial Markets team attained a record-high trading income, posting a 74.6% increase over 2011 as we took advantage of the rise in peso bond prices and the volatility in the U.S. market.

In addition to strong revenue growth, we also maintained our lead in the government securities, swap and foreign exchange markets. For this, the Bureau of the Treasury named us the top local bank in the primary market for peso government securities. We were also ranked No. 1 by the Philippine Dealing and Exchange Corporation in terms of trading volume in the secondary market for peso bonds.

Our remittance business also continued to dominate with a market share of 28.1%. It expanded its market with the establishment of the Korean desk and a representative office in the United Arab Emirates in 2012.

BANK OF THE PHILIPPINE ISLANDS

We also increased our remittance market coverage in the Middle East, East Asia and the developed economies of North America by adding more remittance centers, tie-ups and alliances to better serve overseas Filipinos around the world.

BPI Europe opened a new branch in Milan, Italy to serve the banking needs (EUR deposits and loans) of OFs in the area.

Asset Management and Trust 2012 is another solid year for BPI Asset Management as assets under management grew by 11.3% to Php739 billion. This translated to a 23.5% share of the industry. Earnings were up 13.4% to Php2.9 billion from 2011 levels. We made progress on all our major fund management businesses, which exhibited an increase of 19.0%.

BPI Asset Management was awarded the Best Asset Management Company in the Philippines by The Asset Triple A Investment Awards 2012 for the second year. The award recognized our comprehensive platform for investing in different asset classes and serving the investing needs of institutional, corporate and retail clients, as well as achieving strong performances despite challenging market conditions.

For the third time in a row, the group also remained as the “Best Fund House” in the Philippines in the Asian Investor’s Investment Performance Awards 2012 in recognition of its excellence in fund management. BPI Asset Management also earned the Gold distinction in the Investment Funds Category of the Reader’s Digest Trusted Brands for the sixth year.

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Investment Banking BPI Capital Corporation, the investment bank subsidiary of BPI, continued to be an active contributor in capital market development.

In 2012, it played key roles in major capital market deals as corporations capitalized on positive investor sentiment, favorable interest rate environment, high liquidity in the market, and strong interest from foreign investors.

BPI Capital handled six corporate bond offerings in 2012 with total combined issue size of Php67.0 billion. Tenors of the corporate bonds ranged from 5 up to market first extended tenor of 15 years. The diversity of the bond issuers and the tenors offered allowed a wide array of investors to actively participate, thus promoting a vibrant capital market.

BPI Capital acted as Issue Manager and Selling Agent for the recordbreaking issuance of Php180.0 billion of 15- and 20-year Retail Treasury Bonds (RTBs), the largest in terms of issue size since the start of the program. It was also a Selling Agent for the first ever 25-year RTB Offering in October 2012.

Among its major deals in the equity front were the Php13.6 billion overnight private placement of Ayala Land, Inc. shares, considered the largest equity raising by a real estate company in Asia (ex-Japan) in 2012, in which BPI Capital served as the Sole Domestic Bookrunner of the deal; and the Php10.0 billion preferred shares offering of First Generation Corp. where it acted as Lead Underwriter.

BPI Securities Corporation, our stock brokerage arm, experienced a near doubling of value turnover on the back of a strong equities market and major block sale transactions.

Increase in gross premiums written by BPI/MS Insurance Corporation in 2012 from yearago levels

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ROE of BPI/MS Insurance in 2012

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BPI Securities experienced a near doubling of value turnover on the back of a strong equities market and major block sale transactions.

Insurance Our insurance business contributed a pre-tax net income of Php693.0 million in 2012.

BPI-Philam Life Assurance Corp. (BPLAC), our strategic partnership with The Philippine American Life Insurance Company (Philamlife) in bancassurance, generated total direct premiums of Php11.5 billion for 2012, 78.4% higher than the previous year’s Php6.4 billion.

Higher sales were mainly due to single-pay variable life products, including Max Growth Philippines and Max Growth 6, which generated over Php5 billion in single premium; and Invest Plus Peso, a single-pay variable life product linked to six local BPI AMTG funds, including the Odyssey Funds, which was introduced in 2012.

BPI/MS Insurance Corporation, our non-life insurance subsidiary, maintained its standing as the best financially managed non-life insurance company in the Philippines for more than five years.

In 2012, it posted a 21.7% growth in gross premiums written to Php4.6 billion in 2012 from year ago. Total underwriting (operating) profit rose by 7.9% to Php827.0 million and net income after tax stood at Php570.0 million, 20.6% higher than in 2011. This translated to an ROE of 25.0%.

The company was re-certified in 2012 as ISO 9001:2008 compliant, a testament to the commitment of the company to provide its stakeholders, clients, business partners and employees with the best customer service.

The introduction of these new funds drove the sales of Invest Plus Peso up to reach Php3.8 billion. The strongest contributor in the regular-pay line is Build Plus Peso, linked to BPI AMTG funds as well, with sales of Php156.9 million.

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WE MAKE IT

As a bank, we aim to provide customer experience innovation, appropriate financial solutions and the power of choice to our customers.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

for our customers

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2012 saw a continuous push of the Bank’s customercentric organization towards enabling BPI clients to enjoy the most convenient banking experience possible. Our various innovations in this field has been warmly received by our publics and has earned accolades from institutions here and abroad.

Flexible banking solutions In February 2012, we introduced BPI Advance, a savings account that offers advanced interest payment to allow depositors to enjoy the benefits of their savings ahead of time. Aside from enjoying higher interest rates than a regular savings accounts, depositors can add funds anytime. We generated 4,400 BPI Advance accounts with total volume of Php2.2 billion by end-December 2012.

To make investments easier, we built on the previous year’s initiatives on democratizing investments by making a bold move of removing the holding period requirement on all our unit investment trust fund (UITF) products. This is expected to further break barriers on investing to make retail investing more inclusive and to serve as a differentiator in the market.

INNOVATIN To offer innovative financial solutions to more customers, we designed a Personal Loan variant specifically for seafarers. Loan terms are aligned with the borrower’s employment contract, thereby matching the loan repayment with the borrower’s cash flow. We also streamlined the application process by partnering with leading manning agencies in the credit documentation and verification process. This variant now accounts for almost 10.0% of all our Personal Loans.

BSFB also made it easier for more Filipinos to buy their own home through the launch of its Customize-a-Loan that provides housing loan borrowers a wide range of payment options up to 25 years.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

NG

BPLAC introduced Life Extreme Protect, an affordable product that allows client with the flexibility to change their coverage to suit their changing protection needs. We also launched Lifespan and the enhanced Group Hospitalization (GH) Plan to give more comprehensive set of benefits that are responsive to the needs of corporate clients. Lifespan provides critical illness benefits while GH Plan provides inpatient, outpatient and emergency care benefits that may be availed through cashless facility.

We also initiated the real-time activation of EOL enrollments through the ATM. With this enhancement, clients can already enjoy selected online services in an instant after they activated their EOL enrollment through the ATM. For superiority in technical performance, social media visibility and game-changing innovations that redefined the concept of banking in the country, BPI EOL received the following recognition:

Banking and Payments Asia gave BPI EOL a Special Commendation for Channel Excellence in Internet Banking for introducing features that blazed the trails in Philippine online banking.

Anytime, anywhere banking Our robust online presence has added a whole new dimension to banking with BPI, keeping up with the increasing pace of our customers’ lives and making banking attuned to the latest innovations in technology.

For this year, BPI Express Online (EOL) was enhanced with the BPI Express Assist (BEA) Online facility, an online branch transaction appointment system. Through this facility, customers can fast-track their banking time by reserving a time slot in their preferred branch and submitting details of their transaction in advance through EOL. Clients are given a queue number and all they have to do is to show up for their appointment at the branch.

BANK OF THE PHILIPPINE ISLANDS

• Top Internet Domain under the banking category at the 5th Digital Filipino and Search Profile Index Web Awards awarded by DigitalFilipino.com • Special Commendation for Channel Excellence in Internet Banking from Banking and Payments Asia • Website of the Year- Philippines in the 2012 Asian Banking & Finance Retail Banking Awards To provide clients ease of access to BPI EOL for free, we have increased the total number of our Online Banking Kiosks to 141. These kiosks generated a total of 60,095 new enrollments or 116.0% over the same period last year and 35.0% more financial transactions processed.

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Furthermore, BPI Investments Online was integrated with Investments via Mobile to add another channel where our customers can place investment transactions. For our corporate clients on BPI ExpressLink, we launched the email and SMS alerts on pending transaction reminders.

BFSB further improved its www.bpiloans.com website by simplifying the Auto, Housing and Ka-Negosyo Loan application forms. Our continued partnership with key industry leaders provided us a comprehensive directory of cars, properties, and businesses. Our online loan applications thus increased by 187.7% from the previous year.

Our almost 200 Express Deposit machines, which provide real time selfservice cash deposit facility, are now enabled with cardless functionality.

This feature allows anyone to make a deposit to a BPI account or payment to a BillsPay merchant without the need for a card, as long as he knows the beneficiary’s account details.

Cashless payment solutions Processing of applications for credit cards is now faster as the verification process takes only one to two hours versus 24 hours previously. This was the product of a positive credit data sharing with the banking industry, which paved the way for the country’s first privately run positive credit card bureau through TransUnion. BPI played a significant role in spearheading this initiative. Our card Issuing business continued to provide cashless payment solutions and extending flexibilities to cardholders.

With Ayala Land, Inc., we launched our first-ever Visa credit card with exclusive privileges inside Ayala Malls, the BPI Amore Visa. Holders of this card will be awarded with 1-4-3% shopping rebates at BPI-affiliated establishments in Ayala Malls. They also enjoy mall perks and privileges in participating Ayala Malls merchants, unlimited use of customer and family lounges, invitations to special events and promotions, express lane for cinema ticket purchases, 5% discount on cinema tickets, and reserved seats to mall shows.

We also powered the Jollibee Food Corporation Happy Plus card, the first reloadable offline contactless card that offers convenient cashless payments and rewards customers with loyalty points. Almost 500,000 Happy Plus cards are in the market, and terminals have been installed in almost 1,200 Jollibee, Greenwich, Red Ribbon, Chowking and Mang Inasal outlets.

BPI Express Mobile launched a new offering, the BPI Mobile Wallet. Using Near Field Communication (NFC) Technology, the BPI Mobile Wallet turns a client’s smart phone into a “virtual wallet.” The BPI Mobile Wallet NFC devices are available for clients using BlackBerry Bold 9780 & 9700, BlackBerry Curve 8520 & 9220, iPhone 4/4S with iOS 4 and 5. All they have to do is reload through the BPI Express Mobile App and they can tap their phone over the TAP terminals at select stores to make a purchase.

Commitment to financial wellness In a country of 39 million Facebook and Twitter users, we have chosen to advance the call for financial literacy by utilizing the most powerful online tool today: social media.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

By making the most of our social networking presence, we imparted our 161 years of expertise on money management to the general public, as well as touchbase with its increasingly mobile customer base, through Facebook and Twitter.

Not only are our fan pages loaded with daily tips on such topics as personal savings, budgeting, investments, and other financial issues, our customers and non-customers alike can also post questions and expect answers in minutes from our professional BPI money managers.

Financial wellness was also at the core of our involvement with the Money Summit and Wealth Expo, which we co-presented in July 2012 at the SMX Convention Center.

A number of financial experts, including Executive VicePresident Jose Teodoro Limcaoco of BFSB and Senior Vice-President Maria Theresa Javier of our BPI Asset Management, shared their expertise with participants on hot topics such as investments.

We also co-sponsored Philippine Reality TV and ANC’s On the Money TV segments and allowed our senior officers

The Money Summit and Wealth Expo featured a number of financial experts at BPI, who shared their expertise on hot investment topics.

For a more secure and private transaction, a few clicks on our Facebook fan page give users access to BPI Bankers Online, a first-of-its-kind personal messaging app that allows them to chat with a bank professional.

This guarantees that sound financial advice and account information are always within their fingertips. These platforms extend our advocacy of uplifting financial literacy in the Philippines.

to provide financial literacy to television viewers of these programs.

BFSB likewise has its own Facebook (www.facebook. com/bpiloans) and Twitter account (@BPILoans) where customers may seek advice as well as find information, promos, and apply for loans.

As a starter initiative under the program, BPI installed new ATMs in DoT priority areas such as hotels, resorts and gaming establishments. Prospectively, BPI will introduce new innovative products and service offerings specially designed for the program such as affordable financing or guarantee facility for qualified tourism enterprises, deploying more point of sale terminals to tourism-related enterprises and the DOT-BPI More Fun Prepaid Visa Card.

A major event for the year was when BPI Asset Management brought to Manila for the first time the World’s Most Listened to Personal Finance Expert and One of the World’s 100 Most Powerful Women, Suze Orman, in February 2012. Over 1,000 BPI clients learned from her financial advice for attaining financial freedom.

BANK OF THE PHILIPPINE ISLANDS

Delivering more fun and value In support of the government’s vision to spur tourism as a key anchor for economic development, we forged a partnership with the Department of Tourism (DoT) through the Banking on Tourism program.

As the banking industry goes into new and exciting directions, making it easy for our customers will always be a strategic component of our value proposition.

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Financial inclusion is about providing access to the underserved and unbanked sectors so they can avail of financial services, such as our deposit products and loans, allowing people to take advantage of financial services, especially credit.

Consumers, including overseas Filipinos, micro, small and medium-sized enterprises, and those who belong to the largely ‘unbanked’ segment of the market, have been the focus of our initiatives. We continuously strive to bring more and more Filipinos to our formal channels so we assist them achieve financial security.

Empowering SMEs Fueling the Filipino entrepreneurial spirit, BFSB continued to empower the micro, small and medium enterprise (mSME) sector through our Ka-Negosyo business loans.

For pre-qualified existing clients, we made financing a step easier by offering a zero collateral loan. For our first year of launch, zero collateral loans reached half a billion pesos in portfolio with 1.0% past due rate.

ACCESS TO We further made a revolutionary enhancement to Ka-Negosyo business loans with the birth of Ka-Negosyo with ATM. This is an all-in-one money product which makes it easier for entrepreneurs to access emergency funds anytime: via ATM withdrawal, issuance of checks, funds transfer online and through mobile, and via Express Payment System (EPS).

It can also be used to pay suppliers via third-party funds transfer and even pay bills through BPI Express Online, Express Phone and Express Mobile.

BFSB has been the go-to name in the country’s lively franchising industry. Our highly coveted Ka-Negosyo Best List, which debuted in the 2012 Franchise Asia Expo, is the roster of the country’s best and brightest franchise brands. Our accredited brands are now at 61 compared to 19 of the previous year, from which potential franchisees and seasoned entrepreneurs can choose.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

In 2012, BFSB was able to reach out to more Filipino entrepreneurs, driving its commercial loans portfolio to double-digit growth levels.

Assisting home buyers To benefit home buyers, BFSB forged stronger partnerships through joint programs with key real estate organizations like Philippine Association of Real Estate Boards (PAREB), Real Estate Brokers Association of the Philippines (REBAP), and Subdivision and Housing Developers Association (SHDA).

Journeying with overseas Filipinos BPI’s operations had kept in step with Filipinos overseas who now number more than 10 million. Recognizing the needs of OFs in various life stages, we have positioned our products and services so that they remain relevant and easy to avail of.

We also delivered more financial literacy programs to OFs and their beneficiaries, in partnership with the Overseas Workers Welfare Administration, Philippine Overseas Employment Agency and other private entities.

BPI Europe organized a gala dinner as a show of support to Filipino atheletes competing in the 2012 London Olympics.

C Its Housing Madness in Bacolod and Lipa showcased the projects of 14 national and local developers. Special offers from BPI and our partner developers were made available to potential home buyers during these events.

BPI was also the sole bank partner in the 3rd Property Festival of nine developers in Cagayan de Oro in December 2012, as well as in the Singapore Property Expo of eight Philippine developers in Singapore in July 2012 for overseas Filipinos looking to invest in the Philippines.

BANK OF THE PHILIPPINE ISLANDS

We are increasing our efforts to convert remitter-OFs to becoming bank customers.

In 2012, BPI Remittance Center Hong Kong Limited took part in the celebration of the annual Kababayan Karavan 2012 of Globe Telecom by imparting valuable knowledge on effective financial management to Hong Kong-based Filipinos and providing the facilities to support their needs.

One of our additional remittance options in 2012 was our strategic partnership with online money transfer company Remitly.com in the United States. This allows US-based Filipinos to transmit money securely and within minutes in over 10,000 cash-out locations in the US.

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Increasing credit access To make financing available to more Filipino entrepreneurs who traditionally lacked access to capital, we entered into a partnership in 2012 with the United States Agency for International Development (USAID) for an eight-year credit facility agreement.

Under the program, USAID will issue a US$35-million credit facility for both BPI and BFSB. By acting as USAID’s program conduit, BPI is able to address the critical issue of access to financing, especially for entrepreneurs based outside Metro Manila.

Serving the ‘unserved’ BPI Globe BanKO (BanKO), our mobile-based microfinance banking arm continued to make headways in providing valuable economic assistance to micro-entrepreneurs.

As of end December 2012, we stepped up our lending activity with our loan portfolio increasing to Php2.5 billion to 55 microfinance institutions (MFIs) all over the country. This included rural banks, cooperatives, nongovernment organizations, and people’s organizations.

Our holistic approach to microfinance included some value-added services on capacity building training through our partnership with Ateneo de Manila University’s Development Studies Program and its partner-trainers from the Social Enterprise Development Partnership, Inc. (SEDPI). More than 1,800 participants from 279 MFIs, with over two million microfinance clients, attended the training programs.

Affordable and accessible financial services are still the driving spirit behind BanKO. We continued to utilize the community banking model by doubling our partner outlets to nearly 2,000 in 2012 from the previous year.

Through regular financial literacy caravans at the grass roots level, acquisitions, and exposure in a popular TV noontime show, BanKO managed to expand its customer footprint. Account holders in 2012 have grown to 280,000, enabling it to inch closer to its goal of reaching one million clients by 2013.

As we continue to operate in an emerging market economy where the majority remains unbanked and unserved, performing our role as a financial enabler becomes doubly significant. With initiatives like Ka-Negosyo, BanKO, and financial literacy caravans overseas, we will continue to seek ways, not only to broaden our impact, but also to make it easier for more and more Filipinos to achieve economic fulfillment.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Assisting the transport sector In 2012, the Bank entered into a strategic partnership with the Department of Energy (DoE) that helped the nation’s transportation sector weather rising fuel prices.

Once loaded by the DoE with money through BPI’s ExpressLink real-time funds transfer system, the prepaid cards can be immediately used to buy fuel from at least 50.0% of the retail petrol stations nationwide.

Around 220,000 jeepney drivers enjoying fuel subsidy from the government’s Pantawid Pasada program were able to use our proprietary reloadable prepaid cards.

The pioneering initiative was recognized by Banking and Payments Asia, a leading regional journal for retail banking and payments, which awarded BPI with a Trailblazer Award for its innovation and impact on business and society.

By acting as USAID’s program conduit, BPI addresses the critical issue of access to financing, especially for entrepreneurs based outside Metro Manila.

280,000 Amount in billion Php loan portfolio of BPI Globe BanKO as of end-2012

BANK OF THE PHILIPPINE ISLANDS

Total number of BPI-Globe BanKO account holders as of end-2012

Number of jeepney drivers under the DoE’s Pantawid Pasada Program who enjoyed BPI’s reloadable prepaid cards

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The number of BPI customers neared the six-million mark in 2012, an increase of 17.3% from the previous year’s level. Behind these numbers is our strategic approach to building customer intimacy through various channels of engagement.

In 2012, we launched a campaign that enabled our customers to identify their key financial needs and consult BPI in seeking the best available and realistic options. Our campaign materials spoke directly to career starters and young professionals, new families or early nesters, growing families, the affluent market, as well as to entrepreneurs.

PRESENCE As discussed in the Customer Experience Innovation section, our official Twitter account (@talktobpi) and Facebook fan page (www.facebook.com/bpi) disseminate and address customer service information and concerns.

By end-2012, BPI had over 5,000 Twitter followers and over 160,000 Facebook fans – the biggest social media community ever built by a Philippine bank. Our engagement – or the ratio of fans talking about BPI over our total fan base – peaked at 13.0% and averaged at 10.0% on Facebook.

Facebook users can consult directly with a BPI officer at BPI Bankers Online. Through the app’s appointment-setting feature, consultations over BPI Bankers Online are brought to a BPI Branch for face-to-face consultation or availment of products and services.

Our Relationship Managers and Service Officers at the branches will continue the conversation and deliver the required financial solution.

To deepen our understanding of the evolving needs of our customers and allow us to respond more efficiently and effectively, we will continue to lay down the infrastructure for enhanced customer experience through customer relationship management programs.

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160,000

Facebook fans who viewed BPI’s fan page in 2012

Twitter followers of BPI as of end-2012

BANK OF THE PHILIPPINE ISLANDS

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Delighting our customers is at the core of everything we do at BPI. This is why we continue to focus on how we can respond even more effectively to their financial needs through various programs on customer relations.

Tracking satisfaction We monitor our progress in providing total customer experience through customer satisfaction surveys.

Through the Mystery Client Survey (MCS), we track our service standards at every point of customer interaction in all BPI branches and kiosks nationwide. In 2012, we scored 91.6% in the MCS survey, higher than the previous year’s 90.8%.

We also used the Net Promoter Score (NPS) survey to know if clients would recommend BPI to their friends/relatives. In 2012, a total of 3,000 clients from personal banking and 496 from preferred banking participated in the survey. Our score continued to remain high at 58.0% (positive responses net of negative responses) from the 2011 level.

In addition, we commission third-party research agencies to conduct face-to-face interviews with respondents. These surveys mostly probe into customer satisfaction with BPI’s products, services and personnel. These also include our problem handling and solicitation of suggestions or comments for improvement.

We likewise conduct telephone surveys through third-party agencies who call on our clients and ask questions, and online surveys through a questionnaire posted in BPI Express Online.

92%

BPI score in Mystery Client Survey in 2012 – higher than the previous year’s 91%

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Total number of customer concerns handled by our Customer Care Department in 2012 vs. 720 in 2011

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Listening to our customers Beyond satisfaction scores, what matters more is our ability to connect with our customers and address their questions and concerns. We strive to deepen our understanding of their varying expectations to allow us to improve the way we do business.

Complying with regulations Being in the business of trust, BPI is committed to fully comply with regulations and voluntary codes concerning product and service information and labeling. Our Integrated Marketing Group (IMG) is responsible for ensuring this compliance.

We continue to enhance our customer feedback system. By simply dialing 89-100 or sending us an email via BPI Express Online (expressonline@bpi.com.ph), customers can relay their inquiries or concerns on our products and services.

The following regulations, among others, apply to us: • Indicating the label “Insured by PDIC up to P500,000” on all our brochures and marketing materials on deposit products, as required by the Philippine Deposit Insurance Corporation (PDIC); • Securing clearance from the Advertising Standards Council (ASC), the body that ensures that all materials abide by industry standards, prior to release of any advertising material; • Getting approval from the Department of Trade and Industry (DTI) on advertising or related material that are promotional in nature; and • Protecting the privacy of our clients, in accordance with Republic Act 10123, otherwise known as Data Privacy Act of 2012, which aims to ensure the security and integrity of personal data. Our Legal Department issued legal advisory bulletins on this newly enacted law for the information of our internal stakeholders.

Customer feedback received by our BPI Contact Center is immediately forwarded by our Fulfillment Banking unit to the Customer Care Department (CCD), which is dedicated to attending and taking action on customer complaints.

Other feedback channels include a personal visit to the concerned unit or department, letters to the department, and those sent directly to the Office of the President or to the Bangko Sentral ng Pilipinas.

As part of our continuing efforts to improve customer service, various support units regularly issue notices through bulletins and circulars to proactively share information on customer feedback and service rules.

Simultaneously, concerned units institute measures to increase customer satisfaction. CCD publishes a quarterly issue of the Customer Care Expressions Bulletin which is reviewed by the Branch Service Rules (BSR) unit to ensure that the the contents are consistent with prescribed policies and operating procedures.

Customer feedback pconcerning our branches that passed through CCD are referred to BSR, which reviews existing branch policy procedures to check if there are changes that can be made to improve service and attain customer satisfaction and convenience.

BPI is not aware of substantiated complaints involving breaches of customer privacy, loss of customer data and failure to comply with laws or regulations on marketing communications (including advertising, promotion, and sponsorship) product and service information and labeling during the reporting period. The Bank also does not face any legal actions involving anti-competitive behavior and violations of anti-trust and monopoly legislation in 2012.

CUSTOMER CONCERNS Branch Personnel

Branch Premises

Branch Services 2011 546 2012

664

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2011 126 2012

305

Others 2011 23 2012

33

2011 25 2012

17

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WE MAKE IT

We strive to integrate sustainability objectives with our business strategies by actively managing the socio-environmental risks of our transactions, engaging stakeholders and stepping up our efforts to contribute to a better planet.

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for the planet

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Climate change poses risks to business continuity, but it also presents opportunities for demonstrating our environmental and social responsibility.

Our long-standing efforts in promoting sustainable business across the country is embodied in our partnership with the World Wide Fund for Nature (WWF-Philippines) for a long-term, multi-city study on the impact of climate change on businesses in localities that have been identified to be especially vulnerable.

Entitled “Business Risk Assessment and the Management of Climate Change Impacts,” the study aims to guide city planners and decisionmakers in coming up with a sustainability strategy in the light of a world where calamities like Typhoons Ondoy (Ketsana) and Sendong (Washi) have become part of the “new normal.”

CONFRONTI Following the first phase on Baguio, Cebu, Davao, and Iloilo, BPI and WWF-Philippines unveiled the results of the second phase of the study on the cities of Cagayan de Oro, Dagupan, Laoag, and Zamboanga in 2012. The selection of the cities was based mainly on the occurrence of storms, floods, drought and other extreme climate events during the past decade.

The results of the study were shared with the sectors at risk in each of the selected cities. By predicting probable scenarios, the study recommends how each city can turn their vulnerability into a development opportunity in their own unique ways.

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BPI and WWF-Philippines released a multi-year study that highlights opportunities to capitalize on climate adaptation.

Launching the joint undertaking were (L-R): Atty. Angela Consuelo Ibay, WWF-Philippines Climate Change & Energy Program Head; Jose Ma. Lorenzo Tan, WWF-Philippines vice chairman and CEO; Aurelio R. Montinola III, BPI President and CEO; Florendo Maranan, BPI senior vice-president and BPI Foundation executive director; and Monci Hinay, WWF-Philippines Project Manager for the Business Risk Assessment and the Management of Climate Change Impacts Study.

Photo courtesy of WWF-Philippines

IN BPI-WWF Climate Change Study Results Phase 2 of the BPI-WWF study conducted in 2012 revealed the following vulnerabilities and opportunities: • Cagayan de Oro: Ravaged by floods in 2009 and 2011, the City needs to enlist the help of upland towns instead of addressing the flood risk alone. By managing the catchment basins of Tagoloan and Cagayan de Oro rivers, the flood-prone city can prevent water from going downstream.

• Laoag City: The City was among the least vulnerable cities covered by the study. Its center is positioned in gently rolling, mostly flat terrain, about six kilometers from the coast. A broad expanse of sand dunes stretching from Currimao to the north serves as a natural barrier to protect the City from sea level rise and storm surge effects. Though much less vulnerable, the City center and its international airport sit along a meandering river that occasionally causes flood.

BANK OF THE PHILIPPINE ISLANDS

• Zamboanga: The top exporter of seaweed and coconut sits within a typhoon-free zone and registers the lowest average rainfall among all eight sites assessed in the study. Since much of the City’s growth was due to agricultural activity, its challenge will involve the management of its natural resources.

• Dagupan City: The ‘Bangus Capital of the Philippines’ sits on a natural bog, bordered by Lingayen Gulf and fed by the rains of Central Luzon and Cordilleras. Seven out of the City’s 31 barangays are frequently inundated by floods and high tides, including the downtown area. The study recommends using rainwater and surface water than ground water to prevent saltwater intrusion and the deterioration of water quality which could present a real danger to the city of Dagupan.

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Environmental risks associated with financial transactions can be complex and have an impact on our business and that of our clients. By integrating environmental standards in our lending operations, we are not only operating sustainably, but at the same time helping our clients improve their business model, overall risk profile and become positive change agents.

We deepened our environmental commitment in 2012 with the third extension of our Sustainable Energy Finance (SEF) Program, a pioneering venture with the World Bank-affiliated International Finance Corporation (IFC) that started in 2008.

Four years after becoming the IFC’s first SEF partner in the Philippines and in Southeast Asia, BPI continued to push for more sustainable and energy-efficient operations among small and medium enterprises (SMEs) in the country and blazed new trails in “green financing.”

Sustainable energy loans and leases released in 2012 amounted to Php4.2 billion. As of end-2012, total outstanding loans reached Php7.35 billion. These SEF projects saved a total of 89,821 MWh per year of energy, produced 630,742 MWh per year of clean energy and abated carbon emission by 645,774 tons per year.

Some projects financed during the year were waste-to-energy projects, bio-mass co-generations, and energy-efficient refrigeration systems.

Moreover, we provided knowledge-sharing sessions for our clients, local industry associations and even in Indonesia and Vietnam.

BPI also extended the benefits of the SEF program to government institutions and the academe. This included the rehabilitation of water piping and distribution lines and power reliability and efficiency of electric cooperatives. We entered into a Memorandum of Agreement with the Climate Change Commission, Department of Budget Management, Department of Energy, and the University of the Philippines (UP) to promote more energy efficient government buildings.

Five buildings in the Malacañang complex and three buildings in UP Diliman, Manila, and Los Baños are also set for “greening” under an Energy Service Companies (ESCO) performance guarantee scheme. A first of its kind in the government, the initiative will serve as a launch pad for more widespread energy efficiency measures.

Amount in billion Php of total loans financed through Sustainable Energy Finance (SEF) as of end-2012

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Total MWh of clean energy produced

by SEF-funded projects

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

SPECIAL FEATURE As a trained engineer, Arturo Yan knows how critical technology can be in business.

The company where he is president – Phil-Nippon Kyoei Corporation – has been at the forefront of using Japanese engineering technology in improving clients’ operational efficiency in the past 18 years. When it saw potential in the cold storage business, technology also became a big part of the decision.

GREENING ICE However, Mr. Yan knows there’s always a tradeoff when it comes to harnessing technology in business.

“The challenge is to find a balance between generating returns that will satisfy your shareholders and minimizing your impact on the environment,” he said.

When Glacier Refrigerated Services Corporation (GRSC) was formed as a business unit of Phil-Nippon in 2006, Mr. Yan said its goal was to be a formidable part of the cold chain structure while still managing its carbon footprint.

With this in mind, Glacier built its first cold storage plant inside the FTI Complex in Taguig City. Capable of storing 2.5 million kilos of meat, the facility serves establishments inside the FTI Complex.

“Energy constitutes about 40% of our operating costs so when we started thinking about building another plant, we knew that there are still ways to reduce our consumption while also reducing our emissions,” said Mr. Yan.

BANK OF THE PHILIPPINE ISLANDS

Then BPI came into the picture.

Through its Sustainable Energy Financing (SEF) Program, BPI bankrolled the construction of Glacier’s new plant in Muñoz, which began in January 2012. With a capacity nearly four times its FTI plant, the Quezon City facility can store nine million kilos of meat. More importantly, it utilizes greener technologies.

Glacier uses a refrigerant that emits 60-70% less hydrocarbons while the centralized design of the facility cut energy consumption significantly.

Oversized insulating panels that traps hot air also enabled Glacier to reduce its energy consumption by 25%.

“We’re in an energy destruction mode,” Mr. Yan said. “Some sources of renewable energy, like solar power, are not quite reliable yet. So instead of using cheap sources of power, we choose to limit the use of power. By making the plant energy efficient, we minimize our energy needs.”

As one of the first in the industry to use green refrigerants, Glacier bucked a trend favoring the use of traditional

technology that poses a threat to the ecosystem. Proud of this achievement, it said even its multinational clients appreciate having a green component in their products somewhere in the supply chain.

Admittedly, green technology does not come cheap, Mr. Yan said. And this is where the partnership with BPI really helped.

“BPI received our construction schedule really well. Constructions are really capital intensive, especially since we’re pioneering some of the designs that we used. Thankfully, BPI understood our point of view so they were able to tailorfit the financial package according to our needs,” he explained.

Glacier envisions building more facilities in places such as Roxas City, General Santos, and Misamis Oriental.

Through the SEF Program of BPI, it has become possible to combine the company’s expertise and the Bank’s reliable financing capacity, in a partnership that, Mr. Yan assured, has only just begun.

73

Our environmental responsibility starts from within BPI — by adopting policies, standards and practices to make our workplace, not just a conducive environment for work, but a place that works better for the environment as well.

The Bank continued to make headways through our I-GIVE (I Get Involved, I Volunteer for the Environment) campaign that started in 2008. System-wide changes initiated over the years have started to bear fruit. These initiatives ranged from the switch to energy-saving LED lighting systems for building signages, subcontracting armored car services and cash loading for our ATMs, and building our first-ever “green branch” to maximizing telework and paperless initiatives.

(See table on Green Initiatives) In 2012, we engaged our service providers to partner with us in a program called “Greening the Supply Chain.” This new sustainability program demonstrates our holistic approach to “Greenovation,” which called for the support of as many stakeholders as possible in trying to make the effects of our programs more lasting and meaningful.

Spearheaded by the BPI Sustainability Office with support from the Premises and General Services Division, the new initiative has gained the commitment of the Bank’s service providers in implementing sustainable schemes in their operations.

Around 20 contractors signed up for the initiative during the launch of the program in September 2012. The Bank is implementing the program as part of its partnership agreement with the Green Philippine Islands of Sustainability (GPIoS), a European Union-funded regional consultation and training initiative, which provided the briefing to our service providers.

We also plan to make Green certification part of the accreditation requirements of our service providers. This future direction will help us institutionalize these ‘green’ reforms. Moreover, the Bank is compliant with environmental laws and regulations.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

GREEN Switch to energyefficient LEDs for building signages

BPI Green Branch at ADB

Subcontracting of armored car services

Telework by employees

Paperless initiatives by different business groups

IMPACT: Reduced energy consumption

IMPACT: Reduced electricity and paper consumption and vehicle emissions

IMPACT: Reduced vehicle emissions due to the decrease in the number of armored cars and frequency of trips

IMPACT: Reduced vehicle emissions due to shortened employee commuting time

IMPACT: Reduced paper consumption and delivery vehicle emissions

Initiatives to green the supply chain

Sustainable Energy Finance Program

IMPACT: Reduced GHG emissions in the supply chain

IMPACT: Reduced environmental impact of clients’ products and services

BPI-WWF Study on Business Risk Assessment and the Management of Climate Change Impacts

BANK OF THE PHILIPPINE ISLANDS

IMPACT: Reduced or eliminated preventable losses due to climate change impacts

75

by the numbers The indicators below cover the environmental performance of our Branches, Head Office buildings (BPI Head Office, BPI Family Savings Bank Head Office, BPI Card Center and BPI Intramuros Complex), Business Centers and Cash Centers, and Tenanted Buildings (BPI Buendia Center, Greentop Condominium, BPI Escolta/Sta. Cruz Building, and BPI Binondo Building).

DIRECT ENERGY CONSUMPTION

TENANTED

BUSINESS CENTERS TENANTED*

423

4,000

INDIRECT ENERGY CONSUMPTION 20,656,688

HEAD OFFICE BRANCHES

BRANCHES (695)

4,600

27,223,559

198,452

HEAD OFFICE

14,064,440

BUSINESS CENTERS

426,825

207,475

62,371,512

Total liters of fuel consumed (diesel fuel used in generators)

Total kilowatt hours of electricity purchased

*Buendia Center only

323,720

2012 2011

Total kilowatt hours of electricity saved in 2012 (represents a 0.6% increase from 2011 level)

No. of branches: 2012: 785 2011: 695

2,510

BUSINESS CENTERS

303,376

BRANCHES

577,814

426,825

14,205,840

150,989

542,500 11,928,000

BUSINESS CENTERS

11,385,500

141,400

89,068

TENANTED*

HEAD OFFICE

14,064,440

26,712,390

27,223,559

(511,169)

133,277

BRANCHES

TENANTED

WATER CONSUMPTION 2012 vs. 2011 HEAD OFFICE

ENERGY saved 2012 vs. 2011

528,231

Total cubic meters consumed (represents a 31.8% drop from 2011 level)

*Buendia Center only

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

TOTAL greenhouse gas emissions IN 2012:

65,128.82 tons CO

2

DIRECT (FUEL)

INDIRECT (ELECTRICITY) 2011

2012

314.22

555.30

2011

27,361.20 2012

27,525.23

241.1

Total tons C02 increase in direct GHG emissions from fuel used in generators

OTHER GHG EMISSIONS 36,757.69

Total tons C02 increase in indirect GHG emissions from purchased electricity

WASTE BY TYPE AND DISPOSAL

EMPLOYEES’ FOREIGN TRAVEL 2011

164.03 RECYCLABLES*

2012

35,248.55

ARMORED CAR TRAVEL 2011

1,598.99

(collected by accredited junkshops)

2011

127.87

REsidualS** (landfills)

2012

2011

59.41

166.71

2012

2012

156.26

1,799.74

37,048.29

215.67

Total tons C02 from business-related travel (represents a 3.41% decrease from 2011)

Total tons of recyclable and residual wastes (represents a 26.8% drop from 2011 level) *BPI and BFSB Head Office only ** BPI, BFSB and BPI Card Center only

BANK OF THE PHILIPPINE ISLANDS

77

WE MAKE IT

BPI promotes good relationships with all the communities touched by our business. We aim to contribute significantly to the enhancement of their quality of life.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

for communities

BANK OF THE PHILIPPINE ISLANDS

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Beyond the confines of our boardroom and corporate walls, we embark on initiatives to help improve the lives of people in the communities.

We do this by embedding corporate social responsibility in our business, and also through BPI Foundation, our social development arm, as well as engaging our employees through volunteerism initiatives.

As a responsible corporate citizen, we contribute to building a sustainable society in partnership with non-government organizations, government institutions, and other civic organizations on projects that promote entrepreneurship, education, and the environment.

BPI Foundation’s new initiatives in 2012 were the following: BPI-ISEA Capacity Building for Social Enterprises BPI Foundation continues its effort as catalyst and initiator of enterprise development by collaborating with the Institute for Social Entrepreneurship in Asia (ISEA), a learning action network of social resource institutions and social enterprises.

making a In September 2012, 22 potential trainers and 11 trainees from among the managers and senior staff of social enterprises across the country took a five-day training on Social Enterprise Financial Management and Social Return on Investment (SROI) under a grant provided by BPI Foundation.

Show Me, Teach Me, MSMEs We continued to expand the reach of our entrepreneurship learning program to six key areas in 2012, including Tuguegarao, San Fernando La Union, Bacolod City, Dipolog, General Santos and Zamboanga. The twoday session covered topics on “Starting and Maintaining a Business”, “Finding the Right Market,” “Basic Product Costing and Pricing,” and “Basic Business Recording” in partnership with the Philippine Trade Training Center (PTTC). The program was cited with a Special Award for Enterprise Development Category in the 2nd MAP CSR Leadership Challenge 2011 sponsored by the Management Association of the Philippines.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BPI Library BPI Foundation, in partnership with the Filipinas Heritage Library (FHL) of Ayala Foundation, Inc. and the local government unit of Infanta, Quezon, helped build a muchneeded library in Infanta, Quezon. The new facility, which houses over 500 books, a computer, and other educational materials provided by the Dona Isabel Garcia Trust Fund, aims to be the resource and information center for the communities in the area, especially the youth.

BPI Museum Zamboanga To celebrate the centennial year of BPI Zamboanga branch, we opened the BPI Museum Zamboanga on August 17, 2012.

This is a “lifestyle museum” that depicts the life and culture of Zamboangueños at the end of the Spanish colonial period and the beginning of the American period. We also unveiled the historical marker of the Barrios house where the museum is located at the second floor and was the residence of Gen. John Jacob Pershing and later on those of BPI bank managers. The first floor has been and still is BPI’s main branch in Zamboanga City since 1912.

By making things easier for communities, we will continue to help guarantee a secure and sustainable future for society and the next generation of Filipinos.

BPI partnered with the Filipinas Heritage Library and the local government unit of Infanta, Quezon to build a library in the town that was once ravaged by a typhoon.

d 11.8M

Php

Total amount released as of end-2012 in support of the BPI Builds for Teachers, a housing program for public school teachers in Quezon City, Davao and Saranggani, done in partnership with Habitat for Humanity Philippines

BANK OF THE PHILIPPINE ISLANDS

Amount donated to the BPI Library in Infanta, Quezon for the purchase of 500 new books and other library materials, computer unit, book racks, stands and other pre-operating expenses

81

Entrepreneurship BPI-ISEA Capacity Building for Social Enterprises

Show Me, Teach Me, MSMEs

Beneficiaries: 22 potential trainers and 11 trainees from among the managers and senior staff of social enterprises across the country

Beneficiaries: 285 entrepreneurs from all sectors including persons with disabilities, overseas Filipinos, senior citizens and the youth

Contributions: Php800,000 grant for a 5-day training workshop

Partner: Philippine Trade Training Center

Education BPI Library in Infanta, Quezon

BPI Builds for Teachers

BPI postgraduate scholarship program

Beneficiaries: Youth in Infanta, Quezon

Beneficiaries: Public school teachers in Quezon City, Davao and Saranggani (77 houses to date)

Beneficiaries: 12 public high school teachers from Region XII

Contributions: Php600,000 for the purchase of 500 new books and other library materials, computer unit, book rack, stands and other preoperating expenses Partners: FHL and the local government of Infanta, Quezon

82

Contributions: Pledge of Php14 million (donated Php11.85 million to date) Partner: Habitat for Humanity Philippines

Contributions: Php5,000 monthly living allowance and full tuition fee per teacher

Partners: Department of Education and Mindanao State University-General Santos

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

The BPI-DOST Science Awards recognizes and provides incentives to graduating students in selected colleges/universities who excel in specialized fields of science.

“1000 Teachers” program

Beneficiaries: 20 scholars from Philippine Normal University-Isabela, UP Diliman and Ateneo de Naga University Contributions: Financial support for tuition, review classes and monthly allowance Partner: Philippine Business for Education

Skills improvement and enhancement training for teachers Beneficiaries:

240 elementary teachers in English, Mathematics, Science, Social Studies and Filipino from Gumaca, Quezon; 26 “Makabayan” teachers of Zamboanga City; 178 Math teachers from three political districts of Davao City Partners: UP Manila’s Pahinungod, Miriam College’s G.U.R.O. (Growth, Upgrading and Resource Office), FHL and the UP Alumni Association of Davao

College Scholarship for Dependents of BPI Employees

Endowed Scholarship for OFW Dependent

Scholarship Program for Educational Assistance and Development

Beneficiaries: Five scholars every school year for deserving and qualified dependents of the Bank’s employees, who are going to take up science and engineering courses from accredited universities (12 scholars currently enrolled)

Beneficiaries: Dependent of an overseas Filipino who will pursue a businessrelated course under a four-year scholarship in Miriam College

Beneficiaries: 26 economically disadvantaged honor students from Southern Luzon who wish to take up Bachelor of Science in Computer Science at DLSU’s Aguinaldo Campus in Cavite

Contributions: Full tuition fee support

BPI-DOST Science Awards Beneficiaries: Science and technology graduating students of BPI’s 10 partner universities* Contributions: Php90,000 in total cash prizes for the top 3 winners, on top of the Php25,000 each science awardee receives in recognition of their excellent standing in school Partner: Department of Science and Technology (DOST)

* Ateneo de Manila University, UP Diliman, UP Los Baños, University of Sto. Tomas, De La Salle University, University of San Carlos, Xavier University, Ateneo de Davao University, Silliman University and St. Louis University

BANK OF THE PHILIPPINE ISLANDS

83

preserving History was very much alive during BPI Zamboanga’s centennial anniversary, with activities that revisited important milestones in the Bank’s long and proud history in the city.

84

In Zamboanga City, the site of its first branch in MIndanao, BPI executives, national and local officials, valued clients and other VIPs were on hand to celebrate the centennial anniversary of BPI Zamboanga-Main branch’s founding in 1912.

Originally owned by a wealthy Chinese trader who took on the name Francisco Barrios, its second floor later became the residence of American General John Jacob Pershing. The branch, which opened on the ground floor of the Barrios house in 1912, remains intact today and continues to serve as the main bank branch in the city. BPI has three other branches in the area.

BPI President and CEO Aurelio Montinola III said the Bank has always upheld its commitment to serve as Zamboanga’s foremost partner in banking. “This commitment was true then as it is now.” For his part, Zamboanga City Mayor Celso Lobregat noted how BPI has been there every step of the way, as the “community developed from a small town of calesas and wooded houses to the bustling modern city that it is today.”

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

SPECIAL FEATURE In celebration of the 100 years of BPI in Zamboanga, the Bank opened a museum to stand as a wtiness to the richness of the culture and heritage that BPI proudly shares with the Zamboanguenos. The second floor of the building was converted into a Lifestyle museum that showcases life in Zamboanga around the time that BPI opened its doors there 100 years ago. Period furniture and vintage photographs were on display in the Museum’s Grand Sala and six rooms which include the bedrooms used by Pershing and his family. Various commemorative materials on BPI history and the Zamboanga branch history are also available for viewing. The Museum truly depicts the “gentility and elegance of Zamboangueno culture and society.”

The Barrios house, as it is called, is the last standing Spanish-era residence in Zamboanga City today. In order to preserve this structure in the heart of Zamboanga City, the National Historical Commission of the Philippines, led by its Chairperson, Dr, Maria Serena Diokno, unveiled a national historical marker at the site. This ensures the protection of the building so generations of Filipinos will have a chance to view and appreciate it.

A mass was also held at the Shrine of Our Lady of the Pillar, which houses the Patroness of Zamboanga City. This was followed by a special viewing of the crown of Our Lady. This crown, made of gold and precious gems, was donated by a group of rich Zamboanguenos in the 1950s to be used in a formal crowning ceremony by the then Papal Nuncio.

Safekept in the BPI bank vault, the crown had not been exhibited for display for more than 50 years.

(Above) One of the large bedrooms of the house was converted into the manager’s room and carefully recreated with period office furniture and equipment.

(Left) Part of the original tellers’ counters are still intact and are on display at the ground floor of the newly-renovated more modern BPI Zamboanga - Main branch. Black and white machuca floor tiles remain faithful to the original flooring.

BANK OF THE PHILIPPINE ISLANDS

85

WE MAKE IT

BPI strives to be an employer of choice by providing a safe, secure and conducive working environment for its employees.

It continually safeguards their rights and provides equal opportunity for people to realize their fullest potential and make them agents of change for their communities.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

for our people.

BANK OF THE PHILIPPINE ISLANDS

87

New global challenges that characterize the financial sector, together with an increasingly complicated and rapidly changing situation, make it even more important to invest in the development of people.

This is why BPI has built a system to manage and develop human resources, which is continuously evolving in order to effectively meet today’s emerging business challenges.

our biggest

ASSET: 12,406 Total workforce as of end-2012

3,783 30%

88

8,623 70%

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

By Employment Type PERMANENT

PROBATIONARY

CONTRACTUALS

591

11,815

0

5%

95%

0%

By Gender PERMANENT

3,603 95%

PROBATIONARY

8,212 95%

By Age

OVER 50 YEARS OLD

1,119

9%

BANK OF THE PHILIPPINE ISLANDS

180 5%

CONTRACTUALS

411 5%

30-50 YEARS OLD

5,683

46%

0 0%

0 0%

BELOW 30 YEARS OLD

5,604

45%

89

We believe that our long-term success depends on our ability to attract, develop and retain the right people who can be resilient to the changes brought about by increasing demands in the business environment.

Aiming to be recognized as an employer of choice, we continue to implement best workplace practices and continue to engage our employees so that they in turn give our customers a more positive experience.

Performance evaluation Our employees undergo regular performance evaluations based on their individual accomplishments vis-a-vis their responsibilities, as well as that of the business unit or the Bank. This takes into consideration our earnings performance, asset quality, business volume, customer satisfaction, and corporate governance, among other things.

Job evaluations served as basis for employee salary increases as well as career advancements. In 2012, a total of 6,571 employees, comprising 53.0% of our organization, had undergone regular performance evaluation while 8.0% had taken special/career development evaluations.

BEst place Moreover, we made our Performance Management System available in the cloud. This online system made it easier for our officers to set their goals, monitor job performance and conduct appraisals.

Compensation To become a rewarding place to work, BPI continues to offer competitive pay and benefits packages at all levels.

Regular employees are provided with a comprehensive pay and benefits package, which includes a quarterly bonus (inclusive of the required 13th month pay), overtime pay, and leave credits (vacation, sick, emergency, and maternity/paternity). Our compensation package is reviewed regularly.

We offer a basic monthly salary that is above the minimum wage mandated by law, and is applied uniformly across the country. We determine job levels (A, B, C or specialist hire) based on our assessment of the employee’s job qualifications and position.

90

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

place

Annual salary increases are given to 80% of our staff, which are members of 25 labor unions, in accordance with the collective bargaining agreement (CBA). On the other hand, merit increases are provided to officers. The merit increase is based on personal performance vis-a-vis their objectives for the year.

We extend the inherent benefits of being a financial institution by offering our employees and their families our

products and services at affordable terms. These include low-interest rates for auto and housing loans, emergency loans, medical and group term insurance, salary and emergency loans. In addition, we provide financial security to employees even after their retirement from the Bank through our retirement benefit plan. The plan defines an amount that employees will receive which is dependent on the employee’s age, years of service and compensation.

To become a rewarding place to work, BPI continues to offer competitive pay and benefits packages at all levels.

53% Percentage of employees who had undergone regular performance evaluations in 2012

BANK OF THE PHILIPPINE ISLANDS

Percentage of workforce who had taken special/career development evaluations

80%

Percentage of workforce who are members of labor unions and are covered by collective bargaining agreements

91

Continuing education We continue to provide a range of training programs designed along the Bank’s business objectives. These development programs are aimed at honing the skills and capabilities of our employees in carrying out their daily duties, as well as preparing them to assume higher responsibilities as the next leaders of the organization.

We use a blended learning approach that includes workshops, coaching/ mentoring, instructor-led training sessions, and web-based training courses.

We also design and facilitate leadership and management training programs for supervisors, functional managers, and senior managers to support our investment in leadership development.

New entrants undergo value-strengthening workshops. Others attend Personal Effectiveness and Professional Enhancement Programs.

MBA graduates who aim to fast track a successful banking career can expand their expertise to asset management, trust operations, and investment and corporate banking through the Bank Officers Development Program. Newly minted managers under the Stepping Up to Management (SUM) initiative learn the skills they will need in cultivating relationships, managing people and resources, and working effectively with supervisors towards efficiency.

Mid-level officers take part in the BPI Leadership Excellence Acceleration Program (BPI LEAP). Launched in 2008, this effort was developed in partnership with Harvard Business Publishing, a wholly owned subsidiary of the Harvard Business School, whose faculty jointly facilitates the sessions with top BPI executives. Future leaders of the bank get valuable lessons on sustainability and world-class leadership, which has made transitions to fill vacant management posts seamless.

More than 800 graduates later, BPI LEAP has become a benchmark in training and development. In 2012, the prestigious People Management Association of the Philippines recognized it as the People Program of the Year. This recognition from the premier organization of people managers in the country fetes HR programs that are “relevant, unique, innovative and cutting-edge.”

The Bank also looks after its retiring employees through the conduct of annual seminars on estate planning, investment opportunities in the Bank and outside, and transition from being an employee to an entrepreneur. There are also counselling programs that help employees face life during retirement.

92

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

INVESTMENT IN EMPLOYEE TRAINING NO. OF EMPLOYEES BY RANK STAFF

8,527

JUNIOR SUPERVISORY

2,901

MIDDLE MANAGEMENT

788

SENIOR MANAGEMENT

169

AVE. TRAINING HOURS PER EMPLOYEE STAFF

42.40

JUNIOR SUPERVISORY

60.31

MIDDLE MANAGEMENT

69.30

SENIOR MANAGEMENT

55.95

BY GENDER NO. OF MALE EMPLOYEES

NO. OF FEMALE EMPLOYEES

NO. OF TRAINING HOURS

NO. OF TRAINING HOURS

AVE. HOURS/EMPLOYEE

AVE. HOURS/EMPLOYEE

3,771

180,088 47.76

BANK OF THE PHILIPPINE ISLANDS

8,614

420,464 48.81

93

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BANK OF THE PHILIPPINE ISLANDS

95

Employee retention Being in a growing industry where there is competition for talent drives us to continuously improve our employee retention strategy. Our staff attrition rate of 10.1% in 2012 remains below the industry average.

Turnover

1,252

BY GENDER

440 35%

BY AGE GROUP

812 65%

<30

30-50

>50

709 57%

347 28%

196 16%

New Hires

1,318

BY GENDER

BY AGE GROUP

<30

474 36%

96

844 64%

1,239 94%

30-50

>50

77 6%

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

2 0%

Return to work and retention rates after parental leave employees WHO took parental leaveS

employees entitled to parental leave

208

5,934 119

89

employees WHO returned to work after parental leave ended

Employees who returned to work after parental leave ended and still with BPI as of December 2012

208

197

119

BANK OF THE PHILIPPINE ISLANDS

89

115

82

97

Health, safety and work-life balance Being in a financial services company does not expose our employees to occupational health and safety issues usually associated with manufacturing and industrial companies. As such, we have no recorded incidents of injury, occupational diseases, serious work-related diseases and other fatalities in our organization in 2012.

We run education and training programs regarding serious illnesses. Examples of programs implemented are seminars on cancer awareness, prevention of stroke, and basic life support.

We also regularly issue health bulletins.

Aside from health education, we also have risk-control programs in place to assist workforce members and their families regarding serious diseases.

This was done through wellness fairs conducted in the head offices and provincial business centers where employees and their families avail of free or discounted services such as vaccinations, bone screening and physical examinations. Our clinics in BPI and BFSB head offices also attend to daily and emergency health care of our employees.

On its third season, our banner wellness program, Keep Fit, Feed a Child, involves about 600 employees who pledged to lose or gain weight based on their Body Mass Index (BMI). For every pound lost, BPI matches it with a Php100 contribution to a feeding program called â&#x20AC;&#x153;Pasiglahin ang Estudyanteng Pinoyâ&#x20AC;?

(PEP), in partnership with Kabisig ng Kalahi Inc. and Mead Johnson Nutrition.

Beyond being a fitness program, Keep Fit Feed a Child aims to create awareness on the lack of nutrition among children from 4-10 years old and how it affects school dropout rate and educational performance.

BPI initially turned over Php60,000 that will be used to provide a healthy lunch and milk every day for six months to 30 malnourished children in Grades 1 and 2 at Gen. Gregorio del Pilar Elementary School in Tondo, Manila.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Adherence to labor laws We continue to strictly comply with labor laws and regulations and implement best practices in our workplace. This commitment resulted in zero incidents of labor discrimination, compulsory labor, child labor or human rights abuses.

While the Bank has not been a party to legal cases arising from any of these labor issues, we have a grievance mechanism embedded in the Collective Bargaining Agreement to promptly dispose and amicably settle all grievances. Steps are clearly defined until the level of arbitration.

While we continue to actively recruit qualified people to our workforce, regardless of race, color, gender, religion, political opinion or social origin, we also take advantage of the abundance of local skills and talents available in areas where there are BPI units such as in our branches, business centers and the like. This is also because local residents are more familiar with the local market environment.

Labor relations We maintain harmonious relations with our labor unions.

The Bank also has an open-door communications policy to address concerns among employees immediately before they escalate.

As a requirement in their certification process, we trained and retrained our security personnel, who are not formally part of our workforce and belong to third-party agencies, every two years on human rights-related topics. This is to ensure that they uphold the rights not only of our employees but also of our clients, suppliers and other stakeholders that do business with us.

Employee volunteerism We seek to empower our people to make a positive difference to customers and communities. We also encourage them to grow, develop themselves and give back to society.

Our 12,406-strong workforce continued to benefit from the our policy of investing in the personal growth of our people.

One of the venues for personal growth is the Bayanihan Para sa Inang Bayan (BPI Bayan), a nationwide employee volunteerism program that we started in 2011.

Total volunteer hours invested by BPI employees in the pioneering program were estimated to amount to Php4.2 million in 2012.

Investing in Volunteerism

15,963.50

Estimated total investment in Php based on standard hourly cost of BPI rank-and-file employees

BANK OF THE PHILIPPINE ISLANDS

VOLUNTEER HOURS

4,177,808

NO. OF PROJECTS

Total volunteer hours for 32 BPI BAYAN projects

Nature of Volunteerism Projects SOCIAL SERVICES

EDUCATION

HEALTH

LIVELIHOOD

ENVIRONMENT

8,188.00

2,709.00

1,825.00

2,153.00

1,088.50

10

10

3

5

4

99

BPI BAYAN ‘enhanced my life and made me more compassionate.

I became prouder as a unibanker because I am working with a bank that has a big heart.”

100

Even after being with BPI for 18 years, Gary Rosales said he still gets tongue-tied whenever someone asks him what a biology graduate is doing in a financial institution. Without a doubt, he said he loves his job as head of BPI’s Percides branch in Dumaguete City. But Gary said he had always felt there was something more that he could do to give back to the community.

In 2011, opportunity smiled on Gary. BPI launched the Bayanihan Para sa Inang Bayan (BPI Bayan), which challenges employees to come up with a volunteerism project that would not only engage the workforce, but more importantly create an impact on areas where the Bank operates.

Gary immediately thought of Silliman Beach, a source of pride for many residents of the seaside city but has lately been beset by a garbage problem. “This was the first time that regular coastal cleanups have been undertaken in Silliman Beach,” Gary said. “The community was very delighted at what we were doing. In fact, some of our partner 2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

SPECIAL FEATURE organizations became inspired to replicate the initiative in other areas.”

Aside from the cleanups, the BPI Dumaguete Cluster also held mangrove and tree-rearing activities, as well as information drives and artificial reef construction. Gary’s main role involved inviting employees to join, which can be tricky due to conflicting schedules and the unpredictable weather.

When the group’s initiative was recognized by the Bank as one of the top BPI Bayan programs for 2012, Gary said the victory was much more personal.

“I’ve come full circle when I joined BPI Bayan,” he said. “It reinforced my belief that there are still a lot of people out there who are very generous. The program reflects BPI’s culture of giving, leadership, and excellence. I know now I am home.”

More than 300 kilometers south of Dumaguete, there is a ray of hope in the usually grim halfway house for young cancer patients and their families in Davao City. Dubbed the “Share a Life” program, the heartwarming initiative seeks to make things easier for both kids and their parents or caregivers by helping them through this difficult part of their lives.

“Our main goal was to address the medical, psycho-social concerns of chronically ill patients,” said BPI Davao JP Laurel’s Arleen Aportadera, who originally came up with the idea. “It is a blessing to be of service to others and to have the opportunity to make a difference in the lives of these innocent children and their families.”

There are activities for the kids and their parents and guardians under the program. The volunteers take the kids to the movies and hold parties for them to turn their attention away from painful cancer treatments.

BANK OF THE PHILIPPINE ISLANDS

BPI BAYAN employee volunteers in action (Top) Gary Rosales, head of BPI Percides Branch in Dumaguete City, delighted nearby communities with an initiative to clean up the Silliman Beach.

(Left) Arleen Aportadera of BPI Davao JP Laurel Branch rallied her employees behind the “Share a Life” program for young cancer patients.

Meanwhile, the parents and guardians receive a well-deserved break with a day at the salon for free haircuts and nail care.

To help the families of the cancer patients, the volunteers looked for partners who can regularly fund the program. The Dumaguete group also relied on the help of like-minded organizations in sustaining their efforts.

For both Gary and Arleen, participating in BPI Bayan strengthened their belief in BPI as an institution that looks after the welfare of society instead of being motivated by profit alone.

“It instilled in BPI employee volunteers a sense of pride,” said Arleen. “It enhanced my life, and made me more compassionate. I became prouder to be a Unibanker because I am working with a bank that has a big heart for others.”

101

REPORT OF THE AUDIT COMMITTEE TO THE BOARD OF DIRECTORS BANK OF PHILIPPINE ISLANDS FOR THE YEAR ENDED DECEMBER 31, 2012 The Audit Committee’s role and responsibilities are defined in the Audit Committee Charter approved by the Board of Directors. In compliance with the Audit Committee Charter, the Committee which comprises four (4) non-executive Directors, with 2 independent Directors including its Chairman, assists the Board of Directors in fulfilling its oversight responsibilities to the shareholders with respect to: • • • •

System of internal controls, governance process, and risk management Integrity of the Bank’s financial statements and financial reporting process Performance of Internal audit function and external auditor Compliance with Bank policies , applicable laws, rules and regulatory requirements

The Committee had 12 regular meetings and one (1) special meeting in 2012. Significant matters discussed, reviewed and evaluated were as follows: 1. The audited consolidated financial statements of Bank of the Philippine Islands (BPI) as of and for the year ended December 31, 2012, including the assessment of the Bank’s internal controls relative to the financial reporting process were discussed with Management, internal auditors and the external auditors, Isla Lipana & Co., a member firm of Price Waterhouse Coopers. These were endorsed to the Board of Directors for approval and for inclusion in the 2012 Annual Report to the Stockholders. The review was performed in the following context: •

That Management has the primary responsibility for the financial statements and the financial reporting process; and

•

That Isla Lipana & Co. is responsible for expressing an opinion on the BPI annual audited consolidated financial statements in accordance with the Philippine Financial Reporting Standards; The quarterly unaudited financial statements, including Management’s analysis and discussion on results of operations were also reviewed and endorsed to the Board of Directors for approval.

2. The overall scope, approach and audit plan of Isla Lipana & Co., including fees and terms of engagement were approved. The external auditors had reaffirmed their independence from BPI, its subsidiaries and Management.

An annual executive session was also held with the External Auditor.

The Audit Committee assessed the performance and recommended the re-engagement of Isla Lipana & Co. as the Bank’s external auditor for 2012.

3. The 2012 Internal Audit Work Plan, changes in the Risk Assessment model and Audit Rating Framework were approved. The performance of the internal audit function, competence of staff, adequacy of resources, and access to relevant bank records and documents were also reviewed and assessed. The audit activities were performed in accordance with the International Standards for the Professional Practice of Internal Auditing (ISSPIA).

Internal Audit had maintained the “Generally Conforms” overall rating on all attribute standards of ISSPIA as well as in the IIA Code of Ethics, and the Definition of Internal Auditing, in the 2nd External Quality Assessment review conducted by SGV & Co./ Ernst & Young.

102

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

4. The reports of Internal Audit, Compliance Office, Bank’s Investigation Unit, outsourced Payment Card Industry-Data Security Standard (PCI-DSS) validation, and other regulatory bodies were reviewed, ensuring that Management is taking appropriate actions in a timely manner, including status of Management’s corrective actions on internal control, risks and compliance issues. The Committee also requested AMTG Management to present the audit report to the Trust Committee for review.

The Bangko Sentral ng Pilipinas (BSP) Report of Examination as of April 30, 2011 was also discussed, with the Bank maintaining the CAMELS “4” rating.

5.

The minutes of meetings of the different Audit Committees of BPI subsidiaries were reviewed and noted.

6.

The Audit Committee Charter was updated to include provisions consistent with the new SEC Guidelines for the Assessment of the Performance of Audit Committees and BSP Circular 749 re Guidelines in Strengthening Corporate Governance, and was endorsed to and approved by the Board.

In addition, the Audit Committee: • Regularly coordinated with Risk Management Committee to ensure that risks identified in the audit are properly evaluated, monitored and addressed, • Received updates on new relevant accounting standards, corporate governance and other regulations • Evaluated the performance of the Chief Audit Executive, and • Complied with the SEC requirement on Self-assessment on the Performance of the Audit Committee

Based on Internal Audit’s assurance activities, Internal Audit through the Chief Audit Executive provides reasonable assurance to the Audit Committee, Board of Directors and Senior Management that the Bank’s systems of internal controls, corporate governance and risk management process are adequate and generally effective. This overall assessment states, among others, that the scope and coverage are sufficient, comprehensive and risk-based, that Management is aware of its responsibility for internal control, and that there is no interference with the accomplishment of Internal Audit activities and reporting of issues and other relevant information to appropriate level of Management, Audit Committee, and Board of Directors.

XAVIER P. LOINAZ Chairman

OCTAVIO V. ESPIRITU Member

BANK OF THE PHILIPPINE ISLANDS

OSCAR S. REYES Member

KHOO TENG CHEONG Member

103

Results of Operations

FINANCIAL CONDITION

BPI’s net income for 2012 reached Php16.3 billion, Php3.5 billion or 27.0% higher than 2011’s Php12.8 billion on account of a Php5.6 billion or 13.5% total revenues growth. This strong performance was partly trimmed down by increases in operating expense by Php1.4 billion and impairment losses of Php773 million.

Return on equity and return on assets ended higher at 17.6% and 1.9% compared to the previous year’s 15.2% and 1.6%, respectively.

Total resources grew by Php142.4 billion or 16.9% to Php985.1 billion from Php842.6 billion in 2011. This increase was driven largely by the Php121.2 billion or 17.8% expansion of total deposits to Php802.3 billion. Current and savings deposits increased by Php68.3 billion or 16.2% while time deposits grew Php52.9 billion or 20.5%. Bills payable likewise rose by Php7.1 billion or 37.3% due to additional borrowings on increased funding requirements.

Total revenues improved to Php47.4 billion from Php41.8 billion in 2011, contributed both by the rise in non interest and net interest income by Php4.0 billion and Php1.6 billion, respectively.

Net interest income ended at Php27.4 billion or 6.1% higher than in 2011 as a result of the Php64.2 billion or 8.1% expansion in average asset base. This was partly tempered by the 10 basis points drop in net interest spreads.

Non-interest income reached a record Php19.9 billion or 25.4% more than 2011’s Php15.9 billion as securities trading gain doubled to Php5.9 billion from Php2.9 billion. The Bank sold down its inventory to take advantage of favorable market conditions. Other operating income posted a Php1.2 billion or 17.8% hike mainly due to higher profit from assets sold, trust fees, and miscellaneous income. Fees and commissions rose by Php504 million or 10.9% on increased bank commissions, service charges, and underwriting fees.

Total capital funds ended higher by Php8.0 billion or 8.8% to Php98.5 billion from the previous year’s Php90.5 billion. The increase in capital was brought about by the higher profits from operation, net of cash dividends paid. The Bank’s capital adequacy ratio using Basel II framework at 14.2% was lower than 2011’s 14.9% due to the increase in risk weighted assets on account of higher loan portfolio. The CAR in 2012 remained substantially higher than the BSP’s 10% requirement.

BPI’s market capitalization reached Php337.8 billion and remained the highest in the industry as the Bank’s share price ended at Php95.00, 72% above the previous year’s Php55.20.

BPI share price traded at a premium of 3.5x its book value per share of Php27.30.

Impairment losses amounting to Php2.9 billion, was higher by Php773 million or 36.0% against last year due to additional provisions set up for non credit related items and foreclosed assets.

Loans, net of impairment losses, were up by a Php72.1 billion or 15.9% to Php526.6 billion from the previous year’s Php454.5 billion as both corporate and retail loans posted growths of 15% and 17%, respectively. Non-performing loans ratio at 1.5% improved from last year’s 1.9% and registered below the industry’s 2.0% (October 2012).

Overhead at Php24.9 billion was Php1.4 billion or 6.1% up against the Php23.5 billion of 2011. Occupancy and equipment-related expenses increased by Php660 million or 10.1% on increased computer equipment and software costs, contractual and utilities cost.

Liquid assets rose by Php48.0 billion or 29.4% to Php211.0 billion mainly on higher balances with BSP, trading securities inventory, interbank loans receivable, and securities purchased under agreements to resell.

Other operating expenses was up by Php586 million or 8.9% on higher regulatory cost, management and other professional fees, insurance others, other miscellaneous expenses and a quarter worth of amortization of the acquisition cost of the ex-ING investment management business.

Investment securities also expanded by Php18.8 billion or 11.5% to Php182.6 billion against the previous year’s Php163.8 billion on higher inventory of local and foreign currency bonds carried under the available for sale securities. This was partly reduced by the Php13.5 billion or 15.0% decline in held-to-maturities securities due to maturities.

104

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

The management of the Bank of the Philippine Islands is responsible for the preparation and fair presentation of the consolidated and the parent financial statements as at December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012 and, including the additional components attached therein, in accordance with the prescribed financial reporting framework indicated therein. This responsibility includes designing and implementing internal controls relevant to the preparation and fair presentation of the consolidated and parent financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances.

The Board of Directors reviews and approves the consolidated and parent financial statements and submits the same to the shareholders.

Isla Lipana & Co., the independent auditors appointed by the stockholders, has examined the consolidated and parent financial statements of the Bank of the Philippine Islands and Subsidiaries in accordance with Philippine Standards on Auditing, and in its report to the shareholders has expressed its opinion on the fairness of presentation upon completion of such examination.

Jaime Augusto Zobel de Ayala Chairman of the Board

Aurelio R. Montinola III Antonio V. Paner President and Chief Executive Vice President Executive Officer and Treasurer SUBSCRIBED AND SWORN to before me at Makati City, Metro Manila this __________________, affiants exhibited to me their Passport with the following details:

Name Jaime Augusto Zobel de Ayala Aurelio R. Montinola III Antonio V. Paner

Passport No. EB1548914 XX2882839 EB4075954

Date/Place of Issue Dec. 13, 2010/ DFA Manila Jan. 27, 2009/DFA Manila Nov. 16, 2011/DFA Manila

Valid Until Dec. 12, 2015 Jan. 26, 2014 Nov. 15, 2016

Doc. No. 55; Page No. 12; Book No. III; Series of 2013.

BANK OF THE PHILIPPINE ISLANDS

105

To the Board of Directors and Shareholders of Bank of the Philippine Islands BPI Building, Ayala Avenue Makati City Report on the Financial Statements We have audited the accompanying consolidated financial statements of Bank of the Philippine Islands and Subsidiaries (the BPI Group) and the parent financial statements of Bank of the Philippine Islands (the Parent Bank), which comprise the consolidated and parent statements of condition as at December 31, 2012 and 2011, and the consolidated and parent statements of income, statements of total comprehensive income, statements of changes in capital funds and statements of cash flows for each of the three years in the period ended December 31, 2012, and a summary of significant accounting policies and other explanatory information.

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

Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated and parent financial statements based on our audits.

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

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

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

Opinion In our opinion, the accompanying consolidated and parent financial statements present fairly, in all material respects, the financial position of the BPI Group and of the Parent Bank as at December 31, 2012 and 2011, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards.

106

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Report on Bureau of Internal Revenue Requirements Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole.

The supplementary information in Note 34 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such supplementary information is the responsibility of management and has been subjected to the auditing procedures applied in our audits of the basic financial statements. In our opinion, the supplementary information is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

Isla Lipana & Co.

Blesilda A. Pesta単o Partner CPA Cert. No. 40446 P.T.R. No. 0007713, January 2, 2013, Makati City SEC A.N. (individual) as general auditors 0049-AR-3, Category A; effective until February 13, 2016 SEC A.N. (firm) as general auditors 0009-FR-3, effective until August 15, 2015 TIN 112-071-927 BIR A.N. 08-000745-7-2010, issued on May 31, 2010; effective until May 30, 2013 BOA/PRC Reg. No. 0142, effective until December 31, 2013 Makati City February 22, 2013

BANK OF THE PHILIPPINE ISLANDS

107

BANK OF THE PHILIPPINE ISLANDS STATEMENTS OF CONDITION DECEMBER 31, 2012 AND 2011 (In Millions of Pesos)

Notes

Consolidated 2012 2011

Parent 2012 2011

RESOURCES 7

23,293

22,395

22,518

21,661

DUE FROM BANGKO SENTRAL NG PILIPINAS

7

119,079

83,759

105,244

70,807

DUE FROM OTHER BANKS

7

7,582

9,297

4,724

5,567

38,927

35,277

10,843

24,867

CASH AND OTHER CASH ITEMS

INTERBANK LOANS RECEIVABLE AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS - DERIVATIVE FINANCIAL ASSETS

7, 8

9

5,920

5,389

5,920

5,389

10

22,098

12,275

19,055

11,638

AVAILABLE-FOR-SALE SECURITIES, net

11

106,403

74,084

92,845

64,500

HELD-TO-MATURITY SECURITIES, net

12

76,243

89,742

67,822

79,723

LOANS AND ADVANCES, net

13

526,640

454,499

389,962

337,425

6,887

9,148

4,380

6,431

- TRADING SECURITIES

ASSETS HELD FOR SALE, net BANK PREMISES, FURNITURE, FIXTURES AND EQUIPMENT, net

14

12,421

12,322

8,101

8,199

INVESTMENT PROPERTIES, net

15

2,582

2,637

2,575

2,630 7,008

INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES, net

16

3,680

3,069

7,088

ASSETS ATTRIBUTABLE TO INSURANCE OPERATIONS

5, 7

13,451

12,240

-

-

DEFERRED INCOME TAX ASSETS, net

17

4,915

4,335

3,421

2,958

OTHER RESOURCES, net

18

Total resources (forward)

108BANK OF THE PHILIPPINE ISLANDS

14,948

12,148

10,929

8,099

985,069

842,616

755,427

656,902

107

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BANK OF THE PHILIPPINE ISLANDS STATEMENTS OF CONDITION DECEMBER 31, 2012 AND 2011 (In Millions of Pesos)

Notes

Consolidated 2012 2011

Parent 2012 2011

RESOURCES CASH AND OTHER CASH ITEMS

7

23,293

22,395

22,518

21,661

DUE FROM BANGKO SENTRAL NG PILIPINAS

7

119,079

83,759

105,244

70,807

DUE FROM OTHER BANKS

7

7,582

9,297

4,724

5,567

38,927

35,277

10,843

24,867

5,920

5,389

5,920

5,389

INTERBANK LOANS RECEIVABLE AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS - DERIVATIVE FINANCIAL ASSETS

7, 8

9 10

22,098

12,275

19,055

11,638

AVAILABLE-FOR-SALE SECURITIES, net

11

106,403

74,084

92,845

64,500

HELD-TO-MATURITY SECURITIES, net

12

76,243

89,742

67,822

79,723

LOANS AND ADVANCES, net

13

526,640

454,499

389,962

337,425

6,887

9,148

4,380

6,431

- TRADING SECURITIES

ASSETS HELD FOR SALE, net BANK PREMISES, FURNITURE, FIXTURES AND EQUIPMENT, net

14

12,421

12,322

8,101

8,199

INVESTMENT PROPERTIES, net

15

2,582

2,637

2,575

2,630

INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES, net

16

3,680

3,069

7,088

7,008

ASSETS ATTRIBUTABLE TO INSURANCE OPERATIONS

5, 7

13,451

12,240

-

-

DEFERRED INCOME TAX ASSETS, net

17

4,915

4,335

3,421

2,958

OTHER RESOURCES, net

18

Total resources (forward)

BANK THE PHILIPPINE ISLANDS BANK OFOF THE PHILIPPINE ISLANDS

14,948

12,148

10,929

8,099

985,069

842,616

755,427

656,902

107 109

BANK OF THE PHILIPPINE ISLANDS STATEMENTS OF INCOME FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2012 (In Millions of Pesos, Except Per Share Amounts) Parent 2011

2010

19,356 4,638 3,126 702 763 (963) 27,622

16,762 5,383 3,374 2,001 767 (1,009) 27,278

15,944 5,017 3,113 2,952 539 (1,063) 26,502

12,069 1,290 13,359 23,628 3,454

6,929 588 7,517 20,105 2,003

7,601 668 8,269 19,009 1,583

8,081 971 9,052 17,450 2,165

23,716

20,174

18,102

17,426

15,285

5,908 5,111 1,682

2,948 4,607 1,770

2,946 4,160 2,204

4,717 4,256 1,372

2,712 3,777 1,596

2,652 2,834 2,089

5 25

694 7,878 (1,342) 19,931

949 6,688 (1,070) 15,892

802 5,825 (1,158) 14,779

6,771 (1,122) 15,994

5,917 (943) 13,059

4,430 (1,039) 10,966

27

10,556

10,379

9,137

8,326

7,994

6,664

14, 15, 26 27

7,193 7,139 24,888 19,573

6,476 6,610 23,465 16,143

6,083 5,734 20,954 13,999

5,798 5,377 19,501 14,595

5,080 5,296 18,370 12,115

4,714 4,407 15,785 10,466

3,576 (444) 3,132 16,441

3,570 (440) 3,130 13,013

2,866 (346) 2,520 11,479

2,444 (232) 2,212 12,383

2,556 (297) 2,259 9,856

2,033 127 2,160 8,306

16,291 150 16,441

12,822 191 13,013

11,312 167 11,479

12,383 12,383

9,856 9,856

8,306 8,306

4.58

3.61

3.38

3.48

2.77

Notes

INTEREST INCOME On loans and advances On held-to-maturity securities On available-for-sale securities On deposits with BSP and other banks On trading securities Gross receipts tax INTEREST EXPENSE On deposits On bills payable and other borrowings NET INTEREST INCOME IMPAIRMENT LOSSES NET INTEREST INCOME AFTER IMPAIRMENT LOSSES OTHER INCOME Trading gain on securities Fees and commissions Income from foreign exchange trading Income attributable to insurance operations Other operating income Gross receipts tax OTHER EXPENSES Compensation and fringe benefits Occupancy and equipment-related expenses Other operating expenses INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX Current Deferred

19 20, 21

11, 13, 18

28 17

NET INCOME FOR THE YEAR Attributable to: Equity holders of BPI Non-controlling interests Earnings per share for net income attributable to the equity holders of BPI during the year: Basic and diluted

23

Consolidated 2011

2010

30,790 5,191 3,424 1,229 847 (1,373) 40,108

27,156 6,023 3,592 2,488 812 (1,382) 38,689

25,270 5,787 3,333 3,409 582 (1,394) 36,987

11,648 1,007 12,655 27,453 2,923

11,721 1,102 12,823 25,866 2,150

24,530

2012

2012

2.48

(The noteson onpages pages115 1 to thesefinancial financialstatements.) statements.)

(The notes to 96 218are arean an integral integral part of these

110BANK OF THE PHILIPPINE ISLANDS

109

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BANK OF THE PHILIPPINE ISLANDS STATEMENTS OF TOTAL COMPREHENSIVE INCOME FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2012 (In Millions of Pesos)

NET INCOME FOR THE YEAR OTHER COMPREHENSIVE INCOME Net change in fair value reserve on available-for-sale securities, net of tax effect Fair value reserve on investments of insurance subsidiaries, net of tax effect Share in other comprehensive income of associates Currency translation differences Total other comprehensive (loss) income, net of tax effect TOTAL COMPREHENSIVE INCOME FOR THE YEAR Attributable to: Equity holders of BPI Non-controlling interests

Note 23

2012 16,441

Consolidated 2011 2010 13,013 11,479

(718)

1,420

1,207

2012 12,383

Parent 2011 9,856

2010 8,306

1,495

1,021

(550)

161

(63)

323

-

-

-

502 (104)

351 (5)

830 (215)

-

-

-

1,495

1,021

(159)

(550)

1,703

2,145

16,282

14,716

13,624

11,833

11,351

9,327

16,123 159 16,282

14,523 193 14,716

13,414 210 13,624

11,833 11,833

11,351 11,351

9,327 9,327

(The notes on pages 1 to are integral part of these financial statements.)

(The notes on pages 115 to 21896are anan integral part of these financial statements.)

110BANK OF THE PHILIPPINE ISLANDS

BPI 2012 ANNUAL REPORT

111

BANK OF THE PHILIPPINE ISLANDS STATEMENTS OF CHANGES IN CAPITAL FUNDS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2012 (In Millions of Pesos)

Balance, January 1, 2010 Comprehensive income Net income for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Issuance of shares Employee stock option plan: Exercise of options Cash dividends Transfer from surplus to reserves Other changes in non-controlling interests Total transactions with owners Balance, December 31, 2010 Comprehensive income Net income for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Issuance of shares Employee stock option plan: Expiration of options Cash dividends Transfer from surplus to reserves Other changes in non-controlling interests Total transactions with owners Balance, December 31, 2011 Comprehensive income Net income for the year Other comprehensive loss for the year Total comprehensive income (loss) for the year Transactions with owners Issuance of shares Employee stock option plan: Expiration of options Cash dividends Transfer from surplus to reserves Other changes in non-controlling interests Total transactions with owners Balance, December 31, 2012

Consolidated Attributable to equity holders of BPI (Note 23) Accumulated other Share Share comprehensive capital premium Reserves Surplus income (loss) Total 32,467 1,412 1,394 33,160 (1,635) 66,798

Noncontrolling interests 967

Total equity 67,765

-

-

-

11,312 -

2,102

11,312 2,102

167 43

11,479 2,145

-

-

-

11,312

2,102

13,414

210

13,624

3,077

6,829

-

-

-

9,906

-

9,906

18 3,095 35,562

76 6,905 8,317

(137) 110 (27) 1,367

(9,044) (110) (9,154) 35,318

(43) (9,044) 819 81,031

-

(43) (9,044) 67 886 82,275

-

-

-

12,822 -

1,701

12,822 1,701

191 2

13,013 1,703

-

-

-

12,822

1,701

14,523

193

14,716

-

-

-

-

-

35,562

8,317

(42) 137 95 1,462

42 (6,402) (137) (6,497) 41,643

2,168

-

-

-

16,291 -

-

-

-

16,291

-

-

-

-

-

35,562

8,317

141 141 1,603

(8,180) (141) (8,321) 49,613

2,000

467

-

67 67 1,244

1

-

-

(6,402) (6,402) 89,152

(59) (59) 1,378

(6,402) (59) (6,461) 90,530

(168)

16,291 (168)

150 9

16,441 (159)

(168)

16,123

159

16,282

(8,180) (8,180) 97,095

-

-

(110) (110) 1,427

(8,180) (110) (8,290) 98,522

(The noteson onpages pages115 1 to thesefinancial financialstatements.) statements.)

(The notes to 96 218are arean an integral integral part of these

112BANK OF THE PHILIPPINE ISLANDS

111

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BANK OF THE PHILIPPINE ISLANDS STATEMENTS OF CHANGES IN CAPITAL FUNDS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2012 (In Millions of Pesos) Parent (Note 23)

Balance, January 1, 2010 Comprehensive income Net income for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Issuance of shares Employee stock option plan: Exercise of options Cash dividends Transfer from surplus to reserves Total transactions with owners Balance, December 31, 2010 Comprehensive income Net income for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Issuance of shares Employee stock option plan: Expiration of options Cash dividends Transfer from surplus to reserves Total transactions with owners Balance, December 31, 2011 Comprehensive income Net income for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners Employee stock option plan: Expiration of options Cash dividends Transfer from surplus to reserves Total transactions with owners Balance, December 31, 2012

Share capital 32,467

Share premium 1,412

Reserves 1,351

Surplus 17,390

Accumulated other comprehensive income (loss) (1,324)

Total 51,296

-

-

-

8,306 -

1,021

8,306 1,021

-

-

-

8,306

1,021

9,327

3,077

6,829

-

-

-

9,906

18 3,095 35,562

76 6,905 8,317

(125) 110 (15) 1,336

(9,044) (110) (9,154) 16,542

-

-

-

9,856 -

1,495

9,856 1,495

-

-

-

9,856

1,495

11,351

8,317

(11) 137 126 1,462

11 (6,402) (137) (6,528) 19,870

1,192

(6,402) (6,402) 66,403

-

-

-

12,383 -

(550)

12,383 (550)

-

-

-

12,383

(550)

11,833

8,317

141 141 1,603

(8,180) (141) (8,321) 23,932

642

(8,180) (8,180) 70,056

35,562

35,562

(303)

(31) (9,044) 831 61,454

(Thenotes noteson onpages pages 1 to of these thesefinancial financialstatements.) statements.)

(The 115 to 96 218are arean an integral part of

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BANK OF THE PHILIPPINE ISLANDS STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2012 (In Millions of Pesos) Notes

2012

Consolidated 2011 2010

CASH FLOWS FROM OPERATING ACTIVITIES 19,573 Income before income tax Adjustments for: 2,923 Impairment losses 11,13, 18 3,346 Depreciation and amortization 14, 15 (138) Share in net income of associates (27) Dividend income 25 (41,481) Interest income 12,655 Interest expense Operating loss before changes in operating (3,149) assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Due from Bangko Sentral ng Pilipinas Interbank loans receivable and securities purchased under agreements to resell (9,742) Trading securities, net (74,345) Loans and advances, net 1,868 Assets held for sale Assets attributable to insurance (724) operations (3,661) Other resources Increase (decrease) in: 121,173 Deposit liabilities Due to Bangko Sentral ng Pilipinas and 318 other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts 1,663 outstanding Accrued taxes, interest and other 557 expenses Liabilities attributable to insurance 856 operations 388 Derivative financial instruments 4,699 Deferred credits and other liabilities 39,901 Net cash from (used in) operations 40,410 Interest received (12,418) Interest paid (3,711) Income taxes paid 64,182 Net cash from (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES (Increase) decrease in: (32,454) Available-for-sale securities, net 11 13,905 Held-to-maturity securities, net 12 Bank premises, furniture, fixtures and (2,748) equipment, net 14 (12) Investment properties, net Investment in subsidiaries and (24) associates, net (614) Assets attributable to insurance operations 27 Dividends received (21,920) Net cash (used in) from investing activities (forward)

114BANK OF THE PHILIPPINE ISLANDS

2012

Parent 2011

2010

16,143

13,999

14,595

12,115

10,466

2,150 3,040 (216) (47) (40,071) 12,823

3,454 2,586 (195) (85) (38,381) 13,359

2,003 2,188 (1,383) (28,585) 7,517

1,583 1,920 (1,210) (28,287) 8,269

2,165 1,549 (206) (27,565) 9,052

(6,178)

(5,263)

(3,665)

(5,610)

(4,539)

54,303

(12,731)

-

52,010

(12,300)

3,859 (721) (77,418) 2,327

20,403 41,760 (54,907) 2,467

(7,593) (53,800) 1,759

3,861 (1,236) (62,188) 2,136

20,958 41,829 (38,573) 2,260

(328) (4,185)

(209) (539)

(3,603)

(3,006)

(30)

(38,665)

140,295

83,951

(47,522)

119,905

(283)

67

319

(285)

68

(56)

1,128

1,119

(95)

977

(536)

341

652

(654)

226

724 154 (1,364) (68,367) 40,467 (13,380) (2,442) (43,722)

450 (176) (35) 133,051 37,099 (13,029) (2,670) 154,451

608 3,849 23,596 27,479 (7,423) (2,675) 40,977

154 (1,547) (63,982) 28,623 (8,780) (1,415) (45,554)

(176) (859) 129,746 26,485 (8,703) (1,824) 145,704

39,147 5,693

(38,596) (20,259)

(28,286) 12,165

35,311 5,363

(36,533) (20,187)

(3,246) 3

(2,531) (10)

(1,416) (12)

(1,784) (1)

(1,376) (10)

(120) 183 47 41,707

407 (787) 85 (61,691)

(80)

(39) 1,210 40,060

(17) 436 (57,687)

1,383 (16,246)

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BANK OF THE PHILIPPINE ISLANDS STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2012 (In Millions of Pesos)

CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends paid Proceeds from stock rights offering Increase (decrease) in bills payable Net cash used in financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 December 31

Notes

23

7

2012

Consolidated 2011

2010

2012

Parent 2011

2010

(11,380) 7,144 (4,236)

(3,201) (5,733) (8,934)

(9,044) 9,906 (7,141) (6,279)

(11,380) 7,076 (4,304)

(3,201) (7,357) (10,558)

(9,044) 9,906 (7,372) (6,510)

38,026

(10,949)

86,481

20,427

(16,052)

81,507

150,961 188,987

161,910 150,961

75,429 161,910

122,902 143,329

138,954 122,902

57,447 138,954

(The noteson onpages pages115 1 to thesefinancial financialstatements.) statements.)

(The notes to 96 218are arean an integral integral part of these

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115

BANK OF THE PHILIPPINE ISLANDS NOTES TO FINANCIAL STATEMENTS AS AT DECEMBER 31, 2012 AND 2011 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2012 Note 1 - General Information Bank of the Philippine Islands (“BPI” or the “Parent Bank”) is a domestic commercial bank with an expanded banking license and has its registered office address, which is also its principal place of business, at BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City. BPI and its subsidiaries as detailed in Note 2.3 (collectively referred to as the “BPI Group”) offer a whole breadth of financial services that include corporate banking, consumer banking, investment banking, asset management, corporate finance, securities distribution, and insurance services. At December 31, 2012, the BPI Group has 12,406 employees (2011 - 12,355 employees) and operates 820 branches and 2,068 ATMs (2011 - 819 branches and 1,868 ATMs) to support its delivery of services. The BPI Group also serves its customers through alternative electronic banking channels such as telephone, mobile phone and the internet. The BPI shares have been traded in the Philippine Stock Exchange (PSE) since October 12, 1971. The Parent Bank was registered with the Securities and Exchange Commission (SEC) on January 4, 1943. This license was extended for another 50 years on January 4, 1993.

These financial statements have been approved and authorized for issuance by the Board of Directors of the Parent Bank on February 20, 2013. There are no material events that occurred subsequent to February 20, 2013 until February 22, 2013.

Note 2 - Summary of Significant Accounting Policies The principal accounting policies applied in the preparation of these financial statements are set out below.

These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation The financial statements of the BPI Group have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards (PAS), interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC. As allowed by the SEC, the pre-need subsidiary of the Parent Bank continues to follow the provisions of the Pre-Need Uniform Chart of Accounts (PNUCA) prescribed by the SEC and adopted by the Insurance Commission.

The financial statements comprise the statement of condition, statement of income and statement of total comprehensive income shown as two statements, statement of changes in capital funds, statement of cash flows and the notes.

These financial statements have been prepared under the historical cost convention, as modified by the revaluation of trading securities, available-for-sale financial assets and all derivative contracts.

The preparation of financial statements in conformity with PFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the BPI Group’s accounting policies. Changes in assumptions may have a significant impact on the financial statements in the period the assumptions changed. Management believes that the underlying assumptions are appropriate and that the financial statements therefore fairly present the financial position and results of the BPI Group. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 4.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

2.2 New standards, interpretations and amendments to published standards The BPI Group adopted the following amendments to existing standards and interpretations approved by the FRSC which are effective for the BPI Group beginning January 1, 2012: 

PAS 12 (Amendment), Income Taxes - Deferred Tax (effective January 1, 2012). PAS 12 currently requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in PAS 40, Investment Property. This amendment therefore introduces an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on investment property measured at fair value. As a result of the amendments, SIC 21, Income Taxes Recovery of Revalued Non-Depreciable Assets, will no longer apply to investment properties carried at fair value. The amendments also incorporate into PAS 12 the remaining guidance previously contained in SIC 21, which is withdrawn.

The BPI Group applied the amendments beginning January 1, 2012 but this did not have a material impact on the financial statements as investment properties are measured using the cost model.



PFRS 7 (Amendment), Financial Instruments: Disclosures - Derecognition (effective July 1, 2011). This amendment will promote transparency in the reporting of transfer transactions and improve users’ understanding of the risk exposures relating to transfers of financial assets and the effect of those risks on an entity’s financial position, particularly those involving securitization of financial assets. The BPI Group applied the amendments beginning January 1, 2012 but this did not have a material impact on the financial statements as there were no securities transferred that have not been derecognized in the current year.

New standards, amendments and interpretations to existing standards that are not yet effective and not early adopted by the BPI Group 

PAS 1 (Amendment), Financial Statement Presentation - Other Comprehensive Income (effective July 1, 2012). The main change resulting from these amendments is a requirement for entities to group items presented in other comprehensive income on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in other comprehensive income. The BPI Group will apply the amendment beginning January 1, 2013. The adoption is not expected to have a significant impact on the financial statements but will result in changes in presentation in the statement of total comprehensive income.



PAS 19 (Amendment), Employee Benefits (effective January 1, 2013). These amendments eliminate the corridor approach and calculate finance costs on a net funding basis. The amendments would also require recognition of all actuarial gains and losses in other comprehensive income as they occur and of all past service costs in profit or loss. The amendments replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). As at December 31, 2012, the BPI Group has unrecognized actuarial loss of P514.5 million (Note 30) which will be recognized in other comprehensive income upon adoption of the amendments.



PAS 28 (Revised), Investments in Associates and Joint Ventures (effective January 1, 2013). This revised standard includes the requirements for joint ventures, as well as associates, to be accounted for using the equity method following the issuance of PFRS 11. The BPI Group will apply the revised standard beginning January 1, 2013. The BPI Group is currently assessing the full impact on the financial statements as investments in associates are currently accounted for using the cost method in the Parent Bank’s separate financial statements. The BPI Group has no investments in joint ventures.



PAS 32 (Amendment), Financial Instruments: Presentation – Asset and Liability Offsetting (effective January 1, 2014). These amendments are to the application guidance in PAS 32, Financial Instruments: Presentation, and clarify some of the requirements for offsetting financial assets and financial liabilities on the statement of condition. The BPI Group will apply the amendment beginning January 1, 2014. The adoption is not expected to have a significant impact on the financial statements but will result in changes in presentation of financial assets and financial liabilities subject to offsetting in the statement of condition.

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117



PFRS 9, Financial Instruments (effective January 1, 2015). This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39 that relate to the classification and measurement of financial instruments. PFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than in profit or loss, unless this creates an accounting mismatch. The BPI Group will apply this new standard beginning January 1, 2015. The adoption of PFRS 9 will affect the BPI Group’s accounting for its available-for-sale debt securities as the standard will only allow the recognition of fair value gains and losses in other comprehensive income if they relate to equity investments that are not held for trading. Fair value gains and losses on available-for-sale debt securities will therefore have to be recognized directly in profit or loss. The BPI Group is currently assessing the full impact on the financial statements upon adoption of the new standard.



PFRS 10, Consolidated Financial Statements (effective January 1, 2013). This new standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included in the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess.

The BPI Group will adopt this new standard beginning January 1, 2013 and is currently assessing the full impact on the financial statements upon adoption.



PFRS 12, Disclosures of Interests in Other Entities (effective January 1, 2013). This new standard includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The BPI Group will apply this new standard beginning January 1, 2013 but the adoption is not expected to have a significant impact on the financial statements other than the required disclosure requirements for interests in associates.



PFRS 13, Fair Value Measurement (effective January 1, 2013). This new standard aims to improve consistency and reduce complexity by providing a clarified definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRS. The requirements, which are largely aligned between IFRS and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS or US GAAP. The BPI Group will apply this new standard beginning January 1, 2013 but the adoption is not expected to have a significant impact on the financial statements as the current fair value measurement of its financial instruments carried at fair value is already consistent with requirements of the new standard.

There are no other standards, amendments or interpretations that are not yet effective that would be expected to have a material impact on the BPI Group.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY (3)REPORT

2.3 Consolidation The consolidated financial statements comprise the financial statements of the BPI Group as at December 31, 2012. The subsidiaries financial statements are prepared for the same reporting period as the Parent Bank. The consolidated financial statements include the financial statements of the Parent Bank and the following subsidiaries as at December 31: Subsidiaries BPI Family Savings Bank, Inc. BPI Capital Corporation BPI Leasing Corporation BPI Direct Savings Bank, Inc. BPI International Finance Limited BPI Europe Plc. BPI Securities Corp.

BPI Card Finance Corp.

Filinvest Algo Financial Corp.

BPI Rental Corporation.

BPI Investment Management Inc. Santiago Land Dev. Corp.

BPI Operations Management Corp.

BPI Computer Systems Corp.

BPI Foreign Exchange Corp.

BPI Express Remittance Corp. USA BPI Express Remittance Corp. Nevada BPI Express Remittance Center HK (Ltd.) Green Enterprises S. R. L. in Liquidation (formerly BPI Express Remittance Europe, S.p.A.) Prudential Investments, Inc. First Far - East Development Corporation FEB Stock Brokers, Inc. Citytrust Securities Corporation BPI Express Remittance Spain S.A FEB Speed International AF Holdings and Management Corp.

Ayala Plans, Inc FGU Insurance Corporation BPI/MS Insurance Corporation BPI Globe BanKO, Inc.

Country of incorporation Philippines Philippines Philippines Philippines Hong Kong England and Wales Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines Philippines USA USA Hong Kong Italy Philippines Philippines Philippines Philippines Spain Philippines Philippines Philippines Philippines Philippines Philippines

Principal activities Banking Investment house Leasing Banking Financing Banking (deposit) Securities dealer Financing Financing Rental Investment management Land holding Operations management Business systems service Foreign exchange Remittance Remittance Remittance Remittance Investment house Real estate Securities dealer Securities dealer Remittance Remittance Financial management consultancy Pre-need Non-life insurance Non-life insurance Banking

% of ownership 2012 2011 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

100 100 100 100 100 100 100

100 98.67 94.62 50.85 40

100 98.67 94.62 50.85 40

BPI has control over BPI Globe BanKO, Inc. since BPI is largely involved in key decisions concerning financial and operating policies and activities of, and provision of technological support and technical knowhow to BPI Globe BanKO, Inc.

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119

(a) Subsidiaries Subsidiaries are all entities over which the BPI Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the BPI Group controls another entity. The BPI Group also assesses existence of control where it does not have more than 50% of the voting power but is able to govern the financial and operating policies by virtue of de-facto control. De-facto control may arise in circumstances where the size of the BPI Group’s voting rights relative to the size and dispersion of holdings of other shareholders give the BPI Group the power to govern the financial and operating policies.

Subsidiaries are fully consolidated from the date on which control is transferred to the BPI Group. They are de-consolidated from the date that control ceases.

The BPI Group applies the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the BPI Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisitionrelated costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the BPI Group recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.

The excess of the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the BPI Group’s share of the identifiable net assets acquired is recorded as goodwill. If this consideration is lower than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in profit or loss.

Inter-company transactions, balances and income and expenses on transactions between group companies are eliminated. Profits and losses resulting from inter-company transactions that are recognized in assets are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the BPI Group, except for the pre-need subsidiary which follows the provisions of the PNUCA as allowed by the SEC. When the BPI Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the BPI Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss. (b) Transactions with non-controlling interests Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions - that is, as transactions with the owners in their capacity as owners. For purchases from noncontrolling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to noncontrolling interests are also recorded in equity.

Interests in the equity of subsidiaries not attributable to the Parent Bank are reported in consolidated equity as non-controlling interests. Profits or losses attributable to non-controlling interests are reported in the statement of income as net income (loss) attributable to non-controlling interests.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

(5)

(c) Associates Associates are all entities over which the BPI Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates in the consolidated financial statements are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognized at cost and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition.

The BPI Group’s investment in associates includes goodwill identified on acquisition (net of any accumulated impairment loss).

If the ownership interest in an associate is reduced but significant influence is retained, a proportionate share of the amounts previously recognized in other comprehensive income is reclassified to profit or loss where appropriate.

The BPI Group’s share of its associates’ post-acquisition profits or losses is recognized in profit or loss, and its share of post-acquisition movements in reserves is recognized in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the BPI Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the BPI Group does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate.

The BPI Group determines at each reporting date whether there is any indicator of impairment that the investment in the associate is impaired. If this is the case, the BPI Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount adjacent to ‘share of profit (loss) of an associate’ in profit or loss.

Unrealized gains on transactions between the BPI Group and its associates are eliminated to the extent of the BPI Group’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the BPI Group.

2.4 Investments in subsidiaries and associates Investments in subsidiaries and associates in the Parent Bank’s separate financial statements are accounted for using the cost method in accordance with PAS 27. Under this method, income from investment is recognized in profit or loss only to the extent that the investor receives distributions from accumulated profits of the investee arising after the acquisition date. Distributions received in excess of such profits are regarded as a recovery of investment and are recognized as reduction of the cost of the investment.

The Parent Bank recognizes a dividend from a subsidiary or associate in profit or loss in its separate financial statements when its right to receive the dividend is established.

The Parent Bank determines at each reporting date whether there is any indicator of impairment that the investment in the subsidiary or associate is impaired. If this is the case, the Parent Bank calculates the amount of impairment as the difference between the recoverable amount and carrying value and the difference is recognized in profit or loss.

Investments in subsidiaries and associates are derecognized upon disposal or when no future economic benefits are expected to be derived from the subsidiaries and associates at which time the cost and the related accumulated impairment loss are removed in the statement of condition. Any gains and losses on disposal is determined by comparing the proceeds with the carrying amount of the investment and recognized in profit or loss.

2.5 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief executive officer who allocates resources to, and assesses the performance of the operating segments of the BPI Group.

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All transactions between business segments are conducted on an arm´s length basis, with intra-segment revenue and costs being eliminated upon consolidation. Income and expenses directly associated with each segment are included in determining business segment performance.

In accordance with PFRS 8, the BPI Group has the following main banking business segments: consumer banking, corporate banking and investment banking. Its insurance business is assessed separately from these banking business segments (Note 5).

2.6 Cash and cash equivalents Cash and cash equivalents consist of Cash and other cash items, Due from Bangko Sentral ng Pilipinas (BSP), Due from other banks, and Interbank loans receivable and securities purchased under agreements to resell with maturities of less than three months from the date of acquisition and that are subject to insignificant risk of changes in value.

2.7 Repurchase and reverse repurchase agreements Securities sold subject to repurchase agreements (‘repos’) are reclassified in the financial statements as pledged assets when the transferee has the right by contract or custom to sell or repledge the collateral; the counterparty liability is included in deposits from banks or deposits from customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method.

Securities purchased under agreements to resell (‘reverse repos’) are recorded as loans and advances to other banks and customers and included in the statement of condition under “Interbank loans receivable and securities purchased under agreements to resell”. Securities lent to counterparties are also retained in the financial statements.

2.8 Financial assets 2.8.1 Classification The BPI Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity securities and available-for-sale securities. The classification depends on the purpose for which the financial assets are acquired. Management determines the classification of its financial assets at initial recognition. (a) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading and those designated at fair value through profit or loss at inception.

A financial asset is classified as held for trading if it is acquired principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.

Financial assets held for trading (other than derivatives) are shown as “Trading securities” in the statement of condition.

Derivatives are also categorized as held for trading unless they are designated as hedging instruments.

Financial assets designated at fair value through profit or loss at inception are those that are managed and their performance is evaluated on a fair value basis, in accordance with a documented investment strategy.

Information about these financial assets is provided internally on a fair value basis to the BPI Group’s key management personnel. The BPI Group has no financial assets that are specifically designated at fair value through profit or loss.

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(7)

(b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments: (i) that are not quoted in an active market, (ii) with no intention of being traded, and (iii) that are not designated as available-for-sale. Significant accounts falling under this category include loans and advances, cash and other cash items, due from BSP and other banks, interbank loans receivable and securities purchased under agreements to resell and accounts receivable included under other resources. (c) Held-to-maturity securities Held-to-maturity securities are non-derivative financial assets with fixed or determinable payments and fixed maturities that the BPI Group’s management has the positive intention and ability to hold to maturity. If the BPI Group were to sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available-for-sale. (d)

Available-for-sale securities

Available-for-sale securities are non-derivative financial assets that are either designated in this category or not classified in any of the other categories.

2.8.2

Recognition and measurement

(a) Initial recognition and measurement Regular-way purchases and sales of financial assets at fair value through profit or loss, held-to-maturity securities and available-for-sale securities are recognized on trade date, the date on which the BPI Group commits to purchase or sell the asset. Loans and receivables are recognized upon origination when cash is advanced to the borrowers or when the right to receive payment is established. Financial assets not carried at fair value through profit or loss are initially recognized at fair value plus transaction costs. Financial assets carried at fair value through profit or loss are initially recognized at fair value; and transaction costs are recognized in profit or loss. (b) Subsequent measurement Available-for-sale securities and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity securities are subsequently carried at amortized cost using the effective interest method. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss are included in the statement of income (as “Trading gain/loss on securities”) in the year in which they arise. Gains and losses arising from changes in the fair value of available-for-sale securities are recognized directly in other comprehensive income, until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in other comprehensive income should be recognized in profit or loss. However, interest is calculated on these securities using the effective interest method and foreign currency gains and losses on monetary assets classified as available-for-sale are recognized in profit or loss. Dividends on equity instruments are recognized in profit or loss when the BPI Group’s right to receive payment is established.

2.8.3

Reclassification

The BPI Group may choose to reclassify a non-derivative financial asset held for trading out of the held-fortrading category if the financial asset is no longer held for the purpose of selling it in the near term. Financial assets other than loans and receivables are permitted to be reclassified out of the held-for-trading category only in rare circumstances arising from a single event that is unusual and highly unlikely to recur in the near term. In addition, the BPI Group may choose to reclassify financial assets that would meet the definition of loans and receivables out of the held-for-trading or available-for-sale categories if the BPI Group has the intention and ability to hold these financial assets for the foreseeable future or until maturity at the date of reclassification.

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Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortized cost as applicable, and no reversals of fair value gains or losses recorded before reclassification date are subsequently made. Effective interest rates for financial assets reclassified to loans and receivables and held-to-maturity categories are determined at the reclassification date. Further increases in estimates of cash flows adjust effective interest rates prospectively.

2.8.4

Derecognition

Financial assets are derecognized when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the BPI Group tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition).

2.9 Impairment of financial assets (a) Assets carried at amortized cost The BPI Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The criteria that the BPI Group uses to determine that there is objective evidence of an impairment loss include:  Delinquency in contractual payments of principal or interest;  Cash flow difficulties experienced by the borrower;  Breach of loan covenants or conditions;  Initiation of bankruptcy proceedings;  Deterioration of the borrower’s competitive position; and  Deterioration in the value of collateral.

The BPI Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant.

If the BPI Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

The amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (recoverable amount). The calculation of recoverable amount of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs of obtaining and selling the collateral, whether or not foreclosure is probable. If a loan or held-tomaturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is recognized in profit or loss.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e., on the basis of the BPI Group’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.

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Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the BPI Group and historical loss experience for assets with credit risk characteristics similar to those in the BPI Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined.

If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. Subsequent recoveries of amounts previously written-off are credited to impairment loss in the statement of income. (b) Assets classified as available-for-sale The BPI Group assesses at each reporting date whether there is an objective evidence that a security classified as available-for-sale is impaired. For debt securities, the BPI Group uses the criteria mentioned in (a) above. For an equity security classified as available-for-sale, a significant or prolonged decline in the fair value below cost is considered in determining whether the securities are impaired. Generally, the BPI Group treats ‘significant’ as 20% or more and ‘prolonged’ as greater than twelve months. The cumulative loss (difference between the acquisition cost and the current fair value less any impairment loss on that financial asset previously recognized in profit or loss) is removed from other comprehensive income and recognized in profit or loss when the asset is determined to be impaired. If in a subsequent period, the fair value of a debt instrument previously impaired increases and the increase can be objectively related to an event occurring after the impairment loss was recognized, the impairment loss is reversed through profit or loss.

Reversal of impairment losses recognized previously on equity instruments is made directly to other comprehensive income. (c) Renegotiated loans Loans that are either subject to individual or collective impairment assessment and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans.

2.10 2.10.1

Financial liabilities Classification

The BPI Group classifies its financial liabilities in the following categories: financial liabilities at fair value through profit or loss and financial liabilities at amortized cost. (a) Financial liabilities at fair value through profit or loss This category comprises two sub-categories: financial liabilities classified as held for trading, and financial liabilities designated by the BPI Group as at fair value through profit or loss upon initial recognition.

A financial liability is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.

Derivatives are also categorized as held for trading unless they are designated and effective as hedging instruments. Gains and losses arising from changes in fair value of financial liabilities classified as held for trading are included in the statement of income and are reported as “Trading gains/losses”. The BPI Group has no financial liabilities that are designated at fair value through profit loss.

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(b) Other liabilities measured at amortized cost Financial liabilities that are not classified as at fair value through profit or loss fall into this category and are measured at amortized cost. Financial liabilities measured at amortized cost include deposits from customers and banks, bills payable, amounts due to BSP and other banks, manager’s checks and demand drafts outstanding, subordinated notes and other financial liabilities under deferred credits and other liabilities.

2.10.2

Recognition and measurement

(a) Initial recognition and measurement Financial liabilities not carried at fair value through profit or loss are initially recognized at fair value plus transaction costs. Financial liabilities carried at fair value through profit or loss are initially recognized at fair value; and transaction costs are recognized as expense in profit or loss. (b) Subsequent measurement Financial liabilities at fair value through profit or loss are subsequently carried at fair value. Other liabilities are measured at amortized cost using the effective interest method.

2.10.3

Derecognition

Financial liabilities are derecognized when they have been redeemed or otherwise extinguished (i.e. when the obligation is discharged or is cancelled or has expired). Collateral (shares and bonds) furnished by the BPI Group under standard repurchase agreements and securities lending and borrowing transactions is not derecognized because the BPI Group retains substantially all the risks and rewards on the basis of the predetermined repurchase price, and the criteria for derecognition are therefore not met.

2.11

Determination of fair value of financial instruments

The BPI Group classifies its fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: 

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Philippine Stock Exchange, Inc., Philippine Dealing and Exchange Corp., etc.).



Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). This level includes the majority of the over-the-counter (“OTC”) derivative contracts. The primary source of input parameters like LIBOR yield curve or counterparty credit risk is Bloomberg.



Level 3 - Inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The BPI Group considers relevant and observable market prices in its valuations where possible. The BPI Group has no financial instruments classified under Level 3 as at December 31, 2012 and 2011.

For financial instruments traded in active markets, the determination of fair values of financial assets and financial liabilities is based on quoted market prices or dealer price quotations. This includes listed equity securities and quoted debt instruments on major exchanges and broker quotes mainly from Bloomberg.

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A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an armâ&#x20AC;&#x2122;s length basis. If the above criteria are not met, the market is regarded as being inactive. Indications that a market is inactive are when there is a wide bid-offer spread or significant increase in the bid-offer spread or there are few recent transactions.

For all other financial instruments, fair value is determined using valuation techniques. In these techniques, fair values are estimated from observable data in respect of similar financial instruments, using models to estimate the present value of expected future cash flows or other valuation techniques, using inputs (for example, LIBOR yield curve, FX rates, volatilities and counterparty spreads) existing at reporting dates. The BPI Group uses widely recognized valuation models for determining fair values of non-standardized financial instruments of lower complexity, such as options or interest rate and currency swaps. For these financial instruments, inputs into models are generally market observable.

For more complex instruments, the BPI Group uses internally developed models, which are usually based on valuation methods and techniques generally recognized as standard within the industry. Valuation models are used primarily to value derivatives transacted in the OTC market, unlisted debt securities (including those with embedded derivatives) and other debt instruments for which markets were or have become illiquid. Some of the inputs to these models may not be market observable and are therefore estimated based on assumptions.

The fair value of OTC derivatives is determined using valuation methods that are commonly accepted in the financial markets, such as present value techniques and option pricing models. The fair value of foreign exchange forwards is generally based on current forward exchange rates.

In cases when the fair value of unlisted equity instruments cannot be determined reliably, the instruments are carried at cost less impairment. The fair value for loans and advances as well as liabilities to banks and customers are determined using a present value model on the basis of contractually agreed cash flows, taking into account credit quality, liquidity and costs. The fair values of contingent liabilities and irrevocable loan commitments correspond to their carrying amounts.

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2.12

Classes of financial instruments

The BPI Group classifies the financial instruments into classes that reflect the nature of information and take into account the characteristics of those financial instruments. The classification made can be seen in the table below:

Financial assets

Categories (as defined by PAS 39) Financial assets at fair value through profit or loss

Classes (as determined by the BPI Group) Main classes - Trading securities - Derivative financial assets - Cash and other cash items - Loans and advances to banks

Loans and receivables - Loans and advances to customers

- Others

Held-to-maturity investments Available-for-sale financial assets Financial liabilities

Financial liabilities at fair value through profit or loss

Financial liabilities at amortized cost

Off-balance sheet financial instruments

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Loan commitments

- Investment securities (debt securities) - Investment securities (debt securities) - Investment securities (equity securities)

Sub-classes - Debt securities - Equity securities - Due from BSP - Due from other banks - Interbank loans receivable and securities purchased under agreements to resell - Real estate mortgages - Loans to - Auto loans individuals (retail) - Credit cards - Others - Large corporate - Loans to customers corporate - Small and mediumentities sized enterprises - Accounts receivables - Sales contracts receivable - Rental deposits - Other accrued interest and fees receivable - Government - Others - Government - Others - Listed - Unlisted

- Derivative financial liabilities - Demand - Deposits from - Savings customers - Time - Deposits from banks - Bills payable - Due to BSP and other banks - Managerâ&#x20AC;&#x2122;s check and demand drafts outstanding - Interest payable - Unsecured subordinated debt - Other liabilities - Accounts payable - Outstanding acceptances - Dividend payable

Guarantees, acceptances and other financial facilities

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2.13 Offsetting of financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of condition when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

2.14 Derivative financial instruments Derivatives are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at their fair value. Fair values are obtained from quoted market prices in active markets including recent market transactions, and valuation techniques (for example for structured notes), including discounted cash flow models and options pricing models, as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.

Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. The assessment of whether an embedded derivative is required to be separated from the host contract is done when the BPI Group first becomes a party to the contract. Reassessment of embedded derivative is only done when there are changes in the contract that significantly modify the contractual cash flows. The embedded derivatives are measured at fair value with changes in fair value recognized in profit or loss.

The BPI Group’s derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognized immediately in the statement of income under “Trading gain/loss on securities”.

2.15

Bank premises, furniture, fixtures and equipment

Land and buildings comprise mainly of branches and offices. All bank premises, furniture, fixtures and equipment are stated at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of an asset which comprises its purchase price, import duties and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

Subsequent costs are included in the asset’s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the BPI Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit or loss during the year in which they are incurred.

Land is not depreciated. Depreciation for buildings and furniture and equipment is calculated using the straight-line method to allocate cost or residual values over the estimated useful lives of the assets, as follows: Building Furniture and equipment Equipment for lease

25-50 years 3-5 years 2-8 years

Leasehold improvements are depreciated over the shorter of the lease term (ranges from 5 - 10 years) and the useful life of the related improvement (ranges from 5 to 10 years). Major renovations are depreciated over the remaining useful life of the related asset.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. No Bank premises, furniture, fixtures and equipment were impaired as at December 31, 2012 (2011 - nil).

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An item of Bank premises, furniture, fixtures and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss in the period the item is derecognized.

2.16 Investment properties Properties that are held either to earn rental income or for capital appreciation or both, and that are not significantly occupied by the BPI Group are classified as investment properties. Transfers to, and from, investment property are made when, and only when, there is a change in use, evidenced by: (a) Commencement of owner-occupation, for a transfer from investment property to owner-occupied property; (b) Commencement of development with a view of sale, for a transfer from investment property to real properties held-for-sale and development; (c) End of owner occupation, for a transfer from owner-occupied property to investment property; or (d) Commencement of an operating lease to another party, for a transfer from real properties held-for-sale and development to investment property.

Transfers to and from investment property do not result in gain or loss.

Investment properties comprise land and building. Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are stated at cost less accumulated depreciation and impairment losses, if any. Depreciation on investment property is determined using the same policy as applied to Bank premises, furniture, fixtures, and equipment. Impairment test is conducted when there is an indication that the carrying amount of the asset may not be recovered. An impairment loss is recognized for the amount by which the property’s carrying amount exceeds its recoverable amount, which is the higher of the property’s fair value less costs to sell and value in use.

An item of investment properties is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gains and losses arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss in the period the item is derecognized.

2.17 Foreclosed assets Assets foreclosed shown as Assets held for sale in the statement of condition are accounted for at the lower of cost and fair value less cost to sell similar to the principles of PFRS 5. The cost of assets foreclosed includes the carrying amount of the related loan less allowance for impairment at the time of foreclosure. Impairment loss is recognized for any subsequent write-down of the asset to fair value less cost to sell.

Foreclosed assets not classified as Assets held for sale are accounted for in any of the following classification using the measurement basis appropriate to the asset as follows: (a) Investment property is accounted for using the cost model under PAS 40; (b) Bank-occupied property is accounted for using the cost model under PAS 16; and (c) Financial assets are classified as available-for-sale.

2.18 Intangible assets (a) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the BPI Group’s share in the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in “Miscellaneous assets” under Other resources. Goodwill on acquisitions of associates is included in Investments in subsidiaries and associates. Separately recognized goodwill is carried at cost less accumulated impairment losses. Gains and losses on the disposal of a subsidiary/associate include carrying amount of goodwill relating to the subsidiary/associate sold.

Goodwill is an indefinite-lived intangible asset and hence not subject to amortization.

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Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each cash-generating unit is represented by each primary reporting segment.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently reversed. (b) Contractual customer relationships Contractual customer relationships acquired in a business combination are recognized at fair value at the acquisition date. The contractual customer relationships have finite useful lives and are carried at cost less accumulated amortization. Amortization is calculated using the straight-line method over the expected life of the customer relationship. (c) Computer software Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized on a straight-line basis over the expected useful lives (three to five years). Computer software is included in “Miscellaneous assets” under Other resources.

Costs associated with developing or maintaining computer software programs are recognized as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the BPI Group are recognized as intangible assets when the following criteria are met:      

it is technically feasible to complete the software product so that it will be available for use; management intends to complete the software product and use or sell it; there is an ability to use or sell the software product; it can be demonstrated how the software product will generate probable future economic benefits; adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and the expenditure attributable to the software product during its development can be reliably measured.

Directly attributable costs that are capitalized as part of the software product include the software development employee costs and an appropriate portion of relevant overheads.

Other development expenditures that do not meet these criteria are recognized as an expense when incurred.

Development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

2.19

Impairment of non-financial assets

Assets that have indefinite useful lives - for example, goodwill or intangible assets not ready for use are not subject to amortization and are tested annually for impairment. Assets that have definite useful lives are subject to amortization and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of impairment at each reporting date.

2.20

Borrowings and borrowing costs

The BPI Group’s borrowings consist mainly of bills payable and unsecured subordinated debt. Borrowings are recognized initially at fair value, being their issue proceeds, net of transaction costs incurred. Borrowings are subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in profit or loss over the period of the borrowings using the effective interest method.

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Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the cost of the asset. All other borrowing costs are expensed as incurred. The BPI Group has no qualifying asset as at December 31, 2012 and 2011.

2.21 Interest income and expense Interest income and expense are recognized in profit or loss for all interest-bearing financial instruments using the effective interest method.

The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.

When calculating the effective interest rate, the BPI Group estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring impairment loss.

2.22 Fees and commission income Fees and commissions are generally recognized on an accrual basis when the service has been provided.

Commission and fees arising from negotiating or participating in the negotiation of a transaction for a third party (i.e. the arrangement of the acquisition of shares or other securities, or the purchase or sale of businesses) are recognized on completion of underlying transactions. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts, usually on a timeproportionate basis. Asset management fees related to investment funds are recognized ratably over the period in which the service is provided.

2.23 Dividend income Dividend income is recognized in profit or loss when the BPI Group’s right to receive payment is established.

2.24 Credit card income Credit card income is recognized upon receipt from merchants of charges arising from credit card transactions. These are computed based on rates agreed with merchants and are deducted from the payments to establishments.

2.25 Foreign currency translation (a) Functional and presentation currency Items in the financial statements of each entity in the BPI Group are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The financial statements are presented in Philippine Peso, which is the Parent Bank’s functional and presentation currency.

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(b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss.

Non-monetary items measured at historical cost denominated in a foreign currency are translated at exchange rates as at the date of initial recognition. Non-monetary items in a foreign currency that are measured at fair value are translated using the exchange rates at the date when the fair value is determined.

Changes in the fair value of monetary securities denominated in foreign currency classified as available-forsale are analyzed between translation differences resulting from changes in the amortized cost of the security, and other changes in the carrying amount of the security. Translation differences are recognized in profit or loss, and other changes in carrying amount are recognized in other comprehensive income.

Translation differences on non-monetary financial instruments, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss recognized under â&#x20AC;&#x153;Trading gain (Ioss)â&#x20AC;?.

Translation differences on non-monetary financial instruments, such as equities classified as available-forsale, are included in Accumulated other comprehensive income (loss) in the capital funds. (c) Foreign subsidiaries The results and financial position of BPIâ&#x20AC;&#x2122;s foreign subsidiaries (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i)

assets and liabilities are translated at the closing rate at reporting date;

(ii)

income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

(iii)

all resulting exchange differences are recognized as a separate component (Translation adjustments) of Accumulated other comprehensive income (loss) in the capital funds. When a foreign operation is sold, such exchange differences are recognized in profit or loss as part of the gain or loss on sale.

2.26

Accrued expenses and other liabilities

Accrued expenses and other liabilities are recognized in the period in which the related money, goods or services are received or when a legally enforceable claim against the BPI Group is established.

2.27

Provisions for legal or contractual obligations

Provisions are recognized when the BPI Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognized for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item is included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects the current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to the passage of time is recognized as interest expense.

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2.28

Income taxes

(a) Current income tax Income tax payable is calculated on the basis of the applicable tax law in the respective jurisdiction and is recognized as an expense for the year except to the extent that current tax is related to items (for example, current tax on available-for-sale investments) that are charged or credited in other comprehensive income or directly to capital funds.

The BPI Group has substantial income from its investment in government securities subject to final withholding tax. Such income is presented at its gross amount and the final tax paid or withheld is included in Provision for income tax - Current. (b) Deferred income tax Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted at the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax losses (net operating loss carryover or NOLCO) and unused tax credits (excess minimum corporate income tax or MCIT) to the extent that it is probable that future taxable profit will be available against which the temporary differences, unused tax losses and unused tax credits can be utilized. Deferred income tax liabilities are recognized in full for all taxable temporary differences except to the extent that the deferred tax liability arises from the initial recognition of goodwill.

The BPI Group reassesses at each reporting date the need to recognize a previously unrecognized deferred income tax asset.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

2.29 Employee benefits (a) Pension obligations The BPI Group has a defined benefit plan that shares risks among entities within the group. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The liability recognized in the statement of condition in respect of defined benefit pension plan is the present value of the defined benefit obligation at the reporting date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability.

Cumulative actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are spread to profit or loss over the employeesâ&#x20AC;&#x2122; expected average remaining working lives.

Past-service costs are recognized immediately in profit or loss, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period.

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Where the calculation results in a benefit to the BPI Group, the recognized asset is limited to the net total of any unrecognized actuarial losses and past service costs, and the present value of any reductions in future contributions to the plan.

For individual financial reporting purposes, the unified plan assets are allocated among the BPI Group entities based on the level of the defined benefit obligation attributable to each entity to arrive at the net liability or asset that should be recognized in the individual financial statements. (b) Share-based compensation The BPI Group engages in equity-settled share-based payment transactions in respect of services received from certain employees.

The fair value of the services received is measured by reference to the fair value of the shares or share options granted on the date of the grant. The cost of employee services received in respect of the shares or share options granted is recognized in profit or loss (with a corresponding increase in reserve in capital funds) over the period that the services are received, which is the vesting period.

The fair value of the options granted is determined using option pricing models which take into account the exercise price of the option, the current share price, the risk-free interest rate, the expected volatility of the share price over the life of the option and other relevant factors.

When the stock options are exercised, the proceeds received, net of any directly attributable transaction costs, are credited to capital stock (par value) and paid-in surplus for the excess of exercise price over par value. There are no share-based compensation schemes existing at reporting date. (c) Profit sharing and bonus plans The BPI Group recognizes a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Parent Bankâ&#x20AC;&#x2122;s shareholders after certain adjustments.

The BPI Group recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

2.30 Capital funds Common shares and preferred shares are classified as share capital.

Share premium includes any premiums or consideration received in excess of par value on the issuance of share capital.

Incremental costs directly attributable to the issue of new shares or options are shown in capital funds as a deduction from the proceeds, net of tax.

2.31 Earnings per share (EPS) Basic EPS is calculated by dividing income applicable to common shares by the weighted average number of common shares outstanding during the year with retroactive adjustments for stock dividends. Diluted EPS is computed in the same manner as basic EPS, however, net income attributable to common shares and the weighted average number of shares outstanding are adjusted for the effects of all dilutive potential common shares.

2.32 Dividends on common shares Dividends on common shares are recognized as a liability in the BPI Groupâ&#x20AC;&#x2122;s financial statements in the period in which the dividends are approved by the Board of Directors and the BSP. 2.33 Fiduciary activities The BPI Group commonly acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the BPI Group (Note 31).

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2.34 Leases (a) BPI Group is the lessee (i)

Operating lease Leases in which a significant portion of the risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. Payments, including prepayments, made under operating leases (net of any incentives received from the lessor) are charged to “Occupancy and equipment-related expenses” in the statement of income on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which the termination takes place.

(ii) Finance lease Leases of assets, where the BPI Group has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalized at the commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. (b) BPI Group is the lessor (iii) Operating lease Properties (land and building) leased out under operating leases are included in “Investment properties” in the statement of condition. Rental income under operating leases is recognized in profit or loss on a straight-line basis over the period of the lease. (ii) Finance lease When assets are leased out under a finance lease, the present value of the lease payments is recognized as a receivable. The difference between the gross receivable and the present value of the receivable is recognized as unearned finance income.

Lease income under finance lease is recognized over the term of the lease using the net investment method before tax, which reflects a constant periodic rate of return.

2.35

Insurance and pre-need operations

(a) Non-life insurance The more significant accounting policies observed by the non-life insurance subsidiaries follow: (a) gross premiums written from short-term insurance contracts are recognized at the inception date of the risks underwritten and are earned over the period of cover in accordance with the incidence of risk using the 24th method; (b) acquisition costs are deferred and charged to expense in proportion to the premium revenue recognized; reinsurance commissions are deferred and deducted from the applicable deferred acquisition costs, subject to the same amortization method as the related acquisition costs; (c) a liability adequacy test is performed which compares the subsidiaries’ reported insurance contract liabilities against current best estimates of all contractual future cash flows and claims handling, and policy administration expenses as well as investment income backing up such liabilities, with any deficiency immediately charged to income; (d) amounts recoverable from reinsurers and loss adjustment expenses are classified as assets, with an allowance for estimated uncollectible amounts; and (e) financial assets and liabilities are measured following the classification and valuation provisions of PAS 39.

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(b) Pre-need The more significant provisions of the PNUCA as applied by the pre-need subsidiary follow: (a) premium income from sale of pre-need plans is recognized as earned when collected; (b) costs of contracts issued and other direct costs and expenses are recognized as expense when incurred; (c) pre-need reserves which represent the accrued net liabilities of the subsidiary to its planholders are actuarially computed based on standards and guidelines set forth by the Insurance Commission; the increase or decrease in the account is charged or credited to other costs of contracts issued in profit or loss; and (d) insurance premium reserves which represent the amount that must be set aside by the subsidiary to pay for premiums for insurance coverage of fully paid planholders, are actuarially computed based on standards and guidelines set forth by the Insurance Commission.

2.36

Related party relationships and transactions

Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationship also exists between and/or among entities which are under common control with the reporting enterprise, or between and/or among the reporting enterprise and its key management personnel, directors, or its shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.

2.37

Comparatives

Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosed with comparative information.

Where PAS 8 applies, comparative figures have been adjusted to conform with changes in presentation in the current year. There were no changes to the presentation made during the year.

2.38

Subsequent events (or Events after the reporting date)

Post year-end events that provide additional information about the BPI Group’s financial position at the reporting date (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes to financial statements when material.

Note 3 - Financial Risk and Capital Management Risk management in the BPI Group covers all perceived areas of risk exposure, even as it continuously endeavors to uncover hidden risks. Capital management is understood to be a facet of risk management.

The Board of Directors sets the BPI Group’s management tone by specifying the parameters by which business risks are to be taken and by allocating the appropriate capital for absorbing potential losses from such risks.

The primary objective of the BPI Group is the generation of recurring acceptable returns to shareholders’ capital. To this end, the BPI Group’s policies, business strategies, and business activities are directed towards the generation of cash flows that are in excess of its fiduciary and contractual obligations to its depositors, and to its various other funders and stakeholders.

To generate acceptable returns to its shareholders’ capital, the BPI Group understands that it has to bear risk, that risk-taking is inherent in its business. Risk is understood by the BPI Group as the uncertainty in its future income - an uncertainty that emanates from the possibility of incurring losses that are due to unplanned and unexpected drops in revenues, increases in expenses, impairment of asset values, or increases in liabilities.

The possibility of incurring losses is, however, compensated by the possibility of earning more than expected income. Risk-taking is, therefore, not entirely bad to be avoided. Risk-taking presents opportunities if risks are accounted, deliberately taken, and are kept within rationalized limits.

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The Risk Management Office (RMO) and the Finance and Risk Management Committee (FRMC) are responsible for the management of market and liquidity risks. Their objective is to minimize adverse impacts on the BPI Group’s financial performance due to the unpredictability of financial markets. Market and credit risks management is carried out through policies approved by the Risk Management Committee (RMC)/Executive Committee/Board of Directors. In addition, Internal Audit is responsible for the independent review of risk assessment measures and procedures and the control environment.

The most important risks that the BPI Group manages are credit risk, liquidity risk, market risk and other operational risk. Market risk includes currency exchange risk, interest rate and other price risks.

3.1 Credit risk The BPI Group takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss to the BPI Group by failing to discharge an obligation. Significant changes in the economy, or in the prospects of a particular industry segment that may represent a concentration in the BPI Group’s portfolio, could result in losses that are different from those provided for at the reporting date. Management therefore carefully manages its exposure to credit risk. Credit exposures arise principally in loans and advances, debt securities and other bills. There is also credit risk in off-balance sheet financial arrangements. The Credit Policy Group works with the Credit Committee in managing credit risk, and reports are regularly provided to the Board of Directors.

3.1.1 Credit risk management (a)

Loans and advances

In measuring credit risk of loans and advances at a counterparty level, the BPI Group considers three components: (i) the probability of default by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future development; and (iii) the likely recovery ratio on the defaulted obligations. In the evaluation process, the BPI Group also considers the conditions of the industry/sector to which the counterparty is exposed, other existing exposures to the group where the counterparty may be related, as well as the client and the BPI Group’s fallback position assuming the worstcase scenario. Outstanding and potential credit exposures are reviewed to likewise ensure that they conform to existing internal credit policies.

The BPI Group assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. The BPI Group has internal credit risk rating systems, designed for corporate, small and medium-sized enterprises (SMEs), and retail accounts, that measure the borrower's credit risk based on quantitative and qualitative factors. The ratings of individual exposures may subsequently migrate between classes as the assessment of their probabilities of default changes. For retail, the consumer credit scoring system is a formula-based model for evaluating each credit application against a set of characteristics that experience has shown to be relevant in predicting repayment. The BPI Group regularly validates the performance of the rating systems and their predictive power with regard to default events, and enhances them if necessary. The BPI Group's internal ratings are mapped to the following standard BSP classifications: 

Unclassified - these are loans that do not have a greater-than-normal risk and do not possess the characteristics of loans classified below. The counterparty has the ability to satisfy the obligation in full and therefore minimal loss, if any, is anticipated.



Loans especially mentioned - these are loans that have potential weaknesses that deserve management’s close attention. These potential weaknesses, if left uncorrected, may affect the repayment of the loan and thus increase the credit risk of the BPI Group.



Substandard - these are loans which appear to involve a substantial degree of risk to the BPI Group because of unfavorable record or unsatisfactory characteristics. Further, these are loans with welldefined weaknesses which may include adverse trends or development of a financial, managerial, economic or political nature, or a significant deterioration in collateral.



Doubtful - these are loans which have the weaknesses similar to those of the substandard classification with added characteristics that existing facts, conditions, and values make collection or liquidation in full highly improbable and substantial loss is probable.

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

Loss - these are loans which are considered uncollectible and of such little value that their continuance as bankable assets is not warranted although the loans may have some recovery or salvage value.

(b) Debt securities and other bills For debt securities and other bills, external ratings such as Standard & Poor’s, Moody’s and Fitch’s ratings or their equivalents are used by the BPI Group for managing credit risk exposures. Investments in these securities and bills are viewed as a way to gain better credit quality mix and at the same time, maintain a readily available source to meet funding requirements.

3.1.2 Risk limit control and mitigation policies The BPI Group manages, limits and controls concentrations of credit risk wherever they are identified - in particular, to individual counterparties and groups, to industries and sovereigns.

The BPI Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments.

Such risks are monitored on a regular basis and subjected to annual or more frequent review, when considered necessary. Limits on large exposures and credit concentration are approved by the Board of Directors.

The exposure to any one borrower is further restricted by sub-limits covering on- and off-balance sheet exposures. Actual exposures against limits are monitored regularly.

Exposure to credit risk is also managed through regular analysis of the ability of existing and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate.

The BPI Group employs a range of policies and practices to mitigate credit risk. Some of these specific control and mitigation measures are outlined below. (a) Collateral One of the most traditional and common practice in mitigating credit risk is requiring security particularly for loans and advances. The BPI Group implements guidelines on the acceptability of specific classes of collateral for credit risk mitigation. The principal collateral types for loans and advances are:  

Mortgages over real estate properties and chattels; and Hold-out on financial instruments such as debt securities deposits, and equities

In order to minimize credit loss, the BPI Group seeks additional collateral from the counterparty when impairment indicators are observed for the relevant individual loans and advances. (b) Derivatives The BPI Group maintains strict market limits on net open derivative positions (i.e., the difference between purchase and sale contracts). Credit risk is limited to the net current fair value of instruments, which in relation to derivatives is only a small fraction of the contract, or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements. Collateral or other security is not usually obtained for credit risk exposures on these instruments (except where the BPI Group requires margin deposits from counterparties).

Settlement risk arises in any situation where a payment in cash, securities, foreign exchange currencies, or equities is made in the expectation of a corresponding receipt in cash, securities, foreign exchange currencies, or equities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the BPI Group’s market transactions on any single day. The introduction of the delivery versus payment facility in the local market has brought down settlement risk significantly.

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(c) Master netting arrangements The BPI Group further restricts its exposure to credit losses by entering into master netting arrangements with counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis. However, the credit risk associated with favorable contracts (asset position) is reduced by a master netting arrangement to the extent that if a default occurs, all amounts with the counterparty are terminated and settled on a net basis. The BPI Group’s overall exposure to credit risk on derivative instruments subject to master netting arrangements can change substantially within a short period, as it is affected by each transaction subject to the arrangement. (d) Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required.

Standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit which are written undertakings by the BPI Group on behalf of a customer authorizing a third party to draw drafts on the BPI Group up to a stipulated amount under specific terms and conditions - are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan.

Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, or letters of credit. With respect to credit risk on commitments to extend credit, the BPI Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The BPI Group monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.

3.1.3 Impairment and provisioning policies As described in Note 3.1.1, the BPI Group’s credit-quality mapping on loans and advances is based on the standard BSP loan classifications. Impairment provisions are recognized for financial reporting purposes based on objective evidence of impairment (Note 2.9).

The table below shows the percentage of the BPI Group’s loans and advances and the related allowance for impairment.

Unclassified Loans especially mentioned Substandard Doubtful Loss

Unclassified Loans especially mentioned Substandard Doubtful Loss

Consolidated 2012 2011 Loans and Allowance for Loans and Allowance for advances (%) impairment (%) advances (%) impairment (%) 97.24 0.63 96.48 0.52 0.41 6.34 0.57 5.18 0.85 20.15 1.11 22.98 0.74 66.68 0.96 66.14 0.76 100.00 0.88 100.00 100.00 100.00 Parent 2012 2011 Loans and Allowance for Loans and Allowance for advances (%) impairment (%) advances (%) impairment (%) 97.66 0.58 96.90 0.50 0.34 6.56 0.60 5.17 0.68 19.96 0.61 16.62 0.60 74.62 1.04 64.81 0.72 100.00 0.85 100.00 100.00 100.00

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3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements Credit risk exposures relating to significant on-balance sheet financial assets are as follows:

Due from BSP Due from other banks Interbank loans receivable and securities purchased under agreements to resell (SPAR) Financial assets at fair value through profit or loss Derivative financial assets Trading securities - debt securities Available-for-sale - debt securities Held-to-maturity securities Loans and advances, net Other financial assets Accounts receivable, net Other accrued interest and fees receivable Sales contracts receivable, net Rental deposits Others, net

Consolidated Parent 2012 2012 2011 (In Millions of Pesos) 119,079 105,244 83,759 7,582 4,724 9,297

2011 70,807 5,567

38,927

35,277

10,843

24,867

5,920 21,663 104,929 76,243 526,640

5,389 11,933 72,906 89,742 454,499

5,920 19,055 92,584 67,822 389,962

5,389 11,638 64,283 79,723 337,425

2,846 749 698 294 629 906,199

2,377 664 462 270 108 766,683

2,427 618 678 244 591 700,712

1,669 594 237 223 136 602,558

Credit risk exposures relating to off-balance sheet items are as follows:

Undrawn loan commitments Bills for collection Unused letters of credit Others

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 114,636 108,738 154,248 147,801 17,586 17,575 23,470 23,469 13,707 13,707 11,003 11,003 1,169 1,007 2,765 2,623 147,098 141,027 191,486 184,896

The preceding table represents the maximum credit risk exposure at December 31, 2012 and 2011, without taking into account any collateral held or other credit enhancements. For on-balance-sheet assets, the exposures set out above are based on net carrying amounts as reported in the statements of condition.

Management is confident in its ability to continue to control and sustain minimal exposure to credit risk of the BPI Group resulting from its loan and advances portfolio based on the following:    

98% of the loans and advances portfolio is categorized in the top two classifications of the internal rating system in 2012 (2011 - 97%); Mortgage loans are backed by collateral; 97% of the loans and advances portfolio is considered to be neither past due nor impaired (2011 - 96%); and The BPI Group continues to implement stringent selection process of granting loans and advances.

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3.1.5 Credit quality of loans and advances Loans and advances are summarized as follows:

Neither past due nor impaired Past due but not impaired Impaired Allowance for impairment

Consolidated Parent 2012 2012 2011 (In Millions of Pesos) 519,110 385,204 445,355 6,380 2,969 3,503 12,247 9,320 16,301 537,737 397,493 465,159 (11,097) (7,531) (10,660) 526,640 389,962 454,499

2011 331,698 2,410 10,682 344,790 (7,365) 337,425

Impaired category as shown in the table above includes loan accounts which are individually (Note 3.1.5c) and collectively assessed for impairment.

The total consolidated impairment provision for loans and advances is P2,201 million (2011 - P1,786 million), of which P1,497 million (2011 - P1,251 million) represents provision for individually impaired loans and the remaining amount of P704 million (2011 - P535 million) represents the portfolio provision. Further information of the impairment allowance for loans and advances is provided in Note 13.

When entering into new markets or new industries, the BPI Group focuses on corporate accounts and retail customers with good credit rating and customers providing sufficient collateral, where appropriate or necessary.

Collaterals held as security for Loans and advances are described in Note 13. (a) Loans and advances neither past due nor impaired Loans and advances that were neither past due nor impaired consist mainly of accounts with Unclassified rating and those loans accounts in a portfolio to which an impairment has been allocated on a collective basis.

Details of these accounts follow: Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) Corporate entities: Large corporate customers Small and medium enterprises Retail customers: Mortgages Credit cards Others

326,690 77,380

271,394 76,655

312,912 49,903

261,883 51,524

89,400 20,330 5,310 519,110

76,317 17,506 3,483 445,355

146 20,330 1,913 385,204

62 17,506 723 331,698

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(b) Loans and advances past due but not impaired The table below presents the gross amount of loans and advances that were past due but not impaired classified by type of borrowers. Collateralized past due loans are not considered impaired when the cash flows that may result from foreclosure of the related collateral are higher than the carrying amount of the loans.

Consolidated 2012 Large

2011

Small and

Large

corporate

medium

Retail

customers

enterprises

customers

Past due up to 30 days

388

239

1,556

2,183

Past due 31 - 90 days

28

90

1,059

1,177

Past due 91 - 180 days

41

403

908

1,352

107

316

1,245

564

1,048

4,768

Small and

corporate

medium

Retail

customers

enterprises

customers

66

164

1,205

1,435

188

157

936

1,281

33

293

1

327

1,668

224

236

-

6,380

511

850

2,142

3,503

Total

Total

(In Millions of Pesos)

Over 180 days

5,841

Fair value of collateral

460 6,786

Parent 2012 Large

2011

Small and

Large

corporate

medium

Retail

customers

enterprises

customers

Total

Small and

corporate

medium

Retail

customers

enterprises

customers

Total

(In Millions of Pesos) 360

86

1,445

1,891

47

68

1,125

1,240

Past due 31 - 90 days

3

3

796

802

161

22

733

916

Past due 91 - 180 days

20

245

-

265

-

95

-

95

-

11

-

11

128

31

-

159

383

345

2,241

2,969

336

216

1,858

Past due up to 30 days

Over 180 days Fair value of collateral

641

2,410 430

(c) Loans and advances individually impaired The breakdown of the gross amount of individually impaired loans and advances (included in Impaired category) by class, along with the fair value of related collateral held by the BPI Group as security, are as follows: Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) Corporate entities: Large corporate customers Small and medium enterprises Retail customers: Mortgages Credit cards Others Fair value of collateral

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3,782 5,589

5,157 6,262

3,671 3,624

4,934 4,134

949 1,347 78 11,745 7,511

781 1,162 18 13,380

12 1,347 73 8,727 6,823

10 1,162 13 10,253

10,913

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3.1.6 Credit quality of other financial assets a.

Due from Bangko Sentral ng Pilipinas

Due from BSP are considered fully performing at December 31, 2012 and 2011. This account consists of:

Clearing account Special deposit accounts Reserve deposit account

b.

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 105,283 94,244 31,755 23,257 13,796 11,000 1,431 50,573 47,550 119,079 105,244 83,759 70,807

Due from other banks

Due from other banks are considered fully performing at December 31, 2012 and 2011. The table below presents the credit ratings of counterparty banks based on Standard and Poorâ&#x20AC;&#x2122;s.

AA- to AA+ A- to A+ Lower than AUnrated

c.

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 2,698 1,952 2,409 2,288 2,014 1,633 2,436 2,304 254 168 2,616 971 4,452 975 7,582 4,724 9,297 5,567

Interbank loans receivable and securities purchased under agreement to resell

Interbank loans receivable are considered fully performing at December 31, 2012 and 2011. The table below presents the credit ratings of counterparty banks based on Standard and Poorâ&#x20AC;&#x2122;s.

Lower than AUnrated

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 821 821 504 2,184 821 821 504 2,184

Securities purchased under agreements to resell includes reverse repurchase agreements amounting to P38,106 million and 10,022 million for the BPI Group (Consolidated) and Parent Bank, respectively (2011 - P34,773 million, P22,683 million), which are made with a sovereign counterparty and are considered fully performing.

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d.

Derivative financial assets

The table below presents the Standard and Poor’s credit ratings of counterparties for derivative financial assets presented in the consolidated and parent financial statements.

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 727 727 1,348 1,348 3,141 3,141 2,192 2,192 734 734 137 137 1,318 1,318 1,712 1,712

AA- to AA+ A- to A+ Lower than AUnrated

5,920 e.

5,920

5,389

5,389

Debt securities, treasury bills and other government securities

The table below presents the ratings of debt securities, treasury bills and other government securities at December 31, 2012 and 2011 based on Standard & Poor’s: At December 31, 2012 Consolidated

Parent

Trading

Available-

Held-to-

securities

for-sale

maturity

Total

Trading

Available-

Held-to-

securities

for-sale

maturity

Total

(In Millions of Pesos) AAA

3,457

1,016

AA- to AA+

7,600

21,215

A- to A+

-

Lower than A-

10,092

6,063

4,473

3,457

1,016

-

4,473

34,878

6,370

15,472

5,748

27,590

7,297

407

7,704

73,342

69,036

152,470

514

2,059

737

3,310

21,663

104,929

76,243

202,835

Unrated

9,228 19,055

7,254

7,254

-

67,693

138,284

61,363

1,149

711

1,860

92,584

67,822

179,461

At December 31, 2011 Consolidated

Parent

Trading

Available-

Held-to-

securities

for-sale

maturity

Total

Trading

Available-

Held-to-

securities

for-sale

maturity

Total

(In Millions of Pesos) AAA AA- to AA+

488

1,253

-

1,741

488

1,253

3,076

16,580

6,267

25,923

3,076

11,361

A- to A+ Lower than A-

-

3,460

207

3,667

8,353

49,207

82,982

140,542

Unrated

f.

16

2,406

286

2,708

11,933

72,906

89,742

174,581

-

3,460

8,074

46,217

-

1,741

6,135

20,572

-

3,460

73,376

127,667

-

1,992

212

2,204

11,638

64,283

79,723

155,644

Other financial assets

The BPI Group’s other financial assets (shown under Other resources) as of December 31, 2012 and 2011 consist mainly of sales contracts receivable, accounts receivable, accrued interest and fees receivable from various unrated counterparties with good credit standing.

144 BANK OF THE PHILIPPINE ISLANDS

BPI 2012 ANNUAL REPORT

(30)

145

3.1.7 Repossessed or foreclosed collaterals The BPI Group acquires assets by taking possession of collaterals held as security for loans and advances.

As at December 31, 2012, the BPI Group’s foreclosed collaterals have carrying amount of P6,887 million (2011 - P9,148 million). The related foreclosed collaterals have aggregate fair value of P13,942 million (2011 - P10,776 million). Foreclosed collaterals include real estate (land, building, and improvements), auto or chattel, bond and stocks.

Repossessed properties are sold as soon as practicable and are classified as “Assets held for sale” in the statement of condition.

3.1.8 Concentrations of risks of financial assets with credit risk exposure The BPI Group’s main credit exposure at their carrying amounts, as categorized by industry sectors follow: Consolidated Financial institutions

Less Consumer

Manufacturing

Real estate

Others

allowance

Total

(In Millions of Pesos) Due from BSP Due from other banks

119,079

-

-

-

-

-

119,079

7,582

-

-

-

-

-

7,582

38,927

-

-

-

-

-

38,927

5,913

-

4

-

3

-

5,920

515

-

6

508

20,634

-

21,663

22,473

-

53

644

81,759

-

104,929

90

-

-

711

75,442

-

98,091

142,295

226,337

(11,097)

526,640

(1,241)

2,846

Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets Trading securities - debt securities Available-for-sale - debt securities Held-to-maturity securities Loans and advances, net

37,403

33,611

76,243

Other financial assets Accounts receivable, net

-

-

-

-

4,087

-

-

-

-

749

-

749

Other accrued interest and fees receivable Sales contracts -

-

-

-

756

(58)

698

Rental deposits

-

-

-

-

294

-

294

Others, net

-

-

-

-

651

(22)

629

410,712

(12,418)

906,199

receivable, net

At December 31, 2012

231,982

33,611

98,154

144,158

BANK OF THE PHILIPPINE ISLANDS

(31)

146

145

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Financial institutions

Less Consumer

Manufacturing

Real estate

Others

allowance

Total

(In Millions of Pesos) Due from BSP Due from other banks

83,759

-

-

-

-

-

83,759

9,297

-

-

-

-

-

9,297

35,277

-

-

-

-

-

35,277

5,326

-

12

51

-

5,389

4

-

49

2

11,878

-

11,933

305

465

57,288

-

72,906

-

-

89,542

-

Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets

-

Trading securities - debt securities Available-for-sale - debt securities Held-to-maturity securities Loans and advances, net

14,848 200 29,243

50,318

105,724

120,540

89,742

159,334

(10,660)

454,499

(682)

2,377

Other financial assets Accounts receivable, net

-

-

-

-

3,059

-

-

-

-

664

Other accrued interest and fees receivable

-

664

Sales contracts -

-

-

-

467

(5)

462

Rental deposits

receivable, net

-

-

-

-

270

-

270

Others, net

-

-

-

-

130

(22)

108

322,683

(11,369)

766,683

At December 31, 2011

177,954

50,318

106,090

121,007

Parent Financial institutions

Less Consumer

Manufacturing

Real estate

Others

allowance

Total

(In Millions of Pesos) Due from BSP Due from other banks

105,244

-

-

-

-

-

105,244

4,724

-

-

-

-

-

4,724

10,843

-

-

-

-

-

10,843

5,913

-

515

-

-

21,683

-

53

90

-

-

Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets

4

-

3

-

5,920

-

18,540

-

19,055

460

70,388

-

92,584

711

67,021

-

67,822

69,444

198,151

(7,531)

389,962

(1,165)

2,427

Trading securities - debt securities Available-for-sale - debt securities Held-to-maturity securities Loans and advances, net

33,981

1,433

94,484

Other financial assets Accounts receivable, net

-

-

-

-

3,592

-

-

-

-

618

Other accrued interest and fees receivable

618

-

Sales contracts receivable, net

-

-

-

685

-

-

-

-

244

-

244

Others, net

-

-

-

-

605

(14)

591

359,847

(8,717)

700,712

At December 31, 2012

146 BANK OF THE PHILIPPINE ISLANDS

182,993

1,433

94,541

70,615

(7)

678

-

Rental deposits

BPI (32) 2012 ANNUAL REPORT

147

Financial institutions

Less Consumer

Manufacturing

Real estate

Others

allowance

Total

(In Millions of Pesos) Due from BSP Due from other banks

70,807

-

-

-

-

-

70,807

5,567

-

-

-

-

-

5,567

24,867

-

-

-

-

-

24,867

5,326

-

12

-

51

-

5,389

4

-

36

-

11,598

-

11,638

13,671

-

305

465

49,842

-

64,283

98

-

-

-

79,625

-

79,723

140,539

(7,365)

337,425

(653)

1,669

Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets Trading securities - debt securities Available-for-sale - debt securities Held-to-maturity securities Loans and advances, net

26,634

21,216

102,542

53,859

Other financial assets Accounts receivable, net

-

-

-

-

2,322

-

-

-

-

594

Other accrued interest and fees receivable

-

594

Sales contracts -

-

-

-

242

(5)

237

Rental deposits

receivable, net

-

-

-

-

223

-

223

Others, net

-

-

-

-

150

(14)

136

285,186

(8,037)

602,558

At December 31, 2011

146,974

21,216

102,895

54,324

Trading, available-for-sale and held-to-maturity securities under “Others” category include local and US treasury bills. Likewise, Loans and advances under the same category pertain to loans granted to individual and retail borrowers belonging to various industry sectors.

3.2 Market risk The BPI Group is exposed to market risk - the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is managed by the FRMC guided by policies and procedures approved by the RMC and confirmed by the Executive Committee/Board of Directors.

Market risk management The BPI Group reviews and controls market risk exposures of both its trading and non-trading portfolios.

Trading portfolios include those positions arising from the BPI Group’s market-making transactions. Nontrading portfolios primarily arise from the interest rate management of the BPI Group’s retail and commercial banking assets and liabilities.

As part of the management of market risk, the BPI Group undertakes various hedging strategies. The BPI Group also enters into interest rate swaps to match the interest rate risk associated with fixed-rate long-term debt securities.

The BPI Group uses the 1-day, 99% confidence, Value-at-Risk (VaR) as metric of its exposure to market risk. This metric estimates, at 99% confidence level, the maximum loss that a trading portfolio may incur over a trading day. This metric indicates as well that there is 1% statistical probability that the trading portfolios’ actual loss would be greater than the computed VaR. VaR measurement is an integral part of the BPI Group’s market risk control system. Actual market risk exposures vis-à-vis market risk limits are reported daily to the FRMC. VaR limits for all trading portfolios are set by the RMC. The RMC has set a 1-day VaR limit for the BPI Group aggregate trading portfolio. The BPI Group also has a year-to-date mark-to-market plus trading loss limit at which management action would be triggered.

BANK OF THE PHILIPPINE ISLANDS

148

(34)

147

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Stress tests indicate the potential losses that could arise in extreme conditions. Price risk and liquidity risk stress tests are conducted quarterly aside from the historical tests of the VaR models. Concluded tests indicate that BPI will be able to hurdle both stress scenarios. Results of stress tests are reviewed by senior management and by the RMC. The average daily VaR for the trading portfolios follows:

Local fixed-income Foreign fixed-income Foreign exchange Derivatives Equity securities Mutual fund

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 827 727 380 361 238 229 221 202 32 7 49 18 63 63 40 40 16 15 10 8 1,186 1,026 713 621

The BPI Group uses a simple version of the Balance Sheet VaR (BSVaR) whereby only the principal and interest payments due and relating to the banking book as at particular valuation dates are considered. The BSVaR assumes a static balance sheet, i.e., it is assumed that there will be no new transactions moving forward, and no portfolio rebalancing will be undertaken in response to future changes in market rates.

The BSVaR is founded on re-pricing gaps, or the difference between the amounts of rate sensitive assets and the amounts of rate sensitive liabilities. An asset or liability is considered to be rate-sensitive if the interest rate applied to the outstanding principal balance changes (either contractually or because of a change in a reference rate) during the interval.

The BSVaR estimates the â&#x20AC;&#x153;riskiness of the balance sheetâ&#x20AC;? and compares the degree of risk taking activity in the banking books from one period to the next. In consideration of the static framework, and the fact that income from the positions is accrued rather than generated from marking-to-market, the probable loss (that may be exceeded 1% of the time) that is indicated by the BSVaR is not realized in accounting income.

The cumulative average BSVaR for the banking or non-trading book follows:

BSVaR

148 BANK OF THE PHILIPPINE ISLANDS

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 1,470 1,290 1,362 1,210

BPI 2012 ANNUAL REPORT

(35)

149

3.2.1 Foreign exchange risk The BPI Group takes on exposure to the effects of fluctuations in the prevailing exchange rates on its foreign currency financial position and cash flows. The table below summarizes the BPI Group’s exposure to foreign currency exchange rate risk at December 31, 2012 and 2011. Included in the table are the BPI Group’s financial instruments at carrying amounts, categorized by currency.

Consolidated

USD As at December 31, 2012 Financial Assets Cash and other cash items Due from other banks Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets Trading securities Available-for-sale securities Held-to-maturity securities Loans and advances, net Others financial assets Accounts receivable, net Other accrued interest and fees receivable Others Total financial assets Financial Liabilities Deposit liabilities Derivative financial liabilities Due to BSP and other banks Manager’s checks and demand drafts outstanding Other financial liabilities Accounts payable Others Total financial liabilities Net on-balance sheet financial position (in Philippine Peso)

JPY

2,469 3,803 821 1,674 8,340 44,890 28,668 44,046 67 147 134,925 114,270 1,614 108 64 71

Less allowance

EUR GBP (In Millions of Pesos)

59 378

109 610

-

-

1,287

237

152

55 463 1,529 68

1,588 472 298 29

(493)

38

2

(1)

106 3,215

68 4 3,699

(494)

321 4 143,069

2,530 251

537 153

118,628 2,018 108

1,724 1,291 10

16 1,070

Total

-

-

2,653 5,861

-

821

2,063 9,983 45,825 30,495 44,937 (

-

-

-

11

-

-

85

-

180 1,138 122,157

(494)

20,912

108

1

999 117,126

74 1,375

65 2,965

691

17,799

349

250

3,008

BANK OF THE PHILIPPINE ISLANDS

(36)

150

106

149

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

USD As at December 31, 2011 Financial Assets Cash and other cash items Due from other banks Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets Trading securities - debt Securities Available-for-sale - debt securities Held-to-maturity securities Loans and advances, net Others financial assets Accounts receivable, net Other accrued interest and fees receivable Others Total financial assets Financial Liabilities Deposit liabilities Derivative financial liabilities Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Other financial liabilities Accounts payable Others Total financial liabilities Net on-balance sheet financial position (in Philippine Peso)

150 BANK OF THE PHILIPPINE ISLANDS

JPY

EUR GBP (In Millions of Pesos)

1,750 4,591

47 300

127 551

1

220

283

-

46

1,707 3,777 34,876 32,138 40,251 59

1,398 -

302 157 1,594 91 -

19 1,458

Less allowance

Total

-

1,943 6,900

-

-

504

-

-

1,753

234 1,885 170 22

(580)

4,313 36,918 33,902 41,182

2

(7)

54

(587)

277 2 127,748

136 1 119,287

1 1,966

98 1 3,250

42 3,832

107,808 1,420 66

1,099 -

2,722 46 -

713 -

-

112,342 1,466 66

-

-

58

-

177 1,439 115,548

(587)

12,200

57

-

1

89 1,312 110,752

39 1,138

85 88 2,942

3 716

8,535

828

308

3,116

BPI (37) 2012 ANNUAL REPORT

151

Parent

USD As at December 31, 2012 Financial Assets Cash and other cash items Due from other banks Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets Trading securities Available-for-sale Held-to-maturity securities Loans and advances, net Other financial assets Accounts receivable, net Other accrued interest and fees receivable Others Total financial assets Financial Liabilities Deposit liabilities Derivative financial liabilities Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Other financial liabilities Accounts payable Others Total financial liabilities Net on-balance sheet financial position (in Philippine Peso)

JPY

Less allowance

EUR GBP (In Millions of Pesos)

Total

59 376

84 378

13 131

-

2,475

-

-

-

-

821

1,287

237 55 463 1,529 67

152 1,588 472

(492)

2,061 8,752 39,071 27,333 44,912

-

-

-

(1)

64

147 122,849

1,722

106

28

2,919

2,388

(493)

281 129,385

102,911 1,614 108

1,291 -

2,527 251 -

344 153 -

-

107,073 2,018 108

58

10

11

58

-

137

62 999

74

2 65

2 -

105,752

1,375

2,856

557

-

66 1,138 110,540

17,097

347

63

1,831

(493)

18,845

2,319 2,730 821 1,672 7,109 38,136 25,804 44,046 65

-

4

3,615

BANK OF THE PHILIPPINE ISLANDS

(38)

152

151

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

USD As at December 31, 2011 Financial Assets Cash and other cash items Due from other banks Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets Trading securities - debt Securities Available-for-sale - debt securities Held-to-maturity securities Loans and advances, net Other financial assets Accounts receivable, net Other accrued interest and fees receivable Total financial assets Financial Liabilities Deposit liabilities Derivative financial liabilities Due to BSP and other banks Manager’s checks and demand drafts outstanding Other financial liabilities Accounts payable Others Total financial liabilities Net on-balance sheet financial position (in Philippine Peso) 3.2.2

JPY

EUR GBP (In Millions of Pesos)

Less allowance

Total

1,616 3,667

47 298

120 447

17 208

-

1,800 4,620

1

220

283

-

-

504

1,705

-

46

-

-

1,751

3,777 28,640 27,954 40,251

1,398

59

-

302 157 1,594 91 -

136 107,806

1 1,964

98 3,138

96,971 1,420 66

1,099 -

2,719 46 -

21

-

1

234 1,885 -

(579)

4,313 30,682 29,548 41,161

1

(7)

53

19 2,364

(586)

254 114,686

548 -

-

101,337 1,466 66

-

-

22

86 1,398 99,962

39 1,138

2 91 2,859

548

-

88 1,528 104,507

7,844

826

279

1,816

(586)

10,179

Interest rate risk

There are two types of interest rate risk: (i) fair value interest risk and (ii) cash flow interest risk. Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The BPI Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value which affects mainly the BPI Group’s trading securities portfolio and cash flow risks on available-for-sale securities portfolio which is carried at market.

Interest rate risk in the banking book arises from the BPI Group’s core banking activities. The main source of this type of interest rate risk is repricing risk, which reflects the fact that the BPI Group’s assets and liabilities are of different maturities and are priced at different interest rates. Interest margins may increase as a result of such changes but may also result in losses in the event that unexpected movements arise. The Board of Directors sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored monthly by the FRMC.

152 BANK OF THE PHILIPPINE ISLANDS

BPI 2012 ANNUAL REPORT

(39)

153

The table below summarizes the BPI Groupâ&#x20AC;&#x2122;s exposure to interest rate risk, categorized by the earlier of contractual repricing or maturity dates.

Consolidated

Up to 1 year As at December 31, 2012 Financial Assets Due from BSP Due from other banks Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets Trading securities - debt securities Available-for-sale - debt securities Held-to-maturity securities Loans and advances, net Other financial assets Accounts receivable, net Other accrued interest and fees receivable Sales contracts receivable, net Rental deposits Others, net Total financial assets Financial Liabilities Deposit liabilities Derivative financial liabilities Bills payable Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Unsecured subordinated debt Other financial liabilities Accounts payable Outstanding acceptances Deposits on lease contract Dividends payable Others Total financial liabilities Total interest gap

-

Repricing Over 1 up to Non3 years Over 3 years repricing (In Millions of Pesos)

-

Total

-

119,079 7,582 38,927

119,079 7,582 38,927

1,946 206 10,428 5

663 -

3,311 -

21,457 94,501 76,238

5,920 21,663 104,929 76,243

416,544

20,503

45,181

44,412

526,640

2,846

2,846

749 698 294 629 407,412

749 698 294 629 906,199

-

-

-

429,129

21,166

48,492

439,040 1,931

201,896 647

12,245 3,249

149,093 -

802,274 5,827

-

-

-

26,280 2,035

26,280 2,035

-

-

5,000

5,794 -

5,794 5,000

20,494 27,998

3,621 2,377 1,153 1,290 191,643 215,769

3,621 2,377 1,153 1,290 855,651 50,548

440,971 (11,842)

202,543 (181,377)

BANK OF THE PHILIPPINE ISLANDS

(40)

154

153

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Up to 1 year As at December 31, 2011 Financial Assets Due from BSP Due from other banks Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets Trading securities - debt securities Available-for-sale - debt securities Held-to-maturity securities Loans and advances, net Other financial assets Accounts receivable, net Other accrued interest and fees receivable Sales contracts receivable, net Rental deposits Others, net Total financial assets Financial Liabilities Deposit liabilities Derivative financial liabilities Bills payable Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Unsecured subordinated debt Other financial liabilities Accounts payable Outstanding acceptances Deposits on lease contract Dividends payable Others Total financial liabilities Total interest gap

154 BANK OF THE PHILIPPINE ISLANDS

-

2,005 220 5,276 6 357,324 -

Repricing Over 1 up Nonto 3 years Over 3 years repricing (In Millions of Pesos)

-

969 18,527 -

-

2,415 44,892 -

Total

83,759 9,297 35,277

83,759 9,297 35,277

11,713 67,630 89,736 33,756

5,389 11,933 72,906 89,742 454,499

2,377

2,377

364,831

19,496

47,307

664 462 270 108 335,049

664 462 270 108 766,683

374,615 1,685 -

68,390 813 -

106,847 2,316 -

131,249 19,136 1,717

681,101 4,814 19,136 1,717

5,000

4,131 -

4,131 5,000

2,918 1,390 2,050 3,201 610 166,402 168,647

2,918 1,390 2,050 3,201 610 726,068 40,615

376,300 (11,469)

69,203 (49,707)

114,163 (66,856)

BPI 2012 ANNUAL REPORT

(41)

155

Parent

Up to 1 year As at December 31, 2012 Financial Assets Due from BSP Due from other banks Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets Trading securities - debt securities Available-for-sale - debt securities Held-to-maturity securities Loans and advances, net Other financial assets Accounts receivable, net Other accrued interest and fees receivable Sales contracts receivable, net Rental deposits Others, net Total financial assets Financial Liabilities Deposit liabilities Derivative financial liabilities Bills payable Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Unsecured subordinated debt Other financial liabilities Accounts payable Outstanding acceptances Dividends payable Others Total financial liabilities Total interest gap

-

1,946 206 10,428 5 359,320 371,905 399,579 1,931 401,510 (29,605)

Repricing Over 1 up to Non3 years Over 3 years repricing (In Millions of Pesos)

Total

-

-

105,244 4,724 10,843

105,244 4,724 10,843

663 7,542

3,311 10,693

18,849 82,156 67,817 12,407

5,920 19,055 92,584 67,822 389,962

-

-

2,427

2,427

618 678 244 591 306,598

618 678 244 591 700,712

8,205 52,554 647 53,201 (44,996)

14,004 34,693 3,249 -

141,539 16,963 2,036

628,365 5,827 16,963 2,036

5,000

4,508 -

4,508 5,000

2,548 1,153 1,208 169,955 136,643

2,548 1,153 1,208 667,608 33,104

42,942 (28,938)

BANK OF THE PHILIPPINE ISLANDS

(42)

156

155

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Up to 1 year As at December 31, 2011 Financial Assets Due from BSP Due from other banks Interbank loans receivable and SPAR Financial assets at fair value through profit or loss Derivative financial assets Trading securities - debt securities Available-for-sale - debt securities Held-to-maturity securities Loans and advances, net Other financial assets Accounts receivable, net Other accrued interest and fees receivable Sales contracts receivable, net Rental deposits Others, net Total financial assets Financial Liabilities Deposit liabilities Derivative financial liabilities Bills payable Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Unsecured subordinated debt Other financial liabilities Accounts payable Outstanding acceptances Dividends payable Others Total financial liabilities Total interest gap

Repricing Over 1 up to 3 years

NonOver 3 years repricing (In Millions of Pesos)

-

2,005 220 5,276 6 308,040 -

-

969 4,371 -

Total

-

70,807 5,567 24,867

70,807 5,567 24,867

2,415 14,859

11,418 59,007 79,717 10,155

5,389 11,638 64,283 79,723 337,425

1,669

1,669

-

315,547

5,340

17,274

594 237 223 136 264,397

594 237 223 136 602,558

287,883 1,685 -

53,253 813 -

79,830 2,316 -

123,448 9,887 1,717

544,414 4,814 9,887 1,717

-

5,000

3,389 -

3,389 5,000

54,066 (48,726)

87,146 (69,872)

2,020 1,390 3,201 494 145,546 118,851

2,020 1,390 3,201 494 576,326 26,232

289,568 25,979

3.3 Liquidity risk Liquidity risk is the risk that the BPI Group will be unable to meet its payment obligations associated with its financial liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligations to repay depositors and fulfill commitments to lend.

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3.3.1

Liquidity risk management process

The BPI Group’s liquidity management process, as carried out within the BPI Group and monitored by the RMC and the FRMC includes:     

Day-to-day funding, managed by monitoring future cash flows to ensure that requirements can be met.

This includes replenishment of funds as they mature or are borrowed by customers; Maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen interruption to cash flow; Monitoring liquidity gaps against internal and regulatory requirements; Managing the concentration and profile of debt maturities; and Performing periodic liquidity stress testing on the BPI Group’s liquidity position by assuming a faster rate of withdrawals in its deposit base.

Monitoring and reporting take the form of cash flow measurement and projections for the next day, week and month as these are key periods for liquidity management. The starting point for these projections is an analysis of the contractual maturity of the financial liabilities (Notes 3.3.3 and 3.3.4) and the expected collection date of the financial assets.

The BPI Group also monitors unmatched medium-term assets, the level and type of undrawn lending commitments, the usage of overdraft facilities and the impact of contingent liabilities such as standby letters of credit.

3.3.2

Funding approach

Sources of liquidity are regularly reviewed by the BPI Group to maintain a wide diversification by currency, geography, counterparty, product and term.

3.3.3

Non-derivative cash flows

The table below presents the maturity profile of non-derivative financial instruments based on undiscounted cash flows, which the BPI Group uses to manage the inherent liquidity risk. The maturity analysis is based on the remaining period from the end of the reporting period to the contractual maturity date or, if earlier, the expected date the financial asset will be realized or the financial liability will be settled.

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158

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Consolidated

Up to 1 year As at December 31, 2012 Financial Assets Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and securities under agreements to resell (SPAR) Financial assets at fair value through profit or loss Trading securities Available-for-sale securities Held-to-maturity securities, net Loans and advances, net Other financial assets Accounts receivable, net Other accrued interest and fees receivable Sales contracts receivable, net Rental deposits Others, net Total financial assets Financial Liabilities Deposit liabilities Bills payable Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Unsecured subordinated debt Other financial liabilities Accounts payable Deposits on lease contract Outstanding acceptances Dividends payable Others Total financial liabilities Total maturity gap

158 BANK OF THE PHILIPPINE ISLANDS

Over 1 up to 3 years Over 3 years (In Millions of Pesos)

Total

23,293 119,089 7,582

-

-

-

-

23,293 119,089 7,582

39,379

-

-

39,379

3,562 12,276 23,367 290,707

4,935 21,433 23,611 68,325

2,846

-

27,205 128,792 63,843 185,590 -

35,702 162,501 110,821 544,622 2,846

749 698 294 629 524,471

118,304

405,430

749 698 294 629 1,048,205

588,593 25,604 2,035

202,665 261 -

12,292 1,378 -

803,550 27,243 2,035

5,794 445

845

6,282

5,794 7,572

19,952 385,478

3,621 2,377 1,153 1,290 854,635 193,570

3,621 2,377 1,153 1,290 630,912 (106,441)

203,771 (85,467)

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Up to 1 year As at December 31, 2011 Financial Assets Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and securities under agreements to resell (SPAR) Financial assets at fair value through profit or loss Trading securities Available-for-sale securities Held-to-maturity securities, net Loans and advances, net Other financial assets, net Accounts receivable, net Other accrued interest and fees receivable Sales contracts receivable, net Rental deposits Others, net Total financial assets Financial Liabilities Deposit liabilities Bills payable Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Unsecured subordinated debt Other financial liabilities Accounts payable Outstanding acceptances Deposits on lease contract Dividends payable Others Total financial liabilities Total maturity gap

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160

Over 1 up to 3 years Over 3 years (In Millions of Pesos)

Total

22,395 83,784 9,297

-

-

22,395 83,784 9,297

36,971

-

-

36,971

12,388 8,549

14,663

56,035

12,388 79,247

18,267 268,459

31,079 54,369

52,172 243,200

101,518 566,028

2,377

-

-

2,377

664 462 270 108 463,991

100,111

351,407

664 462 270 108 915,509

508,292 17,498 1,717

71,299 398 -

109,904 1,795 -

689,495 19,691 1,717

4,131 423

845

6,689

4,131 7,957

2,918 1,390 2,050 3,201 610 542,230 (78,239)

72,542 27,569

118,388 233,019

2,918 1,390 2,050 3,201 610 733,160 182,349

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Parent

Up to 1 year As at December 31, 2012 Financial Assets Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and securities under agreements to resell (SPAR) Financial assets at fair value through profit or loss Trading securities Available-for-sale securities Held-to-maturity securities Loans and advances, net Other financial assets, net Accounts receivable, net Other accrued interest and fees receivable Sales contracts receivable, net Rental deposits Others, net Total financial assets Financial Liabilities Deposit liabilities Bills payable Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Unsecured subordinated debt Other financial liabilities Accounts payable Outstanding acceptances Dividends payable Others Total financial liabilities Total maturity gap

160 BANK OF THE PHILIPPINE ISLANDS

Over 1 up to 3 years Over 3 years (In Millions of Pesos)

Total

22,518 105,249 4,724

-

-

22,518 105,249 4,724

10,847

-

-

10,847

3,036 9,861 19,186 263,816 2,427 618 678 244 591 443,795 541,396 15,857 2,036 4,508 445 2,548 1,153 1,208 569,151 (125,356)

4,244 17,343 21,514 39,137 -

24,841 117,441 58,644 89,273 -

32,121 144,645 99,344 392,226 2,427

290,199

618 678 244 591 816,232

52,661 122 -

34,763 1,217 -

628,820 17,196 2,036

845

6,282

4,508 7,572

42,262 247,937

2,548 1,153 1,208 665,041 151,191

82,238

53,628 28,610

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161

Up to 1 year As at December 31, 2011 Financial Assets Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and securities under agreements to resell (SPAR) Financial assets at fair value through profit or loss Trading securities Available-for-sale securities Held-to-maturity securities, net Loans and advances, net Other financial assets, net Sales contracts receivable, net Accounts receivable, net Other accrued interest and fees receivable Rental deposits Others, net Total financial assets Financial Liabilities Deposit liabilities Bills payable Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Unsecured subordinated debt Other financial liabilities Accounts payable Outstanding acceptances Dividends Payable Others Total financial liabilities Total maturity gap

Over 1 up to 3 years Over 3 years (In Millions of Pesos)

Total

21,661 70,829 5,567

-

-

21,661 70,829 5,567

24,868

-

-

24,868

12,082 7,831 17,697 257,357 237 1,669

11,446 31,275 30,021 -

49,295 52,197 105,251 206,743

12,082 68,572 101,169 392,629 237 1,669

594 223 136 420,751

72,742

594 223 136 700,236

413,081 8,441 1,717

53,707 319 -

80,508 1,432 -

547,296 10,192 1,717

3,389 423

845

6,689

3,389 7,957

2,020 1,390 3,201 494 434,156 (13,405)

54,871 17,871

88,629 118,114

2,020 1,390 3,201 494 577,656 122,580

161

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3.3.4

Derivative cash flows

(a) Derivatives settled on a net basis The BPI Groupâ&#x20AC;&#x2122;s derivatives that are settled on a net basis consist only of interest rate swaps and nondeliverable forwards. The table below presents the contractual undiscounted cash outflows of interest rate swaps based on the remaining period from December 31 to the contractual maturity dates.

Consolidated and Parent

Up to 1 year Interest rate swap contracts - held for trading 2012 2011 Non-deliverable forwards - held for trading 2012 2011

Over 1 up Over 3 to 3 years years (In Millions of Pesos)

Total

(72) (8)

(647) (644)

(3,249) (2,316)

(3,968) (2,968)

(1,169) (890)

(146)

-

(1,169) (1,036)

(b) Derivatives settled on a gross basis The BPI Groupâ&#x20AC;&#x2122;s derivatives that are settled on a gross basis include foreign exchange derivatives mainly, currency forwards, currency swaps and spot contracts. The table below presents the contractual undiscounted cash flows of foreign exchange derivatives based on the remaining period from reporting date to the contractual maturity dates.

Consolidated and Parent

Up to 1 year Foreign exchange derivatives - held for trading 2012 - Outflow - Inflow 2011 - Outflow - Inflow

162 BANK OF THE PHILIPPINE ISLANDS

(28,449) 29,033 (76,419) 75,631

Over 1 up to 3 years (In Millions of Pesos)

(367) 368 -

Total

(28,816) 29,401 (76,419) 75,631

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3.4 Fair value of financial assets and liabilities The table below summarizes the carrying amount and fair value of those significant financial assets and liabilities not presented on the statement of condition at fair value at December 31.

Consolidated

Financial assets Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and SPAR Held-to-maturity securities, net Loans and advances, net Other financial assets Accounts receivable, net Other accrued interest and fees receivable Sales contracts receivable, net Rental deposits Others, net Financial liabilities Deposit liabilities Bills payable Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Unsecured subordinated debt Other financial liabilities Accounts payable Deposits on lease contract Outstanding acceptances Dividends payable Others

Carrying amount 2012 2012 2011 (In Millions of Pesos)

Fair value 2011

23,293 119,079 7,582 38,927 76,243 526,640

22,395 83,759 9,297 35,277 89,742 454,499

23,293 119,079 7,582 38,927 86,549 572,880

22,395 83,759 9,297 35,277 98,630 473,092

2,846 749 698 294 629

2,377 664 462 270 108

2,846 749 698 294 629

2,377 664 462 270 108

802,274 26,280 2,035

681,101 19,136 1,717

802,274 26,280 2,035

681,101 19,136 1,717

5,794 5,000

4,131 5,000

5,794 6,481

4,131 6,507

3,621 2,377 1,153 1,290

2,918 2,050 1,390 3,201 610

3,621 2,377 1,153 1,290

2,918 2,050 1,390 3,201 610

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Parent

Financial assets Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and SPAR Held-to-maturity securities, net Loans and advances, net Other financial assets Accounts receivable, net Other accrued interest and fees receivable Sales contracts receivable, net Rental deposits Others, net Financial liabilities Deposit liabilities Bills payable Due to BSP and other banks Managerâ&#x20AC;&#x2122;s checks and demand drafts outstanding Unsecured subordinated debt Other financial liabilities Accounts payable Outstanding acceptances Dividends payable Others (i)

Carrying amount 2012 2012 2011 (In Millions of Pesos)

Fair value 2011

22,518 105,244 4,724 10,843 67,822 389,962

21,661 70,807 5,567 24,867 79,723 337,425

22,518 105,244 4,724 10,843 77,402 423,133

21,661 70,807 5,567 24,867 87,909 353,634

2,427 618 678 244 591

1,669 594 237 223 136

2,427 618 678 244 591

1,669 594 237 223 136

628,365 16,963 2,036

544,414 9,887 1,717

628,365 16,963 2,036

544,414 9,887 1,717

4,508 5,000

3,389 5,000

4,508 6,481

3,389 6,507

2,548 1,153 1,208

2,020 1,390 3,201 494

2,548 1,153 1,208

2,020 1,390 3,201 494

Cash and other cash items, due from BSP and other banks and interbank loans receivable and SPAR

The fair value of floating rate placements and overnight deposits approximates their carrying amount. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity. (ii) Investment securities Fair value of held-to-maturity assets is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. (iii) Loans and advances The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. (iv) Financial liabilities The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the amount repayable on demand.

The estimated fair value of fixed interest-bearing deposits and other borrowings not quoted in an active market is based on discounted cash flows using interest rates for new debts with similar remaining maturity.

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(v) Other financial assets / liabilities Carrying amounts of other financial assets / liabilities which have no definite repayment dates are assumed to be their fair values.

3.5 Fair value hierarchy The following table presents the BPI Groupâ&#x20AC;&#x2122;s assets and liabilities that are measured at fair value at December 31: Consolidated Level 1 2012 Financial assets Financial assets at fair value through profit or loss Derivative financial assets Trading securities - Debt securities - Equity securities Available-for-sale financial assets - Debt securities - Equity securities Financial liabilities Derivative financial liabilities

Level 2 (In Millions of Pesos) 5,920

5,920

21,457 435

206 -

21,663 435

94,501 491 116,884

10,428 16,554

104,929 491 133,438

5,827

5,827

-

Level 1

2011 Financial assets Financial assets at fair value through profit or loss Derivative financial assets Trading securities - Debt securities - Equity securities Available-for-sale financial assets - Debt securities - Equity securities Financial liabilities Derivative financial liabilities

Total

Level 2 (In Millions of Pesos) -

11,933 342 63,840 344 76,459 -

Total

5,389

5,389

-

11,933 342

9,066 14,455

72,906 344 90,914

4,814

4,814

Parent Level 1 2012 Financial assets Financial assets at fair value through profit or loss Derivative financial assets Trading securities â&#x20AC;&#x201C; debt securities Available-for-sale financial assets - Debt securities - Equity securities Financial liabilities Derivative financial liabilities

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Level 2 (In Millions of Pesos)

Total

18,849

5,920 206

5,920 19,055

82,156 136 101,141

10,428 16,554

92,584 136 117,695

5,827

5,827

-

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Level 1 2011 Financial assets Financial assets at fair value through profit or loss - Derivative financial assets - Trading securities - debt securities Available-for-sale financial assets - Debt securities - Equity securities Financial liabilities Derivative financial liabilities

Level 2 (In Millions of Pesos)

Total

11,638

5,389 -

5,389 11,638

55,241 133 67,012

9,042 14,431

64,283 133 81,443

4,814

4,814

-

The BPI Group has no financial instruments that fall under the Level 3 category as at December 31, 2012 and 2011. There were no transfers between Level 1 and Level 2 during the year.

3.6 Insurance risk management The non-life insurance entities decide on the retention, or the absolute amount that they are ready to assume insurance risk from one event. The retention amount is a function of capital, experience, actuarial study and risk appetite or aversion.

In excess of the retention, these entities arrange reinsurances either thru treaties or facultative placements.

They also accredit reinsurers based on certain criteria and set limits as to what can be reinsured. The reinsurance treaties and the accreditation of reinsurers require Board of Directorsâ&#x20AC;&#x2122; approval.

3.7 Capital management Cognizant of its exposure to risks, the BPI Group understands that it must maintain sufficient capital to absorb unexpected losses, to stay in business for the long haul, and to satisfy regulatory requirements. The BPI Group further understands that its performance, as well as the performance of its various units, should be measured in terms of returns generated vis-Ă -vis allocated capital and the amount of risk borne in the conduct of business.

The BPI Group manages its capital following the framework of Basel Committee on Banking Supervision Accord II (Basel II) and its implementation in the Philippines by the BSP. The BSP through its Circular 538 requires each bank and its financial affiliated subsidiaries to keep its Capital Adequacy Ratio (CAR) - the ratio of qualified capital to risk-weighted exposures - to be no less than 10%. In quantifying its CAR, BPI currently uses the Standardized Approach (for credit risk and market risk) and the Basic Indicator Approach (for operational risk). Capital adequacy reports are filed with the BSP every quarter.

Qualifying capital and risk-weighted assets are computed based on BSP regulations. The qualifying capital of the Parent Bank consists of core tier 1 capital and tier 2 capital. Tier 1 capital comprises paid-up capital stock, paid-in surplus, surplus including net income for the year, surplus reserves and minority interest less deductions such as deferred income tax, unsecured credit accommodations to DOSRI, goodwill and unrealized fair value losses on available-for-sale securities. Tier 2 capital includes unsecured subordinated debt (see Note 21), net unrealized fair value gains on available-for-sale investments, and general loan loss provisions for BSP reporting purposes.

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The Basel II framework following BSP Circular 538 took into effect on July 1, 2007. The table below summarizes the CAR under the Basel II framework for the years ended December 31, 2012 and 2011.

Tier 1 capital Tier 2 capital Gross qualifying capital Less: Required deductions Total qualifying capital Risk weighted assets CAR (%)

Consolidated Parent 2012 2012 2011 (In Millions of Pesos) 83,125 84,654 75,978 10,285 9,000 9,461 93,410 93,654 85,439 2,756 29,304 2,531 90,654 64,350 82,908 638,900 14.19

556,026 14.91

511,404 12.58

2011 77,303 8,554 85,857 25,429 60,428 446,005 13.55

The BPI Group has fully complied with the CAR requirement of the BSP. Likewise, the BPI Group manages the capital of its non-life insurance subsidiaries, pre-need subsidiary and securities dealer subsidiaries in accordance with the capital requirements of the relevant regulatory agency, such as Insurance Commission, Philippine SEC and PSE. These subsidiaries have fully complied with the relevant capital requirements.

As part of the reforms of the PSE to expand capital market and improve transparency among listed firms, PSE requires listed entities to maintain a minimum of ten percent (10%) of their issued and outstanding shares, exclusive of any treasury shares, held by the public. The Parent Bank has fully complied with this requirement.

Note 4 - Critical Accounting Estimates and Judgments The BPI Group makes estimates and assumptions that affect the reported amounts of assets and liabilities.

Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. It is reasonably possible that the outcomes within the next financial year could differ from assumptions made at reporting date and could result in the adjustment to the carrying amount of affected assets or liabilities.

A. Critical accounting estimates (i)

Impairment losses on loans and advances (Note 13)

The BPI Group reviews its loan portfolios to assess impairment at least on a monthly basis. In determining whether an impairment loss should be recorded in profit or loss, the BPI Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for loans with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. To the extent that the net present value of estimated cash flows of individually impaired accounts and the estimated impairment for collectively assessed accounts differs by +/- 5%, impairment provision for the year ended December 31, 2012 would be an estimated P397 million (2011 - P383 million) higher or lower.

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(ii) Fair value of derivatives and other financial instruments (Notes 3.4 and 9) The fair value of financial instruments that are not quoted in active markets are determined by using valuation techniques. Where valuation techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them. All models are approved by the Board of Directors before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, the models use only observable data; however, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect reported fair value of financial instruments. The BPI Group considers that it is impracticable to disclose with sufficient reliability the possible effects of sensitivities surrounding the fair value of financial instruments that are not quoted in active markets. (iii) Pension liability on defined benefit plan (Note 30) The BPI Group estimates its pension benefit obligation and expense for defined benefit pension plans based on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 30 and include, among others, the discount rate, expected return on plan assets and future salary increases. The present value of the defined benefit obligations of the BPI Group at December 31, 2012 and 2011 are determined using the market yields on Philippine government bonds with terms consistent with the expected payments of employee benefits. Plan assets are invested in either equity securities, debt securities or other forms of investments. Equity markets may experience volatility, which could affect the value of pension plan assets. This volatility may make it difficult to estimate the long-term rate of return on plan assets. Actual results that differ from the BPI Groupâ&#x20AC;&#x2122;s assumptions are accumulated and amortized over future periods and therefore generally affect the BPI Groupâ&#x20AC;&#x2122;s recognized expense and recorded obligation in such future periods. The BPI Groupâ&#x20AC;&#x2122;s assumptions are based on actual historical experience and external data regarding compensation and discount rate trends. The BPI Group considers that it is impracticable to disclose with sufficient reliability the possible effects of sensitivities surrounding the estimation of pension liability. (iv) Valuation of assets held for sale In determining the fair value of assets held for sale, the BPI Group analyzed the sales prices by applying appropriate units of comparison, adjusted by differences between the subject asset or property and related market data. Should there be a subsequent write-down of the asset to fair value less cost to sell, such writedown is recognized as impairment loss in the statement of income.

In 2012, the BPI Group has recognized an impairment loss on its foreclosed assets amounting to P394 million (2011 - P299 million).

B. Critical accounting judgments (i)

Impairment of available-for-sale securities (Note 11)

The BPI Group follows the guidance of PAS 39 to determine when an available-for-sale security is impaired.

This determination requires significant judgment. In making this judgment, the BPI Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health and near-term business outlook of the issuer, including factors such as industry and sector performance, changes in technology and operational and financing cash flows. (ii) Held-to-maturity securities (Note 12) The BPI Group follows the guidance of PAS 39 in classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgment.

In making this judgment, the BPI Group evaluates its intention and ability to hold such investments to maturity.

If the BPI Group fails to keep these investments to maturity other than for the specific circumstances - for example selling an insignificant amount close to maturity - it will be required to reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value and not at amortized cost.

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(iii) Classification of assets held for sale Management follows the principles in PFRS 5 in classifying certain foreclosed assets (consisting of real estate and auto or chattel), as assets held for sale when the carrying amount of the assets will be recovered principally through sale. Management is committed to a plan to sell these foreclosed assets and the assets are actively marketed for sale at a price that is reasonable in relation to their current fair value. (iv) Realization of deferred income tax assets (Note 17) Management reviews at each reporting date the carrying amounts of deferred tax assets. The carrying amount of deferred tax assets is reduced to the extent that the related tax assets cannot be utilized due to insufficient taxable profit against which the deferred tax losses will be applied. Management believes that sufficient taxable profit will be generated to allow all or part of the deferred income tax assets to be utilized.

Note 5 - Assets and Liabilities Attributable to Insurance Operations Details of assets and liabilities attributable to insurance operations as at December 31 are as follows: 2012 2011 (In Millions of Pesos)

Assets Cash and cash equivalents (Note 7) Insurance balances receivable, net Investment securities Available-for-sale Held-to-maturity Land, building and equipment Accounts receivable and other assets, net

Liabilities Reserves and other balances Accounts payable, accrued expenses and other payables

106 1,952

233 1,874

5,595 3,811 131 1,856 13,451

4,745 3,894 153 1,341 12,240

10,148 645 10,793

9,325 612 9,937

Details of income attributable to insurance operations before income tax and minority interest for the years ended December 31 are as follows: 2012 Premiums earned and related income Investment and other income Benefits, claims and maturities Increase in actuarial reserve liabilities Management and general expenses Commissions Other expenses Income before income tax and minority interest

2011 2010 (In Millions of Pesos) 2,441 2,410 2,188 426 551 410 2,867 2,961 2,598 972 1,093 961 271 30 7 433 429 381 478 417 418 19 43 29 2,173 2,012 1,796 694 949 802

Note 6 - Business Segments Operating segments are reported in accordance with the internal reporting provided to the chief executive officer, who is responsible for allocating resources to the reportable segments and assessing their performance. All operating segments used by the BPI Group meet the definition of a reportable segment under PFRS 8.

The BPI Group has determined the operating segments based on the nature of the services provided and the different markets served representing a strategic business unit.

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The BPI Group’s main operating business segments follow: 

Consumer Banking - this segment addresses the individual and retail markets. It covers deposit taking and servicing, consumer lending such as home mortgages, auto loans and credit card finance as well as the remittance business. It includes the entire transaction processing and service delivery infrastructure consisting of the BPI and BPI Family Bank network of branches, ATMs and point-of-sale terminals as well as phone and Internet-based banking platforms.



Corporate Banking - this segment consists of the entire lending, leasing, trade and cash management services provided by the BPI Group to corporate and institutional customers. These customers include both high-end corporations as well as various middle market clients.



Investment Banking - this segment includes the various business groups operating in the investment markets and dealing in activities other than lending and deposit taking. These services cover corporate finance, securities distribution, asset management, trust and fiduciary services as well as proprietary trading and investment activities.

The performance of the Parent Bank is assessed as a single unit using financial information presented in the separate or Parent only financial statements. Likewise, the chief executive officer assesses the performance of its insurance business as a separate segment from its banking and allied financial undertakings. Information on the assets, liabilities and results of operations of the insurance business is fully disclosed in Note 5.

The BPI Group and the Parent Bank mainly derive revenue (more than 90%) within the Philippines, accordingly, no geographical segment is presented.

Revenues of the BPI Group’s segment operations are derived from interest (net interest income). The segment report forms part of management’s assessment of the performance of the segment, among other performance indicators.

There were no changes in the reportable segments during the year. Transactions between the business segments are carried out at arm’s length. The revenue from external parties reported to management is measured in a manner consistent with that in profit or loss.

Funds are ordinarily allocated between segments, resulting in funding cost transfers disclosed in inter-segment net interest income. Interest charged for these funds is based on the BPI Group’s cost of capital.

Internal charges and transfer pricing adjustments have been reflected in the performance of each business.

Revenue-sharing agreements are used to allocate external customer revenues to a business segment on a reasonable basis. Inter-segment revenues however, are deemed insignificant for financial reporting purposes, thus, not reported in segment analysis below.

The BPI Group’s management reporting is based on a measure of operating profit comprising net income, loan impairment charges, fee and commission income, other income and non-interest income.

Segment assets and liabilities comprise majority of operating assets and liabilities as shown in the statement of condition, but exclude items such as taxation.

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The segment assets, liabilities and results of operations of the reportable segments of the BPI Group as at and for the years ended December 31, 2012, 2011 and 2010 are as follows: 2012 Consumer banking Interest income Interest expense Net interest income Impairment charge Net interest income after impairment charge Fees and commission income Other income Gross receipts tax Other income, net Compensation and fringe benefits Occupancy and equipment - related expenses Other operating expenses Total operating expenses Operating profit Share in net income of associates Provision for income tax Total assets Total liabilities

27,138 11,726 15,412 2,103 13,309 4,192 4,546 (547) 8,191 7,189 4,204 5,230 16,623 4,877

336,125 829,128

Corporate Investment banking banking (In Millions of Pesos) 8,226 4,926 475 107 7,751 4,819 817 6,934 4,819 523 641 1,686 8,816 (55) (697) 2,154 8,760 921 559 1,070 124 3,074 1,015 5,065 1,698 4,023 11,881

366,674 16,626

264,426 29,794

Total per management reporting 40,290 12,308 27,982 2,920 25,062 5,356 15,048 (1,299) 19,105 8,669 5,398 9,319 23,386 20,781 138 3,132 967,225 875,548

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2011

Interest income Interest expense Net interest income Impairment charge Net interest income after impairment charge Fees and commission income Other income Gross receipts tax Other income, net Compensation and fringe benefits Occupancy and equipment - related expenses Other operating expenses Total operating expenses Operating profit Share in net income of associates Provision for income tax Total assets Total liabilities

Consumer Corporate banking banking (In Millions of Pesos) 24,985 6,674 11,819 515 13,166 6,159 1,643 475 11,523 5,684 3,845 518 3,834 1,410 (468) (54) 7,211 1,874 7,467 715 3,882 1,036 6,217 1,248 17,566 2,999 1,168 4,559

288,598 702,138

Investment banking 6,463 105 6,358 33 6,325 455 6,059 (532) 5,982 592 121 986 1,699 10,608

324,863 16,072

226,427 22,599 2010

Interest income Interest expense Net interest income Impairment charge Net interest income after impairment charge Fees and commission income Other income Gross receipts tax Other income, net Compensation and fringe benefits Occupancy and equipment - related expenses Other operating expenses Total operating expenses Operating profit Share in net loss of associates Provision for income tax Total assets Total liabilities

172 BANK OF THE PHILIPPINE ISLANDS

Consumer Corporate Investment banking banking banking (In Millions of Pesos) 26,302 6,421 4,102 12,177 793 12 14,125 5,628 4,090 1,827 1,288 328 12,298 4,340 3,762 3,440 480 363 3,684 1,086 6,162 (418) (46) (668) 6,706 1,520 5,857 6,570 575 396 3,761 1,269 91 6,020 913 509 16,351 2,757 996 2,653 3,103 8,623

270,201 746,969

261,722 18,681

332,005 18,099

Total per management reporting 38,122 12,439 25,683 2,151 23,532 4,818 11,303 (1,054) 15,067 8,774 5,039 8,451 22,264 16,335 216 3,130 839,888 740,809

Total per management reporting 36,825 12,982 23,843 3,443 20,400 4,283 10,932 (1,132) 14,083 7,541 5,121 7,442 20,104 14,379 195 2,520 863,928 783,749

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Reconciliation of segment results to consolidated results of operations: 2012

Interest income Interest expense Net interest income Impairment charge Net interest income after impairment charge Fees and commission income Other income Gross receipts tax Other income, net Compensation and fringe benefits Occupancy and equipment - related expenses Other operating expenses Total operating expenses Operating profit Share in net income of associates Provision for income tax Total assets Total liabilities

Total per Consolidation management adjustments/ reporting Others (In Millions of Pesos) 40,290 (181) 12,308 347 27,982 (528) 2,920 3 25,062 (531) 5,356 (245) 15,048 1,113 (1,299) (43) 19,105 825 8,669 1,887 5,398 1,795 9,319 (2,180) 23,386 1,502 20,781 (1,208) 138 3,132 967,225 17,844 875,548 10,999

Total per consolidated financial statements 40,109 12,655 27,454 2,923 24,531 5,111 16,161 (1,342) 19,930 10,556 7,193 7,139 24,888 19,573 138 3,132 985,069 886,547

2011

Total per Consolidation consolidated adjustments/ financial Others statements (In Millions of Pesos) 38,122 567 38,689 12,439 384 12,823 25,683 183 25,866 2,151 (1) 2,150 23,532 184 23,716 4,818 (211) 4,607 11,303 1,052 12,355 (1,054) (16) ( 1,070) 15,067 825 15,892 8,774 1,605 10,379 5,039 1,437 6,476 8,451 (1,841) 6,610 22,264 1,201 23,465 16,335 (192) 16,143 216 216 3,130 3,130 839,888 2,728 842,616 740,809 11,277 752,086

Total per management reporting Interest income Interest expense Net interest income Impairment charge Net interest income after impairment charge Fees and commission income Other income Gross receipts tax Other income, net Compensation and fringe benefits Occupancy and equipment - related expenses Other operating expenses Total operating expenses Operating profit Share in net income of associates Provision for income tax Total assets Total liabilities

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2010

Total per Consolidation consolidated adjustments/ financial Others statements (In Millions of Pesos) 36,825 162 36,987 12,982 377 13,359 23,843 (215) 23,628 3,443 11 3,454 20,400 (226) 20,174 4,283 (123) 4,160 10,932 845 11,777 (1,132) (26) (1,158) 14,083 696 14,779 7,541 1,596 9,137 5,121 962 6,083 7,442 (1,708) 5,734 20,104 850 20,954 14,379 (380) 13,999 195 195 2,520 2,520 863,928 14,218 878,146 783,749 12,122 795,871

Total per management reporting Interest income Interest expense Net interest income Impairment charge Net interest income after impairment charge Fees and commission income Other income Gross receipts tax Other income, net Compensation and fringe benefits Occupancy and equipment - related expenses Other operating expenses Total operating expenses Operating profit Share in net loss of associates Provision for income tax Total assets Total liabilities

“Consolidation adjustments/Others” pertain to balances of support units and inter-segment elimination in accordance with the BPI Group’s internal reporting.

Note 7 - Cash and Cash Equivalents This account at December 31 consists of: 2012 Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and securities purchased under agreements to resell (Note 8) Cash and cash equivalents attributable to insurance operations (Note 5)

174 BANK OF THE PHILIPPINE ISLANDS

Consolidated 2011

2012 2010 (In Millions of Pesos) 22,518 18,151 105,244 74,184 4,724 6,548

23,293 119,079 7,582

22,395 83,759 9,297

38,927

35,277

62,973

106 188,987

233 150,961

54 161,910

Parent 2011

2010

21,661 70,807 5,567

17,573 65,795 3,209

10,843

24,867

52,377

143,329

122,902

138,954

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Note 8 - Interbank Loans Receivable and Securities Purchased under Agreements to Resell (SPAR) The account at December 31 consists of transactions with:

BSP BPI Leasing Corporation Other banks Accrued interest receivable

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 38,084 10,000 34,729 22,640 1,402 821 821 503 781 38,905 10,821 35,232 24,823 22 22 45 44 38,927 10,843 35,277 24,867

Interbank loans receivable and SPAR maturing within 90 days from the date of acquisition are classified as cash equivalents in the statement of cash flows (Note 7).

Current Non-current

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 38,927 10,843 35,277 24,867 38,927 10,843 35,277 24,867

Government bonds are pledged by the BSP as collateral under reverse repurchase agreements. The face value of securities pledged is equivalent to the total balance of outstanding placements as at reporting date. All collateral agreements mature within 12 months.

The range of average interest rates (%) of interbank loans receivable of the BPI Group for the years ended December 31 follows: Peso-denominated US dollar-denominated

2012 3.92 - 4.94 0.16 - 0.23

2011 4.03 - 4.54 0.31 - 0.34

Note 9 - Derivative Financial Instruments Derivatives held by the BPI Group for non-hedging purposes mainly consist of the following: 

Foreign exchange forwards represent commitments to purchase or sell one currency against another at an agreed forward rate on a specified date in the future. Settlement can be made via full delivery of forward proceeds or via payment of the difference (non-deliverable forward) between the contracted forward rate and the prevailing market rate on maturity.



Foreign exchange swaps refer to spot purchase or sale of one currency against another with an agreement to sell or purchase the same currency at an agreed forward rate in the future.



Interest rate swaps refer to agreement to exchange fixed rate versus floating interest payments (or vice versa) on a reference notional amount over an agreed period of time.



Cross currency swaps refer to spot exchange of notional amounts on two currencies at a given exchange rate and with an agreement to re-exchange the same notional amounts at a specified maturity date based on the original exchange rate. Parties on the transaction agree to pay a stated interest rate on the borrowed notional amount and receive a stated interest rate on the lent notional amount, payable or receivable periodically over the term of the transaction.



Credit-Linked Notes (CLNs) are structured notes whose value is derived from the creditworthiness of an underlying reference entity. A CLN may be viewed as a bundled note that consists of a bond and a credit default swap, allowing the issuer to transfer the credit risk of a reference entity to the investor during the reference period.

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The BPI Groupâ&#x20AC;&#x2122;s credit risk represents the potential cost to replace the swap contracts if counterparties fail to fulfill their obligation. This risk is monitored on an ongoing basis with reference to the current fair value, a proportion of the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the BPI Group assesses counterparties using the same techniques as for its lending activities.

The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognized on the statement of condition. They do not necessarily represent the amounts of future cash flows involved or the current fair values of the instruments and therefore are not indicative of the BPI Groupâ&#x20AC;&#x2122;s exposure to credit or price risks. The derivative instruments become favorable (assets) or unfavorable (liabilities) as a result of fluctuations in market interest rates or foreign exchange rates relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand and the extent at which the instruments can become favorable or unfavorable in fair values can fluctuate significantly from time to time. The fair values of derivative instruments held are set out below: Consolidated and Parent Contract/ Notional Amount 2012 2011 Free-standing derivatives Foreign exchange derivatives Currency swaps Currency forwards Interest rate swaps Embedded credit derivatives Total derivatives assets (liabilities) held for trading

197,512 99,514 41,110 5,747

Assets

Fair Values

2012 2011 (In Millions of Pesos)

150,971 61,755 25,495 19,185

Liabilities 2012 2011

1,038 781 4,021 80

606 1,449 3,214 120

(501) (1,359) (3,967) -

(772) (1,052) (2,967) (23)

5,920

5,389

(5,827)

(4,814)

Note 10 - Trading Securities The account at December 31 consists of:

Debt securities Government securities Commercial papers of private companies Accrued interest receivable Equity securities - listed

176 BANK OF THE PHILIPPINE ISLANDS

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 20,480 1,022 21,502 161 21,663 435 22,098

11,433 274 11,707 226 11,933 342 12,275

18,405 512 18,917 138 19,055 19,055

11,157 258 11,415 223 11,638 11,638

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Note 11 - Available-for-Sale Securities This account at December 31 consists of:

Debt securities Government securities Others Accrued interest receivable Equity securities Listed Unlisted Allowance for impairment

Current Non-current

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 78,725 68,197 54,169 47,128 24,858 23,122 17,674 16,150 103,583 91,319 71,843 63,278 1,346 1,265 1,063 1,005 104,929 92,584 72,906 64,283 1,743 317 2,060 106,989 (586) 106,403

344 1,431 1,775 74,681 (597) 74,084

361 113 474 93,058 (213) 92,845

133 297 430 64,713 (213) 64,500

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 7,925 5,811 6,856 6,487 99,064 87,247 67,825 58,226 106,989 93,058 74,681 64,713

The reconciliation of the allowance for impairment at December 31 is summarized as follows:

At January 1 (Reversal of) provision for impairment losses At December 31

Consolidated 2012 2012 2011 (In Millions of Pesos) 597 213 564 (11) 33 586 213 597

Parent

2011 213 213

The range of average interest rates (%) of available-for-sale debt securities of the BPI Group for the years ended December 31 follows: 2012 5.01 - 5.31 2.46 - 2.74

Peso-denominated Foreign currency-denominated

2011 5.13 - 5.54 2.26 - 2.53

The movement in available-for-sale securities is summarized as follows:

At January 1 Additions Disposals Amortization of premium, net Fair value adjustments Exchange differences Net change in allowance for impairment Net change in accrued interest receivable At December 31

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 74,084 64,500 112,523 98,910 404,123 363,264 297,343 266,203 (373,322) (336,194) (339,449) (304,304) (238) (190) (189) (159) 2,859 2,481 1,683 1,782 (1,397) (1,276) 2,920 2,663 11 (33) 283 260 (714) (595) 106,403 92,845 74,084 64,500

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On October 22, 2008, the BPI Group reclassified certain available-for-sale securities aggregating P19.1 billion to held-to-maturity category. Likewise, on November 12, 2008, an additional portfolio of US dollardenominated available-for-sale securities totaling US$171.6 million (or peso equivalent of P9.2 billion) was further reclassified from available-for-sale to held-to-maturity. The reclassification was triggered by managementâ&#x20AC;&#x2122;s change in intention over the securities in the light of volatile market prices due to global economic downturn. Management believes that despite the market uncertainties, the BPI Group has the capability to hold those reclassified securities until maturity dates.

The aggregate fair value loss of those securities at reclassification dates still recognized in Accumulated other comprehensive income (under Capital funds), and which will be amortized over the remaining lives of the instruments using the effective interest rate method amounts to P1,757 million. Unamortized fair value loss as of December 31, 2012 amounts to P490 million (2011 - P715 million). Fair value loss that would have been recognized in other comprehensive income if the available-for-sale securities had not been reclassified amounts to P374 million for the year ended December 31, 2012 (2011 - P113 million gain). There are no gains or losses recognized in profit or loss or other comprehensive income.

On July 11, 2012, the BPI Group reclassified certain available-for-sale securities totaling P1.01 billion to loans and receivables. The reclassification was triggered by managementâ&#x20AC;&#x2122;s change in intention over the securities following the disappearance of active markets for these securities. As at date of reclassification, fair value gain or loss that would have been recognized in other comprehensive income if the available-for-sale securities had not been reclassified amounts to P725 million, which is the same amount of unamortized fair value loss in other comprehensive income that will be recycled to profit or loss over the remaining lives of the securities. The unamortized fair value loss as of December 31, 2012 amounts to P456 million. The estimated amount of cash flows that the BPI Group expects to recover, as at the date of reclassification, is P1.01 billion at the average effective interest rate of 3.54%. There are no gains or losses recognized in profit or loss or other comprehensive income.

Note 12 - Held-to-Maturity Securities This account at December 31 consists of:

Government securities Commercial papers of private companies Accrued interest receivable

Current Non-current

Consolidated Parent 2012 2012 2011 (In Millions of Pesos) 73,038 64,851 84,709 1,432 1,432 2,990 74,470 66,283 87,699 1,773 1,539 2,043 76,243 67,822 89,742 Consolidated Parent 2012 2012 2011 (In Millions of Pesos) 18,816 15,024 15,298 57,427 52,798 74,444 76,243 67,822 89,742

2011 76,080 1,851 77,931 1,792 79,723

2011 10,223 69,500 79,723

The range of average interest rates (%) of held-to-maturity securities of the BPI Group for the years ended December 31 follows:

Peso-denominated Foreign currency-denominated

178 BANK OF THE PHILIPPINE ISLANDS

2012 7.44 - 7.66 4.57 - 4.75

2011 7.46 - 8.00 4.53 - 4.82

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The movement in held-to-maturity securities is summarized as follows:

At January 1 Additions Maturities Amortization of premium, net Exchange differences Net change in accrued interest receivable At December 31

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 89,742 79,723 95,474 85,136 10,837 9,521 31,517 29,920 (19,973) (17,659) (38,591) (35,616) (2,009) (1,643) (1,417) (1,434) (2,084) (1,867) 2,792 1,766 (270) (253) (33) (49) 76,243 67,822 89,742 79,723

Note 13 - Loans and Advances Major classifications of this account at December 31 are as follows:

Corporate entities Large corporate customers Small and medium enterprise Retail customers Credit cards Mortgages Others Accrued interest receivable Unearned discount/income Allowance for impairment

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 328,242 315,698 276,806 275,099 85,906 53,515 74,518 46,439 25,224 95,914 5,614 540,900 1,962 (5,125) 537,737 (11,097) 526,640

21,571 83,451 13,040 469,386 1,667 (5,894) 465,159 (10,660) 454,499

25,224 175 2,007 396,619 1,396 (522) 397,493 (7,531) 389,962

21,571 146 727 343,982 1,230 (422) 344,790 (7,365) 337,425

The Parent balances above include amounts due from related parties (Note 32).

Current Non-current

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 294,025 269,926 262,020 251,138 243,712 127,567 203,139 93,652 537,737 397,493 465,159 344,790

The amount of loans and advances above include finance lease receivables as follows:

Total future minimum lease collections Unearned finance income Present value of future minimum lease collections Allowance for impairment

Consolidated 2012 2011 (In Millions of Pesos) 7,957 7,256 (1,137) (1,113) 6,820 6,143 (142) (74) 6,678 6,069

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Details of future minimum lease collections follow: Consolidated 2012 2011 (In Millions of Pesos) 4,456 4,268 3,501 2,988 7,957 7,256 (1,137) (1,113) 6,820 6,143

Not later than one year Later than one year but not later than five years Unearned finance income The Parent Bank has no finance lease receivables as at December 31, 2012 and 2011.

Details of the loans and advances portfolio of the BPI Group at December 31 are as follows: 1)

As to industry/economic sector (in %)

Consumer Manufacturing Real estate, renting and other related activities Agriculture and forestry Wholesale and retail trade Financial institutions Others 2)

Consolidated 2012 2011 28.37 27.96 18.24 22.19

2012 6.78 24.51

13.96 1.84 14.66 6.91 16.02 100.00

17.58 2.43 19.42 8.82 20.46 100.00

12.53 2.67 14.26 6.22 14.17 100.00

Parent

2011 6.60 29.77 15.63 3.56 18.85 7.70 17.89 100.00

As to collateral

Secured loans Real estate mortgage Chattel mortgage Others Unsecured loans

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 165,342 32,354 134,168 331,864 203,911 535,775

152,314 30,506 100,630 283,450 180,042 463,492

78,906 3,105 129,313 211,324 184,773 396,097

77,219 3,732 96,695 177,646 165,914 343,560

Other collaterals include hold-out deposits, mortgage trust indentures, government securities and bonds, quedan/warehouse receipts, standby letters of credit, trust receipts, and deposit substitutes.

Loans and advances aggregating P3,431 million (2011 - P3,312 million) and P1,865 million (2011 - P1,283 million) are used as security for bills payable (Note 20) of the BPI Group and Parent Bank, respectively.

The range of average interest rates (%) of loans and advances of the BPI Group for the years ended December 31 follows: Commercial loans Peso-denominated loans Foreign currency-denominated loans Real estate mortgages Auto loans

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2012 5.42 - 5.55 2.36 - 2.60 8.64 - 9.06 9.85 - 10.28

2011 5.08 - 5.89 2.16 - 2.25 8.70 - 9.52 10.45 - 10.60

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Non-performing accounts (over 30 days past due) of the BPI Group and the Parent Bank, net of accounts in the “loss” category and covered with 100% reserves (excluded under BSP Circular 351), are as follows: Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 11,578 6,761 12,095 7,270 2,986 2,157 2,559 1,921 8,592 4,604 9,536 5,349

Non-performing accounts (NPL 30) “Loss” category loans with 100% reserves Net NPL 30

Reconciliation of allowance for impairment by class at December 31 follows: Consolidated

Corporate entities Large Small and corporate medium customers enterprises At January 1 Provision for impairment losses Write-off/disposal Unwind of discount Others At December 31

3,091

3,323

269 (195) (75) (36) 3,054

74 (87) (50) (480) 2,780

Corporate entities Large Small and corporate medium customers enterprises At January 1 Provision for impairment losses Write-off/disposal Unwind of discount Others At December 31

2,641

3,537

629 (86) (68) (25) 3,091

2 (112) (97) (7) 3,323

2012 Retail customers Credit Mortgages cards (In Millions of Pesos) 1,102 1,973 292 (1) 117 1,510

1,233 (836) (65) 2,305

Others

Total

1,171

10,660

333 (73) 17 1,448

2,201 (1,192) (125) (447) 11,097

Others

Total

1,144

10,242

54 (9) (18) 1,171

1,786 (1,086) (165) (117) 10,660

2011 Retail customers Credit Mortgages cards (In Millions of Pesos) 975 1,945 180 (7) (46) 1,102

921 (872) (21) 1,973

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Parent

Corporate entities Large Small and corporate medium customers enterprises At January 1 Provision for impairment losses Write-off/disposal Unwind of discount Others At December 31

3,025

2,289

171 (194) (75) 23 2,950

26 (18) (50) (104) 2,143

Corporate entities Large Small and corporate medium customers enterprises At January 1 Provision for (reversal of) impairment losses Write-off/disposal Unwind of discount Others At December 31

2,752

2,501

489 (86) (68) (62) 3,025

(78) (98) (97) 61 2,289

2012 Retail customers Credit Mortgages cards (In Millions of Pesos) 40 1,973 (1) (1) 38

1,233 (836) (65) 2,305

Total

Others 38

7,365

(2) 59 95

1,430 (1,051) (125) (88) 7,531

2011 Retail customers Credit Mortgages cards (In Millions of Pesos) 60 1,945 1 (21) 40

921 (872) (21) 1,973

Others

Total

13

7,271

11 (2) 16 38

1,344 (1,058) (165) (27) 7,365

Note 14 - Bank Premises, Furniture, Fixtures and Equipment This account at December 31 consists of: Consolidated

Land Cost January 1, 2012 Additions Disposals Amortization Transfers December 31, 2012 Accumulated depreciation January 1, 2012 Depreciation Disposals/transfers December 31, 2012 Net book value, December 31, 2012

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2012 Buildings and Furniture leasehold and Equipment improvements equipment for lease (In Millions of Pesos)

Total

3,159 (9) (4) 3,146

5,831 349 (184) (156) 4 5,844

11,388 1,446 (942) (2) 11,890

4,468 2,072 (1,688) 4,852

24,846 3,867 (2,823) (156) (2) 25,732

3,146

2,225 226 (99) 2,352 3,492

8,807 1,282 (767) 9,322 2,568

1,492 987 (842) 1,637 3,215

12,524 2,495 (1,708) 13,311 12,421

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Land Cost January 1, 2011 Additions Disposals Amortization Transfers December 31, 2011 Accumulated depreciation January 1, 2011 Depreciation Disposals/transfers December 31, 2011 Net book value, December 31, 2011

2011 Buildings and Furniture leasehold and Equipment improvements equipment for lease (In Millions of Pesos)

Total

3,263 22 (126) 3,159

5,501 538 (19) (187) (2) 5,831

11,974 2,423 (2,998) (11) 11,388

4,215 3,031 (2,778) 4,468

24,953 6,014 (5,921) (187) (13) 24,846

3,159

2,022 221 (18) 2,225 3,606

9,761 1,187 (2,141) 8,807 2,581

1,564 934 (1,006) 1,492 2,976

13,347 2,342 (3,165) 12,524 12,322

Parent

Land Cost January 1, 2012 Additions Disposals Amortization Transfers December 31, 2012 Accumulated depreciation January 1, 2012 Depreciation Disposals/transfers December 31, 2012 Net book value, December 31, 2012

Total

2,702 (9) (1) 2,692

5,050 300 (184) (118) 7 5,055

10,501 1,349 (859) (6) 10,985

18,253 1,649 (1,052) (118) 18,732

2,692

1,956 203 (102) 2,057 2,998

8,098 1,193 (717) 8,574 2,411

10,054 1,396 (819) 10,631 8,101

Land Cost January 1, 2011 Additions Disposals Amortization Transfers December 31, 2011 Accumulated depreciation January 1, 2011 Depreciation Disposals/transfers December 31, 2011 Net book value, December 31, 2011

2012 Buildings and leasehold Furniture and improvements equipment (In Millions of Pesos)

2011 Buildings and leasehold Furniture and improvements equipment (In Millions of Pesos)

Total

2,827 1 (126) 2,702

4,771 442 (18) (145) 5,050

11,075 2,291 (2,861) (4) 10,501

18,673 2,734 (3,005) (145) (4) 18,253

2,702

1,777 197 (18) 1,956 3,094

9,049 1,091 (2,042) 8,098 2,403

10,826 1,288 (2,060) 10,054 8,199

Depreciation is included in Occupancy and equipment-related expenses in the statement of income.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Note 15 - Investment Properties This account at December 31 consists of: Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 3,208 3,202 3,208 3,202 1,771 1,770 1,759 1,758 4,979 4,972 4,967 4,960 (1,144) (1,144) (1,077) (1,077) (1,253) (1,253) (1,253) (1,253) 2,582 2,575 2,637 2,630

Land Buildings Accumulated depreciation Allowance for impairment

The movement in investment properties is summarized as follows:

At January 1 Additions Disposals Depreciation At December 31

Consolidated 2012 2011 (In Millions of Pesos) 2,637 2,706 12 1 (4) (67) (66) 2,582 2,637

2012

Parent

2,630 12 (67) 2,575

2011 2,696 1 (67) 2,630

Investment properties have aggregate fair value of P6,449 million as at December 31, 2012 (2011 - P5,899 million). Fair value of investment property is determined on the basis of appraisal made by an internal or an external appraiser duly certified by the BPI Groupâ&#x20AC;&#x2122;s credit policy group. Valuation methods employed by the appraisers include the cost approach, market data approach, reproduction cost approach, development cost approach and income approach.

Depreciation is included in Occupancy and equipment-related expenses in the statement of income.

All investment properties generate rental income. Rental income from investment properties recognized in the statement of income, as part of Other operating income, amounts to P260 million for the year ended December 31, 2012 (2011 - P245 million; 2010 - P216 million). Direct operating expenses (including repairs and maintenance) arising from these investment properties amount to P193 million for the year ended December 31, 2012 (2011 - P205 million; 2010 - P211 million).

Note 16 - Investments in Subsidiaries and Associates This account at December 31 consists of investments in shares of stock:

Carrying value (net of impairment) Investments at equity method Investments at cost method

184 BANK OF THE PHILIPPINE ISLANDS

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 3,680 3,680

3,069 3,069

7,088 7,088

7,008 7,008

BPI(71) 2012 ANNUAL REPORT

185

Investments in associates carried at equity method in the consolidated statement of condition follow:

Name of entity BPI - Philamlife Assurance Corporation National Reinsurance Corporation* Beacon Properties Victoria 1552 Investments, LP Citytrust Realty Corporation

Percentage of ownership interest (%) 2012 2011 47.67 15.12 20.00 35.00 40.00

Allowance for impairment *BPI Group has significant influence

47.67 15.12 20.00 35.00 40.00

Acquisition cost 2012 2011 (In Millions of Pesos) 371 371 204 204 100 100 7 7 2 2 684 684 (7) (7) 677 677

Details and movements of investments in associates carried at equity method in the consolidated financial statements follow:

Acquisition cost At January 1 Allowance for impairment At December 31 Accumulated equity in net income At January 1 Share in net income for the year Dividends received At December 31 Accumulated share in other comprehensive income At January 1 Share in other comprehensive income for the year At December 31

2012 2011 (In Millions of Pesos) 677 677

677 677

1,276 138 (29) 1,385

1,066 216 (6) 1,276

1,116 502 1,618 3,680

765 351 1,116 3,069

Summarized unaudited financial information of associates follows:

Total assets Total liabilities Total revenues Total net income

2012 2011 (In Millions of Pesos) 54,482 40,222 41,441 28,446 14,665 8,730 384 798

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

The details of equity investments at cost method in the separate financial statements of the Parent Bank follow: Acquisition cost 2012 2011 Subsidiaries BPI Europe Plc. Ayala Plans, Inc. BPI Leasing Corporation BPI Capital Corporation BPI Direct Savings Bank, Inc. FGU Insurance Corporation Prudential Investments, Inc. BPI Globe BanKO, Inc. BPI Foreign Exchange Corp.

BPI Express Remittance Corp. USA BPI Family Savings Bank, Inc. First Far-East Development Corporation Green Enterprises S.R.L. in Liquidation (formerly BPI Express Remittance Europe, S.p.A) BPI Card Finance Corp.

FEB Stock Brokers, Inc. BPI Computer Systems Corp.

BPI Express Remittance Spain S.A Others Associates

186 BANK OF THE PHILIPPINE ISLANDS

Allowance for impairment 2012 2011 (In Millions of Pesos)

Carrying value 2012 2011

1,910 863 644 623 392 303 300 359 195 191 150

1,910 863 644 623 392 303 300 279 195 191 150

-

-

1,910 863 644 623 392 303 300 359 195 191 150

1,910 863 644 623 392 303 300 279 195 191 150

91

91

-

-

91

91

54 50 25 23 20 322 677 7,192

54 50 25 23 20 322 677 7,112

(104) (104)

(104) (104)

54 50 25 23 20 218 677 7,088

54 50 25 23 20 218 677 7,008

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187

Note 17 - Deferred Income Taxes The significant components of deferred income tax assets and liabilities at December 31 are as follows: Consolidated Parent 2012 2012 2011 (In Millions of Pesos)

Deferred income tax assets Allowance for impairment Net operating loss carry over (NOLCO) Minimum corporate income tax (MCIT) Others Total deferred income tax assets Deferred income tax liabilities Revaluation gain on properties acquired from a business combination Fair value gain on available-for-sale securities Excess pension asset contribution Others Total deferred income tax liabilities

5,565 7 4 395 5,971

5,130 4 3 604 5,741

4,003 410 4,413

3,793 496 4,289

(810) (174) (72) (1,056) 4,915

(799) (393) (4) (210) (1,406) 4,335

(760) (160) (72) (992) 3,421

(798) (391) (142) (1,331) 2,958

Consolidated Parent 2012 2012 2011 (In Millions of Pesos)

Deferred income tax assets Amount to be recovered within 12 months Amount to be recovered after 12 months Deferred income tax liabilities Amount to be settled within 12 months Amount to be settled after 12 months

2011

2011

430 5,541 5,971

789 4,952 5,741

323 4,090 4,413

689 3,600 4,289

357 699 1,056

282 1,124 1,406

357 635 992

282 1,049 1,331

The movement in the deferred income tax account is summarized as follows: Consolidated Parent 2012 2012 2011 (In Millions of Pesos) 4,335 2,958 5,023 444 232 440 220 231 (263) (665) (84) (200) 4,915 3,421 4,335

At January 1 Income statement charge Fair value adjustment on available-for-sale securities MCIT Others At December 31

2011 3,802 297 (287) (623) (231) 2,958

The deferred tax charge in the statement of income comprises the following temporary differences: 2012 Allowance for impairment NOLCO Pension Leasing income differential Others

Consolidated 2011

(436) (3) (4) (1) (444)

(135) 7 79 (391) (440)

2010

2012

(In Millions of Pesos) (210) (465) 464 (113) (6) (22) (226) (232) (346)

Parent 2011 17 63 (377) (297)

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188

2010 (106) 466 (77) (156) 127

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

The outstanding NOLCO at December 31 consists of: Year of Incurrence

Year of Expiration

2012 2011 2010 2009 2008

2015 2014 2013 2012 2011

Used portion during the year Tax rate Deferred income tax asset on NOLCO

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 10 3 3 11 11 27 4 24 45 (31) 24 14 30% 30% 30% 30% 7 4 -

The details of MCIT at December 31 are as follows: Year of Incurrence

Year of Expiration

2011 2010 2009 2008

2014 2013 2012 2011

Used portion during the year

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 3 3 190 194 190 232 234 232 201 240 201 3 623 671 623 623 (668) (623) 3 3 -

Note 18 - Other Resources The account at December 31 consists of the following:

Intangible assets Accounts receivable Residual value of equipment for lease Sundry debits Accrued trust and other fees Creditable withholding tax Prepaid expenses Rental deposits Miscellaneous assets Allowance for impairment

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 2,865 2,817 3,048 3,019 4,843 4,277 3,528 2,566 2,238 1,855 2,327 2,301 1,284 1,224 1,150 974 1,012 910 798 529 733 457 607 412 533 385 294 244 270 223 1,488 898 1,218 604 16,610 12,452 13,481 9,388 (1,662) (1,523) (1,333) (1,289) 14,948 10,929 12,148 8,099

The reconciliation of the allowance for impairment at December 31 is summarized as follows:

At January 1 Provision for impairment losses Write-off At December 31

188 BANK OF THE PHILIPPINE ISLANDS

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 1,333 1,289 1,332 1,280 329 280 32 33 (46) (31) (24) 1,662 1,523 1,333 1,289

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Current Non-current

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 11,942 10,976 5,532 4,275 4,668 1,476 7,949 5,113 16,610 12,452 13,481 9,388

On December 8, 2010, BPI signed an agreement with ING Bank N.V. – Manila Branch (“ING”) to purchase the latter’s trust business. On February 16, 2011, BPI and ING received the approval of the transaction from the BSP subject to certain conditions. Subsequently, the amendment of the Plan Rules of the Unit Investment Trust Funds ("UITF") managed by ING was approved by the Monetary Board in its meeting on March 25, 2011 allowing BPI to act as Trustee of these UITFs which shall be renamed Odyssey Funds.

The acquisition was completed on March 30, 2011. The purchase of ING’s trust department was accounted for as an acquisition of business under PFRS 3. The main assets acquired from this transaction consist of intangible asset in the form of contractual customer relationships which have an aggregate fair value of P2,784 million and certain IT and transportation equipment valued at P25 million. There were no liabilities assumed from the acquisition. The contractual customer relationships are expected to have a useful life of 10 years. The amount of amortization recognized in the statement of income for the year ended December 31, 2012 is P278 million (2011 - P208 million).

Note 19 - Deposit Liabilities This account at December 31 consists of:

Demand Savings Time

Consolidated Parent 2012 2012 2011 (In Millions of Pesos) 149,092 141,539 131,249 341,971 294,192 291,511 311,211 192,634 258,341 802,274 628,365 681,101

2011 123,448 253,015 167,951 544,414

The Parent balances above include amounts due to related parties (Note 32).

Current Non-current

Consolidated Parent 2012 2012 2011 (In Millions of Pesos) 588,133 541,118 505,864 214,141 87,247 175,237 802,274 628,365 681,101

2011 411,331 133,083 544,414

189

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Related interest expense on deposit liabilities is broken down as follows: 2012 Demand Savings Time

Consolidated 2011

550 2,651 8,447 11,648

692 2,325 8,704 11,721

2012 2010 (In Millions of Pesos) 505 628 2,190 1,608 4,234 9,833 6,929 12,069

Parent 2011

2010

645 1,954 5,002 7,601

583 1,345 6,153 8,081

In 2011, the BPI Group is subject to liquidity and statutory reserve requirements with respect to certain deposit liabilities as mandated by BSP. However, under current and existing BSP regulations as at December 31, 2012, the BPI Group should comply with a simplified minimum reserve requirement instead of the separate liquidity and statutory reserve requirements. Further, BSP requires all reserves be kept at the central bank. The BPI Group is in full compliance with the simplified reserve requirement.

The required liquidity and statutory reserves as reported to BSP as at December 31 comprise as follows: Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 100,158 90,220 78,486 70,090 21,330 20,707 3 100,158 90,220 99,819 90,797

Due from BSP Cash in vault Due from local banks Note 20 - Bills Payable This account at December 31 consists of:

Consolidated Parent 2012 2012 2011 (In Millions of Pesos) 2,940 1,384 3,048 760 5,100 7,482 481 2,614 15,098 15,098 8,374 26,280 16,963 19,136

Bangko Sentral ng Pilipinas Private firms Local banks Foreign banks

2011 1,070 444 8,373 9,887

The range of average interest rates (%) of bills payable of the BPI Group for the years ended December 31 follows: 2012 4.38 - 4.76 6.25 - 6.87 1.28 - 1.49

Bangko Sentral ng Pilipinas Private firms and local banks - Peso-denominated Foreign banks 2012 Interest expense

Current Non-current

190 BANK OF THE PHILIPPINE ISLANDS

584

Consolidated 2011 679

2012 2010 (In Millions of Pesos) 165 867

2011 3.95 - 4.29 6.37 - 7.12 0.82 - 1.01

Parent 2011

2010

245

548

Consolidated Parent 2012 2012 2011 (In Millions of Pesos) 24,890 15,842 17,299 1,390 1,121 1,837 26,280 16,963 19,136

2011 8,426 1,461 9,887

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191

Bills payable include funds borrowed from Land Bank of the Philippines (LBP), Development Bank of the Philippines (DBP) and Social Security System (SSS) which were relent to customers of the BPI Group in accordance with the financing programs of LBP, DBP and SSS and credit balances of settlement bank accounts. The average payment terms of these bills payable is 2.25 years (2011 - 1.12 years). Loans and advances of the BPI Group arising from these financing programs serve as security for the related bills payable (Note 13).

Note 21 - Unsecured Subordinated Debt On December 12, 2008, the Parent Bank issued P5,000 million worth of unsecured subordinated notes (the â&#x20AC;&#x153;Notesâ&#x20AC;?) eligible as Lower Tier 2 capital pursuant to BSP Circular No. 280, series of 2001, as amended. The Notes will at all times, rank pari passu and without any preference among themselves and at least equally with all other present and future unsecured and subordinated obligations of the Parent Bank, except obligations mandatorily preferred by law. The Notes bear interest at the rate of 8.45% per annum and will mature on December 12, 2018 (maturity date). The interest is payable quarterly in arrears from December 12, 2008 until December 11, 2018. The Notes are redeemable in whole and not only in part at the exclusive option of the Parent Bank on December 13, 2013 (redemption date) subject to the satisfaction of certain regulatory approval requirements. Unless the Notes are earlier redeemed on December 13, 2013, the applicable interest rate will be increased to the rate equal to 80% multiplied by the 5-year on-the-run Philippine Treasury benchmark bid yield (benchmark rate) on the first day of the 21st interest period plus the step-up spread. The step-up spread is equal to 150% of 8.45% less 80% of the benchmark rate.

Annual interest expense on the unsecured subordinated notes recognized in 2012, 2011 and 2010 amount to P423 million.

Note 22 - Deferred Credits and Other Liabilities The account at December 31 consists of the following:

Bills purchased - contra Dividends payable Accounts payable Deposit on lease contract Outstanding acceptances Other deferred credits Withholding tax payable Vouchers payable Due to the Treasurer of the Philippines Miscellaneous liabilities

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 11,570 11,557 9,150 9,141 3,201 3,201 3,621 2,548 2,918 2,020 2,377 2,050 1,153 1,153 1,390 1,390 1,541 963 1,007 761 712 624 464 361 459 458 423 423 279 252 288 260 2,013 1,661 1,334 1,012 23,725 19,216 22,225 18,569

Bills purchased - contra represents liabilities arising from the outright purchases of checks before actual clearing as a means of immediate financing offered by the BPI Group. Miscellaneous liabilities include insurance and other employee-related payables.

Current Non-current

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 20,005 17,569 18,002 16,559 3,720 1,647 4,223 2,010 23,725 19,216 22,225 18,569

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Note 23 - Capital Funds Details of authorized capital stock of the Parent Bank follow: 2012 Authorized capital (at P10 par value per share) Common shares Preferred A shares

2011 2010 (In Millions of Pesos Except Par Value Per Share)

49,000 600 49,600

49,000 600 49,600

49,000 600 49,600

Details of outstanding common shares follow: 2012 Issued common shares At January 1 Issuance of shares during the year At December 31 Subscribed common shares

2011 (In Number of Shares)

3,556,356,173 3,556,356,173 -

3,556,328,003 28,170 3,556,356,173 -

2010 3,246,770,334 309,557,669 3,556,328,003 28,170

In August 2010, the Parent Bank offered for subscription a total of 307,692,307 of its common shares to eligible shareholders on a pre-emptive rights basis at P32.50 per share. The net proceeds from the rights offer amounting to P9.91 billion have augmented further the Parent Bankâ&#x20AC;&#x2122;s capital base and have been fully invested in loans at December 31, 2010.

Share premium as at December 31, 2012, 2011 and 2010 amounts to P8,317 million.

As at December 31, 2012, 2011 and 2010, the Parent Bank has 12,447, 12,921 and 13,291 common shareholders, respectively. There are no preferred shares issued and outstanding at December 31, 2012, 2011 and 2010.

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193

Details of and movements in Accumulated other comprehensive income (loss) for the years ended December 31 follow:

Fair value reserve on available-for-sale securities At January 1 Unrealized fair value (loss) gain before tax Deferred income tax effect At December 31 Share in other comprehensive income (loss) of insurance subsidiaries At January 1 Share in other comprehensive income (loss) for the year, before tax Deferred income tax effect At December 31 Share in other comprehensive income (loss) of associates At January 1 Share in other comprehensive income for the year At December 31 Translation adjustment on foreign operations At January 1 Translation differences At December 31

2012

Consolidated 2011

1,748 (1,351) 633 1,030

328 1,683 (263) 1,748

Parent 2011

2010

1,192 (1,195) 645 642

(303) 1,782 (287) 1,192

(1,324) 1,396 (375) (303)

2012 2010 (In Millions of Pesos) (879) 1,538 (331) 328

137

202

(78)

-

-

-

169 (17) 289

(48) (17) 137

341 (61) 202

-

-

-

1,116

765

(65)

-

-

-

502 1,618

351 1,116

830 765

-

-

-

(833) (104) (937) 2,000

(828) (5) (833) 2,168

(613) (215) (828) 467

1,192

(303)

642

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194

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Details of and movements in Reserves for the years ended December 31 follow:

2012 Stock option scheme (Note 24) At January 1 Exercise of options Expiration of options Value of employee services At December 31 Surplus reserves At January 1 Transfer from surplus At December 31

Consolidated 2011

1,462 141 1,603 1,603

2012 2010 (In Millions of Pesos)

42 (42) -

-

179 (137) 42

1,325 137 1,462 1,462

1,462 141 1,603 1,603

1,215 110 1,325 1,367

Parent 2011

2010

11 (11) -

136 (125) 11

1,325 137 1,462 1,462

1,215 110 1,325 1,336

Surplus reserves consist of: 2012 1,569 34 1,603

Reserve for trust business Reserve for self-insurance

2011 (In Millions of Pesos) 1,428 34 1,462

2010 1,291 34 1,325

In compliance with existing BSP regulations, 10% of the Parent Bankâ&#x20AC;&#x2122;s income from trust business is appropriated to surplus reserve. This yearly appropriation is required until the surplus reserve for trust business reaches 20% of the Parent Bankâ&#x20AC;&#x2122;s regulatory net worth.

Reserve for self-insurance represents the amount set aside to cover losses due to fire, defalcation by and other unlawful acts of personnel and third parties.

Cash dividends declared by the Board of Directors of the Parent Bank during the years 2009 to 2012 follow:

Date declared December 16, 2009 May 19, 2010 October 20, 2010 May 18, 2011 November 16, 2011 March 21, 2012 March 21, 2012 October 21, 2012

Date approved by the BSP January 25, 2010 June 22, 2010 November 15, 2010 June 2, 2011 December 6, 2011 April 10, 2012 April 10, 2012 November 16, 2012

Amount of dividends Total Per share (In Millions of Pesos) 0.90 0.90 0.90 0.90 0.90 0.50 0.90 0.90

2,922 2,922 3,200 3,201 3,201 1,778 3,201 3,201

Cash dividends declared are payable to common shareholders of record as of 15th day from receipt by the Parent Bank of the approval by the BSP and distributable on the 15th day from the said record date.

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The calculation of earnings per share (EPS) is shown below: 2012 a) Net income attributable to equity holders of the Parent Bank b) Weighted average number of common shares outstanding during the year c) Basic EPS (a/b)

Consolidated Parent 2012 2011 2010 2011 2010 (In Millions, Except Earnings Per Share Amounts)

16,291

12,822

11,312

12,383

9,856

8,306

3,556 4.58

3,556 3.61

3,350 3.38

3,556 3.48

3,556 2.77

3,350 2.48

There are no stock options outstanding as at December 31, 2012, 2011 and 2010 (Note 24), thus basic and diluted EPS are the same for the years presented.

Note 24 - Stock Option Plan Movements in the number of share options are as follows: 2012 -

At January 1 Granted Exercised Cancelled At December 31 Exercisable

2011 -

2010 7,617,387 (7,438,864) (178,523) -

Note 25 - Other Operating Income Details of other operating income follow: 2012 Trust and asset management fees Rental income Credit card income Gain on sale of assets Dividend income Others

2,913 1,698 1,342 1,192 27 706 7,878

Consolidated 2011 2,569 1,627 1,332 527 47 586 6,688

2012 2010 (In Millions of Pesos) 1,816 1,505 1,180 617 85 622 5,825

2,453 415 1,342 640 1,383 538 6,771

Parent 2011

2010

2,199 397 1,332 310 1,210 469 5,917

1,709 388 1,180 453 206 494 4,430

Trust and asset management fees arise from the BPI Groupâ&#x20AC;&#x2122;s asset management and trust services and are based on agreed terms with various managed funds and investments.

Rental income is earned by the BPI Group by leasing out its investment properties (Note 15) and other assets which consist mainly of fleet of vehicles.

Gain on sale of assets arises mainly from disposals of properties (including equity investments), foreclosed collaterals and non-performing assets.

Dividend income recognized by the Parent Bank substantially pertains to dividend distribution of subsidiaries.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Note 26 - Leases The BPI Group and the Parent Bank have various lease agreements which mainly pertain to branch premises that are renewable under certain terms and conditions. The rentals (included in Occupancy and equipmentrelated expenses) under these lease contracts are as follows: Consolidated Parent (In Millions of Pesos) 936 745 870 684 809 634

2012 2011 2010

The future minimum lease payments under non-cancellable operating leases of the BPI Group are as follows: 2012 2011 (In Millions of Pesos) 71 43 120 64 191 107

No later than 1 year Later than 1 year but no later than 5 years Note 27 - Operating Expenses Details of compensation and fringe benefits expenses follow:

Salaries and wages Retirement expense (Note 30) Other employee benefit expenses

2012

Consolidated 2011

8,328 1,118 1,110 10,556

8,409 922 1,048 10,379

2012

Consolidated 2011

2012 2010 (In Millions of Pesos) 6,565 7,168 886 966 875 1,003 8,326 9,137

Parent 2011

2010

6,420 732 842 7,994

5,176 723 765 6,664

Parent 2011

2010

1,328 1,256 492 307 305 48 198 127

1,227 1,054 436 343 57 51 194 86

142 237 856 5,296

131 220 608 4,407

Details of other operating expenses follow:

Supervision and examination fees Advertising Travel and communication Litigation expenses Amortization expense Insurance Office supplies Taxes and licenses Management and other professional fees Shared expenses Others

196 BANK OF THE PHILIPPINE ISLANDS

1,746 1,457 662 444 334 337 248 222

1,618 1,410 622 458 308 254 235 233

188 1,501 7,139

197 1,275 6,610

2012 2010 (In Millions of Pesos) 1,423 1,477 1,268 1,206 556 576 321 494 331 58 55 312 207 234 113 177 189 1,011 5,734

134 107 862 5,377

BPI (83) 2012 ANNUAL REPORT

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Note 28 - Income Taxes A reconciliation between the provision for income tax at the statutory tax rate and the actual provision for income tax for the years ended December 31 follows: 2012 Amount Statutory income tax Effect of items not subject to statutory tax rate: Income subjected to lower tax rates Tax-exempt income Others, net Actual income tax

5,872

30.00

(1,132) (2,850) 1,242 3,132

(5.78) (14.56) 6.35 16.01

2012 Amount Statutory income tax Effect of items not subject to statutory tax rate: Income subjected to lower tax rates Tax-exempt income Others, net Actual income tax

Rate (%)

Rate (%)

4,379

30.00

(868) (1,982) 683 2,212

(5.95) (13.58) 4.68 15.15

Consolidated 2011 Rate Amount (%) (In Millions of Pesos) 4,843 30.00 (951) (2,634) 1,872 3,130

Amount

(5.89) (16.32) 11.59 19.38

Parent 2011 Rate Amount (%) (In Millions of Pesos) 3,634 30.00 (926) (1,838) 1,389 2,259

2010

4,200

30.00

(354) (2,879) 1,553 2,520

(2.53) (20.56) 11.09 18.00

2010 Amount

(7.64) (15.17) 11.46 18.65

Rate (%)

Rate (%)

3,140

30.00

(247) (2,125) 1,392 2,160

(2.36) (20.30) 13.30 20.64

Note 29 - Basic Quantitative Indicators of Financial Performance The key financial performance indicators follow (in %):

Return on average equity Return on average assets Net interest margin

Consolidated 2012 2011 17.55 15.17 1.91 1.62 3.57 3.67

2012 17.91 1.87 3.37

Parent

2011 15.26 1.59 3.41

Note 30 - Retirement Plans BPI and its subsidiaries, and the non-life insurance company have separate trusteed, noncontributory retirement benefit plans covering all qualified officers and employees. The description of the plans follows: BPI BPI has a unified plan which includes its subsidiaries other than insurance companies. Under this plan, the normal retirement age is 60 years. Normal retirement benefit consists of a lump sum benefit equivalent to 200% of the basic monthly salary of the employee at the time of his retirement for each year of service, if he has rendered at least 10 years of service, or to 150% of his basic monthly salary, if he has rendered less than 10 years of service. For voluntary retirement, the benefit is equivalent to 112.50% of the employeeâ&#x20AC;&#x2122;s basic monthly salary for a minimum of 10 years of service with the rate factor progressing to a maximum of 200% of basic monthly salary for service years of 25 or more. Death or disability benefit, on the other hand, shall be determined on the same basis as in voluntary retirement.

The net defined benefit cost and contributions to be paid by the entities within the BPI Group are determined by an independent actuary.

Plan assets are held in trusts, governed by local regulations and practice in the Philippines.

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2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Non-life insurance subsidiary BPI/MS has a separate trusteed defined benefit plan. Under the plan, the normal retirement age is 60 years or the employee should have completed at least 10 years of service, whichever is earlier. The normal retirement benefit is equal to 150% of the final basic monthly salary for each year of service for below 10 years and 175% of the final basic monthly salary for each year of service for 10 years and above.

Death or disability benefit for all employees of the non-life insurance company shall be determined on the same basis as in normal or voluntary retirement as the case may be.

Following are the amounts recognized based on recent actuarial valuations: (a) Pension (asset) liability recognized in the statement of condition 2012 Present value of defined benefit obligations Fair value of plan assets Deficit in the plan Unrecognized actuarial losses Pension (asset) liability recognized in the statement of condition

10,909 (10,406) 503 (514) (11) 2012

Present value of defined benefit obligations Fair value of plan assets Deficit in the plan Unrecognized actuarial losses Pension (asset) liability recognized in the statement of condition

8,702 (8,385) 317 (313) 4

Consolidated 2011 2010 (In Millions of Pesos) 11,508 10,388 (8,415) (8,421) 3,093 1,967 (3,120) (1,995) (27)

(28)

2009

2008

10,260 (6,576) 3,684 (2,867) 817

Parent 2011 2010 2009 (In Millions of Pesos) 9,161 8,182 7,985 (6,796) (6,775) (5,097) 2,365 1,407 2,888 (2,363) (1,408) (2,050) 2

(1)

9,607 (5,615) 3,992 (3,938)

838

54

2008 7,475 (4,373) 3,102 (2,851) 251

Pension asset is shown as part of â&#x20AC;&#x153;Miscellaneous assetsâ&#x20AC;? within Other resources (Note 18).

Experience adjustments at December 31 follow: 2012 Experience gain (loss) on plan liabilities Experience gain (loss) on plan assets

(33) 1,522

2012 Experience gain (loss) on plan liabilities Experience gain (loss) on plan assets

198 BANK OF THE PHILIPPINE ISLANDS

14 1,231

Consolidated 2011 2010 (In Millions of Pesos) 329 (371) (405) 479 Parent 2011 2010 (In Millions of Pesos) 232 (255) (329) 406

2009

2008

(151) 755

2009

34 (1,223)

2008

(99) 583

16 (952)

BPI (85) 2012 ANNUAL REPORT

199

The movement in plan assets is summarized as follows: Consolidated Parent 2012 2011 2011 (In Millions of Pesos) 8,415 6,796 8,421 6,775 589 476 842 677 77 1,119 886 922 732 (1,239) (1,004) (1,365) (1,136) 1,522 1,231 (405) (329) 10,406 8,385 8,415 6,796

2012 At January 1 Expected return on plan assets Fund transfer from a subsidiary Contributions Benefit payments Actuarial gains (losses) At December 31

The carrying value of the plan assets as at December 31, 2012 is equivalent to the fair value of P10,406 million.

The plan assets are comprised of the following: 2012 Amount Debt securities Equity securities Others

Consolidated

5,120 5,274 12 10,406

% 49 50 1 100

Parent 2012 2011 2011 Amount % Amount % Amount % (In Millions of Pesos Except for Rates) 4,125 5,425 64 49 4,381 64 4,250 2,950 35 50 2,383 35 10 40 1 1 32 1 8,385 8,415 100 100 6,796 100

Pension plan assets of the unified retirement plan include investment in BPIâ&#x20AC;&#x2122;s common shares with carrying amount of P1,381 million (2011 - P1,488 million) and fair value of P3,446 million (2011 - P2,175 million) at December 31, 2012. The actual return on plan assets of the BPI Group was P2,111 million in 2012 (2011 - P437 million).

The movement in the present value of defined benefit obligation is summarized as follows:

At January 1 Present value of defined benefit obligation for transferred employees from a subsidiary Current service cost Interest cost Benefit payments Actuarial (losses) gains At December 31

Consolidated Parent 2012 2012 2011 (In Millions of Pesos) 11,508 9,161 10,388

8,182

816 802 (1,239) (978) 10,909

2 657 639 (1,004) (753) 8,702

83 500 885 (1,136) 647 9,161

Parent 2011

2010

601 1,119 (1,365) 765 11,508

2011

(b) Expense recognized in the statement of income

Current service cost Interest cost Expected return on plan assets Net actuarial loss recognized during the year Total expense included in Compensation and fringe benefits

Consolidated 2012 2012 2011 2010 (In Millions of Pesos) 816 657 601 471 802 639 1,119 1,097 (589) (476) (842) (692)

500 885 (677)

379 854 (536)

89

44

92

66

24

63

1,118

922

968

886

732

760

The BPI Group has no other transactions with the plan other than the contributions and benefit payments presented above for the year ended December 31, 2012.

BANK OF THE PHILIPPINE ISLANDS

(86)

200

199

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

The principal assumptions used for the actuarial valuations of the unified plan of the BPI Group are as follows: Discount rate Expected return on plan assets Future salary increases

2012 6.60% 7.00% 4.00%

2011 6.97% 7.00% 6.50%

2010 10.79% 10.00% 6.50%

The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at reporting date. Expected returns on equity securities and property investments reflect long-term real rates of return experienced in the respective markets.

Assumptions regarding future mortality and disability experience are based on published statistics generally used for local actuarial valuation purposes.

The average remaining service life of employees under the BPI unified retirement plan as at December 31, 2012 and 2011 is 21 years. The BPI Group’s expected net plan cost for the year ending December 31, 2013 amounts to P797 million.

Note 31 - Trust Assets As disclosed in Note 18, BPI and ING received on February 16, 2011 the approval from the BSP of BPI’s purchase of the latter’s trust business subject to certain conditions. Subsequently, the amendment of the Plan Rules of UITFs managed by ING was approved by the Monetary Board in its meeting on March 25, 2011 allowing BPI to act as Trustee of these UITFs which were named as Odyssey Funds.

At December 31, 2012, the net asset value of trust assets administered by the BPI Group amounts to P739 billion (2011 - P664 billion).

Government securities deposited by the BPI Group and the Parent Bank with the BSP in compliance with the requirements of the General Banking Act relative to the trust functions follow:

Government securities

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 6,982 6,830 6,241 6,089

Note 32 - Related Party Transactions In the normal course of the business, the Parent Bank transacts with related parties consisting of its subsidiaries and associates. Likewise, the BPI Group has transactions with Ayala Corporation (AC) and its subsidiaries (Ayala Group). AC has a significant influence over the BPI Group as at reporting date.

These transactions such as loans and advances, deposit arrangements, trading of government securities and commercial papers, sale of assets, lease of bank premises, investment advisory/management, service arrangements and advances for operating expenses are made in the normal banking activities and have terms and conditions that are generally comparable to those offered to non-related parties or to similar transactions in the market.

200 BANK OF THE PHILIPPINE ISLANDS

BPI (87) 2012 ANNUAL REPORT

201

Significant related party transactions and outstanding balances as at and for the years ended December 31 are summarized below: Consolidated 2012

Loans and advances from: Subsidiaries Associates AC Subsidiaries of AC Key management personnel

Deposits from: Subsidiaries Associates Ayala Group Key management personnel

Outstanding Transactions balances (In Millions of Pesos) (1,285) 1,750 4,460 -

396 6,250 4,662 -

4,925

11,308

724 16 21,216 (32)

4,051 59 39,069 310

21,924

43,489

Terms and conditions These are loans and advances granted to related parties that are generally secured with interest rates ranging from 1.19% to 6.50% and with maturity periods ranging from 2 days to 12 years. Additional information on DOSRI loans are discussed below.

These are demand, savings and time deposits bearing the following average interest rates: Demand - 0.40% to 0.55% Savings - 0.95% to 1.06% Time - 3.45% to 3.71%

2011

Loans and advances from: Subsidiaries Associates AC Subsidiaries of AC Key management personnel

Deposits from: Subsidiaries Associates Ayala Group Key management personnel

BANK OF THE PHILIPPINE ISLANDS

202

Outstanding Transactions balances (In Millions of Pesos) 355 (50) (250) (348) -

1,681 4,500 202 -

(293)

6,383

1,171 2 (6,183) 36

3,179 43 17,853 342

(4,974)

21,417

Terms and conditions These are loans and advances granted to related parties that are generally secured with interest rates ranging from 2.05% to 4.75% and with maturity periods ranging from 3 days to 2 years. Additional information on DOSRI loans are discussed below.

These are demand, savings and time deposits bearing the following average interest rates: Demand - 0.55% to 0.56% Savings - 0.98% to 1.01% Time - 3.55% to 3.78%

(88)

201

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

2010

Loans and advances from: Subsidiaries Associates AC Subsidiaries of AC Key management personnel

Deposits from: Subsidiaries Associates Ayala Group Key management personnel

Outstanding Transactions balances (In Millions of Pesos) 578 (250) (625) -

1,326 50 4,750 550 -

(297)

6,676

389 (57) (68)

2,610 41 24,036 306

264

26,993

Terms and conditions These are loans and advances granted to related parties that are generally secured with interest rates ranging from 1.75% to 4.38% and with maturity periods ranging from 3 days to 3 years. Additional information on DOSRI loans are discussed below.

These are demand, savings and time deposits bearing the following average interest rates: Demand - 0.55% to 0.56% Savings - 0.83% to 0.91% Time - 3.79% to 3.88%

Parent 2012

Loans and advances from: Subsidiaries Associates AC Subsidiaries of AC Key management personnel

Deposits from: Subsidiaries Associates Ayala Group Key management personnel

202 BANK OF THE PHILIPPINE ISLANDS

Outstanding Transactions balances (In Millions of Pesos) (1,681) (1,750) 4,210 -

6,250 4,412 -

779

10,662

277 16 21,216 (342)

3,343 59 39,069 310

21,167

42,781

Terms and conditions These are loans and advances granted to related parties that are generally secured with interest rates ranging from 1.19% to 6.50% and with maturity periods ranging from 5 days to 12 years. Additional information on DOSRI loans are discussed below.

These are demand, savings and time deposits bearing the following average interest rates: Demand - 0.39% to 0.55% Savings - 0.92% to 1.05% Time - 2.87% to 3.18%

BPI 2012 ANNUAL REPORT

(89)

203

2011

Loans and advances from: Subsidiaries Associates AC Subsidiaries of AC Key management personnel

Deposits from: Subsidiaries Associates Ayala Group Key management personnel

Outstanding Transactions Balances (In Millions of Pesos) 355 (50) (250) (348) -

1,681 4,500 202 -

(293)

6,383

1,171 2 (6,183) 36

3,179 43 17,853 342

(4,974)

21,417

Terms and conditions These are loans and advances granted to related parties that are generally secured with interest rates ranging from 2.05% to 4.75% and with maturity periods ranging from 3 days to 2 years. Additional information on DOSRI loans are discussed below.

These are demand, savings and time deposits bearing the following average interest rates: Demand - 0. 55% Savings - 0.96% to 1.00% Time - 3.09% to 3.46%

2010

Loans and advances from: Subsidiaries Associates AC Subsidiaries of AC Key management personnel

Deposits from: Subsidiaries Associates Ayala Group Key management personnel

Outstanding Transactions balances (In Millions of Pesos) 578 (250) (625) -

1,326 50 4,750 550 -

(297)

6,676

201 (55) (68)

2,008 41 24,036 306

(78)

26,391

Terms and conditions These are loans and advances granted to related parties that are generally secured with interest rates ranging from 1.75% to 4.38% and with maturity periods ranging from 3 days to 3 years. Additional information on DOSRI loans are discussed below.

These are demand, savings and time deposits bearing the following average interest rates: Demand - 0. 55 to 0.56% Savings - 0.81% to 0.89% Time - 3.26% to 3.38%

BANK OF THE PHILIPPINE ISLANDS

(90)

204

203

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

The aggregate amounts included in the determination of income before income tax that resulted from transactions with each class of related parties are as follows: Consolidated 2012 Interest income Subsidiaries Associates AC Subsidiaries of AC Key management personnel Other income Subsidiaries Associates AC Subsidiaries of AC Key management personnel Interest expense Subsidiaries Associates Ayala Group Key management personnel Other expenses Subsidiaries Associates AC Subsidiaries of AC Key management personnel Retirement benefits Key management personnel Salaries, allowances and other short-term benefits Key management personnel Directorsâ&#x20AC;&#x2122; remuneration

204 BANK OF THE PHILIPPINE ISLANDS

2011

2010

(In Millions of Pesos) 76 3 119 88 286

37 22 121 180

37 22 121 180

973 370 22 62 1,427

883 203 10 18 1,114

498 373 871

21 301 2 324

17 97 2 116

11 239 2 252

905 132 49 1,086

1,027 23 46 1,096

797 23 44 864

39

27

34

556 51

527 46

509 38

BPI 2012 ANNUAL REPORT

(91)

205

Parent 2012 Interest income Subsidiaries Associates AC Subsidiaries of AC Key management personnel Other income Subsidiaries Associates AC Subsidiaries of AC Key management personnel Interest expense Subsidiaries Associates Ayala Group Key management personnel Other expenses Subsidiaries Associates AC Subsidiaries of AC Key management personnel Retirement benefits Key management personnel Salaries, allowances and other short-term benefits Key management personnel Directorsâ&#x20AC;&#x2122; remuneration

2011

2010

(In Millions of Pesos) 56 3 119 82 260

37 22 121 180

34 1 231 14 280

577 370 947

462 203 665

8 373 381

7 301 2 310

17 97 2 116

11 239 2 252

343 132 49 524

476 23 46 545

448 23 44 515

36

25

24

487 38

470 40

365 31

Other income mainly consists of rental income and revenue from service arrangements with related parties.

Other expenses mainly consist of rental expenses and management fees.

There were no provisions recognized against receivables from related parties. Also, no additional provision was recognized during the year.

BANK OF THE PHILIPPINE ISLANDS

(92)

206

205

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Details of DOSRI loans are as follows:

Outstanding DOSRI loans

% to total outstanding loans and advances % to total outstanding DOSRI loans Unsecured DOSRI loans Past due DOSRI loans Non-performing DOSRI loans

Consolidated Parent 2012 2012 2011 2011 (In Millions of Pesos) 6,619 6,569 5,067 5,013 In percentages (%) Consolidated Parent 2012 2012 2011 2011 1.24 1.66 1.09 1.46 29.63 0.06 0.05

28.77 0.03 0.03

29.85 0.06 0.05

29.09 0.03 0.03

At December 31, 2012 and 2011, the BPI Group is in full compliance with the General Banking Act and the BSP regulations on DOSRI loans.

Note 33 - Commitments and Contingencies At present, there are lawsuits, claims and tax assessments pending against the BPI Group. In the opinion of management, after reviewing all actions and proceedings and court decisions with legal counsels, the aggregate liability or loss, if any, arising therefrom will not have a material effect on the BPI Groupâ&#x20AC;&#x2122;s financial position or financial performance.

BPI and some of its subsidiaries are defendants in legal actions arising from normal business activities.

Management believes that these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the financial statements.

In the normal course of business, the BPI Group makes various commitments (Note 3.1.4) that are not presented in the financial statements. The BPI Group does not anticipate any material losses from these commitments.

Note 34 - Supplementary information required by the Bureau of Internal Revenue (a) Supplementary information required by Revenue Regulation No 15-2010 On December 28, 2010, Revenue Regulation (RR) No. 15-2010 became effective and amended certain provisions of RR No. 21-2002 prescribing the manner of compliance with any documentary and/or procedural requirements in connection with the preparation and submission of financial statements and income tax returns. Section 2 of RR No. 21-2002 was further amended to include in the Notes to Financial Statements information on taxes, duties and license fees paid or accrued during the year in addition to what is mandated

by PFRS.

206 BANK OF THE PHILIPPINE ISLANDS

(93)

BPI 2012 ANNUAL REPORT

207

Below is the additional information required by RR No. 15-2010 that is relevant to the Parent Bank. This information is presented for purposes of filing with the Bureau of Internal Revenue (BIR) and is not a required part of the basic financial statements. (i)

Documentary stamp tax Documentary stamp taxes paid for the year ended December 31 consist of: 2012 2,153 212 70 3 2,438

Deposit and loan documents Trade finance documents Mortgage documents Shares of stock Others A portion of the amount disclosed above was passed on to the counterparties. (ii) Withholding taxes Withholding taxes paid/accrued and/or withheld for the year ended December 31 consist of: 2012 Paid Final income taxes withheld on interest on deposits and yield on deposit substitutes Income taxes withheld on compensation Final income taxes withheld on income payment Creditable income taxes withheld (expanded) Fringe benefit tax VAT withholding tax

1,087 1,427 813 632 37 21 4,017

Accrued 129 165 277 61 10 10 652

Total 1,216 1,592 1,090 693 47 31 4,669

(iii) All other local and national taxes All other local and national taxes paid/accrued for the year ended December 31 consist of: 2012 Paid Gross receipts tax Real property tax Municipal taxes Others

2,070 138 67 24 2,299

Accrued 164 164

Total 2,234 138 67 24 2,463

(iv) Tax cases and assessments As at reporting date, the Parent Bank has outstanding cases filed in courts against local government units contesting certain local tax assessments and the tax authorities for various claims for tax refund.

Management is of the opinion that the ultimate outcome of these cases will not have a material impact on the financial statements of the Parent Bank. Also, the taxable years 2009 and 2010 remain open and currently under tax examination, for which no assessment has yet been received.

BANK OF THE PHILIPPINE ISLANDS

(94)

208

207

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

(b) Supplementary information required by Revenue Regulation No. 19-2011 RR No. 19-2011 prescribes the new BIR forms that should be used for income tax filing covering and starting with the calendar year 2011 and modifies Revenue Memorandum Circular No. 57-2011. In the Guidelines and Instructions Section of the new BIR Form 1702 (version November 2011), a required attachment to the income tax returns is an Account Information Form and/or Financial Statements that include in the Notes to Financial Statements schedules of sales/receipts/fees, cost of sales/services, non-operating and taxable other income, itemized deductions (if the taxpayer did not avail of Optional Standard Deduction), taxes and licenses and other information prescribed to be disclosed in the Notes to the Financial statements.

Below is the additional information required by RR No. 19-2011 that is relevant to the Parent Bank. This information is presented for purposes of filing with the BIR and is not a required part of the basic financial statements. (i)

Sales/receipts/fees

Interest income

Nontaxable 2,423

Final tax 7,334

Regular rate 18,842

Total 28,599

(ii) Cost of services/Direct costs Manpower costs Interest expense Insurance - PDIC Supervision and examination fees

Regular rate 6,512 4,042 1,072 351 11,977

(iii) Non-operating and taxable other income Service charges Trust fees Trading gain Foreign exchange Gain on sale of fixed assets Rental income Others

208 BANK OF THE PHILIPPINE ISLANDS

Regular rate 4,934 2,920 1,203 996 666 415 538 11,672

BPI 2012 ANNUAL REPORT

(95)

209

(iv) Itemized deductions Nature of expense/deduction Taxes and licenses Salaries and allowances Depreciation and amortization of leasehold rights Advertising Rental Communication, light and water Bad debts Documentary stamp used Repairs and maintenance Other outside services Amortization of intangibles Security services Litigation assets acquired expenses Management and consultancy fee Office supplies SSS, GSIS, Philhealth, HDMF and other contributions Janitorial and messengerial services Transportation and travel Fringe benefits Membership fees and dues Insurance Miscellaneous loss Amortization of pension trust contribution Directorâ&#x20AC;&#x2122;s fees Commissions Representation and entertainment Credit card expenses Donations Fuel and oil Staff meeting Freight expenses Bank charges Others Sub-total NOLCO Total expenses

Regular rate 2,233 1,409 1,389 1,266 1,120 1,096 1,092 846 826 744 606 385 319 229 211 178 176 113 99 69 65 64 50 39 35 34 32 31 29 18 16 10 90 14,919 14,919

(v) Taxes and licenses The details of the Parent Bankâ&#x20AC;&#x2122;s taxes and licenses are presented in section (a) of this note. (vi) Other information All other information prescribed to be disclosed by the BIR has been included in this note.

BANK OF THE PHILIPPINE ISLANDS

(96)

210

209

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Bank of the Philippine Islands Schedule of Philippine Financial Reporting Standards Effective as at December 31, 2012 PHILIPPINE FINANCIAL REPORTING STANDARDS AND

Adopted

INTERPRETATIONS

Not

Not

Adopted Applicable

Effective as of December 31, 2012 Framework for the Preparation and Presentation of Financial Statements Conceptual Framework Phase A: Objectives and qualitative characteristics PFRSs Practice Statement Management Commentary Philippine Financial Reporting Standards PFRS 1

First-time Adoption of Philippine Financial Reporting

(Revised)

Standards Amendments to PFRS 1 and PAS 27: Cost of an





Investment in a Subsidiary, Jointly Controlled Entity or Associate Amendments to PFRS 1: Additional Exemptions for First-



time Adopters Amendment to PFRS 1: Limited Exemption from



Comparative PFRS 7 Disclosures for First-time Adopters Amendments to PFRS 1: Severe Hyperinflation and

PFRS 2



Removal of Fixed Date for First-time Adopters



Amendments to PFRS 1: Government Loans



Share-based Payment



Amendments to PFRS 2: Vesting Conditions and Cancellations Amendments to PFRS 2: Group Cash-settled Share-



Business Combinations

(Revised) PFRS 4

Insurance Contracts Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts

210BANK OF THE PHILIPPINE ISLANDS





based Payment Transactions PFRS 3



   

BPI 2012 ANNUAL REPORT

211

PHILIPPINE FINANCIAL REPORTING STANDARDS AND

Adopted

INTERPRETATIONS

Not

Not

Adopted Applicable

Effective as of December 31, 2012 PFRS 5

Non-current Assets Held for Sale and Discontinued Operations

PFRS 6

Exploration for and Evaluation of Mineral Resources

PFRS 7

Financial Instruments: Disclosures Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets - Effective Date and Transition Amendments to PFRS 7: Improving Disclosures about Financial Instruments Amendments to PFRS 7: Disclosures - Transfers of Financial Assets Amendments to PFRS 7: Disclosures – Offsetting Financial Assets and Financial Liabilities Amendments to PFRS 7: Mandatory Effective Date of PFRS 9 and Transition Disclosures

PFRS 8

Operating Segments

PFRS 9*

Financial Instruments

   









  

Amendments to PFRS 9: Mandatory Effective Date of PFRS 9 and Transition Disclosures PFRS 10*

Consolidated Financial Statements

PFRS 11*

Joint Arrangements

PFRS 12*

Disclosure of Interests in Other Entities

PFRS 13*

Fair Value Measurement

 

(Revised)

 



Amendment to PAS 1: Capital Disclosures



Instruments and Obligations Arising on Liquidation Amendments to PAS 1: Presentation of Items of Other Comprehensive Income

BANK OF THE PHILIPPINE ISLANDS

212

   



 

Presentation of Financial Statements

Amendments to PAS 32 and PAS 1: Puttable Financial





Philippine Accounting Standards PAS 1







211

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

PHILIPPINE FINANCIAL REPORTING STANDARDS AND

Adopted

INTERPRETATIONS

Not

Not

Adopted Applicable

Effective as of December 31, 2012 PAS 2

Inventories

PAS 7

Statement of Cash Flows

PAS 8

Accounting Policies, Changes in Accounting Estimates and Errors

PAS 10

Events after the Reporting Period

PAS 11

Construction Contracts

PAS 12

Income Taxes Amendment to PAS 12 - Deferred Tax: Recovery of Underlying Assets

      

PAS 16

Property, Plant and Equipment



PAS 17

Leases



PAS 18

Revenue



PAS 19

Employee Benefits



Amendments to PAS 19: Actuarial Gains and Losses, Group Plans and Disclosures PAS 19

PAS 20

PAS 23

 

Accounting for Government Grants and Disclosure of Government Assistance

PAS 21



Employee Benefits

(Amended)*







The Effects of Changes in Foreign Exchange Rates



Amendment: Net Investment in a Foreign Operation



Borrowing Costs



(Revised) PAS 24

Related Party Disclosures

(Revised) PAS 26

Accounting and Reporting by Retirement Benefit Plans

PAS 27

Consolidated and Separate Financial Statements

PAS 27

Separate Financial Statements

(Amended)* PAS 28

   

Investments in Associates

BANK OF THE PHILIPPINE ISLANDS

212





213

BPI 2012 ANNUAL REPORT

Adopted

PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS

Not

Not

Adopted Applicable

Effective as of December 31, 2012 PAS 28

Investments in Associates and Joint Ventures



(Amended)*



PAS 29

Financial Reporting in Hyperinflationary Economies

PAS 31

Interests in Joint Ventures



PAS 32

Financial Instruments: Disclosure and Presentation





Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation Amendment to PAS 32: Classification of Rights Issues Amendments to PAS 32: Offsetting Financial Assets and Financial Liabilities

  

PAS 33

Earnings per Share



PAS 34

Interim Financial Reporting



PAS 36

Impairment of Assets



PAS 37

Provisions, Contingent Liabilities and Contingent Assets



PAS 38

Intangible Assets



PAS 39

Financial Instruments: Recognition and Measurement



Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and Financial Liabilities Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup Transactions Amendments to PAS 39: The Fair Value Option





Guarantee Contracts Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets – Effective Date and Transition Amendments to Philippine Interpretation IFRIC–9 and

PAS 40





Amendments to PAS 39 and PFRS 4: Financial

PAS 39: Embedded Derivatives







Amendment to PAS 39: Eligible Hedged Items



Investment Property



214 BANK OF THE PHILIPPINE ISLANDS



2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

213

PHILIPPINE FINANCIAL REPORTING STANDARDS AND

Adopted

INTERPRETATIONS

Not

Not

Adopted Applicable

Effective as of December 31, 2012 PAS 41

Agriculture



Philippine Interpretations IFRIC 1



Changes in Existing Decommissioning, Restoration and



Similar Liabilities IFRIC 2

Members' Share in Co-operative Entities and Similar



Instruments IFRIC 4

Determining Whether an Arrangement Contains a Lease

IFRIC 5

Rights to Interests arising from Decommissioning,

 

Restoration and Environmental Rehabilitation Funds IFRIC 6

Liabilities arising from Participating in a Specific Market -



Waste Electrical and Electronic Equipment IFRIC 7

Applying the Restatement Approach under PAS 29



Financial Reporting in Hyperinflationary Economies IFRIC 8

Scope of PFRS 2



IFRIC 9

Reassessment of Embedded Derivatives



Amendments to Philippine Interpretation IFRIC–9 and PAS 39: Embedded Derivatives IFRIC 10

Interim Financial Reporting and Impairment



IFRIC 11

PFRS 2- Group and Treasury Share Transactions



IFRIC 12

Service Concession Arrangements

IFRIC 13

Customer Loyalty Programmes

IFRIC 14

The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Amendments to Philippine Interpretations IFRIC- 14, Prepayments of a Minimum Funding Requirement

    

 



 



IFRIC 16

Hedges of a Net Investment in a Foreign Operation

IFRIC 17

Distributions of Non-cash Assets to Owners



IFRIC 18

Transfers of Assets from Customers



IFRIC 19

Extinguishing Financial Liabilities with Equity Instruments



IFRIC 20*

Stripping Costs in the Production Phase of a Surface Mine



SIC-7

Introduction of the Euro



BANK OF THE PHILIPPINE ISLANDS

214





   

215 BPI 2012 ANNUAL REPORT

Adopted

PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS

Not

Not

Adopted Applicable

Effective as of December 31, 2012 SIC-10

Government Assistance - No Specific Relation to



Operating Activities SIC-12

SIC-13

Consolidation - Special Purpose Entities



Amendment to SIC - 12: Scope of SIC 12



Jointly Controlled Entities - Non-Monetary Contributions



by Venturers SIC-15

Operating Leases - Incentives



SIC-25

Income Taxes - Changes in the Tax Status of an Entity or



its Shareholders SIC-27



Evaluating the Substance of Transactions Involving the Legal Form of a Lease Service Concession Arrangements: Disclosures.

SIC-31

Revenue - Barter Transactions Involving Advertising

SIC-32

216

Intangible Assets - Web Site Costs

 

SIC-29

Services



 



2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BANK OF THE PHILIPPINE ISLANDS BPI Building 6768 Ayala Avenue, Corner Paseo de Roxas Makati City Reconciliation of Retained Earnings for Dividend Declaration For the Year Ended December 31, 2012 (In Millions of Pesos) (Figures based on functional currency audited Financial statements) Unappropriated Retained Earnings, based on audited financial statements, December 31,2011 Add: Net income actually earned/realized during the period Less: Non-actual/unrealized income net of tax Equity in Net income of associate/joint venture Unrealized foreign exchange gain - net (except Cash and Cash Equivalents) Unrealized actuarial gain Unrealized trading gain Fair value adjustment of Investment Property resulting to gain Adjustment due to deviation from PFRS/GAAP-gain Other unrealized gains or adjustments to the retained earnings as a result of certain transactions accounted for under PFRS Subtotal Add: Non-actual losses Depreciation on revaluation increment (after tax) Adjustment due to deviation from PFRS/GAAP - loss Loss on fair value adjustment of investment property (after tax) Subtotal

19,870

12,383

(418) (136) (553)

-

Net income actually earned during the period Add (Less): Dividend declarations during the period Appropriations of Retained Earnings during the period Reversals of appropriations Effects of prior period adjustments Treasury shares

12,936

(8,180) (141) (8,321)

Total Retained Earnings, End Available for Dividend

216 BANK OF THE PHILIPPINE ISLANDS

24,485

BPI 2012 ANNUAL REPORT

217

BANK OF THE PHILIPPINE ISLANDS

BPI FAMILY SAVINGS BANK, INC. 100%

BPI DIRECT SAVINGS BANK, INC. 100%

BPI COMPUTER SYSTEMS CORP. 100%

BPI FOREIGN EXCHANGE CORP. 100%

BPI CARD FINANCE CORP. 100%

BPI OPERATIONS MGT. CORP. 100%

BPI INVESTMENT & MGT., INC. 100%

AYALA PLANS. 98.67%

PRUDENTIAL INVESTMENTS INC. 100%

SANTIAGO LAND DEV’T CORP. 100%

FEBSTOCK BROKERS INC. 100%

FIRST FAR EAST DEV’T CORP. 100%

FEB SPEED INT’L 100%

BPI EXPRESS REMITTANCE CORP USA 100%

BPI EXPRESS REMITTANCE SPAIN S.A. 100%

BPI EXPRESS REMITTANCE CORP NEVADA 100%

BPI CAPITAL CORP 100%

BPI SECURITIES CORP 100%

Hilldale Co. Ltd. 100%

VICTORIA 1522 INVESTMENTS, LP 35%

AF CAPITAL FUND Sdn, Bnd. 49%

BPI Nominees Ltd 100%

BPI GLOBE BANKO, INC. 40%

BPI LEASING CORP 100%

BPI INT’L FINANCE LIMITED 100%

BPI EXPRESS REMITTANCE CENTER HK 100%

GREEN ENTERPRISES S.R.L in LIQUIDATION 100% (formerly BPI Express Remittance Europe, S.p.A.)

BPI RENTAL CORP. 100%

CITYTRUST SECURITIES CORP. 100%

FGU INSURANCE CORP 94.62%

BPI/MS INSURANCE CORP. 41.40%

BPI/MS INSURANCE CORP. 9.45%

FCS INSURANCE AGENCY 24.92%

NATIONAL REINSURANCE CORP. 1.58%

NATIONAL REINSURANCE CORP 0.08%

Begara Co. Ltd. 100%

BPI EUROPE PLC 100%

FILINVEST ALGO FINANCIAL CORP. 100%

BPI EXPRESS REMITTANCE UK PLC 100%

AF HOLDINGS and MNG’T CORP 100%

CITYTRUST REALTY CORP. 40%

BPI PHILAM LIFE ASSURANCE, INC. 47.67%

BEACON PROPERTY VENTURES, INC. 20%

NATIONAL REINSURANCE CORP. 13.46%

217

BANK OF THE PHILIPPINE ISLANDS

218

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BANK OF THE PHILIPPINE ISLANDS Financial Indicators As at December 31, 2012 and 2011

2012 Liquidity Ratio

65.37%

68.12%

Debt-to-Equity Ratio

32.22%

27.07%

Asset-to-Equity Ratio

1014.54%

945.15%

281.12%

249.60%

17.55%

15.17%

1.91%

1.62%

Cost to Income Ratio

52.55%

56.19%

Cost to Assets Ratio

2.92%

2.97%

Capital to Assets Ratio

9.86%

10.58%

Net Interest Margin

3.57%

3.67%

Interest Rate Coverage Ratio Return on Equity Ratio Return on Assets

218

2011

BANK OF THE PHILIPPINE ISLANDS

BPI 2012 ANNUAL REPORT

219

Deposits

Global Investment/Wealth Management Services (Hong Kong)

Peso deposits Checking Savings Time

Deposit Substitute

Multi-Currency Time Deposits Consumer Loans Global Securities (Broker/Dealer) Account Foreign Currency Bonds Foreign Currency Investment Funds Foreign Currency Equities Structures/Hedged Securities Investment Management Account Foreign Exchange

Promissory Notes

Payments & Settlement Services

Loans

Self-Service Banking Channels Express Phone Express Online Express Mobile Express Teller ATM Express Deposit Machines BPI Trade Cards and Payments Debit Card Credit Card Prepaid Card Merchant Payment Facilities Payment and Settlement Facilities Bills Payment Funds Transfer Remittance Cash Remittance Direct Credit-to-Account Door-to-Door Branch Pick-up Bank-to-Bank Gift Remittance Prepaid Reloading Corporate Cash Management ExpressLink Collections Disbursements Account and Liquidity Management, Trade and Loan Inquiry

Foreign Currency Deposits Savings Time

Commercial Loans Revolving Credits Term Loans Trade Finance Fleet & Floor Stock Financing Project Finance Receivable Financing Property Equity Credit Line Franchising Loans Sustainable Energy Financing - Preliminary walkthrough energy audit Consumer Loans Housing Loans Auto Loans Motorcycle Loans Wholesale Mortgage Finance Personal Loan Small Business Loans Agribusiness loans Crop loans Leasing Finance Lease Operating Lease Full Service Operating Lease Lease Syndication Receivable Rediscounting

Microfinance

Financial Institutions Depository Services Peso Vostro Services USD Vostro Services

Microsavings Microinsurance Wholesale Microfinance Loans Capacity Building Loans

220

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Asset Management & Trust Institutional Fund Management Fund Management Solutions Corporate and Institutional Funds - Corporations - Educational Institutions - Religious Organizations - Foundations Pension and Provident Funds Other Fiduciary Solutions Securities Custody Mortgage Trust Indenture Escrow Agency Asset or Mortgage-Backed Security Facility/ Loan Agency

ALFM Funds* ALFM Money Market Fund ALFM Peso Bond Fund ALFM Dollar Bond Fund ALFM Euro Bond Fund ALFM Growth Fund

Foreign Exchange Spot Foreign Exchange Forward Foreign Exchange Foreign Exchange Swaps Cash collateralized Forwards Non-deliverable Forwards

Other Mutual Funds* Bahay Pari Solidaritas Fund Ekklesia Mutual Fund

Derivatives Interest Rate Swaps Cross Currency Swaps

BPI Index Funds ABF Philippines Bond Index Fund Philippine Dollar Bond Index Fund Philippine Stock Index Fund*

Insurance Services

*Managed and distributed by BPI Investment Management, Inc.

Wealth Management

Investment Banking

Living Trust Investment Management Account (IMA) / Foreign Currency Denominated IMA Long-term Living Trust/Long-term Investment Management Account MyPortfolio

Capital Raising Debt Underwriting Equity Underwriting Loan Syndication Project Finance Acquisition Financing Securitization

Investment Funds BPI Short-Term Fund BPI Premium Bond Fund BPI Institutional Fund BPI International Fund Plus BPI Global Philippine Fund BPI Balanced Fund BPI Equity Value Fund BPI Global Equity Fund Odyssey Funds Odyssey Peso Cash Management Fund Odyssey Peso Income Fund Odyssey Peso Bond Fund Odyssey Philippine Dollar Bond Fund Odyssey Emerging Market Bond Fund Odyssey Diversified Capital Fund Odyssey Diversified Balanced Fund Odyssey Philippine Equity Fund Odyssey Philippine High Conviction Equity Fund Odyssey Asia Pacific High Dividend Equity Fund Odyssey Tax Exempt Peso Fixed Income Fund Odyssey Tax Exempt Philippine Equity Fund Odyssey Tax Exempt Philippine Dollar Fixed Income Fund

BANK OF THE PHILIPPINE ISLANDS

Financial Consultancy/ Advisory Mergers and Acquisition Capital Restructuring Financial Planning Liability Management Corporate Valuation Business Divestment

Dealership and Brokerage Sovereign Debt Instruments Philippine Sovereign Instruments Treasury Bills and Notes Retail Treasury Bonds Republic of the Philippine Bonds

Life Individual Variable Life Whole Life Accident and Health Protection (Term Life) Credit Secure for Credit Cards Accidental Protection Plan for Credit

Card Holders Savings Protection Plan for Depositors Corporate Term Life Corporate Personal Accident Credit Life Group Health/Medical Group Critical Illness Non Life Fire Motor Engineering Marine & Aviation Bonds Personal Accident Casualty Trade Credit Travel Accident (Schengen and Non-Schengen) Reinsurance

Selected Developed Sovereign Bonds

Ancillary Services

Asian Sovereign Bonds

Call Center Services Economic Research Investment Research Fixed Income Research Equities Research Bank Statement Services Statement Printing Letter Shopping

Private Securities Bank Bonds Commercial Papers Trade Receivables and Acceptances Corporate Promissory Notes and Bonds Mutual Funds Equities

221

BPI REMITTANCE CENTERS

BPI Express Remittance Corp.

BPI Remittance Centre Hong Kong Ltd

Las Vegas Seafood City 3890 South Maryland Pkwy, Ste B Las Vegas NV 89119 Tel. No.: (702) 733-7813 Fax No.: (702) 733-7808 Email: bpilasvegassc@bpi.com.ph

Worldwide 115 Branch 115 / 116 Worldwide House, 19 Des Voeux Road Central HK Tel. Nos.: (852) 2522-7105 / 2521-5366 E-mail: bpiworldwide@bpi.com.ph Hung Hom Branch Shop D7-D8, Planet Square Building No. 1-15 Tak Man Street, Hung Hom, Kowloon Tel. No.: (852) 2954-4833 Fax No.: (852) 2954-4044 E-mail: bpihunghom@bpi.com.ph

Los Angeles Suite 128, Ground Floor, 3550 Wilshire Boulevard Los Angeles, California 90010 Tel. Nos.: (213) 380-9833 or 34 Fax No.: (213) 380-9835 Toll Free No.: 1-800-2743977 E-mail: bpilosangeles@bpi.com.ph

Tsuen Wan Branch Shop 176, 1st Floor, Lik Sang Plaza No. 269 Castle Peak Road, Tsuen Wan New Territories, Hong Kong Tel. No.: (852) 2684-9088 Fax No.: (852) 2692-4088 E-mail: bpitsuenwan@bpi.com.ph

Milpitas Landess Unit 120, 1535 Landess Avenue, Milpitas, CA 95035 Tel. Nos.: (408) 941-2178 / (408) 946-8510 Fax no.: (408) 941-9289 E-mail: bpimilpitas@bpi.com.ph

Yuen Long Branch Shop 18 B2, 2nd Floor, Tung Yik Building Yu King Square, Yuen Long Tel. No.: (852) 2443-5377 Fax No.: (852) 2443-5477 Email Address: bpiyuenlong@bpi.com.ph BPI Express Remittance Spain, S.A. Barcelona Calle Joaquin Costa, 50 08001 Barcelona Spain Tel No.: (003493) 301-1537 Fax No.: (003493) 317-3280 E-mail: bpibarcelona@bpi.com.ph Madrid No. 4-1 Calle General Margallo, 28020 Madrid, Spain Tel No.: (003491) 579-4912 Fax No.: (003491) 570-9769 E-mail: bpimadrid@bpi.com.ph

222

New York 875 Third Avenue corner 53rd Street, Ste. 202, Mezz Level New York, NY 10022 Tel. Nos.: (212) 644-6700 / (212) 644-6706 Fax No.: (212) 752-5969 Toll Free No.: 1-800-4321274 E-mail: bpinewyork@bpi.com.ph North Hills Seafood City 16130 Nordhoff Street, Ste A, North Hills, CA 91343 Tel. Nos.: (818) 672-8206 / 8016 Fax No.: (818) 672-8211 E-mail: bpinorthhillssc@bpi.com.ph Sacramento Seafood City 6051 Mack Road, Sacramento, California 95803 Tel. No.: (916) 429-9077 Fax No.: (916) 429-9271 E-mail: bpisacramentosc@bpi.com.ph

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

San Diego 2220 East Plaza Boulevard, Suite M, Grove Plaza National City, San Diego 91950 Tel. Nos.: (619) 470-9399 / 9499 Fax No.: (619) 470-9515 E-mail: bpisandiego@bpi.com.ph San Francisco 2233 Gellert Boulevard, Gellert Square South San Francisco, CA 94080 Tel. No.: (650) 878-0292 Fax No.: (650) 878-0293 Toll Free No.: 1800-4042743 E-mail: bpisanfrancisco@bpi.com.ph Union City Seafood City 31840 Alvarado Boulevard, Union City, CA 94587 Tel. No: (510) 441-0103 Fax No.: (510) 441-0901 E-mail: bpiunioncitysc@bpi.com.ph Vallejo Seafood City 3495 Sonoma Boulevard,Vallejo CA 94590 Tel. No.: (707) 554-3528 Fax No.: (707) 554-3451 E-mail: bpivallejosc@bpi.com.ph West Covina Seafood City 1525 Amar Road, West Covina, CA 91792 Tel. No.: (626) 964-8711 Fax No.: (626) 964-8751 Toll Free No.: 1-888-9648711 E-mail: bpiwestcovinasc@bpi.com.ph

BANK OF THE PHILIPPINE ISLANDS

OTHER FOREIGN OFFICES Bank of the Philippine Islands (Europe) Plc United Kingdom Threadneedle Office 4th Floor, 28/29 Threadneedle Street London EC2R 8AY, U.K. Tel. No.: (0044) 207-6389100 Fax No.: (0044) 207-6386838 Email: bpithreadneedle@bpi.com.ph; bpinoy@bpieuropeplc.com Earl’s Court Office 26A & 27A Earl’s Court Gardens, London, SW5 0SZ, UK Tel. No.: (0044) 207-835-0088 Fax No.: (0044) 207-373-1848 Email: bpiearlscourt@bpi.com.ph Italy Rome Branch Via dei Mille, 32, 00185 Rome, Italy Tel. Nos.: (0039) 06-4452641/ 06-4450146 Fax No.: (0039) 06-4456310 E-mail: bpirome@bpi.com.ph Milan Branch Piazza Del Duomo 17, 20121 Milan, Italy Tel No: (0039) 02.83427962 Fax No: 02-89092216 Email: bpieuropemilan@bpi.com.ph Bank of the Philippine Islands UAE Representative Office Shop No.1, Al Diyafah Building, Al Mankhool Road Al Hudaiba, Dubai, U.A.E. Tel. No.: +97143542977 Fax No.: +97143542978

223

BANK OF THE PHILIPPINE ISLANDS 6768 Ayala Avenue Makati City 0720 Philippines Tel. No.: (632) 8185541 to 48 Express phone: 89-100 www.bpiexpressonline.com BPI FAMILY SAVINGS BANK BPI Family Savings Bank Center Paseo de Roxas corner Dela Rosa Street Makati City 0713 Philippines Tel. No.: (632) 8185541 to 48 Express Phone: 89-100 www.bpiexpressonline.com BPI CAPITAL CORPORATION 8th Floor, BPI Building 6768 Ayala Avenue corner Paseo de Roxas Makati city 0720 Philippines Tel. No.: (632) 8169277 Fax No.: (632) 8187809 Express Phone: 89-100 www.bpicapital.bpi.com.ph BPI SECURITIES CORPORATION 8th Floor, BPI Building 6768 Ayala Avenue corner Paseo de Roxas Makati City 0720 Philippines Trading: (632) 8169192 / 8455541 / 845-5543 (632) 8455617 / 8169724 Marketing: (632) 8169189 / 8455289 Admin: (632) 8169190 / 8455098 / 8169678 bpitrade@bpi.com.ph BPI LEASING CORPORATION 8th floor, BPI Building 6768 Ayala Avenue corner Paseo de Roxas Makati City 0720 Philippines Tel. No.: (632) 8455251 / 8455630 / 8169261 Fax No.: (632) 8916605 BPIL_CustomerService@bpi.com.ph

224

BPI RENTAL CORPORATION 8th floor, BPI Building 6768 Ayala Avenue corner Paseo de Roxas Makati City 0720 Philippines Tel. No.: (632) 8455251 / 8455630 / 8169261 Fax No.: (632) 8916605 BPIL_CustomerService@bpi.com.ph BPI FOUNDATION, INC. 16th Floor, BPI Building 6768 Ayala Avenue Makati City 0720 Philippines Tel. No.: (632) 8455710 / 8169288 Fax No.: (632) 8169390 Express Phone: 89-100 bpifoundation@bpi.com.ph BPI DIRECT SAVINGS BANK 8th Floor, BPI Card Center 8753 Paseo de Roxas Makati City 1226, Philippines Tel. No.: (632) 8455782 Express Phone: 89-100 www.bpidirect.com BPI / MS INSURANCE CORPORATION 11th, 14th and 16th Floors Ayala Life-FGU Center Building 6811 Ayala Avenue Makati City 1226 Philippines Tel. No.: (632) 840-9000 Fax No.: (632) 840-9748 www.bpims.com AYALA PLANS INCORPORATED 7th Floor, BPI Building 6768 Ayala Avenue Makati City 1226 Philippines Express Phone: 89-100 Toll Free: 1800-188-89100 (PLDT) SMS: Send AP<space>plan number<space>message to 0917-8910000 or 0918-8910000 customerservice@ayalaplans.com.ph

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

BPI FOREX CORPORATION Main Station 6th Floor, BPI Building 6768 Ayala Avenue corner Paseo de Roxas Makati City 0720 Philippines Tel. No.: (632) 6237665 Fax no.: (632) 8455191

SHAREHOLDER SERVICES AND ASSISTANCE

Mabini Station Ground Floor, BPI Malate Mabini Branch 1377 A. Mabini corner Sta. Monica Streets Ermita, Manila Tel. No.: (632) 623-7667

BPI STOCK TRANSFER OFFICE 16th Floor, BPI Head Office Building 6768 Ayala Avenue corner Paseo de Roxas Makati City 0720 Philippines Tel. No.: (632) 8169067 / 9068 / 9898 Fax No.: (632) 891-6605 www.bpiexpressonline.com

BPI INTERNATIONAL FINANCE LTD. Unit 1202, Tower 1 Lippo Centre 89 Queensway, Central, Hong Kong Tel. No.: (852) 2521-1155 Fax No.: (852) 2845-9170

BPI AFFILIATES BPI PHILAM LIFE ASSURANCE CORPORATION 15th floor, Ayala Life - FGU Center Building 6811 Ayala Avenue Makati City 1226 Philippines Tel. No.: (632) 8885433 Fax No.: (632) 8882967 BPI-Philam_customerservice@aia.com www.bpi-philam.com BPI GLOBE BANKO, INC. 4th Floor, BanKO Center Ortigas Avenue, North Greenhills San Juan City 1500 Philippines Tel. No.: (632) 7549980 Fax No.: (632) 7228714 www.banko.com.ph

BANK OF THE PHILIPPINE ISLANDS

For inquiries regarding dividend payments, change of address and account status, lost or damaged stock certificates, please write or call:

INSTITUTIONAL INVESTOR INQUIRIES Bank of the Philippine Islands welcomes inquiries from institutional investors, analysts, and the financial community. Please write or call: BPI INVESTOR RELATIONS OFFICE 18th Floor, BPI Building 6768 Ayala Avenue Makati City 0720 Philippines Tel. No.: (632) 8169753 / 8169557 investorrelations@bpi.com.ph OFFICE OF THE CORPORATE SECRETARY 19th Floor, BPI Building 6768 Ayala Avenue Makati City 0720 Philippines Tel. No.: (632) 8169705 Fax No.: (632) 9169421

225

PROFILE INDICATORS

page

1 Strategy and Analysis 1.1 1.2

Statement from the most senior decision maker(s) of the organization Description of key impacts, risks, and opportunities

16-23 16-23

2 Organizational Profile 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10

Name of the organization Primary brands, products, and/or services Operational structure and major divisions Location of the company headquarters Countries of operations Nature of ownership and legal form Markets served Scale of the reporting organization Significant changes during the reporting period Awards and recognitions received during the reporting period

Cover, 4 218-219 29 4 5, 220-221 4 4, 56-63 4-5, 10-11 2 7

3 Report ParameterS REPORT PROFILE 3.1 Reporting period 3.2 Date of most recent previous report 3.3 Reporting cycle 3.4 Contact point for questions about the report and its contents REPORT SCOPE AND BOUNDARY 3.5 Process for defining report content 3.6 Boundary of the report 3.7 Limitations on the scope or boundary of the report 3.8 Basis for reporting on joint ventures, subsidiaries, and other related entities 3.9 Assessment methods for data and bases for estimates in data compilation 3.10 Explanation of the effect of any re-statements of information provided in

previous reports 3.11 Significant changes from previous reporting period

226

2 2 2 2 2 2 2 2 2 N/A 2

GRI CONTENT INDEX 3.12 GRI Content Index Page

224-225

ASSURANCE 3.13 Current policy and practice dealing with external verification

2

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

page 4 Governance, Commitments and Engagement GOVERNANCE 4.1 Governance structure of the organization, including committees under the

highest governance body responsible for specific tasks 4.2 Indicate if the Chair of the highest governance body is an Executive Officer 4.3 For organizations that have a unitary board structure, state the number and

gender of members of the highest governance body that are independent

and/or non-executive members 4.4 Mechanisms for shareholders and employees to provide recommendations or

direction to the highest governance body 4.5 Linkage between compensation for members of the highest governance body,

senior managers, and executives, and the organizationâ&#x20AC;&#x2122;s performance 4.6 Processes in place for the highest governance body to ensure conflicts of

interest are avoided 4.7 Process for determining the composition, qualifications, and expertise of the

members of the highest governance body and its committees, including any

consideration of gender and other indicators of diversity 4.8 Internally developed statements of mission or values, codes of conduct, and

principles relevant to economic, environmental, and social performance and the

status of their implementation 4.9 Procedures for highest governance body to supervise the organizationâ&#x20AC;&#x2122;s performance 4.10 Process to assess the performance of the highest governance body

24-29 25, 28 25, 95 8-9, 99 25 35 25 Inside Front Cover 24-35 24-35

COMMITMENTS TO EXTERNAL INITIATIVES 68-75 4.11 Explanation of how the organization has adopted the precautionary principle 4.12 Externally developed economic, environmental, and social standards adopted or 63, 70-75, 80-83, 92, 98

any other related initiatives 4.13 Memberships in associations and/or national/international advocacy 8 organizations STAKEHOLDER ENGAGEMENT 4.14 List of stakeholder groups engaged by the organization 4.15 Basis for identification and selection of stakeholders with whom to engage 4.16 Approaches to stakeholder engagement, including frequency of engagement by

type and by stakeholder group 4.17 Key topics and concerns that have been raised through stakeholder

engagement, and how the organization has responded to those key topics

and concerns, including through its reporting

BANK OF THE PHILIPPINE ISLANDS

8-9 8-9 8-9 8

227

Performance INDICATORS

page

ECONOMIC Disclosure on Management Approach EC1 Economic value generated and distributed, including revenues, operating costs,

employee compensation, donations and other community investments, retained

earnings, and payments to capital providers and governments EC3 Coverage of the organizationâ&#x20AC;&#x2122;s defined benefit plan obligations EC5 Standard entry level wage compared to local minimum wage in locations of operations EC7 Procedures for local hiring and proportion of senior management hired from the

local community at significant locations of operation EC8 Development and impact of infrastructure investments and services

provided primarily for public benefit through commercial, in-kind, or pro bono

engagement

44 12-13 90-91 90 99 80-83

ENVIRONMENTAL Disclosure on Management Approach EN3 Direct energy consumption by primary energy source EN4 Indirect energy consumption by primary source EN5 Energy saved due to conservation and efficiency improvements EN7 Initiatives to reduce indirect energy consumption and reductions achieved EN8 Total water withdrawal by source EN16 Total direct and indirect greenhouse gas emissions by weight EN17 Other relevant greenhouse gas emissions by weight EN18 Initiatives to reduce greenhouse gas emissions and reductions achieved EN22 Total weight of waste by type and disposal method EN26 Initiatives to mitigate environmental impacts of products and services, and

extent of impact mitigation EN28 Monetary value of significant fines and total number of non-monetary sanctions

for non-compliance with environmental laws and regulations

68 76 76 76 72-76 76 77 77 72-75, 77 77 72-73 74

SOCIAL Labor Practices and Decent Work Indicators Disclosure on Management Approach LA1 Total workforce by employment type, employment contract, and region, broken

down by gender LA2 Total number and rate of new employee hires and employee turnover by age

group, gender, and region LA3 Benefits provided to full-time employees that are not provided to temporary or

parttime employees, by significant locations of operation LA4 Percentage of employees covered by collective bargaining agreements LA7 Rates of injury, occupational diseases, lost days, and absenteeism, and total

number of work-related fatalities, by region and by gender

228

42, 52, 76, 84, 86, 88 88-89 96 90-91 91 98

2012 INTEGRATED ANNUAL AND SUSTAINABILITY REPORT

Labor Practices and Decent Work Indicators LA8 Education, training, counseling, prevention, and risk-control programs in place

to assist workforce members, their families, or community members regarding

serious diseases LA10 Average hours of training per year per employee, by gender, and by employee

category LA11 Programs for skills management and lifelong learning that support the

continued employability of employees and assist them in managing career endings LA12 Percentage of employees receiving regular performance and career

development reviews, by gender LA15 Return to work and retention rates after parental leave, by gender LA13 Composition of governance bodies and breakdown of employees per employee

category according to gender, age group, minority group membership,

and other indicators of diversity LA14 Ratio of basic salary and remuneration of women to men by employee category,

by significant locations of operation

page 98 93 92 90-91 97 95 94

Human Rights Disclosure on Management Approach HR4 Total number of incidents of discrimination and corrective actions taken HR6 Operations identified as having significant risk for incidents of child labor, and

measures taken to contribute to the elimination of child labor HR7 Operations identified as having significant risk for incidents of forced or

compulsory labor, and measures to contribute to the elimination of forced or

compulsory labor HR8 Percentage of security personnel trained in the organizationâ&#x20AC;&#x2122;s policies or

procedures concerning aspects of human rights that are relevant to operations HR11 Number of grievances related to human rights filed, addressed, and resolved

through formal grievance mechanisms

99 99 99 99 99

Product Responsibility PR4 Total number of incidents of non-compliance with regulations and voluntary

codes concerning product and service information and labeling, by type of outcomes PR5 Practices related to customer satisfaction, including results of surveys

measuring customer satisfaction PR6 Programs for adherence to laws, standards, and voluntary codes related to

marketing communications, including advertising, promotion, and sponsorship PR7 Total number of incidents of non-compliance with regulations and voluntary

codes concerning marketing communications, including advertising, promotion,

and sponsorship PR8 Total number of substantiated complaints regarding breaches of customer

privacy and losses of customer data

67 66-67

67 67

Society SO7

Total number of legal actions for anticompetitive behavior, anti-trust, and monopoly practices and their outcomes

67

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BANK OF THE PHILIPPINE ISLANDS 6768 Ayala Avenue Makati City 0720 Philippines www.bpiexpressonline.com