-
If you are in any doubt about this Offering Circular, you should
consult representatives of the Selling Agents such as a sales
professional or bank manager, or a professional accountant or
other professional adviser.
FINAL OFFERING CIRCULAR STRICTLY CONFIDENTIAL 29 APRIL 2009
RIZAL COMMERCIAL BANKING CORPORATION (A BANKING CORPORATION
ORGANIZED AND EXISTING UNDER PHILIPPINE LAWS)
P4,000,000,000 UNSECURED SUBORDINATED NOTES
ELIGIBLE AS LOWER TIER 2 CAPITAL DUE 2019
CALLABLE WITH STEP-UP IN 2014
ISSUE PRICE 100.0% OF FACE VALUE
Rizal Commercial Banking Corporation, (the “Bank”) is offering
P4,000,000,000 worth of Unsecured Subordinated Notes Eligible as
Lower Tier 2
Capital due 2019, callable with step-up in 2014 (the “Notes”)
pursuant to the authority granted by the Bangko Sentral ng
Pilipinas (“BSP”) to the
Bank on 2 April 2009 and BSP Circular No. 280 (2001) and 503
(2005), as amended from time to time.
The Notes will bear interest at the rate of 7.75% per annum from
and including 15 May 2009 to but excluding 15 May 2014 and interest
will be
payable quarterly in arrears at the end of each Interest Period
on 15 August, 15 November, 15 February and 15 May, commencing on 15
August
2009. Unless the Notes are earlier redeemed on 16 May 2014 (the
“Optional Redemption Date”), the applicable interest rate from and
including
15 May 2014 to but excluding 15 May 2019 (the “Maturity Date”)
will be increased to the rate equal to (80% x Benchmark Rate as of
the first day
of the 21st Interest Period) plus the Step-Up Spread (the
“Step-Up Interest Rate”) and such Step-Up Interest Rate shall be
payable quarterly in
arrears at the end of each Interest Period on 15 August, 15
November, 15 February and 15 May except for the last Interest
Period which will end
on the Maturity Date.
Unless previously redeemed, the Notes will be redeemed at their
principal amount on the Maturity Date or 15 May 2019. Subject to
the
satisfaction of certain regulatory approval requirements, the
Bank may redeem the Notes in whole and not only in part on the
Optional
Redemption Date at the face value of the Notes, plus accrued and
unpaid interest as of but excluding the Optional Redemption Date.
The Notes
will constitute direct, unconditional, unsecured and
subordinated obligations of the Bank, and 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
Bank, except
obligations mandatorily preferred by law. See Terms and
Conditions of the Notes – Status and Subordination.
The Notes cannot be terminated by any holder of the Notes (the
“Noteholder”) before the Maturity Date. Transfers or assignments,
however, shall
not be considered pre-terminations.
The Notes are not deposits. The Notes are not insured by the
Philippine Deposit Insurance Corporation and are not guaranteed by
the
Bank, any person related to the Bank, or any person
whatsoever.
The Notes will be issued in scripless form in denominations of
P500,000.00 and integral multiples of P100,000.00 thereafter and
will be registered
and lodged with the Registrar and Paying Agent in the name of
the Noteholders. The Notes will be represented by the Master Note
deposited with
the Public Trustee (with copy to the Registrar). The Electronic
Registry Book (the “Registry Book”) shall serve as the best
evidence of ownership
with respect to the Notes. However, a written advice will be
issued by the Registrar to the Noteholders to confirm the
registration of the Notes in
their name in the Registry Book, including the amount and
summary terms and conditions of such Notes in accordance with the
regulations of the
BSP (“Registry Confirmations”). Once registered and lodged, the
Notes will be eligible for transfer or assignment through the
Market Maker by
electronic book-entry transfers in the Registry Book,
cancellation of the Registry Confirmations of transferor
Noteholders and issuance of Registry
Confirmations in favor of transferee Noteholders. It is also
intended that the Notes will be listed in the trading platform of
the Philippine Dealing
and Exchange Corp. (“PDEx”). In the event of such listing of the
Notes in the PDEx, the services of the Market Maker shall cease and
secondary
trading on the Notes would henceforth be conducted in the PDEx
in accordance with the rules and regulations of PDEx. See Terms
and
Conditions of the Notes – Secondary Trading.
The Bank has a Bank Financial Strength Rating of E+ and a Senior
Unsecured Debt Rating of Ba3 from Moody’s Investor Services. The
Notes
are not rated. Such a rating would relate to the timely payment
of interest on the Notes and the full payment of the principal
amount of the Notes
on or before 15 May 2019. A rating is not a recommendation to
buy, sell or hold securities and may be subject to revision,
suspension or
withdrawal at any time by the rating agency concerned.
INVESTING IN THE NOTES INVOLVES CERTAIN RISKS. SEE “INVESTMENT
CONSIDERATIONS” FOR A DISCUSSION OF
CERTAIN FACTORS TO BE CONSIDERED IN CONNECTION WITH AN
INVESTMENT IN THE NOTES.
ARRANGER, SELLING AGENT and MARKET MAKER
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i
The date of this Offering Circular is 29 April 2009.
This Offering Circular has been prepared solely for the
information of persons to whom it is transmitted by
Standard Chartered Bank (“SCB”), as Arranger and Selling Agent,
or the Bank, in its capacity as Selling
Agent, with respect to the Notes to be issued by the Bank. This
Offering Circular shall not be reproduced in
any form, in whole or in part, for any purpose whatsoever nor
shall it be transmitted to any other person.
The Bank confirms that this Offering Circular contains all
information with respect to the Bank and its
subsidiaries (collectively, the “Group”) and the Notes which is
material in the context of the issue and
offering of the Notes, that the information contained herein is
true and accurate in all material respects and
is not misleading, that the opinions and intentions expressed
herein are honestly held and have been
reached after considering all relevant circumstances and are
based on reasonable assumptions, that there
are no other facts, the omission of which would, in the context
of the issue and offering of the Notes, make
this document as a whole or any such information or the
expression of any such opinions or intentions
misleading in any material respect, and that all reasonable
enquiries have been made by the Bank to verify
the accuracy of such information. The Bank accepts
responsibility accordingly.
In making an investment decision, the prospective Noteholder
must rely on its own examination of the Bank
and the terms of the offering of the Notes, including the merits
and risks involved. By receiving this Offering
Circular, the prospective Noteholder acknowledges that (i) it
has not relied on the Arranger or any of the
Selling Agents or any person affiliated with them in connection
with its investigation of the accuracy of any
information in this Offering Circular or its investment
decision, and (ii) no person has been authorized to
give any information or to make any representation concerning
the Bank, the Group or the Notes other than
as contained in this Offering Circular and, if given or made,
any such other information or representation
should not be relied upon as having been authorized by the Bank,
the Arranger or Selling Agents.
No representation or warranty, express or implied, is made by
the Arranger and Selling Agents as to the
accuracy or completeness of the information contained in this
Offering Circular. Neither the delivery of this
Offering Circular nor the offer of the Notes shall, under any
circumstances, constitute a representation or
create any implication that there has been no change in the
affairs of the Bank or the Group since the date
of this Offering Circular or that any information contained
herein is correct as at any date subsequent to the
date hereof. The Arranger and Selling Agents expressly do not
undertake to update the contents of this
Offering Circular.
None of the Bank, the Arranger or the Selling Agents or any of
their respective affiliates or representatives
is making any representation to any Noteholder regarding the
legality of an investment by such Noteholder
under applicable laws. In addition, the Noteholder should not
construe the contents of this Offering Circular
as legal, business or tax advice. The Noteholder should be aware
that it may be required to bear the
financial risks of an investment in the Notes for an indefinite
period. The Noteholder should consult with its
own advisers as to the legal, tax, business, financial and
related aspects of a purchase of the Notes.
This Offering Circular does not constitute an offer to sell, or
an invitation by or on behalf of the Bank, the
Arranger or Selling Agents or any of their respective affiliates
or representatives to purchase any of the
Notes, and may not be used for the purpose of an offer to, or a
solicitation by, anyone, in each case, in any
jurisdiction or in any circumstances in which such offer or
solicitation is not authorized or is unlawful.
Recipients of this Offering Circular are required to inform
themselves about and observe any applicable
restrictions.
Each Noteholder must comply with all applicable laws and
regulations in force in each jurisdiction in which
it purchases, offers or sells such Notes or possesses or
distributes this Offering Circular and must obtain
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ii
any consent, approval or permission required by it for the
purchase, offer or sale by it of such Notes under
the laws and regulations in force in any jurisdictions to which
it is subject or in which it makes such
purchases, offers or sales and the Bank, Arranger or Selling
Agents shall have no responsibility therefor.
Conventions
In this Offering Circular, unless otherwise specified or the
context otherwise requires, all references to the
“Philippines” are references to the Republic of the Philippines.
All references to the “Government” herein
are references to the Government of the Philippines. All
references to “United States” or “U.S.” herein are
to the United States of America. Unless otherwise specified or
the context otherwise requires, references
herein to “U.S. dollars” and “U.S.$” are to the lawful currency
of the United States of America and
references herein to “Pesos” and “P” are to the lawful currency
of the Republic of the Philippines. Certain
monetary amounts and currency translations included in this
document have been subject to rounding
adjustments; accordingly, figures shown as totals in certain
tables may not be an arithmetic aggregation of
the figures, which precede them. References in this document to
ownership interests are, save as
otherwise disclosed, as at the date of this document.
Forward-looking Statements
All statements contained in this Offering Circular that are not
statements of historical fact constitute
“forward-looking statements”. Some of these statements can be
identified by forward-looking terms, such
as “anticipate”, “believe”, “can”, “could”, “estimate”,
“expect”, “intend”, “may”, “plan”, “will” and “would” or
similar words. However, these words are not the exclusive means
of identifying forward-looking statements.
All statements regarding the Group’s expected financial
condition and results of operations, business, plans
and prospects are forward-looking statements. These
forward-looking statements include statements as to
the Group’s business strategy, revenue and profitability,
planned projects and other matters discussed in
this Offering Circular regarding matters that are not historical
fact. These forward-looking statements and
any other projections contained in this Offering Circular
(whether made by the Bank or any third party)
involve known and unknown risks, uncertainties and other factors
that may cause the Group’s actual
results, performance or achievements to be materially different
from any future results, performance or
achievements expressed or implied by such forward-looking
statements or other projections.
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TABLE OF CONTENTS
OFFERING CIRCULAR SUMMARY
......................................................................................................................
1
SELECTED FINANCIAL INFORMATION
............................................................................................................
10
INVESTMENT
CONSIDERATIONS......................................................................................................................
13
TERMS AND CONDITIONS OF THE
NOTES......................................................................................................
29
PURPOSE OF ISSUANCE
...................................................................................................................................
47
CAPITALIZATION
................................................................................................................................................
48
DESCRIPTION OF THE BANK
............................................................................................................................
49
PHILIPPINE
TAXATION.....................................................................................................................................
116
PHILIPPINE BANKING INDUSTRY
...................................................................................................................
121
BANKING REGULATION AND
SUPERVISION.................................................................................................
123
PROCEDURE
.....................................................................................................................................................
131
FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Statements of Condition
Consolidated Income Statements
Consolidated Statements of Changes in Capital Funds
Consolidated Cash Flows Statements
Notes to Consolidated Financial Statements
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OFFERING CIRCULAR SUMMARY
This summary highlights information contained elsewhere in this
Offering Circular. This summary is qualified by, and
must be read in conjunction with, the more detailed information
and financial statements appearing elsewhere in this
Offering Circular. Each prospective Noteholder is recommended to
read this entire Offering Circular carefully, including
the Bank's consolidated financial statements and related notes
(the “Financial Statements”) and “Investment
Considerations”.
DESCRIPTION OF THE BANK
Rizal Commercial Banking Corporation (the “Bank”) is a universal
bank which provides a wide range of
banking and other financial products and services, including
commercial and retail banking, credit cards,
asset management and treasury and investment banking products
and services. These services include
traditional loan and deposit products, as well as treasury,
trust banking, investment banking, private
banking, cash management, leasing and finance, remittance,
insurance, retail cash cards and credit card
services. As of 31 December 2008, the Bank was the fourth
largest capitalized private universal bank in the
Philippines. In terms of branches, the Bank, excluding the
Government-owned and foreign banks, ranked
fourth in the Philippines, with a country-wide total of 324
branches as of 31 December 2008.
The Bank, incorporated under the name Rizal Development Bank,
began operations as a private
development bank in the province of Rizal in 1960. In 1963, the
Bank received approval from the then
Central Bank of the Philippines, now the Bangko Sentral ng
Pilipinas (“BSP”) to operate as a commercial
bank and thus began operations under its present name. In 1973,
the Bank formed alliances with two
foreign banks, Continental Illinois National Bank (“Conill”) and
United Financial of Japan (“UFJ”), then
known as Sanwa Bank. The relationship with Continental Illinois
ended in 1985 after it sold its shareholding
in the Bank to UFJ. In December 2006, UFJ (which, after its
merger in 2004 with Mitsubishi Tokyo Financial
Group, became known as The Bank of Tokyo-Mitsubishi UFJ Limited)
disposed of its entire shareholdings
in the Bank, with the majority being sold to Spinnaker Global
Strategic Fund Ltd. and Spinnaker Global
Emerging Markets Fund Ltd. (together, “Spinnaker”). As of 31
December 2008, the Yuchengco group,
primarily through a holding company, the Pan Malayan Management
and Investment Corporation (“Pan
Malayan”) owned approximately 42.0% of the Bank’s outstanding
shares. In addition, as of such date,
others members of the Yuchengco Group of Companies (“YGC”) owned
or controlled an additional 11.5%
of the Bank’s issued and outstanding common shares and Spinnaker
owned 16% of the Bank’s outstanding
common shares. In the early part of 2009, Spinnaker Group sold
its entire stake in the Bank. The equity
interest was primarily bought back by the Bank to have the
flexibility to look for a strategic investor that
agreed with the Bank’s current business direction.
As of 31 December 2008, the Bank’s consolidated total assets and
capital funds before minority interests
amounted to P268.3 billion and P27.7 billion, respectively. The
Bank’s net income attributable to parent
company shareholders for the period ending 31 December 2008
amounted to P2.2 billion. As of 31
December 2008, the Bank had a market capitalization on the
Philippine Stock Exchange (“PSE”) of P9.44
billion. The Bank’s Tier 1 capital adequacy ratio and total
capital adequacy ratio were 13.19% and 17.30%,
respectively, as of 31 December 2008.
The Bank offers commercial, corporate and consumer banking
products and services throughout the
Philippines, as well as treasury, cash management and remittance
services.
The Bank’s Retail Banking Group (“RBG”) currently account for a
significant portion of the Bank’s income
being the largest contributor to its net income for the period
ended 31 December 2008. The Bank’s Retail
Banking Group provides a range of banking products and services
mainly sold through the Bank’s branch
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network. These include deposit products, cash management
solutions, investments including trust
products, and bancassurance. Aside from managing the Bank’s
branches, RBG also manages the Bank’s
nationwide ATM network.
The Bank’s corporate banking practice focuses particularly on
international corporate clients in special
economic zones, Japanese and Filipino-Chinese businesses and
leading Philippine and multinational
corporations. Through its current affiliation with YGC and past
affiliation with UFJ, it has established long-
standing relationships with Japanese companies in special
economic zones within the Philippines, as well
as Chinese and international companies.
The Bank also provides a full range of consumer banking products
and services in the Philippines, primarily
through its subsidiary, RCBC Savings Bank, Inc. (“RSB”).
The Bank’s international operations consist of its wholly-owned
subsidiaries, RCBC North America, Inc.
(formerly RCBC California International Inc.) (“RCBC North
America”) and RCBC TeleMoney Europe SpA
(“RCBC Telemoney Europe”) in the United States and Italy,
respectively, and its majority-owned subsidiary
RCBC International Finance Ltd. (“RCBC IFL”) and its subsidiary
RCBC Investments, Ltd. (“RCBC
Investments”) in Hong Kong. The Bank’s relationship with other
banks, exchanges and other international
money transfer agencies has strengthened its remittance business
used primarily by overseas Filipino
workers (“OFWs”). The Bank estimates it had an approximate 10.0%
share of the remittance business in
the Philippines as of 31 December 2008, and 9.4% as of 30
December 2007, based on remittance volumes
published by the BSP.
The Bank has allocated resources and investments in technology
focused on providing better services for
the banking needs of its clients. It is critical to this
strategy not just to keep pace with evolving customer
expectations but to anticipate their future needs, given the
fast pace of technological advancement.
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STRATEGY
The Bank aims to continue its growth in the core business lines
through its superior execution abilities,
customer service initiatives and expanded distribution
platforms. The key elements of the Bank's strategy
are as follows:
• Increase profitability from existing businesses while building
a diversified franchise;
• Further expand the Bank’s existing branch network while
enhancing the effectiveness of the
distribution network through the introduction of more electronic
channels;
• Invest in technology;
• Invest in people;
• Expand focus on providing services to non-resident
Filipinos;
• Accelerate disposition of non-performing assets (“NPAs”);
and
• Where suitable opportunities arise, pursue a prudent
acquisition strategy.
COMPETITIVE STRENGTHS
The Bank aims to leverage its strategies by its principal
competitive strengths, as follows:
• Sustainable size in a consolidating market, with an
established operating history;
• Leading positions in key products;
• Strong group synergies and support;
• Proven and experienced management team; and
• Extensive and strategically located banking infrastructure and
branch network.
THE OFFER
SCB, in its capacity as Arranger has agreed with the Bank,
subject to the satisfaction of certain conditions,
to distribute and sell the Notes at the Issue Price in
consideration for certain fees and expenses. The
Arranger will offer the Notes to selected prospective
Noteholders.
The distribution and sale of the Notes to prospective
Noteholders shall be undertaken by the Arranger and
the Selling Agents for the issue. Nothing herein shall limit the
right of the Arranger to purchase the Notes
for its own account. The Arranger may, from time to time, engage
in transactions with and perform services
for the Bank or its shareholders or affiliates in the ordinary
course of its business.
The following is a general summary of the terms of the Notes.
This summary is derived from and should be
read in conjunction with the full text of the Terms and
Conditions of the Notes (the “Terms and Conditions”).
The Terms and Conditions shall prevail in the event of any
inconsistency with the terms set out in this
section.
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4
ISSUER Rizal Commercial Banking Corporation (the “Bank”)
NOTES OFFERED P4,000,000,000 Fixed Rate Unsecured Subordinated
Notes
DENOMINATION Minimum denominations of P500,000.00 and in
integral multiples of
P100,000.00 thereafter
ISSUE PRICE 100% of the nominal principal amount of the
Notes
INTEREST RATE Fixed rate of 7.75% per annum, being the rate
equal to the Benchmark
Rate on Pricing Date plus a margin payable to the Noteholder for
the period
from and including the Issue Date up to but excluding the last
day of the
20th Interest Period (if the Redemption Option is not exercised)
or up to but
excluding the Optional Redemption Date (if the Redemption Option
is
exercised)
STEP-UP INTEREST
RATE
Means (80% x Benchmark Rate as of the Banking Day immediately
prior to
the first day of the twenty-first (21st) Interest Period) plus
the Step-Up
Spread, payable to Noteholders in lieu of the Interest Rate
beginning on the
twenty first (21st) Interest Period up to the last Interest
Period in the event
the Issuer does not exercise its Redemption Option
The Step-Up Spread is equal to 150% x (Interest Rate less 80% of
the
Benchmark Rate as at the Pricing Date), equivalent to
3.7925%
ISSUE DATE 15 May 2009
MATURITY DATE The end of ten (10) years from the Issue Date or
on 15 May 2019;
Provided, that, if such date is declared to be a non-Business
Day, the
Maturity Date shall be the next succeeding Business Day
OPTIONAL REDEMPTION
DATE
The first Banking Day of the twenty-first (21st) Interest
Period, which is on
16 May 2014, on which date the Bank may exercise its option to
redeem
the Notes subject to the Terms and Conditions and the
Governing
Regulations
OFFER PERIOD Commencing at 10:00 a.m. on 29 April 2009 and
ending at 5:00 p.m. on 12
May 2009 or such earlier day or later day as may be determined
by the
Bank and the Arranger
THE FOREGOING NOTWITHSTANDING, THE DEADLINE FOR THE
SUBMISSION OF THE DULY EXECUTED APPLICATIONS TO
PURCHASE TO THE SELLING AGENTS MAY BE MOVED TO AN
EARLIER DATE AT THE SOLE AND ABSOLUTE DISCRETION OF THE
ARRANGER WITHOUT PRIOR NOTICE
FORM The Notes shall be scripless and, subject to the payment of
fees to the
Registrar, registered and lodged with the Registrar in the name
of the
Noteholders. Once lodged, the Notes shall be eligible for
electronic transfer
in the Registry Book, without the issuance or cancellation of
Notes
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5
INTEREST ACCRUAL The Notes will bear interest on its principal
from and including the Issue
Date to but excluding the Optional Redemption Date at the
stipulated
Interest Rate. In the event the Notes are not redeemed on the
Optional
Redemption Date, the Notes will bear interest on its principal
from and
including the first (1st) day of the twenty first (21st)
Interest Period to, but
excluding the Maturity Date, at the stipulated Step-Up Interest
Rate. In
such an event, interest at the Step-Up Interest Rate will be
payable to the
Noteholders in lieu of the Interest Rate beginning the twenty
first (21st)
Interest Period up to the last Interest Period.
The amount of interest payable in respect of the Notes for each
Interest
Period shall be calculated by the Paying Agent on a 30/360-day
year basis
with the first (1st) Interest Period having an odd coupon,
imputing the
additional one (1) day in the computation.
INTEREST PERIODS The period commencing on the Issue Date and
having a duration of three
(3) months and, thereafter, each successive three (3)-month
period
commencing on the last day of the immediately preceding Interest
Period
up to, but excluding the first day of the immediately succeeding
Interest
Period, but in the case of the last Interest Period, it will be
the period from
and including the last day of the immediately preceding Interest
Period up
to, but excluding, the Maturity Date
INTEREST PAYMENT
DATE
The last day of an Interest Period when payment for interest in
respect of
the Notes becomes due, as set out in these Terms and
Conditions;
Provided, that, if any Interest Payment Date would otherwise
fall on a day
which is not a Business Day, the Interest Payment Date shall be
deemed
the next succeeding Business Day; Provided further, that if
such
succeeding Business Day falls into the next calendar month, the
Interest
Payment Date shall be the immediately preceding Business Day, in
either
case, without adjustment to the amount of interest to be
paid
PRINCIPAL REPAYMENT Unless the Notes are redeemed by the Bank on
the Optional Redemption
Date or on such other date allowed under Early Redemption of the
Notes,
the Notes shall be redeemed on the Maturity Date or on 15 May
2019 at
face value of the Notes, plus accrued interest covering the
accrued and
unpaid interest as of but excluding the Maturity Date. If the
Maturity Date
falls on a date that is not a Business Day, the Maturity Date
shall fall on the
immediately succeeding Business Day, without adjustment to
interest
payable in respect of the Notes
REDEMPTION OPTION
Subject to the satisfaction of certain regulatory approval
requirements, the
Bank may redeem all (but not only part) of the Notes on the
Optional
Redemption Date or on 16 May 2014 at face value of the Note,
plus
accrued interest covering the accrued and unpaid interest as of
but
excluding the Optional Redemption Date On the Optional
Redemption
Date, upon (x) prior approval of the BSP, subject to the
following
conditions: (i) the capital adequacy ratio of the Bank is at
least equal to the
required minimum ratio; (ii) the Note is simultaneously replaced
with the
issues of new capital which are neither smaller in size nor
lower in quality
-
6
than the original issue (unless the Bank’s capital ratio remains
more than
adequate after redemption); and (y) a thirty (30)-Banking Day
prior written
notice to Noteholders on record.
If at any time within the first five (5) years after Issue Date
of the Notes,
there occurs (a) a change in tax status of the Notes due to
changes in tax
statutes and/or regulations, or (b) a determination by the BSP
that the
Notes do not qualify as Lower Tier 2 capital of the Bank, the
Bank may,
upon prior approval of the BSP and at least a thirty
(30)-Banking Day prior
written notice to the Noteholders, redeem all and not less than
all of the
Notes at the Issue Price plus accrued and unpaid interest.
NON-
PRETERMINABILITY
Presentation of the Notes to the Bank for termination or
redemption before
the Maturity Date is not allowed, unless otherwise expressly
provided in the
Terms and Conditions. Noteholders may, however, transfer or
assign their
Notes to prospective Noteholders who are not Prohibited
Noteholder. Such
transfer or assignment shall not be considered a
pre-termination
PROHIBITED
NOTEHOLDERS
The following persons and entities shall be prohibited from
purchasing
and/or holding any Notes of the Issuer: (1) subsidiaries and
affiliates of the
Issuer, including the subsidiaries and affiliates of the
Issuer's subsidiaries
and affiliates; or (2) unit investment trust funds managed by
the Trust
Department of the Issuer, its subsidiaries, and affiliates, or
other related
entities; or (3) other funds being managed by the Trust
Department of the
Issuer, its subsidiaries and affiliates or other related
entities where (a) the
fund owners have not given prior authority or instruction to the
Trust
Department to purchase or invest in the Notes or (b) the
authority or
instruction of the fund owner and his understanding of the risk
involved in
purchasing or investing in the Notes are not fully documented.
For
purposes hereof, an “affiliate” refers to a related entity
linked by means of
ownership of at least 20.0% to not more than 50.0% of its
outstanding
voting stock.
SECONDARY TRADING
All transfers or assignments of the Notes shall be coursed
through the
Market Maker or other institutions authorized by the BSP or the
Philippine
Dealing and Exchange Corporation (“PDEx”), upon the listing of
the Notes
in PDEx after the Issue Date
The Issuer intends to list the Notes in PDEx for secondary
market trading.
Upon listing of the Notes with PDEx, Noteholders shall course
their
secondary market trades through the trading participants of PDEx
for
execution in the PDEx Trading Platform in accordance with the
PDEx
Trading Rules, Conventions and Guidelines, as these may be
amended or
supplemented from time to time, and shall settle such trades on
a Delivery
versus Payment (DvP) basis in accordance with PDEx Settlement
Rules
and Guidelines. The secondary trading of Notes in PDEx may be
subject to
such fees and charges of PDEx, the trading participants of PDEx,
and other
providers necessary for the completion of such trades
QUALIFICATION
DETERMINATION
Each Selling Agent and Limited Selling Agent (in the case of
initial issuance
of the Notes) and each Market Maker (in the case of secondary
trading of
the Notes) shall verify the identity and other relevant details
of each
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7
investor and ascertain that the proposed holder or transferee of
a Note is
not a Prohibited Noteholder. In the event that the Notes are
listed on PDEx,
the obligation to verify the identity and other relevant details
of each
investor and ascertain that the proposed holder or transferee of
a Note is
not a Prohibited Noteholder shall be performed by the trading
participants
of the PDEx. Final determination shall, however, rest with the
Issuer.
The Noteholder shall immediately submit any and all
information
reasonably required by the Selling Agents, Limited Selling
Agents, and/or
Market Makers with respect to the qualification of the proposed
holder or
transferee in order to determine that such Noteholder or
transferee is not a
Prohibited Noteholder.
STATUS AND
SUBORDINATION
The Notes constitute direct, unconditional, unsecured, and
subordinated Peso-denominated obligations of the Bank,
enforceable
in accordance with these Terms and Conditions. Claims of all
the
Noteholders in respect of the Notes will at all times rank pari
passu
without any preference among themselves. The Notes shall be at
least
pari passu with all other present and future unsecured and
subordinated Peso-denominated obligations of the Bank that by
their
terms rank equal with the Notes, except obligations
mandatorily
preferred by law.
Claims of all Noteholders, however, enjoy priority over the
rights and
claims of holders of all classes of equity securities of the
Bank,
including holders of preference shares, if any. Noteholders or
their
transferees shall not be allowed, and hereby waive their right,
to set
off any amount that may be due the Bank against the Notes.
Upon any distribution to creditors of any assets of the Bank in
the
event of any insolvency or liquidation of the Bank, the claims
of
Noteholders for principal and interest in respect of the Notes
shall be
subordinated in right of payment to claims (whether actual
or
contingent, present or future) of all depositors and creditors
of the
Bank, except those creditors that are expressly ranked equally
with or
junior to the Noteholders in right of payment.
THE NOTES, LIKE OTHER SUBORDINATED INDEBTEDNESS OF THE
BANK, ARE SUBORDINATED TO THE CLAIMS OF DEPOSITORS AND
ORDINARY CREDITORS, ARE NOT A DEPOSIT, AND ARE NOT
GUARANTEED NOR INSURED BY THE BANK OR ANY PARTY
RELATED TO THE BANK, SUCH AS ITS SUBSIDIARIES AND
AFFILIATES, OR THE PHILIPPINE DEPOSIT INSURANCE
CORPORATION, OR ANY OTHER PERSON, AND ARE NOT COVERED
OR SECURED BY ANY ARRANGEMENT THAT LEGALLY OR
ECONOMICALLY ENHANCES THE PRIORITY OF THE CLAIM OF THE
NOTEHOLDER AS AGAINST DEPOSITORS AND OTHER CREDITORS
OF THE ISSUER.
The Notes shall not be used as collateral for any loan made by
the
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8
Bank or any of its subsidiaries or affiliates.
TAXATION If any payments of principal and/or interest under the
Notes shall be subject
to deductions or withholdings for or on account of any present
taxes,
duties, assessments, or governmental charges of whatever
nature
imposed, levied, collected, withheld, or assessed by or within
the
Philippines or any authority therein or thereof having the power
to tax,
including but not limited to stamp, issue, registration,
documentary, value-
added or similar tax, or other taxes, duties, assessments, or
government
charges, including interest, surcharges, and penalties thereon
(the
“Taxes”), then such Taxes shall be for the account of the
Noteholder
concerned, and if the Bank shall be required by law or
regulation to deduct
or withhold such Taxes, then the Bank shall make the
necessary
withholding or deduction for the account of the Noteholder
concerned;
provided, however, that all sums payable by the Bank to
tax-exempt
persons shall be paid in full without deductions for Taxes or
government
charges, subject to the submission by the relevant Noteholder
claiming the
exemption of reasonable and acceptable evidence of such
exemption to
the Registrar
In the event that (a) due to a change in tax status of the Notes
because of
changes in tax statutes (and not merely a change in the
interpretation of
present Tax statutes and regulations), any payments of principal
and/or
interest under the Notes shall be subject to deductions or
withholdings for
or on account of any taxes, duties, assessments, or governmental
charges
of whatever nature imposed, levied, collected, withheld, or
assessed by or
within the Philippines or any authority therein or thereof
having the power to
tax, including but not limited to stamp, issue, registration,
documentary,
value-added or similar tax, or other taxes, duties, assessments,
or
government charges, including interest, surcharges, and
penalties thereon
(the “New Taxes”), and (b) the Bank does not redeem the Notes
prior to
stated maturity, then all payments of principal and interest in
respect of the
Notes shall be made free and clear of, and without withholding
or deduction
for, any such New Taxes, unless such withholding or deduction is
required
by law. In that event, the Bank shall pay to the Noteholders
concerned such
additional amount as will result in the receipt by the
Noteholders of such
amounts as would have been received by them had no such
withholding or
deduction for New Taxes been required.
Documentary stamp tax for the primary issue of the Notes and
the
documentation, if any, shall be for the Bank’s account.
GOVERNING LAW These Terms and Conditions shall be governed by
and construed in
accordance with the laws of the Republic of the Philippines
GOVERNING
REGULATIONS
BSP Memorandum to All Banks and Non-Bank Financial Institutions
dated
17 February 2003 and Circular Nos. 280 (2001) and 503 (2005) on
the
issuance of unsecured subordinated debt instruments and other
related
circulars and issuances, as may be amended from time to time
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9
INVESTMENT
CONSIDERATIONS
See “Investment Considerations” for a discussion of certain
factors to be
considered in connection with an investment in the Notes
ARRANGER Standard Chartered Bank (“SCB”)
SELLING AGENTS SCB, Multinational Investment Bancorporation
(“MIB”), BDO Capital and
Investment Corporation (“BDO Capital”), Citicorp Financial
Services &
Insurance Brokerage Philippines, Inc. (“CFSI”) and to the extent
allowed
under the Governing Regulations, the Bank
REGISTRAR AND
PAYING AGENT Philippine Depository & Trust Corporation
MARKET MAKER Initially, SCB, and may refer, when the
circumstances warrant, to the
PDEx
PUBLIC TRUSTEE The Development Bank of the Philippines
(“DBP”)
PURPOSE OF ISSUANCE
The Notes will be used to raise additional Tier 2 capital and to
further increase and strengthen its capital
base.
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10
SELECTED FINANCIAL INFORMATION
The following summary financial information has been derived
from the Financial Statements, and is qualified in its
entirety by reference to such Financial Statements, including
the notes thereto. The Bank's 2006 and 2007 audited
financial statements have been prepared in accordance with
Philippine Financial Reporting Standards. The 2008
audited financial statements have been prepared in accordance
with Financial Reporting Standards in the Philippines
for Banks. The following data should be read together with more
detailed information contained in “Investment
Considerations”, “Description of the Bank” and the financial
statements and notes included elsewhere in this Offering
Circular.
For the years ended 31 December
2006
2007
2008
Consolidated Statements of
Condition (P millions)
Cash and other cash items 5,005.7 5,875.7 6,807.9
Due from the Bangko Sentral ng Pilipinas 13,787.9 17,611.4
16,391.0
Due from other banks 7,653.7 4,744.9 4,862.2
Investment securities 58,906.0 64,584.5 46,810.8
Loans and other receivables – net 108,933.4 117,195.2
164,402.9
Investments in associates – net 2,049.6 4,172.9 4,294.2
Bank premises, furniture, fixtures and
equipment – net 3,387.5 3,503.8 4,029.8
Investment properties – net 9,984.9 7,761.4 7,387.6
Deferred tax assets 1,832.0 1,645.8 1,391.7
Other resources – net 12,168.9 12,002.3 11,892.1
TOTAL RESOURCES 223,709.7 239,097.9 268,270.2
Deposit liabilities
Demand 9,878.1 10,765.2 11,125.1
Savings 57,975.9 66,769.8 75,738.4
Time 89,696.2 98,393.8 109,363.5
Bills payable 17,634.0 12,820.5 21,452.6
Bonds payable 6,689.1 5,650.7 6,002.8
Outstanding acceptances payable 234.0 234.7 318.9
Accrued taxes, interest and other
expenses 2,835.2 3,087.5 2,787.5
Subordinated debt 5,427.7 5,158.1 6,941.9
Other liabilities 9,947.5 7,197.2 6,902.8
TOTAL LIABILITIES 200,317.8 210,077.5 240,633.5
CAPITAL FUNDS 23,391.9 29,020.4 27,636.7
TOTAL LIABILITIES AND EQUITY 223,709.7 239,097.9 268,270.2
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For the years ended 31 December
2006
2007
2008
Consolidated Statements of
Income (P millions)
INTEREST INCOME ON
Loans and other receivables 9,844.0 9,583.8 10,885.3
Investment securities 5,074.8 4,917.9 3,991.9
Others 409.1 828.7 782.4
15,327.9 15,330.4 15,659.6
INTEREST EXPENSE ON
Deposit liabilities 5,026.3 4,192.6 5,128.8
Bills payable and other borrowings 3,043.2 2,318.7 2,060.7
8,069.5 6,511.3 7,189.5
NET INTEREST INCOME
7,258.4 8,819.1 8,470.1
IMPAIRMENT LOSSES – net
1,749.3 942.5 998.5
NET INTEREST INCOME AFTER
IMPAIRMENT LOSSES
5,509.1 7,876.6 7,471.6
OTHER INCOME
Trading gain (loss)
2,377.6 1,329.1 (511.9)
Service charges and fees
1,078.7 1,514.5 1,643.4
Miscellaneous
1,597.7 1,537.0 3,465.2
5,054.0 4,380.6 4,596.7
OTHER EXPENSES
Employee benefits
2,184.4 2,384.4 2,524.9
Occupancy
1,435.1 1,410.8 1,492.8
Taxes and licenses
1,369.3 1,068.9 1,143.5
Other operating expenses
3,058.0 3,303.8 3,814.6
8,046.8 8,167.9 8,975.8
INCOME BEFORE TAX
2,516.3 4,089.3 3,092.5
TAX EXPENSE
626.9 845.6 919.4
NET INCOME
1,889.4 3,243.7 2,173.1
Attributable to: Equity Holdings of Parent 2,052.6 3,207.6
2,153.7
Minority Interest
(163.2) 36.1 19.4
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12
For the years ended 31 December
2006
2007
2008
Selected Financial Ratios (Pro-forma, in percent except Earnings
per Share)
Return on assets(1) 1.01 1.42 0.87
Return on shareholders’ equity(2) 12.64 12.43 7.40
Net interest margin(3) 4.84 5.00 4.25
Cost-income ratio(4) 65.36 61.88 68.69
Loans-to-deposits(5) 53.73 59.19 67.31
Tier I capital adequacy ratio(6) 18.73 15.06 13.19
Total capital adequacy ratio(7) 20.30 18.70 17.30
Total equity-to-total assets(8) 10.46 12.14 10.30
Total non-performing loans-to-total loans
– excluding interbank loans(9) 7.58 6.29 3.02
Total non-performing loans-to-total loans
– including interbank loans(10) 6.06 5.66 2.55
Allowances for probable loan losses to
total loans(11) 5.54 4.94 2.35
Allowances for probable loan losses-to-
total non-performing loans(12) 73.04 78.48 77.84
Earnings per share (P) (13) 2.82 2.93 1.72
Notes:
(1) Net income divided by average total resources for the period
indicated.
(2) Net income divided by average total capital funds for the
period indicated.
(3) Net interest income divided by average interest-earning
assets.
(4) Total operating expenses divided by the sum of net interest
income and other income.
(5) Total loans divided by total deposits.
(6) Tier I capital divided by total risk-weighted assets.
(7) Total capital divided by total risk-weighted assets.
(8) Total capital funds divided by total resources.
(9) Total nonperforming loans divided by total loans – excluding
interbank loans.
(10) Total nonperforming loans divided by total loans –
including interbank loans.
(11) Total allowance for probable loan losses divided by total
loans.
(12) Total allowance for probable loan losses divided by
non-performing loans.
(13) Net income divided by weighted average common shares.
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13
INVESTMENT CONSIDERATIONS
An investment in the Notes involves a number of investment
considerations. You should carefully consider all the
information contained in this Offering Circular including the
investment considerations described below, before any
decision is made to invest in the Notes. The Bank's business,
financial condition and results of operations could be
materially adversely affected by any of these investment
considerations. The market price of the Notes could decline
due to any one of these risks, and all or part of an investment
in the Notes could be lost.
The following discussion is not intended to be a comprehensive
description of the risks and other factors and is not in
any way meant to be exhaustive. Prospective Noteholders are
encouraged to make their own independent legal, tax,
financial, and business examination of the Bank, the Notes, and
the market. Neither the Bank nor the Arranger makes
any warranty or representation on the marketability or price on
any investment in the Notes.
CONSIDERATIONS RELATING TO THE PHILIPPINES
Substantially all of the Bank’s operations and assets are based
in the Philippines; therefore any
downturn in general economic conditions in the Philippines could
have a material adverse
impact on the Bank
Substantially all of the Bank’s business operations and assets
are based in the Philippines. As a result, the
Bank’s income, results of operations and the quality and growth
of its assets depend, to a large extent, on
the performance of the Philippine economy. In the past, the
Philippines has experienced periods of slow or
negative growth, high inflation, significant devaluation of the
Philippine currency and the imposition of
exchange controls.
From mid-1997 to 1999, the economic crisis in Asia adversely
affected the Philippine economy, causing a
significant depreciation of the peso, increases in interest
rates, increased volatility and the downgrading of
the Philippine local currency sovereign rating and the ratings
outlook for the Philippine banking sector.
These factors had a material adverse impact on the ability of
many Philippine companies to meet their
debt-servicing obligations. In particular, the significant
depreciation of the peso made it difficult for many
Philippine companies with peso revenue streams and significant
U.S. dollar or other foreign currency-
denominated loans or costs to meet their repayment obligations.
While the Philippine economy registered
positive economic growth in the period from 1999 to 2001 as it
recovered from the Asian economic crisis, it
continues to face a significant budget deficit, limited foreign
currency reserves, a volatile peso exchange
rate and a relatively weak bank sector.
In 2006, GDP growth was at 5.4% while GNP growth was at 6.1%. In
2007, GDP growth increased to
7.3%. In 2008, GDP growth slowed down to 4.5%. Prospects for
future growth remain uncertain with the
global economic crisis threatening to curb consumption and
export demand from emerging market
economies including the Philippines. In February 2009, the
Government announced that the budget deficit
for fiscal year 2008 was P68.1 billion, below the government’s
target ceiling of P75 billion for the same
period.
Any deterioration in economic conditions in the Philippines as a
result of these or other factors, including a
significant depreciation of the Peso or increase in interest
rates, could materially adversely affect the
Bank’s borrowers and contractual counter parties. This, in turn,
could materially and adversely affect the
Bank’s financial condition and results of operations, including
the Bank’s ability to grow its asset portfolio,
the quality of the Bank’s assets and its ability to implement
the Bank’s business strategy.
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14
Volatility in the value of the Peso against the U.S. dollar and
other currencies as well as in the
global financial and capital markets could adversely affect the
Bank's business
During the last decade, the Philippine economy has from time to
time experienced devaluation of the Peso
and limited availability of foreign exchange. In July 1997, the
BSP announced that it would allow market
forces to determine the value of the Peso. From 30 June 1997 to
31 December 2003, the Peso has
experienced periods of significant depreciation and has declined
from P29.00 = U.S. $1.00 (average) in
July 1997 to P56.267 = U.S. $1.00 as at 31 December 2004.
However, the Peso in recent years has further
strengthened versus the U.S. dollar on the back of positive
investor sentiment and increased dollar flows
both from foreign investors and Overseas Filipino Workers. From
its end-December 2004 level, the Peso
appreciated to P47.52 by end-December 2008, an appreciation of
15.5% over the four-year period.
Nevertheless, like all emerging markets, the Philippines is not
immune to volatilities in the global financial
and capital markets and changing investor risk appetites that
could trigger capital outflows and put
pressure on the Peso. Given this, a decline in the value of the
Peso as regards foreign currencies may
affect the ability of the Bank's customers to service debt
obligations denominated in foreign currencies and
increase non-performing loans. There can be no assurance that
the Peso will not depreciate further against
other currencies and that such depreciation will not have an
adverse effect on the Bank.
Under BSP guidelines, the Bank is required to match Foreign
Currency Deposit Unit (“FCDU”) liabilities
with foreign currency assets in its FCDU books. As at 31
December 2008, the Bank had P268.3 billion of
resources and P240.6 billion of liabilities (of which P72.1
billion of resources and P73.2 billion liabilities
were in its FCDU books). The Bank has entered into foreign
exchange forward contracts as a means of
hedging against foreign currency fluctuations. More importantly,
it is the Bank’s policy to extend foreign
exchange loans only to entities with natural or regulatory hedge
(exporters or those with foreign exchange-
adjustment mechanisms like utilities). However, there can be no
assurance that the Bank will be able to
successfully hedge its exposure to foreign currency risks.
In early 2007, the BSP liberalized its foreign exchange policies
pertaining to current account and capital
account transactions as well as to prudential regulations. On
the latter, the BSP has imposed a symmetrical
limit of 20% of unimpaired capital with an absolute limit of
US$50 million on both the overbought and
oversold positions of banks. In particular, the oversold limit
at 20% of unimpaired capital serves as a
prudential measure to discourage excessive exposure of banks to
foreign exchange risks. However, the
BSP's liberalization of its foreign exchange policies has its
downside. While it encourages freer dollar
inflows, in the same manner it opens up the country to a greater
magnitude of capital flight at the first sign
of market volatility.
The disruptions recently experienced in the international
capital markets have led to reduced
liquidity and increased credit risk premiums for certain market
participants.
The disruptions recently experienced in the international
capital markets have led to reduced liquidity and
increased credit risk premiums for certain market participants
and have resulted in a reduction of available
financing. Companies located in countries in the emerging
markets may be particularly susceptible to these
disruptions and reductions in the availability of credit or
increases in financing costs, which could result in
them experiencing financial difficulty.
In addition, the availability of credit to entities operating
within the emerging markets is significantly
influenced by levels of investor confidence in such markets as a
whole and so any factors that impact
market confidence (for example, a decrease in credit ratings or
state or central bank intervention in one
market) could affect the price or availability of funding for
entities within any of these markets.
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15
Political instability may have a negative effect on the
Philippine economic condition which could
have a material impact on the Bank’s business.
The Philippines has from time to time experienced political
instability. No assurance can be given that the
political environment in the Philippines will be stable and that
current or future governments will adopt
economic policies conducive to sustained economic growth, and we
cannot make any assurance that the
Bank will not be affected, materially or otherwise, by any
change in the Philippine political environment.
In 2001, following an impeachment trial, mass demonstrations and
the military declaration of its withdrawal
of support, former President Joseph Estrada was removed from
office. Then Vice President Gloria
Macapagal Arroyo was installed as President of the Philippines
on January 20, 2001.
National and local elections were held on May 10, 2004.
Notwithstanding the protest rallies and several
disqualification cases filed against President Arroyo (none of
which prospered), she and Senator Noli De
Castro were proclaimed by Congress as President and Vice
President, respectively on June 24, 2004. In
2005, President Arroyo was alleged to have committed fraud in
the 2004 national elections based on taped
conversations she supposedly had with an official of the
Commission on Elections (“Comelec”). After
President Arroyo admitted to speaking with a Comelec official,
several cabinet members resigned from
their posts and, along with opposition groups, called for her
resignation. Impeachment complaints were
then filed against President Arroyo, but the House of
Representatives eventually voted to reject the
impeachment complaints. Impeachment complaints were re-filed in
2006 and 2007 and have also been
rejected.
In February 2006, the Government thwarted a coup plot supposedly
involving certain military rebels and
communists. President Arroyo put the country under a state of
emergency, citing an alleged tactical
alliance between right- and left-wing enemies of the state and a
conspiracy over broad front to topple the
Government. The state of emergency was lifted after a week.
In November 2007, a group of military rebels together with a
senator walked out of their trial in Makati City
and occupied the second floor of the Manila Peninsula Hotel
calling for President Arroyo to resign. They
were soon joined by a few church officials and former Vice
President Teofisto Guingona who appealed to
the public for support. After a few hours, the mutinous group
agreed to surrender to avoid bloodshed.
Since 2007 the Philippine Senate has been conducting inquiries
into the allegedly anomalous US$329
million deal to construct the National Broadband Network. In
February 2008, former Philippine Forest
Corporation president Rodolfo Noel Lozada Jr. testified in the
Senate and accused key Arroyo allies of
overpricing the deal and receiving and/or demanding hefty
commissions for the implementation of said
deal. The controversy has again fueled mass protests by various
cause-oriented groups calling for the
President to resign.
The Arroyo administration has been pushing for changes to the
Philippine Constitution including, among
others, a change in the form of government from presidential to
parliamentary. However, the Philippine
Supreme Court recently ruled to deny petitions to allow a
People’s Initiative that would have made
constitutional changes possible through an abbreviated process
and a plebiscite.
Another impeachment complaint against President Arroyo was
filed, citing the NBN controversy. This,
however, has not yet been taken up by Congress and falls within
the constitutional ban prohibiting the filing
of an impeachment complaint within one year from the filing of
the last impeachment complaint.
In August 2008, certain members of a long-standing secessionist
group, the Moro Islamic Liberation Front
(“MILF”), launched attacks on government troops and civilians,
including damage to property, following a
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16
stall in the signing of the Memorandum of Agreement on Ancestral
Domain (“MOA-AD”), the result of peace
talks between the Philippine Government and the MILF in an
effort to promote mutual cooperation and
preserve the development of Mindanao. The delay came on the
heels of allegations that the MOA-AD was
essentially ceding highly developed portions of Mindanao to the
secessionists without a popular
consensus, thus compromising national identity and granting
sovereignty to the MILF. The attacks have
decreased with the onset of Ramadan, but are nonetheless far
from abated. The government continues to
hold out on the MOA-AD signing.
General elections are expected to be held in 2010.
No assurance can be given that the future political environment
in the Philippines will be stable or that
current or future Governments will adopt economic policies
conducive to sustaining economic growth.
Political instability in the Philippines could negatively affect
the general economic conditions in the
Philippines which could have a material impact on the financial
results of the Bank and the Group.
An increase in the number of terrorist activities in the
Philippines could negatively affect the
Philippine economy and, therefore, the Group’s financial
condition and its business
The Philippines has been subject to a number of terrorist
attacks in recent years. An increase in the
number of terrorist activities in the Philippines could
negatively affect the Philippine economy and,
therefore, the Group’s financial condition and its business.
The Philippine army has been in conflict with the Abu Sayyaf
organization, which has ties to the al-Qaeda
terrorist network and has been identified as being responsible
for kidnapping and terrorist activities in the
Philippines. There has been a series of bombings in the
Philippines, mainly in southern cities. Although no
one has claimed responsibility for these attacks, Philippine
military officials have stated that the attacks
appeared to be the work of the Abu Sayyaf organization. On
February 24 2004, a bomb exploded on a
Superferry ship off the coast of Manila, causing the vessel to
sink, killing 116 people. On 14 February 2005,
three bombs exploded in the cities of General Santos, Davao and
Makati, killing at least 11 people and
injuring over 100 people. On 8 June 2008, gunmen believed to
belong to the Abu Sayyaf Group abducted
broadcast journalist Ces Drilon of ABS-CBN, her two cameramen
and a professor of Mindanao State
University in Sulu but were released 10 days later. On 15
January 2009, three workers from the
International Committee of the Red Cross were also abducted by
members of the group. As of 2 April 2009,
two of those workers are still in the custody of the rebel
group.
There can be no assurance that the Philippines will not be
subject to further, or an increased number of,
acts of terrorism in the future. Terrorist attacks have, in the
past, had a material adverse effect on
investment and confidence in, and the performance of, the
Philippine economy and, in turn, the Group’s
business. Furthermore, there can be no assurance that the
Philippines will not suffer a large-scale terrorist
attack which cripples the Philippine economy for a significant
period of time.
Corporate governance and disclosure standards in the Philippines
may differ from those in
more developed countries
While a principal objective of the Philippine securities laws
and the listing rules of the Philippine Stock
Exchange (“PSE”) is to promote full and fair disclosure of
material corporate information, there may be less
publicly available information about Philippine public
companies, such as the Bank, than is regularly made
available by public companies in the U.S. and other countries.
Furthermore, although the Bank complies
with the requirements of the PSE with respect to corporate
governance standards, these standards may
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17
differ from those applicable in other jurisdictions. For
example, the Philippine Securities Regulation Code
requires the Bank to have at least two independent directors or
such number of independent directors as is
equal to 20% of the Board, whichever is the lower number. The
Bank usually has two independent
directors. Many other jurisdictions require significantly more
independent directors.
Financial statements of Philippine banks are prepared in
accordance with Financial Reporting Standards in
the Philippines for Banks which requires the use of certain
critical accounting estimates. Management of
institutions are to use their own judgment to come up with
estimates on certain statement of condition and
income statement accounts such as, but not limited to,
impairment losses on loans and receivables; fair
value of derivatives; impairment of available-for-sale and
held-to-maturity securities; and realization of
deferred income tax assets among others.
CONSIDERATIONS RELATING TO THE PHILIPPINE BANKING INDUSTRY
The Philippine banking industry is highly competitive and
increasing competition may result in
declining margins in the Bank's principal businesses
The Bank is subject to significant levels of competition from
many other Philippine banks and branches of
international banks, including competitors which in some
instances have greater financial and other capital
resources, a greater market share and greater brand name
recognition than the Bank. The banking
industry in the Philippines is a mature market that has, in
recent years, been subject to consolidation and
liberalization, including liberalization of foreign ownership
regulations. There are currently a total of 38
domestic and foreign commercial banks operating in the
Philippines.
The recent mergers and consolidations in the banking industry,
as well as the liberalization of foreign
ownership regulations in banks, have allowed the emergence of
foreign and bigger local banks in the
market. This is expected to increase the level of competition
both from Philippine banks and branches of
international banks. This may impact the Philippine banks’
operating margins, but this would also enhance
the industry’s overall efficiency, business opportunities and
service delivery.
In the future, the Bank may face increased competition from
financial institutions offering a wider range of
commercial banking services and products, larger lending limits,
greater financial resources and stronger
balance sheets than the Bank. Increased competition may arise
from:
���� Other Philippine banks and financial institutions with
significant presence in Metro Manila
and large country-wide branch networks;
���� Foreign banks, due to, among other things, relaxed
standards which permitted large
foreign banks to open branch offices;
���� Domestic banks entering into strategic alliances with
foreign banks with significant
financial and management resources; and
���� Continued consolidation in the banking sector.
There can be no assurance that the Bank will be able to compete
effectively in the face of such increased
competition. In addition, the Bank faces intense competition in
areas it has identified for growth such as
consumer loans and remittances. Increased competition may make
it difficult for the Bank to increase the
size of its loan portfolio and deposit base, as well as cause
increased pricing competition, which could have
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18
a material adverse effect on its margins, results of operations
and financial condition and inhibit the Bank’s
ability to implement its growth strategy.
In addition, the Bank may face increasing competition for
Japanese clients. UFJ’s share disposal was
prompted by its merger with The Bank of Tokyo-Mitsubishi, which
already has a presence in the
Philippines. There can be no assurances that the Bank’s Japanese
related business will not suffer because
of perceptions that the Bank no longer has a strong Japanese
alliance.
Philippine banks are generally exposed to higher credit risks
and greater market volatility than
banks in more developed countries
Philippine banks are subject to the credit risk that Philippine
borrowers may not make timely payment of
principal and interest on loans and, in particular that, upon
such failure to pay, Philippine banks may not be
able to enforce the security interest they may have. The credit
risk of Philippine borrowers is, in many
instances, higher than that of borrowers in developed countries
due to:
���� The greater uncertainty associated with the Philippine
regulatory, political, legal and
economic environment;
���� The dependence of the Philippine economy in general on
exports for economic growth. In
recent years, however, Philippine economic growth has largely
been fueled by personal
consumption spending that accounted for 70% of Gross Domestic
Product (“GDP”);
���� The large foreign debt of the Government, relative to the
gross domestic product of the
Philippines. The country’s foreign debt has increased by 21.73%,
from P1.505 trillion as at
January 2008 to P1.87 trillion in January 2009. This already
represents 24.9% of 2008
GDP at current prices; and
���� The greater volatility of interest rates and U.S.
dollar/Peso exchange rates.
Higher credit risk has a material adverse effect on the quality
of loan portfolios and exposes Philippine
banks, including the Bank, to more potential losses and higher
risks than banks in more developed
countries. In addition, higher credit risk generally increases
the cost of capital for Philippine banks
compared to their international counterparts. Such losses and
higher capital costs arising from this higher
credit risk may have a material adverse effect on the Bank's
financial condition, liquidity and results of
operations. According to data published by the BSP, average
non-performing loan ratios (including
interbank loans) in the Philippine banking system were 5.7%,
4.5%, and 3.5% as at the years ended 31
December 2006, 2007 and 2008, respectively.
The Bank's ability to assess, monitor and manage risks inherent
in its business differs from the
standards of its counterparts in more developed countries
The Bank is exposed to a variety of risks, including credit
risk, market risk, portfolio risk, foreign exchange
risk and operational risk. The effectiveness of the Bank's risk
management is limited by the quality and
timeliness of available data in the Philippines in relation to
factors such as the credit history of proposed
borrowers and the loan exposure borrowers have with other
financial institutions. In addition, the
information generated by different groups within the Bank may be
incomplete or obsolete. The Bank may
also have developed credit screening standards in response to
such inadequacies in quality of credit
information that are different from, or inferior to, the
standards used by its international competitors. As a
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result, the Bank's ability to assess, monitor and manage risks
inherent in its business would not meet the
standards of its counterparts in more developed countries. If
the Bank is unable to acquire or develop in the
future the technology, skills set and systems available to meet
such standards, it could have a material
adverse effect on the Bank's ability to manage these risks and
on the Bank's financial condition, liquidity
and results of operations.
CONSIDERATIONS RELATING TO THE BANK
The reports of the Bank’s independent auditors with respect to
the consolidated statements of
condition of the Bank as of 31 December 2006, 2007 and 2008 and
the related consolidated
income statements, statements of changes in capital funds and
cash flows statements for the
periods then ended were qualified
The Bank prepared its 2006 and 2007 consolidated financial
statements in accordance with Philippine
Financial Reporting Standards and its 2008 consolidated
financial statements in accordance with Financial
Reporting Standards in the Philippines for Banks, other than
with respect to the matters qualified in the
relevant audit report. Punongbayan & Araullo (“P&A”),
the Bank’s independent auditors for fiscal years
2006 to 2008 have identified certain matters relating to the
preparation of the Bank’s consolidated financial
statements that were not consistent with the applicable
accounting standards and have included
qualifications to such effect in their published audit reports.
The Bank’s auditors issued audit reports
included qualifications with respect to the staggered
recognition of the additional allowance for impairment
and losses, not writing-off of impaired credit card receivables,
the derecognition of certain non-performing
assets (“NPAs”) transferred and recording by the Bank of certain
transactions pending approval by the BSP
(applicable to non-consolidated or Bank financial statements
only). The qualifications are described below:
• The Bank transferred certain NPAs to special purpose vehicles
(“SPVs”), including transfers to
Philippine Investment One, Inc. (“PIOI”) and New Pacific
Resources Management Inc. (“NPRMI”).
The transfers to PIOI and NPRMI were in consideration for, among
other things, subordinated
notes that contained provisions that payments under the notes
are dependent on the SPV’s ability
to make collections on the transferred NPAs. The Bank’s auditors
have determined that such
provisions do not reflect a complete transfer of risks and
rewards as required by applicable
accounting standards and that the transferred NPAs should be
recognized in the Bank’s financial
statements, including any required additional allowance for
impairment. Moreover, under Republic
Act No. 9182 and the various resolutions and circulars published
by the BSP regarding such Act
(together, the “SPV Act”), the Bank is permitted to defer and
amortize the required additional
allowance for impairment on the NPAs transferred to PIOI and on
the losses resulting from
transfers of NPAs to other SPVs. Applicable accounting standards
in the Philippines, however,
require the full recognition of the required additional
allowance for impairment and losses against
current operations in the period that such impairment and losses
were determined instead of
capitalizing it as deferred charges and amortizing it over
future periods. Had the Bank reflected its
interest in PIOI and NPRMI in its financial statements and not
derecognized the NPAs transferred,
and had the Bank fully recognized the required additional
allowance for impairment and losses, the
gross balance of the Bank’s loans and receivables account would
have increased by P5.2 billion
as of 31 December 2007 and 2008, respectively; allowance for
impairment would have increased
by P1.4 billion and P2.0 billion in 2007 and 2008, respectively;
available-for-sale securities would
have decreased by P1.4 billion and in 2007 and 2008; investment
property would have increased
by P1.4 billion in 2007 and 2008; deferred charges (part of
Other Resources) would have
decreased by P8.6 billion and P7.8 billion in 2007 and 2008,
respectively; other liabilities would
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have increased by P24.0 million and P26.5 million in 2007 and
2008, respectively; and net income
would have decreased by P1.3 billion and P791.3 million in 2006
and 2008, respectively
• Bankard obtained BSP approval for it to stagger the booking of
P3.6 billion required additional
allowance for impairment as of 31 December 2003 for a period of
seven years starting in fiscal
year 2004. Applicable accounting standards in the Philippines,
however, require the full recognition
of required allowance for impairment against current operations
in the period such losses were
determined. In 2006, Bankard sold and transferred to the Bank
certain credit card receivables,
P2.8 billion of which were approved by the BSP for the
staggering scheme. After the sale and
transfer of the receivables, the Bank charged in fiscal year
2006 an impairment loss of P162.1
million of such receivables and wrote-off the remaining balance
of P2.6 billion against allowance
for impairment, instead of against operations. Had Bankard
recognized the required allowance for
impairment in the period the losses were determined and had the
subsequent write-off of the
impaired credit card receivables been charged against 2006
operation, both balances of the loans
and receivables account and the surplus account would have
decreased by P2.6 billion as of 31
December 2007 and 2008. Further, the Bank’s net income would
have decreased by P2.1 billion in
fiscal year 2006.
• As part of its corporate restructuring strategy on November
27, 2006, the Bank approved the
capital infusion of P1 billion each into RCBC Capital
Corporation (“RCBC Capital”) and Bankard
Inc. (“Bankard”), both subsidiaries of the Bank, by way of
conversion of RCBC Capital’s and
Bankard’s debt to the Bank into equity. The Bank reflected the
effects of these transactions in its
2006 financial statements (non-consolidated or Bank only) by
recording the capital infusion as part
of Investments in Subsidiaries and Associates account and, in
addition, provided for allowance for
impairment amounting to P200 million. However, BSP approved the
transactions only on February
23, 2007. The Bank’s auditors have determined that these
transactions should have been
recognized only at the time of the BSP approval. Had the capital
infusion not been recorded in the
2006 financial statements (non-consolidated or Bank only), the
Bank’s loans and receivables
would have increased by P2.0 billion; investments in
subsidiaries and associates would have been
decreased by P1.8 billion and its 2006 net income would have
been increased by P200.0 million.
Certain of these deviations from accounting standards are
allowed by the BSP under the SPV Act or
otherwise. However, there can be no assurances that the BSP will
not change its policies to align its
policies with the applicable accounting standards. If the BSP
were to change its policies, or if the Bank
were to make adjustments to its financial statements to make
them fully consistent with the applicable
accounting standards, the Bank’s impairment losses would
increase resulting in a decrease in net income.
If the Bank were to make any such adjustments to its financial
statements, it may restate the financial
statements of previous years, including the financial statements
included in this Offering Circular. The
Bank’s financial statements included in this Offering Circular
may not be comparable with the financial
statements of other banks in the Philippines and may not be
comparable with the Bank’s future or past
financial statements that have been prepared on a different
basis without such qualifications.
The Bank may incur significant losses from its trading and
investment activities due to market
fluctuations and volatility
In recent years, the performance of the Bank’s treasury
operations has been a key factor in its operating
income. Trading and foreign exchange gains were P2.1 billion and
P1.2 billion for fiscal years 2006 and
2007, respectively, which represented 17.2% and 8.9% of
operating income (net interest income and other
operating income) for the respective periods. However, in 2008,
trading and foreign exchange gains were
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down 71.7% to P340.0 million, which now represents just 2.6% of
operating income. This trend has shown
that the income derived from these activities is inherently
volatile and may not be sustainable year after
year.
The Bank’s income from these activities are subject to
substantial volatility based on, among other things,
changes in interest rates, foreign currency exchange rates, debt
prices, stock market fluctuations
economic, political and other conditions that may fluctuate from
time to time. Given the current turmoil in
the global financial markets, there can be no assurance that, in
the future, the Bank will be able to realize a
stable amount of trading and foreign exchange gains, that it
will not incur a loss from such trading or that it
will hold unto its trading and investment securities to realize
interest income, any or all of which could have
a material adverse effect on the Bank’s future net income.
A substantial portion of the Bank’s assets are held in the form
of Government securities. As of 31
December 2008, the Bank held P40.0 billion Government
securities, respectively, which comprised 14.9%
of its total assets. Such instruments are subject not only to
market fluctuations but to political or economic
changes in the Government’s sovereign rating. There can be no
assurance that the rating of Philippine
sovereign debt will not be subject to downgrades or negative
outlooks. Furthermore, should the
Government be unable to service its obligations, the Bank would
suffer a material adverse impact on its
financial condition.
In addition, due to the tainting of the Bank’s held-to-maturity
(“HTM”) securities in 2006, the Bank was
forbidden to classify any securities under the held-to-maturity
classification for two years. The tainting was
lifted in 2008 which led to the re-classification of P20.7
billion worth of securities to the held-to-maturity
classification. Any such future reclassification or tainting
could materially alter the mark-to-market values
reflected in the financial statements and could add to the
volatility of the Bank’s income.
The Bank may face increasing levels of non-performing loans and
provision for impairment of
assets
The Bank’s results of operations have been, and continue to be,
negatively affected by the level of its non-
performing loans (“NPLs”). For fiscal years 2006, 2007 and 2008,
the Bank made charges to income
provisions for impairments of P1.7 billion, P0.9 billion, and
P1.0 billion, respectively, representing
approximately 24.1%, 10.7% and 11.8% of the Bank’s net interest
income for these periods. Ongoing
volatile economic conditions in the Philippines continue to
adversely affect many of the Bank’s customers,
causing uncertainty regarding their ability to fulfill their
loan obligations thus significantly increasing the
Bank’s exposure to credit risk. These and other factors could
result in an increased number of NPLs in the
future and would require the Bank to book additional provisions
for impairment on loans.
While the Bank has instituted more aggressive NPL disposal
activities and stricter credit processes, there
can be no assurance that the Bank will be successful in
continuing to reduce its NPL levels. An increase in
the Bank’s NPLs could have a material adverse effect on its
financial condition, capital adequacy and
results of operations. Part of the Bank’s NPL disposal strategy
is to continue to sell NPLs to SPVs. The
Bank may not be able to sell its NPLs at commercially reasonable
terms, if at all. In addition, certain of the
Bank’s past sales to SPVs have not sufficiently transferred the
risks and rewards of the sold NPLs to the
SPVs in accordance with the applicable accounting standards. If
the Bank were to include these NPLs in its
statement of condition, it would be required to increase its
impairment losses and its financial condition and
results of operations would be negatively affected.
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The Bank's provisioning policies in respect of non-performing
loans require significant
subjective determinations which may increase the variation of
application of such policies
BSP regulations require that Philippine banks classify
non-performing loans based on four different
categories corresponding to levels of risk: Loans Especially
Mentioned, Substandard, Doubtful and Loss.
Generally, classification depends on a combination of a number
of qualitative as well as quantitative factors
such as the number of months payment is in arrear, the type of
loan, the terms of the loan, and the level of
collateral coverage. These requirements have in the past, and
may in the future, be subject to change by
the BSP. Periodic examination by the BSP of these
classifications may also result in changes being made
by the Bank to such classifications and to the factors relevant
thereto. In addition, these requirements in
certain circumstances may be less stringent than those
applicable to banks in other countries and may
result in particular loans being classified as non-performing
later than would be required in such countries
or being classified in a category reflecting a lower degree of
risk.
Furthermore, the level of loan loss provisions which the Bank
recognizes may increase significantly in the
future due to the introduction of new accounting standards. The
level of provisions currently recognized by
the Bank in respect of its loan portfolio depends largely on the
estimated value of the collateral coverage
for the portfolio. The level of the Bank's provisions may not be
adequate to cover increases in the amount
of its non-performing loans, or any deterioration in the overall
credit quality of the Bank's loan portfolio,
including the value of the underlying collateral. In particular,
the amount of the Bank’s reported loan losses
may increase in the future as a result of factors beyond the
Bank’s control.
Certain accounting standards have been adopted in the
Philippines, based on International Accounting
Standards, which require the Bank’s loan loss provisions to
reflect the net present value of the cash flows
of the loan and underlying collateral. These new accounting
standards may result in the Bank recognizing
significantly higher provisions for loan loss in the future. The
Bank may be unable to recover the assessed
value of its collateral when its borrowers default on their
obligations which may expose the Bank to
significant losses.
While the Bank believes its current level of provisions and
collateral position are more than adequate to
cover its non-performing loan exposure, an unexpected or
significant increase in non-performing loan
levels may result in the need for higher levels of provisions in
the future.
The Bank may be unable to recover the assessed value of its
collateral when its borrowers
default on their obligations, which may expose the Bank to
significant losses
The Bank may not be able to recover the value of any collateral
or enforce any guarantee due, in part, to
the difficulties and delays involved in enforcing such
obligations in the Philippine legal system. In order to
foreclose on collateral or enforce a guarantee, banks in the
Philippines are required to follow certain
procedures specified by Philippine law. These procedures are
subject to administrative and bankruptcy law
requirements more burdensome than in certain other
jurisdictions. The resulting delays can last several
years and lead to deterioration in the physical condition and
market value of the collateral, particularly
where the collateral is in the form of inventory or receivables.
In addition, such collateral may not be