1

Executive Summary

Banco De Oro Unibank, Inc. (BDO) is one of the

universal banks in the Philippines that was a product of a
merger which made it unprecedented in size and scale in the
Philippine banking industry. It offers a variety of
services, ranging from the traditional lending and deposit-
taking to foreign exchange, brokering, and corporate cash
management.

It is currently majority owned by the SM Group of

Companies, which is headed by business tycoon, Mr. Henry
Sy, who is considered the richest man in the Philippines.
As of June 30, 2014, in terms of assets and loans, it is
ranked number one in the universal and commercial bank
group. With this, BDO should be able to compete to uplift
its reputation with the increase in competition and
constant penetration of international banks. The financials
and operations of the bank must be examined to determine if
it still has a competitive advantage over the increasing
number of international banks in the Philippines.

To examine BDO's performance in the financial side, a

thorough financial ratio analysis is done. To study where
the bank is in terms of its operations side, the SWOT
Analysis and PEST Analysis (Political, Economical, Socio-
Cultural and Technological) will be used. The financial
ratios show that in terms of resources, gross customer
loans, deposit liabilities, capital funds and net income,
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BDO is doing well and improving as all the figures are

increasing. This is due to the bank's strengths and
opportunities that it grabbed from the past years. The
financial and operations analysis will enable the reader to
understand how BDO operates, its standings in terms of
finance and operations from the years 2011-2013, and the
future strategies it plans to take especially in the
upcoming ASEAN integration.

Banco De Oro Unibank, Inc. (BDO) is the number one

universal and commercial bank in terms of asset size and
loans in the Philippines as of June 30, 2014 (BSP, 2014).
It is the product of a merger and through the years it has
represented a firm consolidation of strengths and
competencies (BDO, 2014). It is a full service universal
bank and has the ability to provide a wide array of
products and services to its personal consumer and the
corporate market (BDO, 2014). Still being run by its
founder and chairman emeritus, Mr. Henry Sy Sr., the bank
is currently at the top of its game.

Henry Sy Sr. is ranked by the Forbes as the number one

richest man in the Philippines with self-made worth
(Forbes.com LLC, 2014) as evidence with the good reputation
of the bank in the past years. With the continuous increase
of international banks in the Philippines, BDO would have
to revamp itself and gain more competitive advantage in
order to remain sustainable. This paper would focus on the
financial status and operations of the bank from the years
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2016-2017 in conjunction with the upcoming ASEAN

integration.

This study would analyze BDO in terms of its financial

statements by using financial ratio analysis with its
matching interpretations and in terms of its operations by
using the SWOT Analysis and Pest Analysis (Political,
Economical, Socio-Cultural and Technological). The specific
objectives are as follows: (1) to determine whether BDO can
handle the pressures of the ASEAN integration, (2) to
recommend a strategy for BDO.

The ASEAN integration is expected to liberalize goods,

capital and skilled labor flows in the ASEAN region. This
affects the banking industry in positive way by making it
more capable of achieving economies of scale; however, on
the negative side, there would be more competition in both
the domestic and international markets. The banks of
several ASEAN countries are still underdeveloped and have
fragmented banking systems like the Philippines and
Indonesia. With this integration, mergers may occur so as
to gain more advantage over the other banks (Ng, 2014).
This study would help readers understand how to deal with
such integration while using BDO, the Philippines’ number
one bank, as the benchmark.
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Chapter I

Background of the Company

BDO is a full-service universal bank in the

Philippines. It provides a complete array of industry-
leading products and services including Lending (corporate
and consumer), Deposit-taking, Foreign Exchange, Brokering,
Trust and Investments, Credit Cards, Corporate Cash
Management and Remittances in the Philippines. Through its
local subsidiaries, the Bank offers Investment Banking,
Private Banking, Leasing and Finance, Rural Banking, Life
Insurance, Insurance Brokerage and Stock Brokerage
services.

BDO’s institutional strengths and value-added products

and services hold the key to its successful business
relationships with customers. On the front line, its
branches remain at the forefront of setting high standards
as a sales and service-oriented, customer focused force.
BDO has the largest distribution network with over 1,200
operating branches and more than 4,000 ATMs nationwide.

Through selective acquisitions and organic growth, BDO

has positioned itself for increased balance sheet strength
and continuing expansion into new markets. As of 30 June
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2018, BDO is the country’s largest bank in terms of

consolidated resources, customer loans, deposits, assets
under management and capital, as well as branch and ATM
network nationwide.

BDO is a member of the SM Group, one of the country’s

largest and most successful conglomerates with businesses
spanning retail, mall operations, property development
(residential, commercial, resorts/hotel), and financial
services. Although part of a conglomerate, BDO’s day-to-day
operations are handled by a team of professional managers
and bank officers. Further, the Bank has one of the
industry’s strongest Board of Directors composed of
professionals with extensive experience in various fields
that include banking, accounting, finance, law, bank
regulations and risk management, strategy formulation and
merchandise marketing.

Nature of Business

Philippine banking company based in Makati. In terms

of total assets, the firm is the largest bank in the
Philippines, fifteenth largest in Southeast Asia, 116th
largest in Asia, and the 234th largest bank globally as of
March 31, 2016. BDO Unibank is also a member of SM
Group owned by Henry Sy. It is also the largest bank in the
country by market capitalization.

The firm is a full-service universal bank. It provides

products and services to the retail and corporate markets
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including lending (corporate, middle market, SME, and

consumer), deposit-taking, foreign
exchange, brokering, trust and investments, credit cards,
corporate cash management and remittances. Through its
subsidiaries, the Bank offers Leasing and
Financing, Investment Banking, Private Banking,
Bancassurance, Insurance Brokerage and Stock
Brokerage services.

Current Revenue Size, Profit, and Profitability

The country’s leading lender BDO Unibank chalked up a

record high net profit of P28.1 billion in 2017, meeting
its target and maintaining the highest bottom line among
its banking peers. The figure marked a net growth of 7
percent, thanks to lending activities and fee-based
businesses, the SM group-led bank disclosed to the
Philippine Stock Exchange on Monday.

The P28.1-billion profit was the highest net profit

level among Philippine banks, as the Sy firm reaped the
fruits of above-industry asset growth in the last two
decades. BDO’s net profit exceeded Bank of the Philippine
Islands’ P22.42 billion and Metropolitan Bank and Trust
Co.’s P18.22 billion for the same year.

Excluding the consolidation effects of its life

insurance business, last year’s performance also marked a
15-percent improvement in BDO’s core profitability.
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Net interest income rose by 25 percent last year to

P81.8 billion, supported by an 18-percent expansion in the
lending book across all loan segments. The expansion in
earnings assets was funded by an 11-percent growth in
deposits to P2.1 billion. Low-cost deposits grew by 12
percent and accounted for 73 percent of total deposits.

Non-interest income went up by 13 percent to P47.2

billion, with fee-based income accounting for a 30-percent
expansion. In addition, insurance premiums rose by 23
percent to P9.9 billion. These offset the expected 20-
percent decline in securities and foreign exchange trading
gains to P3.9 billion. Overall, gross operating income
advanced by 20 percent to P129 billion.
Operating expenses, on the other hand, rose by 21 percent
to P84.9 billion. Excluding extraordinary items, BDO said
operating expenses would have increased by only 15 percent,
reflecting continuing investments in the branch network and
other strategic initiatives.

BDO added 76 branches last year, bringing total

consolidated branches, including the Hong Kong unit, to
1,180. The bank set aside a higher P6.5 billion to cover
required provisioning associated with the change in loan-
loss methodology.

Ad loans eased to 1.2 percent of total loans from 1.3

percent the previous year. For every P1 worth of bad loans,
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BDO set aside P1.46 as buffer, higher than the P1.39 set
aside the previous year.

BDO’s capital base stood at P298.3 billion, with total

capital adequacy ratio (CAR) and common equity tier 1 ratio
at 14.5 percent and 12.9 percent, respectively, both of
which were well above regulatory levels. The bank had
raised P60 billion in fresh equity via a stock rights offer
in early 2017.

“For 2018, BDO believes that its focused growth

strategy, robust business franchise and solid balance sheet
and capital base place the bank well-positioned to tap
opportunities in growth sectors benefiting from the
country’s favorable demographics and the government’s
infrastructure buildup,” the bank said.

Major Markets Served

BDO is highly confident for building the trust of its

major clients and penetrated its service to a full-service
universal bank that provides a complete array of industry
leading products and services to the retail and corporate
markets including Lending (corporate, middle market, SME,
and consumer), Deposit-taking, Foreign Exchange, Brokering,
Trust and Investments, Credit Cards, Corporate Cash
Management and Remittances. Through its subsidiaries, the
Bank offers Leasing and Financing, Investment Banking,
Private Banking, Bancassurance, Insurance Brokerage and
Stock Brokerage services from toddlers to pensioners not
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only in the Philippines but in the Asia Pacific, North

America, Europe and Middle East regions.

Number of Employees

BDO has 31,443 active employees as of today and

majority of which are Rank and file, Junior Officers, and
Group Heads. Apprentices from University, States and
Colleges are not considered on the count since they are
rendering a required minimum number of hours as part of
their curriculum, paid and given daily allowance as OJT.

CHAPTER 2: Research Design and Methodology

Primary sources of data used in conducting this

research came directly reports thru company websites and
all relevant information. Secondary sources of data came
from articles. Substantial information from competitors are
carefully observed and studied to get accurate assessment.

Scope and Limitations

This research is only limited to Banco De Oro and

its 2 competitors (Bank of the Philippine Islands,
Metropolitan Bank and Trust Company) since they have the
same nature of industry with almost the same profit, market
share, and services offered.
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CHAPTER 3: Vision and Mission

CORPORATE MISSION

To be the leading Philippine bank and financial

services company that empowers customers to achieve their
goals and aspirations, combining our entrepreneurial
spirit, international perspective, and intense customer
focus to deliver a personalized banking experience that is
easy, straightforward, and convenient, while taking pride
in building long-term relationships and finding better ways
to deliver offerings of the highest standard.

CORPORATE MISSION

To be the preferred bank in every market we serve.

OBJECTIVES

We are driven to empower our customers to achieve

their goals.

BDO’s overall strategy focuses on further building its

strong business franchise to consolidate its leadership
position across business lines and strengthen its
capabilities to support future growth, while nimbly
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responding to strategic opportunities and market

challenges.

BDO’s institutional strength and value added products

and services hold the key to its successful business
relationships with customers. Its branches remain at the
forefront of setting high standards as a sales- and
service-oriented, customer focused bank. BDO has the
largest distribution network, with close to 1,200
consolidated operating branches and over 4,000 ATMs
throughout the Philippines.

Through thoughtful acquisitions and sustained organic

growth, BDO has positioned itself for increased balance
sheet strength and continued expansion into new markets. As
of December 31, 2017, BDO remains the country’s largest
bank in terms of total resources, customer loans, deposits,
assets under management and capital, as well as branch and
ATM network nationwide.

The Bank believes that its diversified business model

with products and services catering to the changing needs
of Filipino customers has provided it with a sustainable
and recurring earnings stream, mainly comprising core
interest income from lending activities, as well as non-
interest income from service-based businesses.

The Bank’s strategy is focused on three (3) core

areas, namely:

1. Building a diversified and sustainable earnings

stream on client acquisition through branch expansion,
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provincial lending and deposit taking initiatives, and

increased fee income via cross-selling

2. Creating operating leverage by building a platform

that supports future growth, and an innovative digital
strategy

3. Prudently managing its balance sheet by

conservatively provisioning for risk, complementing current
funding with long-term funding sources and ensuring
sufficient capital to support growth.

CHAPTER 4: Environmental

Saving money is very important for everyone. Without

saving money, you will not increase your wealth and may
continue to struggle or depend on your paychecks. Here are
some reasons why saving for the future is important.

It's important to have an emergency fund set aside to

cover unexpected expenses. This could be an unexpected car
repair, your emergency appendectomy or a sudden job loss.
If the economy starts to slow down and your job is at risk,
you'll be thankful if you've socked away a good amount of
money into your emergency fund to tide you over until you
find a new job.

Ideally, your emergency fund should be about three to

six months of your expenses. If you are just starting out,
try to put aside at least Php50,000 to start. If you are
working to get out of debt, save what you can to bring your
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emergency fund up to between six to 12 months' worth of

your income. If you are single or living on just one
income, you may want to go with a larger emergency fund.

Another reason to increase your emergency fund is the

continuing rise in medical costs. Even if you have
insurance or Medicare, you might find yourself with a
health condition or medication requirements that aren't
fully covered by insurance. In addition to your emergency
fund, make sure you have a plan and good insurance in place
to help you financially survive unexpected events in your
life.

Continuing to save your money from a young age gives

you the opportunity to save up enough money to retire. The
important thing is that you save enough so you can live off
of it without having to work. You don't want to barely
scrape by and have to work a part-time job during your
retirement because you can't afford your lifestyle.

Set up a sinking fund, which is money you set aside

for future, known expenses such as yearly taxes you owe,
repairs on your car, or improvements on your home or other
possessions. This extra saving can help prevent you from
needing to dip into your emergency fund. You can set your
sinking fund based on the expected cost of items like a
kitchen remodel or the average of an unexpected cost like
car repairs.
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Begin saving money for your future education. Each

year more people return to school to earn their masters or
doctorate degrees. You may also consider saving for your
child's education when the time comes. If you are saving
for your child's education.

There are different options and incentives available

based on the state that you are living in. If you are
interested in going back to school for yourself, think
about saving for more than just tuition. If you will go
back full time, you may also want to save up to cover your
living expenses.

Having a debt-free life gives you endless

opportunities to spend and save your money. If you still
have a mortgage, you can pay it off quicker and still have
extra money to save. Being debt-free means you have more
opportunities than you would if you had lots bills. Think
of where all that extra money would go. Into savings, of
course! You don't want to spend all of your money and end
up where you started!

Slowly building your savings allows you to gain

wealth. Most people don't become rich overnight. It takes a
lot of time and effort to earn and save up your money.
Transferring money into savings before you start spending
is one way you guarantee that you don't overspend, and gets
you into a habit of adding money into your savings every
pay period of month.
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Building a savings account gives you backup if an

event that prevents you from earning income for a set
amount of time. Not having to worry about how you're going
to afford your bills in the coming months is one of the
many reasons why you should start saving now.

Having enough money to invest in real estate, stocks,

mutual funds, and bonds is one way to earn higher returns
on your money. Each investment is different, but you
can earn a lot of money this way. Real estate investments
are a fast way to earn high returns. Stocks and mutual
funds aren't as much of a risk, so their returns aren't as
high as real estate, but still offer more returns than just
savings.

Figure 1: Organizational Structure

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Figure 2: PEST Analysis (Political, Economical, Socio-

Cultural and Technological) for Banking Industry
PEST Analysis

Socio-
Political Economical Cultural Technological
The banking Cultural Smartphones can
industry and influences, scan cheques, and
the economy are such the bank can
tied. How as buying process it from
Government income flows, behaviors their end, at
like BSP laws whether the and their location.
affect the economy is necessities, This change helps
state of the prospering or affect how to save paper and
banking barely people see the need to drive
sector. The surviving and use directly to the
government can during times of banking branch to handle
intervene in recession, options. these affairs.
the matters of affects how People turn
banking much capital to banks for
whenever, banks can advice and
leaving the access. assistance
industry Spending for loans
susceptible to habits, and the related to
political reasons behind business,
influence. them, affect home, and
 17

when customers academics.

borrow or spend
funds at banks.

Inflation affects Consumers seek Technology is

currency and its knowledge from changing how
value and causes bank tellers
The banking instability. regarding consumers handle
sector looks saving their funds. Many
all powerful — accounts, bank banks offer a
but it’s related credit mobile app to
susceptible to cards, witness accounts,
investments,
a bigger and more.
transfer funds,
giant: the and pay bills on
government. smartphones.
CHAPTER 5: COMPANY ANALYSIS
2017 was a milestone year for us. In addition to
sustaining our market-leading positions in our major
business lines, including Investment Banking, Private
Banking, Rural Banking, and Insurance Brokerage, we marked
the following achievements:

• In January we completed a Stock Rights Offer (SRO),

which raised P60 billion in fresh equity, the largest
capital raising transaction ever by a Philippine
corporation.

• In August, we issued US$700 million Fixed Rate

Senior Notes under the Bank’s Medium Term Note (MTN)
Program, the largest ever by a Philippine bank.
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• In September, we issued Long-Term Negotiable

Certificate of Deposits (LTNCDs) of P11.8 billion, upsized
to more than twice the original offer of P5 billion on
strong demand from both retail and institutional investors,
and representing the second largest LTNCD issue.

• In December, we issued the BDO Green Bond amounting

to US$150 million, the first green bond by a commercial
bank in the Philippines with the International Finance
Corporation (IFC) as the sole bond investor. This makes the
BDO Green Bond the IFC's first green bond investment in a
financial institution in East Asia and the Pacific.

We reported an all-time-high net income of P28.1

billion in 2017 on strong growth across all business
segments, matching the Bank’s earnings guidance and marking
a 7% rise year-on-year. Excluding consolidation effects of
the life insurance business, however, this represented a
strong 15% jump in core earnings on the back of solid
growth in loans, low-cost deposits and fee-income.

Customer loans rose by 18% to P1.8 trillion on broad-

based increases across all loan segments, while total
deposits went up by 11% to P2.1 trillion, led by the 12%
growth in low-cost CASA deposits (comprising 73% of total
deposits). As a result, net interest income rose by 25% to
P81.8 billion.
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Non-interest income contributed P47.2 billion, higher

by 13%, with fee-based income accounting for P28.9 billion
for a 30% expansion. In addition, insurance premiums went
up by 23% to P9.9 billion. These compensated for the
expected 20% decline in trading and forex gains to P3.9
billion given the challenging market conditions. Overall,
gross operating income advanced by 20% to P129.0 billion.

Meanwhile, operating expenses rose by 21% to P84.9

billion. However, excluding extraordinary items, operating
expenses would have increased by 15%, reflecting BDO’s
continuing investments in its branch network and strategic
initiatives. BDO added 76 branches in 2017, bringing total
consolidated branches (including its Hong Kong branch) to
1,180.

The Bank set aside higher provisions amounting to

P6.5 billion to cover required provisioning associated with
the change in loan loss methodology to Expected Credit
Losses (ECL) related to BSP Circular 855 and IFRS9. Gross
non-performing loan (NPL) ratio improved to 1.2% from 1.3%,
while NPL cover rose to 146% from 139% in 2016.

The Bank’s capital base stood at P298.3 billion, with

Capital Adequacy Ratio (CAR) and Common Equity Tier 1
(CET1) ratio at 14.5% and 12.9%, respectively, both well
above regulatory levels. The Bank had raised P60 billion in
fresh equity via a stock rights offer in January 2017.
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For 2018, BDO believes that its focused growth

strategy, robust business franchise and solid balance sheet
and capital base place the Bank well-positioned to tap
opportunities in growth sectors benefiting from the
country’s favorable demographics and the government’s
infrastructure build-up.

Figure 3 FINANCIAL & OPERATING HIGHLIGHTS

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CHAPTER 6: STRATEGY FORMULATION

Being the premier universal bank in the country, BDO

has utilized its strengths in building customer loyalty
throughout the years. With their slogan, “We Find Ways”,
the bank has been able to build a strong customer base to
the extent of operating in extensive banking hours. BDO is
capable of meeting the customers’ needs efficiently with
the use of advanced technology. This allowed the company to
diversify and innovate its services through offering loans
and deposits, payments and settlement services, asset
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management, investment banking, dealership and brokerage,

insurance services, etc. In addition, BDO has a firm and
competent management operated by the Sy family, which
pioneered the establishment of SM Malls.

However, due to its limited international presence,

BDO has not yet expanded into most of the geographical
areas of the ASEAN region. The bank has also limited
presence in rural areas, and some branches pose
inconsistencies with regard customer services. Also, a big
threat to BDO would be the tight competition in the market,
with Bank of the Philippine Islands (BPI) and Metropolitan
Banking Corporation (Metrobank) as its close competitors.
The competitors of BDO in the market are not just confined
in domestic financial institutions but also in foreign
banks. This can be due to the increase of the presence of
foreign banks as there is an existence of foreign bank
liberalization act. Other external factors contributing to
the threats of BDO includes government regulation. The bank
is regulated by laws and the government is in control when
it comes to tax implementations; the Bangko Sentral ng
Pilipinas (BSP), on the other hand, determines the interest
rates which affects the bank’s profits.

Figure 3 SWOT MATRIX

Strengths Advanced technology, customer

loyalty, strong and competent
management, diverse and
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innovative services, extensive

banking hours.
Weaknesses Limited international presence,
limited presence in the rural
areas, inconsistencies in
customer services.

Opportunities Expansion to foreign

markets, merge with other
banks, increase exposure in
the Philippines.
Strengths – Opportunities Strategy Expand to foreign
markets, grow in the local
markets.
Strengths – Opportunities Strategy Expand to foreign
markets, grow in the local
markets.

Threats Tight competition in the

market, no substitute for
financial services,
increased amount of foreign
banks, government
regulation, ASEAN
integration.
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Strengths – Threats Strategy Improve its products and

services.
Weaknesses – Threats Expansion and widen customer
Strategy base.

On a lighter note, the weaknesses and threats

currently experienced by the BDO can be transformed into
opportunities and later on, become strengths of the
company. BDO can expand their company to foreign markets by
taking advantage in the ASEAN integration since global tie-
ups can boost the bank’s presence abroad. Another effective
option would be to merge with other banks. BDO could also
increase its exposure in the Philippines, especially to
rural areas to create new and loyal customers. Instead of
focusing internationally, the bank can focus on the local
level first and strengthen the market, then gradually
increase exposure afterwards. BDO can overcome its tight
competitors by continuously improving and innovating its
product and services. Through this, the bank’s market
shares would progressively improve soon after.

The SWOT matrix presented in Figure 3 shows that BDO

has more strengths that it could use to counter the
threats, especially its competitors. The company can
maximize its strengths and eliminate weaknesses through
expansion and wide customer base. Using these abilities, it
can also maximize the opportunities that come with the
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ASEAN integration. As of December 2014, BDO announced that

it would acquire Consuji-led One Network Bank (ONB), which
is one of the biggest rural banks in the country and
leading bank in the Mindanao area (Dumlao, 2014).