east west banking corporation · preliminary offering circular july 8, 2008 east west banking...

PRELIMINARY OFFERING CIRCULAR July 8, 2008

East West Banking Corporation (A banking corporation organized and existing under Philippine Laws)

Up to P1,250,000,000 Unsecured Subordinated Notes Due 2019 Callable with Step-up in 2014 Issued under Circular No. 280, as amended, of the Bangko Sentral ng Pilipinas

East West Banking Corporation (“EastWest” or the “Bank”) is offering Lower Tier II Unsecured Subordinated Notes due 2019. The Notes are issued pursuant to the authority granted by the Bangko Sentral ng Pilipinas (“BSP”) to the Bank on December 13, 2007 (the “Authority”), BSP Circular No. 280, as these may be amended from time to time, and the terms of the Trust Agreement and the Registry and Paying Agency Agreement entered into between the Issuer and the Development Bank of the Philippines (“DBP”) as Public Trustee, and the Philippine Depository and Trust Corporation (“PDTC”) as Registry and Paying Agent, respectively, both dated on or about [EXECUTION DATE OF REGISTRY AND PAYING AGENCY AGREEMENT] 2008 and shall at all times be subject to and governed by the Terms and Conditions.

The Notes will bear interest at the rate of [INTEREST RATE]% per annum from and including [ISSUE DATE] 2008 to but excluding [OPTIONAL REDEMPTION DATE] 2014 and interest will be payable semi-annually in arrear on [INTEREST PAYMENT DATE] and [INTEREST PAYMENT DATE] of each year, commencing [FIRST INTEREST PAYMENT DATE] 2008. Unless the Notes are previously redeemed, interest from and including [OPTIONAL REDEMPTION DATE] 2014 to but excluding [MATURITY DATE] 2019 will be reset at the Step-Up Interest Rate, and such interest will be payable semi-annually in arrear on [INTEREST PAYMENT DATE] and [INTEREST PAYMENT DATE] of each year, commencing [FIRST INTEREST PAYMENT DATE AFTER OPTIONAL REDEMPTION DATE] 2014. Unless the Notes are previously redeemed, the Notes are repayable to the Noteholders (as defined in the Terms and Conditions) at 100% of their face value or at par on the Maturity Date or [MATURITY DATE] 2019 or such earlier date as the Notes may become payable in accordance with the Terms and Conditions. The Notes cannot be terminated by any holder (the “Noteholder”) before the Maturity Date (subject only to Condition 36(h) of the Terms and Conditions). Transfers or assignments from one holder to another do not constitute pre-termination.

Applications for the Notes may be made only through the Selling Agents by duly executing an Application to Purchase (“ATP”) and submitting all documentary requirements. Copies of this Preliminary Offering Circular will be made available through the Selling Agents. Definitive notes, or certificates representing the Notes, will not be issued to any Noteholder. The Notes will be offered in minimum denominations of P500,000.00 and in multiples of P100,000 thereafter and will be registered and lodged with the Registry and Paying Agent in the name of the Noteholders. The Notes will be represented by a Master Note deposited with the Registry. 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 Registry 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. The Market Maker, subject to certain limitations, has agreed to quote prices at which it will buy or sell the Notes. Each prospective Noteholder is therefore advised to read the section on Procedure – Transactions in the Secondary Market in this Preliminary Offering Circular for a description of the circumstances in which Noteholders may sell the Notes, or if applicable, purchase the Notes after Issue Date. These arrangements do not assure an active trading market for the Notes. See Terms and Conditions of the Notes.

The Bank has a rating of PRS A minus (corp.), from PhilRatings. This rating indication relates to the timely payment of interest on the Notes and the full payment of principal of the Notes on or before [MATURITY DATE]. 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 assigning rating agency. The Notes are securities exempt from registration with the Philippine Securities and Exchange Commission (“SEC”). Investing in the Notes involves certain risks. Prospective Noteholders should carefully study the matters set out in this Preliminary Offering Circular and in particular, the section “Investment Considerations” for a discussion of certain factors to be considered in connection with an investment in the Notes.

LEAD MANAGER, BOOKRUNNER AND SELLING AGENT

OTHER SELLING AGENTS

MULTINATIONAL INVESTMENT BANCORPORATION

UNICAPITAL, INC.


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The date of this Preliminary Offering Circular is July 8, 2008.

The BSP has, on December 13, 2007, approved the issuance and sale of the Notes in one or more tranches.

The Bank confirms that this document contains all information with respect to the Bank 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, you must rely on your own examination of the Bank and the terms of the offering of Notes, including the merits and risks involved. By receiving this Preliminary Offering Circular, you acknowledge that (i) you have not relied on The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) (the "Lead Manager") or any person affiliated with the Lead Manager in connection with your investigation of the accuracy of any information in this Preliminary Offering Circular or your investment decision, and (ii) no person has been authorised to give any information or to make any representation concerning the Bank or the Notes other than as contained in this Preliminary Offering Circular and, if given or made, any such other information or representation should not be relied upon as having been authorised by the Bank or the Lead Manager.

No representation or warranty, express or implied, is made by the Lead Manager as to the accuracy or completeness of the information contained in this Preliminary Offering Circular. Neither the delivery of this Preliminary Offering Circular nor the offer of Notes shall, under any circumstances, constitute a representation or create any implication that there has been no change in the affairs of the Bank since the date of this Preliminary Offering Circular or that any information contained herein is correct as at any date subsequent to the date hereof.

None of the Bank, the Lead Manager, Selling Agents or any of their respective affiliates or representatives is making any representation to any purchaser of Notes regarding the legality of an investment by such purchaser under applicable laws. In addition, you should not construe the contents of this Preliminary Offering Circular as legal, business or tax advice. You should be aware that you may be required to bear the financial risks of an investment in the Notes for an indefinite period. You should consult with your own advisers as to the legal, tax, business, financial and related aspects of a purchase of Notes.

This Preliminary Offering Circular does not constitute an offer to sell, or an invitation by or on behalf of the Bank or the Lead Manager 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 authorised or is unlawful. Recipients of this Preliminary Offering Circular are required to inform themselves about and observe any applicable restrictions.

The Notes are being offered in the Philippines as securities exempt from the registration requirements of the Securities Regulation Code (Republic Act 8799). The Notes have not been and will not be registered under the United States Securities Act of 1933 (the "Securities Act") and will not be subject to US tax law requirements. Subject to certain exceptions, the Notes may not be offered, sold or delivered within the United States or to US persons. Each purchaser of Notes 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 Preliminary Offering Circular and must obtain 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 neither the Bank nor the Lead Manager shall have any responsibility therefor.

Conventions In this Preliminary 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 “United States Dollars”, “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 Philippines. No representation is made that the Peso or U.S. dollar amounts referred to in this document could have been or could be converted


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into U.S. dollars or Pesos, as the case may be, at any particular rate or at all. 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 Preliminary 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 Bank’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 Bank’s business strategy, revenue and profitability, planned projects and other matters discussed in this Preliminary Offering Circular regarding matters that are not historical fact. These forward-looking statements and any other projections contained in this Preliminary Offering Circular (whether made by the Bank or any third party) involve known and unknown risks, uncertainties and other factors that may cause the Bank’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.

Documents Incorporated by Reference This Preliminary Offering Circular should be read and construed in conjunction with each relevant Pricing Supplement, the most recently published audited annual accounts of the Bank from time to time (if any), in each case with the report of the auditors in connection therewith (if any), and all amendments and supplements from time to time to this Preliminary Offering Circular, which shall be deemed to be incorporated in, and to form part of, this Offering Circular and which shall be deemed to modify or supersede the contents of this Preliminary Offering Circular to the extent that a statement contained in any such document is inconsistent with such contents. Copies of all such documents which are so deemed to be incorporated in, and to form part of, this Preliminary Offering Circular will be available free of charge during usual business hours on any weekday (Saturdays and public holidays excepted) from the specified offices of the Public Trustee set out at the end of this Preliminary Offering Circular.

TABLE OF CONTENTS

PRELIMINARY OFFERING CIRCULAR SUMMARY........................................................................ 1

SELECTED FINANCIAL INFORMATION............................................................................................ 8

RECENT DEVELOPMENTS .................................................................................................................... 11

INVESTMENT CONSIDERATIONS ....................................................................................................... 14

CAPITALIZATION .................................................................................................................................... 21

TERMS AND CONDITIONS OF THE NOTES ...................................................................................... 22

DESCRIPTION OF THE BANK ............................................................................................................... 35

DESCRIPTION OF THE BANK’S ASSETS AND LIABILITIES......................................................... 45

CAPITAL ADEQUACY ............................................................................................................................. 63

MANAGEMENT AND SHAREHOLDERS ............................................................................................. 66

PHILIPPINE TAXATION ......................................................................................................................... 69

PHILIPPINE BANKING INDUSTRY ...................................................................................................... 72

PROCEDURE .............................................................................................................................................. 73

SCHEDULE OF REGISTRY FEES .......................................................................................................... 76

FORM OF PRICING SUPPLEMENT ...................................................................................................... 77

FINANCIAL STATEMENTS

Independent Auditor’s Report

Statements of Condition

Statements of Income

Statements of Changes in Equity

Statements of Cash Flows

Notes to Financial Statements

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PRELIMINARY OFFERING CIRCULAR SUMMARY

This summary highlights information contained elsewhere in this Preliminary 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 Preliminary Offering Circular. Each prospective Noteholder is recommended to read this entire Preliminary Offering Circular carefully, including the Bank's financial statements and related notes (the “Financial Statements”) and “Investment Considerations”.

Description of the Bank EastWest is a medium-sized commercial bank in the Philippines that provides a range of services to consumer and corporate clients. EastWest began operations on 08 July 1994 after receiving authority to operate as a commercial bank from the BSP on 06 July 1994. EastWest's principal banking products and services include deposits, cash management, commercial and consumer loans, trade facilities, remittance, foreign exchange, fixed income securities investments, derivatives and trust services. EastWest has recently redefined its focus to aggressively reposition itself to capitalize on its competencies as a medium-sized bank with a nationwide presence in the Philippines and to focus on developing its banking services for the corporate middle market and retail customers. In 2007 and 2006, revenue from financial and banking services was P3,026.3 million and P2,662.2 million, respectively.

As of December 31, 2007, the Bank was ranked 19th among Philippine banks in terms of total assets, 17th in terms of total loans, 19th in terms of total deposits and 26th in terms of return on equity. The Bank’s total assets were P38.06 billon and P30.30 billion as of 31 December 2007 and 31 December 2006, respectively, and total capital funds were P4.1 billion and P2.9 billion as at 31 December 2007 and 31 December 2006, respectively.

As of 31 March 2008, EastWest had 77 branches, 45 branches of which were located in Metro Manila and the remaining 32 situated in key districts outside Metro Manila, including the Visayas and Mindanao regions. This branch network is complemented by a network of 75 automated teller machines which are part of both the Bancnet and Megalink consortia, with 10 more to be installed in branches and possible offsite areas by the end of 2008.

As of 31 December 2007, the Bank’s core capital ratio and total capital ratio were 15.1% and 15.4%, respectively.

EastWest is a wholly-owned subsidiary of Filinvest Development Corporation (“FDC”). FDC is the listed holding company of the Filinvest Group of Companies (“Filinvest Group”). Incorporated on April 27, 1973, FDC traces its roots to the consumer finance and banking business established in the early years by FDC’s patriarch, Andrew L. Gotianun, Sr. FDC's interest in EastWest represents a strategic decision to maintain and build upon Filinvest Group's roots in financial services.

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Strategy of the Bank The Bank has reviewed and aligned its corporate vision towards dedicating its resources and services to selected market segments and product categories, envisioning itself to be a world-class bank anchored on and differentiated from competition through excellent customer service. To solidify the Bank’s foothold as a significant competitor in the financial services industry in the Philippines, the Bank is committed to increasing its capital base through the support of FDC and focusing principally on the middle market segment.

The Bank is ready to compete in an environment where adaptation is imperative by bringing with it its core strengths, as follows: (i) the full backing of its very stable stockholders; (ii) its cleaner balance sheet relative to its peers; (iii) its strong technology orientation; and (iv) the flexibility and agility of being a young bank. With these core strengths, EastWest believes that it will not be difficult to offer products and services that would best serve the needs of their chosen customers. The Bank will also continue to improve customer service, productivity and efficiency, and implement more smoothly, relative to bigger banks, a robust information technology architecture to support the Bank’s rapidly growing business.

EastWest is focused on growing its asset base to reach economies of scale and benefit from cost efficiencies to achieve desired returns on capital. EastWest plans to grow organically, including through a program of capital fundraising, while at the same time, continuing to look for opportunities to acquire other banks to accelerate its growth objectives.

In addition, to attain its growth targets, EastWest is concentrating its resources in certain market segments where it believes it can compete effectively by systematically adopting a service-oriented culture and offering better customer service than its competitors. On the asset side, EastWest is focused on middle markets and on large corporations as a secondary focus. It intends to have a loan portfolio mix of 40% consumer, 40% middle market and 20% large corporate loans. EastWest has defined middle markets as those businesses with an average loan facility of approximately P40 million. On the liability side, EastWest plans to cater primarily to middle market businesses and individuals with a total relationship balance ranging from P0.5 million to over P5.0 million. To service and encourage growth in these market segments, EastWest plans to improve its cash management and transactional deposit products.

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Summary of the Offering HSBC as Lead Manager has agreed with the Bank, subject to the satisfaction of certain conditions, to distribute and sell the Notes through one or more tranches, in consideration for certain fees and expenses. The Lead Manager and Selling Agents will offer the Notes to selected investors.

The distribution and sale of the Notes to investors shall be undertaken by the Lead Manager and the Selling Agents for the issue. Nothing herein shall limit the right of the Lead Manager to purchase the Notes for its own account. The Lead Manager 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.

ISSUER East West Banking Corporation

NOTES OFFERED Up to P1,250,000,000 Fixed Rate Unsecured Subordinated Notes to be issued in one or more tranches

DENOMINATION Minimum denominations of P500,000.00 and in integral multiples of P100,000.00 thereafter

ISSUE PRICE 100% of the aggregate principal amount of the Notes for the first tranche

INTEREST RATE 8.625% p.a. payable to each Noteholder for the period from and including the Issue Date up to, but excluding the Optional Redemption Date (whether the Redemption Option is exercised or not)

STEP-UP INTEREST RATE If the Notes are not redeemed on the Optional Redemption Date, the Interest Rate on the Notes will be increased to the Step-Up Interest Rate, which shall be computed as follows: the higher of:

(i) 80% of the 5-year on-the-run Philippine Treasury benchmark bid yield (“PDST-F”) on Optional Redemption Date plus the Step-Up Spread, or

(ii) 150% of the difference between the Interest Rate and the 5-year PDST-F on the Pricing Date preceding the initial Issue Date plus the 5-year PDST-F on the Optional Redemption Date.

The Step-Up Interest Rate will be payable to the Noteholders in lieu of the Interest Rate beginning the 12th Interest Period up to the last Interest Period in the event that the Issuer does not exercise its optional redemption.

STEP-UP SPREAD 150% of the difference between the Interest Rate and 80% of the 5-year PDST-F on the Pricing Date preceding the initial Issue Date

ISSUE DATE Shall mean each date when each Tranche of the Notes will be issued by the Issuer to the Noteholders, as the Issuer may determine, provided that Issue Dates for each Tranche subsequent to the first Tranche must fall on a Business Day and in no case later than the last Business Day before the fifth month anniversary of the initial Issue Date

MATURITY DATE Ten (10) years, six months and one day from the initial Issue Date.

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OFFER PERIOD Commencing at 10:00 a.m. on 8 July 2008 and ending at 5:00 p.m. on 18 July 2008 or such earlier day or later day as may be determined by the Bank and the Lead Manager.

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 LEAD MANAGER WITHOUT PRIOR NOTICE. CONSEQUENTLY, THE ISSUE DATE MAY LIKEWISE BE MOVED TO AN EARLIER DATE.

FORM The Notes will be issued scripless and will be maintained in electronic form with the Registry, subject to the payment of fees to the Registry. Legal title to the Notes will be evidenced by the Noteholders recorded as such in the electronic register; however, a Registry Confirmation will be issued by the Registry in favor of the Noteholders in accordance with the Governing Regulations.

INTEREST ACCRUAL The Notes will bear interest on its principal from and including the relevant Issue Date to but excluding the Optional Redemption Date at the 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 Optional Redemption Date to but excluding the Maturity Date at the 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 12th Interest Period up to the last Interest Period.

INTEREST PAYMENT Interest in respect of the Notes will be calculated on a 30/360-day basis and will be paid in arrear semi-annually on the last day of each six-month Interest Period (each an “Interest Payment Date”). If the Interest Payment Date is not a Business Day, interest will be paid on the immediately succeeding Business Day, without adjustment to the amount of interest to be paid. The first interest payment will be for interest that accrues from the Issue Date of each Tranche up to the last day of the first Interest Period, which is the Interest Payment Date falling six months after the initial Issue Date.

Any payment of principal or interest under the Notes shall be made in the proper amounts, net of taxes and fees, if any, through the mode selected by the Noteholder in the Application to Purchase, which may consist of an instruction to the cash settlement bank to pay through (i) a direct credit to their peso current or savings account in EastWest Bank; (ii) a direct credit to their peso current or savings account with a designated Selling Agent; and (iii) through credit via the Real Time Gross Settlement System (“RTGS”) to the designated Selling Agent’s account with BSP, and for which purpose, the Selling Agent shall issue a check for pick-up or deposit to a settlement bank (the “Cash Settlement Bank”) of the Noteholder, for onward remittance by such designated settlement bank to the Noteholder.

INTEREST PERIODS Each consecutive six-calendar month period reckoned from the initial Issue Date, and every succeeding six-calendar month period beginning on the last day of the prior period up to the end of each six-month period thereafter, until the Maturity Date, Provided however that the first Interest Period with respect to a Tranche of Notes issued after the initial Issue Date shall commence on the Issue Date of such subsequent Tranche of Notes and end on the last day of the then current Interest Period.

INTEREST PAYMENT DATE

The last day of an Interest Period when payment for interest in respect of the Notes becomes due; 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 the next succeeding Business Day.

The first interest payment will be for interest that accrues from the Issue Date of each Tranche up to the last day of the first Interest Period, which is the Interest Payment Date falling six months after the initial Issue Date.

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PRINCIPAL REPAYMENT Unless the Notes have been redeemed by the Issuer on the Optional Redemption Date, the Notes will be redeemed at its nominal principal amount on 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

The Issuer may redeem all (but not part only) of the Notes at par plus accrued and unpaid interest five years and six months from the initial Issue Date (the “Optional Redemption Date”), after (i) receipt of prior approval of the BSP, such approval to be granted if the capital adequacy ratio of the Issuer meets the minimum required by applicable regulations; and (ii) a 30-day prior written notice to Noteholders on record through the Public Trustee.

Should the Issuer’s capital adequacy ratio not meet the minimum required by applicable regulations, BSP approval for redemption prior to the Maturity Date may be granted only if the Notes are simultaneously replaced by new capital which is commensurate in size and does not rank ahead of the Notes in winding up.

NON-PRETERMINABILITY The Notes shall not be redeemable or terminable at the instance of any Noteholder before Maturity Date, unless otherwise expressly provided herein.

SECONDARY TRADING All transfers or assignments of the Notes shall be coursed through the Market Makers or other institutions authorized by the BSP or the PDEx, upon the listing of the Notes in PDEx after the Issue Date.

STATUS AND SUBORDINATION

The Notes will constitute direct, unconditional, unsecured, and subordinated obligations of the Issuer. 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 obligations of the Issuer which by their terms rank equal with the Notes.

However, claims of all Noteholders will enjoy priority over the rights and claims of holders of all classes of equity securities of the Issuer, 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 Issuer against the Notes.

Upon any distribution to creditors of any assets of the Issuer in the event of any insolvency or liquidation of the Issuer, 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 Issuer, 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 Issuer, are subordinated to the claims of depositors and ordinary creditors, are not a deposit, and are not guaranteed nor insured by the Issuer or any party related to the Issuer, such as its subsidiaries and affiliates, or the Philippine Deposit Insurance Corporation, or any other person. The Notes shall not be used as collateral for any loan made by the Issuer or any of its subsidiaries and affiliates.

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TAXATION If payments of principal and/or interest in respect of the Notes shall be subject to deductions and withholding for or on account of any present or future taxes or duties imposed by or on behalf of the Republic of the Philippines, including but not limited to stamp, issue, registration, documentary, value-added or similar tax, or other taxes and duties, including interest and penalties thereon, then such taxes or duties 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 or duties, 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, duties, assessments, or government charges, subject to the submission by the relevant Noteholder claiming the exemption of reasonable and acceptable evidence of such exemption to the Registry in accordance with the Terms and Conditions.

In case of transfers deemed pre-termination for tax purposes, the transferor Noteholder shall be liable for the resulting tax due on the entire interest income earned on the Notes (if any), based on the holding period of such Notes.

Documentary stamp tax for the primary issue of the Notes and the documentation, if any, shall be for the Bank’s account.

EARLY REDEMPTION OF THE NOTES

Subject to the Governing Regulations, the Bank shall have the option (but not the obligation), upon securing all required regulatory approvals to redeem the Notes as a whole, but not in part, on any Interest Payment Date (having given not more than 60 nor less than 30 days' notice) at par plus accrued interest for any cause as may be allowed under the Governing Rules. Incremental tax, if any, that may be due on the interest income already earned under the Notes as a result of the exercise by the Bank of its option for early redemption shall be for the account of the Bank.

GOVERNING LAW 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 No. 280 (Series of 2001) on the issuance of unsecured subordinated debt instruments and other related circulars and issuances, as may be amended from time to time.

INVESTMENT CONSIDERATIONS

See “Investment Considerations” for a discussion of certain factors to be considered in connection with an investment in the Notes.

LEAD MANAGER The Hongkong and Shanghai Banking Corporation Limited (“HSBC”)

SELLING AGENTS HSBC, Multinational Investment Bancorporation (“MIB”), Unicapital, Inc., the Issuer (to a limited extent allowed under the Governing Regulations), and any other financial institution(s) to be invited by the Lead Manager in consultation with the Issuer.

REGISTRY AND PAYING AGENT

Philippine Depository & Trust Corp.

MARKET MAKERS HSBC and MIB shall perform the functions and duties of Market Maker pursuant to the Governing Regulations and the Market Making Agreement. When the Philippine Dealing & Exchange Corp. (“PDEx”) becomes operational as the fixed-income exchange, the Issuer intends to list the Notes in PDEx.

PUBLIC TRUSTEE Development Bank of the Philippines

Risks of Investing Prospective investors in the Notes should consider the current and immediate political and economic factors in the Philippines as a principal risk for investing. Political instability and threats to the local and regional currencies may also influence the operations, growth and profitability of the Bank. Of equal importance are the investment considerations regarding the Bank’s operations. Consideration must likewise be placed on the fact that the Notes are inter alia (i) unsecured; (ii) subordinated in right of payment to claims of all depositors and

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other creditors of the Bank, except those creditors that are expressly ranked equally with or junior to the Noteholders in right of payment; (iii) not subject to set-off; and (iv) not eligible for collateral for any loan made by the Bank. See “Investment Considerations”.

Use of Proceeds The Notes will provide additional Tier II Capital, thereby strengthening the capital base of the Bank. The Bank expects to raise up to P[ ] from the Offer after the deduction of fees, commissions, expenses and documentary stamp tax. The net proceeds are to be used to support the growth and expansion objectives of the Bank.

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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 audited annual financial statements have been prepared in accordance with Philippine Financial Reporting Standards (“PFRS”), except for the effects on the financial statements of recognizing the provisions for impairment and credit losses for 2007, and recognizing the provision for tax contingency and derecognizing deferred tax assets in 2006, as direct reduction to surplus as of January 1, 2007 and 2006, respectively. Philippine Financial Reporting Standards require the provision for impairment and credit losses and tax contingency and the derecognition of deferred tax assets be charged against current operations in the period determined.

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 2007 2006 2005 Statements of Income Data (audited, P millions)

INTEREST INCOME ON

Loans and receivable ………………………….….. 1,747.0 1,593.6 1,499.1 Trading and investments securities…………….. 579.0 482.7 600.6 Due from other banks and interbank loans receivables

and securities purchased under resale agreement…… 152.5 64.6 43.2

2,478.5 2,140.9 2,142.9 INTEREST EXPENSE ON Deposit liabilities……………………………………….. 986.7 1,165.6 1,171.7 Other borrowings…………………….. 123.4 35.4 26.1 1,110.1 1,201.0 1,197.8 NET INTEREST INCOME 1,368.4 939.9 945.1 OTHER INCOME Trading and securities gains (losses)…..……………… (14.6) 154.4 210.5 Service charges, fees, and commissions……………… 390.5 235.6 194.4 Miscellaneous(1)…………………………………………. 172.0 131.2 108.5 547.9 521.3 513.3 OPERATING EXPENSES Compensation and employee benefits…………….......... 532.4 403.4 338.7 Taxes and licenses……………………………………... 195.4 132.8 95.9 Rent…………………………………………....……… 125.7 111.2 109.8 Depreciation and amortization……………………….... 116.5 103.4 110.8 Provision for impairment and credit losses 101.0 101.9 103.4 Other operating expenses(2)……………………….……. 662.9 517.6 449.5

1,733.8 1,370.4 1,208.1

INCOME BEFORE INCOME TAX 182.4 90.8 250.4

PROVISION FOR (BENEFIT FROM) INCOME

TAX 45.1 (36.4) 48.7

NET INCOME 137.3 127.3 201.7

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Notes:

(1) Miscellaneous includes foreign exchange gain – net, trust income, gains on asset foreclosure and dacion transactions, dividend income and miscellaneous income.

(2) Other operating expenses includes transportation and traveling, security, messengerial and janitorial services, advertising, insurance, postage, telephone, cables and telegram, power, light and water, repairs and maintenance, stationery and supplies, litigation expenses, amortization of computer software, entertainment, amusement and recreation, service, charges, fees and commissions, brokerage fees, management and other professional fees, impairment loss on goodwill, and miscellaneous.

For the years ended 31 December 2007 2006 2005 Statements of Condition Data (audited, P millions)

Cash and other cash items...…………………… 1,388.7 816.8 597.0 Due from Bangko Sentral ng Pilipinas……….... 4,236.2 3,804.3 1,520.9 Due from other banks………………………….. 855.5 633.1 773.8 Interbank loans receivable and securities purchased under resale agreement……………………...………… 6,381.6 3,000.0

1,300.0

Financial assets at fair value through profit and loss……………………. 1,358.4 670.8

2493.0

Available-for-sale investments…………………… 2,698.2 2,941.7 679.1 Held-to-maturity investments………………………… 552.5 916.7 2,501.1 Loans and receivables, net……………………………… 17,856.4 15,144.0 12,201.4 Bank premises, furniture, fixtures, and equipment, net.. 574.4 519.4 523.1 Equity investments, net………………………... - - 150.0 Investment properties, net.…………………….. 773.7 844.7 811.7 Other resources, net(1)……………………………. 1,379.7 1,011.8 1,278.2 TOTAL ASSETS 38,055.3 30,303.3 24,829.4 Notes:

(1) Other resources, net includes deferred tax assets – net, goodwill, and other assets - net.

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For the years ended 31 December

Selected Financial Ratios 2007 2006 2005

(audited)

Return on assets(1)...……………………………. 0.4% 0.4% 0.9%

Return on shareholders’ equity(2)……….…….... 4.5% 4.4% 7.0%

Net interest margin(3)…………………….…….. 4.7% 4.0% 4.6%

Cost-income ratio(4)………………..…………... 90.5% 93.8% 82.9%

Loans-to-deposits(5)……………………………. 63.1% 65.8% 62.7%

Tier I capital ratio(6)………………… 15.1% 9.2% 17.67%

Total capital ratio(7)……………..…... 15.4% 11.6% 18.2%

Total equity to total assets(8)…………………… 10.8% 9.5% 11.9%

Allowances for probable loan losses to total loans(9)…………………………..……………… 5.6% 4.1% 4.2%

Basic earnings per share (P)(10)………………………. 0.7 5.9 108.3

Notes: (1) Net income divided by average total assets 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 (exclusive of interbank call loans) divided by total deposits amounts due.

(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 allowance for probable loan losses divided by total loans.

(10) Net income divided by total number of outstanding shares.

.

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RECENT DEVELOPMENTS

The following table sets forth selected financial information of the Bank which has been derived from the unaudited financial statements of the Bank for the three-month period ended 31 March 2008. The selected unaudited interim financial information is provided for reference purposes only and should not be relied upon by investors to provide the quality of information of the Bank associated with an audit. Neither the Bank nor the Lead Manager makes any representation regarding the sufficiency of the unaudited interim financial information for an assessment of the statement of condition and, income of the Bank.

STATEMENT OF CONDITION

As of 31 March 2008 (unaudited, P millions) Assets Cash and Other Cash Items .......................................................................... 1,296.3 Due from Bangko Sentral ng Pilipinas – net ............................................... 6,025.9 Due from Other Banks ................................................................................. 992.4 Interbank Loans Receivable and Securities Purchased Under Resale 3,885.8 Financial Assets at Fair Value Through Profit and Loss............................. 685.2 Available-for-Sale Investments – net........................................................... 4,273.8 Held-to-Maturity Investments...................................................................... 971.0 Loans and Receivables – net ........................................................................ 18,612.7 Bank Premises, Furniture, Fixtures and Equipment – net ........................... 567.3 Investment Properties – net .......................................................................... 739.8 Deferred Tax Assets – net ............................................................................ 669.1 Goodwill ....................................................................................................... 150.2 Other Assets - net ......................................................................................... 537.0 TOTAL ASSETS........................................................................................ 39,406.5

Liabilities Deposit Liabilities

Demand..................................................................................................... 8,676.9 Savings...................................................................................................... 4,397.2 Time.......................................................................................................... 19,237.1

Bills and Acceptances Payable ..................................................................... 1,217.5 Accrued Taxes, Interest and Other Expenses ............................................... 212.7 Cashier's Checks and Demand Draft Payable .............................................. 328.2 Other Liabilities ............................................................................................ 1,136.8 TOTAL LIABILITIES............................................................................... 35,206.4

Equity Common stock ............................................................................................. 3,873.5 Surplus reserves ........................................................................................... 16.4 Surplus ......................................................................................................... 312.7 Net unrealized losses on available-for-sale investments............................. (2.5) TOTAL EQUITY....................................................................................... 4,200.1

TOTAL LIABILITIES AND EQUITY................................................... 39,406.5

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STATEMENT OF INCOME

For the three months

ended 31 March 2008 (unaudited, P millions) INTEREST INCOME Loans and receivables………………………………………………………….. 516.8 Trading and investment securities……………………………………………… 108.1 Due from other banks and interbank loans receivable and securities purchased

under resale agreement……………………………………………………. 54.6 679.5 INTEREST EXPENSE Deposit liabilities………………………………………………………………. 246.7 Other borrowings………………………………………………………………. 13.8 260.6 NET INTEREST INCOME………………………………………………….. 418.9 Service charges, fees and commissions………………………………………... 148.5 Trading and securities gains – net……………………………………... 23.3 Trust income…………………………………………………………………..... 8.7 Gain on sale of assets 7.1 Gains on asset foreclosure and dacion transactions……………………………. 4.9 Foreign exchange gain - net……………………………………………………. 2.4 Miscellaneous…………………………………………………………………... 14.0 TOTAL OPERATING INCOME……………………………………………. 208.9 Compensation and fringe benefits……………………………………………… 161.9 Provision for impairment and credit losses…………………………………….. 89.3 Taxes and licenses……………………………………………………………… 43.7 Depreciation and amortization…………………………………………………. 37.4 Rent…………………………………………………………………………….. 33.1 Transportation and traveling…………………………………………………… 33.0 Security, messengerial and janitorial services…………………………………. 23.9 Advertising……………………………………………………………………... 17.8 Postage, telephone, cables and telegram……………………………………….. 17.2 Insurance……………………………………………………………………….. 15.7 Power, light and water………………………………………………………….. 10.6 Stationery and supplies………………………………………………………… 9.2 Repairs and maintenance……………………………………………………….. 8.7 Litigation expenses……………………………………………………………... 7.9 Amortization of computer software……………………………………………. 7.9 Entertainment, amusement and recreation……………………………………... 7.8 Service, charges and fees commissions 4.1 Brokerage fees………………………………………………………………….. 2.2 Management and other professional fees………………………………………. 1.8 Miscellaneous…………………………………………………………………... 23.7 TOTAL OPERATING EXPENSE…………………………………………... 556.9 INCOME BEFORE INCOME TAX………………………………………… 70.9 PROVISION FOR INCOME TAX…………………… 6.3 NET INCOME………………………………………………………………… 64.6

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FOR THE THREE MONTHS ENDED MARCH 31, 2008 Net income for the three months ending March 31, 2008 was P64.6 million. The Bank’s interest income stood at P679.5 million for the first quarter of 2008. Foremost contributor to the interest income was interest income earned from loans and receivables which registered P516.8 million in the first quarter of 2008. This move is in keeping with the Bank’s strategy to considerably expand its loan portfolio. Due to the persistent low interest rate environment, interest income from trading and investment securities was a modest P108.1 million for the first three months of 2008. On the other hand, excess funds from the Bank’s deposit taking activities were channeled to more short term investments in the market. This resulted in the Bank’s interest income from deposits with or loans to other banks of P54.6 million. Conversely, the Bank’s interest expense was P260.6 million for the three months ended March 31, 2008 mainly due to interest expense on deposit liabilities of P246.7 million. The Bank continues to build up its low cost deposits in keeping with its strategy. Thus, at present, the Bank’s average cost of funds is about 3.0%. As a result, the Bank posted net interest income of P418.9 million for the three months ended March 31, 2008. Consistent with the Bank’s risk management objectives and in line with an increase in exposure in the retail lending market, a provision for impairment and credit losses of P89.3 million was recorded for the first quarter of 2008. The Bank posted other income of P208.9 million for the first quarter of 2008. This largely came from service charges, fees and commissions of P148.5 million for the first three months of 2008. This was an offshoot of the significant growth in transactional deposits and lending, both in the corporate and retail businesses of the Bank. Further, as the Bank continues to consolidate its market position, it recorded P23.2 million gains from its securities trading in the first quarter of 2008. Alternatively, operating expenses aggregated to P556.9 million in the first quarter of 2008. This primarily came from the Bank’s continuous commitment to invest in its people, physical infrastructure, information technology and process improvement in support of its growth ambition. In the first quarter of 2008, provision for income tax stood at P6.3 million as a result of higher provision for deferred income tax from utilization of Net Operating Loss Carry Over From end of year 2007 level of total assets of P38,055.3 million, the Bank’s total assets slightly grew to P39,406.5 million as of March 31, 2008. The P1,351.2 million additional sourced funds were deployed mostly to securities investments, while the rest were allocated to loans and other resources of the Bank. As the Bank grows its resource base, it likewise strives to have an optimal balance sheet structure to maximize shareholder value. Thus, during the first quarter of 2008, it started to build-up its investment portfolio. As of March 31, 2008, the Bank’s financial assets at fair value through profit and loss, available-for-sale investments, and held-to-maturity investments stood at P685.2 million, P4,273.8 million and P971.0 million, respectively. Loans and receivables was at P18,612.7 million as of end-March 2008, a modest growth of 4.2% from end-December 2007. At present, the retail and corporate side of the business contribute equally to the Bank’s total loan portfolio. Total liabilities increased by P1,274.6 million to P35,206.4 million as of March 31, 2008 from the previous quarter. The increase was brought about by improved deposit generation activities as the Bank continues to offer a rich selection of deposit products and services to its depositors. Deposit liabilities as of March 31, 2008 stood at P32,311.2 million. With demand and savings deposits at P13,074.1 million, the Bank’s CASA ratio reached the 40.0% mark.

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INVESTMENT CONSIDERATIONS

An investment in the Notes involves a number of investment considerations. You should carefully consider all the information contained in this Preliminary 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 disclose all risks or other significant aspects of investing in the Notes. Investors are encouraged to make their own independent legal, financial, and business examination of the Bank and the market. Neither the Bank nor the Lead Manager 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; a slowdown in economic growth and increased political instability in the Philippines could materially adversely affect the BankÊs business.

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 and its political stability. 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. It has likewise experienced political and military instability from time to time.

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 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. The Philippine economy registered positive economic growth in the period from 1999 to 2001 as it recovered from the Asian economic crisis. For the past two years, the Philippines has made substantial headway in improving its fiscal position and has built up its foreign currency reserves.

The long-term foreign currency sovereign rating and the long-term local currency sovereign rating of the Philippines, by Standard & Poor’s Rating Services, a division of The McGraw-Hill companies, was downgraded from BB and BBB respectively to BB- and BB+ respectively, with a stable outlook on 17 January 2005. Outlook was further downgraded to negative in July 2005. The outlook was revised upwards to stable in February 2006 and was again reaffirmed in April 2008. In addition, Moody’s Investors Service announced a downgrade of the Philippines’ long term foreign and local currency ratings from Ba2 to B1 with a stable outlook on 16 February 2005. Outlook was upgraded to positive in January 2008. There can be no assurance that the rating of Philippine sovereign debt will not be subject to a downgrade from its current levels.

Any deterioration in economic and political conditions in the Philippines as a result of these or other factors, could materially adversely affect the Bank's borrowers and contractual counterparties. This, in turn, could materially and adversely affect the Bank's financial condition and results of operations, including the quality of the Bank's assets and its ability to implement its business strategy.

The BankÊs shares are not listed on any stock exchange and its governance and disclosure standards may differ from other banks in the Philippines and those in more developed countries

There may be less publicly available information about Philippine companies, such as the Bank, than is regularly made available by companies domiciled in other countries. Furthermore, the Bank’s shares are not listed in any stock exchange in the Philippines or any other jurisdiction and there is less available information regarding the Bank than public banks in the Philippines that must comply with certain disclosure requirements. In addition, the Bank is not subject to certain requirements with respect to director independence and corporate governance that apply to listed companies in the Philippines or in other jurisdictions.

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Depreciation in the value of the Peso against the U.S. dollar and other currencies could affect the Bank's business

During the last decade, the Philippine economy has from time to time experienced devaluations 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 2006 the Peso has experienced periods of significant depreciation and has declined from P29.0 = U.S.$1.0 (average) in July 1997 to P56.3 = U.S.$1.0 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 level, the peso appreciated to P53.1 by end-December 2005 and further to P49.1 by end-December 2006. As at 31 December 2007 the PDS Weighted Average Rate was P41.4 = U.S.$1.00, a 15.7% appreciation against the rate as at end-December 2006.

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 2007, the Bank had P38.1 billion of resources and P33.9 billion of liabilities (of which P4.9 billion of resources and P4.9 billion liabilities were in its FCDU books). The Bank has not entered into foreign exchange derivative contracts as a means of hedging against foreign currency fluctuations. In addition, any future 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 (“NPLs”). There can be no assurance that the Peso will not depreciate against other currencies and that such depreciation will not have an adverse effect on the Bank.

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, greater market share and greater brand name recognition than the Bank. The banking industry in the Philippines 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. See “Philippine Banking Industry”.

In the future, the Bank may face increased competition from financial institutions offering a wider range of commercial banking services and products than the Bank and that have larger lending limits, greater financial resources and stronger balance sheets than the Bank. Increased competition may arise from:

Other large Philippine banking and financial institutions with significant presence in Metro Manila and large country-wide branch networks;

Foreign banks, due to, among other things, relaxed standards permitting 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 involving domestic and foreign banks, driven in part by the gradual removal of foreign ownership restrictions.

There can be no assurance that the Bank will be able to compete effectively in the face of such increased competition. Increased competition may make it difficult for the Bank to continue to increase the size of its loan portfolio and deposit base, as well as cause increased pricing competition, which could have a material adverse effect on its growth plans, margins, results of operations and financial condition.

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 payments of principal and interest on loans and, in particular that, upon such failure to pay, Philippine banks may not be able

16

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;

The large foreign debt of the Government and corporate sector, relative to the gross domestic product of the Philippines; and

The greater volatility of interest rates and Peso/U.S. dollar 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. Average NPL ratios inclusive of interbank loans in the Philippine universal and commercial banking system were 5.7% and 4.4% as at the years ended 31 December 2006 and 2007.

Compared to their counterparts in more developed countries, the ability of Philippine banks to assess, monitor and manage risks inherent in their business may differ

Banks in the Philippines are 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 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, skill 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.

The Philippines adopted capital adequacy requirements based on the Basel Capital Accord in July 2001.

CONSIDERATIONS RELATING TO THE BANK

There is no assurance of sustainability of the Bank's strategy in coming years

Over the past two years, the Bank has experienced 53.3% growth in terms of total assets. The Bank experienced growth rates in its loan portfolio (inclusive of interbank loans) of 34.2% and 33.2% in the years ended 31 December 2006 and 2007, respectively. Growth in the Bank’s consumer finance business may be observed through the growth from P5.8 billion to P7.8 billion and P9.9 billion for 2005, 2006 and 2007, respectively. Overall, the Bank's total assets also grew 22.0% from P24.8 billion on 31 December 2005 to P30.3 billion as of 31 December 2006 and 25.6% to P38.1 billion as of 31 December 2007. The Bank's growth strategy includes growing and diversifying its loan portfolio and expanding the range of products and services offered to its customers. There can be no assurance that the Bank will be able to sustain its strategy successfully or that it will be able to further expand or diversify its loan portfolio.

The Bank also faces a number of operational risks in executing its growth strategy. The Bank will need to recruit new employees, who will have to be trained and integrated into the Bank's operations. The Bank will also have to train existing employees to properly adhere to new internal controls and risk management procedures. Failure to properly train and integrate employees, including employees from other banks that are acquired or who join laterally, may increase employee attrition rates, require additional hiring, erode the quality of customer service, divert management resources, increase the Bank's exposure to high-risk credit and impose significant costs on the Bank.

17

The Bank has large exposure to certain sectors in the Philippine economy

The Bank’s largest exposure is to the Personal Consumption sector. The Bank’s top 10 largest exposures account for approximately 10.2% of its total loan portfolio as of 31 December 2007. The next 10 largest exposures account for an additional 5.0% of the loan portfolio. While there are currently no NPLs in the top 10 exposures, there can be no assurance that these exposures would continue to perform their obligations to the Bank.

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 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 insured. These factors have exposed, and may continue to expose, the Bank to legal liability while in possession of the collateral. These difficulties may significantly reduce the Bank's ability to realize the value of its collateral and therefore the effectiveness of taking security for the loans it makes. The Bank carries the value of the foreclosed properties at the lower of the bid price and the loan balance plus accrued interest at the time of such foreclosures. While the Bank at each balance sheet date marks to market its foreclosed properties in accordance with PFRS and BSP regulations, it may incur further expenses to maintain such properties. In realizing cash value for such properties, the Bank may incur further expenses such as legal fees and taxes associated with such realization.

The BankÊs risk management policies are still being enhanced

In order to increase the efficiency and efficacy of its risk management, the Bank has revamped much of its risk management policies and procedures. While the Bank believes that these changes will result in improvements in risk management, there can be no assurance that such will be the case. Parts of the Bank’s risk management framework are new and many of the risk management policies and procedures are still being enhanced. There can be no assurance that these policies and procedures will operate in the way that the Bank has anticipated. In addition, the resources available to the Bank in its risk management operations are not as sophisticated as those available in more developed jurisdictions. Failure to appropriately manage risk can adversely affect the Bank’s financial condition and results of business operations.

The Bank may have to comply with stricter regulations and guidelines issued by regulatory authorities in the Philippines, including the BSP and the Bureau of Internal Revenue (the "BIR") and international bodies, including the Financial Action Task Force (the "FATF")

The Bank is regulated principally by, and has reporting obligations to, the BSP. The Bank is also subject to the banking, corporate, taxation and other laws in effect in the Philippines. The regulatory and legal framework governing the Bank differs in certain material respects from that in effect in other countries and may continue to change as the Philippine economy and commercial and financial markets evolve. In recent years, existing rules and regulations have been modified, new rules and regulations have been enacted and reforms have been implemented which are intended to provide tighter control and more transparency in the Philippine banking sector. These rules include new guidelines on the monitoring and reporting of suspected money laundering activities as well as regulations governing the capital adequacy of banks in the Philippines.

Furthermore, while the Philippines enacted the Anti-Money Laundering Act of 2001 (the "Anti-Money Laundering Act") to introduce more stringent anti-money laundering regulations, these regulations did not initially comply with the standards set by the FATF. However, following pressure from the FATF, an amendment to the Anti-Money Laundering Act became effective on 3 September 2003. In 2 November 2005, the Philippines was removed from the list of Non-Cooperative Countries and Territories (“NCCTs”), confirming that anti-money laundering (“AML”) measures to remedy deficiencies that were originally identified by the FATF are in place. AML systems (including strict customer identification, suspicious transaction reporting, bank

18

examinations, and legal capacities to investigate and prosecute money laundering) were all identified to be of a satisfactory nature.

In addition, new taxation regulations issued by the BIR or new taxation legislation on this subject or on any other banking industry practice, may have an adverse effect on the Bank. If the Bank is unable to comply with existing and new rules and regulations applicable to it, it could incur penalties and its business reputation may suffer, which could materially and adversely affect its financial condition and results of operations.

The Bank is effectively controlled by one shareholder group, with which it has extensive financial and business connections

As at 31 December 2007, FDC owned 100.0% of the Bank’s common shares. Through this, the Gotianun Family owns 100.0% of the Bank’s common shares, thus effectively controlling the Bank and the composition of its Board of Directors. There can be no assurance that the interests of FDC and of the Gotianun Family will necessarily coincide with the interests of other shareholders. See “Management and Shareholders”.

In addition, if there is any public perception in the Philippines that the Bank is reliant on the financial condition of FDC, there could be a loss of confidence in the Bank's solvency among its depositors or creditors in the event of a deterioration in the financial condition of FDC. In particular, this could result in withdrawals of deposits or decreases in new deposits beyond levels anticipated by the Bank, or otherwise have a material adverse effect on the Bank's financial condition and results of operation.

The Bank’s auditors rendered a qualified opinion on the Bank’s audited financial statements as of and for years ended December 31, 2007 and 2006.

In 2007, the Bank recognized the additional provision for impairment and credit losses amounting to P369.12 million, net of deferred tax assets of P 198.76 million, as a direct reduction to surplus as of January 1, 2007. In 2006, the Bank recognized the provision for tax contingency amounting to P71.18 million, net of deferred tax asset of P38.32 million, and derecognized deferred tax assets amounting to P129.72 million, as direct reduction to surplus as of January 1, 2006. Philippine Financial Reporting Standards require that the provision for impairment and credit losses, tax contingency and the derecognition of deferred tax assets be charged against current operations in the period determined. As a result of the foregoing accounting treatment, the audit reports with respect to the Bank’s financial statements for the year ended December 31, 2007 and 2006, were qualified as the provision for impairment and credit losses in 2007, and the provision for tax contingency and the derecognition of deferred tax assets in 2006 were not charged against the 2007 and 2006 operations. Furthermore, in light of the foregoing accounting treatment, the first quarter statements ending as of 31 March 2008 also do not have comparable reviewed first quarter 2007 statements. There is no assurance that future audit or review reports of the financial statements of the Bank will not be qualified or be qualified on the same basis.

CONSIDERATIONS RELATING TO THE OFFERING

Unsecured subordinated notes

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.

In the event of any insolvency or liquidation of the Bank, the claims of Noteholders will be subordinated in right of payment to the prior payment in full of all liabilities (actual or contingent, present or future) of the Bank including all deposit liabilities and other liabilities of the Bank and all offices and branches of the Bank except those liabilities which by their terms rank equal with or junior to the Notes. However, the claims of the Noteholders will have priority over the rights and claims of holders of all classes of equity securities of the Bank, including holders of preference shares, if any.

The Notes are not deposits and are not guaranteed nor insured by the Bank or any party related to the Bank, or the Philippine Depositary Insurance Corporation, or any other person.

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Limitation as to use as collateral

The Notes may not be used as collateral for any loan made by the Bank or any of its subsidiaries or affiliates. The Noteholders are not allowed to set off any amount that may be due to the Bank against the Notes.

Limited right to accelerate

If the Bank fails to make a payment on the Notes when due, the Noteholders thereof may not accelerate payment of such Notes. However, the Noteholders may institute proceedings to enforce the obligation of the Bank to make such payment and may institute proceedings for the insolvency and liquidation of the Bank. The Noteholders may accelerate the Notes only if an insolvency or liquidation proceeding is commenced by or against the Bank or upon the occurrence of other certain related events. See “Terms and Conditions of the Notes” below.

Limitation on transfers

The Notes may only be issued or transferred to (1) Filipino citizens, (2) aliens residing in the Philippines, (3) non-resident aliens engaged in trade or business in the Philippines, (4) subject to the clause on Prohibited Holders, long-term trust accounts and long-term management accounts (including common trust funds of banks other than the Bank) exclusively for Filipino citizens, aliens residing in the Philippines, and non-resident aliens engaged in trade or business in the Philippines, (5) BIR-tax-qualified employee trust funds established by corporations, and (6) other tax-exempt institutions (upon presentation of acceptable proof of tax exemption).

The following persons and entities are prohibited from purchasing and/or holding any Notes of the Bank: (1) subsidiaries and affiliates of the Bank, including subsidiaries and affiliates of the Bank’s subsidiaries and affiliates, or (2) common trust funds managed by the Trust Department of the Bank, its subsidiaries and affiliates, or other related entities, or (3) other funds being managed by the Trust Department of the Bank, 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 that is linked by means of ownership of at least 20% to not more than 50% of its outstanding voting stock.

Generally, the transfer or assignments of Notes may be done at anytime, provided that any transfer between persons of varying tax status such as a transfer between a taxable and non-taxable person; or between a party or parties who claim the benefit of a tax treaty; or other such similar situations, may be done only on an Interest Payment Date (other than the Optional Redemption Date or Maturity Date). Moreover, transfers are restricted during the period between the fifth (5th) Business Day immediately preceding the relevant Interest Payment Date (“Record Date”) and the day immediately preceding an Interest Payment Date.

The Registry is authorized to refuse any transfer or transaction in the Registry which may violate these restrictions. There is no reassurance that the secondary trading of the Notes may not be affected given these restrictions.

Liquidity of the Notes

Noteholders are prohibited by the BSP from having the Notes redeemed prior to their maturity. While no established market for bank-issued subordinated notes exists in the Philippines, Noteholders, however, can sell their Notes in the secondary market subject to market prices. Market Makers have been appointed to provide support by way of daily bid and offer prices, as required under the Governing Regulations. The Bank intends to list the Notes in the Fixed Income Exchange through the Philippine Dealing and Exchange Corporation. Such listing will however, only be done once all tranches of the Notes have been issued.

No assurance can be given that an active trading market for the Notes will develop or will be maintained throughout the life of the Notes.

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Transfers only through Market Maker

All transfers of the Notes must be made through the Market Maker, whether or not the transactions contemplated are privately negotiated or are bona fide offers to purchase or sell the Notes. Consequently, the parties to a transfer may be subject to the guidelines of the Market Maker and the payment to the Market Maker and/or the Registry of any reasonable fees. There is no assurance that the secondary trading of the Notes may not be affected given these restrictions.

Price risk

The price of the notes in the secondary market is subject to market fluctuations which may result in the investments being reduced in value. The Notes are not insured by the Bank or any of its branches, affiliates of subsidiaries. During adverse market conditions, a Noteholder may not be able to liquidate all or part of the Notes as and when required.

Rating of the Bank

The Bank has a rating of PRS A minus (corp.) from PhilRatings as of May 2008. 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 assigning rating agency. There is no assurance that the rating will not change throughout the life of the Notes.

Taxation of the Notes

If, because of changes in the interpretations or conventions regarding current taxes, such that 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 Registry.

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CAPITALIZATION

The following table sets out the audited capitalization and indebtedness of the Bank as at (i) 31 December 2007, 2006 and 2005, and (ii) as adjusted for the proposed issuance of the Notes. The information as of 31 December 2007, 2006 and 2005 has been extracted from the audited financial statements of the Bank as at 31 December 2007, 2006 and 2005, respectively. The following selected financial information should be read together with other portions of this Preliminary Offering Circular.

As at 31 December

As

adjusted

2007

2006

2005

(P millions)

Short-term liabilities

Deposit liabilities................................................................................... 21,502.5 21,502.5 14,804.6 11,595.2

Bills payable and other liabilities(1) ....................................................... 2,640.3 2,640.3 2,203.9 686.1

Total short-term liabilities..................................................................... 20,142.8 24,142.8 17,008.5 12,281.3

Long-term liabilities

Deposit liabilities................................................................................... 9,771.1 9,771.1 10,414.0 9,604.3

Bills payable .......................................................................................... 18.0 18.0 - -

Unsecured subordinated debt due 2019 ............................................... [•] - − −

Total long-term liabilities...................................................................... [•] 9,789.1 10,414.0 9,604.3

Equity

Preferred stock....................................................................................... - - 2,223.5 2,223.5

Common stock(2).................................................................................... 3,873.5 3,873.5 150.0 150.0

Surplus reserves..................................................................................... 16.4 16.4 11.3 8.6

Surplus................................................................................................... 248.1 248.1 485.0 561.4

Net unrealized gains (losses) on available-for sale investments........... (14.5) (14.5) 11.0 0.3

Total equity............................................................................................ 4,123.5 4,123.5 2,880.8 2,943.7

Total capitalization and indebtedness ............................................... [•] 38,055.5 30,303.2 24,829.4

Notes:

(1) Bills payable and other liabilities include all payables except deposit liabilites.

(2) Par value of P10.00 per share. Authorized: 500,000,000 shares; as at 31 December 2007, 387,352,810 shares of common stock were issued and outstanding.

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TERMS AND CONDITIONS OF THE NOTES

The following does not purport to be a complete listing of all the rights, obligations, or privileges of the Notes. Some rights, obligations, or privileges may be further limited or restricted by other documents, including the Purchase Advice issued upon confirmation of a purchase of the Notes. Prospective investors are enjoined to carefully review the Articles of Incorporation, By-Laws and resolutions of the Board of Directors of the Bank, the information contained in this Preliminary Offering Circular, the Trust Agreement and other agreements relevant to the Offer. Copies of the Trust Agreement, the Registry and Paying Agency agreement and the Market Making Agreement are available for inspection during normal business hours at the specified offices of the Trustee. The Noteholders are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Trust Agreement and are deemed to have notice of those provisions of the Registry and Paying Agency Agreement applicable to them.

1

ISSUER

East West Banking Corporation

2 ISSUANCE Up to P1,250,000,000 unsecured subordinated debt, qualifying for Lower Tier 2 Capital (the “Notes”). The Notes will comprise one or more tranches of unsecured subordinated debt issues (each a “Tranche”), issued pursuant to the authority granted by the Bangko Sentral ng Pilipinas (“BSP”) to the Issuer on December 13, 2007 and the Governing Regulations

3 DENOMINATION

Minimum of P500,000.00 and in increments of P100,000.00 thereafter.

4 GOVERNING REGULATIONS

BSP Memorandum to All Banks and Non-Bank Financial Institutions dated 17 February 2003 and Circular No. 280 (Series of 2001) on the issuance of unsecured subordinated debt instruments eligible as Tier 2 capital and other related circulars and issuances, as may be amended from time to time.

5 PURPOSE OF ISSUANCE

To increase and strengthen the Bank’s capital base.

6 BUSINESS DAYS Days on which commercial banks and foreign exchange markets generally settle payments in Metro Manila, Philippines.

7 ISSUE DATE(S) Shall mean each date when each Tranche of the Notes will be issued by the Issuer to the Noteholders, as the Issuer may determine, Provided that Issue Date for each Tranche subsequent to the first Tranche must fall on a Business Day and in no case later than the last Business Day before the fifth month anniversary of the initial Issue Date.

8 INTEREST RATE 8.625% p.a. payable to each Noteholder for the period from and including the Issue Date up to, but excluding the Optional Redemption Date (whether the Redemption Option is exercised or not).

9 INTEREST PAYMENT Interest in respect of the Notes will be calculated on a 30/360-day basis and will be paid in arrear semi-annually on the last day of each six-month Interest Period (each an “Interest Payment Date”). If the Interest Payment Date is not a Business Day, interest will be paid on the immediately succeeding Business Day, without adjustment to the amount of interest to be paid. The first interest payment will be for interest that accrues from the Issue Date of each Tranche up to the last day of the first Interest Period, which is the Interest Payment Date falling six months after the initial Issue Date.

10 INTEREST PERIODS Each consecutive six-calendar month period reckoned from the initial Issue Date, and every succeeding six-calendar month period beginning on the last day of the prior period up to the end of each six-month period thereafter, until the Maturity Date, Provided however that the first Interest Period with respect to a Tranche of Notes issued after the initial Issue Date shall commence on the Issue Date of such subsequent Tranche of Notes and end on the last day of the then current Interest Period.

11 STEP-UP INTEREST RATE If the Notes are not redeemed on the Optional Redemption Date, the Interest Rate on the Notes will be increased to the Step-Up Interest Rate, which shall be computed as follows: the higher of (i) 80% of the 5-year on-the-run Philippine Treasury benchmark bid yield (“PDST-F”) on Optional Redemption Date plus

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the Step-Up Spread, or (ii) 150% of the difference between the Interest Rate and the 5-year PDST-F on the Pricing Date preceding the initial Issue Date plus the 5-year PDST-F on the Optional Redemption Date. The Step-Up Interest Rate will be payable to the Noteholders in lieu of the Interest Rate beginning the 12th Interest Period up to the last Interest Period in the event that the Issuer does not exercise its optional redemption.

12 STEP-UP SPREAD 150% of the difference between the Interest Rate and 80% of the 5-year PDST-F on the Pricing Date preceding the initial Issue Date.

13 MATURITY DATE Ten (10) years, six months and one day from the initial Issue Date.

14 PRINCIPAL REPAYMENT Unless the Notes have been redeemed by the Issuer on the Optional Redemption Date, the Notes will be redeemed at its nominal principal amount on 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.

15 REDEMPTION AT THE OPTION OF THE ISSUER

The Issuer may redeem all (but not part only) of the Notes at the Redemption Option Amount on the Optional Redemption Date subject to: (i) the receipt of prior approval of the BSP, such approval to be granted if the capital adequacy ratio of the Issuer meets the minimum required by applicable regulations; and (ii) a 30-day prior written notice to Noteholders on record through the Public Trustee. Should the Issuer’s capital adequacy ratio not meet the minimum required by applicable regulations, BSP approval for redemption prior to the Maturity Date may be granted only if the Notes are simultaneously replaced by new capital which is commensurate in size and does not rank ahead of the Notes in winding up.

16 REDEMPTION OPTION AMOUNT

The face value of the Note, plus accrued interest covering the accrued and unpaid interest as of but excluding the Optional Redemption Date.

17 OPTIONAL REDEMPTION DATE

End of five (5) years and six (6) months from the initial Issue Date on which date the Bank may exercise its Redemption Option

18 PAYMENT Any payment of principal or interest under the Notes shall be made in the proper amounts, net of taxes and fees, if any, through the mode selected by the Noteholder in the Purchase Advice, which may consist of an instruction to the cash settlement bank to pay through: (i) a direct credit to their peso current or savings account in EastWest Bank; (ii) a direct credit to their peso current or savings account with a designated Selling Agent; or (iii) through credit via the Real Time Gross Settlement System (“RTGS”) to the designated Selling Agent’s account with BSP, and for which purpose, the Selling Agent shall issue a check for pick-up or deposit to a settlement bank (the “Cash Settlement Bank”) of the Noteholder, for onward remittance by such designated settlement bank to the Noteholders.

19 REMEDY FOR NON-PAYMENT

The sole remedy against the Issuer available to any Noteholder for recovery of amounts owing in respect of the Notes will be the institution of proceedings for the insolvency of the Issuer.

20 NON-PRETERMINABILITY The Notes shall not be redeemable or terminable at the instance of any Noteholder before Maturity Date, unless otherwise expressly provided herein.

21 FORM The Notes will be issued scripless and will be maintained in electronic form with the Registry, subject to the payment of fees to the Registry. Legal title to the Notes will be evidenced by the Noteholders recorded as such in the electronic register; however, a Registry Confirmation will be issued by the Registry in favor of the Noteholders in accordance with the Governing Regulations.

22 ELIGIBLE NOTEHOLDERS The Notes may be issued or transferred to any person of legal age, regardless of nationality or residency, or any corporation, association, partnership, trust account, fund or entity, regardless of place of incorporation or domicile, subject to the clause on Prohibited Noteholders and the submission of the appropriate documents to the Registry and Paying Agent.

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23 NOTEHOLDERS The Eligible Noteholders who are actual holders of the Notes.

24 PROHIBITED NOTEHOLDERS

The following persons and entities shall be prohibited from purchasing and/or holding any Notes of the Issuer: (1) non-resident alien individuals or corporations not engaged in trade or business within the Philippines; (2) subsidiaries and affiliates of the Issuer, including the subsidiaries and affiliates of the Issuer's subsidiaries and affiliates; or (3) common trust funds/unit investment trust funds managed by the Trust Department of the Issuer, its subsidiaries, and affiliates, or other related entities; or (4) 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, a ‘subsidiary’ refers to a related entity linked by means of the Issuer’s ownership of at least fifty percent (50%) of its outstanding voting stock, and an ‘affiliate’ refers to a related entity linked by means of the Issuer’s ownership of at least twenty percent (20%) to not more than fifty percent (50%) of its outstanding voting stock.

25 REGISTRY & PAYING AGENT

Philippine Depository and Trust Corp.

26 PUBLIC TRUSTEE Development Bank of the Philippines

27 LEAD MANAGER The Hongkong and Shanghai Banking Corporation Limited (“HSBC”)

28 SELLING AGENTS HSBC, Multinational Investment Bancorporation (“MIB”), Unicapital, Inc. (“Unicapital”), the Issuer (to a limited extent allowed under the Governing Regulations), and any other financial institution(s) to be invited by the Lead Manager in consultation with the Issuer.

29 MARKET MAKERS HSBC and MIB shall perform the functions and duties of Market Maker pursuant to the Governing Regulations and the Market Making Agreement. When the Philippine Dealing & Exchange Corp. (“PDEx”) becomes operational as the fixed-income exchange, the Issuer intends to list the Notes in PDEx.

30 SECONDARY TRADING All secondary trading of the Notes shall be coursed through the Market Maker(s) or other institutions authorized by the BSP or PDEx (only upon listing of the Notes in PDEx, such listing to be done after the final Issue Date of the Notes), subject to the payment by the Issuer of the corresponding listing fees, compliance with all procedures and provisions set out by the Market Maker(s) (in consultation with the Issuer) and payment by the relevant Noteholder of the proper fees, if any, to the Market Maker(s) or PDEx, and the Registry.

31 TRANSFERABILITY Negotiations or transfers of the Notes to one other than the Issuer prior to Maturity Date shall not constitute pre-termination. Each Selling Agent (in the case of initial issuance of the Notes) and Market Maker (in the case of negotiations/transfers of the Notes) shall verify the identity and other relevant details of each investor and ascertain that the proposed Noteholder or transferee of a Note is an Eligible Noteholder and is not a Prohibited Noteholder. Final determination shall, however, vest with the Issuer. All transfers and change in title to the Notes shall be recorded in electronic register maintained by the Registry. Settlement in respect of such transfer or change of title to the Notes, including settlement of documentary stamp taxes, if any, arising from the subsequent transfers, shall be for the account of the transferee and/or transferor.

32 QUALIFICATION DETERMINATION

The Eligible Noteholder shall immediately submit any and all information reasonably required by the Selling Agents and/or Market Makers with respect to the qualification of the proposed Noteholder or transferee in order to determine that such Eligible Noteholder or transferee is an Eligible Noteholder and is not a Prohibited Noteholder.

33 STATUS AND SUBORDINATION

The Notes will constitute direct, unconditional, unsecured, and subordinated obligations of the Issuer. 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

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subordinated obligations of the Issuer which by their terms rank equal with the Notes. However, claims of all Noteholders will enjoy priority over the rights and claims of holders of all classes of equity securities of the Issuer, 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 Issuer against the Notes. Upon any distribution to creditors of any assets of the Issuer in the event of any insolvency or liquidation of the Issuer, 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 Issuer, 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 Issuer, are subordinated to the claims of depositors and ordinary creditors, are not a deposit, and are not guaranteed nor insured by the Issuer or any party related to the Issuer, such as its subsidiaries and affiliates, or the Philippine Deposit Insurance Corporation, or any other person. The Notes shall not be used as collateral for any loan made by the Issuer or any of its subsidiaries or affiliates.

34 REPRESENTATIONS AND WARRANTIES

The Issuer hereby represents and warrants to the Noteholders, as follows: (a) CORPORATE EXISTENCE. The Issuer is a corporation duly

organized, validly existing, and in good standing under and by virtue of the laws of the Republic of the Philippines, is registered or qualified to do business in every jurisdiction where registration or qualification is necessary, and has the corporate power and authority to conduct its business as presently being conducted and to own its properties and assets now owned by it as well as those to be hereafter acquired by it for the purpose of its business, and to incur the indebtedness and other obligations provided for in the Notes.

(b) CORPORATE APPROVALS AND REGISTRATIONS. All corporate

authorizations, approvals, and other acts legally necessary for the offer and issuance of the Notes, for the circulation of the Preliminary and Final Offering Circulars and for the Issuer to enter into and comply with its obligations under the Notes, have been obtained or effected.

(c) GOVERNMENT APPROVALS. All government authorizations, approvals, rulings, registrations, and other acts legally necessary for the offer, issuance, and payment of the Notes, their terms, as may be amended or supplemented, and for the Issuer to enter into and comply with its obligations under the Notes, have been obtained and remain valid.

(d) COMPLIANCE WITH CONDITIONS. All conditions imposed or required under the Governing Regulations, as well as regulations of the Bureau of Internal Revenue and other relevant agencies, in respect of the offer, issuance, and payment of the Notes, have been or will be complied with by the Issuer as of the date and/or time that they are required to be complied with.

(e) DOCUMENTS/INFORMATION. None of the information, data, or submissions made by the Issuer, including those made available to the Noteholders, in connection with the Notes violate any statute or any rule or regulation of any government agency or office, and do not contain any untrue or misleading statement of a material fact, or omit any material fact necessary or required to be stated.

(f) OBLIGATIONS UNDER THE NOTES. The obligations of the Issuer under the Notes, when issued, constitute the Issuer's legal, valid, binding, direct, and unconditional obligations, enforceable in accordance with their terms, and the compliance by the Issuer with its obligations under the Notes

26

will not conflict with, nor constitute a breach or default of, the articles of incorporation, by-laws, or any resolution of the board of directors of the Issuer, or any rights of the stockholders of the Issuer, or any contract or other instrument by which the Issuer is bound, or any law, regulation, or judgment or order of any office, agency, or instrumentality applicable to the Issuer.

(g) COMPLIANCE WITH LAW. The Issuer is compliant with all Philippine laws, statutes, regulations, and circulars, including without limitation the circulars, rules, regulations, and orders issued by the BSP.

(h) COMPLIANCE WITH BANKING LAWS/REGULATIONS. The Issuer has all authorizations, approvals, permits, licenses, and privileges from all governmental and regulatory bodies necessary to carry on its banking business and operations as well as those of its subsidiaries and affiliates as currently conducted; has not violated any of the terms and conditions of such authorizations, approvals, permits, and licenses; and will have free and continued use and exercise thereof.

(i) COMPLIANCE WITH BSP. The Issuer has complied with, corrected, and successfully and effectively implemented, to the satisfaction of the BSP, all final findings and recommendations of the BSP resulting from all past audits and examinations conducted by the BSP on the Issuer.

(j) LITIGATION. There are no legal, administrative, or arbitration actions, suits, or proceedings pending or threatened against or affecting the Issuer which, if adversely determined, would have a material adverse effect on the financial condition or business operations, or which enjoin or otherwise adversely affect the execution, delivery, or performance of the Notes, or its offer or issuance.

(k) FINANCIAL STATEMENTS. The audited financial statements of the Issuer presents fairly, in all material respects, the financial position of the Issuer and its financial performance and its cash flows and are prepared in accordance with the Philippine Financial Reporting Standards, except for the effects on the financial statements of recognizing the provisions for impairment and credit losses for 2007, and recognizing the provision for tax contingency and derecognizing deferred tax assets in 2006, as direct reduction to surplus as of January 1, 2007 and 2006, respectively. There has been no material change in the financial condition or results of operations of the Issuer sufficient to impair its ability to perform its obligations under the Notes according to their terms.

(l) MATERIAL OBLIGATIONS. The Issuer has, as of the date hereof, no liabilities or obligations of any nature, whether accrued, absolute, contingent, or otherwise, including but not limited to tax liabilities due or to become due, and whether incurred in respect of or measured by any income for any period prior to such date or arising out of transactions entered into or any state of facts existing prior thereto, which may in any case or in the aggregate, materially and adversely affect the Issuer's ability to discharge its obligations under the Notes.

(m) CHANGE IN FINANCIAL CONDITION. Since issuance of the various approvals by the relevant government agencies for the offer or issuance of the Notes, there has been no change in the financial condition (including the assets and liabilities) of the Issuer, other than changes that do not, either in any case or in the aggregate, materially and adversely affect the Issuer's ability to discharge its obligations under the Notes.

(n) DEFAULT. No event has occurred and is continuing which constitutes a default by the Issuer under or in respect of any agreement binding upon the Issuer, and no event has occurred which, with the giving of notice, lapse of time, or other condition, would constitute a default by the Issuer under or in

27

respect of such agreement, which default shall materially affect the Issuer's ability to comply with the Notes and pay the principal and interest that may be due on the Notes.

(o) TITLE TO PROPERTY. The Issuer has good and marketable title to all its properties, free and clear of liens, encumbrances, restrictions, pledges, mortgages, security interest, or charges.

(p) COMPLIANCE WITH LAW/TAXES. The Issuer is conducting its business and operations in compliance with the applicable laws and regulations, has filed true, complete, and timely tax returns, and has paid all taxes due in respect of the ownership of its properties and assets or the conduct of its operations, except to the extent that the payment of such taxes is being contested in good faith and by appropriate proceedings.

(q) INSURANCE. The Issuer maintains insurance with responsible and reputable insurance companies in such amounts, covering such risks, and under such terms and conditions, as are prudent and appropriate and as are usually carried by companies engaged in similar business and owning similar properties in the same geographical areas as those in which the Issuer operates.

(r) AUDITOR. The Issuer maintains the services of a responsible and reputable external auditor.

(s) OFFERING CIRCULAR. The Preliminary and Final Offering Circulars issued in connection with the Notes present a fair, complete, and accurate description of the Issuer, the Notes, and the considerations that any investor in the Notes needs to know before making an informed decision to invest in the Notes.

These representations and warranties are true and correct as of the Issue Date and shall remain true and correct as long as the Notes or any portion thereof remain outstanding.

35 COVENANTS The Issuer hereby covenants and agrees that, for as long as the Notes remain

outstanding:

AFFIRMATIVE COVENANTS (a) PAYMENT OF TAXES AND LAWFUL CLAIMS. The Issuer shall pay

and discharge all taxes, assessments, and government charges or levies imposed upon it or upon its income or profits or upon any properties belonging to it prior to the date on which penalties are assessed; pay and discharge when due all lawful claims which, if unpaid, might become a lien or charge upon any of its properties; and take such steps as may be necessary in order to prevent its properties from being subjected to the possibilities of loss, forfeiture, or sale; provided, that the Issuer shall not be required to pay any such tax, assessment, charge, levy, or claim which is being contested by it in good faith and by proper proceedings or as could not reasonably be expected to have a material adverse effect on its condition, business, or properties; provided, that in the case of a tax, assessment, charge, levy, or claim which is being contested in good faith and by proper proceedings, the Public Trustee shall be notified by the Issuer within thirty (30) days from the date of the receipt of written notice of the resolution of such proceedings.

(b) CORPORATE EXISTENCE. The Issuer shall preserve and maintain its corporate existence.

(c) FINANCIAL RECORDS. The Issuer shall maintain adequate financial records and prepare all financial statements in accordance with generally accepted accounting principles and practices in the Philippines consistently

28

applied and in compliance with the regulations of the government body having jurisdiction over it, and, subject to receipt of a written request within a reasonable period before the proposed date of inspection, permit the Public Trustee or its duly designated representatives to inspect the books of accounts and records pertinent to the compliance by the Issuer of its obligations under the Notes.

(d) COMPLIANCE WITH LAWS/CONTRACTS. The Issuer shall comply with all the requirements, terms, covenants, conditions, and provisions of all laws, rules, regulations, orders, writs, judgments, indentures, mortgages, deeds of trust, agreements, and other instruments, arrangements, obligations, and duties to which it, its business, or its assets are legally bound, where non-compliance would have a material adverse effect on the financial condition or business operations of the Issuer, or would materially and adversely affect the Issuer's ability to duly perform and observe its obligations and duties under the Notes.

(e) COMPLIANCE WITH BSP RULES. The Issuer shall fully and promptly comply with all final BSP directives, orders, issuances, and letters, including those regarding its capital, licenses, risk management, and operations; promptly and satisfactorily take all corrective measures that may be required under BSP audit reports; and promptly furnish the Public Trustee with a copy of all the audit reports of, and its submissions to, the BSP.

(f) USE OF PROCEEDS. The Issuer shall use the net proceeds from the Notes to raise Tier 2 capital to increase and strengthen its capital base.

(g) PERFORMANCE OF OBLIGATIONS. The Issuer shall promptly and satisfactorily pay all indebtedness and other liabilities and perform all contractual obligations pursuant to all agreements to which it is a party or by which it or any of its properties may be bound, except those being contested in good faith and by proper proceedings or as could not reasonably be regarded to have a material adverse effect on its financial condition or business operations.

(h) PERFORMANCE OF OBLIGATIONS UNDER THE NOTES. The Issuer shall pay all amounts due under the Notes at the times and in the manner specified in, and perform all its obligations, undertakings, and covenants under the Notes.

(i) AUDITED FINANCIAL STATEMENTS. The Issuer shall, as soon as available and in any event within one hundred twenty (120) days after the end of each fiscal year of the Issuer, or at such later date on which it makes such information publicly available, furnish the Noteholders through the Public Trustee with audited financial statements, consisting of the balance sheet of the Issuer as of the end of such fiscal year and statements of income and retained earnings and of the source and application of funds of the Issuer for such fiscal year, such audited financial statements being prepared in accordance with generally accepted accounting principles and practices in the Philippines consistently applied and being certified by an independent certified public accountant of recognized standing in the Philippines; and shall furnish the Public Trustee no later than sixty (60) days from the end of each calendar quarter with its quarterly financial statements; and shall further furnish the Public Trustee within ten (10) days from written request with such updates and information as may be reasonably requested by the Public Trustee pertaining to the financial condition or business operations of the Issuer, or affecting the Issuer's ability to duly perform and observe its obligations and duties under the Notes.

(j) NOTICE OF LITIGATION AND OTHER MATTERS. The Issuer shall give to the Noteholders through the Public Trustee written notice of: (i) all

29

assessments, litigation, or administrative or arbitration proceedings before or of any court, tribunal, arbitrator, or governmental or municipal authority affecting the Issuer or any of its assets regarding any claim that may materially and adversely affect its financial conditions or business operations; (ii) any labor controversy resulting or threatening to result in any action against the Issuer that may materially and adversely affect its financial condition or business operations or may result in a strike against it, (iii) any Event of Default or any event, which, upon a lapse of time or giving of notice or both, would become an Event of Default, (iv) any damage or destruction or loss which might materially and adversely affect its financial condition or business operations or (v) any other matter or conditions affecting the Issuer or which might have a material adverse effect on the financial condition or business operations of the Issuer, or which might materially and adversely affect the Issuer's ability to duly perform and observe its obligations and duties under the Notes, immediately upon becoming aware that the same is pending or has been commenced or has occurred.

(k) ADDITIONAL INSTRUMENTS. The Issuer shall, when so requested in writing, provide any and all information reasonably needed by the Public Trustee to enable it to comply with its responsibilities and duties under the Governing Regulations, the Notes, and the Trust Agreement; provided, that, in the event that the Issuer cannot, for any reason, provide the required information, the Issuer shall so immediately advise the Public Trustee.

(l) CEASE AND DESIST ORDER. The Issuer shall promptly advise the Noteholders through the Public Trustee: (i) of any request by any government agency for any information related to the Notes, and (ii) of the issuance by any governmental agency of any cease-and-desist order suspending the distribution or sale of the Notes or the initiation of any proceedings for any such purpose; provided, that no amendments or supplements to any selling materials, offering circulars, or other documents pertaining to the offer of the Notes have been or will be made without the prior written notice to, and without the approval of, the Public Trustee.

(m) SUSPENSION ORDERS. The Issuer shall obtain at its sole expense the withdrawal of any order suspending the transactions with respect to the Notes at the earliest time possible.

(n) MAINTENANCE OF RECORDS RELATED TO THE NOTES. The Issuer shall ensure that any documents related to the Notes will, at all times, comply in all material respects with the applicable laws, rules, regulations, and circulars, and, if necessary, make the appropriate revisions, supplements, and amendments to make them comply with such laws, rules, regulations, and circulars.

(o) MAINTENANCE OF OTHER RECORDS. The Issuer shall execute and deliver to the Noteholders through the Public Trustee such reports, documents, and other information relating to the business, properties, condition, or operations, financial or otherwise, of the Issuer as the Public Trustee may from time to time reasonably require.

(p) NOTICE OF DEFAULT. The Issuer shall, as soon as possible and in any event within five (5) days after the occurrence of any default on any of the obligations of the Issuer, or other event which, with the giving of any notice and/or with the lapse of time, would constitute a default under the agreements of the Issuer with any party, serve a written notice to the Noteholders through the Public Trustee of the occurrence of any such default, specifying the details and the steps which the Issuer is taking or proposes to take for the purpose of curing such default, including the Issuer's estimate of the length of time to correct the same.

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(q) SEC / BSP FILINGS. The Issuer shall make available to the Public Trustee financial and other information regarding the Issuer by filing with the SEC and/or BSP, at the time required or within any allowed extension, the reports required by the SEC and/or BSP, as the case may be from banks in particular and from corporations in general.

(r) SERVICES OF EXTERNAL AUDITOR. The Issuer shall maintain the services of its current external auditor and in any event where the current external auditor of the Issuer shall cease to be the external auditor of the Issuer for any reason, the Issuer shall appoint another reputable, responsible and internationally accredited external auditor.

NEGATIVE COVENANTS (a) ENCUMBRANCES. The Issuer shall not permit any indebtedness to be

secured by or to benefit from any lien in favor of any creditor or class of creditors with respect to any present or future property or the right of the Issuer to receive income, nor will the Issuer permit any creditor to receive any priority or preference arising under Article 2244(14) of the Civil Code of the Philippines over the claims of the Noteholders hereunder, which claims shall at all times rank pari passu in all respects with all other unsecured obligations of the Issuer covered thereunder, provided however, that this restriction shall not apply to:

(i) Any lien the benefit of which is at the same time or prior to its creation extended equally and ratably to the Noteholders and all other sums due and to become due from the Issuer under the Notes in a manner and in all respects (including in particular, but without limitation, as to documentation) acceptable to the Majority Noteholders;

(ii) Any lien over any asset created or assumed at the time of the purchase by the Issuer of such asset to secure payment of the purchase price of such asset or to secure the payment of any indebtedness in respect of borrowed money (including extensions and renewals thereof and replacements therefore) incurred for the purpose of financing the purchase of such assets;

(iii) Any lien created for the purpose of paying current taxes, assessments or other governmental charges which are not delinquent or remain payable without any penalty, or the validity of which is contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof;

(iv) Any lien to secure: (a) surety or appeal bonds; (b) bonds for release of attachment, stay of execution or injunction; (c) performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases in the normal course of the Issuer’s business;

(v) Liens on the properties and assets of the Issuer (a) imposed by law, such as carriers’, warehousemen’s and mechanic’s liens and other similar liens arising in the ordinary course of business and not material in amount; (b) arising out of pledges or deposits under workmen’s compensation laws, unemployment insurance, old age pensions or other social security or retirement benefits or similar legislation;

(vi) Any lien existing on the date of this Agreement which is disclosed in writing by the Issuer to the Public Trustee or in the Offering Circular or the Issuer’s audited financial statements; and,

(vii) Any lien which secure (x) letters of credit, bid bonds, performance bonds or similar instruments procured by the Issuer in the ordinary course of business, and/or (y) foreign currency and interest rate swap, repurchase and reverse repurchase agreements and derivative transactions undertaken by the Issuer in the ordinary course of business.

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(b) UNAUTHORIZED BUSINESS. The Issuer shall not engage in any business except that authorized by its Articles of Incorporation.

(c) MATERIAL CHANGE OF CORPORATE STRUCTURE. Except if the corporation formed thereby effectively assumes the entire obligations of the Issuer under the Notes and the terms of such Notes have previously been approved by Noteholders representing at least two-thirds of the Notes then outstanding, the Issuer shall not effect any merger, consolidation re-organization, reconstruction, amalgamation or other material change in its ownership, corporate set-up or management or character of business.

(d) SALE OF ASSETS. The Issuer shall not sell, transfer, convey, lend or otherwise dispose of all or substantially all of its assets.

(e) LOANS/ADVANCES. The Issuer shall not extend any loan or advances to its directors and officers, except loans or advances granted pursuant to benefits, compensation, reimbursements, and allowances as may be allowed under existing Issuer policies and practice and such loans and advances as may be allowed under existing laws and regulations.

(f) ASSIGNMENT. Except by way of security as may be permitted above, the Issuer shall not assign, transfer or otherwise convey any right to receive any of its income or revenues except in the ordinary course of its business.

(g) GUARANTY. Except in the ordinary course of business, the Issuer shall not purchase, repurchase or otherwise acquire, assume, guarantee, endorse or otherwise become directly or contingently liable (including, without limitation, being or becoming liable by way of agreement, contingent or otherwise, to purchase, to use facilities, to provide funds for payment, to supply funds to or otherwise invest in the debtor or otherwise to assure the creditor against loss) for or in connection with any obligation or indebtedness, stock or dividends of any other person.

(h) DIVIDENDS. The Issuer shall not declare or pay any dividends (other than stock dividends) during an Event of Default or if payment would result to an Event of Default.

(i) TREASURY SHARES/DECREASE OF AUTHORIZED CAPITAL STOCK. The Issuer shall not acquire into treasury outstanding shares or decrease or reduce its authorized capital stock during an Event of Default or if such acquisition or decrease/reduction in the authorized capital stock would result to an Event of Default.

(j) SUSPENSION OF BUSINESS OPERATIONS. The Issuer shall not voluntarily suspend all or substantially all of its business operations.

(k) PAYMENT SET-OFFS. Except as otherwise allowed hereinabove, the Issuer shall not grant, in any of its future loan or credit agreements, any creditor any right above and beyond what is provided under Philippine laws to apply amounts on deposit with or in possession of any such creditor by way of set-off in reduction of any amount owing under said loan or credit agreements.

(l) MANAGEMENT CONTRACTS AND OTHER ARRANGEMENTS. The Issuer shall not enter into any management contracts, profit-sharing or any similar contracts or arrangements whereby its business or operations are managed by, or its income or profits are, or might be shared with, another person, firm or company, which management contracts, profit-sharing or any similar contracts or arrangements will materially and adversely affect

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the Issuer’s ability to perform its material obligations under the Notes.

(m) AMENDMENT OF ARTICLES AND BY-LAWS. The Issuer shall not amend its Articles of Incorporation or By-laws if such amendments have the effect of changing the general character of its business from that being carried on at the date hereof.

(n) SUBORDINATED DEBT. As long as any obligations under the Notes remain outstanding, the Issuer shall not create, issue, assume, guarantee, or otherwise incur any bond, note, debenture, or similar security which shall be or purport to be subordinated obligations of the Issuer, or which shall be considered capital of the Issuer for any regulatory purposes, unless such obligation ranks pari passu with, or junior to, the Issuer’s obligations under the Notes in any proceedings in respect of the Issuer for insolvency, winding up, liquidation, receivership, or other similar proceedings. The Notes shall not be used as collateral for any loan made by the Issuer or any of its subsidiaries, if any, or affiliates.

These covenants of the Issuer shall survive the issuance of the Notes and shall be performed fully and faithfully by the Issuer at all times while the Notes or any portion thereof remain outstanding.

36 EVENTS OF DEFAULT The Issuer shall be considered in default under the Notes in case any of the

following events shall occur:

(a) PAYMENT DEFAULT. The Issuer fails to pay any principal and/or interest due on the Notes.

(b) REPRESENTATION/WARRANTY DEFAULT. Any representation and warranty of the Issuer or any certificate or opinion submitted by the Issuer in connection with the issuance of the Notes is untrue, incorrect, or misleading in any material respect.

(c) COVENANT DEFAULT. The Issuer fails to perform or violates its covenants under the Notes, and such failure or violation is not remediable or, if remediable, continues to be unremedied for a period of ten (10) days from notice by the Public Trustee to the Issuer, Provided that the negative covenants specified above shall not be remediable.

(d) OTHER PROVISIONS DEFAULT. The Issuer violates any term or condition of any contract executed by the Issuer with any other bank, financial institution, or other person, corporation, or entity for the payment of moneys which constitutes an event of default under said contract; or, in general, the Issuer violates any contract, law, or regulation which (i) if remediable, is not remedied by the Issuer within ten (10) days from notice by the Public Trustee to the Issuer, or is otherwise not contested by the Issuer, (ii) results in the acceleration or declaration of the whole financial obligation to be due and payable prior to the stated normal date of maturity, or (iii) will, in the reasonable opinion of the Public Trustee, adversely and materially affect the performance by the Issuer of its obligations under the Notes and pay any amount outstanding on the Notes, Provided however that, the Events of Default specified in Items (a), (e), (f) and (g) shall not be remediable.

(e) LICENSE DEFAULT. Any governmental consent, license, approval, authorization, declaration, filing or registration which is granted or required in connection with the Notes expires or is terminated, revoked or modified and the result thereof is to make the Issuer unable to discharge its obligations hereunder or thereunder.

(f) LEGAL DEFAULT. It becomes unlawful for the Issuer to perform any of its material obligations under the Notes.

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(g) EXPROPRIATION DEFAULT. The government or any competent authority takes any action to suspend the whole or the substantial portion of the operations of the Issuer, or condemns, seizes, nationalizes or expropriates (with or without compensation) the Issuer or any material portion of its properties or assets.

(h) INSOLVENCY DEFAULT. The Issuer becomes insolvent or is unable to pay its debts when due or commits or permits any act of bankruptcy, including (i) filing of a petition in any bankruptcy, reorganization, winding-up, suspension of payment, liquidation, or other analogous proceeding; (ii) appointment of a trustee or receiver of all or a substantial portion of its properties; (iii) making of an assignment for the benefit of its creditors of all or substantially all of its properties; (iv) admission in writing of its inability to pay its debts; or (v) entry of any order or judgment of any court, tribunal, or administrative agency or body confirming the insolvency of the Issuer, or approving any reorganization, winding-up, liquidation, or appointment of trustee or receiver of the Issuer or a substantial portion of its property or assets

(i) JUDGMENT DEFAULT. Any final and executory judgment, decree, or arbitral award for the sum of money, damages, fine, or penalty in excess of P50,000,000.00 or its equivalent in any other currency is entered against the Issuer and the enforcement of which is not stayed, and is not paid, discharged, or duly bonded within thirty (30) days after the date when payment of such judgment, decree, or award is due under the applicable law or agreement.

(j) WRIT AND SIMILAR PROCESS DEFAULT. Any writ, warrant of attachment or execution, or similar process shall be issued or levied against more than half of the Issuer's assets, singly or in the aggregate, and such writ, warrant, or similar process shall not be released, vacated, or fully bonded within thirty (30) days after its issue or levy.

(k) CLOSURE DEFAULT. The Issuer voluntarily suspends or ceases operations of a substantial portion of its business for a continuous period of thirty (30) days, except in the case of strikes or lockouts when necessary to prevent business losses, or when due to fortuitous events or force majeure, and, provided that, in any such event, there is no material adverse effect on the business operations or financial condition of the Issuer.

37 EFFECTS OF DEFAULT EVENTS

The Public Trustee shall, within three (3) Banking Days after receiving notice of the occurrence of any Event of Default, give to the Noteholders notice of the occurrence of an Event of Default. If any one or more of the Events of Default shall have occurred and be continuing, after any applicable cure period shall have lapsed, the Public Trustee may, upon the written direction of persons holding at least fifty-one percent (51%) of the aggregate principal amount of the issued Notes (the Majority Noteholders), require the Issuer to perform any act as the Majority Noteholders may reasonably require in order to cure the default as may be allowed under the Governing Regulations, without prejudice to any other remedies to which the Noteholders may be entitled; provided, that in case of an Insolvency Default, the Public Trustee shall on its own (i) institute any Winding-Up Proceedings in accordance with applicable laws or perform any act for the enforcement of any obligation under, or collection of the principal and interest on, the Notes on the understanding that the Notes shall be subordinated in the right of payment of principal and interest to all depositors and other creditors of the Issuer, except those creditors expressed to rank equally with, or behind holders of the Notes, and/or (ii) declare the principal of the Notes to be immediately due and payable, without prejudice to the other remedies available to the Noteholders, in accordance with the Governing Regulations.

38 MEETINGS OF NOTEHOLDERS

All meetings of the Noteholders shall be held in Makati City upon prior notice.

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39 NOTICE OF MEETING

OF NOTEHOLDERS Subject to the terms of the Trust Agreement, notice of every meeting of the Noteholders, setting forth the time, place, and purpose of such meeting in reasonable detail, shall be sent by the Public Trustee to the Issuer and to each of the registered Noteholders not less than fifteen (15) days nor more than forty-five (45) days prior to the date fixed for the meeting and shall likewise be published in at least two (2) newspapers of general circulation in the Philippines for two (2) consecutive days at any time prior to the date stated in the notice for the date of the meeting; provided, that all reasonable costs and expenses incurred by the Public Trustee for the proper dissemination of required information on the requested meeting shall be reimbursed by the Issuer in timely fashion after receipt of the duly supported billing statement.

40 TAXATION If payments of principal and/or interest in respect of the Notes shall be subject to deductions and withholding for or on account of any present or future taxes or duties imposed by or on behalf of the Republic of the Philippines, including but not limited to stamp, issue, registration, documentary, value-added or similar tax, or other taxes and duties, including interest and penalties thereon, then such taxes or duties shall be for the account of the Noteholder concerned, and if the Issuer shall be required by law or regulation to deduct or withhold such taxes or duties, then the Issuer shall make the necessary withholding or deduction for the account of the Noteholder concerned; provided, however, that all sums payable by the Issuer to tax-exempt persons shall be paid in full without deductions for taxes, duties, assessments, or government charges, subject to the submission by the relevant Noteholder claiming the exemption of reasonable and acceptable evidence of such exemption to the Registry. In case of transferes deemed pre-termination for tax purposes, the transferor Noteholder shall be liable for the resulting tax due on the entire interest income earned on the Notes (if any), based on the holding period of such Notes. Documentary stamp tax for the primary issue of the Notes and the documentation, if any, shall be for the Issuer’s account.

41 REDEMPTION DUE TO TAXATION

If payments of principal or interest due on the Notes become subject to additional or increased taxes, other than any taxes and rates of such taxes prevailing as of the Issue Date, as a result of certain changes in law, rule, or regulation, or in the interpretation thereof, and such additional or increased rate of such tax cannot be avoided by use of reasonable measures available to the Issuer, then the Issuer shall have the option (subject to consent of all regulatory approvals) to redeem the Notes as a whole, but not in part, on any Interest Payment Date (having given not more than 60 nor less than 30 days' notice) at par plus accrued interest. Any incremental tax that may be due on the interest income already earned under the Notes as a result of the exercise by the Issuer of its option for early redemption shall be for the account of the Issuer.

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DESCRIPTION OF THE BANK

INTRODUCTION

EastWest is a medium-sized commercial bank in the Philippines that provides a range of services to consumer and corporate clients. The Bank is a domestic corporation registered with the Philippine Securities and Exchange Commission (“SEC”) on 22 March 1994. EastWest was granted authority by the BSP to operate as a commercial bank under Monetary Board Resolution No. 101 dated 06 July 1994.

EastWest is a wholly-owned subsidiary of Filinvest Development Corporation (“FDC”). The Bank’s ultimate parent company is ALG Holdings Corporation. FDC is the listed holding company of the Filinvest Group of Companies (“Filinvest Group”). Incorporated on April 27, 1973, FDC traces its roots to the consumer finance and banking business established in the early years by FDC’s patriarch, Andrew L. Gotianun, Sr. The institution was so named because its principals envisioned the embodiment of the best of both East and West in the Bank – bringing together “the efficiency of the West and the warm hospitality of the East”. EastWest’s current logo, a double infinity sign linked with a loop and angled with dimensional depth, is symbolic of EastWest’s philosophy of looking out to the endless opportunities and possibilities.

In the year 2000, Filinvest Capital, Inc. (“FCI”), an affiliated investment house previously owned by FDC, merged with the Bank. The Bank, as the surviving corporation, issued 2,615,281 preferred shares to FDC in exchange for all the outstanding capital stock of FCI. Consequently, as set forth in the Articlfes of Merger dated 15 August 2001 as amended on 19 December 2001, all rights, business (except for the investment house license, which was surrendered to the SEC), assets and liabilities of FCI were conveyed, assigned and transferred to the Bank. The merger was approved by the BSP and the SEC on 12 July 2001 and 20 December 2001, respectively.

In 2003, Ecology Savings Bank Inc. (“ESBI”) merged with the Bank. The Bank, as the surviving corporation, purchased all the outstanding capital stock of ESBI from EBC Strategic Holdings Corp. in exchange for cash amounting to P172.8 million. Consequently, as set forth in the AOM dated 31 January 2003, all rights, business, assets and liabilities of ESBI were conveyed, assigned and transferred to the Bank. The merger was approved by the BSP and the SEC on 06 August 2003 and 26 June 2003, respectively.

The Bank officially launched its credit card operations on 18 June 2004. The Bank issues credit cards which could be accepted in merchant establishments nationwide with credit card terminals owned and operated by Master Card-member banks. The Bank currently issues the EastWest Master Card.

EastWest's principal banking products and services include deposits, cash management, commercial and consumer loans, trade facilities, remittance, foreign exchange, fixed income securities investments, derivatives and trust services. EastWest has recently redefined its focus to aggressively reposition itself to capitalize on its competencies as a medium-sized bank with a nationwide presence in the Philippines and to focus on developing its banking services for the corporate middle market and retail customers. In 2007 and 2006, revenue from financial and banking services was P3,026.3 million and P2,662.2 million, respectively.

Currently, the Bank is positioning itself in a niche market and is driven by the vision of becoming a world class bank anchored on service excellence in its chosen markets. It has also brought in some of the best talents in the industry to its management team to infuse fresh ideas and bring in experience and expertise.

The Bank is ranked 19th among Philippine banks in terms of total assets, 17th in terms of total loans, 19th in terms of total deposits and 26th in terms of return on equity as of 31 December 2007. The Bank’s total assets were P38.1 billon and total capital funds were P4.1 billion as at 31 December 2007.

As of 31 March 2008, EastWest had 77 branches, 45 branches of which were located in Metro Manila and the remaining 32 were situated in key districts outside Metro Manila, including the Visayas and Mindanao regions. This branch network is complemented by a network of 75 automated teller machines which are part of both the Bancnet and Megalink consortia.

As of 31 December 2007, the Bank’s core capital ratio and capital adequacy ratio were 15.1% and 15.4%, respectively.

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ORGANISATIONAL STRUCTURE AND PRINCIPAL BUSINESS ACTIVITIES

The following chart sets forth an overview of the functional organizational structure of the Bank and its principal activities:

BOARD OF DIRECTORS

Risk Management

DivisionEl Isagon

Audit DivisionFA Ignacio, Jr.

Trust DivisionEA Salvador

Legal DivisionAtty. AF Brioso

PresidentAC Moncupa

Branch Banking GroupG Susmerano Credit Services Group

Corporate Banking GroupVP Ortuoste

Financial Management & Control Group

Corporate Support Services Group

Compliance Department

El Isagon

Treasury GroupHE Cebrero III

Distribution GroupCG Lopez

Retail Credit GroupAG Ilagan

FITIKG Reyes

Central Processing & Settlement Group

MB Ordoñez

Central Accounting DivisionFA Cacho

Strategic Management DivisionGN Ang

Systems and Methods Division

JD Arevalo

EastWest Bank AcademyGG Delos Santos

HR – Recruitment & ComBen Admin Division

JD Trinidad

Admin Services DivisionYV Diola

HR – Training & Org DivisionJD Capili

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EastWest’s principal business activities are organized into the following segments: branch banking, corporate banking, consumer finance, treasury, trust and distribution.

Branch Banking

EastWest’s branches serve as the primary distribution channel for its retail and middle market clients. The Bank’s principal activities include offering of deposit products and services as well as cross-selling of other products and services of the Bank. The branch set-up was created in such a way that it would promote a very strong sales and service culture. All branch personnel are required to undergo series of trainings to develop the competence and skills required for the position. At present, each of EastWest’s branches is staffed with at least one Sales Officer. These Sales Officers directly report to Branch Heads, who are trained as Sales Leaders with expertise in coaching and mentoring. The branches are also supported by a dedicated Marketing Group responsible for the introduction of new and innovative product offerings.

As of 31 December 2007, total deposits is at P31,273.6 million, higher by 24.0% compared to 31 December 2006. 85.6% of total deposits are denominated in pesos, with the remainder denominated in foreign currencies primarily in US Dollars.

EastWest currently has 77 branches in various parts of the country, majority of which are located within Metro Manila. EastWest has been growing its branches every year, with plans to open 10 branches per year from 2008 to 2012, targeting an aggregate of 120 to 150 branches by the next five years.

The branch network is focused on the Philippines’ major industrial and commercial regions. Within these regions, EastWest has strategically positioned its branches in key business and commercial centers, which are areas that generally boast of higher per capita incomes, and have higher growth and traffic, thereby maximizing the number of transactions and deposits per branch.

The following table sets out the distribution of the Bank’s branches for each region as at March 31, 2008.

As of March 31, 2008

Division (No. of Branches)

Division 1 12

Division 2 12

Division 3 10

Division 5 11

South Luzon Sector 11

North Luzon Sector 9

Visayas Sector 7

Mindanao Sector 5

TOTAL BRANCHES 77

Note: (1) Divisions 1, 2, 3, and 5 are located within Metro Manila.

Beyond its branch network, the Bank offers its customers remote access to banking services through online banking, mobile banking and the Bank’s call center. EastWest’s products and services are accessible by customers through EastWest’s online banking system (“Net Access”). This on-line and real-time system allows users to perform a variety of banking transactions, such as balance inquiry, bills payments, fund transfers, check re-order, viewing and printing of statements, and stop payment request. Moreover, Net Access is secured by VeriSign. The Bank also prides itself in having one of the most innovative and competitive cash management products and services that can cater to the needs of its corporate clients. At present, the Bank has 75 automatic teller machine (“ATM”) systems, which provide 24-hour banking services, located in branches and off-site locations accessible to its customers. It has recently been upgraded to improve their data encryption and security capabilities. EastWest is also a member of Bancnet, which allows its member banks’ customers to use ATM terminals operated by other Bancnet member banks. Furthermore, Bancnet has agreements with other

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ATM networks in the Philippines, namely Expressnet and Megalink, which gives its customers access to all ATMs in the country.

The table below sets out the list of products and services distributed through the Bank’s branch network.

Branch Products / Services Description

PERSONAL BANKING

Regular Checking Account The Regular Checking Account is a non-interest bearing peso-denominated deposit subject to withdrawal through the issuance of checks.

Term Savings Account The Term Savings Account is an interest-bearing special savings peso-denominated account that offers premium rates. This account is evidenced by a passbook.

Passbook Savings Account The Passbook Savings Account is an interest-bearing peso-denominated deposit. This account is evidenced by a passbook.

Statement Savings Account The Statement Savings Account is an interest-bearing peso-denominated account evidenced by an ATM card. In lieu of a passbook, a monthly bank statement is issued to depositors.

Dollar Savings Account The Dollar Savings Account is an interest-bearing US Dollar denominated foreign currency savings deposit account.

Peso Time Deposits Account The Peso Time Deposit Account is an interest-bearing deposit evidenced by a certificate issued by the Bank in favor of the depositor with a specific maturity period.

Dollar Time Deposits Account

The Dollar Time Deposit Account is an interest-bearing, US dollar denominated deposit evidenced by a certificate issued by the Bank in favor of the depositor with a specific maturity period.

ChequeMax The ChequeMax is a peso denominated account which offers unlimited check-writing convenience and multiple fund access via the Internet and through a Smart subscribed mobile phone.

ChequeMax Rewards

The ChequeMax Rewards is a 3-in-1, interest-bearing peso denominated checking account with a low required maintaining balance. It is qualified for Rewards Points in excess of the minimum maintaining balance.

BillsPay Facility The BillsPay Facility allows for bills payment over-the-counter, through the ATM, or through the Internet.

Secured Future Fund The Secured Future Fund offers higher yields for peso denominated investments.

Pay@Store Facility Pay@Store Facility is the Bank’s point-of-sale payment facility through the Bancnet’s payment system.

Car Suite Loan The Car Suite Loan is the Bank’s car loan facility.

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Saving Maximizer Account

The Saving Maximizer Account is an interest-bearing special peso denominated savings account. It comes with a tiered-pricing scheme offering clients higher earnings as their balances grow. The account is evidenced by a passbook and comes with an optional ATM card for individual clients.

Home Suite Loan The Home Suite Loan is the Bank’s housing loan facility.

CORPORATE SUITE

Payroll Assist The Payroll Assist is the automated payroll preparation, payment and credit facility.

Electronic Payroll Exchange System

The Electronic Payroll Exchange System is the payroll outsourcing facility.

BizCheque The BizCheque is the peso-denominated check writing service for small and medium-sized companies.

Corporate Collection The Corporate Collection is a set of collection facilities consisting of Bills Collect, Cheque Depot, and Collect@Site.

Cheque Depot The Cheque Depot is a specifically-designed facility by which the Bank takes care of the safekeeping and warehousing of postdated checks, for credit to the client’s account as they fall due.

Bills Collect The Bills Collect is a facility that serves as a payment center, accepting both cash and check.

Collect@Site The Collect@Site facility is the Bank’s deposit pick-up service at your place of business through an armoured car equipped with security escort.

Cheque Prepare The Cheque Prepare is an end-to-end solution for a check-cutting facility.

Branch Banking manages the entire branch network of the Bank, monitoring each branch’s profitability. Each branch is subject to at least one spot audit a year. A more comprehensive audit is done yearly for branches assessed as medium to high risk, while branches assessed as low risk are audited thrice in a five year period. Each of the Bank’s branches has an electronic security system and armed guards. All of these services are provided by independent contractors. The Bank also ensures that the amount of cash held in the vaults of its branches is maintained within authorized limits. The Bank continues to maintain adequate insurance coverage for loss and theft. See “Description of the Bank – Insurance”.

The Bank continues to invest heavily in advanced technology to provide an efficient avenue for their customers to conduct – and the Bank to process – transactions.

Corporate Banking

EastWest’s corporate banking activities are focused on offering loans to middle-market corporate customers (classified by the Bank as customers with average loan facility of around P40 million). The Bank believes it can develop its core competence in this particular segment and make a significant point of differentiation compared with its competitors. To fulfill this objective, top management has given its full support in the full training and development of its Account Officers.

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EastWest complements its lending activities with various cash management solutions. The Bank believes that the development and expansion of its middle-market customer base is essential to its growth and success and intends to concentrate on growing its middle-market portfolio as its core target customer group.

Loan Products EastWest provides a wide range of loan products and services to its corporate customers, including revolving credit lines, discounting of receivables, foreign currency loans, bills purchased, acceptances, trade finance facilities, and term loans. In line with its strategy to create a balanced and diversified portfolio, the Bank caters to corporate clients which are engaged in various industries in the Philippines. Facilities offered to corporate customers include both secured and unsecured loan products, depending on the credit risks associated with the customer and their business. The Bank’s corporate loan portfolio accounts for 36.4% of the total loans and receivables, amounting to P7.2 billion as at 31 December 2007. This compares to 42.4% and 51.9%, which amounts to P7.1 billion and P6.9 billion as at 31 December 2006 and 31 December 2005, respectively. These loans are denominated primarily in Pesos and foreign currencies (primarily in U.S. dollars).

EastWest intends to continue to expand its corporate banking portfolio by tripling the number of its Account Officers, and by providing loan products that are specifically suited to meet the financial needs of the middle market.

Trade Finance The Bank likewise offers a variety of trade finance-related products and services to its corporate customers, including import and/or domestic letters of credit, trust receipts, export advances, commercial bills discounting, inventory financing and bills collection.

Consumer Finance

EastWest offers various types of consumer finance products to individuals, which consist principally of residential mortgage loans, auto loans, personal/salary loans, and credit cards. EastWest reviews various factors in pricing its loan products, including the capacity of the borrower to repay the loan, estimated delinquency rates, funding costs, expenses related to granting loans and a target spread. Loan terms are differentiated according to factors such as a customer’s financial condition, age, loan purpose, collateral and the quality of relationship with EastWest.

In the last few years, EastWest gradually focused its core business towards consumer financing where its competitive strength and expertise lies. The new focus led the Bank to launch several product lines designed to meet the demands of today’s customers. The new consumer banking products have proven to be the new winners on a line-up of innovative products and services of the bank.

As of 31 December 2007, EastWest's total consumer portfolio consisted of Mortgage Loans, Auto Loans, Salary Loans and Credit Cards which amounted to P9.9 billion and accounted for 50.3% of EastWest's total loan portfolio. This is a 26.8% increase, compared to P7.8 billion as of 31 December 2006.

These loans are denominated entirely in Pesos.

Residential Home Mortgage Loans The large majority of EastWest’s residential mortgage loans are extended to property buyers in the Philippines who intend to occupy the premises, with a small proportion being extended to individuals purchasing residential units for investment purposes. All of EastWest’s home mortgage loans are secured by a first mortgage on the property. In addition, EastWest generally requires residential mortgage borrowers to have a minimum equity of at least 20.0% of the value of the property. The interest rate of EastWest’s residential mortgage loans ranges from 8.0% to 11.63% for terms of up to 30 years. EastWest offers loans at adjustable and fixed interest rates. Majority of these loans are re-priced every year.

When a borrower falls in arrears with its mortgage payments, the buyer can either agree to a voluntary disposition of the property to EastWest, or EastWest may commence foreclosure proceedings. Mortgaged collateral that has been foreclosed is generally sold by EastWest in public auctions. However, the mortgagor has the right to redeem such collateral within a year from the date of foreclosure after payment of principal, interest, penalties due to EastWest as well as expenses incurred by the Bank in the proceedings.

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The Bank launched its HomeSuiteLoan program in early 2001 with a mix of competitive interest rates, flexible terms and a complete housing loan package. To date, the bank continues to make the product more attractive and attuned to changing times, by introducing the deferred principal payment program for the first year and an additional 10.0% clean loan so one can actually borrow more against the same collateral.

The HomeSuiteLoan is available in different loan packages, tailor-fitted to the needs of specific markets. LotAcquire is designed for those in the market for initial property. Other programs are HomeAcquire, HomeConstruct and HomeImprove. The Bank also offers HomeFlex, a multi-purpose loan using real estate as collateral. The Bank also offers fixed-term pricing to protect borrowers against the risk of fluctuating interest rates.

As of 31 December 2007, total residential mortgages amounted to P3.1 billion, with 652 new loan releases for the year 2007. This has been an impressive increase as compared to the residential mortgages last 31 December 2006 of P2.2 billion, with a total of 322 new loan releases for the year 2006. The increase is attributable to the improvement of the Bank’s housing loan features such as lower interest rates and the longest repayment term of 30 years, and likewise the introduction of the three-day processing campaign, which was supported by print and web advertising.

Auto Loans The Bank packaged the CarSuiteLoan with competitive interest rates, flexible payment terms and fast processing. In 2004, the first year the product was offered, almost P1.0 billion in auto loans was extended to EastWest’s customers. The CarSuiteLoan offers car loan programs for the purchase of brand new or second-hand vehicles or the refinancing of an existing car loan. Payment terms range from 12 to 60 months, downpayment terms as low as 20.0%, and loan repayment can be made either through post-dated checks, automatic debit arrangement against an existing EastWest savings or current account or over-the-counter payments at any EastWest Personal Banking Center. Turnaround time for a CarSuiteLoan is approximately 3 hours to 1 day. EastWest’s auto loans are offered through car dealerships (including second-hand car dealers), independent sales agents and EastWest’s branches. EastWest provides economic incentives to car dealerships and independent sales agents based on each approved auto loan amount. All of EastWest’s auto loans are secured by a chattel mortgage over the car being purchased. In addition to being subject to EastWest’s internal credit checks, EastWest generally requires the borrower to make a minimum down payment of 20.0% of the purchase price for a new car, and 30.0% in the case of a second-hand car. Depending on whether the car being purchased is a new car or a second-hand car, the interest rate of EastWest’s auto loans can range from 9.0% to 18.0%, with an average maturity of 42 months. When an installment payment falls over 90 days past due, EastWest may commence foreclosure proceedings. Foreclosed cars are generally sold by EastWest through public auction. As of 31 December 2007, EastWest has P4.3 billion worth of car loans.

Credit Cards In 2004, EastWest began issuing MasterCard credit cards under the name "EastWest Bank MasterCard."

Revenues from the credit card operations consist principally of annual fees paid by cardholders, interest on revolving credit card receivables and installment, transactions, annual fees paid by cardholders, cash advance fees, interchange fees paid by merchant acquirer banks for EastWest Bank-issued cards and late payment charges. Annual cardholder fees range from P1,000 to P2,000. The interest rate on revolving balances range from 2.3% to 2.8% per month – currently the lowest finance charge in the market. Fees for cash advances are approximately 5.0% of the total cash advance amount and interchange fees range from 1.3% to 1.5% of the purchased amount. The Bank likewise offers a longer interest-free credit period of 54 days and has the lowest monthly minimum amount due, equal to 3.5% of outstanding balance, to encourage revolving credit cardholders.

From a card base of 10,000 since its launch in June 2004, the Bank has grown its cards base with 126,000 cards in circulation as of 31 December 2007, increasing by almost 1,260.0% in the past three years. This success is based on the continuous improvements undertaken by the Bank to provide quality service to its cardholders. EastWest expanded its acquisition channels by accrediting more tele-sales agencies and by entering into

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corporate tie-ups and co-branding. It also tapped its vast branch network channel. It likewise improved its Gold Card agent commission scheme resulting to an increase in the mix of Gold Card applications from 10.0% to 20.0% of total application turn-ins. Improvement in the Bank’s service levels, from an average of 70.0% in January to December 2006 to 84.0% in January to March 2008 was recorded as was a significantly reduced abandoned call rate from a high of 15.0% in 2006 down to just 5.0% in January to March 2008. The Bank also launched a Customer Complaint and Request Tracking System in March 2007 that allowed monitoring of receipt and resolution of complaints/requests, as well as comparison against standards. Finally, it also installed an Express Lane at the Credit Acceptance Section for Branch-referred card applications which shortened turnaround time to just three days.

Revenues relating to the credit card business are reflected in EastWest’s financial statements as interest income and income from service charges, fees and commissions.

EastWest currently markets and sells its credit cards on a direct basis, as well as through its third party telemarketing companies and its co-branding partner, Asian Spirit.

Salary Loans As is the same for the Bank credit card business, EastWest’s salary loan offerings are launched into a crowded segment in the consumer finance business. Salary Loans may take the form of multi-purpose loans with competitive interest rates, quick two-day processing, ease in application and flexibility in terms of payment.

The SalaryLoanPlus is a multi-purpose loan aimed at employed individuals earning less than P15,000/month which falls below the qualifying level for most credit cards or personal loans offered by major market players in these two segments. The key feature of this type of loan is the salary deduction arrangement with the employer for paying-off the monthly amortization which improves the repayment rate and lowers the propensity for the borrower to default in payment. Besides its market-friendly features, the Bank has partnered with the human resources departments of major corporations to facilitate prospective borrowers’ access to the products.

From a total Salary Loans portfolio of P298.1 million as of 31 December 2006, EastWest has since increased this to P502.5 million as at 31 December 2007, by accrediting 96 new companies and organizations and opening 6,853 new accounts as of 31 December 2007.

Furthermore, EastWest has expanded marketing tie-ups with third-party companies such as appliance dealers, resulting in the accreditation of 9 new companies with total employee base of 18,357 employees. The Bank has also started accrediting labor unions and employee cooperatives to gain entry into large companies. It has signed up a total of 20 unions/cooperatives that provides access to a total of 317,094 potential borrowers. Lastly, the Bank has implemented the Modified Salary Loans program in March 2007 that provided the solution for companies refusing the administrative responsibility for payroll deduction. 13 companies were accredited for the Modified Salary Loans program to date.

Treasury and Trust

Treasury EastWest’s Treasury is primarily responsible for managing the Bank’s liquidity, interest rate and foreign exchange risks inherent in the Bank’s business activities. The Bank's Treasury also actively engages in trading for its own proprietary account. It trades peso denominated treasury bills and fixed income bonds, US Dollar denominated fixed income bonds, and foreign exchange. EastWest is an accredited Government Securities Eligible Dealer.

For the period ended 31 December 2007, trading and investment securities accounted for 12.2% of EastWest’s total assets. As of 31 December 2007, 72.0% of EastWest’s trading and investment securities portfolio was represented by Government securities, of which P0.8 billion and P2.6 billion were in Peso and U.S. dollar-denominated Government securities, respectively, while the majority of the balance was in private issue securities. For the same period, EastWest’s interest income from trading and investment securities and due from other banks and interbank loans receivable and securities purchased under resale agreement of P731.5 million, foreign exchange trading gain of P57.5 million and securities trading loss of P14.6 million represented 24.2%, 1.9% and -0.5% of its gross income, respectively.

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The following tables set out, as of the dates indicated, information relating to EastWest’s total investment portfolio:

As of 31 December

2007

2006

2005

Investment Portfolio (P millions)

Government bonds.................................................... 2,531.0 3,365.3 2,091.9

Treasury notes........................................................... 773.0 610.2 1,130.2

BSP Treasury bills .................................................... 48.4 60.5 2,181.6

Private bonds and commercial papers ...................... 1,192.6 427.5 288.7

Total debt securities.................................................. 4,545.0 4,463.5 5,692.4

Non-debt securities ................................................... 114.2 115.8 134.9

Total ......................................................................... 4,659.2 4,579.3 5,827.3

The following tables sets out, as of the date indicated, an analysis of the residual maturity profile of EastWest's investments in Government and corporate debt securities classified as available-for-sale securities:

As of 31 December 2007

Up to One

Year Up to Five

Years Five to 10

Years More than 10 Years

Available-for-sale instruments Amount Amount Amount Amount

(P millions)

Government Securities ........................................... 291.9 997.3 234.0 93.0

Corporate securities................................................ 316.5 33.1 497.1 285.4

Total debt securities ............................................. 608.4 1,030.4 731.1 378.3

Trust EastWest offers a wide range of trust products and services, including fund management, investment management services, custodianship, administration and collateral agency services and stock and transfer agency services. In addition to offering trust services to corporate and high net-worth individual customers, EastWest provides retail customers with alternative investment opportunities through its investment fund products.

As of and for the period ended, 31 December 2007, the total assets held in trust amounted to P10.2 billion and the total revenue from this business amounted to P56.9 million.

Part of the Bank’s Trust Banking offerings is a selection of unit investment trust funds, in both Pesos and U.S. dollars with intermediate and long-term investment horizons. A Peso money market fund is likewise offered. The Bank intends to offer a Peso equity-linked fund in the near future.

Distribution

Distribution, the newest Group in the Bank, was formed last January 2008. Its main role is to buy and sell money market, fixed income instruments and foreign exchange products to the end customers. It works closely with the Treasury Group in providing market advisory to its clients. The Group is currently divided into two divisions, Retail Sales and Institutional Sales. The Retail Sales Division uses the branches as a vast marketing network to push high yield products to its individual clientele including high networth individuals. The Institutional Sales Division’s main markets are corporate entities such as insurance companies, trust divisions of banks and thrift banks.

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SUBSIDIARIES AND AFFILIATES

The Bank does not have any subsidiaries. It however owns 39.0% of Filinvest Information Technologies, Inc. whose primary business is to provide computer services and information technology services including but not limited to general consulting, information systems planning, network integration, business re-engineering services, systems integration and systems development to any person, corporation, partnership and any other juridical entity.

FDC owns 61.0% of Filinvest Information Technologies, Inc., while the remaining shares are owned by a few other stockholders.

INSURANCE

As a matter of prudent business practice, the Bank insures all of its properties against fire and all other usual risks. It also has insurance policies for operational risks such as loss of cash or securities. Cash held inside the vault and transported by armored cars are sufficiently covered by reputable insurance companies. Trust receipts and collaterals provided by its customers are likewise insured based on the collaterals’ market value. Adequate life insurance is also secured for individual borrowers to cover their loan accounts. Like other insurance policies, the Bank’s insurance policies are subject to exclusions such as those events related to war and terrorism.

LEGAL PROCEEDINGS

EastWest has not been involved in any material legal proceedings that can adversely affect the daily operations of the Bank or its consolidated financial condition.

The Bank has no outstanding tax liabilities with the BIR.

Furthermore, the Bank has been compliant with anti-money laundering laws and has been consistently prudent in terms of its policies in conducting know-your-customer checks. It has submitted regular reports to Anti-Money Laundering Council, and continuously organizes classroom training for its employees to minimize the risk of exposing the Bank to money launderers. There is also an updated Corporate Governance Manual that is pending approval by the Board of Directors that aims to further improve the Bank’s compliance structure.

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DESCRIPTION OF THE BANKÊS ASSETS AND LIABILITIES

LOAN PORTFOLIO AND CREDIT EXPOSURE

As of 31 December 2007, the Bank’s gross loan portfolio (excluding interbank loans and loans to BSP) amounted to P19.7 billion representing approximately 51.8% of its total resources as of that date. This represents an increase of 18.8% from 31 December 2006 to 31 December 2007. The growth is primarily due to an increase in consumer loans.

Despite an increase in the level of corporate banking, its share in the total loan portfolio decreased from 42.4% in 2006 to 36.4% by the end of 2007 due to the change in EastWest’s strategy from a corporate lending focus to an emphasis on growth in consumer lending.

Consumer finance, including auto loans, residential mortgage loans, credit card services and salary loans, grew 26.8% from 2006 to 2007. As of 31 December 2007, total consumer loans accounted for 50.0% of EastWest’s total gross loan portfolio. The following table shows a breakdown of the loan portfolio between corporate banking and consumer finance loans:


2007

2006

2005 Loan portfolio

breakdown (P bn) (%) (P bn) (%) (P bn) (%)

Corporate banking ........... 7.2 36.4 7.1 42.4 6.7 50.4

Consumer finance ............ 9.9 50.3 7.8 47.2 5.8 43.6

Others (1) ........................... 2.6 13.3 1.7 10.4 0.8 6.0

Total ................................ 19.7 100.0 16.6 100 13.3 100

Note:

(1) Others comprise small business lending, accounts receivable, accrued interest receivable, and sales contract receivables.

Industry concentration As of 31 December 2007, the Personal Consumption sector represented the largest sector of EastWest’s consolidated loan portfolio, at 28.6%.

The BSP considers that loan concentration exists when total loan exposure to a particular industry or economic sector exceeds 30% of total loan portfolio. As of 31 December 2007, the Bank does not have credit concentration in any particular industry.

EastWest also monitors its exposure to specific sectors of the economy to ensure compliance with specific pre-determined lending requirements imposed by law on all Philippine banks. EastWest has no specific limits with respect to portfolio mix but maintains a conscious effort to ensure diversification.

Loans to real estate business are limited by BSP regulations to 20.0% in the aggregate of EastWest’s total loan portfolio. Excluded from this ceiling are loans not exceeding P3.5 million to finance the acquisition or improvement of residential units, provided that the aggregate real estate loans including the loans not exceeding P3.5 million shall not exceed 30.0% of EastWest’s total portfolio. EastWest has historically adhered to the prescribed limits set by the BSP.

BSP regulations require banks to allocate 25.0% of their loanable funds for agricultural credit in general, of which at least 10.0% must be made available for agrarian reform credit. Alternatively, a bank may temporarily meet all or a portion of its agrarian reform and agricultural lending requirements by investing in eligible government securities under certain conditions. The Bank continuously tries to fulfill this requirement without compromising the quality of its loan portfolio

Mandatory credit allocation laws require all Philippine banks to allocate 6.0% of their loan portfolios to small-sized enterprises and 2.0% to medium-sized enterprises. EastWest is in compliance with these requirements.

The following table sets out an analysis of the Bank’s loan portfolio by economic activity, as defined and categorized by the BSP:

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Industry Concentration 2007

2006

2005

(P bn) (%) (P bn) (%) (P bn) (%)

Financial intermediation

1.4 6.8

0.8 4.9

1.3 9.4

Transportation, storage, and communications

0.3 1.5

0.5 2.9

3.3 25.1

Manufacturing

1.7 8.8

1.3 7.7

2.6 19.7

Agriculture, Fisheries and Forestry

0.6 3.0

0.2 1.1

0.3 2.2

Wholesale and retail trade

3.2 16.0

2.0 12.0

1.6 12.2

Personal consumption

5.6 28.5

4. 6 27.5

1.5 11.0

Real estate, renting and business services

4.3 21.7

4.7 28.5

2.4 17.9

Others

2.7 13.7

2.6 15.5

0.3 2.5

Total.......................................

19.7 100.0

16.6 100.0

13.3 100.0

Maturity profile Over half of EastWest’s loans to customers consist of loans that are due more than one year. Short-term loans principally comprise loans to corporate customers for working capital and loans to consumers and small and medium enterprises. Medium- and long-term loans are typically granted to corporations and businesses to finance capital expenditures and mortgages advanced for property purchases. The percentage of EastWest’s loans with longer maturities has increased recently due primarily to increase in mortgage and auto loans.

The following table sets out an analysis of the Bank’s total loan portfolio by maturity:


2007

2006

2005

By maturity (P bn) (%) (P bn) (%) (P bn) (%)

Due within one year ......... 9.9 50.3 4.4 26.5 3.5 26.3

Due over one year ............ 9.8 49.7 12.2 73.5 9.8 73.7

Total................................. 19.7 100.0 16.6 100.0 13.3 100.0

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Currencies EastWest provides loans to customers in peso and certain foreign currencies. The Bank maintains its practice of extending foreign currency loans primarily to exporters, who have an identifiable source of foreign currency earnings from which to repay the loans or otherwise hedge its foreign currency exposure and to importers who have authorization from the BSP to purchase foreign currency to service their foreign currency obligations.

Substantially all of EastWest’s foreign currency denominated loans are loans to corporate customers.

The following table shows an analysis of EastWest’s gross loans and receivables by currency:


2007

2006

2005

Currencies (P bn) (%) (P bn) (%) (P bn) (%)

Philippine Peso 19.0 97.6 16.0 96.7 12,9 97.3

US Dollars (in PHP) 0.5 2.4 0.6 3.3 0.4 2.7

Total................................. 19.7 100.0 16.6 100.0 13.3 100.0

Interest rates An important component of EastWest’s asset and liability policy is its management of interest rate risk, which is the relationship between market interest rates and EastWest’s interest rates on its interest-earning assets and interest-bearing liabilities. See “Risk Management Policies and Procedures – Market Risk Management – Interest Rate Sensitivity Management.”

EastWest’s pricing policy with respect to its interest-bearing liabilities is set by EastWest’s Asset and Liability Committee. Current account deposits do not pay any interest and savings account deposits typically pay no interest for deposits falling below a maintaining balance. The basic rate for savings account deposits that are above the minimum threshold is 0.75% per annum. EastWest also offers special interest rates for deposits under its time deposits account. These larger deposits are placed on pre-agreed terms and pay interest rates that generally track Philippine Treasury bill rates.

Size and concentration of loans The BSP generally disallows any bank from maintaining a financial exposure to any single person or group of connected persons in excess of 25% of the Bank’s unimpaired capital and surplus, which includes combined capital accounts, paid-in-capital and surplus, but excludes reserves for valuation purposes, liabilities and deferred income tax.

The following table sets out a breakdown of the Bank’s total loan portfolio by principal amount:


2007

2006

2005 By size and

concentration (P bn) (%) (P bn) (%) (P bn) (%)

Less than P1 million ........ 8.7 44.1 7.2 43.6 5.0 37.2

P1 to 10 million ............... 4.8 24.3 3.1 18.6 2.8 20.9

P10 to 50 million ............. 3.1 15.6 2.6 15.9 1.8 13.8

P50 to 100 million ........... 1.2 6.3 0.8 5.1 0.8 6.3

More than P100 million... 1.9 9.7 2.8 16.8 2.9 21.8

Total ................................ 19.7 100.0 16.6 100.0 13.3 100.0

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Security EastWest principally focuses on cash flows and cash generating capabilities in assessing the creditworthiness of borrowers. However, EastWest will secondarily seek to minimize credit risk with respect to a loan by securing loans with collateral guarantees.

In EastWest’s loan portfolio, secured loans are predominantly secured by real estate. Other forms of collateral include collateral over automobiles, machinery and inventory and cash collateral. Personal guarantees are accepted from time to time as an additional source of collateral enhancement. As of 31 December 2007, 56.1% of the total loans were extended on a secured basis, with 44.3% of the secured loans backed by real estate mortgages.

For loans secured by real estate, the Bank’s general policy is that the maximum loan value should not be in excess of 60.0% of the appraised value of the property provided as security for such loans. For home mortgage loans, the maximum value should not be in excess of 80.0%. EastWest typically reassesses mortgaged property every two years in accordance with BSP guidelines. EastWest appraises real estate collateral using an internal appraiser and also uses independent appraisers as necessary.

The following table sets out a breakdown of the Bank’s loans according to security.


2007

2006

2005

By security (P mn) (%) (P mn) (%) (P mn) (%)

Secured

Real estate .................. 4,902.3 24.8 3,754.8 22.6 4,597.0 34.5

Chattel mortgage........ 4,393.3 22.3 4,495.2 27.1 2,986.1 22.5

Governtment securities .................... 108.7 0.6 778.6 4.7 585.1 4.4

Deposit hold-outs....... 844.0 4.3 1,242.3 7.5 1,353.4 10.2

Others......................... 814.7 4.1 264.1 1.6 407.7 3.0

Total secured 11,063.0 56.1 10,535.0 63.4 9,929.3 74.6

Unsecured......................... 8,665.8 43.9 6,068.7 36.6 3,378.8 25.4

Total................................. 19,728.8 100.0 16,603.7 100.0 13,308.1 100.0

FUNDING

EastWest’s funding operations are designed to ensure both a stable source of funds and effective liquidity management. EastWest’s main sources of funding are time, savings and demand deposits. Deposits represented 95.8% of EastWest’s sources of funding in the year ended 31 December 2007. As of 31 December 2007, time, savings and demand deposits represented 55.7%, 14.3% and 30.0% respectively, of total consolidated deposits of P31.3 billion. In recent years, EastWest has made directed efforts to increase its deposit base. The Bank also sources its funding requirements from the interbank market and general financings.

As of 31 December 2007, the Bank’s deposit mix has significantly improved with low-cost funds comprising 44.3% (compared to 40.5% in prior year) of the total deposits. The improvement in the mix, coupled with the Bank’s thrust to reduce its high-cost deposit rate, has resulted to a dramatic improvement in its cost of funds. Blended deposit rate has gone down to 2.9% from 2006 to 2007.

The Bank is a member of the Philippine Deposit Insurance Corporation (“PDIC”), which insures all deposits up to a maximum of P250,000 per depositor. The PDIC is funded by semi-annual assessment fees at a prescribed percentage of the Bank’s deposit liabilities less certain exclusions.

The Bank also sources funds from the interbank market. The Bank turns to these funding sources as and when market circumstances prove favorable. The following sets forth the principal sources of funding and the average cost per funding source:

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2007 2006

2005

Funding sources (P mn) Ave. cost

(%) (P mn) Ave.

cost (%) (P mn) Ave.

cost (%)

Deposits

By type

Demand ...................... 9,378.5 0.60% 4,101.5 2.92% 2,589.4 1.57%

Savings ....................... 4,467.5 0.88% 6,111.9 1.54% 5,556.9 4.92%

Time

30 to 90 days.......... 3,465.8 3.67% 4,075.7 4.93% 3,515.8 7.29%

90 to 180 days........ 182.4 3.67% 275.2 4.93% 209.5 7.29%

Over 180 days........ 13,779.4 5.63% 10,654.4 6.06% 9,327.9 6.97%

17,427.6 15,005.3 13053.2

By currency

Philippine peso........... 26,768.6 3.01% 21,267.4 4.41% 18,112.1 5.67%

Foreign currency ........ 4,504.9 2.47% 3,951.2 2.82% 3,087.4 3.29%

Total deposits 31,273.6 2.93% 25,218.6 4.16% 21,199.5 5.32%

Borrowings

Philippine peso........... 1,366.8 4.66% 1,316.9 7.08% 97.3 20.04%

Foreign currency ........ - - - - 26.5 5.07%

Total borrowings 1,366.8 4.66% 1,316.9 7.08% 123.9 16.82%

Total................................. 32,640.4 3.00% 26,535.4 4.31% 21,323.4 5.39%

LIQUIDITY

Pursuant to regulations of the BSP, commercial banks are required to maintain a statutory legal reserve of 10% of Peso deposits and deposit substitutes and a liquidity reserve of 11% of the same base. Statutory legal reserves may be in the form of cash in vault or deposits with the BSP or eligible government securities. Liquidity reserves may be placed in eligible government securities yielding rates that are close to but below market rates. On the FCDU side, the Bank is required to maintain an asset cover of 100% for these liabilities, of which at least 30% must be in liquid assets.

Liquid assets include cash and other cash items, due from BSP, due from other banks, interbank loan receivables and trading and investment securities. The following table sets forth information with respect to the Bank’s liquidity position as at the dates indicated. The Bank is compliant with the legal and liquidity reserves for both the Peso and FCDU books. The Bank’s liquid assets include Cash and Other Cash Items, Due from Bangko Sentral ng Pilipinas, Due From Other Banks, Interbank Loans Receivable and Trading and investment securities (excluding Held-to-Maturity Investments).


2007

2006

2005

Liquidity (P millions, except percentages)

Liquid assets ............................................................. 16,918.7 11,866.7 7,363.8

Financial ratios

Liquid assets to total assets ................................. 44.5% 39.2% 29.7%

Liquid assets to total deposits ............................. 54.1% 47.1% 34.7%

Net loans to total deposits ................................... 57.1% 60.1% 57.6%

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LENDING ADMINISTRATION AND LOAN LOSS PROVISIONING

Loan classifications EastWest classifies loans as non-performing in accordance with BSP guidelines. The guidelines require banks to classify their loan portfolios based on perceived levels of risk to encourage timely and adequate management action to maintain the quality of their loan portfolios. These classifications are then used to determine the minimum levels of allowances for loan losses which banks are required to maintain. All of EastWest’s risk assets, in particular EastWest’s loan portfolio, are either classified or unclassified. Those loans which do not have a greater than normal risk, and for which no loss on ultimate collection is anticipated, are unclassified. All other loan accounts, comprising those loan accounts which have a greater than normal risk, are classified, as follows:

Loans especially mentioned. These are loans that EastWest believes have potential weaknesses that deserve management’s close attention, and which deficiencies, if left uncorrected, could affect repayment. Weaknesses include repayment capability which may be endangered by economic/market conditions as reflected in the borrower’s deteriorating financial performance, the existence of technical defects in the supporting collateral, and insufficient credit information about the borrower.

Sub-standard loans. This classification includes loans that EastWest believes represent a substantial and unreasonable degree of risk to EastWest. Those loans classified as sub-standard have a weakness that is well-defined that jeopardizes their liquidation. Such weaknesses may include adverse trends of a financial, managerial, economic or political nature, or a significant weakness in collateral.

Doubtful loans. These are sub-standard loans for which EastWest believes collection in full, either according to their terms or through liquidation, is highly improbable, and substantial loss is probable.

Loss loan. Loans which fall under this category are considered impossible to collect or are worthless.

The appropriate classification is generally made once payments on a loan are in arrears for more than 90 days, but may be made earlier when the loan is not yet past due if there are, among other things, indications of the deterioration of the creditworthiness of the borrower. Once interest on a loan is past due for 90 days, EastWest will classify the entire principal outstanding under such loan as past due, and it may initiate calling on all loans outstanding to that borrower as due and demandable.

Loan provisioning Under existing BSP regulations, a general provision for loan losses shall be established as follows: (i) 5.0% of the outstanding balance of unclassified restructured loans less the outstanding balance of restructured loans which are considered non-risk under existing laws and regulations; and (ii) 1.0% of the outstanding balance of unclassified loans other than restructured loans less loans which are considered non-risk under existing laws and regulations. In accordance with BSP guidelines, EastWest makes the appropriate specific loan loss allowance as follows:

Loan loss allowances Loan Loss Allowance (% of Principal Amount of Loan)

Risk classification

Especially mentioned .......................................... 5.0%

Sub-standard (secured)........................................ 10.0%

Sub-standard (unsecured).................................... 25.0%

Doubtful .............................................................. 50.0%

Loss ..................................................................... 100.0%

The specific loan loss provision determined under BSP guidelines may differ from that determined under PAS 39. PAS 39 requires the level of loan loss provisioning to be determined on the basis of future recoverable amounts of the loans and receivables discounted at their original effective interest rates. If the loan or receivable

51

has a variable interest rate, the discount rate for measuring the recoverable amount is the current effective interest rate determined under the contract. If the loan or receivable is collateralized and foreclosure is probable, EastWest should measure the level of loan loss provisioning based on the fair value of the collateral.

The BSP conducts an annual audit on the Bank’s individual loans to determine the classifications EastWest must apply to its loans when reporting classified loans to the BSP. The last audit was conducted in the last quarter of 2007. To date, the final Report of Examination (“ROE”) has not been given to the Bank. As of the BSP audit conducted on 30 September 2007, total additional assessed valuation reserves amounted to P435.4 million which covered investment accounts, the loan portfolio, ROPA, and other risk asset accounts. As of December 2007, based on PAS 39, the Bank has provided a total of P668.8 million in terms of provision for losses.

The following is a summary of the risk classification of the aggregate loan portfolio (as a percentage of total outstanding loans) and allowance for impairment of EastWest as of the dates indicated below:


2007

2006

2005

Risk Classification (P mn) (%) (P mn) (%) (P mn) (%)

Especially Mentioned 1.1 0.1 0.8 0.1 0.6 0.2

Sub-standard 684.8 53.1 1,043.0 82.2 100.1 35.1

Doubtful 118.3 9.2 18.1 1.4 31.0 10.9

Loss 484.3 37.6 206.1 16.2 153.7 53.9

Total Classified Loans ... 1,288.4 100.0 1,268.0 100.0 285.3 100.0


2007

2006

2005 Allowance for

Probable Loan Losses (P mn) (%) (P mn) (%) (P mn) (%)

Specific 921.9 83.8 527.24 87.8 489.3 87.0

General 178.4 16.2 73.00 12.2 73.0 13.0

Total................................. 1,100.3 100.0 600.24 100.0 562.35 100.0

The following table sets out, for the periods indicated, the allocation of the total provisions held by EastWest amongst its principal lending units:


2007

2006

2005

Provision allocation (P millions)

Corporate Banking.................................................... 840.7 438.9 397.6

Consumer Finance .................................................... 229. 6 94.6 59.2

Human Resource....................................................... - − −

Other(1) ...................................................................... 401.2 301.8 325.1

Total provisions........................................................ 1,471.5 835.4 781.8

Note: (1) Others comprise allowance for receivables, instruments, investment properties and other assets

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Allowance for impairment on classified accounts is based on the total principal balance outstanding. Loans classified as "loss" assets are generally written off by EastWest in accordance with BSP guidelines. The Board of Directors of EastWest has discretion as to the frequency of write-off provided that these are made against provisions for impairment or against current operations. The prior approval of the Monetary Board is required to write off loans to directors, officers, stockholders and related interests (“DOSRI”)

In addition to making specific allowances for impairment based on the risk classification of its loan portfolio, EastWest’s allowances for impairment also include general allowances of 1.0% of the gross loan portfolio plus 5.0% of unclassified restructured loans. Generally, movements in EastWest’s allowances for impairment represent provisions charged to operations. Since 2004, however, loan loss provisioning has fluctuated because of the implementation of IAS in 2005. On a monthly basis, all past-due accounts are updated for movements according to Aging of Past Due Accounts reports, which are summarized for portfolio tracking purposes and used to implement pro-active strategies. Going forward, EastWest may consider sales of a portion of its NPLs to manage its liabilities and performance. Credit card receivables With respect to credit card receivables, in August 2003, the BSP issued Memo Circular No. 398 which became effective in December 2003, prescribing, among others, the standard valuation reserves requirements for delinquent and potentially uncollectible credit card receivables.

The following table sets out EastWest’s reconciliation of its balance of reserves for impairment and credit losses on a consolidated basis over the periods indicated:


2007

2006

2005

Credit card provisions (P millions)

Balance of reserves at beginning of period .............. 34.9 16.8 0.1

Cumulative effects of the adoption of PAS 39 ........ - - -

Additions charged to expense .................................. 113.5 18.1 16.8

Charge-offs............................................................... - - -

Reversals and others ................................................ - (0.1) -

Ending balance......................................................... 148.4 34. 9 16.8

Note:

(1) Not included is transfer of Allowance for Losses from Contractual Write-offs to General Accounting amounting to P101 million

Non-performing assets In accordance with BSP guidelines, loans and other assets in litigation are classified as Non-performing Assets (“NPA”). EastWest’s NPAs principally comprise Real and Other Property Acquired (“ROPA”) and NPLs. The table below sets out details of EastWest’s NPLs, non-accruing loans, ROPA, NPAs, restructured loans, and write-offs for loan losses for the specified periods on a consolidated basis:


2007

2006

2005

Non-performing assets (P millions, except percentages)

Non-performing loans, gross .................................... 1,920.1 1,535.0 1,270.2

Non-performing loans, net of reserves ..................... 1,686.2 1,370.8 1,105.7

Classified loans......................................................... 1,288.4 1,268.0 285.3

Total loans (without Interbank Call Loans) ............. 19,728.8 16,603.7 13,308.1

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Total loans (with Interbank Call Loans)................... 26,110.4 19,603.7 14,608.1

Total loans, net of reserves (with Interbank Call Loans) ....................................................................... 25,010.0 18,918.9 14,045.8

Total loans, net of reserves (without Interbank Call Loans)................................................................ 18,628.5 15,918.9 12,745.8

Total non-performing loans to total loans (without Interbank Call Loans)(1).............................. 9.7% 9.2% 9.5%

Total non-performing loans to total loans (with Interbank Call Loans) (1)............................................ 7.4% 7.8% 8.7%

Classified loans to total loans (with Interbank Call Loans)................................................................ 4.9% 6.5% 1.9%

Classified loans to total loans (without Interbank Call Loans)................................................................ 6.5% 7.6% 2.1%

Non-accruing loans................................................... 1,920.1 1,535.0 1,270.2

Non-accruing loans to total loans (without Interbank Call Loans) ............................................... 9.7% 9.2% 9.2%

Non-performing assets.............................................. 6,036.7 4,727.9 4,926.6

Non-performing assets as a percentage of tangible assets (excluding intangibles and deferred tax assets) ................................................... 16.2% 15.9% 20.3%

Allowance for impairment (loans) as a percentage of total non-performing loans ................ 57.3% 44.6% 44.3%

Allowance for impairment (total) as a percentage of non-performing assets .......................................... 24.4% 17.7% 15.9%

Total restructured loans ............................................ 574.9 501.0 673.0

Classified as performing...................................... 510.3 420.0 622.4

Classified as non-performing .............................. 64.6 82.0 50.6

Restructured loans as percentage of total loans (net of interbank call loans) ...................................... 2.9% 3.0% 5.6%

Allowance for impairment (total) as a percentage of non-performing assets and restructured loans classified as performing............................................ 22.5% 16.2 % 14.1%

Allowance for impairment (total) as a percentage of non-performing assets and restructured loans classified as non-performing .................................... 24.1% 14.2% 15.7%

Note: (1) The BSP issued Circular No. 351 on September 2002 allowing banks that have no unbooked valuation reserves to

exclude from non-performing classification loans classified "loss" in the latest examination of the BSP which are fully covered by allowance for impairment, provided that interest on said loans shall not be accrued.

Loans are classified as non-accruing (or past due) if (i) any repayment of principal at maturity or any scheduled payment of principal or interest due quarterly (or longer) is not made when due and (ii) in the case of any principal or interest due monthly, if the amount due is not paid and has remained outstanding for three months. In the case of (i), such loans are treated as non-performing if the payment is not made within a further 30 days. In the case of (ii), such loans are treated as nonperforming upon the occurrence of the default in payment.

Accrued interest arising from loan accounts are classified according to the classification of their corresponding loan accounts except for those which remain uncollected after six months from the date such loans or installments have matured or have become past due for which a 100.0% allowance is provided. EastWest’s NPLs net of reserves amounted to P1.7 billion as of 31 December 2007, representing 8.6% of EastWest’s total consolidated gross loan portfolio (exclusive of interbank call loans) as of 31 December 2007.

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Ten largest NPLs As of 31 December 2007, EastWest’s ten largest NPLs accounted for 2.4% of its total loans to customers and 24.1% of its gross NPLs to customers. As of 31 December 2007, EastWest’s exposure to its ten largest NPLs ranged from P14.8 million to P100.0 million, and amounted to P462.8 million in aggregate. As of 31 December 2007, no individual borrower or group accounted for more than 10.0% of EastWest’s total amount of gross NPLs. Loan restructuring EastWest has, from time to time, restructured those NPLs which it considers suitable for restructuring in order to manage its loan portfolio and reduce its exposure to non-performing loans. The decision to restructure a NPL, as well as the method of restructuring, is borrower-specific. EastWest has restructured loans through extensions of maturity or rescheduling interest or principal payments based on expected cash flows of the borrower. EastWest has, in some instances, agreed to debt-for-asset swaps as part of a broader restructuring scheme.

In accordance with BSP guidelines, NPLs which are successfully restructured are considered to be current and no longer treated by EastWest as non-performing, generally following three consecutive payments of required amortization of principal and/or interest, and for restructured loans with capitalized interest and which are not fully secured, six consecutive payments are generally required for the loan to be considered performing. However, these loans may only be removed from classified status following a review by the BSP or the credit review unit of EastWest. As of 31 December 2007, EastWest had a portfolio of P0.5 billion of restructured loans which were treated as performing.

The following table sets out EastWest’s consolidated restructured loans for the specified periods:


2007

2006

2005

Restructured Loans (P millions)

Non-performing restructured loans, gross 65 81 51

Performing restructured loans, gross 510 420 622

Total 575 501 673

Foreclosure and disposal of assets EastWest’s preferred strategy for managing its exposure to NPLs that are secured is to foreclose the collateral/property securing the NPL if the borrower cannot or will not repay the loan on acceptable terms. EastWest had net investment properties of P773.7 million and P844.7 million as of 31 December 2007 and 2006, consisting of buildings and improvements, and land properties, respectively.

Existing BSP rules recommend immediate disposal through sale of investment properties. If such immediate sale is not possible, BSP rules recommend that such investment properties be charged-off by annually providing a 10.0% valuation reserve beginning on the sixth year after expiry of the redemption period or perfection of contract and every year thereafter until the tenth year after the expiry of the redemption period or perfection of contract. EastWest’s valuation reserves on investment properties amounted to P9.8 million as of 31 December 2005, P42.2 million as of 31 December 2006 and P178.8 million as of December 31, 2007. However, the BSP prescribes a different approach for calculating valuation reserves for investment properties which is essentially based on the carrying value of the investment properties. Accordingly, the amount that may be prescribed by the BSP in the event of an assessment may be different from the amount stated herein.

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REMEDIAL MANAGEMENT Corporate Banking Remedial management is being implemented across the Corporate Banking Group. Top management believes that remedial management starts from the very point account evaluation is done. The Bank believes that the best strategy is to minimize problem loans by preventing or minimizing the entry of potential problem accounts into the Bank’s loan portfolio. At the start of 2008, the Bank hired the services of two highly respected resource persons to conduct training on the Bank’s Account Officers and Marketing Assistants. Other seminars are being scheduled within the year to further enhance the technical competence (pinpointing of potential problem loans) and soft component aspects of the Bank’s Account Officers and Marketing Assistants.

The Corporate Banking Group follows the BSP rating of accounts and requires the needed monitoring. The BSP rates borrowing accounts under the following categories. Rated 1 to 5 accounts are unrated accounts and include financially sound companies with management expertise capable of competing in the industry they are in. Rated 6 accounts are in the watch list, which would include accounts with some deterioration in the company's financial indicators. Rated 7 accounts are special mentioned, which cover accounts which reported net losses in some years. Rated 8 accounts are sub-standard which cover accounts where occasional past due is experienced. Rated 9 accounts are doubtful while rated 10 accounts are loss accounts that require 100.0% provisioning.

As a matter of procedure, rated 1 to 4 accounts are visited at least once every six months, with lower rated accounts visited more frequently. In the case of accounts rated 1 to 4, the objective of the visit is more of being in the loop regarding the plans of the client. The Account Officer of the Bank is therefore expected to visit accounts rated 5 and below at least quarterly. Accounts that turn past due are reported the next banking day to the Group Head. The Loan Committee conducts a meeting once a month to address past due concerns of the Corporate Banking Group.

Consumer Finance The four major retail products of the Bank – Credit Cards, Auto Loans, Mortgage Loans, and Salary Loans – have their own Collections Head and Collections Unit that perform remedial management for the Consumer Finance business. Given the growth in size of the Bank’s business lines, these Collections Units are now consolidated to report to a Collection Division Head.

Credit Cards The Collection Unit of Credit Cards composes of one Unit head, three Collections Supervisors, one Recovery Manager and an MIS officer. There are 29 in-house Telephone Collectors, three Agency Coordinators, and two Field Collectors. The total head count of the unit is 50. The past due accounts are divided into X days (where X-days refer to the earliest aging bucket, 1 to 29 days past due), 30 days, 60 days, 90 days, 120 days and 150 days. Accounts from X to 60 days past due are given a telephone call and managed by the in-house team. Accounts from 90 to 150 days past due are endorsed to external collections agencies for curing and/or restructuring. Delinquent accounts that remain either uncontactable, unresponsive or deliberately hiding to avoid payment, despite efforts to reach them, can be endorsed to an Early Collection Agency. The Recovery Unit handles 180 days past due accounts. These are all endorsed to collection agencies. The in-house team uses the Powercard and Collections Management System (“CMS”) for collections. CMS is an online collections system that can capture day to day productivity. The delinquency rate of the Credit Cards business is at 7.6% as at March 2008. Monthly average amount collected by the in-house team is at P30.0 million and the monthly average recovery peso collected is at P5.0 million.

Auto Loans The Collection Unit of Auto Loans is composed of a Unit Head, a Collection Supervisor and a Skip Accounts Supervisor. There are nine in-house Telephone Collectors and three Provincial Collectors. There are eight Skip Tracers that are also tasked to repossess units.

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All levels of delinquency from X days to 90 days are called and managed in-house. Accounts that reach 90 days past due are automatically endorsed to the Legal Department for filing of a Civil Case for Replevin with damages. The unit uses the Auto Loans Processing System and the Phoenix system for its collections call outs. Both systems are being upgraded to optimize productivity for collectors. The Non Performing Loans Ratio (NPL) for Auto Loans is at 11.0% as at 31 March 2008. To mitigate this, several vacant positions in Collections are scheduled for replacement by May. The Field Collectors have also been given targets for the repossession of units.

Mortgage Loans and Salary Loans The Collection Unit of Mortgage Loans and Salary Loans is composed of a Unit Head, three Supervisors, and fourteen in-house Collectors. The in-house team uses CMS for their call attempts via telephone to contact a delinquent account. The accounts are grouped according to their delinquency and are queued according to the balances for call outs. Productivity targets are used to measure the Collectors’ effectiveness. In addition, calling strategy reminder letters are sent to accounts that are X to 30 days past due. Legal demand letters are sent out to accounts that are 60 days past due. The NPL ratio for mortgage loans is at 10.2% as at 31 March 2008. Several action plans are in place to bring down this ratio. Aggressive hiring to replace several key vacancies in the unit has been set out. A task force to gather documents to expedite endorsement to the Legal Department had been set up to initiate foreclosure proceedings on accounts that are more than 90 days past due. A Remedial Division has been established. The current system will also be enhanced to be able to optimize the productivity of Collectors. The NPL ratio for salary loans is at 14.9% as at end of April 2008, an increase from the single digit ratio in the last quarter of 2007. This is due to major corporate clients having encountered temporary financial setbacks. The same clients are now in the process of restructuring their loans. In light of this, one major company has already provided for post dated checks this April 2008. A dynamic and timely feedback mechanism has been set-up between the Salary Loans Collections Unit and the Sales and Acquisitions unit to ensure companies that are booked in this program are properly monitored with financial standings that are current.

RISK MANAGEMENT POLICIES AND PROCEDURES

Credit Risk Management

Credit risk is the risk that the counterparty in a transaction may default. The risk may arise from lending, trade finance, trading investments, derivatives and other activities. EastWest’s credit risk and loan portfolio are managed at the transaction, borrower, product and portfolio levels. EastWest has a structured and standardized credit rating and approval process according to the business and/or product segment. For large corporate credit transactions, EastWest has a comprehensive procedure for credit evaluation and risk assessment. It also has well-defined concentration limits which are established for each type of borrower, individual risk rating and type of product or program to mitigate risk exposure across business units.

The Risk Management Division undertakes several functions with respect to credit risk management. It independently performs credit analysis and review for consumer, commercial and corporate loan products to ensure consistency in EastWest’s risk assessment process. It also ensures that EastWest’s credit policies and procedures are adequate and updated to meet the changing demands of the business.

The Risk Management Division’s portfolio management function involves the review of the Bank’s loan portfolio, including the portfolio risks associated with particular industry sectors, regions, loan size and maturity. It monitors compliance to the BSP’s limit on exposure to any single person or group of connected persons to an amount not exceeding 25.0% of EastWest’s adjusted capital accounts.

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EastWest is exposed to risks that are particular to all its business activities and the environment within which it operates. The Bank’s Risk Management Division’s primary role is to ensure that the Bank identifies, measures and monitors the credit, market and operational risks that arise from its business activities. It also ensures that all units adhere strictly to the policies and procedures which are established to address these risks. In coordination with the respective business units, it is also responsible for risk policy development, risk analysis, implementation of risk methodologies and risk reporting to senior management and the various committees of EastWest.

The Board of Directors is primarily responsible for approving the risk parameters, credit policies and the overall risk capacity of EastWest. The Board of Directors, through the Risk Management Committee, oversees the risk management activities of the Bank. The Risk Management Committee is also responsible for reviewing risk management policies and procedures relating to credit, market and operational risks.

Credit risk assessment for consumer loan products The consumer loan portfolio of EastWest is composed of four main product groups, namely: credit cards, auto, residential mortgage loans, and personal loans. Each of these product groups has its own risk guidelines and risk assessment system. Although each loan application is examined through an individual credit evaluation process (combined manual and automated process), each of the main product groups of the consumer loans are managed on a portfolio basis with respect to defaults as well as accept, reject and review standards.

Credit risk assessment for corporate loan products EastWest has a credit scoring system for corporate loan products that assesses risks relating to the borrower and the loan exposure. Borrower risk is evaluated by considering (i) quantitative factors, such as profitability, liquidity, capital adequacy and sales growth; (ii) qualitative factors, such as management skills and management integrity and (iii) industry risk. Industry risk is assessed by considering certain industry characteristics, such as its importance to the economy, growth outlook, cyclicality, industry structure and relevant Government policies. Based on these factors, each borrower is assigned a Borrower Risk Rating (the "BRR"), a 10-scale scoring system that ranges from "AAA" to "D."

In addition to the BRR, EastWest assigns a loan exposure rating (the "LER"), a 100-point system which comprises a Facility Tenor Rating (the "FTR") and a Security Risk Rating (the "SRR"). The FTR measures the maturity risk based on the length of loan exposure, while the SRR measures the quality of the collateral and risk of its potential deterioration over the term of the loan. The credit limit to a borrower is determined under the Risk Asset Acceptance Criteria (the "RAAC") which is a range of acceptable combinations of the BRR and the LER. For example, under the RAAC, a borrower with a high BRR will have a broader range of acceptable LERs. The credit rating for each borrower is reviewed annually except when the borrower has a higher risk profile or when there are extraordinary or adverse developments affecting the borrower, the industry and/or the Philippine economy.

EastWest determines the credit risk spread over its costs of funding based on the expected loss for each type of borrower.

Credit approval process Before any extension of credit, EastWest identifies the needs of the prospective borrower, analyzes the appropriateness of the exposure and evaluates inherent risks. The lending officers are responsible for soliciting target customers, evaluating credit, and loan packaging.

The Loans and Investment Committee is responsible for reviewing credit facilities which are beyond management’s credit authority limit before endorsement to the Executive Committee and the Board of Directors. The Loans and Investment Committee is a senior level group comprised of a chairman and senior officers of EastWest. The Committee is also responsible for the following:

■ Reviewing credit policy recommendations, credit issues and other credit matters before endorsement to the Executive Committee and the Board of Directors;

■ Approving credit procedural guidelines underlying new credit policies and enhancements in the existing procedures; and

■ Reviewing collection reports, loan portfolio reports, past due loans, items in litigation, ROPA and NPLs prior to presentation at the monthly Risk Management Committee meetings.

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The Executive Committee may modify, defer and reject credit proposals as it sees fit based on EastWest’s current risk tolerance policy. All credit proposals approved by the Executive Committee are confirmed by the Board of Directors. Credit proposals exceeding the Executive Committee’s credit authority limit and those which carry an unusual or material risk require approval of the Board of Directors. The Board of Directors has the ultimate authority to approve credit transactions and is also the only body with authority to approve DOSRI loans.

Credit approval authority The Board of Directors, being the ultimate approving authority of EastWest, has delegated specific approval limits to the Loans and Investments Committee, Retail Credit Committee and senior credit officers. These approval limits reflect the Board of Director’s level of risk tolerance based on the type of borrower, size of maximum credit exposure, collateral, tenor and qualification of the credit officer. The approval limit of individual credit officers is based on, among other things, experience, education and training. The Executive Committee has a delegated approval limit of P75.0 million. In addition, senior credit officers are granted varying approval limits with respect to low-risk facilities, such as bills purchase accommodations, loans versus deposits, and consumer loans. These credits may only be approved with a joint approval from two senior credit officers.

Credit monitoring and review process Pursuant to the BSP’s regulations, EastWest is required to establish a system of identifying and monitoring existing or potential problem loans and other risk assets and of evaluating credit policies vis-à-vis prevailing circumstances and emerging portfolio trends. In compliance with this requirement, the Risk Taking Unit, on a regular basis or as circumstances require, establishes and maintains a system for monitoring the financial condition of individual accounts and updates the senior management of EastWest accordingly.

All corporate accounts are reviewed at least once a year together with the credit line renewal. Larger exposures and lower rated-borrowers or counter-parties are reviewed more frequently, as necessary.

The Bank also has an independent Credit Review unit responsible for reviewing the credit approval process.

The Credit Review Unit reports credit policy exceptions to the senior management of EastWest, evaluates compliance of lending units to existing credit management policies and procedures and, recommends to the Executive Committee the loan classifications in accordance with the standard classifications prescribed by the BSP.

The Corporate Banking Unit, Credit Review Unit, The Central Operations Unit and Central Accounting Division in coordination with the Compliance Unit are all responsible for monitoring compliance with DOSRI rules and guidelines. EastWest and its subsidiaries, from time to time and in the ordinary course of business, enter into loan transactions with DOSRI. All such loans are on a commercial and arm’s-length basis. The General Banking Law and BSP regulations require that (a) the amount of individual outstanding loans, other credit accommodations and guarantees to DOSRI should not exceed an amount equivalent to their unencumbered deposits and the book value of their paid-in capital investment in the bank, (b) unsecured loans, other credit accommodations and guarantees to each of EastWest’s DOSRI may not exceed 30.0% of their respective total loans, other credit accommodations and guarantees, (c) the aggregate outstanding borrowings of DOSRI may not, without the prior approval of the Monetary Board, exceed 15.0% of EastWest’s total loan portfolio or 100.0% of EastWest’s net worth, whichever is lower and (d) that the total unsecured DOSRI borrowings do not exceed 30.0% of the aggregate ceiling or the outstanding loans, whichever is lower. On 31 January 2007, the BSP issued Circular No. 560, imposing lower ceilings on loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of banks and quasi-banks.

Market Risk Management Market risk is the risk of future loss from changes in the value of a financial instrument held by EastWest. The primary source of market risk for EastWest is price risk. Price risk is the risk of a decrease in EastWest’s earnings due to changes in the level or volatility of market factors, such as foreign exchange rates, interest rates, commodity prices or equity prices. Price risk is measured primarily through the Value-at-Risk ("VaR") model. EastWest manages its market risk through a system of limits based on notional amounts, VAR, and earnings at risk. The Board of Directors, Treasury Group, Treasury Operations, and the Assets and Liability Committee ("ALCO") manage market risk through policy setting, reports, and transactions control.

The ALCO regularly monitors EastWest’s sensitivity to market risks.

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The Market Risk Management Unit of the Risk Management Division is responsible for (i) recommending market risk policies to the Risk Management Committee of the Board of Directors, (ii) reviewing and endorsing market risk limits (iii) identifying, analyzing and measuring market risk affecting EastWest’s trading, position-taking, lending, borrowing and other transactional activities, (iv) conducting stress tests and sensitivity analysis on the Bank’s portfolio of financial instruments to assess risks, (v) assisting risk-taking personnel in developing risk reduction strategies, and (vi) establishing standards to monitor and report compliance with market risk limits.

Price risk The Bank manages its price risks through application of various limits set by the Risk Management Committee and approved by the Board of Directors. Such limits primarily include the following:

■ VaR Limits — VaR Limits place a ceiling on the monetary amount of potential loss on trading transactions deemed tolerable by management;

■ Nominal Position Limits — Nominal Position Limits determine the maximum size of open risk positions that may be held by EastWest within a given time period. Such limits include overnight and daylight position limits which may vary for overbought and oversold positions. These limits must conform to the regulatory limits set by the BSP;

■ Management Action Trigger ("MAT")/Loss Alert/Stop Loss Limits — These limits establish management’s tolerance levels for accepting cumulative month-to-date market risk losses on trading positions;

■ Earnings-at-Risk ("EaR") Limits —EaR Limits place a ceiling on the amount of risk deemed tolerable by management for the accrual/interest rate portfolios of the Bank; and

■ Trader or Dealer Limits — These limits set the maximum volume of transactions that a trader/dealer may execute and is determined relative to the depth of experience and level of expertise of the personnel making the risk-bearing decision.

If any of the above limits is exceeded, such occurrence is promptly reported by the Market Risk Unit to the risk taking unit and the President for appropriate action. All limits violations are also reported to the Risk Management Committee and the Board of Directors during Market Risk Committee meetings.

Market risk management process Treasury and other risk taking units, in coordination with the Market Risk Unit of the Risk Management Division, develops a risk measurement and management process that is appropriate for EastWest’s business and such process is approved by the Risk Management Committee and the Board of Directors. A product program manual which sets out, among other things, a standardized process of measuring and managing price and liquidity risks, market risk limits, operational procedures and controls and approval procedures, is then prepared for each product. Price risk limits are applied at the business unit level, endorsed by Risk Management Committee and approved by the Board of Directors based on, among other things, a business unit’s capacity to manage price risks, the size and distribution of the aggregate exposure to price risks and the expected return relative to price risks.

Interest rate sensitivity management A critical element of EastWest’s risk management program consists of measuring and monitoring the risks associated with fluctuations in market interest rates on EastWest’s net interest income.

EastWest employs "gap analysis" to measure the interest rate sensitivity of its assets and liabilities. The asset/liability gap analysis measures, for any given period, any mismatch between the amounts of interest-earning assets and interest-bearing liabilities which would mature, or reprice, during that period. If there is a positive gap, there is asset sensitivity, which generally means that an increase in interest rates would have a positive effect on EastWest’s net interest income. If there is a negative gap, this generally means that an increase in interest rates would have a negative effect on EastWest’s net interest income.

Another method employed by EastWest to measure its exposure to fluctuations in interest rates examines the impact of interest rate movements of various magnitudes on its net income.

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Foreign Exchange Risk Management EastWest manages its exposure to foreign exchange risk by maintaining foreign currency exposure within existing regulatory guidelines and at a level that it believes to be relatively conservative for a financial institution engaged in that type of business.

EastWest’s net foreign exchange exposure, taking into account any spot or forward exchange contracts, is computed as its foreign currency assets less foreign currency liabilities. As of 2 April 2007, BSP regulations impose a cap of 20.0% of unimpaired capital, or U.S.$50.0 million, whichever is lower, on the excess foreign exchange holding of banks in the Philippines. In the case of EastWest, its foreign exchange exposure is primarily limited to the day-to-day, over-the-counter buying and selling of foreign exchange in EastWest’s branches as well as foreign exchange trading with corporate accounts and other financial institutions in the interbank spot market. EastWest is permitted to engage in proprietary trading to take advantage of foreign exchange fluctuations.

EastWest’s foreign exchange exposure during the day is guided by the limits set out in EastWest’s Market Risk Policy Manual. These limits are within the prescribed ceilings mandated by the BSP. At the end of each day, EastWest reports to the BSP on its compliance with the mandated foreign currency exposure limits. In addition, it also reports to the BSP on the respective foreign currency positions of its subsidiaries.

Liquidity Risk Management Liquidity risk is the risk that there are insufficient funds available to adequately meet all maturing liabilities, including demand deposits and off-balance sheet commitments. The primary responsibility of managing EastWest’s liquidity risks lies with the ALCO. The ALCO’s primary responsibilities include (i) ensuring that EastWest holds sufficient liquid assets of appropriate quality and in appropriate currencies to meet short-term funding and regulatory requirements, (ii) managing EastWest’s balance sheet and ensuring that EastWest’s business strategies are consistent with its liquidity, capital and funding strategies, (iii) establishing asset and/ or liability pricing policies that are consistent with EastWest’s balance sheet objectives, (iv) recommending liquidity risk limits to the Risk Management Committee and the Board of Directors and (v) approving the assumptions used in contingency and funding plans.

To ensure that EastWest has sufficient liquidity at all times, the ALCO and the Treasurer of EastWest formulate a contingency plan. The contingency plan sets out the amount and the sources of funds (such as unused credit facilities) that are available to EastWest and the circumstances under which EastWest may use such funds. The Treasurer periodically performs simulated stress tests that evaluate EastWest’s ability to withstand a prolonged liquidity problem. Under a stress test, the Treasurer evaluates potential cash outflows resulting from, among other things, a potential early termination of financial instruments and a potential increase in withdrawals of deposits. Such potential cash outflows are then compared to the amount of funds that are available to EastWest to determine the liquidity status of each business unit and EastWest during a liquidity crisis. In performing such stress test, the Treasurer assumes certain customer and market behavior under adverse market conditions and circumstances under which EastWest’s reputation is tarnished. The Treasurer also determines the amount of committed credit lines that should be available to EastWest during a liquidity crisis.

As of 31 December 2007, the total amount of funds that were available to EastWest under credit facilities for secured and unsecured borrowings, swaps and settlement was estimated to be P3.1 billion.

EastWest also manages its short-term liquidity risks through the use of a Maximum Cumulative Outflow ("MCO") limit which limits the outflow of cash on a cumulative basis and on a tenor basis. To maintain sufficient liquidity in foreign currencies, EastWest has also set an MCO limit for certain designated foreign currencies. The MCO limits are endorsed by the Risk Management Committee and approved by the Board of Directors.

EastWest takes a multi-tiered approach to maintaining liquid assets. BSP regulations require EastWest to maintain minimum cash reserves and liquid assets as a proportion of its overall deposits. EastWest’s principal source of liquidity is comprised of P1.4 billion of cash, due from other banks of P0.9 billion, due from the BSP of P4.2 billion and short-term interbank loans receivable with maturities of less than one year amounting to P6.4 billion as of 31 December 2007. In addition to regulatory reserves, EastWest maintains what it believes to be a sufficient level of secondary reserves in the form of liquid assets such as short-term trading and investment securities that can be realized quickly. Of a total portfolio of trading and investment securities of P4.6 billion as of 31 December 2007, P0.9 billion or 20.0%, comprised trading and investment securities with remaining

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maturities of one year or less. In addition, EastWest manages liquidity by maintaining a loan portfolio with a sufficient proportion of short-term loans. As of 31 December 2007, P9.9 billion, or 50.0%, of EastWest’s total loans and receivables had remaining maturities of less than one year.

Operations Risk Management EastWest is exposed to many types of operational risk. Operational risk can result from a variety of factors, including failure to obtain proper internal authorizations, improperly documented transactions, failure of operational and information security procedures, computer systems, software or equipment, fraud, inadequate training and employee errors. EastWest attempts to mitigate operational risk by maintaining a comprehensive system of internal controls, establishing systems and procedures to monitor transactions, maintaining key back-up procedures and undertaking regular contingency planning.

Operational controls and procedures in branches EastWest has operating manuals detailing the procedures for the processing of various banking transactions and the operation of the application software. Amendments to these manuals are implemented through circulars sent to all offices.

When taking a deposit from a new customer, EastWest requires the new customer to complete a relationship form, which details the terms and conditions for providing various banking services. EastWest enters into a relationship with a customer only after it verifies the customer’s identity.

EastWest has a scheme of delegation of financial powers that sets out the monetary limit for each employee concerned with respect to the processing of transactions in a customer’s account. Cash transactions over a certain limit are subject to special scrutiny to avoid laundering.

EastWest’s banking software has multiple security features to protect the integrity of applications and data. EastWest gives importance to computer security and has a comprehensive information technology security policy. Most of the information technology assets including critical servers are hosted in centralized data centers, which are subject to appropriate physical and logical access controls.

Operational controls and procedures for internet banking To open an internet banking account, the customer must provide EastWest with documentation to prove the customer’s identity. After verification of this documentation, EastWest opens the internet banking account and issues the customer a user identity and password to access his account online.

Operational controls and procedures in treasury EastWest uses technology to monitor risk limits and exposures. EastWest’s front office, back office and accounting and reconciliation functions are fully segregated. The respective middle offices use various risk monitoring tools such as counter-party limits, nominal position limits, aggregate control limits, VaR limits, earnings-at-risk limits, MCO limits, stop loss, loss alert and individual dealer limits (per trader, position limits, stop loss and loss alert, among others). Procedures for reporting breaches in limits are also in place.

EastWest’s front office treasury transactions consist of transactions relating to fixed income, interbank transactions, foreign exchange, swaps, money market and derivatives. EastWest’s traders analyze the market conditions and take views on price movements. Trading strategies are discussed frequently and decisions are taken based on market forecasts, information and liquidity considerations. Thereafter, they enter into transactions in conformity with various limits relating to counter-parties, securities and brokers. Trading operations are also conducted in conformity with the code of conduct prescribed by internal and regulatory guidelines.

Interbank trading is conducted through Reuters, Philippine Dealing and Exchange Corporation ("PDEx") and Bloomberg dealing systems. Deals done through Reuters and PDEx are captured on a real-time basis for processing. Brokered deals carried out through voice systems are confirmed through the dealing system by the dealers.

EastWest’s back office undertakes the settlement of funds and securities. The back office has procedures and controls for minimizing operational risks, including procedures with respect to deal confirmations with counter-parties, verifying the authenticity of counter-party checks and securities, ensuring receipt of contract notes from

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brokers, monitoring receipt of interest and principal amounts on due dates, ensuring transfer of title in the case of purchases of securities, reconciling actual security holdings with the holdings pursuant to the records and reports any irregularity or shortcoming observed.

Audit The Internal Audit Unit is an independent unit responsible for ensuring, internal control, operational efficiency, reliability of financial reporting and compliance with applicable laws and regulations.

The Internal Audit Unit is responsible for undertaking a comprehensive audit of all business groups and other functions, in accordance with a risk-based audit plan and provides an independent appraisal of the adequacy and effectiveness of the risk management and control processes in operation throughout EastWest. It is also in charge of conceptualizing and implementing improved systems of internal controls, to minimize operational risk. Various components of information technology from applications to databases, networks and operating systems are covered under the annual audit plan. The audit plan for every fiscal year is approved by the Audit Committee.

The Head of the Internal Audit Unit reports directly to the Audit Committee and the Board of Directors. These reporting lines and organizational structures ensure that the Internal Audit Unit has the full support and access required to efficiently and systematically conduct its work independently. The Audit Group issues various reports to the Audit Committee, management and other relevant parties throughout the year, including audit reports, compulsory audit reports of branch visits and periodic reports issued to the Audit Committee, the Board of Directors and management.

Anti-money laundering controls Under the Anti-Money Laundering Act, EastWest is required to submit a "covered" transaction report involving a single transaction in cash or other equivalent monetary instruments in excess of P500,000 within one banking day. EastWest is also required to submit a "suspicious" transaction report to the Anti-Money Laundering Council of the BSP if there is reasonable ground to believe that any amounts processed are the proceeds of money-laundering activities. EastWest is required to establish and record the identities of their clients based on official documents. In addition, all records of transactions are required to be maintained and stored for five years from the date of a transaction. Records of closed accounts must also be kept for five years after their closure.

Under the Anti-Money Laundering Act, within 20 banking days after the end of each financial year, EastWest is required to submit to the BSP a certificate signed by the President and the Chief Compliance Officer that EastWest is complying with the anti-money laundering regulations.

In an effort to further prevent any money laundering activities through EastWest, it has adopted the Know Your Customer ("KYC") policies and guidelines. Under the KYC guidelines, each business unit is required to validate the true identity of a customer based on official or other reliable identifying documents or records before an account may be opened. Each business unit is also required to monitor account activities to determine whether transactions conform to the normal or expected transactions for a customer or an account. For a high net worth individual, whose source of funds is unclear, a more extensive due diligence is required. Decisions to enter into a business relationship with a higher risk customer, such as a politically exposed person or a private individual holding a prominent position, are made exclusively at the senior management level.

Legal Risk The uncertainty of the enforceability of the obligations of EastWest’s customers and counter-parties, including foreclosure on collateral, creates legal risk. Changes in law and regulation could adversely affect EastWest. Legal risk is higher in new areas of business where the law is often untested by the courts. EastWest seeks to minimize its legal risk by using stringent legal documentation, employing procedures designed to ensure that transactions are properly authorized and consulting internal and external legal advisors.

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CAPITAL ADEQUACY The Philippines adopted capital adequacy requirements based on the BASEL Capital Accord in July 2001. The Basel Capital Accord is currently the international standard for setting minimum capital adequacy requirements by national bank supervisory authorities worldwide.

On 7 November 2002, the BSP approved new guidelines to incorporate capital charge for market risks into the risk-based capital requirement effective 1 July 2003. The new guidelines complement the existing risk-based capital adequacy framework covering only credit risks as prescribed under BSP Circular 280. With these new guidelines, the Philippines’ prudential regulations on capital are now fully aligned with current international standards.

However, on 2 June 2006, the BSP approved the implementation of Basel II, after major changes have been made to further define bank’s capital risks and ratios. The approval has thus taken effect last 1 July 2007 and is currently being implemented.

Basel II is a set of proposals that aim to revise Basel I to make regulatory capital requirements more risk sensitive and reflective of all, or at least most of the risks banks are exposed to. In addition, Basel II also puts emphasis on banks’ own risk assessment, supervisory review, and the important role that disclosures play. As such, Basel II is structured as a three-pillar approach that transcends regulatory capital requirements. That is, Basel II not only prescribes a risk-based capital framework, but an entire risk-based supervisory framework.

Basel II’s three pillars are: (1) minimum capital requirements; (2) supervisory review process; and (3) market discipline. These three pillars are based on the principles that (1) banks should have capital appropriate for their risk-taking activities, (2) banks should be able to properly assess the risks they are taking and supervisors should be able to evaluate the soundness of these assessments, and (3) banks should be disclosing pertinent information necessary to enable market mechanism to complement the supervisory oversight function

The bank is compliant with the implementation of BASEL II. As of July 2007, status of implementation is as follows:

Credit Risk - Standardized Approach The Bank implemented the BSP standard risk weights while working for implementation of the advanced approaches. At this time, risk management is working on building up the credit data base which will be used in the modeling of the more advanced approaches in determining the risks. As part of the implementation of BASEL II, the Bank has also implemented the Credit Risk Rating for corporate accounts and credit scoring system for the consumer lending operations such as housing loans, auto loans and credit cards. Housing loan scoring was effected in April 2007, while the auto and credit card scoring systems were implemented and made operational in the first quarter of 2008. Review and back-testing of the credit scoring system is being done on a quarterly basis to ensure propriety and effectiveness of the system. The database being created which should cover 5 years as required by BSP Circular and Basel II shall be used to establish ratios such as probability of default, exposure at default and the loss given default.

Market Risk - Standardized Approach The Bank has implemented the necessary limits and limits control for market risks such as, VAR which uses the parametric model with 99% confidence level and defeasance period of 1 day, daily mark to market, DV01, trading limits and other limits to monitor market risk positions. The Market Risk Management Unit is responsible for conducting back-testing to compare actual trading results with the Bank’s model-generated risk measures at least weekly. Based on the results of the back-testing, if a certain market risk is not addressed by EastWest’s model, modification may be made, to capture such risk. The Market Risk Management Unit is also responsible for conducting stress tests on EastWest’s portfolio of financial instruments and reporting the results of such tests to the Risk Committee. Periodically, EastWest performs stress tests that evaluate the Banks’ potential losses resulting from changes in market factors, such as foreign exchange rates and interest rates, caused by simulated hypothetical scenarios or historical events where extreme one day shocks have been observed.

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For liquidity risk, EastWest manages its short-term liquidity risks through the use of a Maximum Cumulative Outflow (''MCO'') limit which limits the outflow of cash on a cumulative basis and on a tenor basis.

A critical element of EastWest’s risk management program consists of measuring and monitoring the risks associated with fluctuations in market interest rates on EastWest’s net interest income. The Bank believes that the short-term nature of its assets and liabilities reduces the exposure of its net interest income to such risks.

The Bank employs ''gap analysis'' to measure the interest rate sensitivity of its assets and liabilities. The asset/liability gap analysis measures, for any given period, any mismatch between the amounts of interest-earning assets and interest-bearing liabilities which would mature, or reprice, during that period. If there is a positive gap, there is asset sensitivity, which generally means that an increase in interest rates would have a positive effect on EastWest’s net interest income. If there is a negative gap, this generally means that an increase in interest rates would have a negative effect on EastWest’s net interest income.

Operational Risk The Bank uses basic indicator approach for operational risks. Currently, the Bank is in the process of capturing and building the database for the 5year loss events and classifying these events into risk categories which should be used as basis for the identification and risk assessments. The result of this process shall be transformed into Key Risk indicators after all the risk inventory and mapping are done. The ultimate result of the other identification assessment, inventory and mapping shall be the Risk Self Assessment which shall be given to all operating units to serve as guides and reference for their risk taking activities.

BSP conducted an audit on EastWest last 2005 and the Bank was asked to look into the operational issues in terms of capitalization. EastWest has complied with the set minimum capital adequacy ratio for commercial banks, which is set by the BSP at 10%. Since the audit, the Bank has been implementing a capitalization plan to further improve its ratios, which included an infusion of P1.5 billion as primary capital by the Bank’s stockholders, and the proposed issuance of the Notes. The Bank is currently exploring other avenues to boost its capital base. With these plans in place, EastWest expects their capital adequacy ratio to be sufficiently above the current ratios required of commercial banks.

The following table sets out the capital adequacy ratios of the Bank as of the dates indicated:


2007

2006

2005

Capital adequacy (In percentages)

Core capital ratio (Tier I).......................................... 15.1% 9.2% 17.67%

Total capital ratio ...................................................... 15.4% 11.6% 18.2%

The following table sets out a breakdown of the Bank’s capital base by category of capital as of the dates indicated:


2007

2006

2005

Capital structure (P millions)

Tier I Capital

Preferred Stock - 1,787.5 1,787.5

Paid-up common stock ........................................ 3,873.5 150.0 150.0

Surplus ................................................................. 480.0 558.6 284.1

Surplus reserves................................................... 16.4 11.3 6.8

Undivided profits................................................. 116.5 171.9 263.6

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Deductions from Tier I

Unsecured DOSRI ............................................... - - -

Net Tier I Capital.................................................... 4,486.3 2,679.3 2,492.1

Tier II Capital

General loan loss provisions ............................... 73.0 73.0 73.0

Paid-up limited life redeemable preferred stocks ................................................................... - 436.0 436.0

Appraisal incremental reserves ........................... - - -

Net unrealized gain.............................................. - - -

Total Gross Qualifying Capital ............................. 4,559.3 3,188.3 3,001.1

Deductions ................................................................ 781.3 739.4 593.6

Total Qualifying Capital ........................................ 3,778.1 2,449.0 2,407.5

Note: (1) FY 2005 based on Basel 1 per BSP requirements

(2) FY 2006 and 2007 based on Basel 2 per BSP requirements

The following table sets out the breakdown of the Bank’s risk-weighted assets by category as of the dates indicated:


2007

2006

2005

Risk-weighted assets (P millions)

On balance sheet accounts

20%...................................................................... 1,049.5 1,251.7 -

50%...................................................................... 2,757.6 1,821.4 710.7

75%...................................................................... 2,257.2 1,273.0 -

100%.................................................................... 15,015.0 13,481.7 12,097.2

125%.................................................................... - - 1,270.2

150%................................................................ 2,015.5 1,959.9 -

Off balance sheet exposures

20%...................................................................... - - 261.7

50%...................................................................... - - 24.6

100%.................................................................... 269.3 218.7 -

Gross risk-weighted assets ....................................... 21,589.0 18,756.1 14,105.0

Deductions................................................................ 262.0 73.0 -

Net credit weighted assets ........................................ 21,327.0 18,683.1 14,105.0

Total market risk-weighted exposures..................... 1,053.3 141.3

Total market and net credit risk-weighted exposures.................................................................. 22,380.4 18,824.3 14,372.5

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MANAGEMENT AND SHAREHOLDERS

Board of Directors

EastWest is directed by a board of directors (the “Board”) consisting of eight members. The Board of Directors are elected annually by the stockholders entitled to vote and shall serve a term of one (1) year and until the election and qualification of their successors. The Board holds its regular meetings at least once every quarter of each calendar year. The Board also elects among themselves a Chairman of the Board and a Vice-Chairman. Below is a current list of the members of EastWest’s Board of Directors.

Name

Description

Andrew L. Gotianun, Sr. Chairman Emeritus

Mr. Andrew Gotianun, Sr. has been the Chairman of the Board since 1995. He currently sits as Chairman of the Board for other companies, such as Filinvest Development Corporation, Davao Sugar Central Corporation, Filinvest Farms Corporation, Pacific Sugar Holdings, GCK Realty Inc., and ALG Holdings, Inc. He was President and Director of East Asia Utilities Corporation and Cebu Private Power Corporation from 1997-1999. He also worked for the Insular Bank of Asia and America from 1980-1985 and for Filinvest Credit Corporation from 1970-1985. He graduated from San Beda College, with a degree in Commercial Science.

Jonathan T. Gotianun Chairman

Mr. Jonathan Gotianun graduated with a degree of Management Engineering from Ateneo de Manila and another degree of Commerce from the University of Sta. Clara, California. He immediately pursued a Masters in Management from Northwestern University, Illinois afterwards. Prior to being Chairman of EastWest, he was its Vice-Chairman and Director since 1994. He is the son of the Chairman, Mr. Andrew Gotianun, Sr.

Antonio C. Moncupa, Jr. President and Chief Executive Officer

Mr. Antonio Moncupa, Jr. became President and CEO of EastWest last January 1, 2007. Prior to joining EastWest, Mr. Moncupa was CFO (2003-2006) and Treasurer (1995-2002) at the International Exchange Bank. He finished with a double degree in Economics and Accounting from De La Salle University-Taft, and pursued a Masters in Business Administration at the University of Chicago.

Mercedes T. Gotianun Director

Mrs. Mercedes Gotianun graduated magna cum laude, with a degree in BS Pharmacy from the University of the Philippines. She has been a Director of EastWest Bank since 1995. She also currently sits as Director for Filinvest Development Corporation and Davao Sugar Central Corporation. She is the Chairman of Filinvest Land, Inc., and Vice-Chairman for Filinvest Alabang, Inc. She is the wife of Mr. Andrew Gotianun and the mother of Jonathan and Lourdes.

Lourdes Josephine T. Gotianun-Yap Director

Mrs. Lourdes Josephine Gotianun-Yap has been a Director for EastWest since August 2000. She is currently the President of Filinvest Development Corporation, Filinvest Asia Corporation, Cyberzone Properties, Inc., and The Palms Country Club. She is also Executive Vice President of Filinvest Alabang, Inc. She graduated with a degree of Business Management from Ateneo de Manila. She then pursued an MBA major in Finance from the University of Chicago. She is married to Mr. Joseph Yap.

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Jose S. Sandejas Director

Mr. Jose Sandejas graduated with a degree in Chemical Engineering from De La Salle University- Taft. He later on pursued a Doctorate in Materials Engineering at Rensselaer Polytechnic Institute. He was Director of Benguet Consolidated Corporation, Petron Corporation and the Board of Investments.

Carlos R. Alindada Director

Mr. Carlos Alindada graduated with a degree of Accounting from the University of the East, and an MBA in Corporate Finance from New York University. He also pursued the Advance Management Program at Harvard. He has been a Director of EastWest since April 2002. He was a former Director of the National Power Corporation (2001) and the former Commissioner of the Energy Regulation Commission (2001-2004). Prior to that, he was Chairman and Managing Partner of SGV& Co. (1996-1999).

Atty. Cirilo T. Tolosa Director

Mr. Cirilo Tolosa graduated from the University of San Agustin in Iloilo City with an Associate degree in Arts. He pursued a Bachelor of Laws at Ateneo de Manila afterwards, and then went to the University of Michigan to pursue a Masters in Law. He is a Managing Partner at Tolosa Romulo Agabin Flores & Enriquez, and a Corporate Secretary for various De La Salle schools, Epson Philippines, Inc., Prime Manpower Resources Dev. Inc. and Manpower Outsourcing Services, Inc.

Management

Listed below are the members of the Bank’s management team:

Name

Description

Horacio E. Cebrero, III Treasurer

Mr. Horacio Cebrero III is the Executive Vice President and Treasurer of the Bank. He graduated with a degree of BSC Marketing and has previously worked with the Rizal Commercial Banking Corporation as the Deputy Treasurer. He was also Vice President for Foreign Exchange Trading Desk at Citibank, Manila.

Gerardo Susmerano Head, Branch Banking Group

Mr. Gerardo Susmerano is the Executive Vice President and Group Head of the Branch Banking group. He graduated with a degree of BSC in Accounting and has pursued a Masters in Business Administration. He has prior work experience with the International Exchange Bank and is a former Branch Head for Citytrust.

Alex G. Ilagan Head, Retail Credit Group

Mr. Alex Ilagan is the Senior Vice President and Group Head of the Retail Credit Group. He graduated with a degree of AB Economics and a degree of BS Business Administration. He is a former Executive Vice President of Security International Card Corporation.

Celso Bernard G. Lopez Head, Distribution Group

Mr. Celso Lopez is the Senior Vice President and Group Head of the Distribution Group. He graduated with a degree of BA Management Economics. After which, he pursued an Executive Masters in Business Administration with distinction. He is the former Head of Fixed-Income Distribution of Security Bank and Head of Asset Distribution of the Hong Kong and Shanghai Banking Corporation.

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Vicente P. Ortuoste

Head, Corporate Banking Group

Mr. Vicente Ortuoste is the First Vice President and Group Head of the Corporate Banking Group. He graduated with a degree of BS Business Administration. He has worked with the United Coconut Planters Bank as Vice President.

Karl G. Reyes

General Manager, Filinvest Information Technology, Inc. (FITI)

Mr. Karl Reyes is the First Vice President and General Manager of Filinvest Information Technology, Inc. He graduated with a degree of BSC Banking and Finance. He is a former Senior Manager of China Bank.

Martin B. Ordoñez Head, Central Processing & Settlement Group

Mr. Martin Ordoñez is the First Vice President and Head of Central Processing & Settlement Group. He graduated with a degree of BSC Management of Financial Institution. He is a former Vice President of Banco de Oro.

Ivy B. Uy Deputy Head, Branch Banking Group

Ms. Ivy B. Uy is the First Vice President and Deputy Group Head of the Branch Banking Group. She graduated with a degree of BS HRM. She is a former sales officer of International Exchange Bank and Citytrust.

The directors and officers of EastWest have never been subjected to bankruptcy proceedings, nor have any of them been convicted of any offence or subject to any order, judgment or decree.

Employees

As of 31 December 2007, the Bank had a total of 1,378 regular employees, 495 or 35.9% of whom are Bank Officers in the managerial and professional levels. Of the total number of regular employees, 883 are staff assigned in the Head Office and the branch network, and 77 are contractual employees.

The Bank’s employees do not have a labor union. EastWest has not been engaged in any labor disputes from its employees as well.

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PHILIPPINE TAXATION

The following discussion is a general description of certain Philippine tax aspects relating to the Notes. It is based on the laws, regulations and rulings in force as at the date of this Preliminary Offering Circular and is subject to any changes in law occurring after such date, which changes could be made on a retroactive basis. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase, own or dispose of the Notes.

The tax treatment of a holder of the Notes may vary depending upon such holders’ particular situation, and certain holders may be subject to special rules not discussed below. Foreign tax consequences of the ownership and disposition of the Notes are not discussed below. This summary does not purport to address all tax aspects that may be important to a holder of the Notes.

HOLDERS OF THE NOTES ARE URGED TO CONSULT THEIR OWN TAX ADIVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THEIR OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY LOCAL OR FOREIGN TAX LAWS.

As used in this section, the term “resident alien” refers to an individual whose residence is within the Philippines but who is not a citizen of the Philippines; a “non-resident alien” is an individual whose residence is not within the Philippines and who is not a citizen of the Philippines; a non-resident alien who is actually within the Philippines for an aggregate period of more than 180 days during any calendar year is considered a “non-resident alien doing business in the Philippines”; otherwise, such non-resident alien who is actually within the Philippines for an aggregate period of 180 days or less during any calendar year is considered a “non-resident alien not doing business in the Philippines.” A “resident foreign corporation” is a foreign corporation engaged in trade or business within the Philippines; and a “non-resident foreign corporation” is a foreign corporation not engaged in trade or business within the Philippines. The term “foreign” when applied to a corporation means a corporation which is not domestic while the term “domestic” when applied to a corporation means a corporation created or organized in the Philippines or under its laws.

Taxation of Interest Income

The Notes will be, under current interpretation of the Tax Code, treated as a long-term investment, in particular, as a deposit substitute instrument. Interest income thus earned by the Noteholders shall be taxed as described in the following paragraphs. As a general rule, interest income from deposit substitutes earned by individual citizens of the Philippines, resident aliens and non-resident aliens engaged in trade or business in the Philippines is subject to a final withholding tax at the rate of 20%. For tax purposes, a nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a nonresident alien engaged in trade or business within the Philippines. However, the Tax Code provides for the exemption from the 20% final withholding tax of interest income from long-term investments earned by the abovementioned individuals, where the following requirements are complied with. The long-term investment –

(1) Must have a maturity of not less than five years;

(2) Must be in the form of savings, common or individual trust fund, deposit substitutes, investment management accounts or other forms which must be prescribed by the BSP;

(3) Must be issued by banks only (not by non-bank financial intermediaries and finance companies);

(4) Must be issued to individual citizens, resident aliens, or non-resident aliens engaged in trade or business within the Philippines;

(5) Must be in denominations of P10,000 or other denominations as may be prescribed by the BSP; and

(6) Should not be pre-terminated by the holder thereof before the fifth year.

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The exemption of interest income from long-term investments by the aforementioned individuals is dependent on full compliance with the above requisites, otherwise a final tax of 20% shall be imposed or, if the investment is pre-terminated before maturity, a final tax shall be imposed on the entire income already earned by the holder of the long-term investment at the following rates, on the basis of the holding period of the instrument: Four years to less than five years – 5% Three years to less than four years – 12% Less than three years – 20% Accordingly, Noteholders who are individual citizens, resident aliens and non-resident aliens engaged in trade and business in the Philippines and who shall hold on to the Notes for at least five years shall be exempt from the 20% final withhold tax. In the absence of any regulation or definitive ruling or guidelines from the BIR, the Bank has taken the position that transfers or assignments of the Notes by the aforesaid individual Noteholders to another Noteholder may be construed as pre-termination solely for tax purposes. Accordingly, a final tax may be due on the interest income already earned by the transferor Noteholder (depending on the holding period of such Notes), which shall be borne by the Noteholder. Interest income received by non-resident aliens not engaged in trade or business in the Philippines shall generally be subject to a final withholding tax of 25%. However, such tax rate may be reduced under an applicable tax treaty. Interest income received by domestic and resident foreign corporations shall be subject to the final withholding tax of 20%. Interest income received by nonresident aliens not engaged in trade or business in the Philippines shall generally be subject to a final withholding tax of 25%. Interest income received by non-resident foreign corporations are generally subject to a final withholding tax of 32%. The foregoing rates may be reduced under an applicable tax treaty. Under Rep. Act No. 9337 (amending the National Internal Revenue Code), interest income received by a non-resident foreign corporation shall generally be subject to the 35% final withholding tax provided that effective 1 January 2009, the rate of income tax shall be 30%. This rate may also be reduced under an applicable tax treaty. 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 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, unless such withholding or deduction is required by law.

Documentary stamp taxes

A documentary stamp tax is imposed upon the issuance of debt instruments at the rate of P1.00 on each P200.00 or fractional part thereof, of the issue price of such debt instruments. Any applicable documentary stamp taxes for the primary issue of the Notes shall be for the Bank’s account.

Currently, no stamp tax is imposed on the subsequent sale or disposition of the Notes.

Taxation on a sale or other disposition of the Notes

A Noteholder may recognize gains or losses upon the sale or other disposition (including a redemption at maturity) of the Notes. Gains shall be the excess of the selling price over the par value or book value of the Notes. The par value of the Notes is the price at which the Notes was purchased by the transferor Noteholder plus the accumulated discount from the time of purchase up to the time of the sale or assignment. Under the Tax Code, any gain realized from the sale, exchange or retirement of securities, debentures and other certificates of indebtedness with an original maturity date of more than five years (as measured from the date of issuance of such securities, debentures or other certificates of indebtedness) will not be subject to income tax. Since the Notes have a maturity of more than five years from the date of issuance, any gains realized by a Noteholder from the transfer or assignment or retirement of the Notes will not be subject to Philippine income tax.

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Estate and donorÊs tax

The transfer of the Notes upon the death of a Noteholder to his heirs by way of succession, whether or not such individual was a citizen or a resident of the Philippines, will be subject to Philippine estate tax which is levied on the net estate of the deceased at progressive rates ranging from 5% to 20%, if the value of the net estate is over P200,000. Where the value of the net estate is not over P200,000, the transfer of the Notes upon the death of a Noteholder to his heirs by way of succession is exempt from tax.

A holder of such Notes will be subject to donor’s tax on the transfer of the Notes by gift to a person who is not a “stranger” at progressive rates ranging from 2% to 15% if the value of the net gifts made during the calendar year exceed P100,000. The rate of tax with respect to net gifts made to a “stranger” is a flat rate of 30% of the value of the net gifts. A “stranger” is defined as any person who is not a brother or sister (whether by whole or half-blood) spouse, ancestor or lineal descendant or relative by consanguinity in the collateral line within the fourth degree of relationship to the donor.

The estate tax, as well as the donor’s tax in respect of the Notes, shall not be collected (a) if the deceased Noteholder at the time of death or the donor Noteholder at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; or (b) if the laws of the foreign country of which the deceased Noteholder or the donor Noteholder was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.

Value-added tax

At issuance, no Value-Added Tax (“VAT”) shall be imposable upon the Notes. Subsequent transfers shall similarly be free of VAT, unless the Noteholder is a dealer in securities. In that instance, the Noteholder shall be liable to pay 12% VAT on the gross receipts derived from the sale or transfer of the Notes.

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PHILIPPINE BANKING INDUSTRY

The banking industry in the Philippines is composed of universal banks, commercial banks, savings banks, savings and mortgage banks, private development banks, stock savings and loan associations, rural banks and cooperative banks.

As at 31 December 2007, the commercial sector consisted of 38 commercial banks, of which there are 20 private domestic banks and 21 branches of foreign banks and Government-controlled banks. Of the 38 commercial banks, 17 are universal banks, of which three are foreign bank branches.

Commercial banks are organized primarily to accept drafts and to issue letters of credit, discount and negotiate promissory notes, drafts, bills of exchange and other evidences of indebtedness, receive deposits, buy and sell foreign exchange and gold and silver bullion, and lend money on a secured or unsecured basis. Universal banks are banks that have authority, in addition to commercial banking powers, to exercise the powers of investment houses, invest in the equity of business not related to banking and own up to 100% of the equity in a thrift bank, a rural bank or financial allied enterprise. A publicly-listed universal or commercial bank may own up to 100% of the voting stock of only one other universal or commercial bank.

Thrift banks primarily accumulate the savings of depositors and invest them, together with their capital, in secured or unsecured loans, or in financing for home building and home development, in readily marketable debt securities, in commercial paper and accounts receivable, drafts, bills of exchange, acceptances or notes arising out of commercial transactions. Thrift banks also provide short-term working capital and medium- and long-term financing for businesses engaged in agriculture, services, industry, housing and other financial and allied services for its chosen market and constituencies, especially for small and medium-sized enterprises and individuals. As at 30 September 2007, there were 82 thrift banks.

Rural and co-operative banks are organized primarily to make credit available and readily accessible in the rural areas on reasonable terms. Loans and advances extended by rural banks are primarily for the purpose of meeting the normal credit needs of farmers and fishermen, as well as the normal credit needs of co-operatives and merchants. As at 30 September 2007, there were 732 rural and co-operative banks.

Specialized government banks are organized to serve a particular purpose. The existing specialized banks are the Development Bank of the Philippines (“DBP”), Land Bank of the Philippines (“LBP”), and AI-Amanah Islamic Investment Bank of the Philippines (“AAIIB”). DBP was organized primarily to provide banking services catering to the medium- and long-term needs of agricultural and industrial enterprises, particularly in rural areas and preferably for small- and medium-sized enterprises. LBP primarily provides financial support in all phases of the Philippines' agrarian reform program. In addition to their special functions, DBP and LBP are allowed to operate as universal banks. AAIIB was organized to promote and accelerate the socio-economic development of the Autonomous Region of Muslim Mindanao through banking, financing and investment operations and to establish and participate in agricultural, commercial and industrial ventures based on Islamic banking principles and rulings.

During the past decade, the Philippine banking industry has been marked by two major trends – the liberalization of the industry, and mergers and consolidation.

Foreign bank entry was liberalized in 1994, enabling foreign banks to invest in up to 60% of the voting stock of an existing bank or a new banking subsidiary, or to establish branches with full banking authority. This led to the establishment of 10 new foreign bank branches in 1995. The General Banking Law further liberalized the industry by providing that the Monetary Board may authorize foreign banks to acquire up to 100% of the voting stock of one domestic bank. Under the General Banking Law, any foreign bank, which prior to the effectiveness of the said law availed itself of the privilege to acquire up to 60% of the voting stock of a domestic bank, may further acquire voting shares of such bank to the extent necessary for it to own 100% thereof. As at 30 June 2007, there were 11 foreign banks with branches and 3 foreign banks with subsidiaries in the Philippines.

73

PROCEDURE

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information found elsewhere in this Preliminary Offering Circular and the Terms and Conditions included herein regarding the offer, maintenance, trade and settlement of the Notes. Prospective investors should read this entire Preliminary Offering Circular and the Terms and Conditions fully and carefully. In case of any inconsistency between this summary and the more detailed information in this Preliminary Offering Circular, then the more detailed portions and/or Terms and Conditions, as the case may be, shall at all times prevail.

Offering Procedures

Pursuant to the Issue Management and Placement Agreement, Registry and Paying Agency Agreement, and Trust Agreement (the “Agreements”) entered into by the Bank with the relevant counterparties, the Notes shall be offered for sale through HSBC, as Lead Manager, and HSBC, Multinational Investment Bancorporation and Unicapital, Inc. as Selling Agents, and, to a limited extent, through the Bank, in its capacity as a Selling Agent. The following is a summary of the procedures to be adopted among the parties and the prospective Noteholders and is qualified in its entirety by, and should be read in conjunction with, the more detailed information found elsewhere in this Offering Circular.

The Offer Period

During the Offer Period, the Bank, through the Lead Manager and Selling Agents, shall solicit subscriptions to the Notes from Eligible Noteholders. Prospective Noteholders will be required to complete an application to purchase (the “Application to Purchase”) which shall be provided by the Lead Manager and Selling Agents, and submit the duly executed Applications to Purchase and other documentary requirements to Selling Agents from whom the Applications to Purchase were obtained on or before 5:00 p.m. on the last day of the Offer Period. There shall be no limitation on the number of Notes that a prospective Noteholder may apply for, although the Notes will be issued in minimum denominations of P500,000.00 and in integral multiples of P100,000.00 thereafter. Only Applications to Purchase which are accompanied by deposits, cheque payments or covered by appropriate debit instructions or other instructions acceptable to the Lead Manager and each relevant Selling Agent shall be accepted by the Selling Agents. No later than the relevant Issue Date, the amounts received shall be placed in a depository bank to be identified by the Lead Manager, to be released to the Issuer on the relevant Issue Date, to the extent of accepted Applications to Purchase (in whole or in part) or to the applicant (through the Selling Agent concerned) if and to the extent that Applications to Purchase have been rejected (in whole or in part).

The Allocation Period

The Bank, together with the Lead Manager, reserves the right to accept, reject, scale down or reallocate any Notes applied for. Payments made by purchasers whose Applications to Purchase are rejected or scaled down shall be returned to them through their respective Selling Agents, in full (in case of a rejection) or in a proportionate sum (in case of a scale down), but in both instances shall carry no interest whatsoever.

The Selling Agents shall, on behalf of the Issuer, accept the allocated Applications to Purchase in accordance with the allocation report prepared by the Lead Manager and approved by the Bank. The acceptance of these Applications to Purchase shall ipso facto convert such Applications to Purchase into perfected and consummated purchase agreements and cause the release of the corresponding payments to the Issuer.

Immediately upon conversion of the Purchase Agreements, the Selling Agents shall send out the relevant copies of the Purchase Advice to the investors, with copies to the Registry, to enable the Registry to prepare the Registry Book and the relevant Registry Confirmations.

74

Issue Date

Upon receipt of a confirmation from the Bank on the approval and acceptance by the Bank of the Notes applied for, the Selling Agents shall issue a written advice (“Purchase Advice”) to successful prospective Noteholders confirming the acceptance of their offer to purchase Notes and consequent ownership thereof. The Registry shall, upon receipt of the Purchase Advice from the Selling Agents and in any case not later than five Business Days from the Issue Date, issue and deliver an original copy of the Registry Confirmation to the Noteholder at their mailing addresses as indicated in their respective Purchase Advice, in accordance with the terms of the Registry and Paying Agency Agreement. The Registry shall rely primarily on the Purchase Advice and, subsidiarily, on the duly accepted Applications to Purchase in its preparation of the Registry Book and the issuance of the Registry Confirmation for each Noteholder (including, and especially, his tax status).

Transactions in the Secondary Market

All transfers or assignments of the Notes shall be made through the Market Makers, who shall issue to such Noteholder (with a copy to the Registry) a Purchase Advice to evidence the transfer or assignment of such Notes. Negotiations or transfers from one Noteholder to another do not constitute pre-termination. The following are restricted transfers of the Notes:

Any transfer between persons of varying tax status such as a transfer between a taxable and non-taxable person; or between a party or parties who claim the benefit of a tax treaty; or other such similar situations, except when effected on an Interest Payment Date (other than the Optional Redemption Date or Maturity Date); and

Transfers effected during the period between the Record Date and the day immediately preceding an Interest Payment Date.

The following documents, in form and substance acceptable to the Registry, must be presented to the Registry to register any transfer or assignment of Notes:

The seller/transferor Noteholder(s)’ transfer instruction;

Letter instruction of the Market Maker;

The relevant Purchase Advice of the buyer/transferee Noteholder(s) (with the information provided therein duly set forth in typewritten form);

Duly accomplished investor registration form of the transferee Noteholder as prescribed by the Registry (in case of a new holder);

Proof of the qualified tax-exempt status of the transferee Noteholder, if applicable, and the covering affidavit of undertaking;

Proof of payment of applicable taxes (if any are due) and, in cases of transfers or assignments which are treated by the Issuer as a pre-termination solely for tax purposes, proof that the applicable tax on the entire income earned by the transferor Noteholder has been deducted or withheld from its sales proceeds;

The original duly endorsed signature cards of the transferee Noteholder(s) and such other original or certified true copies of other documents submitted by the transferee Noteholder(s) in support of the transfer or assignment of the Notes in its favour;

The appropriate secretary’s certificate attesting to the board resolutions authorizing the transfers and acceptances as well as designating the authorized signatories, together with specimen signature cards duly signed by the parties, and duly authenticated by each party’s corporate secretary, as required; and

75

Such other documents that may be reasonably required by the Registry, including those for non-trade transactions.

Payment of Interest and Principal

On the relevant Interest Payment Date, the Registry shall authorize and instruct the concerned unit of the Bank to make payments due on the outstanding Notes out of the Payment Account to the Noteholders by way of: (i) a direct credit to their peso current or savings account in EastWest Bank; (ii) a direct credit to their peso current or savings account with a designated Selling Agent; and (iii) through credit via the Real Time Gross Settlement System (“RTGS”) to the designated Selling Agent’s account with BSP, and for which purpose, the Selling Agent shall issue a check for pick-up or deposit to a settlement bank (the “Cash Settlement Bank”) of the Noteholder, for onward remittance by such designated settlement bank to the Noteholders.

76

SCHEDULE OF REGISTRY FEES

The Registry shall be entitled to charge the Noteholders and/or their counterparties such fees as the Registry shall prescribe in connection with the services that the Registry shall perform such as, but not limited to, the opening and maintaining of accounts, the maintenance of records of the Noteholders in the Registry Book, the issuance, cancellation and replacement of any Registry Confirmation and transfers of the Notes. The Registry will charge the following fees to Noteholders:

Fees charged for secondary market transactions

P50 transfer fee (for each of the transferee and transferor Noteholder)

P210 account opening fee for non-trade transactions

P100 account opening fee for each new securities account payable by transferee who has no existing account with the Registry at the time of the request

Other fees

P50 will be charged for each statement requested outside of the quarterly statements of account released

P50 will be charged for the replacement of Registry Confirmations, subject to the fulfillment of certain terms and conditions

P200 will be charged for requests for a certificate of holding

77

FORM OF PRICING SUPPLEMENT

The form of the Pricing Supplement that will be issued in respect of each issue of the Notes after the initial Issue Date, subject only to the deletion of non-applicable provisions, is set out below.

PRICING SUPPLEMENT DATED [ ]

Issue of [ISSUE AMOUNT] Lower Tier II Unsecured Subordinated Notes (the “Notes”) issued under the P1,250,000,000 authority to issue granted by the Bangko Sentral ng Pilipinas

Reference is made to the Master Note issued by the East West Banking Corporation (the “Bank”) dated [INITIAL ISSUE DATE] (as may be amended from time to time) in connection with its issue of Notes due [MATURITY DATE] 2019, all terms of which shall have the same meaning when used herein (the “Master Note”). In connection with the Master Note, effective as of [DATE OF PRICING SUPPLEMENT], the total amount of the Notes issued as referred to therein has been increased by an additional amount of P[TRANCHE AMOUNT] at an Interest Rate of [ORIGINAL INTEREST RATE] % p.a. Consequently, the total amount of the Notes issued is hereby amended to P[TOTAL AMOUNT OF NOTES ISSUED], and which total amount shall be governed by the Terms and Conditions of the Master Note, as amended by the amendment to be executed and any subsequent amendments that may be executed in accordance with the provisions of the Master Note. This document constitutes the Pricing Supplement relating to the issue of Notes described herein. Terms used herein shall be deemed to be defined as such for the purposes of the Terms and Conditions set forth in the Offering Circular dated [DATE OF FINAL OFFERING CIRCULAR] [and the Supplemental Offering Circular dated [DATE OF SUPPLEMENTAL OFFERING CIRCULAR, IF ANY]]. This Pricing Supplement contains the final terms of the Notes issued on the Issue Date indicated below, and must be read in conjunction with such Offering Circular as so supplemented.

[INSERT TERMS AND CONDITIONS]

MATERIAL ADVERSE CHANGE STATEMENT

[Except as disclosed in this document, there/There] has been no significant change in the financial or trading position of the Bank since [insert date of last audited accounts or interim accounts (if later)] and no material adverse change in the financial position or prospects of the Bank since [insert date of last published annual accounts.]

RESPONSIBILITY

The Bank accepts responsibility for the information contained in this Pricing Supplement which, when read together with the Offering Circular [and the supplemental Offering Circular] referred to above, contains all information that is material in the context of the issue of the Notes. Signed on behalf of the Issuer: EAST WEST BANKING CORPORATION Issuer and Selling Agent By:

*SGVMC110691*

EAST WEST BANKING CORPORATION Financial Statements December 31, 2007 and 2006 and Independent Auditors’ Report

SYCIP GORRES VELAYO & CO.

ASSURANCE AND ADVISORY BUSINESS SERVICES

A MEMBER PRACTICE OF ERNST & YOUNG GLOBAL SGV & CO Quality In Everything We Do

*SGVMC110691*

INDEPENDENT AUDITORS’ REPORT The Stockholders and the Board of Directors East West Banking Corporation We have audited the accompanying financial statements of East West Banking Corporation (the Bank), which comprise the statements of condition as of December 31, 2007 and 2006, and the statements of income, statements of changes in equity and statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

SGV & CO SyCip Gorres Velayo & Co.

6760 Ayala Avenue 1226 Makati City Philippines

Phone: (632) 891-0307 Fax: (632) 819-0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-FR-1

SGV & Co is a member practice of Ernst & Young Global

*SGVMC110691*

- 2 - Opinion As discussed in Note 11 to the financial statements, in 2007, the Bank recognized the additional provisions for impairment and credit losses amounting to P=369.12 million, net of deferred tax assets of P=198.76 million, as direct reduction to surplus as of January 1, 2007. As discussed in Notes 14 and 19 to the financial statements, in 2006, the Bank recognized the provision for tax contingency amounting to P=71.18 million, net of deferred tax asset of P=38.32 million, and derecognized deferred tax assets amounting to P=129.72 million, as direct reduction to surplus as of January 1, 2006. Philippine Financial Reporting Standards require that the provision for impairment and credit losses, tax contingency and derecognition of deferred tax assets be charged to current operations in the period such are recognized. Had the provisions for impairment and credit losses, tax contingency and derecognition of deferred tax assets been recognized in the current operations, net income of P=137.28 million and P=127.28 million in 2007 and 2006, would have been a net loss of P=231.83 million and P=73.62 million, respectively. In our opinion, except for the effects of the matters discussed in the preceding paragraph, the financial statements present fairly, in all material respects, the financial position of East West Banking Corporation as of December 31, 2007 and 2006, and its financial performance and its cash flows for the years then ended in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO. Ramon D. Dizon Partner CPA Certificate No. 46047 SEC Accreditation No. 0077-AR-1 Tax Identification No. 102-085-577 PTR No. 0017592, January 3, 2008, Makati City March 27, 2008

*SGVMC110691*

EAST WEST BANKING CORPORATION STATEMENTS OF CONDITION December 31 2007 2006 ASSETS Cash and Other Cash Items (Notes 12, 16 and 18) P=1,388,731,710 P=816,819,931 Due from Bangko Sentral ng Pilipinas - net (Notes 11, 12,

16 and 18) 4,236,218,248 3,804,271,284 Due from Other Banks (Notes 16 and 18) 855,513,590 633,083,728 Interbank Loans Receivable and Securities Purchased

Under Resale Agreement (Notes 16 and 18) 6,381,584,000 3,000,000,000 Financial Assets at Fair Value Through Profit

and Loss (Notes 4, 16 and 18) 1,358,411,913 670,753,479 Available-for-Sale Investments - net (Notes 3, 4, 16 and 18) 2,698,232,874 2,941,724,447 Held-to-Maturity Investments (Notes 4, 12,

16, 18 and 23) 552,477,403 916,688,714 Loans and Receivables - net (Notes 3, 5, 11, 16, 18 and 22) 17,856,345,333 15,143,979,990 Bank Premises, Furniture, Fixtures

and Equipment - net (Notes 3, 6 and 16) 574,399,342 519,421,855 Investment Properties - net (Notes 3, 7, 11 and 16) 773,692,190 844,686,201 Deferred Tax Assets - net (Notes 3, 16 and 19) 664,130,341 471,787,149 Goodwill (Notes 3, 10 and 16) 150,211,812 150,211,812 Other Assets - net (Notes 3, 9 11, 16 and 18) 565,377,758 389,809,668 P=38,055,326,514 P=30,303,238,258 LIABILITIES AND EQUITY LIABILITIES Deposit Liabilities (Notes 12, 16, 18 and 22) Demand P=9,378,480,808 P=4,101,458,342 Savings 4,467,493,702 6,111,891,456 Time 17,427,611,772 15,005,223,072 31,273,586,282 25,218,572,870 Bills and Acceptances Payable (Notes 13, 16 and 18) 1,366,779,651 1,316,879,635 Accrued Taxes, Interest and Other

Expenses (Notes 14, 16 and 18) 172,433,786 241,732,952 Cashier’s Checks and Demand

Draft Payable (Notes 16 and 18) 173,019,549 250,477,812 Other Liabilities (Notes 15, 16 and 18) 946,018,154 394,763,202 33,931,837,422 27,422,426,471 EQUITY Common stock (Note 17) 3,873,528,100 150,000,000 Preferred stock (Note 17) − 2,223,528,100 Surplus reserves (Notes 17 and 23) 16,365,399 11,332,251 Surplus (Notes 11, 14 and 19) 248,120,863 484,986,826 Net unrealized gains (losses) on available-for-sale

investments (Note 4) (14,525,270) 10,964,610 4,123,489,092 2,880,811,787 P=38,055,326,514 P=30,303,238,258 See accompanying Notes to Financial Statements.

*SGVMC110691*

EAST WEST BANKING CORPORATION STATEMENTS OF INCOME Years Ended December 31 2007 2006 INTEREST INCOME Loans and receivables (Notes 5 and 22) P=1,746,955,331 P=1,593,593,573 Trading and investment securities (Note 4) 579,033,180 482,698,467 Due from other banks and interbank loans receivable and

securities purchased under resale agreement 152,457,250 64,627,800 2,478,445,761 2,140,919,840 INTEREST EXPENSE Deposit liabilities (Note 22) 986,655,197 1,165,565,025 Other borrowings 123,411,915 35,419,733 1,110,067,112 1,200,984,758 NET INTEREST INCOME 1,368,378,649 939,935,082 Service charges, fees and commissions (Note 22) 390,481,779 235,620,053 Foreign exchange gain - net 57,480,687 9,643,990 Trust income (Note 23) 56,946,404 31,210,774 Gains on asset foreclosure and dacion transactions 2,276,534 11,117,299 Dividend income (Note 8) 119,294 15,749,432 Trading and securities gains (losses) - net (Note 4) (14,638,902) 154,427,743 Miscellaneous (Note 7) 55,139,169 63,487,836 TOTAL OPERATING INCOME 1,916,183,614 1,461,192,209 Compensation and fringe benefits (Notes 20 and 22) 532,362,974 403,360,353 Taxes and licenses 195,410,756 132,827,767 Rent (Note 21) 125,671,102 111,231,409 Depreciation and amortization (Notes 6, 7 and 9) 116,525,582 103,417,608 Provision for impairment and credit losses (Note 11) 100,935,044 101,920,984 Transportation and traveling 92,460,183 63,920,649 Security, messengerial and janitorial services 75,304,048 55,359,804 Advertising 65,877,704 30,283,206 Insurance 58,498,223 48,464,239 Postage, telephone, cables and telegram 42,918,249 30,379,834 Power, light and water 37,488,162 32,496,771 Repairs and maintenance 34,984,893 32,640,423 Stationery and supplies 33,666,017 25,025,897 Litigation expenses 33,471,488 44,166,741 Amortization of computer software (Note 9) 31,467,117 23,422,918 Entertainment, amusement and recreation (Note 19) 24,716,927 16,201,721 Service, charges, fees and commissions 23,128,253 18,326,893 Brokerage fees 6,566,223 7,525,457 Management and other professional fees 6,150,291 15,035,887 Impairment loss on goodwill (Note 10) − 5,000,000 Miscellaneous (Note 7) 96,175,560 69,345,485 TOTAL OPERATING EXPENSE 1,733,778,796 1,370,354,046

(Forward)

*SGVMC110691*

- 2 - Years Ended December 31 2007 2006 INCOME BEFORE INCOME TAX P=182,404,818 P=90,838,163 PROVISION FOR (BENEFIT FROM)

INCOME TAX (Note 19) 45,120,173 (36,437,523) NET INCOME P=137,284,645 P=127,275,686 EARNINGS PER SHARE (Note 25) Basic P=0.70 P=5.87 Diluted P=0.70 P=0.45 See accompanying Notes to Financial Statements

*SGVMC110691*

EAST WEST BANKING CORPORATION STATEMENTS OF CHANGES IN EQUITY

Common Stock Preferred Stock Surplus

Reserves Surplus

Net Unrealized Gains (Losses) on Available-

for-Sale Investments

Total Equity

For the Year Ended December 31, 2007

Balances at January 1, 2007 P=150,000,000 P=2,223,528,100 P=11,332,251 P=484,986,826 P=10,964,610 P=2,880,811,787 Provisions for impairment and credit losses (Note 11) − − − (369,117,460) − (369,117,460) Balances at January 1, 2007, as adjusted 150,000,000 2,223,528,100 11,332,251 115,869,366 10,964,610 2,511,694,327 Changes in fair value of available-for-sale (AFS) investments – – – – (11,291,498) (11,291,498) Changes in fair value of AFS investments taken to profit and loss through sale − − − − (14,198,382) (14,198,382) Net income – – – 137,284,645 – 137,284,645 Total income recognized during the year – – – 137,284,645 (25,489,880) 111,794,765 Conversion of preferred stock to common stock (Note 17) 2,223,528,100 (2,223,528,100) – – – – Common stock issued (Note 17) 1,500,000,000 – – – – 1,500,000,000 Transfer from surplus to surplus reserves (Note 23) – – 5,033,148 (5,033,148) – – Balances at December 31, 2007 P=3,873,528,100 P=− P=16,365,399 P=248,120,863 (P=14,525,270) P=4,123,489,092

For the Year Ended December 31, 2006

Balances at January 1, 2006 P=150,000,000 P=2,223,528,100 P=8,547,900 P=561,387,057 P=250,651 P=2,943,713,708 Provision for tax contingency (Note 14) – – – (71,171,943) – (71,171,943) Derecognition of deferred tax assets on NOLCO and MCIT (Note 19) – – – (129,719,623) − (129,719,623) Balances at January 1, 2006, as adjusted 150,000,000 P=2,223,528,100 8,547,900 360,495,491 250,651 2,742,822,142 Changes in fair value of AFS investments – – – – (56,298,445) (56,298,445) Changes in fair value of AFS investments taken to profit and loss through sale − − − − 67,012,404 67,012,404 Net income – – – 127,275,686 – 127,275,686 Total income recognized during the year – – – 127,275,686 10,713,959 137,989,645 Transfer from surplus to surplus reserves (Note 23) – – 2,784,351 (2,784,351) – – Balances at December 31, 2006 P=150,000,000 P=2,223,528,100 P=11,332,251 P=484,986,826 P=10,964,610 P=2,880,811,787

See accompanying Notes to Financial Statements.

*SGVMC110691*

EAST WEST BANKING CORPORATION STATEMENTS OF CASH FLOWS Years Ended December 31 2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES Income before provision for income tax P=182,404,818 P=90,838,163 Adjustments for: Depreciation and amortization (Notes 6 , 7 and 9) 116,525,582 103,417,608 Amortization of computer software (Note 9) 31,467,117 23,422,918 Gains on disposal of bank premises, furniture, fixtures and equipment (3,713,438) (567,083) Gains on asset foreclosure and dacion transactions (2,276,534) (11,117,299) Gains on disposal of investment properties (694,769) (3,937,173) Impairment loss on goodwill (Note 10) − 5,000,000 Gain on disposition of equity investment (Note 8) − (1,980,051)

Changes in operating assets and liabilities: Decrease (increase) in the amounts of: Financial assets at fair value through profit and loss (687,658,434) 1,822,262,379 Loans and receivables (3,183,766,746) (2,657,194,919) Other assets (275,017,458) (265,354,220) Increase (decrease) in the amounts of: Deposit liabilities 6,055,013,412 4,019,024,984 Accrued taxes, interest and other expenses 39,488,363 (6,309,642) Cashier’s checks and demand draft payable (77,458,263) 134,329,422 Other liabilities 551,254,952 221,009,087

Net cash generated from operations 2,745,568,602 3,472,844,174 Income taxes paid (147,495,339) (54,876,083) Net cash provided by operating activities 2,598,073,263 3,417,969,091 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of:

Available-for-sale (AFS) investments 9,074,609,624 27,303,110,884 Bank premises furniture, fixtures and equipment (Note 6) 5,491,539 2,412,983 Investment properties (Note 7) 64,199,394 77,291,769 Equity investments − 151,980,051

Proceeds from maturity of held-to-maturity (HTM) investments 802,924,312 6,607,254,792 Acquisitions of: AFS investments (8,856,607,931) (29,581,743,863) HTM investments (438,713,001) (5,022,820,375)

Bank premises, furniture, fixtures and equipment (Note 6) (153,612,677) (74,492,141) Capitalized computer software (38,391,934) (11,457,102)

Net cash provided by (used in) investing activities 459,899,326 (548,463,002) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bills payable 550,194,765,764 91,412,673,191 Payments of bills payable (550,121,978,648) (90,248,960,305) Increase (decrease) in outstanding acceptances (22,887,100) 29,291,235 Issuance of common stock 1,500,000,000 − Net cash provided by financing activities 1,549,900,016 1,193,004,121 NET INCREASE IN CASH AND CASH EQUIVALENTS 4,607,872,605 4,062,510,210 (Forward)

*SGVMC110691*

- 2 - Years Ended December 31 2007 2006 CASH AND CASH EQUIVALENTS AT BEGINNING

OF YEAR

Cash and other cash items P=816,819,931 P=596,978,313 Due from Bangko Sentral ng Pilipinas (BSP) 3,804,271,284 1,520,928,079 Due from other banks 633,083,728 773,758,341 Interbank loans receivable and securities

purchased under resale agreement 3,000,000,000 1,300,000,000 8,254,174,943 4,191,664,733 CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and other cash items 1,388,731,710 816,819,931 Due from BSP 4,236,218,248 3,804,271,284 Due from other banks 855,513,590 633,083,728 Interbank loans receivable and securities

purchased under resale agreement 6,381,584,000 3,000,000,000 P=12,862,047,548 P=8,254,174,943 NET OPERATIONAL CASH FLOWS FROM INTEREST AND DIVIDENDS Years Ended December 31 2007 2006 Interest received P=2,437,110,347 P=2,315,282,484 Interest paid 1,109,898,886 1,213,657,800 Dividend received 119,294 15,749,432

See accompanying Notes to Financial Statements.

*SGVMC110691*

EAST WEST BANKING CORPORATION NOTES TO FINANCIAL STATEMENTS 1. Organization and Status of Operations East West Banking Corporation (the Bank) was granted authority by the Bangko Sentral ng

Pilipinas (BSP) to operate as a commercial bank under Monetary Board (MB) Resolution No. 101 dated July 6, 1994, and commenced operations on July 8, 1994. The Bank is a majority-owned subsidiary of Filinvest Development Corporation (FDC). The Bank’s ultimate parent company is ALG Holdings Corporation.

The Bank is a domestic corporation registered with the Securities and Exchange Commission

(SEC) on March 22, 1994. Through its network of 76 and 72 branches as of December 31, 2007 and 2006, respectively, the Bank provides a wide range of financial services to consumer and corporate clients. The Bank’s principal banking products and services include deposit-taking, loan and trade finance, treasury, trust services, cash management and custodial services. Its principal place of business is at the 20th Floor, PBCom Tower, 6795 Ayala Avenue corner Herrera Street, Makati City.

The Bank officially launched its credit card operations on June 18, 2004. The Bank issues credit

cards which could be accepted in merchant establishments nationwide with credit card terminals owned and operated by Master Card-member banks. The Bank currently issues only the East West Master Card.

The accompanying comparative financial statements of the Bank were approved and authorized

for issue by the Board of Directors (BOD) on March 27, 2008. 2. Summary of Significant Accounting Policies

Basis of Presentation The accompanying financial statements have been prepared on a historical cost basis except for financial assets at fair value through profit or loss (FVPL), available-for-sale (AFS) investments and derivative financial instruments that have been measured at fair value. The financial statements are presented in Philippine pesos, which is the Bank’s functional and reporting currency.

The financial statements of the Bank reflect the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The financial statements individually prepared for these units are combined after eliminating inter-unit accounts.

The books of accounts of the RBU are maintained in Philippine pesos, while those of the FCDU are maintained in United States (US) dollars. For financial reporting purposes, FCDU accounts and foreign currency-denominated accounts in the RBU are translated into their equivalents in Philippine pesos.

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Statement of Compliance The accompanying financial statements of the Bank have been prepared in compliance with Philippine Financial Reporting Standards (PFRS), except for the effects on the financial statements of recognizing the provisions for impairment and credit losses for 2007, and recognizing the provision for tax contingency and derecognizing deferred tax assets in 2006, as direct reduction to surplus as of January 1, 2007 and 2006, respectively (see Notes 11, 14 and 19).

Changes in Accounting Policies The Bank’s accounting policies are consistent with the previous year except for the adoption of

the following new PFRS, amendments to Philippine Accounting Standard (PAS) and Philippine Interpretations starting January 1, 2007:

• Amendment to PAS 1, Presentation of Financial Statements, Capital Disclosures • PFRS 7, Financial Instruments: Disclosures • Philippine Interpretation IFRIC 7, Applying the Restatement Approach Under PAS 29,

Financial Reporting in Hyperinflationary Economies • Philippine Interpretation IFRIC 8, Scope of PFRS 2 • Philippine Interpretation IFRIC 10, Interim Financial Reporting and Impairment The following standards have significant effect on the Bank’s financial statements:

Amendment to PAS 1, Presentation of Financial Statements: Capital Disclosures The amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it manages capital. Adoption of this standard resulted in inclusion of the Bank’s additional disclosure on capital management (see Note 17).

PFRS 7, Financial Instruments: Disclosures This new standard introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, as well as sensitivity analysis to market risk. It replaces PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and the disclosure requirements in PAS 32, Financial Instruments: Disclosure and Presentation. Adoption of this standard resulted in the inclusion of additional disclosures on the quantitative analysis of credit risk, liquidity risk and market risk exposure of the Bank (see Note 18).

Foreign Currency Translation Transactions and balances The books of accounts of the RBU are maintained in Philippine pesos, while those of the FCDU are maintained in US dollars. For financial reporting purposes, the monetary assets and liabilities of the FCDU and the foreign currency-denominated monetary assets and liabilities in the RBU are translated in Philippine pesos based on the Philippine Dealing System (PDS) closing rate prevailing at end of the year and foreign currency-denominated income and expenses, at the PDS weighted average rate (PDSWAR) for the year. Foreign exchange differences arising from translation of foreign currency-denominated assets and liabilities are credited to or charged against operations in the period in which the rates change.

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Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Financial Instruments - Initial Recognition and Subsequent Measurement

Date of recognition Purchases or sales of financial assets that require delivery of assets within the time frame

established by regulation or convention in the marketplace are recognized on the settlement date. Derivatives are recognized on trade date basis. Deposits, amounts due to banks and customers and loans are recognized when cash is received by the Bank or advanced to the borrowers. Securities transactions and related commission income and expense are recorded on a settlement date basis.

The Bank recognized financial instruments when, and only when, the Bank becomes a party to the

contractual terms of the financial instruments. Initial recognition of financial instruments All financial instruments are initially recognized at fair value. Except for financial assets and financial liabilities at FVPL, the initial measurement of investments includes transaction costs. The Bank classifies its financial assets in the following categories: financial assets at FVPL, held-to-maturity (HTM) investments, AFS investments, and loans and receivables, while financial liabilities are classified as financial liabilities at FVPL and other financial liabilities which are carried at amortized cost. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market and for HTM investments, the ability and intention to hold the investment until maturity. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date.

Determination of fair value The fair value for financial instruments traded in active markets at the balance sheet date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction.

For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models.

‘Day 1’ profit Where the transaction price in a non-active market is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Bank recognizes the difference between the transaction price and fair value (a Day 1 profit) in the statement of income in ‘Trading and securities gains (losses) - net’ unless it qualifies for recognition as some other type of asset.

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In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Bank determines the appropriate method of recognizing the ‘Day 1’ profit amount.

Derivative financial instruments The Bank is a counterparty to derivative contracts, such as currency forwards. These derivatives are entered into as a service to customers and as a means of reducing or managing their respective foreign exchange and interest rate exposures, as well as for trading purposes. Such derivative financial instruments are initially recorded at fair value on the date at which the derivative contract is entered into and are subsequently remeasured at fair value. Any gains or losses arising from changes in fair values of derivatives (except those accounted for as accounting hedges) are taken directly to the statement of income and are included in ‘Trading and securities gains (losses) - net’. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The Bank does not apply hedge accounting.

Embedded derivatives that are bifurcated from the host financial and non-financial contracts are also accounted for at FVPL. An embedded derivative is separated from the host contract and accounted for as a derivative if all of the following conditions are met: a) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics of the host contract; b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and c) the hybrid or combined instrument is not recognized at fair value through profit or loss. The Bank assesses whether embedded derivative are required to be separated from the host contracts when the Bank first becomes party to the contract. Reassessment of embedded derivatives is only done when there are changes in the contract that significantly modifies contractual cash flows. As of December 31, 2007 and 2006, the Bank has no embedded derivatives.

Financial assets or financial liabilities held for trading Financial assets or financial liabilities held for trading are recorded in the statement of condition at fair value. Changes in fair value relating to the held-for-trading positions are recognized in ‘Trading and securities gains (losses) - net’. Interest earned or incurred is recorded in interest income or expense, respectively, while dividend income is recorded when the right to receive payment has been established.

Included in this classification are quoted debt securities which have been acquired principally for the purpose of selling or repurchasing in the near term.

Designated financial assets or financial liabilities at FVPL Financial assets or financial liabilities classified in this category are designated by management

on initial recognition when the following criteria are met:

• The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis;

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• The assets and liabilities are part of the Bank’s financial assets, financial liabilities or both

which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

• The financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Designated financial assets and financial liabilities at FVPL are recorded in the statement of

condition at fair value. Changes in fair value are recorded in ‘Trading and securities gains (losses) - net’ on financial assets and liabilities designated at FVPL. Interest earned or incurred is recorded in interest income or expense, respectively, while dividend income is recorded according to the terms of the contract, or when the right of the payment has been established.

As of December 31, 2007 and 2006, the Bank has no designated financial assets and liabilities at FVPL.

HTM investments HTM investments are quoted nonderivative financial assets with fixed or determinable payments and fixed maturities for which the Bank’s management has the positive intention and ability to hold to maturity. Where the Bank sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. After initial measurement, these investments are subsequently measured at amortized cost using the effective interest rate method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortization is included in interest income in the statement of income. Gains and losses are recognized in income when the HTM investments are derecognized and impaired, as well as through the amortization process. The losses arising from impairment of such investments are recognized in the statement of income under ‘Provision for impairment and credit losses’. The effects of restatement on foreign currency denominated HTM investments are recognized in the statement of income. Loans and receivables This financial asset category relates to the balance sheet captions ‘Due from BSP’, ‘Due from other banks’, ‘Loans and receivables’ and ‘Interbank loan receivable and securities purchased under resale agreement’. These are nonderivative financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. These are not entered into with the intention of immediate or short-term resale and are not classified as ‘financial assets held for trading’, designated as ‘AFS investments’ or ‘Financial assets designated at FVPL’. ‘Loans and receivables’ also include receivables arising from transaction on credit cards operation. After initial measurement, loans and receivables are subsequently measured at amortized cost using the effective interest rate method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the effective interest rate. The amortization is included in the ‘interest income’ in the statement of income. The losses arising from impairment are recognized in ‘Provision for impairment and credit losses’ in the statement of income.

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AFS investments AFS investments are those which are designated as such or do not qualify to be classified as financial assets held for trading, designated as FVPL, HTM investments or loans and receivables. These are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. These include equity investments, money market papers and other debt instruments. After initial measurement, AFS investments are subsequently measured at fair value. The effective yield component of AFS debt securities, as well as the impact of restatement on foreign currency-denominated AFS debt securities, is reported in earnings. The unrealized gains and losses arising from the fair valuation of AFS investments are excluded, net of tax, from reported earnings and are reported as ‘Net unrealized gains (losses) on AFS investments’ in the equity section of the statement of condition. When the security is disposed of, the cumulative gain or loss previously recognized in equity is recognized as ‘Trading and securities gains (losses) - net’ in the statement of income. Where the Bank holds more than one investment in the same security, these are deemed to be disposed of on a first-in first-out basis. Interest earned on holding AFS debt investments are reported as interest income using the effective interest rate. Dividends earned on holding AFS equity investments are recognized in the statement of income as when the right of the payment has been established. The losses arising from impairment of such investments are recognized as ‘Provision for impairment and credit losses’ in the statement of income.

Bills and acceptances payable and other borrowed funds Issued financial instruments or their components, which are not designated at FVPL, are classified as other financial liabilities under ‘Bills and acceptances payable’ or other appropriate financial liability accounts, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue. After initial measurement, bills payable and similar financial liabilities not qualified as and not designated as FVPL, are subsequently measured at amortized cost using the effective interest rate method. Amortized cost is calculated by taking into account any discount or premium on the issuance and fees that are an integral part of the effective interest rate. Derecognition of Financial Assets and Liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized where: • the rights to receive cash flows from the asset have expired; • the Bank retains the right to receive cash flows from the asset, but has assumed an obligation

to pay them in full without material delay to a third party under a “pass-through” arrangement; or

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• the Bank has transferred its rights to receive cash flows from the asset and either (a) has

transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred the control of the asset.

Where the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the statement of income. Repurchase and Reverse Repurchase Agreements Securities sold under agreements to repurchase at a specified future date (‘repos’) are not derecognized from the statement of condition. The corresponding cash received, including accrued interest, is recognized in the statement of condition as a loan to the Bank, reflecting the economic substance of such transaction. Conversely, securities purchased under agreements to resell at a specified future date (‘reverse repos’) are not recognized on the statement of condition. The corresponding cash paid, including accrued interest, is recognized in the statement of condition as ‘Securities purchased under resale agreements’ (SPURA), and is considered a loan to the counterparty. The difference between the purchase price and resale price is treated as interest income and is accrued over the life of the agreement using the effective interest rate method.

Impairment of Financial Assets The Bank assesses at each statement of condition date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

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Assets carried at amortized cost For loans and receivables, due from BSP, due from other banks and interbank loans receivable carried at amortized cost, the Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognized, are not included in a collective assessment for impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The carrying amount of the asset is reduced through use of an allowance account and the amount of loss is charged to the statement of income. Interest income continues to be recognized based on the original effective interest rate of the asset. Loans, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, any amounts formerly charged are credited to the ‘Provision for impairment and credit losses’. The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate, adjusted for the original credit risk premium. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics as industry, collateral type, past-due status and term. For impairment evaluation of credit card receivables, net flow rate (NFR) method was used.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directly consistent with changes in related observable data from period to period (such changes in unemployment rates,

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property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the Bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience.

Assets carried at cost

If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset.

AFS investments For AFS investments, the Bank assesses at each statement of condition date whether there is objective evidence that a financial asset or group of financial assets is impaired.

In case of equity investments classified as AFS, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the statement of income - is removed from equity and recognized in the statement of income. Impairment losses on equity investments are not reversed through the statement of income. Increases in fair value after impairment are recognized directly in equity.

In the case of debt instruments classified as AFS, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Interest continues to be accrued at the original effective interest rate on the reduced carrying amount of the asset and is recorded as part of ‘Interest income’ in the statement of income. If, in subsequent year, the fair value of a debt instrument increased and the increase can be objectively related to an event occurring after the impairment loss was recognized in the statement of income, the impairment loss is reversed through the statement of income.

Restructured loans Loan restructuring may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews restructured loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate. The difference between the recorded value of the original loan and the present value of the restructured cash flows, discounted at the original effective interest rate, is recognized in ‘Provision for impairment and credit losses’ in the statement of income.

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Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of condition if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the statement of condition.

Revenue Recognition Revenue is recognized to the extent that it is probable that economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized.

Interest income For all financial instruments measured at amortized cost and interest-bearing financial instruments

classified as AFS investments, interest income is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options), includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The adjusted carrying amount is calculated based on the original effective interest rate. The change in carrying amount is recorded as interest income.

Once the recorded value of a financial asset or group of similar financial assets has been reduced

due to an impairment loss, interest income continues to be recognized using the original effective interest rate applied to the new carrying amount. Fee and commission income The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: a) Fee income earned from services that are provided over a certain period of time

Fees earned for the provision of services over a period of time are accrued over that period. These fees include investment fund fees, custodian fees, fiduciary fees, commission income,

b) Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria. Loan syndication fees are recognized in the statement of income when the syndication has been completed and the Bank retains no part of the loans for itself or retains part at the same effective interest rate as for the other participants.

Dividend income Dividend income is recognized when the Bank’s right to receive payment is established.

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Trading and securities gains - net Results arising from trading activities include all gains and losses from changes in fair value for financial assets and financial liabilities held for trading.

Commissions earned on credit cards

Commissions earned on credit cards are taken up as income upon receipt from member establishments of charges arising from credit availments by credit cardholders. These commissions are computed based on certain agreed rates and are deducted from amounts remittable to member establishments. Purchases by credit cardholders, collectible on an installment basis, are recorded at the cost of the items purchased plus certain percentage of cost. The excess over cost is credited to ‘Unearned discount’ and is shown as a deduction from ‘Loans and receivables’ in the statement of condition.

The unearned discount is taken up to income over the installment terms and is computed using the effective interest method.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and other cash items (COCI), amounts due from BSP and other banks, and interbank loans receivable (IBLR) and SPURA with original maturities of three months or less from dates of placements and that are subject to insignificant risk of changes in value. Bank Premises, Furniture, Fixtures and Equipment Bank premises, including improvements, furniture, fixtures and equipment and leasehold improvements, are carried at cost, less accumulated depreciation and amortization, and any accumulated impairment in value. The initial cost of bank premises, furniture, fixtures and equipment consists of its purchase price, including import duties, taxes and any directly attributable costs of bringing the assets to their working condition and location for their intended use. Expenditures incurred after the assets have been put into operation, such as repairs and maintenance are normally charged against operations in the year in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of bank premises, furniture, fixtures and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional cost of the assets. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization and any accumulated impairment in value are removed from the accounts and any resulting gain or loss is credited to or charged against current operations. Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the bank premises, furniture, fixtures and equipment.

Estimated Useful Life Buildings 30 years Furniture, fixtures and equipment 3-5 years Leasehold improvements 5 years or the lease term

whichever is shorter

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The estimated useful life and the depreciation and amortization method are reviewed periodically to ensure that the period and the method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of bank premises, furniture, fixtures and equipment. The carrying values of the bank premises, furniture, fixtures and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets or cash-generating units are written down to their recoverable amounts. Investment Properties Investment properties are measured initially at cost, including transaction costs. An investment property acquired through an exchange transaction is measured at fair value of the asset acquired unless the fair value of such an asset cannot be measured in which case the investment property acquired is measured at the carrying amount of asset given up. Subsequent to initial recognition, depreciable investment properties are carried at cost less accumulated depreciation and impairment in value.

Investment properties are derecognized when they have either been disposed of or when the investment properties are permanently withdrawn from use and no future benefit is expected from their disposal. Any gains or losses on the retirement or disposal of investment properties are recognized in the statement of income in ‘Miscellaneous income’ in the year of retirement or disposal.

Expenditures incurred after the investment properties have been put into operations, such as repairs and maintenance costs, are normally charged to income in the period in which the costs are incurred. Depreciation is calculated on a straight-line basis using the remaining useful lives from the time of acquisition of the investment properties but not to exceed 15 years for both buildings and condominium units. Foreclosed properties of land or building are classified under investment properties from foreclosure date. Other foreclosed properties which do not qualify as land or building are classified as ‘Other assets’ in the statement of condition. Transfers are made to investment properties when, and only when, there is a change in use evidenced by ending of owner occupation, commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment properties when, and only when, there is a change in use evidenced by commencement of owner occupation or commencement of development with a view to sale.

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Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Bank’s interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired (see Note 10). Capitalized Computer Software Capitalized computer software, included under ’Other asset,’ as acquired separately is measured at cost on initial recognition. Following initial recognition, capitalized software is carried at cost less any accumulated amortization and any accumulated impairment losses. The capitalized software is amortized on a straight-line basis over its useful economic life of five years. Impairment of Nonfinancial Assets At each reporting date, the Bank assesses whether there is any indication that its nonfinancial assets (bank premises, furniture and fixtures, investment properties, and other repossessed assets) may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, the Bank makes an estimate of recoverable amount. Recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is assessed as part of the cash generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash-generating unit). An impairment loss is charged to operations in the year in which it arises, unless the asset is carried at a revalued amount, in which case the impairment loss is charged to the revaluation increment of the said asset.

For nonfinancial assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of income unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation expense is adjusted in future years to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining life.

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Goodwill Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

Impairment is determined for goodwill by assessing the recoverable amount of the cash generating unit (or group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash generating unit (or group of cash-generating units) is less than the carrying amount of the cash generating unit (or group of cash-generating units) to which goodwill has been allocated, an impairment loss is recognized immediately in the statement of income. Impairment losses relating to goodwill cannot be reversed for subsequent increases in its recoverable amount in future periods. The Bank performed its annual impairment test of goodwill as of December 31, 2007 and 2006. Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

(a) There is a change in contractual terms, other than a renewal or extension of the arrangement; (b) A renewal option is exercised or extension granted, unless that term of the renewal or

extension was initially included in the lease term; (c) There is a change in the determination of whether fulfillment is dependent on a specified

asset; or (d) There is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) above, and at the date of renewal or extension period for scenario (b). Bank as lessee Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statement of income on a straight-line basis over the lease term. Banks as lessor Leases where the Bank does not transfer substantially all the risk and benefits of ownership of the assets are classified as operating leases. Lease payments received are recognized as an income in the statement of income on a straight-line basis over the lease term. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as the rental income. Contingent rents are recognized as revenue in the period in which they are earned.

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Retirement Cost The Bank has a funded, noncontributory defined benefit retirement plan (the Plan).

The retirement cost of the Bank is determined using the projected unit credit method. Under this method, the current service cost is the present value of retirement benefits payable in the future with respect to services rendered in the current period. The liability recognized in the statement of condition with respect to defined benefit pension plans is the present value of the defined benefit obligation at the statement of condition date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. In case the fair value of the plan assets exceed the present value of the defined benefit obligation, the recognition of the net plan assets should not exceeds the total of (a) any cumulative unrecognized net actuarial losses and past service cost and (b) the present value of any economic benefits available in the form of refunds from the Plan or reductions in future contributions to the Plan.

The defined benefit obligation is calculated annually by an independent actuary. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rate on government bonds that have terms to maturity approximating the terms of the related retirement liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to income when the net cumulative unrecognized actuarial gains and losses at the end of the previous period exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working life of the employees participating in the Plan.

Past service costs, if any, are recognized immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortized on a straight-line basis over the vesting period. Provisions and Contingencies

Provisions are recognized when the Bank (a) has a present obligation (legal or constructive) as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at pre-tax rate that reflects current market assessments of the time value of money and where, appropriate, the risk specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense.

Contingent liabilities are not recognized in the financial statements but are disclosed unless the

possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the financial statements but are disclosed when an inflow of economic benefits is probable.

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Income Taxes Current income tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws to compute the amount are those that are enacted or substantially enacted by the statement of condition date.

Deferred income tax Deferred income tax is provided, using the balance sheet liability method, on all temporary differences at the statement of condition date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences. Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits from the excess of Minimum Corporate Income Tax (MCIT) over the regular income tax and unused Net Operating Loss Carryover (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carryforward of unused tax credits from excess MCIT and unused NOLCO can be utilized.

The carrying amount of deferred income tax assets is reviewed at each statement of condition date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized.

Current tax and deferred tax relating to items recognized directly in equity is also recognized in equity and not in the statement of income.

Deferred income tax assets and liabilities are measured at the tax rates that are applicable to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of condition date. Subsequent Events

Post year-end events that provide additional information about the Bank’s position at the statement of condition date (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes when material to the financial statements.

Fiduciary Activities Assets and income arising from fiduciary activities together with related undertakings to return such assets to customers are excluded from the financial statements where the Bank acts in a fiduciary capacity such as nominee, trustee or agent.

Earnings per Share (EPS)

Basic EPS is determined by dividing the net income for the year attributable to common shares by the weighted average number of common shares outstanding during the year while diluted EPS is computed by dividing net income for the year attributable to common shares by the weighted average number of outstanding and dilutive potential common shares. Basic and diluted EPS are given retroactive adjustments for any stock dividends declared in the current year, if any.

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Dividends on Common Shares

Dividends on common shares are recognized as a liability and deducted from equity when declared and approved by the respective shareholders’ of the Bank. Dividends for the year that are declared and approved after the balance sheet date, if any, are dealt with as an event after the statement of condition date and disclosed accordingly. Future Changes in Accounting Policies The Bank has not applied the following PFRS and Philippine Interpretations which are not yet effective for the year ended December 31, 2007:

PFRS 8, Operating Segments (effective for annual periods beginning on or after January 1, 2009) This PFRS adopts a management approach to reporting segment information. PFRS 8, will replace PAS 14, Segment Reporting, and is required to be adopted only by entities whose debt or equity instruments are publicly traded, or are in the process of filing with the SEC for purposes of issuing any class of instruments in a public market. The Bank is not required and will not adopt PFRS 8.

Amendment to PAS 1, Amendment on Statement of Comprehensive Income (effective for annual periods beginning on or after January 1, 2009) In accordance with the amendment to PAS 1, the statements of changes in equity shall include only transactions with owners, while all non-owner changes will be presented in equity as a single line with details include in a separate statement. Owners are defined as holders of instruments classified as equity. In addition, the amendments to PAS 1 provides for the introduction of a new statement of comprehensive income that combines all items of income and expenses recognized in the statement of income together with ‘other comprehensive income’. The revision specify what is included in other comprehensive income, such as gains and losses on AFS financial assets, actuarial gains and losses on defined benefit pension plans and changes in the asset revaluation reserve. Entities can choose to present all items in one statement, or to present two linked statements, a separate statement of income and statement of comprehensive income. The Bank will assess the impact of adoption of the said amendment in 2009.

PAS 23, Borrowing Costs (effective for annual periods beginning on or after January 1, 2009)

This standard has been revised to require capitalization of borrowing costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The Bank currently does not expect this standard to have impact on its financial statements.

Philippine Interpretation IFRIC 11, Group and Treasury Share Transactions (effective for annual periods beginning on or after March 1, 2007) This interpretation requires arrangements whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an equity-settled scheme by the entity even if (a) the entity chooses or is required to buy those equity instruments (e.g., treasury shares) from another party, or (b) the shareholder(s) of the entity provide the equity instruments needed. It also

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provides guidance on how subsidiaries, in their separate financial statements, account for such schemes when their employees receive rights to the equity instruments of the parent. The Bank currently does not have any stock option plan and therefore, does not expect this interpretation to have impact to its financial statements. Philippine Interpretation IFRIC 12, Service Concession Arrangements, (effective for annual periods beginning on or after January 1, 2008) This interpretation covers contractual arrangements arising from private entities providing public services and is not relevant to the Bank’s current operations. Philippine Interpretation IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after July 1, 2008) This interpretation addresses the accounting by an entity that grants award credits to its customers. The Bank will assess the impact of adoption when it applies Philippine Interpretation IFRIC 13 in 2008.

Philippine Interpretation IFRIC14, PAS 19, The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after January 1, 2008) This Interpretation provides guidance on how to assess the limit in PAS 19, Employee Benefits, on the amount of the surplus that can be recognized as an asset, and how the pension assets or liability may be affected when there is a statutory or contractual minimum funding requirement. The Bank will assess the impact of adoption when it applies Philippine Interpretation IFRIC 14 in 2008.

3. Significant Accounting Judgments and Estimates

The preparation of the financial statements in compliance with PFRS requires the Bank to make judgments and estimates that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and contingent liabilities. Future events may occur which will cause the judgments and assumptions used in arriving at the estimates to change. The effects of any change in judgments and estimates are reflected in the financial statements as these become reasonably determinable.

Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Judgments (a) Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded on the statement of condition cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of liquidity and model inputs such as correlation and volatility for longer-dated derivatives (see Note 18).

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(b) HTM investments

The classification to HTM investments requires significant judgment. In making this judgment, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank fails to keep these investments to maturity other than in certain specific circumstances - for example, selling an insignificant amount close to maturity - it will be required to reclassify the entire portfolio as AFS investments. The investments would therefore be measured at fair value and not at amortized cost.

(c) Financial assets not quoted in an active market

The Bank classifies financial assets by evaluating, among others, whether the asset is quoted or not in an active market. Included in the evaluation on whether a financial asset is quoted in an active market is the determination on whether quoted prices are readily and regularly available, and whether those prices represent actual and regularly occurring market transactions on an arm’s length basis.

Estimates a) Impairment losses of loans and receivables

The Bank reviews its nonperforming loans and receivables at each reporting date to assess whether provision for impairment should be recorded in the statement of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.

In addition to specific allowance against individually significant loans and receivables, the Bank also makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. This collective allowance is based on any deterioration in the internal rating of the loan or investment since it was granted or acquired. These internal ratings take into consideration factors such as any deterioration in country risk, industry, and technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows.

As of December 31, 2007 and 2006, the allowance for impairment and credit losses on loans and receivables of the Bank amounted to P=1.10 billion and P=0.68 billion, respectively. Loans and receivables are carried at P=17.86 billion and P=15.14 billion as of December 31, 2007 and 2006, respectively (see Note 5). In 2007, the Bank recognized provision for impairment and credit losses amounting to P=349.96 million and P=100.93 million charged to surplus and current operations, respectively.

b) Fair values of derivatives The fair values derivatives that are not quoted in active markets are determined using valuation techniques. Where valuation techniques are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them. All models are reviewed before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable data, however areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect reported fair value of financial instruments.

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c) Valuation of unquoted equity investments

Valuation of unquoted equity investments is normally based on one of the following: • recent arm’s length market transactions; • current fair value of another instrument that is substantially the same; • the expected cash flows discounted at current rates applicable for terms with similar terms

and risk characteristics; or • other valuation models.

The determination of the cash flows and discount factors for unquoted equity investments requires significant estimation. The Bank calibrates the valuation techniques periodically and tests them for validity using either prices from observable current market transactions in the same instrument or from other available observable market data. Unquoted equity instruments are carried at cost when (a) the range of reasonable fair value estimates is significant and (b) the probabilities of various estimates cannot be reliably assessed.

d) Impairment of AFS equity investments The Bank treats AFS equity investments as impaired when there has been a significant or prolonged declined in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Bank treats ‘significant’ generally as 20% more of the original cost of investment, and ‘prolonged’ (e.g., greater than 6 months). In addition, the Bank evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equity instruments. AFS equity investments are carried at P=114.17 million and P=115.79 million as of December 31, 2007 and 2006, respectively (see Note 4).

e) Recognition of deferred income taxes

Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies.

The Bank recognized deferred tax assets amounting to P=664.13 million and P=471.79 million as of December 31, 2007 and 2006, respectively. The Bank has unrecognized deferred tax assets amounting to P=20.95 million and P=139.34 million as of December 31, 2007 and 2006, respectively (see Note 19).

f) Impairment of nonfinancial assets Bank premises, furniture, fixtures and equipment and Investment properties The Bank assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Bank considers important which could trigger an impairment review include the following: • significant underperformance relative to expected historical or projected future operating

results;

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• significant changes in the manner of use of the acquired assets or the strategy for overall

business; and • significant negative industry or economic trends.

As of December 31, 2007, the carrying value of the bank premises, furniture, fixtures and equipment and investment properties amounted to P=574.40 million and P=773.69 million, respectively. As of December 31, 2006, the carrying value of the bank premises, furniture, fixtures and equipment and investment properties amounted to P=519.42 million and P=844.69 million, respectively (see Notes 6 and 7).

g) Goodwill The Bank determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use, which requires the Bank to make an estimate of the expected future cash flows and to choose a suitable discount rate in order to calculate the present value.

As of December 31, 2007 and 2006, the carrying value of goodwill amounted to P=150.21 million. In 2007, the Bank has no provision for impairment loss of goodwill (see Note 10).

h) Estimated useful lives of bank premises, furniture, fixtures and equipment, depreciable

investment properties and repossessed vehicles The Bank reviews on an annual basis the estimated useful lives of bank premise, furniture, fixtures and equipment, depreciable investment properties and repossessed vehicles based on expected asset utilization as anchored on business plans and strategies that also consider expected future technological developments and market behavior. It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the estimated useful lives of bank premises, furniture, fixtures and equipment and depreciable investment properties would decrease their respective balances and increase the recorded depreciation and amortization expense.

As of December 31, 2007 and 2006, the accumulated depreciation of bank premises, furniture, fixtures and equipment of the Bank amounted to P=573.59 million and P=509.44 million, respectively (see Note 6). As of December 31, 2007 and 2006, the accumulated depreciation of investment properties of the Bank amounted to P=37.97 million and P=29.83 million, respectively (see Note 7). As of December 31, 2007 and 2006, the accumulated depreciation of repossessed vehicles of the Bank amounted to P=9.09 million and P=5.53 million, respectively (see Note 9).

i) Operating leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statement of income on a straight-line basis over the lease term (see Note 21).

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j) Contingencies

The Bank is currently involved in various legal proceedings. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the Bank’s defense in these matters and is based upon an analysis of potential results. The Bank currently does not believe that these proceedings will have a material adverse effect on its financial position. It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to these proceedings (see Note 25).

4. Debt and Equity Securities Classified as Financial Assets

Financial assets at FVPL of the Bank consist of:

2007 2006 Government bonds P=704,297,244 P=662,476,581 Treasury notes 645,529,102 5,370,400 BSP Treasury bills 8,585,567 2,906,498 P=1,358,411,913 P=670,753,479

Financial assets at FVPL include net unrealized losses of P=7.73 million as of December 31, 2007

and net unrealized gains of P=3.36 million as of December 31, 2006.

AFS investments of the Bank consist of:

2007 2006 Government bonds P=1,616,230,505 P=2,498,760,097 Private bonds 1,017,890,227 377,235,851 Unquoted equity instruments 114,173,238 115,789,595 2,748,293,970 2,991,785,543 Allowance for impairment losses (Note 11) (50,061,096) (50,061,096) P=2,698,232,874 P=2,941,724,447

AFS investments are carried net of unrealized losses of P=14.53 million as of December 31, 2007 and net of unrealized gains of P=10.96 million as of December 31, 2006. Allowance for impairment losses is attributable to AFS unquoted equity instruments.

HTM investments of the Bank consist of:

2007 2006 Government bonds P=210,426,019 P=204,034,343 Private bonds 174,735,144 50,222,254 Treasury notes 127,479,288 604,841,786 BSP Treasury bills 39,836,952 57,590,331 P=552,477,403 P=916,688,714

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Peso-denominated government bonds bear nominal annual interest rates ranging from 8.5% to 12.37% in 2007 and from 4.00% to 10.63% in 2006, while US dollar-denominated bonds bear nominal interest ranging from 6.5% to 9.87% in 2007 and 4.19% to 7.02% in 2006.

Interest income on trading and investment securities for the year ended December 31, 2007 and 2006, respectively.

2007 2007 Financial assets at FVPL P=393,470,628 P=274,886,945 AFS investments 146,128,840 99,374,602 HTM investments 39,433,712 108,436,920 P=579,033,180 P=482,698,467

Trading and securities gains (losses) for the year ended December 31, 2007 and 2006 consist of the following:

2007 2006 Financial assets at FVPL (P=440,520) P=87,415,339 AFS investments (14,198,382) 67,012,404 (P=14,638,902) P=154,427,743

5. Loans and Receivables

Loans and receivables consist of:

2007 2006 Corporate lending P=7,180,505,114 P=7,042,127,476 Consumer lending 6,829,305,305 5,624,876,226 Residential mortgages 3,103,886,543 2,210,606,883 Small business lending 1,992,969,640 1,105,759,818 Others 622,124,063 620,342,563 19,728,790,665 16,603,712,966 Unearned discounts (772,104,307) (774,937,245) 18,956,686,358 15,828,775,721 Allowance for impairment and credit losses

(Note 11) (1,100,341,025) (684,795,731) P=17,856,345,333 P=15,143,979,990

Credit card receivables, under consumer lending, amounted to P=1.90 billion and P=0.82 billion as of December 31, 2007 and 2006, respectively. Loans and receivables from corporate lending includes unquoted debt securities amounting to P=214.46 million and P=329.66 million as of December 31, 2007 and 2006, respectively. Loans and receivables - Others consist of accounts receivable, accrued interest receivable and sales contract receivables.

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In 2001, a memorandum of understanding between the Bank and Filinvest Land, Inc. (FLI), a related party, was approved and executed, by which the former agreed to purchase, on a without recourse basis, the installment contracts receivable from FLI. On various dates in 2004, several deeds of assignment were executed by the Bank and FLI wherein the latter sold, assigned and transferred without recourse to the former all the rights, titles and interest in various loan accounts and the related mortgages at book value. Receivables purchased outstanding by the Bank without recourse under the terms of the foregoing assignment agreement amounted to P=315.07 million and P=774.41 million as of December 31, 2007 and 2006, respectively, which also approximates its fair value at the inception date.

A reconciliation of allowance for impairment and credit losses for loans and receivables per class follows (amounts in thousands): 2007

Corporate

lending Consumer

lending Residential mortgages

Small business lending Others Total

At January 1 P=483,373 P=62,590 P=25,302 P=19,252 P=94,279 P=684,796 Provision for the year charged to

operations (Note 11) 18,226 82,709 − − – 100,935 Provision for the year charged to

surplus (Note 11) 155,426 58,147 37,099 − 99,289 349,961 Interest accrued on impaired loans (18,226) − − − − (18,226) Write-off (5,294) − − − − (5,294) Reclassification (11,831) (101,030) − − 101,030 (11,831) At December 31 P=621,674 P=102,416 P=62,401 P=19,252 P=294,598 P=1,100,341 Specific impairment P=549,777 P=− P=− P=7,962 P=− P=557,739 Collective impairment 71,897 102,416 62,401 11,290 294,598 542,602 P=621,674 P=102,416 P=62,401 P=19,252 P=294,598 P=1,100,341

2006

Corporate

lending Consumer

lending Residential mortgages

Small business lending Others Total

At January 1 P=472,402 P=51,731 P=31,641 P=6,574 P=55,628 P=617,976 Provision for the year 48,196 18,055 − − 9,915 76,166 Interest accrued on impaired loans (30,887) − − − − (30,887) Write-off (17,493) − − − − (17,493) Reclassification 11,154 (7,195) (6,339) 12,678 28,736 39,034 At December 31 P=483,372 P=62,591 P=25,302 P=19,252 P=94,279 P=684,796 Specific impairment P=365,580 P=− P=− P=7,962 P=− P=373,543 Collective impairment 117,792 62,591 25,302 11,290 94,279 311,253 P=483,372 P=62,591 P=25,302 P=19,252 P=94,279 P=684,796

The following is a reconciliation of the individual and collective allowances for impairment losses on loans and receivables:

2007 2006

Specific

Impairment Collective

Impairment Total Specific

Impairment Collective

Impairment Total At January 1 P=373,543 P=311,253 P=684,796 P=349,895 P=268,081 P=617,976 Provision for the year 201,321 231,349 432,670 17,309 27,970 45,279 Write-off (5,294) − (5,294) (17,493) − (17,493) Reclassification (11,831) − (11,831) 23,832 15,202 39,034 At December 31 P=557,739 P=542,602 P=1,100,341 P=373,543 P=311,253 P=684,796

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BSP Reporting The details of the secured and unsecured loans receivables of the Bank follow (amounts in thousands):

2007 2006 Gross Amount % Gross Amount % Loans secured by: Real estate P=4,902,263 24.85 P=3,754,819 22.62 Chattel 4,393,349 22.27 4,495,173 27.07 Hold-out on deposit 843,971 4.28 1,242,287 7.48 Securities 108,730 0.55 778,602 4.69 Quedans 460 0.00 97,077 0.58 Others 814,212 4.13 167,049 1.01 P=11,062,985 56.08 10,535,007 63.45 Unsecured 8,665,806 43.92 6,068,706 36.55 P=19,728,791 100.00 P=16,603,713 100.00

Information on the concentration of credit as to industry follows (amounts in thousands):

2007 2006 Gross Amount % Gross Amount % Personal consumption P=5,638,691 28.58 P=4,564,850 27.49 Real estate, renting and business

services 4,268,725 21.64 4,728,297 28.48 Wholesale and retail trade 3,164,229 16.04 1,994,231 12.01 Manufacturing 1,732,625 8.78 1,271,725 7.67 Financial intermediaries 1,350,950 6.85 812,653 4.89 Agriculture, fisheries and forestry 588,122 2.98 182,774 1.10 Transport, storage and

communications 290,624 1.47 480,235 2.89 Others 2,694,825 13.66 2,568,948 15.47 P=19,728,791 100.00 P=16,603,713 100.00

The BSP considers that loan concentration exists when total loan exposure to a particular industry

or economic sector exceeds 30% of total loan portfolio. As of December 31, 2007 and 2006, the Bank does not have credit concentration in any particular industry.

BSP Circular No. 351 allows banks to exclude from nonperforming classification receivables classified as “Loss” in the latest examination of the BSP which are fully covered by allowance for credit losses, provided that interest on said receivables shall not be accrued and that such receivables shall be deducted from the total receivable portfolio for purposes of computing non-performing loans (NPLs). As of December 31, 2007 and 2006, NPLs of the Bank not fully covered by allowance for credit losses are as follow (amounts in thousands):

2007 2006 Total NPLs P=1,920,111 P=1,535,144 NPLs fully covered by allowance for credit losses (233,936) (164,244) P=1,686,175 P=1,370,900

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As of December 31, 2007 and 2006, secured and unsecured NPLs of the Bank are as follow (amounts in thousands):

2007 2006 Secured P=1,119,993 P=919,475 Unsecured 800,118 615,669 P=1,920,111 P=1,535,144

Interest income on loans and receivables for the year ended December 31, 2007 and 2006 consist of:

2007 2006 Loans and receivables P=1,738,854,407 P=1,585,492,544 Unquoted debt securities 8,100,924 8,101,029 P=1,746,955,331 P=1,593,593,573

Interest income accrued on impaired loans and receivables amounted to P=18.23 million and

P=30.89 million as of December 31, 2007 and 2006, respectively. 6. Bank Premises, Furniture, Fixtures and Equipment The composition of and movements in this account follow:

2007

Land Buildings

Furniture, Fixtures and

Equipment Leasehold

Improvements Total Cost As of January 1 P=269,306,675 P=73,342,209 P=416,495,846 P=269,719,262 P=1,028,863,992 Additions − 517,257 91,171,690 61,923,730 153,612,677 Disposals − − (31,403,712) − (31,403,712) Reclassifications − − (3,082,251) − (3,082,251) As of December 31 269,306,675 73,859,466 473,181,573 331,642,992 1,147,990,706 Accumulated depreciation and amortization As of January 1 − 11,390,644 317,256,553 180,794,940 509,442,137 Depreciation and amortization − 2,453,251 60,028,100 31,820,241 94,301,592 Disposals − − (29,625,611) − (29,625,611) Reclassifications − − (526,754) − (526,754) As of December 31 − 13,843,895 347,132,288 212,615,181 573,591,364 Net book value P=269,306,675 P=60,015,571 P=126,049,285 P=119,027,811 P=574,399,342

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2006

Land Buildings

Furniture, Fixtures and

Equipment Leasehold

Improvements Total Cost As of January 1 P=269,306,675 P=32,246,050 P=416,197,791 P=251,580,527 P=969,331,043 Additions – 10,135,456 46,217,950 18,138,735 74,492,141 Disposals – – (15,158,695) – (15,158,695) Reclassifications – 30,960,703 (30,761,200) – 199,503 As of December 31 269,306,675 73,342,209 416,495,846 269,719,262 1,028,863,992 Accumulated depreciation and amortization As of January 1 – 10,030,931 289,856,910 146,308,979 446,196,820 Depreciation and amortization – 1,242,576 51,300,352 34,485,961 87,028,889 Disposals – – (13,312,795) – (13,312,795) Reclassifications – 117,137 (10,587,914) – (10,470,777) As of December 31 – 11,390,644 317,256,553 180,794,940 509,442,137 Net book value P=269,306,675 P=61,951,565 P=99,239,293 P=88,924,322 P=519,421,855

7. Investment Properties The composition of and movements in this account follow:

2007

Land Buildings and Improvements Total

Cost At January 1 P=793,545,318 P=123,198,082 P=916,743,400 Additions 121,970,170 18,588,207 140,558,377 Disposals (47,080,442) (20,155,404) (67,235,846) Reclassification (112,769,521) 113,120,336 350,815 At December 31 755,665,525 234,751,221 990,416,746 Accumulated depreciation and amortization At January 1 − 29,826,651 29,826,651 Depreciation and amortization − 11,527,666 11,527,666 Disposals − (3,385,584) (3,385,584) At December 31 − 37,968,733 37,968,733 Accumulated impairment losses (Note 11) At January 1 34,683,793 7,546,755 42,230,548 Provision for impairment directly

charged to surplus 106,234,722 13,443,772 119,678,494 Disposals (295,750) (49,887) (345,637) Reclassifications 10,427,920 6,764,498 17,192,418 At December 31 151,050,685 27,705,138 178,755,823 Net book value P=604,614,840 P=169,077,350 P=773,692,190

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*SGVMC110691*

2006

Land Buildings and Improvements Total

Cost At January 1 P=694,747,191 P=155,420,908 P=850,168,099 Additions 216,985,275 26,036,387 243,021,662 Disposals (43,666,267) (37,872,763) (81,539,030) Reclassification (74,520,881) (20,386,450) (94,907,331) At December 31 793,545,318 123,198,082 916,743,400 Accumulated depreciation and amortization At January 1 – 28,700,393 28,700,393 Depreciation and amortization – 11,395,749 11,395,749 Disposals – (4,082,154) (4,082,154) Reclassifications – (6,187,337) (6,187,337) At December 31 – 29,826,651 29,826,651 Accumulated impairment losses (Note 11) At January 1 5,698,597 4,052,083 9,750,680 Provision for impairment losses 8,649,830 – 8,649,830 Disposals (3,132,737) (969,543) (4,102,280) Reclassifications 23,468,103 4,464,215 27,932,318 At December 31 34,683,793 7,546,755 42,230,548 Net book value P=758,861,525 P=85,824,676 P=844,686,201

The Bank’s investment properties consist entirely of real estate properties and land improvements acquired in settlement of loans and receivables.

The fair values of the Bank’s investment properties have been determined on the basis of recent sales of similar properties in the same areas as the investment properties and taking into account the economic conditions prevailing at the time the valuations were made. The aggregate fair value of the investment properties of the Bank amounted to P=1.13 billion and P=985.16 million as of December 31, 2007 and 2006, respectively. Details of the rental income charged to miscellaneous income, and direct operating expenses included in the miscellaneous expenses, related to the investment properties of the Bank follow:

2007 2006 Rent income on investment properties P=600,000 P=600,000 Direct operating expenses from investment

properties generating rent income

(359,392) (475,942) Direct operating expenses from investment

properties not generating rent income

(16,144,290) (6,733,402) (P=15,903,682) (P=6,609,344)

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*SGVMC110691*

8. Equity Investment

As of December 31, 2005, this account consists of investment in EW Savings Bank, Incorporated (EWSBI), which is carried at acquisition cost amounting to P=150 million.

As Bank’s sole subsidiary, EWSBI was registered with the SEC on September 10, 1997. EWSBI is wholly owned by the Bank. Its primary purpose is to engage in the general business of a savings and mortgage bank and to exercise all the rights, attributes, process and privileges together with the assumption of all the duties and obligations of a savings and mortgage bank as provided in Section 5 of Republic Act No. 7906, otherwise known as the “Thrift Banks Act of 1995” and other related laws.

However, on March 31, 2000, EWSBI’s BOD decided to shorten the term of EWSBI and

eventually end its corporate life effective on the same date. As a result, EWSBI changed its basis of accounting from going-concern basis to the liquidation basis, thus, EWSBI was no longer consolidated to the Bank. EWSBI’s activities after March 31, 2000 have been limited to disposal of assets and liquidation of liabilities. Accordingly, the carrying values of EWSBI’s remaining

assets are currently maintained at their estimated realizable values. EWSBI’s total liabilities, on the other hand, are carried at their estimated settlement amounts. The net earnings of EWSBI represent primarily interest income on short-term bank deposits net of expenses incidental to liquidation.

On April 7, 2006, the BOD of EWSBI declared cash dividend in favor of the Bank amounting to P=15.70 million to be distributed on or before April 10, 2006.

On October 16, 2006, the SEC approved the dissolution of EWSBI. The remaining assets of EWSBI were absorbed by the Bank which resulted in recovery of its investment amounting to P=150.00 million and recognition of gain amounting to P=1.98 million.

9. Other Assets This account consists of:

2007 2006 Advances to contractors P=134,846,119 P=− Vehicles and other repossessed assets 131,025,567 93,670,945 Deposits 75,171,273 41,301,834 Deferred charges 72,469,366 70,850,808 Capitalized computer software - net 68,593,443 61,668,626 Sundry debits 7,006,649 15,148,721 Miscellaneous - net (Notes 18 and 20) 136,199,099 139,687,177 625,311,516 422,328,111 Allowance for probable losses (Note 11) (59,933,758) (32,518,443) P=565,377,758 P=389,809,668

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Movements in repossessed motor vehicles follow:

2007 2006 Cost As of January 1 P=44,689,634 P=34,865,862 Additions 132,268,902 40,539,634 Disposals (113,713,835) (30,715,862) Reclassification 675,000 − As of December 31 63,919,701 44,689,634 Accumulated depreciation and

amortization

As of January 1 5,532,334 11,725,368 Depreciation and amortization 10,696,324 4,992,970 Disposals (7,140,429) (11,186,004) As of December 31 9,088,229 5,532,334 Net book value P=54,831,472 P=39,157,300

Movements in capitalized computer software follow:

2007 2006 Balance at beginning of year P=61,668,626 P=73,634,442 Computer software purchased during the year 38,391,934 11,457,102 Amortization during the year (31,467,117) (23,422,918) Balance at end of year P=68,593,443 P=61,668,626

10. Goodwill

In 2003, the Bank merged with Ecology Savings Bank Inc. (ESBI). The Bank, as the surviving corporation, purchased all the outstanding capital stock of ESBI from EBC Strategic Holdings Corp. (ESHC) in exchange for cash amounting to P=172.8 million. Consequently, as set forth in the articles of merger (AOM) dated January 31, 2003, all rights, business, assets and liabilities of ESBI were conveyed, assigned and transferred to the Bank. The merger was approved by the BSP and the SEC on August 6, 2003 and June 26, 2003, respectively. The merger resulted in goodwill amounting to P=172.8 million. Movements in goodwill follow:

2007 2006 Balance at beginning of year P=150,211,812 P=155,211,812 Impairment loss during the year − (5,000,000) Balance at end of year P=150,211,812 P=150,211,812

For impairment testing, the recoverable amount has been determined based on value in use calculation using projected cash flows for the next five years of 30 branches. The discount rate applied to cash flow projections is 12.47%.

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11. Allowance for Impairment and Credit Losses

Details of and changes in the allowance for impairment and credit losses follow:

2007 2006 Balances at beginning of year

Due from BSP P=25,755,517 P=− Loans and receivables (Note 5) 684,795,731 617,976,371 AFS investments (Note 4) 50,061,096 154,092,808 Investment properties (Note 7) 42,230,548 9,750,680 Other assets (Note 9) 32,518,443 −

835,361,335 781,819,859 Provisions charged directly to surplus (Notes 5, 7

and 9) 567,873,014 − Provisions charged to current operations (Note 5) 100,935,044 101,920,984 Interest accrued on impaired loans (18,225,663) (30,886,537) Reclassifications (Notes 5, 7 and 9) (9,204,297) − Write-off (Note 5) (5,294,105) (17,492,971) Balances at end of year

Due from BSP 82,353,626 25,755,517 Loans and receivables (Note 5) 1,100,341,025 684,795,731 AFS investments (Note 4) 50,061,096 50,061,096 Investment properties (Note 7) 178,755,823 42,230,548 Other assets (Note 9) 59,933,758 32,518,443

P=1,471,445,328 P=835,361,335

In 2007, the Bank recognized the additional provisions for impairment and credit losses related to Due from BSP, Loans and receivables, Investment properties and Other assets amounting to P=56.60 million, P=349.96 million, P=119.68 million and P=41.64 million, respectively, as a direct reduction to surplus as of January 1, 2007. PFRS require the provision for impairment and credit losses to be charged against current operations in the year such provision for impairment and credit losses is determined. Had the provisions for impairment and credit losses been recognized in accordance with PFRS, the net income of P=137.28 million would have been a net loss of P=231.83 million.

12. Deposit Liabilities

Of the total deposit liabilities of the Bank as of December 31, 2007 and 2006, about 41.00% and 41.29%, respectively, are subject to periodic interest repricing. The remaining deposit liabilities earn annual fixed interest rates ranging from 0.75% to 7.00% and from 1.00 % to 5.00% in 2007 and 2006, respectively.

Under existing BSP regulations, non-FCDU deposit liabilities are subject to liquidity reserve equivalent to 11% starting July 15, 2005 (under BSP Circular 491), and statutory reserve of 10%. As of December 31, 2007 and 2006, the Bank is in compliance with such regulations.

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Available reserves as of December 31, 2007 and 2006 follow:

2007 2006 Cash and other cash items P=1,210,506,703 P=732,006,906 Due from BSP 3,936,661,123 3,275,959,621 HTM investments − 552,155,909 P=5,147,167,826 P=4,560,122,436

13. Bills and Acceptances Payable This account consists of:

2007 2006 Bills payable to: BSP P=1,336,100,290 P=1,233,000,000 Banks and other financial institutions 18,000,000 48,313,173 Outstanding acceptances 12,679,361 35,566,462 P=1,366,779,651 P=1,316,879,635

Bills payable to the BSP, other banks and other financial institutions are subject to annual interest rates ranging from 4.50% to 9.64% in 2007 and from 3.40% to 12.00% in 2006.

14. Accrued Taxes, Interest and Other Expenses This account consists of:

2007 2006 Accrued interest payable P=91,036,456 P=90,868,230 Accrued expenses 62,216,748 26,398,092 Accrued other taxes 13,386,482 9,885,001 Income tax payable 5,794,100 5,086,332 Provision for tax contingency − 109,495,297 P=172,433,786 P=241,732,952

In 2006, the Bank recognized its provision for tax contingency amounting to P=71.18 million, net of deferred tax asset of P=38.32 million, as a direct reduction to the Surplus as of January 1, 2006. PFRS require the provision for tax contingency to be charged against current operations in the year such provision for tax contingency is determined. Had the provision for the tax contingency been recognized with PFRS, the net income would have decreased by P=71.18 million. In 2007, the Bank made a full settlement of its prior years’ tax assessments with the Bureau of Internal Revenue.

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15. Other Liabilities This account consists of:

2007 2006 Bills purchased (Note 18) P=657,829,917 P=194,382,399 Accounts payable (Note 18) 186,480,480 44,054,747 Deferred credits 49,008,409 23,770,884 Due to BSP (Note 18) 10,253,416 10,275,583 Marginal deposits and letters of credit (Note 18) 2,538,374 12,659,689 Miscellaneous (Note 18) 39,907,558 109,619,900 P=946,018,154 P=394,763,202

16. Maturity Analysis of Assets and Liabilities

The following table shows an analysis of assets and liabilities analyzed according to whether they are expected to be recovered or settled within one year and beyond one year from statements of condition date (amounts in thousands): 2007 2006

Less than twelve

months

Over twelve

months Total

Less than twelve

months

Over twelve

months Total Financial Assets

COCI P=1,388,732 P=− P=1,388,732 P=816,820 P=− P=816,820 Due from BSP - gross (Note 11) 4,318,572 − 4,318,572 3,830,027 − 3,830,027 Due from other banks 855,514 − 855,514 633,084 − 633,084 IBLR and SPURA 6,381,584 − 6,381,584 3,000,000 − 3,000,000 Financial assets at FVPL 13,560 1,344,852 1,358,412 665,943 4,810 670,753 AFS investments - gross (Note 4) 608,413 2,139,881 2,748,294 533,982 2,457,804 2,991,786 HTM investments 307,585 244,892 552,477 609,399 307,290 916,689 Loans and receivables - gross (Note 5) 9,956,320 9,772,471 19,728,791 4,448,376 12,155,337 16,603,713

23,830,280 13,502,096 37,332,376 14,537,631 14,925,241 29,462,872 Nonfinancial Assets Bank premises, furniture, fixtures and

equipment − 574,399 574,399 − 519,422 519,422 Investment property - gross (Note 7) − 952,448 952,448 − 886,915 886,917 Deferred tax assets − 664,130 664,130 − 471,787 471,787 Goodwill − 150,212 150,212 − 150,212 150,212

Other assets - gross (Note 9) 346,449 278,863 625,312 263,120 159,208 422,328 346,449 2,620,052 2,966,501 263,120 2,187,544 2,450,666 24,176,729 16,122,148 40,298,877 14,800,751 17,112,785 31,913,538 Allowances for impairment and

credit losses (Note 11) – – (1,471,445) – – (835,361) Unearned interest and discounts (Note 5) – – (772,104) – – (774,937) P=24,176,729 P=16,122,148 P=38,055,328 P=14,800,751 P=17,112,785 P=30,303,240

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2007 2006

Less than twelve

months

Over twelve

months Total

Less than twelve

months

Over twelve

months Total Financial Liabilities Deposit liabilities P=21,502,484 P=9,771,102 P=31,273,586 P=14,804,573 P=10,414,000 P=25,218,573 Bills payable and acceptances payable 1,348,780 18,000 1,366,780 1,316,880 – 1,316,880 Cashiers’ checks and demand drafts payable 173,020 – 173,020 250,478 – 250,478 Accrued interest, taxes and other expense

(Note 14) 153,253 – 153,253 117,266 – 117,266 Other liabilities (Note 15) 857,102 – 857,102 261,372 – 261,372

24,034,639 9,789,102 33,823,741 16,750,569 10,414,000 27,164,569 Nonfinancial liabilities

Accrued interest and other liabilities (Note 14) 19,181 – 19,181 124,467 – 124,467

Other liabilities (Note 15) 88,916 − 88,916 133,391 − 133,391 108,097 − 108,096 257,858 − 257,858 P=24,142,736 P=9,789,102 P=33,931,838 P=17,008,427 P=10,414,000 P=27,422,427

17. Equity

Capital stock as of December 31, 2007 and 2006 consists of:

2007 2006 Preferred stock Preferred “A” - P=100 par value convertible,

nonvoting shares Authorized - 20,000,000 shares Issued and outstanding - 17,875,281 shares P=– P=1,787,528,100 Preferred “B” - P=100 par value nonconvertible,

nonvoting shares Authorized - 7,000,000 shares Issued and outstanding - 4,360,000 shares − 436,000,000 – 2,223,528,100 Common stock - P=100 par value Authorized - 3,000,000 shares Issued and outstanding - 1,500,000 shares – 150,000,000 Common stock - P=10 par value Authorized - 500,000,000 shares Issued and outstanding - 387,352,810 shares 3,873,528,100 – P=3,873,528,100 P=2,373,528,100

On January 25, 2007, the BOD approved the additional cash infusion of FDC Forex Corporation, a wholly owned subsidiary of FDC, to the Bank amounting to P=500.00 million and allowed the former to own forty percent (40%) of the Bank’s capital stock. This was initially booked as deposit for stock subscription pending Bank’s application with SEC to increase authorized capital stock. On May 30, 2007, BSP approved the Bank’s request to allow FDC Forex Corporation to own 40% of the Bank.

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On May 31 and December 28, 2007, the BOD and SEC, respectively, approved the following amendments to the articles of incorporation of the Bank:

a) increase in authorized capital stock from P=3 billion to P=5 billion; b) decrease in the par value of common stock from P=100 per share to P=10 per share; c) conversion of the existing 27,000,000 shares of preferred stock to equal number of shares

of common stock; and d) deletion of all provisions pertaining to the features of preferred stock.

On December 28, 2007, FDC Forex Corporation infused additional cash amounting to P=1.00 billion. On the same day, capital stock amounting to P=1.50 billion was issued to FDC Forex Corporation. The outstanding common stock amounting to P=150.00 million was retired and replaced by P=10 par common. Preferred “A” and “B” shares with outstanding balance of P=1.79 billion and P=436.00 million, respectively, were converted to 223,352,810 common shares with par value of P=10. Prior to conversion of preferred shares to common shares The preferences, privileges, limitations, restrictions granted to or imposed upon the shareholders of the preferred stock follow:

Preferred “A” shares of stock:

a) Nonvoting. Owners or holders of preferred “A” shares shall have no voting rights, except in matters as to which existing law requires the vote or consent of the holders of a specified proportion of all the stock of the corporation irrespective of class.

b) Convertible. Owners or holders of preferred shares may convert such preferred shares to

voting common shares provided that any such conversion shall not be in conflict with or violate the applicable nationality requirements or other limitations on stock holdings in banks prescribed in the General Banking Law, the rules and regulations promulgated by the BSP and the Corporation Code. Conversion of preferred shares to common shares shall be governed by the rules to be prescribed by the BOD.

c) Preferences. Owners or holders of preferred “A” shares shall enjoy the same rights and

privileges as common voting shares (except voting rights) insofar as the right to participate in the profits of the Bank is concerned, including rights to stock dividends and to pre-emption, provided that all holders of preferred shares shall have preference over holders of common shares in the distribution or liquidation of the resources of the Bank in case of dissolution and/or liquidation as provided for in the Corporation Code and the Civil Code of the Philippines on preference of credits.

Preferred “B” shares of stock:

a) Nonvoting. Owners or holders of preferred “B” shares shall have no voting rights, except in matters as to which existing law requires the vote or consent of the holders of a specified proportion of all the stock of the corporation.

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Dividend Rights. The holders of preferred “B” shares shall be entitled to receive cash dividends at 9% per annum on the par value thereof. Cumulative dividends, as the BOD of the Bank may from time to time declare, are to be paid out of the unrestricted surplus of the Bank. Dividends in arrears amounted to P=333.54 million and P=313.92 million as of December 31, 2007 and 2006, respectively. The cumulative preferred dividends were waived upon conversion of preferred shares to common shares.

c) Redemption Privilege. At the option of the Bank, it shall redeem the preferred “B” shares outstanding at that time within a period of five years from its issuance upon prior approval of the BSP, and only if the redeemed shares are replaced with at least an equivalent amount of newly paid-in shares so that the total paid-in capital stock is maintained at the same level immediately prior to redemption, by paying in cash an amount equal to the par value of the preferred “B” shares to be so redeemed. In all case of redemption under this paragraph, the following rules shall apply:

i. Notice of redemption shall be sent to the holders of the preferred “B” shares to be

redeemed within such reasonable time as the BOD may determine;

ii. If not all of the shares of preferred “B” stock represented by any certificate are redeemed at any one time, the other holders shall be entitled to receive new preferred “B” shares of stock certificate representing the shares which are not so redeemed; and

iii. Subject to existing rules and regulations, the BOD shall have full discretion from time to

time to prescribe and regulate, subject to the procedures herein above set forth, the procedure to be followed and the details concerning the redemption of said shares.

d) Nonconvertible. Owners or holders of preferred “B” shares are not entitled to convert such

shares to voting common shares.

e) Preference in liquidation. In the event of any voluntary or involuntary dissolution or liquidation or winding up of the Bank except in connection with a merger or consolidation, the holders of preferred “B” shares of stock shall be entitled to be paid in full. Ratably insofar as the assets of the Bank will permit, the redemption value of each preferred “B” share of stock before any distribution shall be made to the holders of the preferred “A” shares of stock and common shares of stock shall be entitled to no other distribution thereon.

Capital Management

The Bank actively manages its capital in accordance with regulatory requirements. The primary objective of which is to ensure that the Bank, at all times, maintains adequate capital to cover risks inherent to its banking activities without prejudice to optimizing shareholder’s value. As a matter of policy, it adopts capital adequacy requirements based on the Basel Capital Accord in July 2001, popularly known as Basel I, as contained in Circular No. 280 and amended Circular No. 400. Under this rule, BSP provided risk weight ratings for capital adequacy ratio (CAR) computation. In August 2006, the BSP issued Circular No. 538 that contains the Basel II implementing guidelines which took effect in July 2007. Under the new rule, risk weight ratings are based from external rating agencies. Moreover, total risk weighted assets is being computed based on credit, market and operational risks.

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*SGVMC110691*

Under existing BSP regulations, the determination of the Bank’s compliance with regulatory requirements and ratios is based on the amount of the Bank’s “unimpaired capital” (regulatory net worth) reported to the BSP, which is determined on the basis of regulatory policies. In addition, the risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted assets, should not be less than 10%. Qualifying capital and risk-weighted assets are computed based on BSP regulations.

The regulatory Gross Qualifying Capital of the Bank consists of Tier 1 (core) and Tier 2 (supplementary) capital. Tier 1 capital comprises share capital, retained earnings (including current year profit) and minority interest less required deductions such as deferred income tax and unsecured credit accommodations to DOSRI. Tier 2 capital includes unsecured subordinated debts, revaluation reserves and general loan loss provision. Certain items are deducted from the regulatory Gross Qualifying Capital, such as but not limited to equity investments in unconsolidated subsidiary banks and other financial allied undertakings, but excluding investments in debt capital instruments of unconsolidated subsidiary banks (for solo basis) and equity investments in subsidiary non-financial allied undertakings.

Risk-weighted assets are determined by assigning defined risk weights to amounts of on-balance sheet exposures and to the credit equivalent amounts of off-balance sheet exposures. Certain items are deducted from risk-weighted assets, such as the excess of general loan loss provision over the amount permitted to be included in Tier 2 capital. The risk weights vary from 0% to 100% depending on the type of exposure, with the risk weights of off-balance sheet exposures being subjected further to credit conversion factors.

Below is a summary of risk weights and selected exposure types:

75% Direct loans of defined Small Medium Enterprise (SME) and microfinance loans portfolio; non-performing housing loans fully secured by first mortgage

Risk weight Exposure/Asset type* 0% Cash on hand; claims collateralized by securities issued by the NG, BSP;

loans covered by the Trade and Investment Development Corporation of the Philippines; real estate mortgages covered by the Home Guarantee Corporation

20%

COCI, claims guaranteed by Philippine incorporated banks/quasi-banks with the highest credit quality; claims guaranteed by foreign incorporated banks with the highest credit quality; loans to exporters to the extent guaranteed by Small Business Guarantee and Finance Corporation

50%

Housing loans fully secured by first mortgage on residential property; Local Government Unit (LGU) bonds which are covered by Deed of Assignment of Internal Revenue allotment of the LGU and guaranteed by the LGU Guarantee Corporation

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*SGVMC110691*

100%

All other assets (e.g., real estate assets) excluding those deducted from capital (e.g., deferred income tax)

125% All non-performing loans (except non-performing housing loans fully secured by first mortgage) and all non-performing debt securities

* Not all inclusive With respect to off-balance sheet exposures, the exposure amount is multiplied by a credit

conversion factor (CCF), ranging from 0% to 100%, to arrive at the credit equivalent amount, before the risk weight factor is multiplied to arrive at the risk-weighted exposure. Direct credit substitutes (e.g., guarantees) have a CCF of 100%, while items not involving credit risk has a CCF of 0%.

In the case of derivatives, the credit equivalent amount (against which the risk weight factor is

multiplied to arrive at the risk-weighted exposure) is generally the sum of the current credit exposure or replacement cost (the positive fair value or zero if the fair value is negative or zero) and an estimate of the potential future credit exposure or add-on. The add-on ranges from 0% to 1.5% (interest rate-related) and from 1.0 % to 7.5 % (exchange rate-related), depending on the residual maturity of the contract. For credit-linked notes and similar instruments, the risk-weighted exposure is the higher of the exposure based on the risk weight of the issuer’s collateral or the reference entity or entities.

The Bank’s risk-weighted capital adequacy ratio is calculated by dividing the sum of its Tier 1 and Tier 2 capital, as defined under BSP regulations, by its risk-weighted assets. The risk-weighted assets, as defined by the BSP regulations, consist of all of the assets on the Bank’s balance sheet at their respective book values, together with certain other off-balance sheet items, weighted by certain percentages depending on the risks associated with the type of assets. The determination of the Bank’s compliance with regulatory requirements and ratios is based on the amount of the Bank’s “unimpaired capital” (regulatory net worth) as reported to the BSP, which is determined on the basis of regulatory accounting practices which differ from PFRS in some respects. As of December 31, 2007 and 2006, the Bank was in compliance with the capital adequacy ratio. The capital-to-risk assets ratio of the Bank as reported to the BSP as of December 31, 2007 and 2006 are shown in the table below (amounts in millions).

2007 2006

Actual Required Actual Required Tier 1 capital P=4,486.32 P=2,679.31 Tier 2 capital 73.00 509.00 Gross qualifying capital 4,559.32 3,188.31 Less: Required deductions 781.25 739.36 Total qualifying capital P=3,778.97 P=2,400 P=2,448.95 P=2,400 Risk weighted assets P=24,616.94 P=21,189.28 Tier 1 capital ratio 15.05% 9.16% Total capital ratio 15.35% 11.56%

Risk weight Exposure/Asset type*

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*SGVMC110691*

The BSP, under BSP Circular 538 dated August 4, 2006 has issued the prescribed guidelines implementing the revised risk-based capital adequacy framework for the Philippine banking system to conform to Basel II recommendations. The new BSP guidelines were effective starting July 1, 2007.

18. Financial Risk Management Objectives and Policies

Risk Management The risk management process is performed at the strategic, transaction and portfolio levels. At the strategic level, the Bank sets revenue goals and defines its risk philosophy to create a risk culture within the Bank. Revenue goals are incorporated in the business plans putting emphasis on the identification and quantification of risk attendant to its various revenue activities. The emphasis on risks allows for basic reward/risk trade-off analyses not only in the budget process but also in a risk approval process. The resulting business plan will relate the amount of risks to be taken to achieve the desired revenue goals.

The Bank’s activities are principally related to the use of financial instruments and are exposed to credit risk, liquidity risk and market risk, the latter being subdivided into trading and non-trading risks. It is also subject to operating risks. Forming part of a coherent risk management system are the risk concepts, trading tools, analytical models, statistical methodologies, historical studies and market analysis, which are being employed by the Bank. These stages constitute the essence of risk process that involves establishing core competencies in recognizing, dimensioning, assessing, limiting, assuming, managing, controlling and monitoring risks. It starts with risk identification covering the entire spectrum of risk-sensitive positions and ends with assessing the risk taking activities through performance metrics, which serve as rational basis for future business plans.

The Bank’s accepts deposits from customers at fixed rates, and for various periods, and seeks to earn above-average interest margins by investing these funds in high-quality assets. It also seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates, while maintaining sufficient liquidity for longer periods at higher rates, while maintaining sufficient liquidity to meet all claims that might fall due. The Bank trades in financial instruments where it takes positions in traded and over-the-counter instruments to take advantage of short-term market movements in bonds and in currency and interest rate. The Bank places trading limits on the level of exposure that can be taken in relation to both overnight and intra-day market positions. Risk Management Structure a. BOD

The Bank’s risk culture is practiced and observed across the Bank putting the prime responsibility on the BOD. It establishes the risk culture and the risk management organization and incorporates the risk process as an essential part of the strategic plan of the Bank. All risk management policies and policy amendments, risk-taking limits such as but not limited to credit and trade transactions, market risks limits, counterparty limits, trader’s limits and activities are based on the Bank’s established approving authorities which are approved by the Bank’s BOD.

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*SGVMC110691*

b. Executive Committee

This is a board level committee, which reviews the bank-wide credit strategy, profile and performance. It approves the credit risk-taking activities (e.g. Loan Approval Memorandum, including attached credit ratings and other exceptions) based on the Bank’s established approving authorities and likewise reviews and endorses credit-granting activities. All credit approved at the level of the Loans and Investments Committee (Loan Com) passes through this committee for final approval.

c. Asset-Liability Management Committee (ALCO)

ALCO, a management level committee, meets on a weekly basis and is responsible for the over-all management of the Bank’s asset, liabilities and its over-all financial structure. The ALCO’s primary responsibilities include (i) ensuring that the Bank and each business units hold sufficient liquid assets of appropriate quality and in appropriate currencies to meet short-term funding and regulatory requirements, (ii) managing balance sheet and ensuring that business strategies are consistent with its liquidity, capital and funding strategies, (iii) establishing asset and/or liability pricing policies that are consistent with balance sheet objectives, (iv) recommending liquidity risk limits to the Market Risk Committee and BOD and (v) approving the assumption used in contingency and funding plans.

d. Risk Management Committee (RMC) This board level committee handles the effectiveness of the Bank’s over-all risk management practices; purposes and all risk management policies and policy amendments are reviewed and endorsed by the RMC for BOD approval. The committee also evaluates the magnitude, direction and distribution of risks across the Bank and reports to the BOD for approval of all types of recommended risk tolerances.

e. Loan Com This committee is headed by no less than the Chairman of the Bank whose primary responsibility is to oversee the Bank’s credit risk-taking activities and overall adherence to the credit risk management framework. Said committee reviews business/credit risk strategies, quality and profitability of the Bank’s credit portfolio and recommends changes to the credit evaluation process, credit risk acceptance criteria and the minimum and target return per credit rating portfolio. All credit risk-taking activities based on the Bank’s established approving authorities are evaluated and approved at this committee.

f. Audit Committee (Audit Com)

The Audit Com is primarily tasked to discuss with management the Bank’s major risk exposures and the steps management has taken to monitor and control such exposures including the Bank’s risk assessment and risk management policies. The Committee discuss with management and the independent auditor the major issues regarding accounting principles and financial statement presentation, including any significant changes in the Bank’s selection or application of accounting principles; and major issues as to the adequacy of the Bank’s internal controls; and the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Bank.

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g. Corporate Governance Committee (CGC)

The CGC assists the BOD in fulfilling its corporate governance responsibilities. It reviews and evaluates the qualifications, in compliance with the rules and regulations of the SEC and BSP, all persons nominated to the BOD as well as those nominated to other positions requiring appointment by the BOD. This committee ensures the BOD’s effectiveness and due observance of corporate governance principles and guidelines and oversees the periodic performance evaluation of the BOD and its Committees and Executive Management. It makes recommendations to the BOD regarding the continuing education of the directors, assignment to board committees, succession plan for the board members and senior officers and their remuneration commensurate with corporate and individual performance.

h. Risk Management Division (RMD)

RMD performs an independent regulatory function within the Bank. RMD is tasked with identifying, analyzing, measuring, controlling and evaluating risk exposures arising from fluctuations in the prices or market value of instruments, products and transactions in the Bank’s overall portfolio (on or off balance sheet). It is responsible for recommending trading risk and liquidity management policies, setting uniform standards of risk assessments and measurements; providing senior management with periodic evaluation and simulation; analyzing limit compliance exception.

i. Internal Audit Division (IAD)

The IAD audits risk management processes throughout the Bank annually or in a cycle depending on the latest audit rating. IAD employs a risk-based audit approach that examines both the adequacy of the procedures and the Bank’s compliance with the procedures. IAD discusses the results of all assessments with management, and reports its findings and recommendations to the Audit Com. The Audit Com conducts the detailed discussion of the findings and recommendations during its monthly meetings.

Risk Mitigation Pursuant to the BSP’s regulations, the Bank is required to establish a system of identifying and monitoring existing or potential problem loans and other risk assets and of evaluating credit policies vis-à-vis prevailing circumstances and emerging portfolio trends. In compliance with this requirement, the RMD on a regular basis or as circumstances requires, establishes and maintains a system for monitoring the financial condition of individual accounts and updates the senior management of the Bank, accordingly. The RMD monitors individual accounts to ensure that the Bank is aware of and understands the current financial condition or credit quality of the borrower and is in compliance with existing covenants. Accounts are reviewed at least once a year together with the credit line renewal. Larger exposures and lower rated-borrowers or counter-parties are reviewed more frequently, as necessary. The Credit Review unit is responsible for reviewing the credit approval process. Borrowers with unquestionable repaying capacity and to whom the Bank is prepared to lend on an unsecured basis, either partially or totally, are generally rated High Grade borrowers. A Standard rated borrower normally requires tangible collateral such as real estate mortgage (REM) to either fully or partially secure the credit facilities because it indicates a relatively higher credit risk than those accounts as High Grade. For any account to be acceptable, its rating should be in the High and Standard grades. For Sub-standard grade accounts, the granting of new/additional

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loans/credits may be considered on a fully secured basis only and covered by readily marketable and prime collateral such as REM and non-risk assets (e.g., government securities, bank deposits).

Credit Risk Credit risk refers to earnings or capital arising from an obligor/s, customer/s or counterparty’s failure to perform and/or to meet the terms of any contract with the Bank, subjecting the Bank to a financial loss. Credit risks may lasts for the entire tenor and set at the full amount of a transaction and in some cases may exceed the original principal exposures. The risk may arise from lending, trade finance, treasury, investments and other activities undertaken by the Bank. The Bank’s credit risk and loan portfolio is managed by the RMD at the transaction, borrower, product and portfolio levels. The Bank has a structured and standardized credit rating and approval process according to the business and/or product segment. For large corporate credit transactions, the Bank has a comprehensive procedure for credit evaluation, risk assessment and a well-defined concentration limits, which are established for each type of borrower. The RMD undertakes several functions with respect to credit risk such as independent credit analysis, including the portfolio risks associated with particular industry sectors, regions, loan size and maturity, and development of a strategy to achieve its desired portfolio mix and risk profile. It also ensures that the Bank’s credit policies and procedures are adequate and constantly evolving to meet the changing demands of the business. The RMD is also responsible for developing procedures to streamline and expedite the processing of credit applications.

The RMD reviews the Bank’s loan portfolio in line with the Bank’s policy of not having significant concentrations of exposure to specific industries or group of borrowers. It monitors compliance to the BSP’s limit on exposure to any single person or group of connected persons to an amount not exceeding 25.0% of the Bank’s adjusted capital accounts.

Remedial management is jointly handled by the Legal Services Department, Collections Department of the Retail Credit Group, and Ropa Sales and Appraisal of the Credit Services Group, under the Loan Committee oversight. All inherent elements in managing problem accounts that includes loan restructuring, collection and servicing of loan accounts encountering repayment difficulties as well as overseeing watch list accounts which are at risk due to adverse economic or business conditions comprise the remedial measures instituted by the Bank. The Bank extends as much assistance as necessary to restructure remedial accounts before taking steps to enforce legal proceedings. The Bank can reduce credit risk by diversifying its loan portfolio across various sectors and borrowers. This is the underlying principle of portfolio diversification against loan concentration. In general, the Bank is convinced that excessive concentration of lending in a single business sector (e.g. real estate development) or geographic area plays a significant role in weakening asset quality. Good diversification across economic sectors and geographic areas enables the Bank to ride through business cycles without causing undue harm to asset quality. It likewise allows the Bank to manage risks associated with the Bank’s largest exposures.

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Credit risk exposures The table below shows the maximum exposure to credit risk for the components of the statements of condition. The maximum exposure is shown gross, before the effect of mitigation through the use of master netting and collateral agreements (amounts in thousands).

2007 2006 Due from BSP P=4,236,218 P=3,804,271 Due from other banks 855,514 633,084 IBLR and SPURA 6,381,584 3,000,000 Financial assets at FVPL

Government bonds 704,297 662,477 Treasury notes 645,529 5,370 BSP treasury bills 8,586 2,906

1,358,412 670,753 AFS investments

Government bonds 1,616,231 2,498,760 Private bonds 1,017,890 377,236 Unquoted equity instruments 64,112 65,728

2,698,233 2,941,724 HTM investments

Government bonds 210,426 204,035 Private bonds 174,735 50,222 Treasury notes 127,479 604,842 BSP treasury bills 39,837 57,590

552,477 916,689 Loans and receivables

Corporate lending 6,556,120 6,552,592 Consumer lending 5,980,310 4,806,348 Residential mortgages 3,020,308 2,174,006 Small business lending 1,972,082 1,084,971 Others 327,525 526,063

17,856,345 15,143,980 Contingent liabilities 10,182,147 7,551,542 Commitments 1,910,533 26,228 12,092,680 7,577,770 P=46,031,463 P=34,688,271

Concentration of risk is managed by client/counterparty and by industry sector. For risk concentration monitoring purposes, the financial assets are broadly categorized into (1) loans and receivables and (2) trading and investment securities. Limit per client or counterparty The maximum credit exposure to any client or counterparty is P=650.0 million and P=600.0 million as of December 31, 2007 and 2006 respectively, before taking into account any collateral held or other credit enhancements.

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Concentration by industry An industry sector analysis of the Bank’s financial assets, before and after taking into account collateral held or other credit enhancements, is as follows (in thousands):

2007 2006 Amount % Amount % Financial intermediation P=17,318,708 37.62 P=12,428,703 35.83 Manufacturing 13,632,649 29.62 9,416,033 27.15 Real estate and renting & business

activity 3,870,280 8.41 4,716,207 13.60 Wholesale & retail trade, repair of

motor vehicles 3,114,883 6.77 1,979,927 5.70 Agriculture, fisheries and forestry 479,333 1.04 176,294 0.51 Transportation, storage and

communication 290,250 0.63 422,544 1.22 Private households w/ employed

persons 4,740,377 10.30 3,644,586 10.50 Others 2,584,983 5.61 1,903,977 5.49 P=46,031,463 100.00 P=34,688,271 100.00

Collateral and other credit enhancements Premium security items are collaterals that would have the effect of reducing the estimated cash risk for a facility. The primary consideration for enhancements falling this category is the ease of converting these enhancements into cash.

The percentage (%) of loan value attached to each of these security items is part of the Bank’s lending guidelines. These percentages take into account safety margins for foreign exchange rate exposure/fluctuation, interest rate exposure, and price volatility. Primary securities would include hold-out on deposits which are cash deposits in any form whether in Philippine currency or in US dollars or in other major currencies which are converted at prevailing booking rate at the time of transaction. REM - includes industrial, commercial, residential and developed agricultural real properties. The secured loan value is determined using the collateral’s latest appraisal report. REM is documented and registered for the full amount of approved credit accommodation. However, if the amount of loan is higher than the maximum allowable loan value, the difference must be stated in the Loan Approval Memorandum (LAM) as clean or unsecured. REM appraisal values are updated on an annual basis. These collaterals are valued according to existing credit policy standards.

Other form of collateral is the Standby Letter of Credit (SLC) or bank guarantee. These are bank guarantees issued by reputable banks in favor of the Bank to support their credit facility. Receivables from highly reputable rated companies covered by direct assignment of receivables to the Bank, including direct flow of receivables’ proceeds to the bank are likewise acceptable collaterals/security.

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Financial securities includes blue chip stocks and bonds - includes shares of stock and bonds of corporations with proven profit and cash dividend record and whose securities are actively being traded in the Philippine Stock Exchange (PSE). Secured loan value shall be determined per Bank’s approved credit policies. The stocks shall be marked to market using average closing rate at the end of trading for the last working day of each week. A 100 points drop in the PSE stock index for three (3) consecutive trading days will trigger an immediate revaluation of stocks held. Government securities - includes all securities issued by or fully guaranteed by the National Government (NG) and/or the BSP, but excluding those securities issued by provincial or city governments and agencies or corporations owned by the government. These collateral are valued lower than the prevailing market price taking into account safety margins. The collateral manager monitors the movement of market prices on a daily basis and shall recommend triggers. The drop in share prices should not be equal or be more than the percentage of safety margin previously considered. In case of security deterioration, client shall be required additional security/collateral. The Bank is not permitted to sell or repledge the collateral in the absence of default by the owner of the collateral. It is the Bank’s policy to dispose assets acquired in an orderly fashion. The proceeds of the sale of the foreclosed assets, included under ‘Investment properties, are used to reduce or repay the outstanding claim. In general, the Bank does not occupy repossessed properties for business use.

As part of the Bank’s risk control on security/collateral documentation, standard documents are made for each security type and deviation from the pro-forma documents are subject to legal department’s approval prior to acceptance. Internal Risk Rating System The Bank has a credit scoring system for corporate loan products above P=15.0 million that assesses risks relating to the borrower and the loan exposure. Borrower risk is evaluated by considering (i) quantitative factors, such as profitability, liquidity, capital adequacy and sales growth; (ii) qualitative factors, such as management skills and management integrity and (iii) industry risk. Considering certain industry characteristics, such as its importance to the economy, growth outlook, industry structure and relevant government policies are the basis for industry risk assessment. Based on these factors, each borrower is assigned a Borrower Risk Rating (BRR), a 10-scale scoring system that ranges from 1 to 10. In addition to the BRR, the Bank assigns a Facility Risk Rating (FRR). The FRR measures the maturity risk based on the length of loan exposure, while the BRR measures the quality of the collateral and risk of its potential deterioration over the term of the loan.

The Bank determines the credit risk spread over its costs of funding based on the expected average loan loss write-offs and the accompanying cost of carrying such losses for each type of borrower. In addition to the credit risk spread, a desired net spread, which is determined by the ALCO, is added to the cost of funding to arrive at the risk-adjusted price of its loans.

The credit rating for each borrower is reviewed annually except when the borrower has a higher risk profile or when there are extraordinary or adverse developments affecting the borrower, the industry and/or the Philippine economy, more than an annual review is being done.

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For consumer loans, the Bank uses a different credit-scoring model, which started in April 2007 is focused on the characteristics of a particular set of borrowers with similar risk profiles, product needs and behavior. Credit risk is specific to the identified target set of customers and follows pre-determined risk acceptance criteria for evaluation and approval. The business line credit program has a well-defined limit and credit authority structure and is subject to standard terms and conditions. The following is a brief explanation of the Bank’s risk rating: Risk rating class 1 - This category will apply to a borrower with a very low probability of going into default in the coming year. The borrower has a high degree of stability, substance and diversity. These borrowers are of the highest quality under virtually all-economic conditions. Risk rating class 2 - This category applies to borrowers with a low probability of going into default in the coming year. The borrower normally has a comfortable degree of stability, substance and diversity. These borrowers are quality multinational or local corporations, which are well capitalized. Risk rating class 3 - This category covers the smaller corporations with limited access to public capital markets or access to alternative financial markets. This access is however limited to favorable economic and/or market conditions. The borrower has reported profits for the past three fiscal years and is expected to be profitable again in the current year. Risk rating class 4 - This category is for those borrowers where clear risk elements exist and the probability of default is somewhat greater. Borrowers in this category normally have limited access to public financial markets. Borrowers should be able to withstand normal business cycles, but any prolonged unfavorable economic period would create deterioration beyond acceptable levels. Risk rating class 5 - The risk elements for the Bank are sufficiently pronounced, although borrowers should still be able to withstand normal business cycles. Any prolonged unfavorable economic and/or market period would create an immediate deterioration beyond acceptable levels. Risk rating class 6 - Borrowers for which unfavorable industry or company-specific risk factors represent a concern. Operating performance and financial strength may be marginal and it is uncertain whether the borrower can attract alternative sources of finance. The borrower will find it very hard to cope with any significant economic downturn and a default in such a case is more than a possibility. Generally, borrowers that incur net losses for two or more consecutive years fall under this rating. Risk rating class 7 - In this category are borrowers characterized by some probability of default, manifested by some or all of the following: • Evidence of weakness in the borrowers’ financial conditions or credit worthiness; • Unacceptable risk is generated by potential or emerging weaknesses as far as asset protection

and/or cash flow is concerned; • This will apply to any borrower that has reached a point where there is a real risk that the

borrower’s ability to pay the interests and repay the principal timely could be jeopardized; and

• The client is expected to have financial difficulties and exposure may be at risk.

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Risk rating class 8 - This category shall apply to borrowers where one or more of the following factors apply: • The collection of principal or interests becomes questionable regardless of scheduled payment

date, by reason of adverse developments of a financial, or by important weaknesses in cover. The probability of default is assessed at up to 50%;

• Substandard loans are loans or portions thereof, which appear to involve a substantial and unreasonable degree of risk to the institution because of unfavorable record or unsatisfactory characteristics; and

• There exists in such loans the possibility of future loss to the institution unless given closer supervision.

Risk rating class 9 - This represents those credits where one of more of the following factors apply: • All borrowers with “non-performing loan” status; • Any portion of any interest and/or principal payment is in arrears for more than 90 days; and • The borrower is unable or unwilling to service debt over an extended period of time and near

future prospects of orderly debt service are doubtful. Risk rating class 10 - Represents those credits where the prospect for re-establishment of creditworthiness and debt service is remote. This category also applies where the lender shall take or has taken title to the assets of the borrower and is preparing a foreclosure and/or liquidation although partial recovery may be obtained in the future. These are loans or portions thereof which are considered uncollectible or worthless and of such little value that the continuance as bankable assets is not warranted although the loans may have some recovery or salvage value.

It is the Bank’s policy to maintain accurate and consistent risk ratings across the credit portfolio. This facilitates focused management of the applicable risk and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of financial analytics, combined with processed market information to provide the main inputs for the measurement of counterparty risk. All internal risk ratings are tailored to the various categories and are derived in accordance with the Bank’s rating policy. The attributable risk ratings are assessed and updated regularly. For other accounts such as due from other Banks, financial assets at FVPL, AFS investments and HTM investments, the external ratings based on Standard and Poor’s were used to rate the accounts. The table below shows the credit risk rating comprising each category of credit quality and the equivalent external grades for each internal credit risk rating applied only for comparison purposes.

Standard&Poor’s

Equivalent Ratings High Grade Risk rating class 1 AAA Risk rating class 2 AA Risk rating class 3 A Risk rating class 4 BBB

(Forward)

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Standard&Poor’s

Equivalent Ratings Standard Grade Risk rating class 5 BB Risk rating class 6 B Risk rating class 7 CCC Substandard Grade Risk rating class 8 CC Risk rating class 9 C Risk rating class 10 D

Credit quality per class of financial assets The credit quality of financial assets is managed by the Bank using internal credit ratings. The table below shows the credit quality by class of asset for loan-related balance sheet lines, based on the Bank’s credit rating system. 2007 Neither Past Due nor Impaired

High Grade Standard

Grade Substandard

Grade Others

Past Due or Individually

Impaired Total Due from BSP P=4,236,218 P=− P=− P=− P=− P=4,236,218 Due from other banks 646,455 − − 209,059 – 855,514 IBLR and SPURA 6,381,584 − − − − 6,381,584 Financial assets at FVPL

Government bonds − 704,297 − − − 704,297 Treasury notes 645,529 − − − − 645,529 BSP treasury bills 8,586 − − − − 8,586

654,115 704,297 − − − 1,358,412 AFS investments

Government bonds 20,570 1,595,661 − − − 1,616,231 Private bonds 479,145 116,889 − 421,856 1,017,890 Equity instruments − − − 64,112 64,112

20,570 2,074,806 116,889 − 485,968 2,698,233 HTM investments

Government bonds − 210,426 − − 210,426 Private bonds − 125,064 − 49,671 − 174,735 Treasury notes 127,479 − − − 127,479 BSP treasury bills 39,837 − − − 39,837

167,316 335,490 − 49,671 − 552,477 Loans receivables Corporate lending 2,176,639 1,951,648 774,396 1,723,762 554,060 7,180,505 Small business lending 159,343 109,198 27,871 1,647,058 49,500 1,992,970 Consumer lending − − 482,279 6,347,026 − 6,829,305 Residential mortgages − − 227,767 2,876,120 − 3,103,887 Others − − 622,124 − 622,124 2,335,982 2,060,846 1,512,313 13,216,090 603,560 19,728,791

P=14,442,240 P=5,175,439 P=1,629,202 P=13,474,820 P=1,089,528 P=35,811,229

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2006 Neither Past Due nor Impaired

High Grade Standard

Grade Substandard

Grade Others

Past Due or Individually

Impaired Total Due from BSP P=3,804,271 P=− P=− P=− P=− P=3,804,271 Due from other banks 481,781 − 151,303 − − 633,084 IBLR and SPURA 3,000,000 − − − − 3,000,000 Financial assets at FVPL

Government bonds − 662,477 − − − 662,477 Treasury notes 5,370 − − − − 5,370 BSP treasury bills 2,906 − − − − 2,906

8,276 662,477 − − − 670,753 AFS investments

Government bonds − 2,399,347 − 99,413 − 2,498,760 Private bonds 217,499 − − 159,737 − 377,236 Equity instruments − − − 65,728 − 65,728

217,499 2,399,347 − 324,878 − 2,941,724 HTM investments

Government bonds − 204,035 − − − 204,035 Private bonds − 50,222 − − − 50,222 Treasury notes 604,842 − − − − 604,842 BSP treasury bills 57,590 − − − − 57,590

662,432 254,257 − − − 916,689 Loans receivables Corporate lending 2,497,514 1,931,770 899,481 1,362,965 350,397 7,042,127 Small business lending 161,743 370,969 13,087 556,558 3,403 1,105,760 Consumer lending − − 227,726 5,397,150 − 5,624,876 Residential mortgages − − 126,912 2,083,695 − 2,210,607 Others − − − 620,343 − 620,343 2,659,257 2,302,739 1,267,206 10,020,711 353,800 16,603,713

P=10,833,516 P=5,618,820 P=1,418,509 P=10,345,589 P=353,800 P=28,570,234

The table below shows the aging analysis of the past due but not impaired loans and receivables per class that the Bank held. Under PFRS 7, a financial asset is past due when a counterparty has failed to make a payments when contractually due.

2007

Less than 30

days 31 to 60 days 61 to 90 days91 to

180 days More than

180 days Total Loans and receivables Corporate lending P=364 P=− P=− P= P=10,629 P=10,993 Small business lending − − − − Consumer lending 423,131 2,168 − 945 3,485 429,729 Residential mortgages 488 1,896 − 2,440 7,199 12,023 P=423,983 P=4,064 P=− P=3,385 P=21,313 P=452,745

2006

Less than 30

days 31 to 60 days 61 to 90 days91 to

180 days More than

180 days Total Loans and receivables Corporate lending P=− P=− P=− P=– P=− P= Small business lending − − − − − − Consumer lending 2,725 10,617 − 44,052 4,075,579 4,132,973 Residential mortgages 198 665 − 2,823 − 3,686 P=2,923 P=11,282 P=− P=46,875 P=4,075,579 P=4,136,659

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Collaterals of past due but not impaired loans mostly consists of REM of industrial, commercial, residential and developed agricultural real estate properties. As of December 31, 2007, the fair value of these collaterals amounted to P=894.11 million. Carrying amount per class of financial assets whose terms have been renegotiated The table below shows the carrying amount for renegotiated financial assets by class.

2007 2006Loans and receivables Corporate lending P=439,072,709 P=386,621,239 Residential mortgages 84,684,455 99,621,135 Consumer lending 51,097,386 14,803,798 P=574,854,550 P=501,046,172

Impairment Assessment The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 90 days or there are any known difficulties in the cash flows of counterparties, credit rating downgrades, or infringement of the original terms of the contract. The Bank addresses impairment assessment in two areas: Specific or individually assessed allowances and Collectively assessed allowances.

a. Specific Impairment Testing

Specific testing is the process wherein classified accounts are individually subject to impairment testing. Classified accounts are past due accounts and accounts whose credit standing and/or collateral has weakened due to varying circumstances. This present status of the account may adversely affect the collection of both principal and interest payments. Indicators of impairment testing are past due accounts, decline in credit rating from independent rating agencies and recurring net losses.

The net recoverable amount is computed using the present value approach. The discount rate used for loans with fixed and floating interest rate is the original effective interest rate and last repriced interest rate, respectively. A net recoverable amount is the total cash inflows to be collected over the entire term of the loan or the expected proceeds from the sale of collateral. Specific impairment testing parameters include the account information (loan amount original and outstanding), interest rate (nominal and historical effective) and the business plan. Also included are the expected date of recovery, expected cash flows, probability of collection, and the carrying value of loan and net recoverable amount.

All loan accounts are subject to impairment testing per PAS 39. Specific impairment testing are conducted on all past due Institutional Banking Group (IBG) accounts, such as corporate and commercial loan accounts.

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b. Collective Impairment Testing

It is the process wherein all loan accounts not included in the specific impairment testing shall be subjected to impairment test on an aggregate basis. All loan accounts not included in the specific impairment test are subject to collective testing per PAS 39. Collective testing is being done per industry. Impairment loss is derived by multiplying the outstanding loan balance on a per industry level against a “factor rate.” The factor rate is computed by deriving the product of the Default Rate (DR) and the Loss Given Default Rate (LGDR). The LGDR is based on the historical performance of the industry in the Bank’s loan portfolio, which may be updated and revised in the future as recommended by IBG. It also involves determination of the DR to be given to an individual account in a particular industry. The historical experience in handling the account determines the rate. The loan loss rate given to an individual account in a particular industry is used in the collective testing for current IBG accounts. For consumer accounts, the accounts are derived per type of product – salary loans, housing loans, and auto loans. The maturity dates and the rate of probability of collection per type of product is determined by the historical performance and handling of accounts per maturity. The rate of probability of collection may be updated and revised in the future as recommended by Retail Credit Group.

Accounts both in current and past due status are collectively tested as required under PAS 39. Collective testing is done based on maturities. Impairment loss per maturity date represents the difference between the outstanding loan balances against the estimated amount to be collected.

Liquidity Risk and Funding Management Liquidity risk is the risk that there are insufficient funds available to adequately meet all maturing liabilities, including demand deposits and off-balance sheet commitments. To ensure that the Bank has sufficient liquidity at all times, the ALCO and the Treasurer formulate a contingency plan upon consolidation and approval of business strategies of each business unit. The contingency plan sets out the amount and the sources of funds (such as unused credit facilities) that are available to the Bank and the circumstances under which such funds will be used. The Treasurer periodically performs simulated stress tests that evaluate the Bank’s ability to withstand a prolonged liquidity problem. Under a stress test, the potential cash flows resulting from, among other things, a potential early termination of financial instruments and a potential increase in withdrawals of deposits. Such potential cash outflows are then compared to the amount of funds that are available to determine the liquidity status of the Bank and of each business unit during a liquidity crisis. In performing such stress test, the Treasurer assumes certain customer and market behaviour under adverse market conditions and circumstances under which reputation is tarnished. The Treasurer also determines the amount of committed credit lines that should be available to the Bank during a liquidity crisis.

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The Bank also manages its short-term liquidity risks through the use of a Maximum Cumulative outflow (MCO) limit, which limits the outflow of cash on a cumulative basis and on a tenor basis. To maintain sufficient liquidity in foreign currencies, an MCO limit is set for certain designated foreign currencies. The MCO limits are endorsed by the RMC and approved by the BOD. The Bank takes a multi-tiered approach to maintaining liquid assets. The Bank’s principal source of liquidity is comprised of COCI, due from BSP, due from other banks and IBLR with maturities of less than one year. In addition to regulatory reserves, the Bank maintains a sufficient level of secondary reserves in the form of liquid assets such as short-term trading and investment securities that can be realized quickly. Analysis of financial liabilities by remaining contractual maturities The table below shows the maturity profile of the Bank’s liabilities, based on its internal methodology that manages liquidity based on contractual undiscounted cash flows (amounts in millions):

2007

On

demand Up to 1 month

1 to 3 months

3 to 6 months

6 to 12 months

Beyond 1 year Total

Deposit liabilities P=13,841 P=10,371 P=2,629 P=295 P=222 P=4,166 P=31,524 Cashier’s checks and demand draft payable 181 − − − − − 181 Bills and acceptances payable − 1,367 − − 3 23 1,393 Other liabilities 985 − − − − − 985 Contingent liabilities 1,953 9 47 94 2 − 2,105 P=16,960 P=11,747 P=2,676 P=389 P=227 P=4,189 P=37,568

2006

On

demand Up to 1 month

1 to 3 months

3 to 6 months

6 to 12 months

Beyond 1 year Total

Deposit liabilities P=10,213 P=5,690 P=2,852 P=1,532 P=2,224 P=2,807 P=25,318 Cashier’s checks and demand draft payable 262 − − − − − 262 Bills and acceptances payable − 1,273 − − 4 53 1,330 Other liabilities 1,342 − − − − − 1,342 Contingent liabilities 2,285 33 42 14 6 − 2,380 P=14,102 P=6,996 P=2,894 P=1,546 P=2,234 P=2,860 P=30,632

Market Risk Market risk is the risk of future loss from changes in the value of a financial instrument held by the Bank. The primary sources of market risk for the Bank are price risk and liquidity risk. Price risk is the risk of a decrease in the Bank’s earnings due to changes in the level or volatility of market factors, such as foreign exchange rates and interest rates. Price risk is measured primarily through the Value-at-Risk (VaR) model, mainly for the trading purposes.

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Market Risk in the Trading Books Treasury, in coordination with the RMD, develops a risk measurement and management process that is appropriate for Bank’s business and the RMC and the BOD approve such process. A product program manual, which sets out, among other things, a standardized process of measuring and managing price and liquidity risks, market risk limits, operational procedures and controls and approval procedures, is then prepared for each product.

The market risk limits of the Bank are segregated into price risk limits and liquidity risk limits. Price risk limits are applied at the business unit level and are endorsed by the RMC and approved by the BOD based on, among other things, a business unit’s capacity to manage price risks, the size and distribution of the aggregate exposure to price risks and the expected return relative to price risks. Objectives and Limitations of the VaR Methodology VaR measures the potential loss from an unlikely adverse event in a normal market environment. It is a measure based on estimated volatility for marked to market portfolios. VaR is computed daily based on the Bloomberg parametric VaR engine with a 99% confidence level and a defeasance period of 3 days for fixed income positions. The 99% confidence level means that losses exceeding VaR figure should occur on average, not more than once every 100 days. The VaR below pertains to interest rate risk of trading books.

December 28, 2007 P=112,909,807 Average VaR 49,100,700 Highest VaR 113,335,197 Lowest VaR 16,453,489

If any of the above limits exceeded, such occurrence is promptly reported to senior management. Daily Reports containing VaR are submitted to the Treasurer, President, Risk Head, and Treasury Desk Heads. Back testing to compare actual trading results with the internal model-generated risk measures have been done. Results are reported to the Risk Management Committee meeting on a quarterly basis. VaR based on the parametric approach is limited by the assumptions made in the calculations. VaR will not be able to account for losses in improbably abnormal or extreme market conditions. Stress testing provides a means of complementing VaR by simulating the potential loss impact from these simulated extreme market conditions. Price Risk The Bank manages its price risks through application of various limits set by the RMC and approved by the BOD. Such limits primarily include the Market Risk Limits (MRL), which places a ceiling on the total volume of trading/ownership of given product lines at given tenors; Nominal Position Limits (NPL) which determine the maximum size of open risk positions that may be held by the Bank within a given time period. Such limits include overnight and daylight position limits, which may vary for overbought and oversold positions. Trader/Dealer Limits set the maximum volume of transactions that a trader/dealer may execute and is determined relative to the depth of

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experience and level of expertise of the personnel making the risk-bearing decision and VaR Limits which places a ceiling on the monetary amount of potential loss on trading transactions deemed tolerable by management.

Foreign Currency Risk Foreign currency risk is the risk to earnings or capital arising from changes in foreign exchange rates. The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial and cash flows.

The Bank’s foreign currency risk originates from its holdings of foreign currency denominated assets and liabilities.

Foreign currency liabilities generally consist of foreign currency deposits in the Bank’s FCDU. Foreign currency deposits are generally used to fund the Bank’s foreign currency denominated loan and investment portfolio in the FCDU. Banks are required by the BSP to match the foreign currency assets with the foreign currency liabilities held through FCDU. In addition, the BSP requires a 30% liquidity reserve on all foreign currency liabilities held through FCDU. The Bank’s policy is to maintain foreign currency exposure within acceptable limits and within existing regulatory guidelines. The Bank believes that its profile of foreign currency exposure on its assets and liabilities is within limits for financial institutions engaged in the type of businesses in which the Bank is engaged.

Total foreign exchange (FX) currency position is monitored through the daily BSP FX position reports, which are subject to the overbought and oversold limits set by the BSP at 20% of unimpaired capital. Internet limit regarding the end of day trading positions in FX, which take into account the trading desk and the branch FX transactions, are also monitored. End of day FX positions are included in the daily VaR summary.

The table below summarizes the Bank’s exposure to foreign exchange risk as of December 31, 2007 and 2006 (amounts in US dollars):

2007 USD Other currencies Total Assets Due from other banks $16,530,193 $289,370 $16,819,563 IBLR and SPURA 15,300,000 − 15,300,000 Financial assets at FVPL 16,870,205 − 16,870,205 AFS investments 59,164,326 − 59,164,326 HTM investments 10,261,485 − 10,261,485 Loans and receivables 10,118,166 123,667 10,241,833 Other assets 9,007,217 57,927 9,065,144 137,251,592 470,964 137,722,556 (Forward)

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2007

USD Other

currencies Total Liabilities Deposit liabilities $109,131,500 $– $109,131,500 Bills and acceptances payable 6,748,162 83,754 6,831,916 Cashier’s checks and demand draft payable 195,799 195,799 Accrued taxes, interest and other expenses 503,422 503,422 Other liabilities 396,548 396,548 116,975,431 83,754 117,059,185 Currency forwards 142,391 − 142,391 Net exposure $20,133,770 $387,210 $20,520,980

2006

USD Other

currencies Total Assets Due from other banks $11,142,807 $– $11,142,807 IBLR and SPURA – – – Financial assets at FVPL 13,511,657 – 13,511,657 AFS investments 50,963,902 – 50,963,902 HTM investments 6,150,824 – 6,150,824 Loans and receivables 8,757,110 16,689 8,773,799 Other assets 19,307,187 – 19,307,187 109,833,487 16,689 109,850,176 Currency forwards 79,961 – 79,961 Liabilities Deposit liabilities 80,587,158 – 80,587,158 Bills and acceptances payable 10,819,511 – 10,819,511 Cashier’s checks and demand draft payable 228,821 – 228,821 Accrued taxes, interest and other expenses 379,879 – 379,879 Other liabilities 3,461,621 48,708 3,510,329 95,476,990 48,708 95,525,698 Net exposure $14,276,536 ($32,019) $14,244,517

The table below indicates the currencies to which the Bank had significant exposure as of December 31, 2007. The analysis calculates the effect of a reasonably possible movement of the currency rate against Peso, with all other variables held constant on the statement of income. A negative amount in the table reflects a potential net reduction in statement of income while a positive amount reflects net potential increase. There is no other impact on the Bank’s equity other than those already affecting the statements of income.

Foreign currency appreciates (depreciates) USD GBP EUR JPY

+ 10% 83 6,565 1,625 .03 - 10% (83) (6,565) (1,625) (.03)

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Market Risk in the Non-Trading Books

Interest Rate Risk A critical element of risk management program consists of measuring and monitoring the risks associated with fluctuations in market interest rates on the Bank’s net interest income. The short-term nature of its business of its assets and liabilities reduces the exposure of its net interest income to such risks. The Bank employs “Gap Analysis” to measure the interest rate sensitivity of its assets and liabilities. The asset/liability gap analysis measures, for any given period, any mismatches between the amounts of interest-earning assets and interest-bearing liabilities that would mature, or re-price, during that period. The repricing gap is calculated by first distributing the assets and liabilities contained in the Bank’s statement of condition into tenor buckets according to the time remaining to the next repricing date (or the time remaining to maturity if there is no repricing), and then obtaining the difference between the total of the repricing (interest rate sensitive) assets and repricing (interest rate sensitive) liabilities. If there is a positive gap, there is asset sensitivity which generally means that an increase in interest rates would have a positive effect on the Bank’s net interest income. If there is a negative gap, this generally means that an increase in interest rates would have a negative effect on interest income. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. Accordingly, during a period of rising interest rates, a bank with a positive gap would be in a position to invest in higher yielding assets earlier than it would need to refinance its interest rate sensitive liabilities. During a period of falling interest rates, a bank with a positive gap would tend to see its interest rate sensitive assets repricing earlier its interest rate sensitive liabilities, which may restrain the growth of its net income or result in a decline in net interest income.

The following table provides for the average effective interest rates by period of repricing (or by period of maturity if there is no repricing) of the Bank as of December 31, 2007 and 2006:

2007

Up to 1 month

>1 month to 3 months

>3 months to 6 months


>12 months

Peso Assets Due from BSP 2.01000% − 2.89000% − − Due from other banks 1.87500% − − − − Investment securities* 3.89548% 4.99861% 7.19071% 5.65339% 6.18818% Loans and receivables 8.35958% 9.07051% 11.16081% 11.90209% 14.95830% Liabilities Deposit liabilities 3.13506% − − − 6.47504% Bills payable 4.59490% − − − 9.27000% USD Assets Due from other banks 3.29000% − − − − Investment securities* − − − 6.25450% 6.37000% Loans and receivables 7.81909% 9.64414% 10.95000% 9.76000% -

(Forward)

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2007

Up to 1 month

>1 month to 3 months



>12 months

Liabilities Deposit liabilities 3.47794% 3.48467% 3.67017% 4.02862% 6.25000%

2006

Up to 1 month




>12 months

Peso Assets Due from BSP – 3.85139% 4.23657% 6.14288% 1.93241% Due from banks 2.24017% – – – – Investment securities* – 4.87500% 5.26635% 6.08986% 6.69619% Loans and receivables 11.82095% 10.53259% 11.48278% 12.22627% 10.01872% Liabilities Deposit liabilities 3.10717% 4.62880% 4.91169% 4.76190% 5.73518% Bills payable 5.60000% – – – 4.41070% USD Assets Due from other banks 2.24017% – – – – Investment securities* – – – 3.33397% 3.36816% Loans and receivables 10.70288% 10.68927% 9.88849% – 10.89515% Liabilities Deposit liabilities 1.39454% 4.21521% 4.63954% 4.18625% 5.77280%

*Consisting of financial assets at FVPL, AFS investments and HTM investments

The following table sets forth the asset-liability gap position of the Bank as of December 31, 2007 and 2006 (amounts in millions):

2007

Up to 1 month

> 1 to 3 months

> 3 to 6 months

>6 to 12 months

>12 months Total

Assets Loans and receivables P=2,200 P=5,817 P=2,338 P=1,595 P=5,365 P=17,315 AFS and HTM investments 19 111 485 213 2,423 3,251 Placements with other banks 856 – – – – 856 Total assets 3,075 5,928 2,823 1,808 7,788 21,422 Liabilities Deposit liabilities 12,158 2,611 294 218 15,992 31,273 Bills and acceptances payable 1,367 – – – – 1,367 Total liabilities 13,525 2,611 294 218 15,992 32,640 Asset-liability gap (P=10,450) P=3,317 P=2,529 P=1,590 (P=8,204) (P=11,218)

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2006

Up to 1 month

> 1 to 3 months

> 3 to 6 months

>6 to 12 months

>12 months Total

Assets Loans and receivables P=4,526 P=1,589 P=1,239 P=1,317 P=5,938 P=14,609 AFS and HTM investments – 337 1 222 3,299 3,859 Placements with other banks 633 – – – – 633 Total assets 5,159 1,926 1,240 1,539 9,237 19,101 Liabilities Deposit liabilities 12,083 2,223 656 430 9,826 25,218 Bills and acceptances payable 1,317 – – – – 1,317 Total liabilities 13,400 2,223 656 430 9,826 26,535 Asset-liability gap (P=8,241) (P=297) P=584 P=1,109 (P=589) (P=7,434)

The Bank also monitors its exposure to fluctuations in interest rates by using scenario analysis to estimate the impact of interest rate movements on its interest income. This is done by modeling the impact to the Bank’s interest income and interest expenses of different parallel changes in the interest rate curve, assuming the parallel change only occurs once and the interest rate curve after the parallel change does not change again for the next twelve months. The following table sets forth, for the period indicated, the impact of changes in interest rates on the Bank’s non-trading net interest income before tax (amounts in million):

Change in basis points 2007 2006

+100bps (22.76) (75.21) - 100bps 22.76 75.21

Given the repricing position of the assets and liabilities of the Bank as of December 31, 2007 and 2006, if interest rates increased by 100 basis points, the Bank would expect annualized non-trading net interest income before tax to decrease by P=22.76 million and P=75.21 million, respectively.

If interest rates decreased by 100 basis points, the annualized non-trading income net interest income before tax would increase by P=22.76 million and P=75.21 million, respectively. There is no other impact on the Bank’s equity other than those affecting the statements of income.

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Fair Value Measurement The table below presents a comparison by category of carrying amounts and estimated fair values of all of the Bank’s financial instruments as of December 31, 2007 and 2006:

2007 2006

Carrying Value Fair Value Carrying Value Fair Value Financial assets Loans and receivables

COCI P=1,388,731,710 P=1,388,731,710 P=816,819,931 P=816,819,931 Due from BSP 4,236,218,248 4,236,218,248 3,804,271,284 3,804,271,284 Due from other banks 855,513,590 855,513,590 633,083,728 633,083,728 IBLR and SPURA 6,381,584,000 6,381,584,000 3,000,000,000 3,000,000,000 Loans and receivables

Corporate lending 6,556,120,075 5,703,487,133 6,552,591,816 5,691,414,835 Consumer lending 5,980,309,627 5,980,309,627 4,806,348,144 4,806,348,144 Residential mortgages 3,020,308,598 2,757,454,421 2,174,005,946 2,118,907,789 Small business lending 1,972,081,920 1,405,387,430 1,084,970,632 1,025,896,980 Others 327,525,113 327,525,113 526,063,452 526,063,452

30,718,392,882 29,036,211,272 23,398,154,933 22,422,806,143 Financial assets at FVPL

Government bonds 704,297,244 704,297,244 662,476,581 662,476,581 Treasury notes 645,529,102 645,529,102 5,370,400 5,370,400 BSP treasury bills 8,585,567 8,585,567 2,906,498 2,906,498

1,358,411,913 1,358,411,913 670,753,479 670,753,479 AFS investments

Government bonds 1,616,230,505 1,616,230,505 2,498,760,097 2,498,760,097 Private bonds 1,017,890,227 1,017,890,227 377,235,851 377,235,851 Unquoted equity instruments 64,112,142 64,112,142 65,728,499 65,728,499

2,698,232,874 2,698,232,874 2,941,724,447 2,941,724,447 HTM investments

Government bonds 210,426,019 212,013,906 204,034,343 174,465,792 Private bonds 174,735,144 174,313,717 50,222,254 42,425,107 Treasury notes 127,479,288 129,652,906 604,841,786 588,196,777 BSP treasury bills 39,836,952 39,865,906 57,590,331 57,419,920

552,477,403 555,846,435 916,688,714 862,507,596 P=35,327,515,072 P=33,648,702,494 P=27,927,321,573 P=26,897,791,655

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2007 2006

Carrying Value Fair Value Carrying Value Fair Value Financial Liabilities

Deposit liabilities Demand P=9,378,480,808 P=9,378,480,808 P=4,101,458,342 P=4,101,458,342

Savings 4,467,493,702 4,467,493,702 6,111,891,456 6,111,891,456

Time 17,427,611,772 17,410,206,420 15,005,223,072 15,004,433,353 31,273,586,282 31,256,180,930 25,218,572,870 25,217,783,151 Bills and acceptances payable 1,366,779,651 1,366,779,651 1,316,879,635 1,316,879,635 Cashier’s checks and demand

draft payable 173,019,549 173,019,549 250,477,812 250,477,812 Accrued interest payable 91,036,456 91,036,456 90,868,230 90,868,230 Other liabilities 919,318,937 919,318,937 287,770,511 287,770,511

P=33,823,740,875 P=33,806,335,523 P=27,164,569,058 P=27,163,779,339

The methods and assumptions used by the Bank in estimating the fair value of the financial instruments are:

Cash and other cash items, due from other banks and interbank loans receivable - The carrying amounts approximate fair values considering that these accounts consist mostly of overnight deposits and floating rate placements.

Debt securities - Fair values are generally based upon quoted market prices. If the market prices are not readily available, fair values are estimated using either values obtained from independent parties offering pricing services or adjusted quoted market prices of comparable investments or using the discounted cash flow methodology. Equity securities - Fair values are based on quoted prices published in markets. Unquoted equity securities for which no reliable basis of fair value measurement is available, are allowed under PAS 39 to be carried at cost less impairment loss, if any.

Loans and receivables - Fair values of loans and receivables are estimated using the discounted cash flow methodology, using the Bank’s current incremental lending rates for similar types of loans and receivables. Accounts receivable, accrued interest receivable, sales contracts receivable, refundable deposits and due from related parties included in other assets - Quoted market prices are not readily available for these assets. They are not reported at fair value and are not significant in relation to the Bank’s total portfolio of securities. Liabilities - The fair values of liabilities approximate their carrying amounts due to either to demand nature or the relatively short-term maturities of these liabilities except for time deposit liabilities whose fair value are estimated using the discounted cash flow methodology using the Bank’s incremental borrowing rates for similar borrowings with maturities consistent with those remaining for the liability being valued.

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The following table shows an analysis of financial instruments recorded at fair value, between those whose fair value is based on quoted market prices and those involving valuation techniques where all the model inputs are observable in the market:

2007 2006

Quoted Market

Price

Valuation Techniques

(Non-market Observable)

Quoted Market Price

Valuation Techniques

(Non-market Observable)

Financial assets at FVPL Government bonds P=704,297,244 P=– P=662,476,581 P=– Treasury notes 645,529,102 − 5,370,000 − BSP treasury bills 8,585,567 − 2,906,498 –

1,358,411,913 − 670,753,079 − AFS investments

Government bonds 1,616,230,505 − 2,498,760,097 − Private bonds and commercial papers 1,017,890,227 − 377,235,851 − Equity instruments − 64,112,142 − 65,728,499

2,634,120,732 64,112,142 2,875,995,948 65,728,499 P=3,992,532,645 P=64,112,142 P=3,546,749,027 P=65,728,499

Derivative Financial Instruments The Bank’s freestanding derivative financial instruments are transactions not designated as hedges. The table below sets out information about the Bank’s derivative financial instruments and the related marked-to-market gain (derivative liability) or loss (derivative asset):

2007

Notional Amount

Derivative Asset

Derivative Liability

Freestanding currency forwards $33,487,050 P=– P=5,877,724

2006 Notional

Amount Derivative

Asset Derivative

Liability Freestanding currency forwards $32,500,000 P=3,921,686 P=–

The derivative liability as of December 31, 2007 is recorded under miscellaneous liabilities while the derivative asset as of December 31, 2006 is recorded under miscellaneous assets.

19. Income and Other Taxes

Under Philippine tax laws, the RBU of the Bank is subject to percentage and other taxes (presented as ‘Taxes and licenses’ in the statement of income) as well as income taxes. Percentage and other taxes paid consist principally of gross receipts tax and documentary stamp taxes. Income taxes include corporate income tax, as discussed below, and final taxes paid which represents final withholding tax on gross interest income from government securities and other deposit substitutes and income from FCDU transactions. These income taxes, as well as the deferred tax benefits and provisions, are presented as ‘Provision for (benefit from) income tax’ in the statement of income.

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Republic Act (RA) No. 9397, An Act Amending National Internal Revenue Code, provides that the Regular Corporate Income Tax (RCIT) rate shall be 35% until December 31, 2008. Starting January 1, 2009, the RCIT shall be 30%. The interest expense allowed as a deductible expense is reduced by 42% starting November 1, 2005 until December 2008. Starting January 1, 2009, interest expense allowed as deductible expense shall be reduced by 33% of interest income subjected to final tax. An MCIT of 2% of modified gross income is computed and compared with the RCIT. Any excess of MCIT over the RCIT is deferred and can be used as a tax credit against future income tax liability for the next three years. In addition, NOLCO is allowed as a deduction from taxable income in the next three years form the period of incurrence.

FCDU offshore income (income from non-residents) is tax-exempt while gross onshore income (income from residents) is generally subject to 10% gross income tax. In addition, interest income on deposit placements with other FCDUs and offshore banking units is subject to a 7.5% final tax. RA No. 9294, which became effective in May 2004, provides that the income derived by the FCDU from foreign currency transactions with non-residents, Offshore Banking Units (OBUs), local commercial banks including branches of foreign banks is tax-exempt while interest income on foreign currency loans from residents other than OBUs or other depository banks under the expanded system is subject to 10% income tax.

Provision for (benefit from) income tax consists of:

2007 2006 Current: MCIT P=20,811,569 P=11,596,955 Final tax 17,896,241 40,286,685

38,707,810 51,883,640 Deferred 6,412,363 (88,321,163) P=45,120,173 (P=36,437,523)

The components of the Bank’s net deferred tax assets follow:

2007 2006 Tax effects of: Allowance for probable losses P=513,480,690 P=325,953,143 NOLCO 156,429,066 156,429,066 Gains on asset foreclosure and dacion

transactions

(58,583,987) (47,385,389) MCIT 40,487,299 19,675,730 Depreciation of assets foreclosed or dacioned 16,403,504 20,663,584 Net retirement plan assets (4,086,231) (5,978,113) Unamortized past service cost − 2,429,128 P=664,130,341 P=471,787,149

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In 2007, the Bank provided allowance for impairment and credit losses amounting to P=567.87 million and P=100.93 million charged to surplus and current operations, respectively. The related deferred tax assets amounting to P=198.76 million related to provision for impairment and credit losses amounting to P=567.87 million was also charged to surplus (see Note 11).

The details of the Bank’s NOLCO and MCIT follow:

Year Incurred Amount Used/Expired Balance Expiry Year NOLCO 2007 P=59,860,991 P=– P=59,860,991 2010 2006 151,853,428 – 151,853,428 2009 2005 295,086,760 – 295,086,760 2008 2004 386,188,037 (386,188,037) – 2007 P=892,989,216 (P=386,188,037) P=506,801,179

Year Incurred Amount Used/Expired Balance Expiry Year MCIT 2007 P=20,811,569 P=– P=20,811,569 2010 2006 11,596,955 – 11,596,955 2009 2005 8,078,775 – 8,078,775 2008 2004 4,174,760 (4,174,760) – 2007 P=44,662,059 (P=4,174,760) P=40,487,299

In 2006, the Bank derecognized its deferred tax asset on NOLCO and MCIT expiring in 2007 amounting to P=129.72 million as a direct reduction to the Surplus as of January 1, 2006. PFRS requires the derecognition of the deferred tax assets to be charged to current operations in the year such derecognition is determined. Had the derecognition been adjusted in accordance with PFRS, the net income would have decreased by P=129.72 million.

Details of the Bank’s unrecognized deferred tax assets are as follows:

2007 2006 Tax effects of:

NOLCO P=20,951,347 P=135,165,813 MCIT – 4,174,760

P=20,951,347 P=139,340,573 Management believes that it is not probable that sufficient taxable income will be available in the

near foreseeable future against which the tax benefits from the foregoing temporary differences could be realized.

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The reconciliation of statutory income tax at statutory tax rate to the effective income tax follows:

2007 2006 Statutory income tax P=63,841,686 P=31,793,357 Additions to (reductions from) income taxes resulting from the tax effects of:

Non taxable income (28,767,875) (2,643,304) Nondeductible expenses 20,856,059 18,533,183 Interest income subjected to final tax (31,761,044) (85,010,822) Unrecognized NOLCO 20,951,347 – Others – 890,063 Effective income tax P=45,120,173 (P=36,437,523)

20. Retirement Plan

The Bank has a funded noncontributory defined benefit retirement plan (the Plan) covering substantially all its officers and regular employees. Under the Plan, all covered officers and employees are entitled to cash benefits after satisfying certain age and service requirements. The principal actuarial assumptions used in determining retirement liability of the Bank under the Plan are shown below:

2007 2006 Discount rate: At January 1 8.18% 11.77% At December 31 10.38% 8.18% Expected return on plan assets 14.00% 13.50% Future salary increase rate 5.00% 6.00%

The overall expected rate of return on plan assets is determined based on the market prices prevailing on that date applicable to the period over which the obligation is to be settled.

Changes in the present value of the defined obligation (PVO) are as follows:

2007 2006 As of January 1 P=31,463,036 P=27,343,901 Interest cost 2,573,676 3,218,377 Current service cost 12,116,255 4,906,538 Benefits paid (2,271,393) (18,343,137) Actuarial losses (gains) on PVO (13,158,894) 14,337,357 As of December 31 P=30,722,680 P=31,463,036

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Changes in fair value of plan assets are as follows:

2007 2006 As of January 1 P=31,612,855 P=39,278,649 Expected return 4,267,735 5,302,618 Contributions 5,615,482 4,675,973 Benefits paid (2,271,393) (18,343,137) Actuarial gains (losses) on plan assets (1,619,668) 698,752 As of December 31 P=37,605,011 P=31,612,855 Actual return on plan assets P=2,448,067 P=6,001,370

The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:

2007 2006 Debt instruments 97.63% 96.63% Other assets 2.37% 3.37% 100.00% 100.00%

Changes in the net retirement asset recognized in the statements of condition are as follows:

2007 2006 Fair value of plan assets P=37,605,011 P=31,612,855 Present value of funded obligation 30,772,680 31,463,036 Net plan assets 6,882,331 149,819 Unrecognized actuarial losses 4,792,617 16,930,505 P=11,674,948 P=17,080,324

The amounts included in compensation and fringe benefits expense in the statements of income are as follows:

2007 2006 Current service cost P=12,116,255 P=4,906,538 Interest cost 2,573,676 3,218,377 Expected return on plan assets (4,267,735) (5,302,618) Expense recognized during the year P=10,422,196 P=2,822,297

The amounts for December 31, 2007 and 2006 are as follows:

2007 2006 Fair value of plan assets P=37,605,011 P=31,612,855 PVO 30,722,680 31,463,036 Net plan asset 6,882,331 149,819 Experience adjustments on plan liabilities 5,736,136 11,093,938 Experience adjustments on plan assets (1,619,668) 698,752

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21. Leases The Bank leases several premises occupied by its head office and branches. Some leases are

subject to annual escalation of 5% to 10% and for periods ranging from 5 to 15 years, renewable upon mutual agreement of both parties. Total rentals charged to operations amounted to P=125.67 million in 2007 and P=111.23 million in 2006.

Future minimum annual rentals payable under the aforementioned lease agreements follow:

2007 2006 Within one year P=95,476,443 P=97,820,452 After one year but not more than five years 423,076,927 267,132,335 More than five years 74,223,825 150,624,524 P=592,777,195 P=515,577,311

22. Related Party Transactions

In the ordinary course of business, the Bank has various transactions with its related parties and with certain directors, officers, stockholders and related interests (DOSRI). These transactions usually arise from normal banking activities such as lending, borrowing, deposit arrangements and trading of securities, among others. Under existing policies of the Bank, these transactions are made substantially on the same terms as with other individuals and businesses of comparable risks.

Under current banking regulations, the aggregate amount of loans to DOSRI should not exceed the total capital funds or 15% of the total loan portfolio of the Bank, whichever is lower. In addition, the amount of direct credit accommodations to DOSRI, of which 70% must be secured, should not exceed the amount of their respective regular and/or quasi-deposits and book value of their respective investments in the Bank.

On January 31, 2007, BSP Circular No. 560 was issued providing the rules and regulations that

govern loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of banks and quasi-banks. Under the said circular, the total outstanding exposures to each of the bank’s subsidiaries and affiliates shall not exceed 10% of bank’s net worth, the unsecured portion of which shall not exceed 5% of such net worth. Further, the total outstanding exposures to subsidiaries and affiliates shall not exceed 20% of the net worth of the lending bank. BSP Circular No. 560 is effective February 15, 2007. BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts.

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The following table shows information relating to the loans, other credit accommodations and guarantees classified as DOSRI accounts under regulations existing prior to said circular and new DOSRI loans, other credit accommodations granted under said circular (amounts in thousands).

2007 2006 Total outstanding DOSRI accounts P=474,855 P=1,570,487 Percent of DOSRI accounts granted under regulations

existing prior to BSP Circular No. 423 2.49% 9.83% Percent of DOSRI accounts granted under BSP Circular No. 423 2.49% 9.83% Percent of DOSRI accounts to total loans 2.49% 9.83% Percent of unsecured DOSRI accounts to total DOSRI

accounts − 0.61% Percent of past due DOSRI loans to total DOSRI loans − – Percent of nonaccruing DOSRI loans to total DOSRI

loans − – The following table shows information relating to the loans, other credit accommodations and

guarantees, as well as availments of previously approved loans and committed credit lines not considered DOSRI accounts prior to the issuance of said circular but are allowed a transition period of two years from the effectivity of said circular or until said loan, other credit accommodations and guarantees become past due, or are extended, renewed or restructured, whichever comes later, as of December 31, 2007 and 2006 (amounts in thousands):

2007 2006 Total outstanding non-DOSRI accounts prior to

BSP Circular No. 423 P=18,631,812 P=14,412,883 Percent of unsecured non-DOSRI accounts prior to

BSP Circular No. 423 to total loans 45.31% 34.03% Percent of past due non-DOSRI accounts prior to

BSP Circular No. 423 to total loans 6.60% 7.36% Percent of nonaccruing non-DOSRI accounts prior

to BSP Circular No. 423 to total loans 10.05% 9.60%

The year end balances with respect to related parties included in the financial statements follow:

2007 2006 Deposit liabilities P=643,490,798 P=433,969,479 Loans and receivables 332,284,454 1,554,222,320

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The income and expenses with respect to related parties included in the financial statements

follow:

2007 2006 Interest income on loans and receivables P=7,806,163 P=159,181,305 Interest expense for deposit liabilities 1,707,096 5,754,869 Service charges, fees and commissions 1,320,196 1,083,032 P=10,833,455 P=166,019,206

The remuneration of directors and other members of key management are as follows:

2007 2006 Compensation and short-term benefits P=28,854,524 P=30,033,717 Directors’ fees 4,441,369 2,066,951 P=33,295,893 P=32,100,668

23. Trust Operations Securities and other properties held by the Bank in fiduciary or agency capacity for clients and

beneficiaries are not included in the accompanying statements of condition since these are not assets of the Bank. The combined trust and managed funds operated by the Trust Department of the Bank amounted to P=10.16 billion and P=5.31 billion as of December 31, 2007 and 2006, respectively.

Government securities with a total face value of P=120.0 million and P=60.0 million as of

December 31, 2007 and 2006, respectively, are deposited with the BSP in compliance with current banking regulations related to the Bank’s trust functions. These government securities are recorded as part of HTM investments as of December 31, 2007 and 2006.

In accordance with BSP regulations, 10% of the profits realized by the Bank from its trust

operations are appropriated to surplus reserves. The yearly appropriation is required until the surplus reserves for trust operations amounts to 20% of the Bank’s authorized capital stock.

24. Commitments and Contingent Liabilities In the normal course of the Bank’s operations, there are various outstanding commitments and

contingent liabilities which are not reflected in the accompanying financial statements. The Bank does not anticipate material unreserved losses as a result of these transactions.

Bank has several loan related suits and claims that remain unsettled. It is not practicable to

estimate the potential financial impact of these contingencies. However, in the opinion of the management, the suits and claims, if decided adversely, will not involve sums having a material effect on the Bank’s financial statements.

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The following is a summary of the Bank’s commitments and contingent liabilities at their equivalent peso contractual amounts (amounts in thousands):

2007 2006 Trust department accounts (see Note 23) P=10,160,391 P=5,306,386 Unused commercial letters of credit 302,337 175,758 Outstanding guarantees 154,164 99,998 Inward bills for collection 52,473 37,342 Late deposits/payment received 20,139 10,197 Outward bills for collection 3,255 9,036 Items held for safekeeping 850 98 Unsold traveler’s check 755 1,270 Others 11 10

25. Financial Performance Earnings per share amounts were computed as follows:

2007 2006 a. Net income P=137,284,645 P=127,275,686 b. Cumulative preferred dividends (Note 17) − 39,240,000 c. Weighted average number of outstanding

common shares (Note 17) 194,813,632 15,000,000 d. Weighted average number of convertible

preferred shares (Note 17) – 178,752,810 e. Total weighted average number of

outstanding common and convertible preferred shares (c + d) 194,813,632 193,752,810

f. Basic EPS [(a – b)/c] P=0.70 P=5.87 g. Diluted EPS [(a – b)/e] P=0.70 P=0.45

The following basic ratios measure the financial performance of the Bank:

2007 2006 Return on average equity (ROE) 4.53% 4.42%Return on average assets (ROA) 0.38% 0.42%Net interest margin on average earnings assets 4.67% 4.04%

THE COMPANY

East West Banking Corporation 20F PBCom Tower

6795 Ayala Avenue corner Rufino Street Makati City, Philippines

LEAD MANAGER, SOLE BOOKRUNNER, SELLING AGENT and MARKET MAKER

The Hongkong and Shanghai Banking Corporation Limited

8F The Enterprise Centre Tower I 6766 Ayala Avenue corner Paseo de Roxas

Makati City, Philippines

SELLING AGENT and MARKET MAKER

Multinational Investment Bancorporation 41F Rufino Pacific Tower

6784 Ayala Avenue Makati City, Philippines

SELLING AGENT

Unicapital, Inc. 3F Majalco Building

Benavidez corner Trasierra Street Makati City, Philippines

SELLING AGENT

(To a limited extent under the Governing Regulations)

East West Banking Corporation 20F PBCom Tower


PUBLIC TRUSTEE

REGISTRY AND PAYING AGENT

Development Bank of the Philippines

Sen. Gil J. Puyat Avenue Makati City, Philippines

Philippine Depository and Trust Corp.

37F The Enterprise Centre Tower I 6766 Ayala Avenue corner Paseo de Roxas

Makati City, Philippines

LEGAL ADVISERS To the Lead Manager

Picazo Buyco Tan Fider and Santos

17F, 18F and 19F Liberty Center 104 H.V. dela Costa Street

Salcedo Village Makati City, Philippines

To the Issuer

Brioso Arnedo Ona Pamfilo Chuanico & Associates 20F PBCom Tower


INDEPENDENT AUDITORS

SyCip Gorres Velayo & Co.

6760 Ayala Avenue 1226 Makati City, Philippines