2011 Annual Report Financial Supplements - BDO

REPORT OFINDEPENDENT AUDITORSReport on Other Legal and Regulatory RequirementsAs discussed in Note 27 to the financial statements, the Parent Bank presented the supplementary informationrequired by the Bureau of Internal Revenue for the year ended December 31, 2011 in a supplementary schedulefiled separately from the basic financial statements. Such supplementary information is the responsibility ofmanagement. The supplementary information is presented for purposes of additional analysis and is not arequired part of the basic financial statements prepared in accordance with Philippine Financial ReportingStandards; it is neither a required disclosure under Philippine Securities and Exchange Commission rules andregulations covering form and content of financial statements under Securities Regulation Code 68.PUNONGBAYAN & ARAULLOBy: Benjamin P. ValdezPartnerCPA Reg. No. 0028485TIN 136-619-880PTR No. 3174790, January 2, 2012, Makati CitySEC Group A AccreditationPartner – No. 009-AR-3 (until Dec. 9, 2014)Firm – No. 0002-FR-3 (until Jan. 18, 2015)BIR AN 08-002511-11-2011 (until Sept. 22, 2014)Firm’s BOA/PRC Cert. of Reg. No. 0002 (until Dec. 31, 2012)February 25, 2012

STATEMENTS OFFINANCIAL POSITIONDECEMBER 31, 2011 AND 2010(Amounts in Millions of Philippine Pesos)NotesBDO Unibank GroupParent Bank2011 2010 2011 2010R E S O U R C E SCASH AND OTHER CASH ITEMS 7DUE FROM BANGKO SENTRAL NG PILIPINAS 7DUE FROM OTHER BANKS 8TRADING AND INVESTMENT SECURITIES 9LOANS AND OTHER RECEIVABLES - Net 10PREMISES, FURNITURE, FIXTURESAND EQUIPMENT - Net 11INVESTMENT PROPERTIES - Net 12OTHER RESOURCES - Net 13P 33,129 P 26,673 P 33,102 P 26,660124,894 138,482 115,992 129,71824,719 21,777 22,777 20,433188,418 197,287 171,081 177,641673,927 566,021 653,857 548,61815,690 15,057 15,074 14,11510,137 11,979 9,571 11,15226,435 23,593 33,804 30,866TOTAL RESOURCESP 1,097,349 P 1,000,869 P 1,055,258 P 959,203LIABILITIES AND EQUITYDEPOSIT LIABILITIES 15BILLS PAYABLE 16SUBORDINATED NOTES PAYABLE 17OTHER LIABILITIES 18Total LiabilitiesEQUITYAttributable to:Shareholders of the Parent Bank 19Non-controlling Interests 19P 858,569 P 782,635 P 838,748 P 762,63459,474 65,861 51,378 56,08138,255 23,152 38,255 23,15244,089 40,489 37,294 34,7871,000,387 912,137 965,675 876,65496,329 88,009 89,583 82,549633 723 - -96,962 88,732 89,583 82,549TOTAL LIABILITIES AND EQUITYP 1,097,349 P 1,000,869 P 1,055,258 P 959,203See Notes to Financial Statements.www.bdo.com.ph 7

STATEMENTS OFINCOMEFOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos Except Per Share Data)BDO Unibank GroupParent BankNotes 201120102009201120102009INTEREST INCOME 20 P 50,467P49,930P48,810P48,024P46,544P45,011INTEREST EXPENSE 21 16,68815,77218,25116,03914,99017,181NET INTEREST INCOME 33,77934,15830,55931,98531,55427,830IMPAIRMENT LOSSES - Net 14 6,1446,6986,1535,9456,3745,775NET INTEREST INCOMEAFTER IMPAIRMENT LOSSES 27,63527,46024,40626,04025,18022,055OTHER OPERATING INCOME 22 20,89917,84115,48317,97616,40414,375OTHER OPERATING EXPENSES 22 36,31634,78932,12933,86331,85428,811PROFIT BEFORE TAX 12,21810,5127,76010,1539,7307,619TAX EXPENSE 27 1,6301,6311,6591,1991,2971,263NET PROFIT P 10,588P8,881P6,101P8,954P8,433P6,356Attributable To:Shareholders of the Parent Bank P 10,531Non-controlling Interests 57P8,82556P6,03566P10,588P8,881P6,101Earnings Per Share:Basic 28 P3.91Diluted 28 P3.91PP3.373.37PP2.572.47PP3.313.31PP3.213.21PP2.712.60See Notes to Financial Statements.

STATEMENTS OFCOMPREHENSIVE INCOMEFOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos)Note 2011BDO Unibank Group201020092011Parent Bank20102009NET PROFIT P 10,588P8,881P6,101P8,954P8,433P6,356OTHER COMPREHENSIVE INCOME (LOSS)Unrealized fair value gainson available-for-sale securities 8463,0202,3561,0961,9512,173Transfer of realized fair value losses (gains)on available-for-sale securities to statements of income (209 )7681,057(118 )1,352231Net fair value gains on available for sale securities 9 6373,7883,4139783,3032,404Translation adjustment related to foreign operations (9 )(350 )(1 )-(317 )-Other Comprehensive Income, Net of Tax 6283,4383,4129782,9862,404TOTAL COMPREHENSIVE INCOME P 11,216P12,319P9,513P9,932P11,419P8,760Attributable To:Shareholders of the Parent Bank P 11,218Non-controlling Interests (2 )P12,23188P9,44766P11,216P12,319P9,513See Notes to Financial Statements.www.bdo.com.ph 9

BALANCE AT JANUARY 1, 2009 P 23,020 P 5,000 P 76 P 15,937 P 1,329 P 14,049 ( P 3,505 ) P 1,311 ( P 5 ) P 57,212 P 562 P 57,774Transactions with ownersIssuance of additional shares 19 377 - - - - - - - - 377 - 377Premium on issuance of new shares, net of listing fees 19 - - - 921 - - - - - 921 - 921Cash dividends 19 - - - - - ( 791 ) - - - ( 791 ) - (791 )Merger of subsidiaries 19 - - - - - 110 - - - 110 - 110Contribution to stock options, net of recognition - - ( 69 ) - - - - - - ( 69 ) - (69 )Acquisition of GEMB 26 - - - - - - - - - - 7 7Total transactions with owners 377 - ( 69 )921 - ( 681 ) - - - 548 7 555Total comprehensive income - - - - - 6,035 3,413 - ( 1 )9,447 66 9,513Transfer to (from) Surplus FreeAdditional appropriation - - - - 128 ( 128 ) - - - - - -Trust reserve 25 - - - - 75 ( 75 ) - - - - - -Revaluation increment on land and building sold - - - - - 177 - ( 132 ) - 45 - 45- - - - 203 ( 26 ) - ( 132 ) - 45 - 45BALANCE AT DECEMBER 31, 2009 P 23,397 P 5,000 P 7 P 16,858 P 1,532 P 19,377 ( P 92 ) P 1,179 ( P 6 ) P 67,252 P 635 P 67,887See Notes to Financial Statements.

BALANCE AT JANUARY 1, 2009 P 23,020 P 5,000 P 76 P 15,918 P 1,025 P 9,439 ( P 2,520 ) P 1,302- P 53,260PTransactions with ownersIssuance of additional shares 19 377 - - - - - - - - 377Premium on issuance of shares, net of listing fees 19 - - - 921 - - - - - 921Cash dividends 19 - - - - - ( 729 ) - - - (729 )Contribution to stock options, net of recognition - - ( 69 ) - - - - - - (69 )Total transactions with owners 377 - ( 69 )921 - ( 729 ) - - - 500Total comprehensive income - - - - - 6,356 2,404 - - 8,760Transfer to (from) Surplus FreeTrust reserve - - - - 75 ( 75 ) - - - -Revaluation reversal, inclusive of tax component - - - - - 178 - ( 126 ) - 52- - - - 75 103 - ( 126 ) - 52BALANCE AT DECEMBER 31, 2009 P 23,397 P 5,000 P 7 P 16,839 P 1,100 P 15,169 ( P 116 ) P 1,176- P 62,572PSee Notes to Financial Statements.

FOR THE YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos)Notes2011 2010Parent Bank 2011 2010 NET INCREASE (DECREASE) INCASH AND CASH EQUIVALENTS(Brought Forward)( P 4,190 ) P ,82 P ,88( P 4,940 ) P 8,1P,CASH AND CASH EQUIVALENTSAT BEGINNING OF YEARrrr77826,673138,48221,7770,,81,221,02,1,10226,660129,71820,4330,2,81,11186,932 112,1010,21176,811 10,80101,CASH AND CASH EQUIVALENTSAT END OF YEARrr77833,129124,89424,7192,18,8221,0,,81,233,102115,99222,7772,012,1820,1,11P 182,742 P 18,2 P 112,10P 171,871 P 1,811P10,80Supplemental Information on Noncash Financing and Investing ActivitiesThe following ar In 2011, the Parent Bank agreed to transferrrrreferred shar rd of DirrrrrTrrrger wasrrrgerrreferredsharr rrVrrrrrent Bank, rrTrrent Bank, rSee Notes to Financial Statements.www.bdo.com.ph 15

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)1. CORPORATE MATTERS1.01 Incorporation and OperationsBDO Unibank, Inc. (formerly Banco de Oro Unibank, Inc., the Bank, BDO Unibank or theParent Bank) was incorporated in the Philippines on August 16, 1967 to engage in thebusiness of banking. It was authorized to engage in trust operations on January 5, 1988 and inforeign currency deposit operations on November 23, 1990. The Bangko Sentral ng Pilipinas(BSP) granted approval to the Parent Bank to operate as an expanded commercial bank onAugust 5, 1996. The Parent Bank commenced operations as such in September of the sameyear. The Parent Bank and its subsidiaries (collectively referred to as the BDO UnibankGroup) offer a wide range of commercial, investment, private and other banking services.These services include traditional loan and deposit products, as well as treasury, assetmanagement, realty management, leasing and finance, remittance, trade services, retail cashcards, insurance, credit card services, stockbrokerage, trust and others.On January 29, 2011, the Parent Bank’s Board of Directors (BOD) approved the change inthe Bank registered name from Banco De Oro Unibank, Inc. to BDO Unibank, Inc. Thechange in the Bank’s registered name was approved by the Philippine Securities and ExchangeCommission (SEC) on November 4, 2011.As a banking institution, the BDO Unibank Group’s operations are regulated and supervisedby the BSP. In this regard, the BDO Unibank Group is required to comply with the rules andregulations of the BSP such as those relating to maintenance of reserve requirements ondeposit liabilities and deposit substitutes and those relating to the adoption and use of safeand sound banking practices, among others, as promulgated by the BSP. BDO UnibankGroup is subject to the provisions of the General Banking Law of 2000 [Republic Act (RA)No. 8791].The Parent Bank’s common shares are listed in the Philippine Stock Exchange (PSE). As ofDecember 31, 2011, the Parent Bank has 744 branches (including one foreign branch) and934 on-site and 662 off-site automated teller machines. The Parent Bank’s registered addressis at BDO Corporate Center, 7899 Makati Avenue, Makati City.The BDO Unibank Group operates mainly within the Philippines with a banking branch inHong Kong and various remittance subsidiaries operating in Asia, Europe and the UnitedStates. In 2011, 2010 and 2009, these foreign operations accounted for 0.5%, 0.4% and 1.0%,respectively, of the BDO Unibank Group’s total revenues and 1.1%, 0.1% and 1.1%,respectively, of the BDO Unibank Group’s total resources. The BDO Unibank Group’ssubsidiaries and associates are shown in Note 13.01.

1.02 Approval of Financial StatementsThe financial statements of the BDO Unibank Group and the Parent Bank for the year endedDecember 31, 2011 (with comparatives for the years ended December 31, 2010 and 2009) wereapproved and authorized for issue by the BOD on February 25, 2012.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe significant accounting policies that have been used in the preparation of these financialstatements are summarized in the succeeding pages. The policies have been consistentlyapplied to all the years presented, unless otherwise stated.2.01 Basis of Preparation of Consolidated Financial Statements(a) Statement of Compliance with Financial Reporting Standards in the Philippines for BanksThe consolidated financial statements of BDO Unibank Group and the financialstatements of the Parent Bank have been prepared in accordance with the FinancialReporting Standards in the Philippines (FRSP) for banks. FRSP and Philippine FinancialReporting Standards (PFRS) are similar except for the reclassification of the embeddedderivatives in credit-linked notes (CLNs) that are linked to Republic of the Philippines(ROP) bonds from fair value through profit or loss (FVTPL) to unquoted debt securitiesclassified as loans or UDSCL (included as part of Loans and Other Receivables), that areoutstanding as of the effective date of reclassification, which is permitted by the BSP forprudential reporting, and by the SEC for financial reporting.PFRSs are adopted by the Financial Reporting Standards Council (FRSC) from thepronouncements issued by the International Accounting Standards Board.The financial statements have been prepared using the measurement bases specified byPFRS for each type of assets, liabilities, income and expense. The measurement bases aremore fully described in the accounting policies that follow.The reconciliations and explanatory notes in the succeeding pages thereto describe thedifference on the statements of financial position under FRSP and PFRS.www.bdo.com.ph 17

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)(i) The reconciliations of the equity reported under FRSP to equity under PFRS as ofDecember 31 follow:BDO Unibank GroupParent Bank2011 2010 2011 2010Equity under FRSP P 96,962 P 88,732 P 89,583 P 82,549Prior year reconciling items 311 381 240 301Current year reconciling items:Amortization of premium/discount dueto change in effective interest rates ( 16) ( 222 ) ( 16 ) ( 209 )Amortization of negative fair value ofembedded derivatives on CLNsreclassified to loans and other receivables 9 - - -Reversal of net adjustments to equity due to:Unwinding of CLNs ( 80) - - -Unrealized mark-to-market gain (loss) onembedded derivatives on CLNsreclassified to loans and other receivables ( 202) 152 ( 202) 148( 289) ( 70 ) ( 218) ( 61 )Total adjustments to equity 22 311 22 240Equity under PFRS P 96,984 P 89,043 P 89,605 P 82,789(ii) Differences in the measurement of items in the statements of financial position as ofDecember 31 are summarized below.BDO Unibank Group2011FRSP Difference PFRSChanges in resources:Trading and investment securities P 188,418 (P 218) P 188,200Loans and other receivables 673,927 240 674,167P 862,345 P 862,367Total adjustments to equity P 222010FRSP Difference PFRSChanges in resources:Trading and investment securities P 197,287 P 41 P 197,328Loans and other receivables 566,021 270 566,291P 763,308 P 763,619Total adjustments to equity P 311

(ii) Philippine Interpretation IFRIC 14 (Amendment), Prepayment of a Minimum FundingRequirement (effective from January 1, 2011). This interpretation addresses unintendedconsequences that can arise from the previous requirements when an entity prepaysfuture contributions into a defined benefit pension plan. It sets out guidance on whenan entity recognizes an asset in relation to a surplus for defined benefit plans based onPAS 19, Employee Benefits, that are subject to a minimum funding requirement. TheBDO Unibank Group is not subject to minimum funding requirement, hence, theadoption of the revised standard has no material effect on its financial statements.(iii) Philippine Interpretation IFRIC 19, Extinguishing Financial Liabilities with EquityInstruments (effective from July 1, 2010). This interpretation clarifies the accountingwhen an entity renegotiates the terms of a financial liability through issuance of equityinstruments to extinguish all or part of the financial liability. These transactions aresometimes referred to as “debt for equity” exchanges or swaps. The interpretationrequires the debtor to account for a financial liability which is extinguished by equityinstruments as follows:the issue of equity instruments to a creditor to extinguish all or part of a financialliability is consideration paid in accordance with PAS 39, Financial Instruments:Recognition and Measurement;the entity measures the equity instruments issued at fair value, unless this cannotbe reliably measured;if the fair value of the equity instruments cannot be reliably measured, then thefair value of the financial liability extinguished is used; and,the difference between the carrying amount of the financial liability extinguishedand the consideration paid is recognized in profit or loss.The adoption of the interpretation did not have a material effect on BDO UnibankGroup’s financial statements as it did not extinguish financial liabilities through equityswap during the year.(iv) 2010 Annual Improvements to PFRS. The FRSC has adopted the 2010 Improvements toPFRS. Most of these amendments became effective for annual periods beginning onor after July 1, 2010 or January 1, 2011. Among those improvements, only thefollowing amendments which are effective from July 1, 2010 were identified to berelevant to BDO Unibank Group’s financial statements but which did not have anymaterial impact on its financial statements:PAS 1 (Amendment), Presentation of Financial Statements: Clarification of Statement ofChanges in Equity (effective from July 1, 2010). The amendment clarifies that, foreach component of equity, an entity may present an analysis of othercomprehensive income either in the statement of changes in equity or in thenotes to the financial statements. As the BDO Unibank Group’s othercomprehensive income only includes fair value changes on Available-for-sale(AFS) securities, revaluation of certain items of bank premises, furniture, fixturesand equipment, and cumulative translation adjustment, the BDO UnibankGroup has elected to continue presenting each item of other comprehensiveincome in the statement of changes in equity.www.bdo.com.ph 21

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated) Consolidated and Separate Financial Statements(effective from July 1, 2010). This amendment clarifies that the consequentialamendments made to PAS 21, The Effect of Changes in Foreign Exchange Rates,PAS 28, Investment in Associate, and, PAS 31, Investment in Joint Ventures, arising fromthe PAS 27 (2008) amendments apply prospectively, to be consistent with therelated PAS 27 transition requirements. The amendment has no impact on BDOUnibank Group’s financial statements.PAS 34 (Amendment), Interim Financial Reporting – Significant Event and Transactions(effective from January 1, 2011). The amendment provides further guidance toillustrate how to apply disclosure principles under PAS 34 for significant eventsand transactions to improve interim financial reporting. It requires additionaldisclosure covering significant changes to fair value measurement andclassification of financial instruments, and to update relevant information from themost recent annual report. This amendment has no significant effect on thefinancial statements since the BDO Unibank Group already provides adequateinformation in its financial statements in compliance with the disclosurerequirements. PFRS 3 (Amendments), Business Combinations (effective from July 1, 2010).The amendment clarifies that contingent consideration arrangement and balancesarising from business combinations with acquisition dates prior to the entity’s dateof adoption of PFRS 3 (Revised 2008) shall not be adjusted on the adoption date.It also provides guidance on the subsequent accounting for such balances.It further clarifies that the choice of measuring non-controlling interest (NCI) atfair value or at the proportionate share in the recognized amounts of an acquiree’sidentifiable net assets, applies only to instruments that represent ownershipinterests and entitle their holders to a proportionate share of the acquiree’s netassets in the event of liquidation. All other components of NCI are measured atfair value unless PFRS requires another measurement basis.This amendment also clarifies accounting for all share-based payment transactionsthat are part of a business combination, including unreplaced and voluntaryreplaced share-based payment awards. Specifically, this provides guidance forsituations where the acquirer does not have an obligation to replace an award butreplaces an existing acquiree award that would otherwise have continuedunchanged after the acquisition, thus resulting to the accounting for these awardsbeing the same as for the awards that the acquirer is obliged to replace. Thisamendment has no significant effect on the BDO Unibank Group’s financialstatements since the manner of measuring NCI at the time of businesscombination is based on net identifiable assets and there are noshare-based payment transactions that are part of a business combination.

PFRS 7 (Amendment), Financial Instruments: Clarification of Disclosures (effective fromJanuary 1, 2011). The amendment clarifies the disclosure requirements whichemphasize the interaction between quantitative and qualitative disclosures aboutthe nature and extent of risks arising from financial instruments. It also amendsthe required disclosure of financial assets including the financial effect of collateralheld as security. This amendment has no significant effect on the financialstatements since BDO Unibank Group already provides adequate information inits financial statements in compliance with the disclosure requirements.Philippine Interpretation IFRIC 13, Customer Loyalty Programmes – Fair ValueAwards Credits (effective from January 1, 2011). The improvement clarifies thatwhen the fair value of award credits is measured on the basis of the value of theawards for which they could be redeemed, the fair value of the award creditsshould take into account the expected forfeitures as well as discounts or incentivesthat would otherwise be offered to customers who have not earned award creditsfrom an initial sale. This improvement has no significant effect on theconsolidated financial statements of BDO Unibank Group.(b) Effective in 2011 but not Relevant to BDO Unibank GroupThe following amended standards are mandatory for accounting periods beginning on orafter July 1, 2010 or January 1, 2011 but are not relevant to BDO Unibank Group’sfinancial statements:PAS 32 (Amendment) : Financial Instruments: Presentation -Classification of Rights IssuesPFRS 1 (Amendments) : First-time Adoption of PFRS(c) Effective Subsequent to 2011 but not Adopted EarlyThere are new PFRS, amendments, annual improvements and interpretations to existingstandards that are effective for periods subsequent to 2011. Management has initiallydetermined the following pronouncements, which the BDO Unibank Group will apply inaccordance with their transitional provisions, to be relevant to its financial statements:(i) PAS 1 (Amendment), Financial Statements Presentation – Presentation of Items of OtherComprehensive Income (effective from July 1, 2012). The amendment requires an entity togroup items presented in Other Comprehensive Income into those that, in accordancewith other PFRSs: (a) will not be reclassified subsequently to profit or loss and (b) willbe reclassified subsequently to profit or loss when specific conditions are met. Themanagement expects that this will not affect the presentation of items in othercomprehensive income since BDO Unibank Group’s other comprehensive incomeonly includes unrealized fair value gains and losses on AFS securities and cumulativetranslation, which can be reclassified to profit or loss when specified conditions aremet.www.bdo.com.ph 23

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)(ii) PAS 12 (Amendment), Income Taxes – Deferred Tax: Recovery of Underlying Assets(effective from January 1, 2012). The amendment provides an exception to theexisting principle in PAS 12 that recovery of the carrying amount of investmentproperty measured at fair value under PAS 40, Investment Property, will be ornormally be through sale. The amendment introduces a rebuttable presumption thatthe measurement of a deferred tax liability or asset on an investment propertymeasured at fair value should reflect the tax consequence of recovering the carryingamount entirely through sale. The presumption is rebutted for depreciable investmentproperty (e.g., building) measured at fair value that is held with an objective toconsume substantially the economic benefits embodied in the asset over time, ratherthan through sale. As a result of the amendment, Standing Interpretation Committee(SIC) 21 Income Taxes – Recovery of Revalued Non-Depreciable Assets, isaccordingly withdrawn. The management does not expect that this amendment willimpact the financial statements since BDO Unibank Group does not measure itsinvestment property at fair value.(iii) PAS 19 (Amendment), Employee Benefits (effective from January 1, 2013). Theamendment made a number of changes as part of the improvements throughout thestandard. The main changes relate to defined benefit plans as follows:eliminates the corridor approach under the existing guidance of PAS 19 andrequires an entity to recognize all gains and losses arising in the reporting period;streamlines the presentation of changes in plan assets and liabilities resulting inthe disaggregation of changes into three main components of service costs, netinterest on net defined benefit obligation or asset, and remeasurement; and,enhances disclosure requirements, including information about thecharacteristics of defined benefit plans and the risks that entities are exposed tothrough participation in them.Currently, BDO Unibank Group is using the corridor approach. The unrecognizedactuarial losses of BDO Unibank Group and the Parent Bank as of December 31,2011 amounted to P4,520 and P4,252, respectively, which will be retrospectivelyrecognized as loss in other comprehensive income in 2013.(iv) PFRS 7 (Amendment), Financial Instruments: Disclosures – Transfers of Financial Assets(effective from July 1, 2011). The amendment requires additional disclosures that willallow users of financial statements to understand the relationship between transferredfinancial assets that are not derecognized in their entirety and the associated liabilities;and, to evaluate the nature of, and risk associated with any continuing involvement ofthe reporting entity in financial assets that are derecognized in their entirety. BDOUnibank Group does not usually enter into this type of arrangement with regard totransfer of financial asset, hence, the amendment may not significantly change BDOUnibank Group’s disclosures in its financial statements.

(v)PFRS 9, Financial Instruments: Classification and Measurement (effective fromJanuary 1, 2015). This is the first part of a new standard on classification andmeasurement of financial assets and financial liabilities that will replace PAS 39 in itsentirety. This chapter deals with two measurement categories for financial assets:amortized cost and fair value. All equity instruments will be measured at fair valuewhile debt instruments will be measured at amortized cost only if the entity is holdingit to collect contractual cash flows which represent payment of principal and interest.The accounting for embedded derivatives in host contracts that are financial assets issimplified by removing the requirement to consider whether or not they are closelyrelated, and, in most arrangement, does not require separation from the hostcontract.For liabilities, the standard retains most of the PAS 39 requirements which includeamortized-cost accounting for most financial liabilities, with bifurcation of embeddedderivatives. The main change is that, in case where the fair value option is taken forfinancial liabilities, the part of a fair value change due to an entity’s own credit risk isrecorded in other comprehensive income rather than in profit or loss, unless thiscreates an accounting mismatch.To date, other chapters of PFRS 9 dealing with impairment methodology and hedgeaccounting are still being completed.BDO Unibank Group does not expect to implement and adopt PFRS 9 until itseffective date or until all chapters of this new standard have been published. Inaddition, management is currently assessing the impact of PFRS 9 on the financialstatements of BDO Unibank Group.(vi) PFRS 13, Fair Value Measurement (effective from January 1, 2013). This standard aimsto improve consistency and reduce complexity by providing a precise definition offair value and a single source of fair value measurement and disclosure requirementsfor use across PFRS. The requirements do not extend the use of fair valueaccounting but provide guidance on how it should be applied where its use is alreadyrequired or permitted by other standards. BDO Unibank Group is yet to assess theimpact of this new standard.(vii) Consolidation Standards PAS 27 (Revised), Separate Financial Statements (effective from January 1, 2013).This revised standard now covers the requirements pertaining solely to separatefinancial statements after the relevant discussions on control and consolidatedfinancial statements have been transferred and included in the new PFRS 10.No new major changes relating to separate financial statements have beenintroduced as a result of the revision.PAS 28 (Revised), Investments in Associate and Joint Venture (effective fromJanuary 1, 2013). This revised standard includes the requirements for joint ventures,as well as associates, to be accounted for using equity method following theissuance of PFRS 11, Joint Arrangement.www.bdo.com.ph 25

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)PFRS 10, Consolidated Financial Statements (effective from January 1, 2013). Thisstandard builds on existing principles of consolidation by identifying theconcept of control as the determining factor in whether an entity should beincluded within the consolidated financial statements. The standard alsoprovides additional guidance to assist in determining control where this isdifficult to assess. PFRS 12, Disclosure of Interest in Other Entities (effective from January 1, 2013).This standard integrates and makes consistent the disclosure requirements forall forms of interests in other entities, including joint arrangements, associates,special purpose vehicles and unconsolidated structured entities. This alsointroduces new disclosure requirements about the risks to which an entity isexposed from its involvement with structured entities.BDO Unibank Group is currently reviewing the impact of the above consolidationstandards on its financial statements in time for its adoption in 2013.2.03 Presentation of Consolidated Financial StatementsThe consolidated financial statements are presented in accordance with PAS 1. BDOUnibank Group has elected to present the statement of comprehensive income in twostatements: a statement of income and a statement of comprehensive income.Two comparative periods are presented for the statements of financial position when BDOUnibank Group:(a) Applies an accounting policy retrospectively;(b) Makes a retrospective restatement of items in its financial statements; or,(c) Reclassifies items in the financial statements.2.04 Basis of ConsolidationBDO Unibank Group obtains and exercises control through voting rights. BDO UnibankGroup’s consolidated financial statements comprise the accounts of the Parent Bank and itssubsidiaries as enumerated in Note 13.01, after the elimination of material intercompanytransactions. All significant intercompany balances and transactions with subsidiaries,including income, expenses and dividends, are eliminated in full. Unrealized profits and lossesfrom intercompany transactions that are recognized in assets are also eliminated in full.Intercompany losses that indicate impairment are recognized in BDO Unibank Groupfinancial statements.Business combinations arising from transfers of interests in entities that are under thecommon control of the shareholder that controls BDO Unibank Group are accounted forunder the pooling-of-interests method and reflected in the financial statements as if thebusiness combination had occurred at the beginning of the earliest comparative periodpresented, or if later, at the date that common control was established; for this purpose,comparatives are restated. The resources and liabilities acquired are recognized in BDOUnibank Group’s controlling shareholder’s financial statements at the carrying amountsrecognized previously. The components of equity of the acquired entities are added to thesame components within BDO Unibank Group equity.The financial statements of subsidiaries are prepared for the same reporting period as theCompany, using consistent accounting principles.

BDO Unibank Group accounts for its investments in subsidiaries and non-controlling interest(previously called “minority interest”) as follows:(a) Investments in SubsidiariesSubsidiaries are all entities over which BDO Unibank Group has the power to control interms of financial and operating policies generally accompanying a shareholding of morethan one half of the voting rights. BDO Unibank Group obtains and exercises controlover subsidiaries through voting rights. The existence and effect of potential voting rightsthat are currently exercisable or convertible are considered when assessing whether BDOUnibank Group controls another entity. Subsidiaries are consolidated from the date BDOUnibank Group obtains control until such time that such control ceases.Except as otherwise indicated, the acquisition of subsidiaries are accounted for using theacquisition method (previously called “purchase method” - see Note 2.13). Acquisitionmethod requires recognizing and measuring the identifiable assets acquired, the liabilitiesassumed and any non-controlling interest in the acquiree. The consideration transferredfor the acquisition of a subsidiary is the fair values of the assets transferred, the liabilitiesincurred and the equity interests issued by the BDO Unibank, if any. The considerationtransferred also includes the fair value of any asset or liability resulting from a contingentconsideration arrangement. Acquisition-related costs are expensed as incurred andsubsequent change in the fair value of contingent consideration is recognized directly inprofit or loss.Identifiable assets acquired and liabilities and contingent liabilities assumed in abusiness combination are measured initially at their fair values at the acquisition date. Onan acquisition-by-acquisition basis, the BDO Unibank Group recognizes anynon-controlling interest in the acquiree either at fair value or at the non-controllinginterest’s proportionate share of the acquiree’s net assets.The excess of the consideration transferred, the amount of any non-controlling interest inthe acquiree and the acquisition-date fair value of any previous equity interest in theacquiree over the fair value of the Group’s share of the identifiable net assets acquired isrecognized as goodwill. If this is less than the fair value of the net assets of the subsidiaryacquired in the case of a bargain purchase, the difference is recognized directly as a gain inprofit or loss (see Note 2.13).(b) Transactions with Non-controlling InterestsBDO Unibank Group’s transaction with non-controlling interests that do not result inloss of control are accounted for as equity transactions – that is, as transaction with theowners of BDO Unibank Group in their capacity as owners. The difference between thefair value of any consideration paid and the relevant share acquired of the carrying valueof net assets of the subsidiary is recognized in equity. Disposals of equity investments tonon-controlling interests results in gains or losses for the Group that are also recognizedin equity.www.bdo.com.ph 27

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)When BDO Unibank Group ceases to have control, any interest retained in the subsidiaryis remeasured to its fair value, with the change in carrying amount recognized in profit orloss. The initial carrying amount for the purposes of subsequently accounting for theinterest retained as an associate, joint venture or financial asset is the fair value. Inaddition, any amounts previously recognized in other comprehensive income in respect ofthat entity are accounted for as if BDO Unibank Group had directly disposed of therelated resources or liabilities. This may mean that amounts previously recognized inother comprehensive income are reclassified to profit or loss.In BDO Unibank Group’s financial statements, the non-controlling interest component isshown in BDO Unibank Group’s statement of changes in equity and in BDO UnibankGroup’s statement of income. Non-controlling interests in 2011 and 2010 represent theinterests not held by BDO Unibank Group in BDO Leasing and Finance, Inc., BDO EliteSavings Bank, Inc. and Equimark – NFC Development Corp.2.05 Segment ReportingOperating segments are reported in a manner consistent with the internal reporting providedto the BDO Unibank Group’s chief operating decision-maker. The chief operating decisionmakeris responsible for allocating resources and assessing performance of the operatingsegments.In identifying its operating segments, management generally follows the BDO UnibankGroup's products and services as disclosed in Note 5, which represent the main products andservices provided by the BDO Unibank Group.Each of these operating segments is managed separately as each of these services requiresdifferent technologies and resources as well as marketing approaches. All inter-segmenttransfers are carried out at arm's length prices.The measurement policies of the BDO Unibank Group uses for segment reporting underPFRS 8, Operating Segments, is the same as those used in its financial statements. In addition,corporate assets which are not directly attributable to the business activities of any operatingsegment are not allocated to a segment.There have been no changes from prior periods in the measurement methods used todetermine reported segment profit or loss.The BDO Unibank Group’s operations are organized according to the nature of the productsand services provided. Financial information on operating segments is presented in Note 5.2.06 Financial AssetsFinancial assets include cash and other financial instruments. Financial assets, other thanthose designated and effective as hedging instruments, are classified into the followingcategories: at FVTPL, loans and receivables, held-to-maturity (HTM) and available-for-sale(AFS). Financial assets are assigned to the different categories by management on initialrecognition, depending on the purpose for which the investments were acquired. Except forderivative financial instruments and financial assets designated at FVTPL, the designation offinancial assets is re-evaluated at the end of each reporting period at which date a choice ofclassification or accounting treatment is available, subject to compliance with specificprovisions of applicable accounting standards.

Regular purchases and sales of financial assets are recognized on their settlement date. Allfinancial assets that are not classified as at FVTPL are initially recognized at fair value plus anydirectly attributable transaction costs. Financial assets carried at FVTPL are initially recordedat fair value and transaction costs related to it are recognized in profit or loss.The foregoing categories of financial instruments are more fully described below.(a) Financial Assets at Fair Value Through Profit or LossThis category includes derivative financial instruments and financial assets that are eitherclassified as held for trading (HFT) or are designated by BDO Unibank Group to becarried at FVTPL upon initial recognition. A financial asset is classified in this category ifacquired principally for the purpose of selling in the near term or if so designated bymanagement. Derivatives are also categorized as “held for trading” unless they aredesignated as hedges.Subsequent to initial recognition, the financial assets included in this category aremeasured at fair value with changes in fair value recognized in profit or loss. Financialassets (except derivatives and financial assets originally designated as financial assets atFVTPL) may be subsequently reclassified out of FVTPL category:(i) Only in rare circumstances and if there is a change in intention (i.e., the financial assetis no longer held for the purpose of selling or repurchasing it in the near future);(ii) If the financial asset would have met the definition of loans receivables and if thefinancial asset had not been required to be classified as HFT at initial recognition andthe entity has the intention and ability to hold the financial asset for the foreseeablefuture or until maturity; and,(iii) For CLNs and derivatives embedded in CLNs linked to ROP bonds as permitted byBSP for prudential reporting and by the SEC for financial reporting.(b) Loans and ReceivablesLoans and receivables are non-derivative financial assets with fixed or determinablepayments that are not quoted in an active market. These arise when BDO UnibankGroup provides money, goods or services directly to the debtor with no intention oftrading the receivables. Included in this category are financial assets arising from directloans to customers, interbank loans and receivables, sales contract receivables and allreceivables from customers and other banks. Loans and receivables also include theaggregate rental on finance lease transactions. Unearned income on finance leasetransactions is shown as a deduction from loans and receivables.www.bdo.com.ph 29

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Loans and receivables are subsequently measured at amortized cost using the effectiveinterest method, less impairment losses. Any change in the value of loans and receivablesis recognized in profit or loss, except for reclassified financial assets under PAS 39 andPFRS 7. Increases in estimates of future cash receipts from financial assets that have beenreclassified in accordance with PAS 39 and PFRS 7 shall be recognized as an adjustmentto the effective interest rate from the date of the change in estimate. The differencebetween the sale and repurchase price is recognized as interest and accrued over the life ofthe agreements using the effective interest method. Securities Purchased Under ReverseRepurchase Agreement (SPURRA), wherein BDO Unibank Group enters into short-termpurchases of securities under reverse repurchase agreements of substantially identicalsecurities with the BSP, are included in this category.BDO Unibank Group’s financial assets categorized as loans and receivables are presentedas Cash and Cash Equivalents and Loans and Other Receivables in the statement offinancial position. Cash and cash equivalents consist of cash and non-restricted balanceswith the BSP and amounts due from other banks. For purposes of reporting cash flows,cash and cash equivalents include cash and other cash items, amounts due from BSPand other banks, interbank call loans receivable and SPURRA with original maturitiesof three months or less from placement date.Impairment loss is the estimated amount of loss in BDO Unibank Group’s loan portfolio,based on the evaluation of the estimated future cash flows discounted at the loan’s originaleffective interest rate or the last repricing rate for loans issued at variable rates (see Note2.23). Impairment is established through an allowance account which is charged toexpense. Loans and receivables are written off against the allowance for impairment whenmanagement believes that the collectibility of the principal is unlikely, subject to BSPregulations.(c) HTM InvestmentsThis category includes non-derivative financial assets with fixed or determinable paymentsand a fixed date of maturity that BDO Unibank Group has the positive intention andability to hold to maturity. Investments intended to be held for an undefined period arenot included under this category.HTM investments consist of government and private debt securities. If BDO UnibankGroup were to sell other than an insignificant amount of HTM investments, the entirecategory of HTM securities would be tainted and would be reclassified as AFS securities.The tainting provision will not apply if the sales or reclassifications of HTM investments:(i) are so close to maturity or the financial asset’s call date that changes in the market rateof interest would not have a significant effect on the financial asset’s fair value; (ii) occurafter BDO Unibank Group has collected substantially all of the financial asset’s originalprincipal through scheduled payments or prepayments; or, (iii) are attributable to anisolated event that is beyond the control of BDO Unibank Group, is nonrecurring andcould not have been reasonably anticipated by BDO Unibank Group.

Subsequent to initial recognition, HTM investments are measured at amortized costs usingeffective interest method, less impairment losses, if any. Impairment loss, which is thedifference between the carrying value and the present value of estimated cash flows of theinvestment, is recognized when there is objective evidence that the investment has beenimpaired. Any changes to the carrying amount of the investment due to impairment arerecognized in profit or loss.(d) AFS SecuritiesThis category includes non-derivative financial assets that are either designated to thiscategory or do not qualify for inclusion in any of the other categories of financial assets.Non-derivative financial asset classified as AFS may be reclassified to loans andreceivables category that would have met the definition of loans and receivables if there isan intention and ability to hold that financial asset for the foreseeable future or untilmaturity.All financial assets within this category are subsequently measured at fair value, unlessotherwise disclosed, with changes in value recognized in other comprehensive income, netof any effects arising from income taxes. Cumulative gains and losses arising fromsecurities classified as AFS are reclassified from other comprehensive income to profit orloss when these are sold or when the investment are impaired and presented as areclassification adjustment within other comprehensive income.In the case of impairment, any loss previously recognized in other comprehensive incomeis reclassified to profit or loss. Reversal of impairment losses are recognized in othercomprehensive income, except for financial assets that are debt securities which arerecognized in profit or loss only if the reversal can be objectively related to an eventoccurring after the impairment loss was recognized.The fair values of quoted investments in active markets are based on current closing prices.If the market for a financial asset is not active and for unlisted securities, BDO UnibankGroup establishes the fair value by using valuation techniques, which include the use ofrecent arm’s length transactions, discounted cash flow analysis, option pricing models andother valuation techniques commonly used by market participants.Gains and losses arising from changes in the fair value of the financial assets at FVTPLcategory are reported as part of Trading Gain under Other Operating Income account in thestatement of income in the period in which these arise. Gains and losses arising fromchanges in the fair value of AFS securities are recognized in other comprehensive incomeuntil the financial asset is derecognized or impaired, at which time the cumulative gain or losspreviously recognized in other comprehensive income shall be reclassified to profit or loss.However, interest calculated using the effective interest method is recognized in profit orloss.Non-compounding interest, dividend income and other cash flows resulting from holdingimpaired financial assets are recognized in profit or loss when received, regardless of how therelated carrying amount of financial assets is measured.Derecognition of financial assets occurs when the right to receive cash flows from thefinancial instruments expire or are transferred and substantially all of the risks and rewards ofownership have been transferred.www.bdo.com.ph 31

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)2.07 Derivative Financial Instruments and Hedge AccountingBDO Unibank Group is a party to various foreign-currency forward and swap contracts andcross-currency and interest rate swaps. These contracts are entered into as a service tocustomers and as a means of reducing or managing BDO Unibank Group’s foreign exchangeand interest rate exposures, as well as for trading purposes.Derivatives are initially recognized at fair value on the date on which derivative contract isentered into and are subsequently measured at their fair value (except for the embeddedderivatives in CLNs linked to ROP bonds which BDO Unibank Group reclassified to loans).Fair values are obtained from quoted market prices in active markets, including recent markettransactions, and valuation techniques, including discounted cash flow models and optionpricing models, as appropriate. All derivatives are carried as assets when fair value is positiveand as liabilities when fair value is negative.The best evidence of the fair value of a derivative at initial recognition is the transaction price(the fair value of the consideration given or received) unless the fair value of the instrument isevidenced by comparison with other observable current market transactions in the sameinstrument or based on a valuation technique whose variables include only data fromobservable markets. When such evidence exists, BDO Unibank Group recognizes profit orloss at initial recognition.For more complex instruments, BDO Unibank Group uses proprietary models, which usuallyare developed from recognized valuation models. Some or all of the inputs into these modelsmay not be market observable, and are derived from market prices or rates or are estimatedbased on assumptions. When entering into a transaction, the financial instrument isrecognized initially at the transaction price, which is the best indicator of fair value, althoughthe value obtained from the valuation model may differ from the transaction price. Thisinitial difference in fair value indicated by valuation techniques is recognized as profit or lossdepending upon the individual facts and circumstances of each transaction and not later thanwhen the market data becomes observable.The value produced by a model or other valuation technique is adjusted to allow for a numberof factors as appropriate, because valuation techniques cannot appropriately reflect all factorsmarket participants take into account when entering into a transaction. Valuation adjustmentsare recorded to allow for model risks, bid-ask spreads, liquidity risks as well as other factors.Management believes that these valuation adjustments are necessary and appropriate to fairlystate financial instruments carried at fair value in the statement of financial position.Certain derivatives embedded in other financial instruments are considered as separatederivatives when their economic characteristics and risks are not closely related to those of thehost contract and the host contract is not carried at fair value through profit or loss. Theseembedded derivatives are bifurcated from the host contracts and are measured at fair valuewith changes in fair value recognized in profit or loss (except for the embedded derivatives inCLNs linked to ROP bonds which were not bifurcated from the host contracts and werereclassified to loans as permitted for prudential reporting).

Certain derivatives may be designated as either: (i) hedges of the fair value of recognized assetsor liabilities or firm commitments (fair value hedge); or, (ii) hedges of highly probable futurecash flows attributable to a recognized asset or liability, or a forecasted transaction (cash flowhedge). Changes in the fair value of derivatives are recognized in profit or loss. The methodof recognizing the resulting fair value gain or loss on derivatives that qualify as hedginginstrument depends on the hedging relationship designated by the BDO Unibank Group.2.08 Non-current Assets Held for SaleAssets held for sale include real and other properties acquired through repossession orforeclosure that BDO Unibank Group intends to sell within one year from the date ofclassification as held for sale.Assets classified as held for sale are measured at the lower of their carrying amountsimmediately prior to their classification as held for sale and their fair value less costs to sell.Assets classified as held for sale are not subject to depreciation or amortization. The profit orloss arising from the sale of held for sale assets is included as part of Income from AssetsAcquired under Other Operating Income account in profit or loss.2.09 Investment PropertiesInvestment properties are stated at cost. The cost of an investment property comprises itspurchase price and directly attributable cost incurred. This also includes land and buildingacquired by BDO Unibank Group from defaulting borrowers not held for sale in the next 12months. For these assets, the cost is recognized initially at fair value. Investment propertiesexcept land are depreciated on a straight-line basis over a period of 10 years.BDO Unibank Group adopted the cost model in measuring its investment properties; hence,these are carried at cost less accumulated depreciation and any impairment in value.Depreciation and impairment loss are recognized in the same manner as in premises,furniture, fixtures and equipment.Investment properties are derecognized upon disposal or when permanently withdrawn fromuse and no future economic benefit is expected from their disposal. Any gain or loss on theretirement or disposal of an investment property is recognized in profit or loss in the year ofretirement or disposal.2.10 Real Properties for Development and SaleReal properties for development and sale consist of subdivision land for sale anddevelopment, and land acquired for home building, home development, and other types ofreal estate development. These are carried at the lower of aggregate cost and net realizablevalue (NRV). Costs include acquisition costs and costs incurred for development,improvement and construction of subdivision land. NRV is the selling price less estimatedcost to complete, commissions and other marketing costs.Land acquired for home building, home development and other types of real estatedevelopment is also carried at the lower of aggregate cost and NRV. Cost include acquisitioncosts and, once land development commences, the cost of these properties, includingdevelopment costs incurred, will be classified to Real Properties for Development and Sale.www.bdo.com.ph 33

The residual values and estimated useful lives of premises, furniture, fixtures and equipmentare reviewed and adjusted, if appropriate, at the end of each reporting period.An item of premises, furniture, fixtures and equipment is derecognized upon disposal or whenno future economic benefits are expected to arise from the continued use of the asset. Anygain or loss arising on derecognition of the asset (calculated as the difference between the netdisposal proceeds and the carrying amount of the item) is included in profit or loss in theperiod the item is derecognized.2.13 Business CombinationExcept as indicated otherwise, business acquisitions are accounted for using the acquisitionmethod of accounting.Goodwill acquired in a business combination is initially measured at cost being the excess ofthe cost of a business combination over BDO Unibank Group’s interest in the net fair valueof the identifiable assets, liabilities and contingent liabilities. Subsequent to initial recognition,goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewedfor impairment annually or more frequently if events or changes in circumstances indicate thatthe carrying value may be impaired (see Note 2.24).Impairment losses on goodwill are not reversed. Negative goodwill, if any, which is the excessof BDO Unibank Group’s interest in the net fair value of acquired identifiable assets,liabilities and contingent liabilities over cost is recognized directly in profit or loss.For the purpose of impairment testing, goodwill is allocated to cash-generating units orgroups of cash-generating units that are expected to benefit from the business combination inwhich the goodwill arose. The cash-generating units or groups of cash-generating units areidentified according to operating segment.Gains and losses on the disposal of an interest in a subsidiary include the carrying amount ofgoodwill relating to it.If the business combination is achieved in stages, the acquirer is required to remeasure itspreviously held equity interest in the acquiree at its acquisition-date fair value and recognizethe resulting gain or loss, if any, in the profit or loss or other comprehensive income, asappropriate.Any contingent consideration to be transferred by the Group is recognized at fair value at theacquisition date. Subsequent changes to the fair value of the contingent consideration that isdeemed to be an asset or liability is recognized in accordance with PAS 37 either in profit orloss or as a change to other comprehensive income. Contingent consideration that isclassified as equity is not remeasured, and its subsequent settlement is accounted for withinequity.Transfers of assets between commonly-controlled entities are accounted for under historicalcost accounting.www.bdo.com.ph 35

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)2.14 Intangible AssetsGoodwill represents the excess of the cost of acquisition over the fair value of the net assetsacquired and branch licenses at the date of acquisition. Goodwill is classified as intangibleasset with indefinite useful life, and thus, not subject to amortization but to an annual test forimpairment (see Note 2.24). Goodwill is subsequently carried at cost less any accumulatedimpairment losses.Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each ofthose cash generating units is represented by each primary reporting segment.Acquired computer software licenses are capitalized on the basis of the costs incurred toacquire and install the specific software. These costs are amortized on straight-line basis overthe expected useful life of five years. Costs associated with maintaining computer softwareare expensed as incurred.2.15 Financial LiabilitiesFinancial liabilities include deposit liabilities, bills payable, derivative liabilities, subordinatednotes payable and other liabilities.Financial liabilities are recognized when the BDO Unibank Group becomes a party to thecontractual terms of the instrument.Deposit liabilities and other liabilities are recognized initially at fair value and subsequentlymeasured at amortized cost less settlement payments.Bills payable and subordinated notes payable, except for government financial assistance arerecognized initially at fair value, which is the issue proceeds (fair value of considerationreceived), net of direct issue costs. Bills payable and subordinated notes payable aresubsequently measured at amortized cost; any difference between proceeds, net of transactioncosts, and the redemption value is recognized in profit or loss over the period of theborrowings using the effective interest method.Preferred shares, which carry a mandatory coupon or are redeemable on a specific date or atthe option of the shareholder are classified as financial liabilities and are presented as part ofBills Payable in the statement of financial position. The dividends on these preferred sharesare recognized in profit or loss as interest expense on an amortized cost basis using theeffective interest method.The fair value of the liability portion of a convertible bond is determined using a marketinterest rate for an equivalent non-convertible bond. This amount is recorded as a liability onan amortized cost basis until extinguished on conversion or maturity of the bond. Theremainder of the proceeds is allocated to the conversion option. This is recognized andincluded in equity, net of income tax effects.Derivative liabilities are recognized initially and subsequently measured at fair value withchanges in fair value recognized in profit or loss.Dividend distributions to shareholders are recognized as financial liabilities when thedividends are declared by BDO Unibank Group and are subject for approval by the BSP.

Financial assistance from the Philippine Deposit Insurance Corporation (PDIC), arising fromthe acquisition of First e-Bank in 2002, is accounted for under PAS 20, Accounting forGovernment Grants and Disclosure of Government Assistance, whereby the loan received is initiallyrecorded at the amount borrowed with no re-measurement to fair value or imputation ofmarket interest.Financial liabilities are derecognized in the statement of financial position only when theobligations are extinguished either through discharge, cancellation or expiration.2.16 Offsetting Financial InstrumentsFinancial assets and liabilities are offset and the net amount is reported in the statement offinancial position when there is a legally enforceable right to offset the recognized amountsand there is an intention to settle on a net basis or realize the asset and settle the liabilitysimultaneously.2.17 Terminal Value of Leased Assets and Deposits on Finance LeaseThe residual value of leased assets, which approximates the amount of guaranty deposit paidby the lessee at the inception of the lease, is the estimated proceeds from the disposal of theleased asset at the end of the lease term. At the end of the lease term, the residual value of theleased asset is generally applied against the guaranty deposit of the lessee. The residual valueof leased assets is included as part of Other Liabilities account in the BDO Unibank Groupstatement of financial position.2.18 Related Party TransactionsRelated party transactions are transfers of resources, services or obligations between BDOUnibank Group and its related parties, regardless whether a price is charged.Parties are considered to be related if one party has the ability to control the other party orexercise significant influence over the other party in making financial and operating decisions.These include: (a) individuals owning, directly or indirectly through one or moreintermediaries, control or are controlled by, or under common control with the BDOUnibank Group; (b) associates; and, (c) individuals owning, directly or indirectly, an interest inthe voting power of the BDO Unibank Group that gives them significant influence overBDO Unibank Group and close members of the family of any such individual.In considering each possible related party relationship, attention is directed to the substanceof the relationship and not merely on the legal form.2.19 EquityCapital stock represents the nominal value of shares that have been issued.Common stock options pertain to the cumulative amount of stock option arising from thestock option plan granted by BDO Unibank Group to its qualified officers. The optionsunder the stock option plan were fully exercised and paid for in 2010.Additional paid-in capital includes any premiums received on the issuance of capital stock.Any transaction costs associated with the issuance of shares are deducted from additionalpaid-in capital.www.bdo.com.ph 37

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Surplus reserves pertain to a portion of BDO Unibank Group’s income from trust operationsset-up on a yearly basis in compliance with BSP regulations. Surplus reserves also consist ofreserve for contingencies and self-insurance.Surplus free includes all current and prior period results as disclosed in profit or loss andwhich are available and not restricted for use by BDO Unibank Group.Net unrealized fair value gains (losses) on AFS securities pertains to cumulativemark-to-market valuation of AFS financial assets.Revaluation increment consists of gains arising from the revaluation of land under bankpremises, furniture, fixtures and equipment.Accumulated translation adjustment pertains to exchange differences arising on translation ofthe assets and liabilities of foreign subsidiaries and overseas branch that are taken to othercomprehensive income.Non-controlling interests represents the portion of the net assets and profit or loss notattributable to BDO Unibank Group and are presented separately in the BDO UnibankGroup statement of income and within equity in the BDO Unibank Group statement offinancial position and changes in equity.2.20 Revenue and Expense RecognitionRevenue is recognized to the extent that it can be reliably measured; it is probable that theeconomic benefits will flow to BDO Unibank Group; and the expenses incurred or to beincurred can be measured reliably. The following specific recognition criteria of income andexpenses must also be met before revenue is recognized:(a) Interest – Interest income and expenses are recognized in profit or loss for all financialassets or instruments using the effective interest method.The effective interest method is a method of calculating the amortized cost of a financialasset or a financial liability and of allocating the interest income or interest expense overthe relevant period. The effective interest rate is the rate that exactly discounts estimatedfuture cash payments or receipts through the expected life of the financial instrument or,when appropriate, a shorter period to the net carrying amount of the financial asset orfinancial liability. When calculating the effective interest rate, BDO Unibank Groupestimates cash flows considering all contractual terms of the financial instrument but doesnot consider future credit losses. The calculation includes all fees and points paid orreceived between parties to the contract that are an integral part of the effective interestrate, transaction costs and all other premiums or discounts.Once a financial asset or a group of similar financial assets has been written down as aresult of an impairment loss, interest income is recognized using the rate of interest usedto discount the future cash flows for the purpose of measuring the impairment loss.

(b) Service charges, fees and commissions – Service charges, fees and commissions are generallyrecognized when the service has been provided. Loan syndication fees are recognized asrevenue when the syndication has been completed and BDO Unibank Group retained nopart of the loan package for itself or retained a part at the same effective interest rate forthe other participants. Commission and fees arising from negotiating, or participating inthe negotiation of a transaction for a third party – such as the arrangement of theacquisition of shares or other securities or the purchase or sale of businesses – arerecognized at the completion of the underlying transaction. Portfolio and othermanagement advisory and service fees are recognized based on the applicable servicecontracts, usually on a time-proportionate basis. Asset management fees related toinvestment funds are recognized ratably over the period the service is provided. The sameprinciple is applied for wealth management, financial planning and custody services thatare continuously provided over an extended period of time.(c) Trading gain – Trading gain is recognized when the ownership of the securities istransferred to the buyer (at an amount equal to the excess of the selling price over thecarrying amount of securities) and as a result of the mark-to-market valuation of thesecurities at year-end. Only trading gain arising from mark-to-market valuation offinancial assets at FVTPL is recognized in profit or loss by the BDO Unibank Group.(d) Income from assets sold or exchanged – Income from assets sold or exchanged is recognizedwhen the title to the assets is transferred to the buyer or when the collectability of theentire sales price is reasonably assured. This is included as part of Other OperatingIncome account in profit or loss.(e) Dividend income – Dividend income is recognized when BDO Unibank Group’s right toreceive dividend is established.(f) Rental income – Rental income arising from leased properties is accounted for on a straightlinebasis over the lease terms on ongoing leases and is recorded in profit or loss as part ofOther Operating Income.(g) Commissions earned on credit cards – Commissions earned on credit cards are taken up asincome upon receipt from member establishments of charges arising from creditavailments by credit cardholders. These commissions are computed based on certainagreed rates and are deducted from amounts remittable to member establishments.(h) Income on direct financing leases and receivables financed – Income on loans and receivablesfinanced with short-term maturities is recognized using the effective interest method.Interest and finance fees on finance leases on loans and receivables financed withlong-term maturities and the excess of the aggregate lease rental plus the estimatedterminal value of the leased equipment over its cost are credited to unearned discount andamortized over the term of the note or lease using the effective interest method.Unearned income ceases to be amortized when receivables become past due.(i) Real property sales – Revenue is accounted for using the full accrual method. Under thismethod, sale is recognized when the earning process is virtually complete and collectabilityof the entire sales price is reasonably assured.Collections from accounts which did not qualify from revenue recognition are treated ascustomers’ deposit included in accounts payable under Other Liabilities in the statementsof financial position.www.bdo.com.ph 39

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)The BDO Unibank Group records its revenue at gross and separately recognizes an expenseand liability relative to the fair value of the reward points earned by clients and customers (seeNote 3.02) since such points are redeemable significantly from the goods or services providedby a third party participating in the program, for example, SM Group(a related party) and rewards partners of the Bank.Cost and expenses are recognized in profit or loss upon utilization of the assets or services orat the date these are incurred.2.21 Provisions and ContingenciesProvisions are recognized when present obligations will probably lead to an outflow ofeconomic resources and these can be estimated reliably even if the timing or amount of theoutflow may still be uncertain. A present obligation arises from the presence of a legal orconstructive commitment that has resulted from past events, for example, legal disputes oronerous contracts.Provisions are measured at the estimated expenditure required to settle the present obligation,based on the most reliable evidence available at the end of reporting period, including the risksand uncertainties associated with the present obligation. Where there are a number of similarobligations, the likelihood that an outflow will be required in settlement is determined byconsidering the class of obligations as a whole. In addition, long-term provisions are discountedto their present values, where time value of money is material.Provisions are reviewed at the end of each reporting period and adjusted to reflect the currentbest estimate.In those cases where the possible outflow of economic resource as a result of presentobligations is considered improbable or remote, or the amount to be provided for cannot bemeasured reliably, no liability is recognized in the financial statements. On the other hand, anyreimbursement expected to be received in the course of settlement of the present obligation isrecognized, if virtually certain, as a separate asset, not exceeding the amount of the relatedprovision. Similarly, probable inflows of economic benefits that do not yet meet the recognitioncriteria of an asset are considered contingent assets, hence, are not recognized in the financialstatements.2.22 LeasesBDO Unibank Group accounts for its leases as follows:(a) BDO Unibank Group as LessorLeases, wherein BDO Unibank Group substantially transfers to the lessee all risks andbenefits incidental to ownership of the leased item, are classified as finance leases and arepresented as receivable at an amount equal to BDO Unibank Group’s net investment inthe lease. Finance income is recognized based on the pattern reflecting a constantperiodic rate of return on BDO Unibank Group’s net investment outstanding in respectof the finance lease.Leases, which do not transfer to the lessee substantially all the risks and benefits ofownership of the asset, are classified as operating leases. Operating lease collections arerecognized as income in profit or loss on a straight-line basis over the lease term.

(b) BDO Unibank Group as LesseeLeases, which do not transfer to BDO Unibank Group substantially all the risks andbenefits of ownership of the asset are classified as operating leases. Operating leasepayments are recognized as expense in profit or loss on a straight-line basis over the leaseterm.BDO Unibank Group determines whether an arrangement is, or contains a lease based on thesubstance of the arrangement. It makes an assessment of whether the fulfillment of thearrangement is dependent on the use of a specific asset or assets and the arrangement conveysa right to use the asset.2.23 Impairment of Financial AssetsBDO Unibank Group assesses at the end of each reporting period whether there is objectiveevidence that a financial asset or group of financial assets is impaired. A financial asset or agroup of financial assets is impaired and impairment losses are incurred if, and only if, there isobjective evidence of impairment as a result of one or more events that occurred after theinitial recognition of the asset (a loss event) and that loss event has an impact on the estimatedfuture cash flows of the financial asset or group of financial assets that can be reliablyestimated. Objective evidence that a financial asset or group of assets is impaired includesobservable data that comes to the attention of BDO Unibank Group about certain lossevents, including, among others: (i) significant financial difficulty of the issuer or debtor; (ii) abreach of contract, such as a default or delinquency in interest or principal payments; (iii) theprobability that the borrower will enter bankruptcy or other financial reorganization; (iv) thedisappearance of an active market for that financial asset because of financial difficulties; or,(v) observable data indicating that there is a measurable decrease in the estimated future cashflows from a group of financial assets since the initial recognition of those assets, although thedecrease cannot yet be identified with the individual financial assets in the group.(a) Assets carried at amortized cost. BDO Unibank Group first assesses whether objectiveevidence of impairment exists individually for financial assets that are individuallysignificant and individually or collectively for financial assets that are not individuallysignificant. If BDO Unibank Group determines that no objective evidence of impairmentexists for an individually assessed financial asset, whether significant or not, BDOUnibank Group includes the asset in a group of financial assets with similar credit riskcharacteristics and collectively assesses them for impairment. Assets that are individuallyassessed for impairment and for which an impairment loss is or continues to berecognized are not included in a collective assessment of impairment.If there is objective evidence that an impairment loss on loans and receivable or HTMinvestments carried at amortized cost has been incurred, the amount of the loss ismeasured as the difference between the asset’s carrying amount and the present value ofestimated future cash flows (excluding future credit losses that have not been incurred)discounted at the financial asset’s original effective interest rate. The carrying amount ofthe asset is reduced through the use of an allowance account and the amount of the loss isrecognized in profit or loss. If a loan or HTM investment has a variable interest rate, thediscount rate for measuring any impairment loss is the current effective interest ratedetermined under the contract. When practicable, BDO Unibank Group may measureimpairment on the basis of an instrument’s fair value using an observable market price.www.bdo.com.ph 41

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)The calculation of the present value of the estimated future cash flows of a collateralizedfinancial asset reflects the cash flows that may result from foreclosure less costs forobtaining and selling the collateral, whether or not foreclosure is probable.For the purpose of a collective evaluation of impairment, financial assets are grouped onthe basis of similar credit risk characteristics, i.e., on the basis of BDO Unibank Group’sor BSP’s grading process that considers asset type, industry, collateral type, status andother relevant factors. Those characteristics are relevant to the estimation of future cashflows for groups of such assets by being indicative of the debtors’ ability to pay allamounts due according to the contractual terms of the assets being evaluated.Future cash flows in a group of financial assets that are collectively evaluated forimpairment are estimated on the basis of the contractual cash flows of the assets andhistorical loss experience for assets with credit risk characteristics similar to those in thegroup. Historical loss experience is adjusted on the basis of current observable data toreflect the effects of current conditions that did not affect the period on which thehistorical loss experience is based and to remove the effects of conditions in the historicalperiod that do not exist currently.Estimates of changes in future cash flows for groups of assets should reflect and beconsistent with changes in related observable data from period to period. Themethodologies and assumptions used for estimating future cash flows are reviewedregularly by BDO Unibank Group to reduce any differences between loss estimates andactual loss experience.When a loan is uncollectible, it is written off against the related allowance for loanimpairment. Such loans are written off after all the necessary procedures, includingapproval from the management and the BOD, have been completed and the amount ofthe loss has been determined. Subsequent recoveries of amounts previously written offdecrease the amount of the impairment loss in profit or loss. If in a subsequent periodthe amount of the impairment loss decreases and the decrease can be related objectively toan event occurring after the impairment was recognized (such as an improvement in thedebtor’s credit rating), the previously recognized impairment loss is reversed by adjustingthe allowance account. The amount of the reversal is recognized in profit or loss.(b) Assets carried at fair value with changes recognized in other comprehensive income. In the case ofinvestments classified as AFS securities, a significant or prolonged decline in the fair valueof the security below its cost is considered in determining whether the assetsare impaired. If any such evidence exists for AFS securities, the cumulativeloss – measured as the difference between the acquisition cost and the current fair value,less any impairment loss on that financial asset previously recognized in profit or loss – isreclassified from other comprehensive income to profit or loss as a reclassificationadjustment. Impairment losses recognized in profit or loss on equity instruments are notreversed through profit or loss. If, in a subsequent period, the fair value of a debtinstrument classified as AFS increases and the increase can be objectively related to anevent occurring after the impairment loss was recognized in profit or loss, the impairmentloss is reversed through profit or loss.

(c) Assets carried at cost. BDO Unibank Group assesses at the end of each reporting periodwhether there is objective evidence that any of the unquoted equity securities andderivative assets linked to and required to be settled in such unquoted equity instruments,which are carried at cost, may be impaired. The amount of impairment loss is thedifference between the carrying amount of the equity security and the present value of theestimated future cash flows discounted at the current market rate of return of a similarasset. Impairment losses on assets carried at cost cannot be reversed.When possible, BDO Unibank Group seeks to restructure loans rather than to takepossession of collateral. This may involve extending the payment arrangements and theagreement of new loan conditions. Once the terms have been renegotiated, the loan is nolonger considered past due. Management continuously reviews restructured loans toensure that all criteria are met and that future payments are likely to occur. The loanscontinue to be subject to an individual or collective impairment assessment, calculatedusing the loans’ original effective interest rate. The difference between the recorded saleof the original loan and the present value of the restructured cash flows, discounted at theoriginal effective interest rate, is recognized as part of Impairment Losses account inprofit or loss.2.24 Impairment of Non-financial AssetsBDO Unibank Group’s real properties for development and sale, equity investments,goodwill, intangible assets (recorded as part of Other Resources), premises, furniture, fixturesand equipment and investment properties are subject to impairment testing. Intangible assetswith an indefinite useful life, such as goodwill are tested for impairment at least annually. Allother individual assets or cash-generating units are tested for impairment whenever events orchanges in circumstances indicate that the carrying amount may not be recoverable.For purposes of assessing impairment, assets are grouped at the lowest levels for which thereare separately identifiable cash flows (cash-generating units). As a result, assets are tested forimpairment either individually or at the cash-generating unit level.An impairment loss is recognized for the amount by which the asset’s or cash-generatingunit’s carrying amount exceeds its recoverable amounts which is the higher of its fair valueless costs to sell and its value in use. In determining value in use, management estimates theexpected future cash flows from each cash-generating unit and determines the suitable interestrate in order to calculate the present value of those cash flows. Discount factors aredetermined individually for each cash-generating unit and reflect management’s assessment ofrespective risk profiles, such as market and asset-specific risk factors.All assets are subsequently reassessed for indications that an impairment loss previouslyrecognized may no longer exist and the carrying amount of the asset is adjusted to therecoverable amount resulting in the reversal of the impairment loss.www.bdo.com.ph 43

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)2.25 Foreign Currency Transactions and TranslationsThe financial statements of the FCDUs of BDO Unibank Group and foreign subsidiaries aretranslated at the prevailing current exchange rates (for statement of financial positionaccounts) and average exchange rate during the period (for statement of income accounts) forconsolidation purposes.The accounting records of BDO Unibank Group are maintained in Philippine pesos exceptfor the FCDUs and foreign subsidiaries which are maintained in US dollars or EuropeanUnion Euro (Euro). BDO Remittance, an overseas branch, and Express Padala HK aremaintained in Hong Kong dollars. Foreign currency transactions during the period aretranslated into the functional currency at exchange rates which approximate those prevailingon transaction dates.Foreign exchange gains and losses resulting from the settlement of such transactions and fromthe translation at period-end exchange rates of monetary assets and liabilities denominated inforeign currencies are recognized in profit or loss.The operating results and financial position of foreign subsidiaries and an overseas branch,which are measured using the US dollar or Euro and Hong Kong dollars, respectively, aretranslated to Philippine pesos, the BDO Unibank Group’s functional currency, as follows:(a) Assets and liabilities are translated at the closing rate at the end of the reporting period;(b) Income and expenses are translated at the monthly average exchange rates (unless thisaverage is not reasonable approximation of the cumulative effect of the rates prevailing onthe transaction dates, in which case income and expenses are translated at the dates of thetransactions), except for FCDU which uses the book rate or the previous month-endPhilippine Dealing System closing rate in translating income and expenses and theoverseas branch which used the month-end Philippine Dealing System closing rate intranslating income and expenses; and,(c) All resulting exchange differences are recognized as a separate component of othercomprehensive income.On consolidation, exchange differences arising from the translation of the net investment inforeign subsidiaries and an overseas branch is recognized to other comprehensive income aspart of Accumulated Translation Adjustment. When a foreign operation is sold, suchexchange differences are recognized in profit or loss.The translation of the financial statements into Philippine peso should not be construed as arepresentation that the US dollar, Euro or Hong Kong dollar amounts could be convertedinto Philippine peso amounts at the translation rates or at any other rates of exchange.

2.26 Employee BenefitsPost-employment benefits are provided to employees through a defined benefit plan, as wellas defined contribution plan.(a)Post-employment Defined BenefitA defined benefit plan is a post-employment plan that defines an amount ofpost-employment benefit that an employee will receive on retirement, usually dependenton one or more factors such as age, years of service and expected rate of salary increases.The legal obligation for any benefits from this kind of post-employment plan remainswith BDO Unibank Group, even if plan assets for funding the defined benefit plan havebeen acquired. Plan assets may include assets specifically designated to a long-term benefitfund, as well as qualifying insurance policies. BDO Unibank Group’s defined benefitpost-employment plan covers all regular full-time employees. The post-employment planis tax-qualified, noncontributory and administered by a trustee.The asset recognized in the statement of financial position for defined benefitpost-employment plans is the fair value of plan assets at the end of reporting period lessthe present value of the defined benefit obligation (DBO), together with adjustments forunrecognized actuarial gains or losses and past service costs. The DBO is calculated byindependent actuaries using the projected unit credit method. The present value of theDBO is determined by discounting the estimated future cash outflows using interestrates of high quality corporate bonds that are denominated in the currency in which thebenefits will be paid and that have terms to maturity approximating to the terms of therelated post-employment liability.Actuarial gains and losses are not recognized as an expense unless the total unrecognizedgain or loss exceeds 10% of the greater of the obligation and related plan assets. Theamount exceeding this 10% corridor is charged or credited to profit or loss over theemployees’ expected average remaining working lives. Actuarial gains and losses withinthe 10% corridor are disclosed separately. Past service costs are recognized immediatelyin profit or loss, unless the changes to the post-employment plan are conditional on theemployees remaining in service for a specified period of time (the vesting period). In thiscase, the past service costs are amortized on a straight-line basis over the vesting period.(b)Defined Contribution PlanA defined contribution plan is a post-employment plan under which BDO UnibankGroup pays fixed contributions into an independent entity, such as the Social SecuritySystem (SSS). BDO Unibank Group has no legal or constructive obligations to payfurther contributions after payment of the fixed contribution. The contributionsrecognized in respect of defined contribution plans are expensed as they fall due.Liabilities and assets may be recognized if underpayment or prepayment has occurred.www.bdo.com.ph 45

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)(c)Termination BenefitsTermination benefits are payable when employment is terminated by BDO UnibankGroup before the normal retirement date, or whenever an employee accepts voluntaryredundancy in exchange for these benefits. BDO Unibank Group recognizestermination benefits when it is demonstrably committed to either: (i) terminating theemployment of current employees according to a detailed formal plan without possibilityof withdrawal; or, (ii) providing termination benefits as a result of an offer made toencourage voluntary redundancy. Benefits falling due more than 12 months after the endof reporting period are discounted to present value.(d)Bonus PlansBDO Unibank Group recognizes a liability and an expense for bonuses based on theGroup’s bonus policy. BDO Unibank Group recognizes a provision where it iscontractually obliged to pay the benefits.(e)Executive Stock Option PlanBDO Unibank Group grants stock option plan to its senior officers (fromvice-president up) for their contribution to BDO Unibank Group’s performance andattainment of team goals. The amount of stock option allocated to the qualified officersis based on the performance of the individual officers as determined by the managementand is determined based on BDO Unibank Group’s performance in the preceding yearand amortized over five years starting from the date of the approval of the BOD. Thenumber of officers qualified at the grant date is regularly evaluated during the vestingperiod (at least annually) and the amount of stock option is decreased in case there arechanges in the number of qualified employees arising from resignation ordisqualification. The annual amortization of stock option is included as part ofEmployee Benefits in profit or loss and the cumulative balance is shown as CommonStock Options in the statement of changes in equity (nil in 2011 and 2010).(f)Compensated AbsencesCompensated absences are recognized for the number of paid leave days(including holiday entitlement) remaining at the end of reporting period. These areincluded in Other Liabilities account at the undiscounted amount that BDO UnibankGroup expects to pay as a result of the unused entitlement.2.27 Income TaxesTax expense recognized in profit or loss comprise the sum of deferred tax and current tax notrecognized in other comprehensive income or directly in equity, if any.Current tax assets or liabilities comprise those claims from, or obligations to, fiscal authoritiesrelating to the current or prior reporting period, that are uncollected or unpaid at the end ofthe reporting period. They are calculated according to the tax rates and tax laws applicable tothe fiscal periods to which they relate, based on the taxable profit for the period. All changesto current tax assets or liabilities are recognized as a component of tax expense in profit orloss.

Deferred tax is provided, using the liability method, on temporary differences at the end ofthe reporting period between the tax base of assets and liabilities and their carrying amountsfor financial reporting purposes. Under the liability method, with certain exceptions, deferredtax liabilities are recognized for all taxable temporary differences and deferred tax assets arerecognized for all deductible temporary differences and the carryforward of unused tax lossesand unused tax credits to the extent that it is probable that taxable profit will be availableagainst which the deferred tax asset can be utilized.The carrying amount of deferred tax assets is reviewed at the end of each reporting period andreduced to the extent that it is probable that sufficient taxable profit will be available to allowall or part of the deferred tax asset to be utilized.Deferred tax assets and liabilities are measured at the tax rates that are expected to apply tothe period when the asset is realized or the liability is settled, based on tax rates and tax lawsthat have been enacted or substantively enacted at the end of each reporting period.Most changes in deferred tax assets or liabilities are recognized as a component of tax expensein the statement of income. Only changes in deferred tax assets or liabilities that relate to achange in value of resources or liabilities relate to items recognized in other comprehensiveincome or directly in equity are recognized in other comprehensive income or directly inequity.2.28 Earnings Per Share (EPS)Basic earnings per common share is determined by dividing net profit by the weighted averagenumber of common shares subscribed and issued during the period, after retroactiveadjustment for any stock dividend declared in the current period.The diluted earnings per common share is also computed by dividing net profit by theweighted average number of common shares subscribed and issued during the period.However, net profit attributable to common shares and the weighted average number ofcommon shares outstanding are adjusted to reflect the effects of potentially dilutiveconvertible preferred shares and stock option plan granted by BDO Unibank Group to thequalified officers. Convertible preferred shares are deemed to have been converted tocommon shares at the issuance of preferred shares. The stock option plan is deemed to havebeen converted into common stock in the year the stock option is granted.2.29 Trust ActivitiesBDO Unibank Group commonly acts as trustee and in other fiduciary capacities that result inthe holding or placing of assets on behalf of individuals, trusts, retirement benefit plans andother institutions. Assets and income arising thereon are excluded from these financialstatements, as these are neither assets nor income of BDO Unibank Group.2.30 Event After the Reporting PeriodAny post-year-end event that provides additional information about BDO Unibank Group’sposition at the end of reporting period (adjusting event) is reflected in the financialstatements. Post-year-end events that are not adjusting events, if any, are disclosed whenmaterial to the financial statements.www.bdo.com.ph 47

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATESBDO Unibank Group’s financial statements prepared in accordance with FRSP for banksrequire management to make judgments and estimates that affect the amounts reported in thefinancial statements and related notes. Judgments and estimates are continually evaluated andare based on historical experience and other factors, including expectations of future eventsthat are believed to be reasonable under the circumstances. Actual results may ultimatelydiffer from these estimates and the differences could be significant.3.01 Critical Management Judgments in Applying Accounting PoliciesIn the process of applying BDO Unibank Group’s accounting policies, management has madethe following judgments, apart from those involving estimation, which have the mostsignificant effect on the amounts recognized in the financial statements:(a) HTM InvestmentsBDO Unibank Group follows the guidance of PAS 39 in classifying non-derivativefinancial assets with fixed or determinable payments and fixed maturity as HTM. Thisclassification requires significant judgment. In making this judgment, BDO UnibankGroup considers its intention and ability to hold such investments to maturity.Management has confirmed its intention and determined its ability to hold theinvestments up to maturity.If BDO Unibank Group fails to keep these investments at maturity (other than for theallowed specific circumstances, e.g., selling more than an insignificant amount close tomaturity), it will be required to reclassify the entire class to AFS securities. Theinvestments would therefore be measured at fair value and not at amortized cost.However, the tainting provision will not apply if the sales or reclassifications of HTMinvestments: (i) are so close to maturity or the financial asset’s call date that changes in themarket rate of interest would not have a significant effect on the financial asset’s fairvalue; (ii) occur after BDO Unibank Group has collected substantially all of the financialasset’s original principal through scheduled payments or prepayments; or,(iii) are attributable to an isolated event that is beyond the control of BDO UnibankGroup, is nonrecurring and could not have been reasonably anticipated by BDO UnibankGroup.(b) Impairment of AFS SecuritiesBDO Unibank Group follows the guidance of PAS 39 in determining when an investmentis permanently impaired. This determination requires significant judgment. In makingthis judgment, BDO Unibank Group evaluates, among other factors, the duration andextent to which the fair value of an investment is less than its cost; and the financial healthof and near-term business outlook for the investee, including factors such as industry andsector performance, changes in technology and operational and financing cash flow. Forinvestments issued by counterparty under bankruptcy, BDO Unibank Group determinespermanent impairment based on the price of the most recent transaction and on latestindications obtained from reputable counterparties (which regularly quote prices fordistressed securities) since current bid prices are no longer available.

(c) Distinction Between Investment Properties and Owner-occupied PropertiesBDO Unibank Group determines whether a property qualifies as investment property. Inmaking its judgment, BDO Unibank Group considers whether the property generatescash flows largely independent of the other assets held by BDO Unibank Group. Owneroccupiedproperties generate cash flows that are attributable not only to other assets usedin the production or supply process.Some properties comprise a portion that is held to earn rental or for capital appreciationand another portion that is held for use in the production and supply of goods andservices or for administrative purposes. If these portions can be sold separately (or leasedout separately under finance lease), BDO Unibank Group accounts for those portionsseparately. If the portion cannot be sold separately, the property is accounted for asinvestment property only if an insignificant portion is held for use in the production orsupply of goods or services for administrative purposes. Judgment is applied indetermining whether ancillary services are so significant that a property does not qualify asinvestment property. BDO Unibank Group considers each property separately in makingits judgment.(d) Operating and Finance LeasesBDO Unibank Group has entered into various lease agreements either as a lessor orlessee. Critical judgment was exercised by management to distinguish each leaseagreement as either an operating or finance lease by looking at the transfer or retention ofsignificant risks and rewards of ownership of the properties covered by the agreements.Failure to make the right judgment will result in either overstatement or understatementof resources and liabilities.(e) Classification of Acquired Properties and Fair Value Determination of Non-current Assets Held forSale and Investment PropertiesBDO Unibank Group classifies its acquired properties as Premises, Furniture, Fixturesand Equipment if used in operations, as Non-current Assets Held for Sale if expected thatthe properties will be recovered through sale rather than use, as Investment Properties ifintended to be held for capital appreciation or as Financial Assets if qualified as such inaccordance with PAS 39. At initial recognition, BDO Unibank Group determines the fairvalue of the acquired properties through internally or externally generated appraisal. Theappraised value is determined based on the current economic and market conditions aswell as the physical condition of the properties.(f) Provisions and ContingenciesJudgment is exercised by management to distinguish between provisions andcontingencies. Policies on recognition and disclosure of provisions and contingencies arediscussed in Note 2.21 and relevant disclosures are presented in Note 31.www.bdo.com.ph 49

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)3.02 Key Sources of Estimation UncertaintyThe following are the key assumptions concerning the future, and other key sources ofestimation uncertainty at the end of the reporting period, that have a significant risk of causinga material adjustment to the carrying amounts of resources and liabilities within the nextfinancial year:(a) Impairment Losses on Financial Assets (AFS Securities, HTM Investments and Loans andReceivables)BDO Unibank Group reviews its AFS, HTM and loans and receivables portfolios toassess impairment at least on a quarterly basis. In determining whether an impairmentloss should be recorded in profit or loss, BDO Unibank Group makes judgments as towhether there is any observable data indicating that there is a measurable decrease in theestimated future cash flows from the financial asset or a portfolio of similar financialassets. This evidence may include observable data indicating that there has been anadverse change in the payment status of borrowers or issuers in a group, or national orlocal economic conditions that correlate with defaults on assets in the group.Management uses estimates based on historical loss experience for assets with credit riskcharacteristics and objective evidence of impairment similar to those in the portfolio whenscheduling its future cash flows. The methodology and assumptions used for estimatingboth the amount and timing of future cash flows are reviewed regularly to reduce anydifferences between loss estimates and actual loss experience.BDO Unibank Group carries certain financial assets at fair value, which requires theextensive use of accounting estimates and judgment. Significant components of fair valuemeasurement are determined using verifiable objective evidence such as foreign exchangerates, interest rates and volatility rates. However, the amount of changes in fair valuewould differ if BDO Unibank Group had utilized different valuation methods andassumptions. Any change in fair value of these financial assets and liabilities would affectprofit or loss and other comprehensive income.For the total impairment losses on financial assets recognized in profit or loss, seeNote 14.(b) Fair Value of Financial Assets and LiabilitiesAs at December 31, the following table summarizes the carrying amounts and fair valuesof those financial resources and liabilities not presented in the statements of financialposition at their fair value.December 31, 2011BDO Unibank Group Parent BankCost Fair Value Cost Fair ValueFinancial Assets:Due from other banks and BSP P 149,613 P 149,655 P 138,769 P 138,811AFS securities – unquoted 570 * 310 *HTM investments 93,670 106,032 85,742 97,761Loans and other receivables 673,927 680,546 653,857 663,057Other resources 2,427 2,427 2,318 2,318

BDO Unibank Group Parent BankCost Fair Value Cost Fair ValueFinancial Liabilities:Deposit liabilities 858,569 861,289 838,748 841,447Bills payable 59,474 59,495 51,378 51,460Subordinated notes payable 38,255 41,549 38,255 41,549Other liabilities 41,494 41,494 34,930 34,930December 31, 2010Financial Assets:Due from other banks and BSP P 160,259 P 160,260 P 150,151 P 150,152AFS securities – unquoted 927 * 662 *HTM investments 104,241 115,245 95,569 106,175Loans and other receivables 566,021 567,808 548,618 554,063Other resources 2,552 2,552 2,886 2,886Financial Liabilities:Deposit liabilities 782,635 784,917 762,634 765,289Bills payable 65,861 65,378 56,081 55,679Subordinated notes payable 23,152 25,120 23,152 25,120Other liabilities 37,898 37,898 32,403 32,403* Data not available(i) Due from Other Banks and BSPDue from BSP pertains to deposits made by BDO Unibank Group to BSP forclearing and reserve requirements. Due from other banks includes interbankplacements and items in the course of collection. The fair value of floating rateplacements and overnight deposits is their carrying amount. The estimated fair valueof fixed interest-bearing deposits is based on discounted cash flows using prevailingmoney market interest rates for debts with similar credit risk and remaining maturity,which for short-term deposits approximate the nominal value.(ii) AFS SecuritiesThe fair value of AFS securities is determined by direct reference to published pricequoted in an active market for traded securities. On the other hand, unquoted AFSsecurities are carried at cost because the fair value cannot be reliably determined eitherby reference to similar financial instruments or through valuation technique.Currently, there is no available market to sell the unquoted equity AFS securities. TheBank will hold into the investments until management decides to sell them when therewill be offers to buy out such investments on the appearance of an available marketwhere the investments can be sold.(iii) HTM InvestmentsThe fair value for held-to-maturity assets is based on market prices. Where thisinformation is not available, fair value has been estimated using quoted market pricesfor securities with similar credit, maturity and yield characteristics or through valuationtechniques using discounted cash flow analysis.www.bdo.com.ph 51

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)(iv) Loans and Other ReceivablesLoans and other receivables are net of provisions for impairment. The estimated fairvalue of loans and receivables represents the discounted amount of estimated futurecash flows expected to be received. Expected cash flows are discounted at currentmarket rates to determine fair value.(v) Deposits and BorrowingsThe estimated fair value of demand deposits with no stated maturity, which includesnon-interest-bearing deposits, is the amount repayable on demand. The estimated fairvalue of long-term fixed interest-bearing deposits and other borrowings withoutquoted market price is based on discounted cash flows using interest rates for newdebts with similar remaining maturity.(c) Fair Value of DerivativesThe fair value of derivative financial instruments that are not quoted in an active market isdetermined through valuation techniques using the net present value computation.Valuation techniques are used to determine fair values which are validated and periodicallyreviewed. To the extent practicable, models use observable data, however, areas such ascounterparty credit risk, volatilities and correlations require management to make estimates.Changes in assumptions could affect the reported fair value of financial instruments. BDOUnibank Group uses judgment to select a variety of methods and make assumptions thatare mainly based on market conditions existing at the end of each reporting period.(d) Financial Instruments Measured at Fair ValueFinancial assets and liabilities measured at fair value are categorized in accordance with thefair value hierarchy. This hierarchy groups financial assets and liabilities into threelevels based on the significance of inputs used in measuring the fair value of the financialassets and liabilities. The fair value hierarchy has the following levels:Level 1: quoted prices (unadjusted) in active markets for identical assetsor liabilities;Level 2: inputs other than quoted prices included within Level 1 that are observablefor the asset or liability, either directly (i.e., as prices) or indirectly(i.e., derived from prices); and,Level 3: inputs for the asset or liability that are not based on observablemarket data (unobservable inputs).The level within which the financial asset or liability is classified is determined based onthe lowest level of significant input to the fair value measurement.

The financial assets and liabilities measured at fair value in the statements of financialposition as of December 31, 2011 and 2010 are grouped into the fair value hierarchy aspresented in the following table. For the purpose of this disclosure, the investments inunquoted equity securities classified as AFS amounting to P570 and P927 in 2011 and2010, respectively, in the BDO Unibank Group financial statements and P310 and P662 in2011 and 2010, respectively in the Parent Bank financial statements are measured at costless impairment charges because the fair value cannot be reliably measured and thereforeare not included. Unquoted equity securities consist of preferred shares and commonshares of various unlisted local companies.BDO Unibank GroupDecember 31, 2011Notes Level 1 Level 2 TotalResourcesFinancial assets at FVTPL 9.01Derivative financial assets P 1,890 P 1,849 P 3,739Government bonds 949 - 949Other debt securities 58 - 58Equity securities - quoted 77 - 772,974 1,849 4,823AFS securities 9.02Government debt securities 55,065 56 55,121Other debt securities-quoted 28,279 - 28,279Equity securities 5,516 439 5,95588,860 495 89,355P 91,834 P 2,344 P 94,178LiabilitiesDerivatives with negativefair values 18 P 1,877 P 1,443 P 3,320December 31, 2010ResourcesFinancial assets at FVTPL 9.01Derivative financial assets P 3,380 P 1,730 P 5,110Government bonds 1,640 - 1,640Other debt securities 610 - 610Equity securities 12 - 125,642 1,730 7,372AFS securities 9.02Government debt securities 52,299 78 52,377Other debt securities-quoted 26,211 - 26,211Equity securities 6,140 19 6,15984,650 97 84,747P 90,292 P 1,827 P 92,119LiabilitiesDerivatives with negativefair values 18 P 3,168 P 1,547 P 4,715www.bdo.com.ph 53

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Parent BankDecember 31, 2011Notes Level 1 Level 2 TotalResourcesFinancial assets at FVTPL 9.01Derivative financial assets P 1,890 P - P 1,890Government bonds 518 - 5182,408 - 2,408AFS securities 9.02Government debt securities 52,527 56 52,583Other debt securities - quoted 27,722 - 27,722Equity securities 1,877 439 2,31682,126 495 82,621P 84,534 P 495 P 85,029LiabilitiesDerivatives with negativefair values 18 P 1,877 P - P 1,877December 31, 2010ResourcesFinancial assets at FVTPL 9.01Derivative financial assets P 3,379 P - P 3,379Government bonds 866 - 866Other debt securities 102 - 1024,347 - 4,347AFS securities 9.02Government debt securities 49,677 78 49,755Other debt securities - quoted 24,348 - 24,348Equity securities 2,940 20 2,96076,965 98 77,063P 81,312 P 98 P 81,410LiabilitiesDerivatives with negativefair values 18 P 3,168 P - P 3,168The BDO Unibank Group and Parent Bank have no financial instrument as ofDecember 31, 2011 and 2010 whose fair value was measured under level 3. The methodsand valuation techniques used for the purpose of measuring fair values are unchangedcompared to the previous reporting periods.There have been no significant transfers among levels 1 and 2 in the reporting periods.

(e) Useful Lives of Premises, Furniture, Fixtures and Equipment and Investment PropertiesBDO Unibank Group estimates the useful lives of premises, furniture, fixtures andequipment and investment properties based on the period over which the assets areexpected to be available for use. The estimated useful lives of premises, furniture, fixturesand equipment and investment properties are reviewed periodically and are updated ifexpectations differ from previous estimates due to physical wear and tear, technical orcommercial obsolescence and legal or other limits on the use of the assets. The carryingamounts of premises, furniture, fixtures and equipment are analyzed in Note 11. On theother hand, the carrying amounts of investment properties are analyzed in Note 12. Basedon management’s assessment as at December 31, 2011 and 2010, there is no change inestimated useful lives of premises, furniture, fixtures and equipment and investmentproperties during the year. Actual results, however, may vary due to changes in estimatesbrought about by changes in factors mentioned above.(f) Realizable Amount of Deferred Tax AssetsBDO Unibank Group reviews its deferred tax assets at the end of each reporting periodand reduces the carrying amount to the extent that it is no longer probable that sufficienttaxable profit will be available to allow all or part of the deferred tax assets to be utilized.The carrying value of deferred tax assets, which management assessed to be fully utilizedwithin the next two to three years, as of December 31, 2011 and 2010 is disclosed inNote 27.01.(g) Impairment of Non-financial AssetsExcept for intangible assets with indefinite useful lives, PFRS requires that an impairmentreview be performed when certain impairment indicators are present. BDO UnibankGroup’s policy on estimating the impairment of non-financial assets is discussed in detailin Note 2.24. Though management believes that the assumptions used in the estimationof fair values reflected in the financial statements are appropriate and reasonable,significant changes in these assumptions may materially affect the assessment ofrecoverable values and any resulting impairment loss could have a material adverse effecton the results of operations.Impairment losses recognized in profit or loss are disclosed in Note 14.(h) Retirement BenefitsThe determination of BDO Unibank Group’s obligation and cost of post-employmentand other retirement benefits is dependent on the selection of certain assumptions used byactuaries in calculating such amounts. Those assumptions are described in Note 23 andinclude, among others, discount rates, expected rate of return on plan assets and salaryincrease rates. In accordance with PFRS, actual results that differ from the assumptionsare accumulated and amortized over future periods and therefore, generally affect therecognized expense and recorded obligation in such future periods.www.bdo.com.ph 55

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)The retirement benefit asset and net unrecognized actuarial losses of BDO UnibankGroup amounted to P1,494 and P4,520, respectively, in 2011 while the retirement benefitasset and net unrecognized actuarial losses of BDO Unibank Group amounted to P998and P3,821, respectively, in 2010. On the other hand, the retirement benefit asset and netunrecognized actuarial losses of the Parent Bank amounted to P1,519 and P4,252,respectively, in 2011 while the retirement benefit asset and net unrecognized actuariallosses amounted to P1,026 and P3,650, respectively, in 2010 (see Note 23.02).(i) Reward PointsThe BDO Unibank Group provides rewards points to its banking clients and customerseach time they avail of the pre-identified products and services of the Bank and thecompanies which the Bank has identified as partners in the rewards program. Rewardpoints are redeemable in a wide selection of reward categories, including travel,merchandise of third parties, reward credits and gift certificates. Certain loyalty points forcredit card have no expiration date unless the credit card is cancelled but for otherrewards program, unredeemed points may expire at some future date.The BDO Unibank Group establishes reserves to cover the cost of future rewardredemptions for points earned to date. The provision for the cost of rewards is basedupon points earned by bank clients and the current cost per point of redemption. Theestimated points to be redeemed are measured and adjusted based on many factorsincluding but not limited to past redemption behavior of bank clients, product type onwhich the points are earned and their ultimate redemption rate on the points earned todate but not yet redeemed.The BDO Unibank Group continually evaluates its reserve methodology for rewardsbased on developments in redemption patterns, cost per point redeemed and otherfactors. The reserve for unredeemed points is impacted over time by enrollment levels,amount of points earned and redeemed, weighted-average cost per point, redemptionchoices made by bank clients and other membership rewards program changes. Thecalculation is most sensitive to changes in the estimated ultimate redemption rate. Thisrate is based on the expectation that a large majority of all points earned will eventually beredeemed and the awards will be redeemed through goods or services supplied by a thirdparty based on BDO Unibank Group’s past experience.The carrying value of the rewards points accrued by the BDO Unibank Group and theParent Bank is presented as part of Accrued expenses under Other Liabilities in thestatements of financial position as disclosed in Note 18.4. RISK MANAGEMENTBy their nature, BDO Unibank Group’s activities are principally related to the use of financialinstruments including derivatives. BDO Unibank Group accepts deposits from customers atfixed and floating rates for various periods, and seeks to earn above-average interest marginsby investing these funds in high-quality assets. BDO Unibank Group seeks to increase thesemargins by consolidating short-term funds and lending for longer periods at higher rates,while maintaining sufficient liquidity to meet all claims that might fall due. BDO UnibankGroup also trades in financial instruments where it takes positions in traded and over-thecounterinstruments, including derivatives, to take advantage of short-term market movementsin equities and bonds and in currency and interest rate prices.

To manage the risk for holding financial assets and liabilities, BDO Unibank Group operatesan integrated risk management system to address the risks it faces in its banking activities,including liquidity, interest rate, credit and market risks. BDO Unibank Group’s riskmanagement objective is to adequately and consistently evaluate, manage, control, andmonitor the risk profile of BDO Unibank Group’s statements of financial position tooptimize the risk-reward balance and maximize return on BDO Unibank Group’s capital.BDO Unibank Group’s Risk Management Committee (RMC) has overall responsibility forBDO Unibank Group’s risk management systems and sets risk management policies acrossthe full range of risks to which BDO Unibank Group is exposed. Specifically, BDO UnibankGroup’s RMC places trading limits on the level of exposure that can be taken in relation toboth overnight and intra-day market positions. With the exception of specific hedgingarrangements, foreign exchange and interest rate exposures associated with these derivativesare normally offset by entering into counterbalancing positions, thereby controlling thevariability in the net cash amounts required to liquidate market positions.Within BDO Unibank Group’s overall risk management system, the Assets and LiabilitiesCommittee (ALCO) is responsible for managing the Group’s statement of financial position,including BDO Unibank Group’s liquidity, interest rate and foreign exchange related risks. Inaddition, ALCO formulates investment and financial policies by determining the assetallocation and funding mix strategies that are likely to yield the targeted financial results.Separately, the Risk Management Group (RMG) is mandated to adequately and consistentlyevaluate, manage, control, and monitor the over-all risk profile of the Bank’s activities acrossthe different risk areas (i.e., credit, market, liquidity, and operational) to optimize the riskrewardbalance and maximize return on capital.RMG has responsibility for the setting of risk policies across the full range of risks to whichBDO Unibank Group is exposed to.In the performance of its function, RMG observes the following framework:It is responsible for policy formulation in coordination with the relevantbusinesses/functions and ensures that proper approval for the manuals/policies isobtained from the appropriate body.It then disseminates the approved policies to the relevant businesses/functions afterwhich, pertinent authorities are delegated down to the businesses/functions to guidethem in the conduct of their businesses/functions. RMG then performs compliancemonitoring and review to ensure approved policies are adhered to.It is responsible for clarifying interpretations of risk policies/guidelines raised by theBusiness Heads/Units.When adverse trends are observed in the account/portfolio, RMG is responsible forflagging these trends and ensuring relevant policies for problem accounts/portfoliomanagement are properly applied.RMG is responsible for the direct management of accounts in BDO Unibank Group’sNon-Performing Loan (NPL)/property-related items in litigations portfolio andensures that appropriate strategies are formulated to maximize collection and/orrecovery of these assets.www.bdo.com.ph 57

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)It is also responsible for regular review and monitoring of accounts under itssupervision and ensuring that the account’s loan classification is assessed timely andaccurately.4.01 Liquidity RiskLiquidity risk is the risk that there could be insufficient funds available to adequately meet thecredit demands of BDO Unibank Group’s customers and repay deposits on maturity. BDOUnibank Group manages liquidity risk by holding sufficient liquid assets of appropriate qualityto ensure short-term funding requirements are met and by maintaining a balanced loanportfolio which is repriced on a regular basis. In addition, BDO Unibank Group seeks tomaintain sufficient liquidity to take advantage of interest rate and exchange rate opportunitieswhen they arise.The analysis of the maturity groupings of resources, liabilities and off-book items as ofDecember 31, 2011 and 2010 in accordance with account classification of the BSP, arepresented below. The amounts disclosed in the maturity analysis are the contractualundiscounted cash flows using the primary contractual maturities or behavioral assumptionson core levels (e.g., core deposit liabilities and core deposit substitutes with maturities withinone year have been classified in the more than three years category), if the latter is morerelevant for purposes of profiling the liquidity gap. Such undiscounted cash flows may differfrom the amounts included in the statement of financial position because the statement offinancial position amounts are based on discounted cash flows.BDO Unibank Group2011MoreOne to than three More than Morethree months to one year to than threemonths one year three years years TotalResources:Cash and othercash items P 33,129 P - P - P - P 33,129Due from BSP/other banks 149,613 - - - 149,613Loans and otherreceivables 196,509 79,198 110,138 288,082 673,927Trading and investmentsecurities 6,248 9,576 25,382 147,212 188,418Other resources - 6,772 - 45,490 52,262Total Resources 385,499 95,546 135,520 480,784 1,097,349Liabilities and Equity:Deposit liabilities 247,847 7,954 5,957 596,811 858,569Bills and subordinatednotes payable 31,613 16,983 20,309 28,824 97,729Other liabilities 6,793 29,158 2,951 5,187 44,089Total Liabilities 286,253 54,095 29,217 630,822 1,000,387Equity - - - 96,962 96,962Total Liabilities and Equity 286,253 54,095 29,217 727,784 1,097,349On-book gap(balance carried forward) P 99,246 P 41,451 P 106,303 (P 247,000) P -

2011MoreOne to than three More than Morethree months to one year to than threemonths one year three years years TotalOn-book gap(balance brought forward) P 99,246 P 41,451 P 106,303 (P 247,000) P -Cumulative on-book gap 99,246 140,697 247,000 - -Contingent assets 236,326 38,544 23,717 15,321 313,908Contingent liabilities 251,414 38,495 23,627 15,232 328,768Off-book gap ( 15,088) 49 90 89 ( 14,860)Net Periodic Gap 84,158 41,500 106,393 ( 246,911) ( 14,860)Cumulative Total Gap P 84,158 P 125,658 P 232,051 (P 14,860) P -2010MoreOne to than three More than Morethree months to one year to than threemonths one year three years years TotalResources:Cash and othercash items P 26,673 P - P - P - P 26,673Due from BSP/other banks ` 160,056 - 203 - 160,259Loans and otherreceivables 194,732 47,730 85,579 237,980 566,021Trading and investmentsecurities 11,995 13,939 29,484 141,869 197,287Other resources - 10,142 - 40,487 50,629Total Resources 393,456 71,811 115,266 420,336 1,000,869Liabilities and Equity:Deposit liabilities 178,826 3,781 10,138 589,890 782,635Bills and subordinatednotes payable 37,694 277 30,861 20,181 89,013Other liabilities 5,245 22,857 6,316 6,071 40,489Total Liabilities 221,765 26,915 47,315 616,142 912,137Equity - - - 88,732 88,732Total Liabilities and Equity 221,765 26,915 47,315 704,874 1,000,869On-book gap 171,691 44,896 67,951 ( 284,538) -Cumulative on-book gap 171,691 216,587 284,538 - -Contingent assets 186,900 60,742 7,634 13,791 269,067Contingent liabilities 189,913 61,050 7,715 13,737 272,415Off-book gap ( 3,013) ( 308) ( 81) 54 ( 3,348)Net Periodic Gap 168,678 44,588 67,870 ( 284,484) ( 3,348)Cumulative Total Gap P 168,678 P 213,266 P 281,136 (P 3,348) P -www.bdo.com.ph 59

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Parent Bank2011MoreOne to than three More than Morethree months to one year to than threemonths one year three years years TotalResources:Cash and othercash items P 33,102 P - P - P - P 33,102Due from BSP/other banks ` 138,769 - - - 138,769Loans and otherreceivables 186,687 78,505 106,294 282,371 653,857Trading and investmentsecurities 4,079 5,984 18,766 142,252 171,081Other resources 8 6,832 368 51,241 58,449Total Resources 362,645 91,321 125,428 475,864 1,055,258Liabilities and Equity:Deposit liabilities 239,038 6,518 3,970 589,222 838,748Bills and subordinatednotes payable 31,274 16,200 13,335 28,824 89,633Other liabilities 6,470 29,505 1,153 166 37,294Total Liabilities 276,782 52,223 18,458 618,212 965,675Equity - - - 89,583 89,583Total Liabilities and Equity 276,782 52,223 18,458 707,795 1,055,258On-book gap 85,863 39,098 106,970 ( 231,931) -Cumulative on-book gap 85,863 124,961 231,931 - -Contingent assets 231,635 37,542 7,562 5,248 281,987Contingent liabilities 246,799 37,561 7,672 5,242 297,274Off-book gap ( 15,164) ( 19) ( 110) 6 ( 15,287)Net Periodic Gap 70,699 39,079 106,860 ( 231,925) ( 15,287)Cumulative Total Gap P 70,699 P 109,778 P 216,638 (P 15,287) P -

2010MoreOne to than three More than Morethree months to one year to than threemonths one year three years years TotalResources:Cash and othercash items P 26,660 P - P - P - P 26,660Due from BSP/other banks 150,151 - - - 150,151Loans and otherreceivables 189,156 44,487 80,805 234,170 548,618Trading and investmentsecurities 8,853 12,356 27,874 128,558 177,641Other resources - 10,142 - 45,991 56,133Total Resources 374,820 66,985 108,679 408,719 959,203Liabilities and Equity:Deposit liabilities 178,184 3,636 9,550 571,264 762,634Bills and subordinatednotes payable 35,333 252 25,916 17,732 79,233Other liabilities 4,583 24,671 5,397 136 34,787Total Liabilities 218,100 28,559 40,863 589,132 876,654Equity - - - 82,549 82,549Total Liabilities and Equity 218,100 28,559 40,863 671,681 959,203On-book gap 156,720 38,426 67,816 ( 262,962) -Cumulative on-book gap 156,720 195,146 262,962 - -Contingent assets 173,035 55,056 5,347 4,858 238,296Contingent liabilities 176,103 55,347 5,480 4,854 241,784Off-book gap ( 3,068) ( 291) ( 133) 4 ( 3,488 )Net Periodic Gap 153,652 38,135 67,683 ( 262,958) ( 3,488 )Cumulative Total Gap P 153,652 P 191,787 P 259,470 (P 3,488) P -4.02 Market RiskBDO Unibank Group’s exposure to market risk, the risk of future loss from changes in theprice of a financial instrument, relates primarily to its holdings in foreign exchangeinstruments, debt securities, equity securities and derivatives. BDO Unibank Group managesits risk by identifying, analyzing and measuring relevant or likely market risks. Market RiskManagement recommends market risk limits based on relevant activity indicators for approvalby BDO Unibank Group’s RMC and BOD.www.bdo.com.ph 61

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)4.02.01 Foreign Exchange RiskBDO Unibank Group manages its exposure to effects of fluctuations in the foreign currencyexchange rates by maintaining foreign currency exposure within the existing regulatoryguidelines and at a level that it believes to be relatively conservative for a financial institutionengaged in that type of business.BDO Unibank Group’s net foreign exchange exposure is computed as its foreign currencyassets less foreign currency liabilities. BSP regulations impose a cap of 20% of unimpairedcapital or US$50 million, whichever is lower, on the group excess foreign exchange holding ofbanks in the Philippines. BDO Unibank Group’s foreign exchange exposure is primarilylimited to the day-to-day, over-the-counter buying and selling of foreign exchange in BDOUnibank Group’s branches as well as foreign exchange trading with corporate accounts andother financial institutions. BDO Unibank Group, being a major market participant in thePhilippine Dealing System, may engage in proprietary trading to take advantage of foreignexchange fluctuations.BDO Unibank Group’s foreign exchange exposure during the day is guided by the limits setforth in BDO Unibank Group’s Risk Management Manual. These limits are within theprescribed ceilings mandated by the BSP. At the end of each day, BDO Unibank Groupreports to the BSP on its compliance with the mandated foreign currency exposure limits. Inaddition, it also reports to the BSP on the respective foreign currency positions of itssubsidiaries.The breakdown of the financial assets and liabilities as to foreign and peso-denominatedbalances as of December 31, 2011 and 2010 follows:BDO Unibank Group2011 2010ForeignForeignCurrency Peso Total Currency Peso TotalResources:Cash and other cash itemsand due from BSP P 24 P 157,999 P 158,023 P 12 P 165,143 P 165,155Due from other banks 24,137 582 24,719 21,738 39 21,777Trading and investmentsecurities:At FVTPL 2,071 2,752 4,823 3,743 3,629 7,372AFS securities 66,152 23,773 89,925 48,040 37,634 85,674HTM 77,940 15,730 93,670 84,361 19,880 104,241Loans and other receivables 124,178 549,749 673,927 133,032 432,989 566,021Other resources 2,002 425 2,427 2,194 358 2,552P 296,504 P 751,010 P 1,047,514 P 293,120 P 659,672 P 952,792Liabilities:Deposit liabilities P 206,618 P 651,951 P 858,569 P 217,049 P 565,586 P 782,635Bills payable 44,565 14,909 59,474 39,825 26,036 65,861Subordinated notes payable - 38,255 38,255 - 23,152 23,152Other liabilities 2,455 39,039 41,494 5,080 32,818 37,898P 253,638 P 744,154 P 997,792 P 261,954 P 647,592 P 909,546

Parent Bank2011 2010ForeignForeignCurrency Peso Total Currency Peso TotalResources:Cash and other cash itemsand due from BSP P - P 149,094 P 149,094 P - P 156,378 P 156,378Due from other banks 22,741 36 22,777 20,396 37 20,433Trading and investmentsecurities:At FVTPL 1,864 544 2,408 3,203 1,144 4,347AFS securities 63,023 19,908 82,931 44,791 32,934 77,725HTM 73,092 12,650 85,742 79,168 16,401 95,569Loans and other receivables 123,685 530,172 653,857 131,914 416,704 548,618Other resources 2,002 316 2,318 2,194 692 2,886P 286,407 P 712,720 P 999,127 P 281,666 P 624,290 P 905,956Liabilities:Deposit liabilities P 200,000 P 638,748 P 838,748 P 209,524 P 553,110 P 762,634Bills payable 44,565 6,813 51,378 39,605 16,476 56,081Subordinated notes payable - 38,255 38,255 - 23,152 23,152Other liabilities 2,017 32,913 34,930 4,842 27,561 32,4034.02.02 Interest Rate RiskP 246,582 P 716,729 P 963,311 P 253,971 P 620,299 P 874,270BDO Unibank Group prepares gap analysis to measure the sensitivity of its resources,liabilities and off-book items to interest rate fluctuations. The focus of analysis is the impactof changes in interest rates on accrual or reported earnings. This analysis would givemanagement a glimpse of maturity and re-pricing profile of its interest sensitive resources andliabilities. An interest rate gap report is prepared by classifying all assets and liabilities intovarious time buckets according to contracted maturities or anticipated repricing dates, andother applicable behavioral assumptions. The difference in the amount of resources andliabilities maturing or being repriced in any time period category would then give BDOUnibank Group an indication of the extent to which it is exposed to the risk of potentialchanges in net interest income.www.bdo.com.ph 63

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)The analyses of the groupings of resources, liabilities and off-book items as ofDecember 31, 2011 and 2010 based on the expected interest realization or recognition arepresented below.BDO Unibank Group2011More MoreOne to than three than one Morethree months to year to than five Non-ratemonths one year five years years sensitive TotalResources:Cash and othercash items P - P - P - P - P 33,129 P 33,129Due from BSP/other banks 33,313 - - - 116,300 149,613Loans and otherreceivables 422,094 55,037 66,314 130,482 - 673,927Trading and investmentsecurities 3,979 6,947 21,593 151,071 4,828 188,418Other resources 3 1 9 38 52,211 52,262Total Resources 459,389 61,985 87,916 281,591 206,468 1,097,349Liabilities and Equity:Deposit liabilities 276,466 25,253 22,025 34,437 500,388 858,569Bills and subordinatednotes payable 37,822 16,996 14,086 28,825 - 97,729Other liabilities 674 1,347 701 99 41,268 44,089Total Liabilities 314,962 43,596 36,812 63,361 541,656 1,000,387Equity - - - - 96,962 96,962Total Liabilities and Equity 314,962 43,596 36,812 63,361 638,618 1,097,349On-book gap 144,427 18,389 51,104 218,230 ( 432,150) -Cumulative on-book gap 144,427 162,816 213,920 432,150 - -Contingent assets 36,142 1,843 23,273 15,322 - 76,580Contingent liabilities 4,791 1,094 15,955 12,601 - 34,441Off-book gap 31,351 749 7,318 2,720 - 42,139Net Periodic Gap 175,778 19,138 58,422 220,951 ( 432,150) 42,139Cumulative Total Gap P 175,778 P 194,916 P 253,338 P 474,289 P 42,139 P -

BDO Unibank Group2010More MoreOne to than three than one Morethree months to year to than five Non-ratemonths one year five years years sensitive TotalResources:Cash and othercash items P 26,673 P - P - P - P - P 26,673Due from BSP/other banks 85,204 135 - - 74,920 160,259Loans and otherreceivables 332,314 44,523 83,456 100,169 5,559 566,021Trading and investmentsecurities 11,926 16,911 44,184 122,730 1,536 197,287Other resources 4,152 3,798 1,154 - 41,525 50,629Total Resources 460,269 65,367 128,794 222,899 123,540 1,000,869Liabilities and Equity:Deposit liabilities 246,928 20,272 89,072 2,281 424,082 782,635Bills and subordinatednotes payable 55,492 2,816 29,237 1,468 - 89,013Other liabilities 1,365 3,053 1,385 56 34,630 40,489Total Liabilities 303,785 26,141 119,694 3,805 458,712 912,137Equity - - - - 88,732 88,732Total Liabilities and Equity 303,785 26,141 119,694 3,805 547,444 1,000,869On-book gap 156,484 39,226 9,100 219,094 ( 423,904) -Cumulative on-book gap 156,484 195,710 204,810 423,904 - -Contingent assets 35,448 20,471 15,047 6,377 2,420 79,763Contingent liabilities 35,238 20,206 15,228 6,371 1,207 78,250Off-book gap 210 265 ( 181) 6 1,213 1,513Net Periodic Gap 156,694 39,491 8,919 219,100 ( 422,691) 1,513Cumulative Total Gap P 156,694 P 196,185 P 205,104 P 424,204 P 1,513 P -Parent Bank2011More MoreOne to than three than one Morethree months to year to than five Non-ratemonths one year five years years sensitive TotalResources:Cash and othercash items P - P - P - P - P 33,102 P 33,102Due from BSP/other banks 25,431 - - - 113,338 138,769Loans and otherreceivables 418,656 51,715 58,681 124,805 - 653,857Trading and investmentsecurities 3,565 5,984 18,766 140,452 2,314 171,081Other resources - - - - 58,449 58,449Total Resources(balance carried forward) P 447,652 P 57,699 P 77,447 P 265,257 P 207,203 P 1,055,258www.bdo.com.ph 65

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Parent Bank2011More MoreOne to than three than one Morethree months to year to than five Non-ratemonths one year five years years sensitive TotalTotal Resources(balance brought forward) P 447,652 P 57,699 P 77,447 P 265,257 P 207,203 P 1,055,258Liabilities and Equity:Deposit liabilities 267,086 21,648 19,321 34,437 496,256 838,748Bills and subordinatednotes payable 31,625 15,849 13,335 28,824 - 89,633Other liabilities 351 685 - - 36,258 37,294Total Liabilities 299,062 38,182 32,656 63,261 532,514 965,675Equity - - - - 89,583 89,583Total Liabilities and Equity 299,062 38,182 32,656 63,261 622,097 1,055,258On-book gap 148,590 19,517 44,791 201,996 ( 414,894) -Cumulative on-book gap 148,590 168,107 212,898 414,894 - -Contingent assets 31,451 841 7,119 5,248 - 44,659Contingent liabilities 175 160 - 2,612 - 2,947Off-book gap 31,276 681 7,119 2,636 - 41,712Net Periodic Gap 179,866 20,198 51,910 204,632 ( 414,894) 41,712Cumulative Total Gap P 179,866 P 200,064 P 251,974 P 456,606 P 41,712 P -2010More MoreOne to than three than one Morethree months to year to than five Non-ratemonths one year five years years sensitive TotalResources:Cash and othercash items P 26,660 P - P - P - P - P 26,660Due from BSP/other banks 82,323 135 - - 67,693 150,151Loans and otherreceivables 326,196 41,280 76,583 98,910 5,649 548,618Trading and investmentsecurities 8,817 15,576 39,213 114,035 - 177,641Other resources 4,152 3,798 1,154 - 47,029 56,133Total Resources 448,148 60,789 116,950 212,945 120,371 959,203Liabilities and Equity:Deposit liabilities 236,309 18,827 83,176 1,973 422,349 762,634Bills and subordinatednotes payable 46,051 2,790 28,923 1,469 - 79,233Other liabilities 702 2,538 - - 31,547 34,787Total Liabilities 283,062 24,155 112,099 3,442 453,896 876,654Equity - - - - 82,549 82,549Total Liabilities and Equity(balance carried forward) P 283,062 P 24,155 P 112,099 P 3,442 P 536,445 P 959,203

Parent Bank2010More MoreOne to than three than one Morethree months to year to than five Non-ratemonths one year five years years sensitive TotalTotal Liabilities and Equity(balance brought forward) P 283,062 P 24,155 P 112,099 P 3,442 P 536,445 P 959,203On-book gap 165,086 36,634 4,851 209,503 ( 416,074) -Cumulative on-book gap 165,086 201,720 206,571 416,074 - -Contingent assets 21,587 14,789 6,248 3,957 - 46,581Contingent liabilities 21,428 14,527 6,540 3,954 - 46,449Off-book gap 159 262 ( 292) 3 - 132Net Periodic Gap 165,245 36,896 4,559 209,506 ( 416,074) 132Cumulative Total Gap P 165,245 P 202,141 P 206,700 P 416,206 P 132 P -BDO Unibank Group’s market risk management limits are generally categorized as limits on:Value-at-risk – The RMG computes the value-at-risk benchmarked at a level which isa percentage of projected earnings. BDO Unibank Group uses the value at risk (VaR)model to estimate the daily potential loss that BDO Unibank Group can incur fromits trading book, based on a number of assumptions with a confidence level of 99%.The measurement is designed such that exceptions over dealing limits should onlyarise in very exceptional circumstances.Stop loss – The RMG sets the amount of each risk-bearing activity at a percentage ofthe budgeted annual income for such activity.Nominal position – The RMG sets the nominal amount to prevent over-trading,excessive concentration, and to limit financial loss supplementing other alreadyestablished limits.Trading volume – The RMG sets the volume of transactions that any employee mayexecute at various levels based on the rank of the personnel making therisk-bearing decision.Earnings-at-risk – The RMG computes the earnings-at-risk based on a percentage ofprojected annual net interest income.www.bdo.com.ph 67

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)VaR is one of the key measures in BDO Unibank Group’s management of market risk. VaRis defined as a statistical estimate of the maximum possible loss on a given position during atime horizon within a given confidence interval. BDO Unibank Group uses a 99%confidence level and a 260-day observation period in VaR calculation. BDO UnibankGroup’s VaR limit is established as a percentage of projected earnings and is used to alertsenior management whenever the potential losses in BDO Unibank Group’s portfolios exceedtolerable levels. Because the VaR measure is tied to market volatility, it therefore allowsmanagement to react quickly and adjust its portfolio strategies in different market conditionsin accordance with its risk philosophy and appetite. The VaR model is validated throughback-testing.Although VaR is an important tool for measuring market risk, the assumptions on which themodel is based do give rise to some limitations, including the following:A 1-day holding period assumes that it is possible to hedge or dispose of positionswithin that period. This is considered to be a realistic assumption in almost all casesbut may not be the case in situations in which there is severe market illiquidity for aprolonged period;A 99% confidence level does not reflect losses that may occur beyond this level. Evenwithin the model used, there is a one percent probability that losses could exceed theVaR;VaR is calculated on an end-of-day basis and does not reflect exposures that may ariseon positions during the trading day;The use of historical data as a basis for determining the possible range of futureoutcomes may not always cover all possible scenarios, especially those of anexceptional nature; and,The VaR measure is dependent upon BDO Unibank Group’s position and thevolatility of market prices. The VaR of an unchanged position reduces if the marketprice volatility declines and vice-versa.The limitations of the VaR methodology are recognized by supplementing VaR limits withother position and sensitivity limit structures, including limits to address potentialconcentration risks within each trading portfolio. In addition, the Bank uses a wide range ofstress tests to model the financial impact of a variety of exceptional market scenarios onindividual trading portfolios and the Bank’s overall position. Stress VaR is also performed onall portfolios as a complementary measure of risk. While VaR deals with risk during times ofnormality, stress testing is used to measure the potential effect of a crisis or low probabilityevent.

A summary of the VaR position of the trading portfolios at December 31 follows:BDO Unibank Group2011 2010VaR Stress VaR VaR Stress VaRForeign currency risk (P 8) (P 80) (P 12) (P 108)Interest rate risk – Peso ( 17) ( 73) ( 136) ( 969)Interest rate risk – USD ( 6)( 132) ( 14)( 206)Parent Bank(P 31) (P 285) (P 162) (P 1,283)2011 2010VaR Stress VaR VaR Stress VaRForeign currency risk (P 8) (P 80) (P 11) (P 102)Interest rate risk – Peso ( 8) ( 17) ( 115) ( 779)Interest rate risk – USD ( 2)( 34) ( 2)( 42)(P 18) (P 131) (P 128) (P 923)The earnings-at-risk before tax in a rising and declining interest rate scenario for financialassets and liabilities repriced during 2011 and 2010 is shown below.BDO Unibank Group2011Change in interest rates (in basis points)-100 +100 -50 +50Change on annualizednet interest income (P 1,515) P 1,515 (P 758) P 758As a percentage of BDOUnibank Group’s netinterest income for 2011 ( 4.5%) 4.5% ( 2.2%) 2.2%Earnings-at-risk P 1,9182010Change in interest rates (in basis points)-100 +100 -50 +50Change on annualizednet interest income (P 1,090) P 1,090 (P 545) P 545As a percentage of BDOUnibank Group’s netinterest income for 2010 ( 3.2%) 3.2% ( 1.6%) 1.6%Earnings-at-risk P 386www.bdo.com.ph 69

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Parent Bank2011Change in interest rates (in basis points)-100 +100 -50 +50Change on annualizednet interest income (P 1,633) P 1,633 (P 816) P 816As a percentage of ParentBank’s net interestincome for 2011 ( 5.1%) 5.1% ( 2.6%) 2.6%Earnings-at-risk P 1,9182010Change in interest rates (in basis points)-100 +100 -50 +50Change on annualizednet interest income (P 1,365) P 1,365 (P 683) P 683As a percentage of ParentBank’s net interestincome for 2010 ( 4.3%) 4.3% ( 2.2%) 2.2%Earnings-at-risk P 4194.02.03 Price RiskBDO Unibank Group is exposed to equity securities price risk because of investments held byBDO Unibank Group and classified on the statement of financial position either as AFS or atFVTPL. BDO Unibank Group is not exposed to commodity price risk. To manage its pricerisk arising from investments in equity securities, BDO Unibank Group diversifies itsportfolio. Diversification of the portfolio is done in accordance with the limits set by BDOUnibank Group.The table below summarizes the impact of increases of the financial assets at FVTPL and AFSsecurities on BDO Unibank Group’s net profit after tax and equity as ofDecember 31. The analysis is based on the assumption that the correlated equity indices haveincreased by 3.04% in 2011 and increased by 17.2% in 2010 for securities classified as FVTPLand AFS securities with all other variables held constant and all BDO Unibank Group’s equityinstruments moved according to the historical correlation with the index.BDO Unibank GroupImpact onImpact on othernet profit after tax comprehensive incomeincrease (decrease) increase (decrease)2011 2010 2011 2010Financial assets at FVTPL P 2 P 1 P - P -AFS securities - - 115 540P 2 P 1 P 115 P 540

Parent BankImpact onImpact on othernet profit after tax comprehensive incomeincrease (decrease) increase (decrease)2011 2010 2011 2010AFS securities P - P - P 38 P 1504.02.04 Credit RiskCredit risk is the risk that the counterparty in a transaction may default and arises fromlending, trade finance, treasury, derivatives and other activities undertaken by theBDO Unibank Group. BDO Unibank Group manages its credit risk and loan portfoliothrough the RMG, which undertakes several functions with respect to credit riskmanagement.The RMG undertakes credit analysis and review to ensure consistency in BDO UnibankGroup’s risk assessment process. The RMG performs risk ratings for corporate accounts andassists the design and development of scorecards for consumer accounts. It also ensures thatBDO Unibank Group’s credit policies and procedures are adequate to meet the demands ofthe business. The RMG is also responsible for developing procedures to streamline andexpedite the processing of credit applications.The RMG also undertakes portfolio management by reviewing BDO Unibank Group’s loanportfolio, including the portfolio risks associated with particular industry sectors, loan size andmaturity, and development of a strategy for BDO Unibank Group to achieve its desiredportfolio mix and risk profile.BDO Unibank Group structures the levels of credit risk it undertakes by placing limits on theamount of risk accepted in relation to one borrower, or groups of borrowers, and to industrysegments. Such risks are monitored on a revolving basis and subject to an annual or morefrequent review.Exposure to credit risk is managed through regular analysis of the ability of borrowers andpotential borrowers to meet interest and capital repayment obligations and by changing theselending limits when appropriate. Exposure to credit risk is also managed in part by obtainingcollateral and corporate and personal guarantees.4.02.04.01 Exposure to Credit RiskLoan classification and credit risk rating are an integral part of the BDO Unibank Group’smanagement of credit risk. On an annual basis, loans are reviewed, classified and rated basedon internal and external factors that affect its performance. On a quarterly basis, loanclassifications of impaired accounts are assessed and the results are used as basis for thereview of loan loss provisions.www.bdo.com.ph 71

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)The BDO Unibank Group’s definition of its loan classification and corresponding credit riskratings are as follows: Current/Unclassified : Grades AAA to B Watchlisted : Grade B Loans Especially Mentioned : Grade C Substandard : Grade D Doubtful : Grade E Loss : Grade FOnce an account is Watchlisted or Adversely Classified, the resulting risk rating grade isaligned based on the above classification.(i) UnclassifiedThese are individual credits that do not have a greater-than-normal risk and do notpossess the characteristics of adversely classified loans as to be defined below. These arecredits that have the apparent ability to satisfy their obligations in full and therefore noloss in ultimate collection is anticipated. These are adequately secured by readilymarketable collateral or other forms of support security or are supported by sufficientcredit and financial information of favorable nature to assure repayment as agreed.(ii) WatchlistedSince early identification of troublesome or potential accounts is vital in portfoliomanagement, a “Watchlisted” classification of credit accounts is maintained. Theseaccounts are not adversely classified but they require more than normal attention toprevent these accounts from deteriorating to said category.Past due or individually impaired comprise accounts under the following risk ratings:(iii) Adversely Classifieda. Loans Especially Mentioned (LEM)Accounts classified as “Loans Especially Mentioned” (LEM) are individual creditsthat have potential weaknesses particularly on documentation or credit administrationthat deserve management’s close attention. These potential weaknesses, if leftuncorrected, may affect the repayment prospects of the loan and thus heighten thecredit risk to the BDO Unibank Group.A credit may also be classified as “Loans Especially Mentioned” if there is evidenceof weakness in the borrower’s financial condition or credit worthiness, or the credit issubject to an unrealistic repayment program or inadequate source of funds.

. SubstandardAccounts classified as “Substandard” are individual credits or portions thereof, whichappear to involve a substantial and unreasonable degree of risk to the Bank becauseof unfavorable record or unsatisfactory characteristics. There exists in such accountsthe possibility of future loss to the BDO Unibank Group unless given closersupervision. Those classified as “Substandard” must have a well-defined weakness orweaknesses that jeopardize their liquidation. Such well-defined weaknesses mayinclude adverse trends or development of financial, managerial, economic or politicalnature, or a significant weakness in collateral.c. DoubtfulAccounts classified as “Doubtful” are individual credits or portions thereof whichhave the weaknesses inherent in those classified as “Substandard”, with the addedcharacteristics that existing facts, conditions and values make collection or liquidationin full highly improbable and in which substantial loss is probable. Positive andvigorous action is required to avert or minimize losses.d. LossAccounts classified as “Loss” are individual credits or portions thereof which areconsidered uncollectible or worthless and of such little value that their continuance asbankable assets is not warranted although the loans may have some recovery orsalvage value. The amount of loss is difficult to measure and it is not practical ordesirable to defer writing off these basically worthless assets even though partialrecovery may be obtained in the future.In addition to the above, credit portfolio review is another integral part of the BDO UnibankGroup’s management of credit risk. This exercise involves the conduct of periodical postapproval review of individual credits whose main objective is to help monitor and maintainsound and healthy risk asset portfolio. Parameters of the credit portfolio review arestructured so as to reflect both sides of the risk management equation such as credit qualityand process. This function actuates the philosophy that credit quality is derived from soundrisk management process. The credit quality of financial assets is managed by the BDOUnibank Group using internal credit ratings.www.bdo.com.ph 73

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)The following table shows the exposure to credit risk as of December 31, 2011 and 2010 foreach internal risk grade and the related allowance for impairment:BDO Unibank Group2011Loans andTrading andOther Due from InvestmentReceivables Other Banks SecuritiesCarrying Amount P 673,927 P 24,719 P 181,816Individually ImpairedGrade C: LEM P 10,715 P - P -Grade D: Substandard 3,538 - -Grade E: Doubtful 5,168 - 1,006Grade F: Loss 6,390 - 888Gross amount 25,811 1,894Allowance for impairment ( 12,385) - ( 1,894)Carrying amount 13,426 - -Collectively ImpairedUnclassified 28 - 11,104Grade C: LEM 3,622 - -Grade D: Substandard 2,333 - -Grade E: Doubtful 535 - -Grade F: Loss 6,174 - -Gross amount 12,692 - 11,104Allowance for impairment ( 7,268) - ( 147)Carrying amount 5,424 - 10,957Past Due But Not ImpairedUnclassified 6,187 - -Neither Past Due Nor ImpairedUnclassified 648,890 24,719 170,859Accounts with Negotiated Terms - - -Total Carrying Amount P 673,927 P 24,719 P 181,816

BDO Unibank Group2010Loans andTrading andOther Due from InvestmentReceivables Other Banks SecuritiesCarrying Amount P 566,021 P 21,777 P 190,310Individually ImpairedUnclassified P - P - P 2,439Grade C: LEM 2,386 - 219Grade D: Substandard 7,090 - -Grade E: Doubtful 2,412 - 3,314Grade F: Loss 7,852 - 1,253Gross amount 19,740 7,225Allowance for impairment ( 13,622) - ( 4,932)Carrying amount 6,118 - 2,293Collectively ImpairedUnclassified 18 - -Grade C: LEM 3,208 - -Grade D: Substandard 1,993 - -Grade E: Doubtful 638 - -Grade F: Loss 6,509 - -Gross amount 12,366 - -Allowance for impairment ( 7,419) - -Carrying amount 4,947 - -Past Due But Not ImpairedUnclassified 5,183 - -Neither Past Due Nor ImpairedUnclassified 549,773 21,777 188,017Accounts with Negotiated Terms - - -Total Carrying Amount P 566,021 P 21,777 P 190,310www.bdo.com.ph 75

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)An aging of past due but not impaired accounts of BDO Unibank Group follows:Loans andOther Receivables2011 2010Below 30 days P 6,107 P 4,96330 to 60 days 17 2361 to 90 days 3 2091 to 180 days 29 10More than 180 days 31 167Parent BankP 6,187 P 5,1832011Loans andTrading andOther Due from InvestmentReceivables Other Banks SecuritiesCarrying Amount P 653,857 P 22,777 P 168,455Individually ImpairedGrade C: LEM P 10,676 - P -Grade D: Substandard 3,433 - -Grade E: Doubtful 4,936 - 1,006Grade F: Loss 6,330 - 888Gross amount 25,375 - 1,894Allowance for impairment ( 12,079) - ( 1,894)Carrying amount 13,296 - -Collectively ImpairedGrade C: LEM 3,622 - -Grade D: Substandard 2,333 - -Grade E: Doubtful 535 - -Grade F: Loss 6,174 - -Gross amount 12,664 - -Allowance for impairment ( 7,264) - -Carrying amount 5,400 - -Past Due But Not ImpairedUnclassified 6,176 - -Neither Past Due Nor ImpairedUnclassified 628,985 22,777 168,455Total Carrying Amount P 653,857 P 22,777 P 168,455

Parent Bank2010Loans andTrading andOther Due from InvestmentReceivables Other Banks SecuritiesCarrying Amount P 548,618 P 20,433 P 174,141Individually ImpairedUnclassified P - P - P 2,439Grade C: LEM 1,443 - -Grade D: Substandard 6,848 - -Grade E: Doubtful 2,303 - 3,314Grade F: Loss 7,704 - 1,114Gross amount 18,298 - 6,867Allowance for impairment ( 13,286 ) - ( 4,752)Carrying amount 5,012 - 2,115Collectively ImpairedGrade C: LEM 3,208 - -Grade D: Substandard 1,993 - -Grade E: Doubtful 638 - -Grade F: Loss 6,508 - -Gross amount 12,347 - -Allowance for impairment ( 7,418 ) - -Carrying amount 4,929 - -Past Due But Not ImpairedUnclassified 5,122 - -Neither Past Due Nor ImpairedUnclassified 533,555 20,433 172,026Total Carrying Amount P 548,618 P 20,433 P 174,141An aging of past due but not impaired accounts of the Parent Bank follows:Loans andOther Receivables2011 2010Below 30 days P 6,107 P 4,95330 to 60 days 17 2061 to 90 days 3 1591 to 180 days 18 9More than 180 days 31 125P 6,176 P 5,122www.bdo.com.ph 77

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Exposure to credit risk also includes unused commercial letters of credits and committedcredit lines amounting to P33,391 and P111,469, respectively, for 2011 and P30,991 andP89,694, respectively, for 2010 in the BDO Unibank Group financial statements and P33,391and P110,148, respectively, for 2011 and P30,991 and P89,618, respectively, for 2011 in theParent Bank financial statements (see Note 31.03).4.02.04.02 Collateral Held as Security and Other Credit EnhancementsBDO Unibank Group holds collateral against loans and receivables from customers in theform of mortgage interests over property, other registered securities over assets, andguarantees. Estimates of fair value are based on the value of collateral assessed at the time ofborrowing and are updated periodically, e.g., annually for real estate properties, as provided inthe Parent Bank’s Credit Policy Manual. Collateral generally is not held over due from otherbanks, interbank loans and investment securities, except when securities are held as part ofreverse repurchase and securities borrowing activity. BDO Unibank Group holds collateralagainst loans and other receivables in the form of property, debt securities, equities andothers.Estimate of the fair value of collateral and other security enhancements held against thefollowing loans and other receivables risk groupings as of December 31 follows:BDO Unibank Group Parent Bank2011 2010 2011 2010Individually impairedProperty P 16,358 P 20,821 P 16,290 P 20,678Equity 709 118 398 -Others 19,968 6,776 19,894 6,37237,035 27,715 36,582 27,050Collectively impairedProperty 5,069 4,636 5,069 4,636Others 1,262 200 1,262 2006,331 4,836 6,331 4,836Past due but not impairedProperty 5,300 6,574 5,299 6,573Equity 1 1 - -Others 2,755 863 2,746 8548,056 7,438 8,045 7,427Neither past due nor impairedProperty 264,652 267,958 264,161 267,148Debt security 1,314 1,027 1,203 899Equity 96,380 5,472 87,458 -Others 397,615 130,754 391,625 123,002759,961 405,211 744,447 391,049P 811,383 P 445,200 P 795,405 P 430,362

4.02.04.03 Concentrations of Credit RiskThe BDO Unibank Group monitors concentrations of credit risk by sector and by geographiclocation. An analysis of concentrations of credit risk (gross of allowance) at the reporting dateis shown below.BDO Unibank Group2011 2010ReceivablesReceivablesCash and Cash from Investment Cash and Cash from InvestmentEquivalents Customers Securities Equivalents Customers SecuritiesConcentration by sector:Financial intermediaries P 182,742 P 84,668 P 124,158 P 186,932 P 79,058 P 137,745Wholesale and retail trade - 105,905 1 - 76,592 541Manufacturing - 101,468 15,753 - 90,555 17,151Real estate, renting andother related activities - 77,624 5,388 - 55,842 4,320Other community, socialand personal activities - 58,315 - - 39,474 -Transportation andcommunication - 51,378 7,671 - 36,295 6,946Agriculture, fishing andforestry - 8,037 - 9,592 717Others - 182,751 30,886 154,104 27,822P 182,742 P 670,146 P 183,857 P 186,932 P 541,512 P 195,242Concentration by location:Philippines P 159,982 P 650,516 P 150,939 P 166,404 P 535,335 P 158,756Others 22,760 19,630 32,918 20,528 6,177 36,486P 182,742 P 670,146 P 183,857 P 186,932 P 541,512 P 195,242Parent Bank2011 2010ReceivablesReceivablesCash and Cash from Investment Cash and Cash from InvestmentEquivalents Customers Securities Equivalents Customers SecuritiesConcentration by sector:Financial intermediaries P 171,871 P 86,169 P 110,700 P 176,811 P 78,142 P 123,773Wholesale and retail trade - 104,115 1 - 75,211 541Manufacturing - 97,730 15,746 - 86,861 15,546Real estate, renting andother related activities - 75,364 5,370 - 53,887 4,113Other community, socialand personal activities - 55,560 - - 39,291 -Transportation andcommunication - 48,203 7,671 - 33,845 6,946Agriculture, fishing andforestry - 7,536 - 8,254 717Others - 181,690 30,861 - 151,462 27,257P 171,871 P 656,367 P 170,349 P 176,811 P 526,953 P 178,893Concentration by location:Philippines P 150,543 P 636,737 P 138,891 P 157,949 P 520,776 P 143,680Others 21,328 19,630 31,458 18,862 6,177 35,213P 171,871 P 656,367 P 170,349 P 176,811 P 526,953 P 178,893www.bdo.com.ph 79

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)4.03 Operational RiskOperational risk is the risk of loss due to BDO Unibank Group’s:Failure to comply with defined operational procedures;Inability to address fraud committed internally or externally;Inability to handle system failures; and,Inability to cope with the impact of external events.BDO Unibank Group manages its operational risks by instituting policies to minimize itsexpected losses, allocating capital for the unexpected losses, and having insurance and/or abusiness continuity plan to prepare for catastrophic losses.FrameworkTrue to its commitment to sound management and corporate governance, BDO UnibankGroup considers operational risk management as a critical element in the conduct of itsbusiness. Under BDO Unibank Group’s Operational Risk Management (ORM) framework,the BOD has the ultimate responsibility for providing leadership in the management of riskin BDO Unibank Group. In 2011, the Group adopted a process-driven approach wherebyit focuses on mapping operational risks along critical/key business processes. The businessprocess owners, as risk owners, are responsible for identifying, assessing and limiting theimpact of risk in their businesses/operations. The RMG provides the common risklanguage and management tools across BDO Unibank Group as well as monitors theimplementation of the ORM framework and policies.Alongside the shift to the process-driven ORM approach in 2011, the Group also adoptedthe periodic Risk and Control Self-Assessment (RCSA) process so that business processowners could document both their operational risks and control mechanisms they have putin place to manage those risks. This ORM tool allows the Group to identify risks thebusiness/operation faces, assess the severity of those risks, evaluate the adequacy of keycontrols associated to the identified risks, and take proactive action to address anydeficiencies identified.The BDO Unibank Group also continues to use Key Risk Indicators (KRI) as alerts foroperational risk vulnerabilities.The BDO Unibank Group continues to expand its operational loss database to cover moreloss event categories as defined by Basel II.Operational risks arising from health, safety and environmental issues are appropriatelymanaged through policies and measures that are integrated into the BDO Unibank Group’sday-to-day operations. These include Environmental Consciousness, Occupational Healthand Safety, and Community Health and Safety.

5. SEGMENT REPORTINGThe BDO Unibank Group’s main operating businesses are organized and managed separatelyaccording to the nature of services provided and the different markets served, with eachsegment representing a strategic business unit. These are also the basis of BDO UnibankGroup in reporting to its chief operating decision-maker for its strategicdecision-making activities.Management currently identifies the BDO Unibank Group’s three service lines as primaryoperating segments. In addition, minor operating segments, for which quantitative thresholdshave not been met, as described in PFRS 8, Operating Segments, are combined below as Others.(a) Commercial banking – handles the entire lending (corporate and consumer), tradefinancing and cash management services for corporate and retail customers;(b) Investment banking – provides services to corporate clients outside the traditional loanand deposit products. These services include loan syndications, underwriting and placingof debt and equity securities, and financial advisory services;(c) Private banking – provides traditional and non-traditional investment and structuredproducts to high net worth individuals and institutional accounts; and,(d) Others – includes asset management, insurance brokerage, realty management, leasing,financing, remittance, accounting service, credit card service and computer service, noneof which individually constitutes a separate reportable segment.These segments are the basis on which BDO Unibank Group reports its segmentinformation. Transactions between the segments are on normal commercial terms andconditions. Inter-segment transactions are eliminated in consolidation.Funds are ordinarily allocated between segments, resulting in funding cost transfers disclosedin operating income. Interest charged for these funds is based on BDO Unibank Group’scost of capital. There are no other material items of income or expense between thesegments.Segment assets and liabilities comprise operating assets and liabilities including items such astaxation and borrowings.Segment revenues and expenses that are directly attributable to primary operating segmentand the relevant portions of BDO Unibank Group’s revenues and expenses that can beallocated to that operating segment are accordingly reflected as revenues and expenses of thatoperating segment. Revenue sharing agreements are used to allocate external customerrevenues to a segment on a reasonable basis.www.bdo.com.ph 81

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Segment information (by service lines) as of and for the years ended December 31, 2011 and2010 follows:December 31, 2011Statements of IncomeCommercial Investment PrivateBanking Banking Banking Others Eliminations GroupTotal interest incomeExternal P 47,972 P 56 P 1,006 P 1,433 P - P 50,467Inter-segment 115 9 51 18 ( 193) -48,087 65 1,057 1,451 ( 193) 50,467Total interest expenseExternal 16,013 - 385 290 - 16,688Inter-segment 26 29 1 87 ( 143) -16,039 29 386 377 ( 143) 16,688Net interest income 32,048 36 671 1,074 ( 50) 33,779Other operating incomeInvestment banking fees - 730 - - - 730Others 17,976 172 650 2,034 ( 663) 20,16917,976 902 650 2,034 ( 663) 20,899Other operating expensesDepreciation andamortization 2,502 4 22 322 - 2,850Impairment losses 5,945 - 30 169 - 6,144Others 31,375 320 650 1,197 ( 76) 33,46639,822 324 702 1,688 ( 76) 42,460Profit before tax 10,202 614 619 1,420 ( 637) 12,218Tax expense 1,212 176 73 169 - 1,630Net profit P 8,990 P 438 P 546 P 1,251 (P 637) P 10,588Statements of Financial PositionTotal resourcesSegment assets P 1,050,750 P 4,091 P 28,160 P 25,377 ( P 16,958) P 1,091,420Intangible assets 433 10 - 1 - 444Deferred tax assets(liabilities) 5,586 ( 30) 37 ( 108) - 5,485P 1,056,769 P 4,071 P 28,197 P 25,270 (P 16,958) P 1,097,349Total liabilities P 965,678 P 2,462 P 23,153 P 14,440 (P 5,346) P 1,000,387Other segment informationCapital expenditures P 2,915 P 1 P 53 P 409 P - P 3,378Investment in associatesunder equity method 4,678 68 - - - 4,746Share in the profitof associates 681 - - - - 681

Commercial Investment PrivateBanking Banking Banking Others Eliminations GroupDecember 31, 2010Statements of IncomeTotal interest incomeExternal P 46,764 P 22 P 1,267 P 1,877 P - P 49,930Inter-segment 1 13 - 20 ( 34) -46,765 35 1,267 1,897 ( 34) 49,930Total interest expenseExternal 14,998 - 480 294 - 15,772Inter-segment 32 1 1 - ( 34) -15,030 1 481 294 ( 34) 15,772Net interest income 31,735 34 786 1,603 - 34,158Other operating incomeInvestment banking fees - 392 - - - 392Others 16,429 188 681 1,130 ( 979) 17,44916,429 580 681 1,130 ( 979) 17,841Other operating expensesDepreciation andamortization 2,004 4 24 848 - 2,880Impairment losses 6,376 - 58 316 ( 52 ) 6,698Others 30,036 237 653 1,066 ( 83) 31,90938,416 241 735 2,230 ( 135) 41,487Profit before tax 9,748 373 732 503 ( 844) 10,512Tax expense 1,310 82 84 162 ( 7) 1,631Net profit P 8,438 P 291 P 648 P 341 (P 837) P 8,881Statements of Financial PositionTotal resourcesSegment assets P 954,185 P 2,148 P 30,590 P 22,701 ( P 15,155) P 994,469Intangible assets 805 10 1 - - 816Deferred tax assets(liabilities) 5,687 ( 32) 29 ( 100) - 5,584P 960,677 P 2,126 P 30,620 P 22,601 (P 15,155) P 1,000,869Total liabilities P 876,657 P 934 P 26,149 P 15,973 (P 7,576) P 912,137Other segment informationCapital expenditures P 2,493 P 2 P 8 P 285 P - P 2,788Investment in associatesunder equity method 3,858 68 - - - 3,926Share in the profitof associates 16 - - - - 16www.bdo.com.ph 83

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)6. FINANCIAL ASSETS AND LIABILITIESThese consist of the following:BDO Unibank Group2011ClassesAt Amortized At Fair Carrying FairCost Value Amount ValueFinancial AssetsCash and other cash items P - P 33,129 P 33,129 P 33,129Due from BSP 124,894 - 124,894 124,936Due from other banks 24,719 - 24,719 24,719Financial assets at FVTPL - 4,823 4,823 4,823AFS securities - 89,925 89,925 89,925HTM investments 93,670 - 93,670 106,032Loans and other receivables 673,927 - 673,927 680,546Other resources 2,427 - 2,427 2,427P 919,637 P 127,877 P 1,047,514 P 1,066,537At Amortized Carrying FairCost Amount ValueFinancial LiabilitiesDeposit liabilities P 858,569 P 858,569 P 861,289Bills payable 59,474 59,474 59,495Subordinated notes payable 38,255 38,255 41,549Other liabilities 41,494 41,494 41,494P 997,792 P 997,792 P 1,003,8272010ClassesAt Amortized At Fair Carrying FairCost Value Amount ValueFinancial AssetsCash and other cash items P - P 26,673 P 26,673 P 26,673Due from BSP 138,482 - 138,482 138,483Due from other banks 21,777 - 21,777 21,777Financial assets at FVTPL - 7,372 7,372 7,372AFS securities - 85,674 85,674 85,674HTM investments 104,241 - 104,241 115,245Loans and other receivables 566,021 - 566,021 567,808Other resources 2,552 - 2,552 2,552P 833,073 P 119,719 P 952,792 P 965,584

At Amortized Carrying FairCost Amount ValueFinancial LiabilitiesDeposit liabilities P 782,635 P 782,635 P 784,917Bills payable 65,861 65,861 65,378Subordinated notes payable 23,152 23,152 25,120Other liabilities 37,898 37,898 37,898Parent BankP 909,546 P 909,546 P 913,3132011ClassesAt Amortized At Fair Carrying FairCost Value Amount ValueFinancial AssetsCash and other cash items P - P 33,102 P 33,102 P 33,102Due from BSP 115,992 - 115,992 116,034Due from other banks 22,777 - 22,777 22,777Financial assets at FVTPL - 2,408 2,408 2,408AFS securities - 82,931 82,931 82,931HTM investments 85,742 - 85,742 97,761Loans and other receivables 653,857 - 653,857 663,057Other resources 2,318 - 2,318 2,318P 880,686 P 118,441 P 999,127 P 1,020,388At Amortized Carrying FairCost Amount ValueFinancial LiabilitiesDeposit liabilities P 838,748 P 838,748 P 841,447Bills payable 51,378 51,378 51,460Subordinated notes payable 38,255 38,255 41,549Other liabilities 34,930 34,930 34,930P 963,311 P 963,311 P 969,3862010ClassesAt Amortized At Fair Carrying FairCost Value Amount ValueFinancial AssetsCash and other cash items P - P 26,660 P 26,660 P 26,660Due from BSP 129,718 - 129,718 129,719Due from other banks 20,433 - 20,433 20,433Financial assets at FVTPL - 4,347 4,347 4,347AFS securities - 77,725 77,725 77,725HTM investments 95,569 - 95,569 106,175Loans and other receivables 548,618 - 548,618 554,063Other resources 2,886 - 2,886 2,886P 797,224 P 108,732 P 905,956 P 922,008www.bdo.com.ph 85

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)At Amortized Carrying FairCost Amount ValueFinancial LiabilitiesDeposit liabilities P 762,634 P 762,634 P 765,289Bills payable 56,081 56,081 55,679Subordinated notes payable 23,152 23,152 25,120Other liabilities 32,403 32,403 32,403P 874,270 P 874,270 P 878,4917. CASH AND BALANCES WITH THE BSPThese accounts are composed of the following:BDO Unibank Group Parent Bank2011 2010 2011 2010Cash and other cash items P 33,129 P 26,673 P 33,102 P 26,660Due from BSP:Mandatory reserves 30,566 70,237 28,006 68,166Other than mandatoryreserves 94,328 68,245 87,986 61,552124,894 138,482 115,992 129,718P 158,023 P 165,155 P 149,094 P 156,378Mandatory reserves represent the balance of the deposit account maintained with the BSP tomeet reserve requirements and to serve as clearing account for interbank claims. Due fromBSP bears annual interest rates of 0.1% to 4.8% in 2011 and 3.2% to 4.2% in 2010, except forthe amounts within the required reserve as determined by BSP. Total interest income earnedamounted to P2,025, P2,714 and P1,988 in 2011, 2010 and 2009, respectively, in the BDOUnibank Group financial statements and P1,866, P2,631 and P1,941 in 2011, 2010 and 2009,respectively, in the Parent Bank’s financial statements (see Note 20).Cash and other cash items and balances with the BSP are included in cash and cashequivalents for statements of cash flows purposes.Under Section 254 of the Manual of Regulations for Banks (MORB), a bank is required tomaintain at least 25 percent of its statutory reserve requirements in the form of deposit withthe BSP as among the allowable instruments for reserve cover. Section 254.1 of the MORBfurther provides that such deposit account with the BSP is not considered as a regular currentaccount as BSP checks for drawings against such deposit shall be limited to: (i) settlement ofobligations with the BSP; and, (ii) withdrawals to meet cash requirements.

8. DUE FROM OTHER BANKSThe balance of this account represents deposits with the following:BDO Unibank Group Parent Bank2011 2010 2011 2010Foreign banks P 22,601 P 20,144 P 21,311 P 18,848Local banks 2,118 1,633 1,466 1,585The breakdown of this account as to currency follows:P 24,719 P 21,777 P 22,777 P 20,433BDO Unibank Group Parent Bank2011 2010 2011 2010US dollar P 20,875 P 18,051 P 19,775 P 17,582Other currencies 3,262 3,687 2,966 2,814Peso 582 39 36 37P 24,719 P 21,777 P 22,777 P 20,433Annual interest rates on these deposits range from 0% to 4.6% in 2011, 0% to 4.1% in 2010,and 0% to 10% in 2009 in the BDO Unibank Group financial statements and 0% to 2.6% in2011, 0% to 2.6% in 2010, and 0% to 5% in 2009 in the Parent Bank’s financial statements.Due from other banks are included in cash and cash equivalents for statements of cash flowspurposes.9. TRADING AND INVESTMENT SECURITIESThe components of this account are shown below.BDO Unibank Group Parent Bank2011 2010 2011 2010Financial assets at FVTPL P 4,823 P 7,372 P 2,408 P 4,347AFS securities 89,925 85,674 82,931 77,725HTM investments 93,670 104,241 85,742 95,569P 188,418 P 197,287 P 171,081 P 177,641www.bdo.com.ph 87

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)9.01 Financial Assets at FVTPLThis account is composed of the following:BDO Unibank Group Parent Bank2011 2010 2011 2010Derivative financial assets P 3,739 P 5,110 P 1,890 P 3,379Government bonds 949 1,640 518 866Other debt securities 58 610 - 1024,746 7,360 2,408 4,347Equity securities - quoted 77 12 - -P 4,823 P 7,372 P 2,408 P 4,347All financial assets at FVTPL are held for trading. For government bonds and other debtsecurities, the amounts presented have been determined directly by reference to publishedprices quoted in an active market. On the other hand, the fair value of derivative financialassets is determined through valuation technique using net present value of future cash flowsmethod. BDO Unibank Group recognized total fair value gain (loss) on financial assets atFVTPL amounting to P378, (P131) and P1,814 in 2011, 2010 and 2009, respectively, in theBDO Unibank Group financial statements and P359, (P270) and P1,778 in 2011, 2010 and2009, respectively, in the Parent Bank financial statements. These are included as part ofTrading gain – net under Other Operating Income in the statements of income (see Note 22).Foreign currency-denominated securities amounted to P2,071 and P3,743 as ofDecember 31, 2011 and 2010, respectively, in the BDO Unibank Group financial statementsand P1,864 and P3,203 as of December 31, 2011 and 2010, respectively, in the Parent Bankfinancial statements.Derivative instruments used by BDO Unibank Group include foreign currency and interestrate forwards/futures, foreign currency and interest rate swaps. Also in 2007, derivativesincluded embedded credit default swaps bifurcated from CLNs or credit-linked deposits(CLDs) (which were reclassified to Loans and Other Receivables together with their hostcontracts in 2008). Foreign currency and interest rate forwards/futures representcommitments to purchase/sell or are contractual obligations to receive or pay a new amountbased on changes in currency rates or interest rates on a future date at a specified price.Foreign currency and interest rate swaps are commitments to exchange one set of cash flowsfor another. The credit default swaps represent commitment of the counterparty to swap thenote and deposit with high yielding securities upon the occurrence of the reference event bythe reference entity.

The aggregate contractual or notional amount of derivative financial instruments and the totalfair values of derivative financial assets and liabilities are shown below.BDO Unibank Group2011 2010Notional Fair Values Notional Fair ValuesAmount Assets Liabilities Amount Assets LiabilitiesCurrency forwards/futures P 262,018 P 1,617 P 1,765 P 272,670 P 2,110 P 2,200Currency swaps 78,474 1,899 1,320 70,016 2,474 1,899Interest rate swaps 17,415 183 229 15,490 475 575Credit default swaps 2,195 14 5 2,077 1 2Others - 26 1 1,320 50 39Parent BankP 360,102 P 3,739 P 3,320 P 361,573 P 5,110 P 4,7152011 2010Notional Fair Values Notional Fair ValuesAmount Assets Liabilities Amount Assets LiabilitiesCurrency forwards/futures P 261,585 P 1,020 P 1,165 P 217,077 P 1,509 P 1,564Currency swaps 26,417 649 496 33,565 1,373 1,059Interest rate swaps 16,088 181 210 10,961 448 504Credit default swaps 2,195 14 5 440 - 2Others - 26 1 1,320 49 39P 306,285 P 1,890 P 1,877 P 263,363 P 3,379 P 3,168In 2008, BDO Unibank Group reclassified certain equity securities from FVTPL to AFS anddebt securities and embedded derivatives of CLNs from FVTPL to HTM and Loans andOther Receivables, respectively (see Note 9.04).Derivatives embedded in CLNs and CLDs amounting to P183 and P70 in BDO UnibankGroup and Parent Bank financial statements, respectively, as of reclassification date, werereclassified to Loans and Other Receivables together with their related host contracts(see Note 9.04).A CLN is an instrument under which the issuer issues a note to the investor whereby bothparties agree that upon the occurrence of a credit event in relation to the reference entity, theCLN accelerates and the investor is delivered the defaulted asset of the reference entity, orpaid a net settlement amount equal to the market price of the defaulted asset or referenceobligation adjusted for any transaction unwind costs.www.bdo.com.ph 89

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)9.02 AFS SecuritiesAFS securities consist of the following:BDO Unibank Group Parent BankNote 2011 2010 2011 2010Government debtsecurities P 55,267 P 52,580 P 52,583 P 49,958Other debt securities:Quoted 29,508 30,366 28,951 28,364Not quoted 253 243 253 243Equity securities:Quoted 5,555 6,197 1,877 2,960Not quoted 2,292 2,099 925 72692,875 91,485 84,589 82,251Allowance forimpairment 14 ( 2,950) ( 5,811) ( 1,658) ( 4,526 )As to currency, this account is composed of the following:P 89,925 P 85,674 P 82,931 P 77,725BDO Unibank Group Parent Bank2011 2010 2011 2010Foreign currencies P 66,152 P 48,040 P 63,023 P 44,791Peso 23,773 37,634 19,908 32,934P 89,925 P 85,674 P 82,931 P 77,725Government debt securities issued by the ROP and foreign sovereigns and other debtsecurities issued by resident and non-resident corporations earn interest at annual ratesranging from 0% to 13% in 2011, 0% to 12% in 2010, and 0% to 13% in 2009 both in theBDO Unibank Group and Parent Bank financial statements.As of December 31, 2011 and 2010, other debt securities also include investments in foreignfinancial institutions under bankruptcy amounting to P1,229 and P4,016, respectively, withallowance for impairment on such investments amounted to P1,229 and P4,016, respectively,in the Parent Bank financial statements (see Note 10 for the related interbank loan receivablesfrom these financial institutions). In 2011, the Parent Bank disposed fully impaired debtsecurities issued by a foreign financial institution under bankruptcy amounting to P2,295.The sale resulted to a gain of P640 and is presented as part of Trading gain – net under OtherOperating Income and Expenses (see Note 22). Also, in 2011, collateralized debt obligationsamounting to P477, with full allowance for impairment losses, in the Parent bank financialstatements, respectively, were redeemed at zero.Unquoted equity securities consist of preferred shares and common shares of various unlistedlocal companies.

The fair values of government debt and quoted AFS securities (other debt securities andequity shares) have been determined directly by reference to published prices generated in anactive market. For unquoted AFS securities, the fair value is not reliably determinable eitherby reference to similar financial instruments or through valuation technique using the netpresent value of the future cash flows. Accordingly, unquoted AFS securities are carried atcost.Changes in AFS securities are presented below.BDO Unibank GroupParent Bank2011 2010 2011 2010Balance at beginning of year P 85,674 P 47,033 P 77,725 P 39,327Additions 400,320 487,648 397,304 485,044Disposals ( 399,954) ( 450,925) ( 396,247 ) ( 447,710 )Foreign currency revaluation 178 ( 1,803) 185 ( 1,793 )Unrealized fair value gains 846 3,020 1,096 1,951Impairment recovery - net 2,861 701 2,868 9069.03 Held-to-Maturity InvestmentsThe balance of this account is composed of the following:P 89,925 P 85,674 P 82,931 P 77,725BDO Unibank Group Parent BankNote 2011 2010 2011 2010Government debtsecurities P 83,240 P 90,514 P 75,312 P 82,202Other debt securities:Listed 9,625 13,035 9,625 12,681Not quoted 1,217 1,145 1,217 1,09894,082 104,694 86,154 95,981Allowance forimpairment 14 ( 412) ( 453) ( 412) ( 412)P 93,670 P 104,241 P 85,742 P 95,569On October 6, 2010, the BDO Unibank Group participated in the Global Bond Exchangeoffered by the ROP wherein certain U.S. dollar denominated government bonds due between2011 to 2016 were exchanged by the Parent Bank for newly issued U.S. dollar denominatedglobal bonds due 2021. The BDO Unibank Group and Parent Bank exchanged Republic ofPhilippine (ROP) bonds with face value of US$111.5 million and US$75.4 million,respectively. The fair value of the Benchmark bonds received by BDO Unibank Group andParent Bank amounted to US$134.6 million and US$94.1 million, respectively, resulting to again of US$18.8 million or P824 and US$16.6 million or P728, respectively, to be deferredand amortized over the remaining life of the Benchmark bonds. The total amount of gainamortized by BDO Unibank Group and Parent Bank amounted to US$1.73 million or P73and US$1.47 million or P64 in 2011, respectively, and US$0.41 million or P18 andUS$0.36 million or P16 in 2010, respectively, shown as part of Trading Gains – net presentedunder Other Operating Income in the statements of income.www.bdo.com.ph 91

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Unamortized deferred gain from the transaction, which is included as part of UnearnedIncome under Other Liabilities account, amounted to P733 and P806 as ofDecember 31, 2011 and 2010, respectively, in the BDO Unibank Group financial statementsand P648 and P712 as of December 31, 2011 and 2010, respectively, in the Parent Bankstatements of financial position (see Note 18). As of December 31, 2011 and 2010,outstanding balance of the Benchmark bonds of BDO Unibank Group amounted to P5,863and P5,860, respectively, and of the Parent Bank amounted to P4,128 and P4,125,respectively.As mentioned in Note 25, certain government debt securities are deposited with the BSP.As to currency, HTM investments consist of the following:BDO Unibank GroupParent Bank2011 2010 2011 2010Foreign currencies P 77,940 P 84,361 P 73,092 P 79,168Peso 15,730 19,880 12,650 16,401P 93,670 P 104,241 P 85,742 P 95,569The maturity profile of HTM investments is presented below.BDO Unibank GroupParent Bank2011 2010 2011 2010Less than one year P 10,946 P 16,334 P 9,809 P 14,320One to five years 32,080 25,206 27,075 22,397Beyond five years 50,644 62,701 48,858 58,852Changes in the HTM account are summarized below.P 93,670 P 104,241 P 85,742 P 95,569BDO Unibank GroupParent Bank2011 2010 2011 2010Balance at beginning of year P 104,241 P 116,177 P 95,569 P 107,440Additions 12,205 25,446 10,589 22,632Maturities ( 22,746) ( 32,656) ( 20,344) ( 30,171)Foreign currency revaluation ( 72)( 4,653)( 72)( 4,300)Impairment loss (recovery) - net 42 ( 73) - ( 32)The fair values of the HTM investments follow:P 93,670 P 104,241 P 85,742 P 95,569BDO Unibank GroupParent Bank2011 2010 2011 2010Government debt securities P 94,799 P 100,405 P 86,528 P 91,667Other debt securities 11,233 14,840 11,233 14,508P 106,032 P 115,245 P 97,761 P 106,175

The fair values are determined through valuation techniques by determining the net presentvalue of estimated future cash flows. Annual interest rates on these investments range from0% to 14% in 2011, 0% to 14% in 2010 and 0% to 11.4% in 2009 both in the BDO UnibankGroup and the Parent Bank financial statements.9.04 Reclassification of Investment SecuritiesBDO Unibank Group recognized the deterioration of the world’s financial markets thatoccurred in the third quarter of 2008. The enormity and extent of the global credit crisis wascrystallized by the substantial government programs instituted by major economies inresponse to the crisis, including temporary liquidity facilities, outright purchase of commercialpapers and mortgaged-backed securities, guarantee of new unsecured debt issued by banksand purchase of equity stakes in financial institutions.In 2008, BDO Unibank Group chose to avail of the regulatory relief on specific financialassets granted by the BSP under the governing provisions of Circular No. 628, whichpermitted the reclassification of certain financial assets to help banks cope with the adverseimpact of the global financial crisis.Presented below are the details of the reclassifications made by BDO Unibank Group in 2008and the related details at the end of 2011 and 2010.BDO Unibank GroupAtReclassification DateCarrying FairValue ValueReclassification from FVTPL to HTM P 6,297 P 6,297Reclassification of debt securities from AFS to HTM 25,540 25,540Reclassification of embedded derivatives of CLNsfrom FVTPL to Loans and Other Receivables ( 183) ( 183)Reclassification of CLNs from AFS to Loans and Other Receivables 18,520 18,520Balances atDecember 31, 2011 December 31, 2010Carrying Fair Carrying FairValue Value Value ValueReclassification from FVTPL to HTM P 1,547 P 1,960 P 1,635 P 1,885Reclassification of debt securitiesfrom AFS to HTM 17,960 20,768 20,184 22,696Reclassification of CLNs from AFSto Loans and Other Receivables 7,287 7,959 13,037 14,224Parent BankAtReclassification DateCarrying FairValue ValueReclassification from FVTPL to HTM P 6,297 P 6,297Reclassification of debt securities from AFS to HTM 22,474 22,474Reclassification of embedded derivatives of CLNsfrom FVTPL to Loans and Other Receivables ( 70) ( 70)Reclassification of CLNs from AFS to Loans and Other Receivables 14,096 14,096www.bdo.com.ph 93

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Balances atDecember 31, 2011 December 31, 2010Carrying Fair Carrying FairValue Value Value ValueReclassification from FVTPL to HTM P 1,547 P 1,960 P 1,635 P 1,885Reclassification of debt securitiesfrom AFS to HTM 16,107 18,743 18,248 20,539Reclassification of CLNs from AFSto Loans and Other Receivables 7,287 7,959 12,159 13,351Estimated cash flows on instruments reclassified from FVTPL to HTM at the date ofreclassification amounted to P9,174 both for BDO Unibank Group and Parent Bank. On theother hand, estimated cash flows on CLNs reclassified from AFS to Loans and OtherReceivables at the date of reclassification amounted to P22,591 and P18,728 for BDOUnibank Group and Parent Bank, respectively.Reclassification from FVTPL to HTMTotal trading losses on FVTPL reclassified to HTM both in the BDO Unibank Group andParent Bank financial statements which were recognized in profit or loss amounted toP199 in 2008. On the other hand, the net trading gain (loss) that would have been recognizedin the period following the reclassification during 2011, 2010 and 2009 if the reclassificationshad not been made would have amounted to P151, P84 and P396, respectively, for bothBDO Unibank Group and Parent Bank. Effective interest rates of FVTPL reclassified toHTM range from 7.0% to 8.6% in 2011, 2010 and 2009 in the BDO Unibank Group andParent Bank financial statements. Amortization of premium due to change in effectiveinterest rates recognized as part of interest income in profit or loss on reclassified securitiesamounted to (P9) in both the BDO Unibank Group and Parent Bank financial statements in2011 and 2010. No impairment recovery or loss was booked on reclassified instruments inboth the BDO Unibank Group and Parent Bank financial statements in 2011 and 2010.Reclassification of Debt Securities from AFS to HTMUnrealized fair value losses in equity of debt securities reclassified from AFS to HTM atreclassification dates amounted to P102 and P46 in the BDO Unibank Group and ParentBank financial statements, respectively, in 2008. The net trading gain (loss) that would havebeen recognized in other comprehensive income during the period following thereclassification if the reclassifications had not been made would have amounted to P635,P1,395, and 3,395 in 2011, 2010 and 2009, respectively, in the BDO Unibank Group financialstatement and P463, P1,175 and P3,190 in 2011, 2010 and 2009, respectively, in the ParentBank financial statement. Trading gain (loss) booked on the redemption of the reclassifiedsecurities both in BDO Unibank Group and Parent Bank financial statements are (P5) in 2011and P98 in 2010. On the other hand, amortization of fair value loss previously recognized inother comprehensive income to profit or loss due to reclassification amounted to P71 andP30 in the BDO Unibank Group financial statement and P62 and P20 in the Parent Bankfinancial statements in 2011 and 2010, respectively.

Reclassification of CLNs from AFS to Loans and Other ReceivablesUnrealized fair value losses in equity of CLNs linked to ROP bonds reclassified from AFS toLoans and Other Receivables at reclassification dates amounted to P627 and P624 in theBDO Unibank Group and Parent Bank financial statements, respectively, in 2008. Theeffective interest rates on reclassified investments range from 5.44% to 12.54%, 1.64% to12.55%, and 4.3% to 12.55% in the BDO Unibank Group financial statements, in 2011, 2010and 2009, respectively, and 5.44% to 12.54% in 2011 and 2.78% to 12.55% in 2010 and 1.1%to 12.55% in 2009 in the Parent Bank financial statements. Interest income recognized inprofit or loss on reclassified securities amounted to P178 and P254 in 2011 and 2010,respectively, in the BDO Unibank Group financial statements and P167 and P125 in 2011 and2010, respectively, in the Parent Bank financial statements.Additional unrealized fair value gain (losses) recognized in other comprehensive income in theperiod following the reclassification had the CLNs not been reclassified to Loans and OtherReceivables would have amounted to (P371), P444 and P643 in 2011, 2010 and 2009,respectively, in the BDO Unibank Group financial statements and (P371), P469 and P623 in2011, 2010 and 2009, respectively, in the Parent Bank financial statements. Additional tradinggain (loss) to be recognized in profit or loss had the embedded derivatives not beenreclassified totaled to (P208), P152 and P1,597 in 2011, 2010 and 2009, respectively, in theBDO Unibank Group financial statements and (P202), P148 and P1,274 in 2011, 2010 and2009, respectively, in the Parent Bank financial statements.In 2011, the BDO Unibank Group unwound the outstanding CLDs and CLNs with certainfinancial institutions amounting to P437 and P5,454, respectively. On the other hand, theParent Bank unwound the outstanding CLNs with certain financial institutions amounting toP5,009. The BDO Unibank Group and Parent Bank recognized loss amounting to P13 andP7, respectively, in the unwinding of CLNs and is presented as part of theTrading gain – net under Other Operating Income in the 2011 statement of income. Also,the unwinding of CLN by the Parent Bank resulted to reversal of net unrealized lossamounting to (P25) and is presented as part of Trading net under Other Operating Income inthe 2011 statement of income.After the reclassification, amortization of unrealized fair value losses on outstanding CLDsand CLNs previously recognized directly in the statements of comprehensive incomeamounted to P157 and P82 in 2011 and 2010, respectively, for the BDO Unibank Group andP157 and P98 in 2011 and 2010, respectively, for the Parent Bank.www.bdo.com.ph 95

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)10. LOANS AND OTHER RECEIVABLESThis account consists of the following:BDO Unibank GroupParent BankNotes 2011 2010 2011 2010Receivables from customers:Loans and discounts 24 P 591,323 P 470,461 P 577,544 P 455,902Customers’ liabilitiesunder letters of creditand trust receipts 38,085 34,104 38,085 34,104Bills purchased 10,697 9,356 10,697 9,356Others 30,041 27,591 30,041 27,591670,146 541,512 656,367 526,953Allowance for impairment 14 ( 24,358) ( 23,507) ( 24,077) ( 23,276)645,788 518,005 632,290 503,677Other receivables:Interbank loans receivables 7,325 26,151 7,325 26,151UDSCL 9.04 8,452 13,386 8,452 12,505Accounts receivable 13, 24 7,628 6,002 6,171 6,861SPURRA 4,989 2,912 - -Sales contract receivables 2,347 2,107 2,259 1,954Others 67 95 - -30,808 50,653 24,207 47,471Allowance for impairment 14 ( 2,669) ( 2,637) ( 2,640) ( 2,530)28,139 48,016 21,567 44,941P 673,927 P 566,021 P 653,857 P 548,618In 2011, to execute the deed of assignment made on January 13, 2008, the Parent Bank agreedto transfer, cede and convey absolutely to SM Keppel Land, Inc. (SM Keppel) the outstandingadvances totaling P364 recognized as part of Accounts receivable under Loans and OtherReceivables in exchange for 36,401,500 preferred shares of SM Keppel for a subscriptionprice of P364 (see Note 13.01).Included in the total loan portfolio are non-performing loans, net of accounts in the losscategory and fully provided with allowance (excluded under BSP Circular 351), as follows:BDO Unibank Group Parent Bank2011 2010 2011 2010Non–performing loans P 25,332 P 24,937 P 24,909 P 24,400Loss category loans,fully provided with allowance* ( 11,919) ( 6,087) ( 11,839) ( 5,973)P 13,413 P 18,850 P 13,070 P 18,427* Loans classified as loss and fully provided with allowance as per latest applicable BSP Results ofExamination as of December 31, 2011 and 2010. The 2011 loans classified as loss is inclusive of theReceivable from SPV presented under Other Resources in the 2011 statement of financial position.

Per MORB, non-performing loans shall, as a general rule, refer to loan accounts whoseprincipal and/or interest is unpaid for 30 days or more after due date or after they havebecome past due in accordance with existing rules and regulations. This shall apply to loanspayable in lump sum and loans payable in quarterly, semi-annual or annual installments, inwhich case, the total outstanding balance thereof shall be considered non-performing. In thecase of loans payable in monthly installments, the total outstanding balance thereof shall beconsidered nonperforming when three or more installments are in arrears. In the case ofloans payable in daily, weekly or semi-monthly installments, the entire outstanding balance ofthe loan/receivable shall be considered as past due when the total amount of arrearagesreaches 10% of the total loan/receivable balance. Restructured loans shall be considered nonperformingexcept when as of restructuring date, it has an updated principal and interestpayments and it is fully secured by real estate with loan value of up to 60% of the appraisedvalue of real estate security and the insured improvements and such other first classcollaterals.As of December 31, 2010, interbank loans receivables include loans to a foreign financialinstitution under bankruptcy amounting to P19 with related allowance for impairment of P19(see Note 9.02 for the investment in other debt securities in that foreign financial institution).In 2011, the Parent Bank disposed the loan through a sale at a gain of P0.2 and is presented aspart of Trading gain – net in the statement of income.The concentration credit of the total loan portfolio as to industry follows:BDO Unibank Group Parent Bank2011 2010 2011 2010Wholesale and retail trade P 105,905 P 76,592 P 104,115 P 75,211Manufacturing (various industries) 101,468 90,555 97,730 86,861Financial intermediaries 84,668 79,058 86,169 78,142Real estate, renting and otherrelated activities 77,624 55,842 75,364 53,887Other community, social andpersonal activities 58,315 39,474 55,560 39,291Transportation and communication 51,378 36,295 48,203 33,845Agriculture, fishing and forestry 8,037 9,592 7,536 8,254Others 182,751 154,104 181,690 151,462P 670,146 P 541,512 P 656,367 P 526,953The breakdown of total loan portfolio as to secured and unsecured follows:BDO Unibank GroupParent Bank2011 2010 2011 2010Secured:Real estate mortgage P 115,833 P 93,722 P 115,296 P 93,309Chattel mortgage 61,452 42,566 53,100 34,738Other securities 137,259 104,142 131,166 103,961314,544 240,430 299,562 232,008Unsecured 355,602 301,082 356,805 294,945P 670,146 P 541,512 P 656,367 P 526,953www.bdo.com.ph 97

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)The breakdown of total loans as to type of interest rate follows:BDO Unibank GroupParent Bank2011 2010 2011 2010Variable interest rates P 483,438 P 364,479 P 469,209 P 355,991Fixed interest rates 186,708 177,033 187,158 170,962P 670,146 P 541,512 P 656,367 P 526,953Loans and other receivables bear annual interest rates of 0% (primarily non-performing loans)to 43.7% (for credit card installment receivables) per annum in 2011, 2010 and 2009 in boththe BDO Unibank Group and Parent Bank financial statements.The BDO Unibank Group’s receivables from customers amounting to P960 and P1,448 as ofDecember 31, 2011 and 2010, respectively, are pledged as collaterals with the BSP to secureborrowings under rediscounting privileges (see Note 16).11. PREMISES, FURNITURE, FIXTURES AND EQUIPMENTThe gross carrying amounts and accumulated depreciation and amortization of premises,furniture, fixtures and equipment at the beginning and end of 2011 and 2010 are shownbelow.BDO Unibank GroupLeasehold Furniture,Rights and Fixtures andLand Buildings Improvements Equipment TotalDecember 31, 2011Cost P 5,130 P 7,701 P 2,858 P 12,750 P 28,439Accumulateddepreciation andamortization - ( 2,498)( 1,635)( 8,616)( 12,749)Net carrying amount P 5,130 P 5,203 P 1,223 P 4,134 P 15,690December 31, 2010Cost P 5,079 P 6,620 P 2,673 P 15,185 P 29,557Accumulateddepreciation andamortization - ( 2,167)( 1,268)( 11,065)( 14,500)Net carrying amount P 5,079 P 4,453 P 1,405 P 4,120 P 15,057January 1, 2010Cost P 4,780 P 5,568 P 2,293 P 16,475 P 29,116Accumulateddepreciation andamortization - ( 1,685) ( 880) ( 11,811) ( 14,376)Allowancefor impairment - - ( 4)( 4)( 8)Net carrying amount P 4,780 P 3,883 P 1,409 P 4,660 P 14,732Parent BankDecember 31, 2011Cost P 5,130 P 7,642 P 2,715 P 11,713 P 27,200Accumulateddepreciation andamortization - ( 2,459)( 1,558)( 8,109)( 12,126)Net carrying amount P 5,130 P 5,183 P 1,157 P 3,604 P 15,074

Leasehold Furniture,Rights and Fixtures andLand Buildings Improvements Equipment TotalDecember 31, 2010Cost P 5,079 P 6,561 P 2,611 P 12,170 P 26,421Accumulateddepreciation andamortization - ( 2,131)( 1,255)( 8,920)( 12,306)Net carrying amount P 5,079 P 4,430 P 1,356 P 3,250 P 14,115January 1, 2010Cost P 4,780 P 5,509 P 2,125 P 13,487 P 25,901Accumulateddepreciation andamortization - ( 1,651)( 803)( 10,389)( 12,843)Net carrying amount P 4,780 P 3,858 P 1,322 P 3,098 P 13,058A reconciliation of the carrying amounts, at the beginning and end of 2011 and 2010, ofpremises, furniture, fixtures and equipment is shown below.BDO Unibank GroupLeasehold Furniture,Rights and Fixtures andLand Buildings Improvements Equipment TotalBalance at January 1, 2011,net of accumulateddepreciation andamortization P 5,079 P 4,453 P 1,405 P 4,120 P 15,057Additions 76 994 247 1,772 3,089Disposals ( 79) ( 3) - ( 449) ( 531)Reclassifications 54 67 ( 1) - 120Depreciation and amortizationcharges for the year - ( 308)( 428)( 1,309)( 2,045)Balance at December 31,2011, net of accumulateddepreciation andamortization P 5,130 P 5,203 P 1,223 P 4,134 P 15,690Balance at January 1, 2010,net of accumulateddepreciation andamortization P 4,780 P 3,883 P 1,409 P 4,660 P 14,732Additions 89 564 474 1,334 2,461Disposals ( 15) ( 15) ( 37) ( 155) ( 222)Reclassifications 225 253 5 - 483Depreciation and amortizationcharges for the year - ( 232)( 446)( 1,719)( 2,397)Balance at December 31,2010, net of accumulateddepreciation andamortization P 5,079 P 4,453 P 1,405 P 4,120 P 15,057Parent BankBalance at January 1, 2011,net of accumulateddepreciation andamortization P 5,079 P 4,430 P 1,356 P 3,250 P 14,115Additions 76 994 205 1,474 2,749Disposals ( 79) ( 3) - ( 69) ( 151)Reclassifications 54 67 ( 1) - 120Depreciation and amortizationcharges for the year - ( 305)( 403)( 1,051)( 1,759)Balance at December 31,2011, net of accumulateddepreciation andamortization P 5,130 P 5,183 P 1,157 P 3,604 P 15,074www.bdo.com.ph 99

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Parent BankLeasehold Furniture,Rights and Fixtures andLand Buildings Improvements Equipment TotalBalance at January 1, 2010,net of accumulateddepreciation andamortization P 4,780 P 3,858 P 1,322 P 3,098 P 13,058Additions 89 564 447 1,100 2,200Disposals ( 15) ( 15) ( 6) ( 59) ( 95)Reclassifications 225 252 5 - 482Depreciation and amortizationcharges for the year - ( 229)( 412)( 889)( 1,530)Balance at December 31,2010, net of accumulateddepreciation andamortization P 5,079 P 4,430 P 1,356 P 3,250 P 14,115Under BSP rules, investments in premises, furniture, fixtures and equipment should not exceed50% of a bank’s unimpaired capital. As of December 31, 2011 and 2010, the BDO UnibankGroup has complied with this requirement.12. INVESTMENT PROPERTIESInvestment properties include land and buildings held for capital appreciation and for rental.Income earned from investment properties under rental arrangements amounted to P68 andP62 in 2011 and P81 and P78 in 2010 and are presented as part of Income from assetsacquired under other Operating Income in the BDO Unibank Group and Parent Bankfinancial statements, respectively (see Note 22). Direct expenses incurred from theseproperties amounted to P45 and P17 in 2011 and P32 and P22 in 2010 in the BDO UnibankGroup and Parent Bank financial statements, respectively.The gross carrying amounts and accumulated depreciation and impairment at the beginningand end of 2011 and 2010 are shown below.BDO Unibank GroupLand Buildings TotalDecember 31, 2011Cost P 10,231 P 3,839 P 14,070Accumulated depreciation - ( 1,658) ( 1,658)Allowance for impairment(see Note 14) ( 2,206) ( 69) ( 2,275)Net carrying amount P 8,025 P 2,112 P 10,137December 31, 2010Cost P 11,342 P 4,077 P 15,419Accumulated depreciation - ( 1,500) ( 1,500)Allowance for impairment(see Note 14) ( 1,765) ( 175) ( 1,940)Net carrying amount P 9,577 P 2,402 P 11,979

Land Buildings TotalJanuary 1, 2010Cost P 12,123 P 4,537 P 16,660Accumulated depreciation - ( 1,555) ( 1,555)Allowance for impairment(see Note 14) ( 1,251) ( 20) ( 1,271)Net carrying amount P 10,872 P 2,962 P 13,834Parent BankDecember 31, 2011Cost P 9,694 P 3,611 P 13,305Accumulated depreciation - ( 1,566 ) ( 1,566)Allowance for impairment(see Note 14) ( 2,143) ( 25) ( 2,168)Net carrying amount P 7,551 P 2,020 P 9,571December 31, 2010Cost P 10,566 P 3,840 P 14,406Accumulated depreciation - ( 1,417 ) ( 1,417)Allowance for impairment(see Note 14) ( 1,719) ( 118) ( 1,837)Net carrying amount P 8,847 P 2,305 P 11,152January 1, 2009Cost P 11,312 P 4,225 P 15,537Accumulated depreciation - ( 1,479 ) ( 1,479)Allowance for impairment ( 1,233) ( 20) ( 1,253)Net carrying amount P 10,079 P 2,726 P 12,805A reconciliation of the carrying amounts, at the beginning and end of 2011 and 2010, ofinvestment properties is shown below.BDO Unibank GroupLand Buildings TotalBalance at January 1, 2011,net of accumulateddepreciation and impairment P 9,577 P 2,402 P 11,979Additions 209 80 289Disposals ( 1,531 ) ( 256 ) ( 1,787 )Reclassifications ( 73 ) 320 247Depreciation for the year - ( 397 ) ( 397 )Impairment ( 157 ) ( 37 ) ( 194)Balance at December 31, 2011,net of accumulateddepreciation and impairment P 8,025 P 2,112 P 10,137www.bdo.com.ph 101

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)BDO Unibank GroupLand Buildings TotalBalance at January 1, 2010,net of accumulateddepreciation and impairment P 10,872 P 2,962 P 13,834Additions 165 162 327Disposals ( 1,385 ) ( 177 ) ( 1,562 )Reclassifications 25 ( 186 ) ( 161 )Depreciation for the year - ( 302 ) ( 302 )Impairment ( 100 ) ( 57 ) ( 157 )Balance at December 31, 2010,net of accumulateddepreciation and impairment P 9,577 P 2,402 P 11,979Parent BankBalance at January 1, 2011,net of accumulateddepreciation and impairment P 8,847 P 2,305 P 11,152Additions 104 62 166Disposals ( 1,208 ) ( 224 ) ( 1,432 )Reclassification ( 35 ) 250 215Impairment ( 157 ) - ( 157 )Depreciation for the year - ( 373 ) ( 373 )Balance at December 31, 2011,net of accumulateddepreciation and impairment P 7,551 P 2,020 P 9,571Balance at January 1, 2010,net of accumulateddepreciation and impairment P 10,079 P 2,726 P 12,805Additions 145 148 293Disposals ( 1,346 ) ( 100 ) ( 1,446 )Reclassification 54 ( 186 ) ( 132 )Impairment ( 85 ) - ( 85 )Depreciation for the year - ( 283 ) ( 283 )Balance at December 31, 2010,net of accumulateddepreciation and impairment P 8,847 P 2,305 P 11,152The fair value of investment properties as of December 31, 2011 and 2010, determined basedon the present value of the estimated future cash flows discounted at the current market rate,amounted to P16,414 and P17,393, respectively, for BDO Unibank Group accounts andP15,494 and P16,225, respectively, for the Parent Bank accounts.The BDO Unibank Group has no contractual obligations to purchase, construct or developinvestment properties, or to repair, maintain or enhance the same nor are there anyrestrictions on the future use or realizability of the investment properties.

Real and other properties acquired (ROPA) in settlement of loans through foreclosure ordacion in payment are significantly accounted for as either: financial assets, investmentproperties, non-current assets held for sale or AFS. As of December 31, 2011 and 2010,ROPA, gross of allowance, comprise of the following:BDO Unibank Group Parent Bank2011 2010 2011 2010Investment properties P 11,421 P 12,796 P 10,918 P 12,044Non-current assets held for sale 2,612 2,295 2,612 2,295AFS securities 1,584 3,731 1,468 3,731Other resources - others 122 66 - -P 15,739 P 18,888 P 14,998 P 18,07013. OTHER RESOURCESThe components of this account are shown below.BDO Unibank Group Parent BankNotes 2011 2010 2011 2010Deferred tax assets - net 27.01 P 5,485 P 5,584 P 5,586 P 5,687Equity investments 13.01 4,746 3,926 19,277 14,548Receivables from specialpurpose vehicles (SPVs) 13.02 3,440 3,440 3,440 3,440Real properties fordevelopment and sale 3,384 3,453 - -Deposits under escrow 13.03 2,931 2,931 2,931 2,931Non-current assetsheld for sale 13.04 2,612 2,328 2,612 2,295Foreign currency notes andcoins on hand 1,989 2,182 1,989 2,182Interoffice float items – net 1,617 716 1,517 1,084Retirement asset 23.02 1,494 998 1,519 1,026Goodwill 13.05, 26 1,247 1,247 1,247 1,247Returned checks andother cash items 348 341 348 341Prepaid documentary stamps 314 210 295 197Dividend receivable 168 96 316 691Computer software – net 13.06 144 367 144 366Advances to subsidiaries 24 - - - 3,183Others 13.06 5,487 4,314 4,502 3,16035,406 32,133 45,723 42,378Allowance for impairment 14 ( 8,971) ( 8,540) ( 11,919) ( 11,512)P 26,435 P 23,593 P 33,804 P 30,866www.bdo.com.ph 103

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)13.01 Equity InvestmentsEquity investments consist of the following:BDO Unibank Group Parent Bank%InterestHeld 2011 2010 2011 2010Philippine SubsidiariesBDO Private Bank, Inc. (BDO Private) 100% P - P - P 2,579 P 2,579BDO Strategic Holdings, Inc. (BDOSHI) 100% - - 8,184 2,135BDO Leasing and Finance, Inc. (BDO Leasing) 87% - - 1,878 1,878BDO Elite Savings Bank, Inc.(formerly GE Money Bank, Inc. or GEMB) 99% - - 1,500 1,500EBC Strategic Holdings Corporation (ESHC) 100% - - - 1,421BDO Capital & Investment Corporation(BDO Capital) 100% - - 300 300BDO Technology Center, Inc. (BDO Technology) 100% - - - 47Equimark - NFC Development Corp. 60% - - 45 45PCIB Securities, Inc. 100% - - 39 39PCI Realty Corporation 100% - - 34 34BDO Insurance Brokers, Inc. (BDOI) 100% - - 11 11PCI Insurance Brokers, Inc. (PCI Insurance) 100% - - 8 8Equitable Card Network, Inc. 100% - - - -Total subsidiaries - - 14,578 9,997Foreign SubsidiariesPCI Express Padala (HK) Ltd. 100% - - - 215Express Padala HK Ltd. 100% - - 28 28BDO Remittance (USA), Inc 100% - - 26 26PCIB Europe, S.P.A. 100% - - 1 1Express Padala Frankfurt GmbH 100% - - 1 1Equitable PCI Express Padala (Nederland) B.V. 100% - - - 1- - 56 272AssociatesManila North Tollways Corporation (MNTC) 12% 1,405 1,405 1,405 1,405SM Keppel Land, Inc. 50% 1,658 1,294 1,658 1,294Generali Pilipinas Holdings, Inc. (Generali) 40% 1,235 1,235 1,168 1,168Northpine Land Incorporated 20% 232 232 232 232Taal Land 33% 170 170 170 170Others * 10 10 10 104,710 4,346 4,643 4,279Accumulated equity in net losses:Balance at beginning of year ( 420 ) ( 436 ) - -Equity in net profit during the year 681 16 - -261 ( 420 ) - -Dividends received ( 225) - - -Net investments in associates 4,746 3,926 4,643 4,279Gross 4,746 3,926 19,277 14,548Allowance for impairment ( 559 ) ( 539 ) ( 4,375 ) ( 4,355)Net P 4,187 P 3,387 P 14,902 P 10,193* This consists of various insignificant investments in associates, thus, percentage held is no longer disclosed.The BDO Unibank Group’s percentage of interest held in each subsidiary and associate is thesame as that of the Parent Bank, except for Generali which is at 40% at the BDO UnibankGroup and 37.5% at the Parent Bank.

The BDO Unibank Group’s subsidiaries and associates are all incorporated in the Philippines,except for the following:SubsidiariesPCI Express Padala (HK) Ltd.Express Padala HK Ltd.BDO Remittance (USA), Inc.Express Padala Frankfurt GmbHPCIB Europe, S.P.AEquitable PCI Express Padala (Nederland) B.V.Country of IncorporationHong KongHong KongUnited States of AmericaGermanyItalythe NetherlandsThe following table presents the aggregated unaudited financial information of BDO UnibankGroup’s associates as of and for the years ended December 31, 2011, 2010 and 2009:2011 2010 2009Assets P 23,932 P 22,819 P 3,941Liabilities 12,313 11,890 799Equity 11,619 10,929 3,142Revenues 7,138 8,101 ( 9)Net profit (loss) 2,329 1,750 ( 352 )13.01.01 Dividend DeclarationsIn 2011 and 2010, the Parent Bank’s share in the cash dividends declared by BDO UnibankGroup's subsidiaries amounted to P411 and P791, respectively. These are presented as part ofDividend income under Other Operating Income in the Parent Bank statements of income(see Note 22). Out of the total dividends declared, the Parent Bank received P95 and P102 in2011 and 2010, respectively.13.01.02 Mergers Among SubsidiariesOn April 30, 2011, the Parent Bank’s BOD approved the five-way merger (the Merger) ofwholly-owned subsidiaries: BDOSHI, Equitable Card Network (ECN), Inc., ESHC, BDOTechnology, and Strategic Property Holdings, Inc. (SPHI), with BDOSHI as the survivingcorporation. The Merger has been undertaken as part of the streamlining of the BDOUnibank Group’s organizational structure. The Merger was approved by the BSP and theSEC on November 29, 2011 and December 29, 2011, respectively, and was accounted forusing the pooling-of-interests method. The Parent Bank’s investment in its subsidiaries didnot increase as a result of this exercise except for the following: (a) dacion en pago of3,621,159 preferred shares and 2,000,001 common shares of BDOSHI by ESHC for the P557advances from the Parent Bank presented as part of Advances to subsidiaries under OtherResources in 2010 statement of position, and (b) subscription of additional 40,231,915preferred shares of BDOSHI through conversion of advances of BDOSHI and ESHCtotaling P2,626 (recognized as part of Advances to subsidiaries under Other Resources in2010 statement of position) and advances of SPHI amounting to P1,397 (recognized as partof Accounts receivable under Loans and Receivables in 2010 statement of position )(see Notes 10 and 26).www.bdo.com.ph 105

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)13.01.03 AcquisitionsIn 2011, to execute the deed of assignment made on January 13, 2008, the Parent Bank agreedto transfer, cede and convey absolutely to SM Keppel the outstanding advances totaling P364recognized as part of Others under Loans and Other Receivables in exchange for 36,401,500preferred shares of SM Keppel for a subscription price of P364 (see Note 10).As a result, the investment in SM Keppel as of December 31, 2011 increased to P1,658.On February 11, 2010, BSP approved the acquisition by BDO of the 12.4% equity interest inMNTC equivalent to 2,197,800 common shares held by Global Fund Holdings, Inc. (GlobalFund) in MNTC for a purchase price of P1,405. The purchase of 12.4% was previouslyapproved by the BOD on July 25, 2009. Investment in MNTC is recognized as EquityInvestments and is presented as part of Other Resources in the statements of financialposition. The Parent Bank is properly represented in the board of directors of MNTC.In response to the capital infusion call of Generali to cover its 2007 and 2008 capitaldeficiency, BDO Unibank Group’s BOD separately approved on January 9, 2010 andJuly 31, 2010 additional investment of P114 and P156, respectively. The approval of the BSPwas made on March 5, 2010 and September 21, 2010, respectively. Investment in Generalihas a carrying value of P1,168 and allowance for impairment loss amounting to P898 as ofDecember 31, 2011 and 2010. The investment is recognized as Equity Investments and ispresented as part of Other Resources account.13.01.04 Dissolution of SubsidiariesOn September 30, 2011, the Parent Bank approved the dissolution of PCI Express Padala(Hong Kong) Limited effective September 20, 2011. Capital amounting to P248 was fullyreturned to the Parent Bank on December 5, 2011.On April 30, 2010 by virtue of a proxy letter, the Parent Bank approved the liquidation ofPCIB Europe S.P.A with cut-off financial statement date of December 31, 2009. PCIBEurope S.P.A made partial returns of capital amounting to P23 and P1 on July 16, 2010 andOctober 6, 2010, respectively. As of December 31, 2011, total equity of PCIB Europe S.P.A.amounted to P0.5.13.02 Receivables from SPVsReceivables from SPVs represent the amount due from sale of certain non-performing assetsto SPVs. In 2005, the former EPCIB (now part of BDO Unibank Group) sold certainnonperforming assets with book value of P15,069 to Philippine Investment One, PhilippineInvestment Two and Cameron Granville Asset Management, Inc. (CGAM) for aconsideration of P4,134. Cash received from the SPVs amounted to P98 in 2005 and thebalance of P3,336, through issuance of SPV Notes, shall be paid based on a cash flowwaterfall arrangement and interest rate of 20% and 50% per annum on the P2,776 and P560,respectively. Also, in 2005, the former Equitable Savings Bank, Inc. (ESB) entered into saleand purchase agreements with CGAM and LNC (SPV-AMC) Corporation (LNC) for the saleof the former ESB’s loans to CGAM for P621 and for the sale of its investment properties toLNC for P98. The former ESB received SPV Notes amounting to P60 for loans fromCGAM and P39 for investment properties from LNC, in addition to cash received amountingto P23 from CGAM and P4 from LNC.Full allowance for impairment on the receivables from SPVs amounted to P3,440 as ofDecember 31, 2011 and 2010.

13.03 Deposits Under EscrowDeposits under escrow pertain to the portion of the cash received by BDO Unibank Group inconsideration for its assumption of First e-Bank Corporation’s deposits and other liabilities inOctober 2002. This amount is held in escrow pending compliance by BDO Unibank Groupwith certain terms and conditions, particularly the transfer of titles, as stipulated in theMemorandum of Agreement (MOA). Deposits under escrow earn an annual effective interestof 5.8% and 5.7% in 2011 and 2010, respectively.13.04 Non-current Assets Held for saleNon-current assets held for sale consist of real and other properties acquired throughrepossession or foreclosure that BDO Unibank Group intends to sell within one year fromthe date of classification as held for sale. Impairment loss recognized by the BDO UnibankGroup and the Parent Bank on non-current assets held for sale in 2011, 2010 and 2009amounted to P131, P128 and P5, respectively (see Note 14).13.05 GoodwillGoodwill represents the excess of the cost of acquisition of the Parent Bank over the fairvalue of the net assets acquired and branch licenses at the date of acquisition. This issignificantly from the acquisition of BDO Card Corporation, United Overseas BankPhilippines (UOBP), American Express Bank, Ltd. and GE Money Bank (see Note 26.02),which were acquired in 2005, 2006, 2007 and 2009, respectively. The BDO Unibank Groupand the Parent Bank recognized impairment loss of P150, P271 and P171 in 2011, 2010 and2009, respectively (see Note 14).13.06 OthersAmortization expense on computer software licenses amounted to P373, P170, and P125 in2011, 2010 and 2009, respectively, in the BDO Unibank Group financial statements andP371, P173, and P134 in 2011, 2010 and 2009, respectively, in the Parent Bank financialstatements. These are included as part of Miscellaneous under Other Operating Expensesaccount in the statements of income (see Note 22).Depreciation expense on certain assets amounting to P35, P11 and P11 in 2011, 2010 and2009, respectively, in the BDO Unibank Group financial statements, and are presented aspart of Occupancy under Other Operating Expenses account in the statements of income(see Note 22).www.bdo.com.ph 107

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)14. ALLOWANCE FOR IMPAIRMENTChanges in the allowance for impairment are summarized below.BDO Unibank GroupParent Bank2011 2010 2011 2010Balance at beginning of year:AFS securities P 5,811 P 6,526 P 4,526 P 5,432HTM investments 453 737 412 737Loans and other receivables 26,144 22,496 25,806 21,364Investment properties 1,940 1,271 1,837 1,253Other resources 8,540 8,111 11,512 10,89542,888 39,141 44,093 39,681Impairment losses - net 6,144 6,698 5,945 6,374Reclassification/write-off/foreigncurrency revaluation ( 7,397) ( 2,951) ( 7,164) ( 1,962 )Balance at end of year:AFS securities 2,950 5,811 1,658 4,526HTM investments 412 453 412 412Loans and other receivables 27,027 26,144 26,717 25,806Investment properties 2,275 1,940 2,168 1,837Other resources 8,971 8,540 11,919 11,512P 41,635 P 42,888 P 42,874 P 44,093Total impairment losses on financial assets amounted to P5,372, P6,141, and P5,261 in 2011,2010 and 2009, respectively, in the BDO Unibank Group financial statements and P5,225,P5,777, and P4,892 in 2011, 2010 and 2009, respectively, in the Parent Bank financialstatements.Total impairment losses on non-financial assets amounted to P772, P557, and P892 in 2011,2010 and 2009, respectively, in the BDO Unibank Group financial statements and P720,P597, and P883 in 2011, 2010 and 2009, respectively, in the Parent Bank financial statements.15. DEPOSIT LIABILITIESThe breakdown of this account follows:BDO Unibank Group Parent Bank2011 2010 2011 2010Demand P 48,499 P 45,445 P 36,059 P 33,489Savings 482,517 426,024 483,147 426,687Time 327,553 311,166 319,542 302,458P 858,569 P 782,635 P 838,748 P 762,634

This account is composed of the following (by counterparties):BDO Unibank Group Parent Bank2011 2010 2011 2010Due to other banksDemand P 841 P 714 P 788 P 702Savings 1,959 2,874 1,959 2,874Time 1,796 4,334 1,796 1,9504,596 7,922 4,543 5,526Due to customersDemand 47,658 44,731 35,271 32,787Savings 480,558 423,150 481,188 423,813Time 325,757 306,832 317,746 300,508The breakdown of deposit liabilities, as to currency, follows:853,973 774,713 834,205 757,108P 858,569 P 782,635 P 838,748 P 762,634BDO Unibank Group Parent Bank2011 2010 2011 2010Foreign currencies P 206,618 P 217,049 P 200,000 P 209,524Peso 651,951 565,586 638,748 553,110The maturity profile of this account is presented below.P 858,569 P 782,635 P 838,748 P 762,634BDO Unibank Group Parent Bank2011 2010 2011 2010Less than one year P 792,225 P 708,223 P 774,462 P 693,130One to five years 55,100 59,469 53,042 54,561Beyond five years 11,244 14,943 11,244 14,943P 858,569 P 782,635 P 838,748 P 762,634The BDO Unibank Group’s and Parent Bank’s deposit liabilities are in the form of demand,savings and time deposit accounts both bearing annual interest rates of 0% to 8.3% in 2011and 0% to 9.7% in 2010. Demand and savings deposits usually have both fixed and variableinterest rates while time deposit has fixed interest rate except for one tranche of the pesodenominatedlong-term negotiable certificates of deposits (LTNCDs) which are repriced everyquarter.www.bdo.com.ph 109

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)On December 23, 2004, the BSP approved the Parent Bank’s application to issue in two ormore tranches of up to P5,000 worth of peso-denominated LTNCDs within one year fromdate of approval. The first tranche amounting to P2,100 was issued on June 1, 2005 andmatured on June 2, 2010 and the second tranche amounting to P2,900 was issued onNovember 23, 2005 and matured on November 24, 2010. The first tranche paid a variableinterest based on 3M PDST-F (formerly MART 1) plus 0.25% spread while the second tranchepaid a fixed rate of 9.73%. Also, on September 25, 2006, the BSP approved the Parent Bank’sapplication to issue another P5,000 LTNCDs in one tranche. The P5,000 LTNCDs, with afixed interest rate of 8.25% per annum, were issued on October 4, 2006 and matured onNovember 3, 2011. These are presented as part of Time Deposits under Deposit Liabilitiesaccount in the 2010 statement of financial position.Also on April 26, 2007, the Monetary Board (MB) of the BSP authorized BDO Private toissue up to P5,000 worth of fixed rate or zero coupon LTNCDs in one or more tranches.The first tranche, consisting of P2,191 in zero coupon LTNCDs, was issued onJune 18, 2007 and will mature on December 18, 2012. These LTNCDs are presented, net ofdiscount and included P17 in capitalized transaction costs, as part of the Time DepositLiabilities account in the statements of financial position.Under existing BSP regulations, non-FCDU deposit liabilities of the BDO Unibank Groupare subject to liquidity reserve requirement equivalent to 11.0% both in 2011 and 2010 andstatutory reserve equivalent to 10.0% and 8.0% in 2011 and 2010, respectively. As ofDecember 31, 2011, the BDO Unibank Group is in compliant with these regulations.16. BILLS PAYABLEThis account is composed of the following:BDO Unibank Group Parent Bank2011 2010 2011 2010Deposit substitutes P 17,152 P 8,304 P 17,149 P 8,031Foreign banks 13,694 26,096 13,694 25,876Senior notes 13,210 13,202 13,210 13,202PDIC 4,472 4,483 4,472 4,483BSP 968 1,445 968 1,445Local banks 132 131 132 131Others 9,846 12,200 1,753 2,913The breakdown of this account as to currency follows:P 59,474 P 65,861 P 51,378 P 56,081BDO Unibank Group Parent Bank2011 2010 2011 2010Peso P 14,909 P 26,036 P 6,813 P 16,476Foreign currencies 44,565 39,825 44,565 39,605P 59,474 P 65,861 P 51,378 P 56,081

The maturity profile of this account is presented below.BDO Unibank Group Parent Bank2011 2010 2011 2010Less than one year P 42,767 P 43,976 P 35,430 P 34,477One to five years 15,718 6,788 14,959 6,514Beyond five years 989 15,097 989 15,090P 59,474 P 65,861 P 51,378 P 56,081Bills payable bear annual interest rates of 0.2% to 12.0% in 2011 and 0.3% to 12.0% in 2010.Certain bills payable to local banks and the BSP are collateralized by certain receivables fromcustomers (see Note 10).The following comprise the interest expense included as part of Interest Expense on billspayable and other liabilities in the statements of income (see Note 21):BDO Unibank Group2011 2010 2009Senior notes P 511 P 98 P -Deposit substitutes 277 312 635Foreign banks 182 69 112PDIC 175 175 175Local banks 29 1 29BSP 27 121 254SMPHI - - 126Others 322 575 459P 1,523 P 1,351 P 1,790Parent Bank2011 2010 2009Senior notes P 511 P 98 P -PDIC 175 175 175Foreign banks 182 69 112Deposit substitutes 172 285 422BSP 27 121 254SMPHI - - 127Local banks - - 27Others 158 243 303P 1,225 P 991 P 1,420www.bdo.com.ph 111

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Senior NotesOn October 22, 2010, BDO Unibank Group issued Senior Notes with a face value of US$300million at a price of 99.632 or a total price of US$299 million. The Senior Notes, which willmature on April 22, 2016, bear a fixed interest rate of 3.875% per annum,with an effective rate of 3.95% per annum, and will be payable semi-annually everyApril 22 and October 22 starting in 2011. The net proceeds from the issuance are intended tosupport business expansion plans, and general banking and relending activities. As ofDecember 31, 2011 and 2010, the Senior Notes have a carrying amount of P13,210 andP13,202, respectively, and are presented as part of Bills Payable in the statements of financialposition. Interest on Senior Notes incurred amounted to P511 in 2011 and P98 in 2010recognized in profit or loss and included as part of Interest Expense on Bills Payable andOther Liabilities account on an amortized cost basis using the effective interest method(see Note 21).PDICThis represents the financial assistance to United Overseas Bank Philippines (UOBP) fromPDIC amounting to P4,420 which was transferred by UOBP to the Parent Bank. Thetransfer was covered by the MOA relative to the Parent Bank's acquisition of UOBP branchesin 2005. The financial assistance, which is recorded as part of Bills Payable in the statementsof financial position will mature on December 19, 2012 and bears annual interest rate of3.9%. The proceeds of the financial assistance from PDIC are invested in governmentsecurities as provided for in the MOA.SMPHI (Preferred Shares)As required under PAS 32, Financial Instruments: Presentation and Disclosure, the Parent Bankrecognized as financial liability 25,000,000 shares of redeemable, cumulative andnon-participating preferred shares with a par value of P10 per share issued to SMPHI onOctober 18, 2004. The preferred shares were issued at US$2 per share or an aggregatesubscription price of US$50 million. The preferred shares entitled SMPHI to cumulativedividends, payable in US dollars semi-annually in arrears, equal to 6.5% of the issue price perannum.As required by BSP, the Parent Bank set up a sinking fund on October 17, 2005 for theredemption of the preferred shares. The balance of the sinking fund as ofDecember 31, 2008 amounted to P2,110 and was invested in debt securities, shown as part ofHTM investments.On October 19, 2009, the preferred shares were redeemed in full by the Parent Bank atP2,446 inclusive of remaining dividends in arrears of P77.17. SUBORDINATED NOTES PAYABLEOn June 27, 2011, the Parent Bank issued P8,500 unsecured subordinated notes eligible asLower Tier 2 Capital due on September 27, 2021, callable on 2016 (the Series 4 Notes) bearingan interest rate of 6.50% per annum, pursuant to the authority granted by the BSP to the Bankon April 7, 2011 and BSP Circular No. 280 Series of 2001, as amended, and BSP Circular No.709 Series of 2011. The issuance was approved by the BOD on August 28, 2010.

On October 7, 2011, the Parent Bank issued another P6,500 unsecured subordinated noteseligible as Lower Tier 2 Capital due on January 7, 2022, callable on 2016 (the Series 5 Notes)bearing an interest rate of 6.375% per annum, pursuant to the authority granted by the BSP tothe Bank on April 7, 2011 and BSP Circular No. 280 Series of 2001, as amended, and BSPCircular No. 709 Series of 2011. The issuance was approved by the BOD onAugust 28, 2010.On November 21, 2007, the Parent Bank issued P10,000 unsecured subordinated noteseligible as Lower Tier 2 Capital due on November 21, 2017 bearing an interest of 7.0% perannum, callable with step-up in 2012 (the Series 1 Notes) pursuant to the authority granted bythe BSP to the Parent Bank on October 8, 2007 and BSP Circular No. 280 Series of 2001, asamended. The issuance was approved by the BOD, in its special meeting held onJune 1, 2007.On May 30, 2008, the Parent Bank issued the second tranche of P10,000 unsecuredsubordinated notes eligible as Lower Tier 2 Capital due on May 30, 2018 bearing an interest of8.5% per annum, callable with step-up in 2013 (the Series 2 Notes) pursuant to the authoritygranted by the BSP to the Parent Bank on April 3, 2008 and BSP Circular No. 280 Series of2001, as amended. This issuance was approved by the BOD, in its special meeting held onFebruary 23, 2008.On March 20, 2009, the Parent Bank issued the third tranche of unsecured subordinated debtqualifying as Tier 2 Capital of the Parent Bank with face of P3,000 due March 20, 2019 withcoupon interest of 7.5% per annum callable with step-up in 2014 (the Series 3 Notes). Thisissuance was approved by the BOD on January 31, 2009.The Notes represent direct, unconditional unsecured and subordinated peso-denominatedobligations of the Parent Bank, issued in accordance with the Terms and Conditions underthe Master Note. The Notes, like other subordinated indebtedness of the Parent Bank, aresubordinated to the claims of depositors and ordinary creditors, are not a deposit, and are notguaranteed nor insured by the Parent Bank or any party related to the Parent Bank, such as itssubsidiaries and affiliates, or the PDIC, or any other person. The Notes shall not be used ascollateral for any loan made by the Parent Bank or any of its subsidiaries or affiliates. TheNotes carry interest rates based on prevailing market rates, with a step-up provision if notcalled on the fifth year from issue date. The Parent Bank has the option to call the Notes onthe fifth year, subject to prior notice to Noteholders. The Notes were used further to expandthe Parent Bank’s consumer loan portfolio and to refinance an existing issue of Lower Tier 2debt. The Notes also increased and strengthened the Parent Bank’s capital base, inanticipation of continued growth in the coming years.The outstanding balance of the Notes amounted to P38,255 and P23,152 as ofDecember 31, 2011 and 2010, respectively.Total interest expense on subordinated notes payable included as part of Interest Expenses onbills payable and other liabilities in the statements of income amounted to P2,154, P1,775, andP1,725 in 2011, 2010 and 2009, respectively, both in the BDO Unibank Group and ParentBank statements of income (see Note 21).www.bdo.com.ph 113

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)18. OTHER LIABILITIESOther liabilities consist of the following:BDO Unibank GroupParent BankNote 2011 2010 2011 2010Bills purchased-contra P 10,287 P 9,162 P 10,287 P 9,162Accounts payable 7,436 5,125 5,504 4,481Manager’s checks 6,558 4,609 6,473 4,586Accrued expenses 5,088 4,222 4,790 3,985Derivatives with negativefair values 3,320 4,715 1,877 3,168Outstanding acceptancespayable 1,569 1,214 1,569 1,214Unearned income 9.03 989 1,083 893 976Withholding taxes payable 899 760 859 729Capitalized interest andother charges 602 677 602 677Payment order payable 252 266 252 266Due to principal 230 236 - -Due to BSP and Treasurerof the Philippines 166 357 163 354Others 6,693 8,063 4,025 5,189P 44,089 P 40,489 P 37,294 P 34,787The liability for unredeemed reward points amounting to P1,176 and P800 as ofDecember 31, 2011 and 2010, respectively, presented under Accrued Expenses represents thefair value of points earned which are redeemable significantly for goods or services providedby third parties, which the Parent Bank identified as partners in the rewards program (seeNote 2.20).19. EQUITY19.01 Capital Management and Regulatory CapitalOn January 15, 2009, the BSP issued Circular No. 639 articulating the need for Banks to adoptand document an Internal Capital Adequacy Assessment Process (ICAAP). All universal andcommercial banks are expected to perform a thorough assessment of all their material risksand maintain adequate capital to support these risks. This is intended to complement thecurrent regulatory capital requirement of at least 10% of risk assets, which covered only credit,market and operational risks. On December 29, 2009, BSP issued Circular No. 677 effectivelyextending the implemention of ICAAP from January 2010 to January 2011.In October 2009, the BDO Unibank Group presented its ICAAP and submitted the initialdraft of its ICAAP document to the BSP. Based on comments from the BSP,BDO Unibank Group subsequently revised its ICAAP document and secured approval fromits BOD on January 8, 2011.The ICAAP document articulates the BDO Unibank Group’s capital planning strategy anddiscusses governance, risk assessment, capital assessment and planning, capital adequacymonitoring and reporting, as well as internal control reviews.

The lead regulator of the banking industry, the BSP, sets and monitors capital requirementsfor the BDO Unibank Group. In implementing current capital requirements, the BSPrequires BDO Unibank Group to maintain a prescribed ratio of qualifying capital to riskweightedassets.Under current banking regulations, the combined capital accounts of a bank should not beless than an amount equal to ten percent of its risk assets. The qualifying capital of the BDOUnibank Group for purposes of determining the capital-to-risk assets ratio is total equityexcluding:(a) Unbooked valuation reserves and other capital adjustments as may be required by theBSP;(b) Total outstanding unsecured credit accommodations to directors, officers, stockholdersand related interests (DOSRI);(c) Deferred tax asset or liability;(d) Goodwill;(e) Sinking fund for redemption of redeemable preferred shares; and,(f) Other regulatory deductions.Risk assets consist of total assets after exclusion of cash on hand, due from BSP, loanscovered by hold-out on or assignment of deposits, loans or acceptances under letters of creditto the extent covered by margin deposits, and other non-risk items as determined by the MBof the BSP.The amount of surplus funds available for dividend declaration is determined also on thebasis of regulatory net worth after considering certain adjustments.The BDO Unibank Group’s policy is to maintain a strong capital base to promote investor,creditor and market confidence and to sustain future development of the business. Theimpact of the level of capital on shareholder’s return is also recognized and BDO UnibankGroup recognizes the need to maintain a balance between the higher returns that might bepossible with greater gearing and the advantages and security afforded by a sound capitalposition.The regulatory capital is analyzed into two tiers, which are Tier 1 Capital plus Tier 2 Capitalless deductions from the total of Tier 1 and Tier 2 capital for the following:(a) Investments in equity of unconsolidated subsidiary banks and other financial alliedundertakings, but excluding insurance companies;(b) Investments in debt capital instruments of unconsolidated subsidiary banks;(c) Investments in equity of subsidiary insurance companies and non-financial alliedundertakings;(d) Reciprocal investments in equity of other banks/enterprises; and,(e) Reciprocal investments in unsecured subordinated term debt instruments of otherbanks/quasi-banks qualifying as Hybrid Tier 1, Upper Tier 2 and Lower Tier 2, in excessof the lower of: (i) an aggregate ceiling of 5% of total Tier 1 capital of the bank excludingHybrid Tier 1; or, (ii) 10% of the total outstanding unsecured subordinated term debtissuance of the other bank/quasi-banks.Provided that any asset deducted from the qualifying capital in computing the numerator ofthe risk-based capital ratio shall not be included in the risk-weighted assets in computing thedenominator of the ratio.www.bdo.com.ph 115

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)At the end of each reporting period, BDO Unibank Group has complied with the prescribedratio of qualifying capital to risk-weighted assets.Under an existing BSP circular, expanded commercial banks are required to comply with theminimum capital requirement of P4,950. At the end of each reporting period, the ParentBank has complied with the above capitalization requirement.There have been no material changes in BDO Unibank Group’s management of capitalduring the period.The Bank’s regulatory capital position (computed using balances prepared under FRSP forbanks) as of December 31, 2011 and 2010 follows:BDO Unibank Group Parent Bank2011 2010 2011 2010Tier 1 Capital P 90,978 P 83,474 P 84,619 P 78,201Tier 2 Capital 46,004 28,967 43,929 28,823Total Regulatory Capital 136,982 112,441 128,548 107,024Deductions ( 10,771) ( 10,229 ) ( 25,554) ( 21,957 )Total Qualifying Capital P 126,211 P 102,212 P 102,994 P 85,067Total Risk Weighted Assets P 798,936 P 738,416 P 756,567 P 700,510Capital ratiosTotal regulatory capital expressedas percentage of total riskweighted assets 15.8% 13.8% 13.6% 12.1%Total Tier 1 expressedas percentage of total riskweighted assets 10.2% 10.0% 8.7% 8.6%Tier 1 Capital P 90,978 P 83,474 P 84,619 P 78,201Tier 1 Capital Deductions ( 9,777) ( 9,394) ( 18,931) ( 17,698 )Net Tier 1 Capital P 81,201 P 74,080 P 65,688 P 60,503

19.02 Capital AllocationThe allocation of capital between specific operations and activities is, to a large extent, drivenby optimization of the return achieved on the capital allocated. The amount of capitalallocated to each operation or activity is based primarily upon the regulatory capital, but insome cases the regulatory requirements do not reflect fully the varying degree of riskassociated with different activities. In such cases the capital requirements may be flexed toreflect differing risk profiles subject to the overall level of capital to support a particularoperation or activity not falling below the minimum required for regulatory purposes.The process of allocating capital to specific operations and activities is undertakenindependently of those responsible of the operation and is subject to review by the ALCO.Although maximization of the return on risk-adjusted capital is the principal basis used indetermining how capital is allocated within BDO Unibank Group to particular operations oractivities, it is not the sole basis used for decision making. Account also is taken of synergieswith other operations and activities, the availability of management and other resources andthe fit of the activity with the longer term strategic objectives. The policies in respect ofcapital management and allocation are reviewed regularly by the BOD.19.03 Capital StockCapital stock consists of the following:Number of Shares2011 2010Common shares – P10 par valueAuthorized – 4,500,000,000 sharesIssued, fully paid and outstandingBalance at beginning of year 2,607,437,907 2,339,768,510Issued during the year - 267,669,397Balance at end of year 2,607,437,907 2,607,437,907Preferred shares – P10 par valueAuthorized – 2,000,000,000 sharesIssued, fully paid and outstanding 500,000,000 500,000,000Amount2011 2010Common sharesBalance at beginning of year P 26,074 P 23,397Issued during the year - 2,677Balance at end of year P 26,074 P 26,074Preferred shares – Issued, fully paid and outstanding P 5,000 P 5,000The Parent Bank’s application for listing of its common stock was approved by the PSE onApril 24, 2002. The application is for the initial listing of up to 952,708,650 common shares,with par value of P10 per share, at an offer price range of P17.80 to P23.8 per share. Theproceeds from the sale of the Bank’s listed shares amounted to about P2,200.www.bdo.com.ph 117

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)The history of shares issuances from the initial public offering (IPO) and subsequently,private placements exempt from registration pursuant to Section 10.1 of the SecuritiesRegulation Code, is as follows:Transaction Subscriber Issue DateNumber of SharesIssuedIPO VariousMay 21, 2002 908,189,550Private placement International FinanceCorporation (IFC) June 21, 2005 31,403,592Private placement UOBPFebruary 8, 2006 22,429,906BDO-EPCIB Merger BDO-EPCIB Merger May 31, 2007 1,308,606,021Private placementPrivate placementIFCGE Capital InternationalHoldings Corporation(GE Capital)August 23, 2007August 20, 200931,403,59237,735,849Private placement Multi Realty DevelopmentCorporation April 23, 2010 107,320,482Private placement IFCApril 26, 2010 24,033,253Private placement IFC Capitalization(Equity) Fund, L.P.(IFC Equity Fund) April 26, 2010 136,315,6622,607,437,907As of December 31, 2011, there are 13,517 holders of the listed shares equivalent to 100% ofthe Parent Bank’s total outstanding shares. Such listed shares closed at P59 per share as ofDecember 29, 2011.On March 19, 2010, the Bank’s BOD approved a capital raising program that would allow theBank to raise between US$250 million to US$300 million worth of common shares, with theIFC and the IFC Equity Fund, as anchor investors. Subsequently, on April 26, 2010, the Bankissued 24,033,253 shares to the IFC and 136,315,662 shares to the IFC Capitalization Fund atP41.50 per share for a total subscription price of P997 and P5,657, respectively. Foreigninstitutional investors participated in this capital raising through a top-up offering, resulting inthe issuance of an additional 107,320,482 common shares at the same offer price. The Bankwas able to raise a total of P10,994 from this capital raising exercise.In 2009, the Parent Bank issued to GE Capital 37,735,849 common shares worth P377 in linewith the latter’s strategic investment in the Parent Bank (see Note 26.02).On August 30, 2008, the BOD approved the issuance of up to 500,000,000 perpetual, voting,non-cumulative, convertible, non-participating, peso-denominated Series A preferred sharesqualifying as Tier 1 capital of BDO Unibank Group. The conversion right is at the option ofthe holder after three years from the issue date or at the option of BDO Unibank Group atany time after issue date upon the occurrence of certain trigger events such as: (i) a change intax status of the preferred shares; or, (ii) the preferred shares do not qualify as Tier 1 capital ofBDO Unibank Group as determined by the BSP or other applicable laws and regulations.Dividend rate is at 6.5% per annum of the par value. Subsequently, on September 30, 2008,the Parent Bank issued 500,000,000 preferred shares at P10 per share or a total value ofP5,000.

19.04 Issuance of Global Depositary Receipts by PrimebridgeOn various dates in 2006, Primebridge Holdings, Inc. (Primebridge), a stockholder owning22.1% of the Parent Bank’s total outstanding shares as of December 31, 2005, offered andsold in aggregate 9,399,700 global depositary receipts (GDRs) with each GDR representing 20shares of the Parent Bank’s common stock.The GDRs constitute an offering in the United States only to qualified institutional buyers inreliance on Rule 144A under the US Securities Act of 1993 (the Securities Act) and an offeringoutside the United States in reliance on Regulation under the Securities Act. The offeredprice for each GDR was US$12.70 on January 25, 2006 and February 14, 2006; and US$14.55on May 15, 2006. The GDRs are listed and are being traded at the London Stock Exchange.As part of the offering, Primebridge, while remaining as the registered holder of the BDOUnibank Group shares underlying the GDRs, transferred all rights and interests in the Bank’sshares underlying the GDRs to the depository on behalf of the holders of the GDRs and thelatter are entitled to receive dividends paid on the shares. However, GDR holders have novoting rights or other direct rights of a shareholder with respect to the Parent Bank’s shares.As of December 31, 2006, 4,724,214 GDRs issued, covering shares originally held byPrimebridge, were converted into 94,484,280 shares of the Parent Bank. As ofDecember 31, 2011 and 2010, 9,600 GDRs equivalent to 192,000 shares of the Parent Bankremained unconverted.19.05 Reclassification of Authorized Capital StockOn April 25, 2009 and May 29, 2009, the BOD and stockholders approved the reclassificationin the Parent Bank’s authorized capital stock of 1,000,000,000 unissued common shares into1,000,000,000 Series A preferred shares without affecting the features of unissued shares ofthe Parent Bank, both common and preferred, and without modifying the rights of currentstockholders. On March 8, 2010, the SEC approved the Parent Bank's Amended Articles ofIncorporation to implement the reclassification.19.06 Surplus FreeOn May 27, 2011, the BOD of the Parent Bank approved the declaration of annual cashdividends amounting to P1.00 per common share or a total of P2,607 payable to stockholdersof record as of August 16, 2011. The cash dividends were approved by the BSP onJune 23, 2011 and were paid to the stockholders on August 26, 2011.On January 29, 2011, the BOD of the Parent Bank approved the declaration of annualdividends on peso denominated preferred shares at the rate of 6.5% per annum for a totaldividend of P330. The declaration was approved by BSP on March 3, 2011 and was paid onMarch 15, 2011.On May 28, 2010, the BOD of the Parent Bank approved the declaration of annual cashdividends amounting to P0.80 per common share or a total of P2,085 payable to stockholdersof record as of August 17, 2010. The cash dividends were approved by BSP on July 1, 2010and were paid to the stockholders on August 27, 2010.On January 9, 2010, the BOD approved the declaration of annual cash dividends on pesodenominated preferred shares at the rate of 6.5% per annum amounting to P330. Thedeclaration was approved by BSP on February 19, 2010 and was paid on March 19, 2010.www.bdo.com.ph 119

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)On May 23, 2009, the BOD approved the declaration of cash dividends amounting to P0.28per common share or a total of P645 payable to stockholders of record as ofAugust 11, 2009. The cash dividends were approved by the BSP on July 17, 2009 and werepaid to the stockholders on August 28, 2009.On February 28, 2009, the BOD approved the declaration of annual dividend on pesodenominated and semi-annual dividend on U.S. dollar denominated preferred shares at therate of 6.5% per annum each for a total dividend of P84 for the peso denominated preferredshares and US$1,625 thousand for the U.S. dollar denominated preferred shares. Thedividends were approved by the BSP on July 17, 2009 and were paid to the stockholders onJuly 23, 2009.On December 7, 2011, the BOD of Equimark-NFC Development Corp., a subsidiary ofBDO Unibank Group, approved the declaration of cash dividends at P160.00 per share onthe 750,000 shares outstanding at the date of declaration or for P120. The dividends weredeclared to stockholders on record as of December 29, 2011 and payable onJanuary 2, 2012. Total dividends paid to stockholders not within BDO Unibank Groupamounted to P48.On December 7, 2011, the BOD of BDO Leasing, a subsidiary of BDO Unibank Group,approved the declaration of cash dividends at P0.10 per share on the 2,162,475,312 sharesoutstanding at the date of declaration or for P216. The dividends were declared tostockholders on record as of December 26, 2011 and payable on January 18, 2012, of which,total dividends paid to non-controlling interests amounted to P27.On June 29, 2011, the BOD of BDO Leasing approved the declaration of cash dividends atP0.05 per share on the 2,162,475,312 shares outstanding at the date of declaration or for atotal of P108. The dividends were declared to stockholders on record as of July 14, 2011 andpayable on July 29, 2011. Total dividends paid to non-controlling interests amounted to P13.On December 8, 2010, the BOD of BDO Leasing, a subsidiary of BDO Unibank Group,approved the declaration of cash dividends at P0.10 per share on the 2,162,475,312 sharesoutstanding at the date of declaration or for P216. The dividends were declared tostockholders on record as of December 22, 2010 and payable on January 18, 2011. Totaldividends paid to non-controlling interests amounted to P27.On May 31, 2010, the BOD of BDO Leasing approved the declaration of cash dividends atP0.05 per share on the 2,162,475,312 shares outstanding at the date of declaration or for atotal of P108. The dividends were declared to stockholders on record as of June 30, 2010 andpayable on July 26, 2010. Total dividends paid to non-controlling interests amounted to P13.

20. INTEREST INCOMEInterest income consists of the following:BDO Unibank GroupNotes 2011 2010 2009Loans and other receivables 10 P 37,354 P 35,923 P 33,561Trading and investmentsecurities 9 10,588 10,203 11,345Due from other banks 7, 8 2,049 2,739 2,531Others 476 1,065 1,373P 50,467 P 49,930 P 48,810Parent Bank2011 2010 2009Loans and other receivables 10 P 36,128 P 34,389 P 32,238Trading and investmentsecurities 9 9,848 9,379 10,123Due from other banks 7, 8 1,884 2,646 2,473Others 164 130 177P 48,024 P 46,544 P 45,01121. INTEREST EXPENSEInterest expense is composed of the following:BDO Unibank GroupNotes 2011 2010 2009Deposit liabilities 15 P 13,006 P 12,645 P 14,735Bills payable and otherliabilities 16, 17, 18 3,682 3,127 3,516P 16,688 P 15,772 P 18,251Parent Bank2011 2010 2009Deposit liabilities 15 P 12,659 P 12,224 P 14,034Bills payable and otherliabilities 16, 17, 18 3,380 2,766 3,147P 16,039 P 14,990 P 17,181www.bdo.com.ph 121

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)22. OTHER OPERATING INCOME AND EXPENSESOther operating income is composed of the following:BDO Unibank GroupNotes 2011 2010 2009Service charges, fees andcommissions 24 P 10,528 P 8,930 P 8,351Trading gain - net 9 3,907 5,585 3,340Trust fees 25 1,727 1,474 1,218Foreign exchange gains - net 1,714 261 294Income from assets acquired 12 947 140 512Dividend 13 256 239 71Miscellaneous - net 1,820 1,212 1,697P 20,899 P 17,841 P 15,483Parent BankNotes 2011 2010 2009Service charges, fees andcommissions 24 P 9,063 P 7,952 P 7,155Trading gain - net 9 3,400 5,185 3,041Foreign exchange gains(losses) - net 1,572 31 ( 71)Trust fees 25 1,489 1,273 1,089Income from assets acquired 12 879 118 491Dividend income 13 653 820 1,286Miscellaneous - net 24 920 1,025 1,384P 17,976 P 16,404 P 14,375

BDO Unibank GroupNotes 2011 2010 2009Employee benefits 23 P 14,002 P 13,619 P 12,399Occupancy 31 4,365 4,467 4,334Taxes and licenses 3,662 3,510 3,424Advertising 2,172 2,022 1,278Security, clerical, messengerialand janitorial 1,952 1,894 1,881Insurance 1,694 1,515 1,367Fees and commissions 1,537 1,335 1,110Representation and entertainment 872 859 730Power, light and water 803 740 601Litigation/assets acquired 754 607 557Repairs and maintenance 737 671 638Travelling 602 537 583Information technology 460 621 585Supplies 442 413 351Amortization of intangibles 375 176 136Miscellaneous 13.06 1,887 1,803 2,155P 36,316 P 34,789 P 32,129Parent BankNotes 2011 2010 2009Employee benefit 23 P 13,107 P 12,776 P 11,520Occupancy 31 3,944 3,473 3,081Taxes and licenses 3,399 3,243 3,106Advertising 2,082 1,954 1,209Security, clerical, messengerialand janitorial 1,909 1,845 1,832Insurance 1,647 1,467 1,313Fees and commissions 1,321 1,172 968Power, light and water 766 702 573Representation and entertainment 763 755 666Litigation/assets acquired 729 577 533Repairs and maintenance 721 644 620Travelling 545 492 534Information technology 439 610 570Supplies 414 385 326Amortization of intangibles 371 174 134Miscellaneous 13.06 1,706 1,585 1,826P 33,863 P 31,854 P 28,811www.bdo.com.ph 123

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)23. EMPLOYEE BENEFITS23.01 Employee Benefits ExpenseExpenses recognized for employee benefits are presented below.BDO Unibank Group2011 2010 2009Salaries and wages P 8,154 P 7,415 P 6,977Bonuses 2,734 2,367 2,217Retirement – defined benefit plan 1,319 1,336 1,309Social security costs 357 325 309Other benefits 1,438 2,176 1,587P 14,002 P 13,619 P 12,399Parent Bank2011 2010 2009Salaries and wages P 7,616 P 6,895 P 6,385Bonuses 2,557 2,201 2,079Retirement – defined benefit plan 1,237 1,264 1,239Social security costs 340 307 291Other benefits 1,357 2,109 1,52623.02 Post-employment BenefitsP 13,107 P 12,776 P 11,520The BDO Unibank Group maintains a partially funded, tax-qualified noncontributoryretirement plan that is being administered by the Parent Bank’s trust and investment groupcovering all regular full-time employees. Actuarial valuations are made annually to update thepost-employment benefit costs and the amount of contributions.The amounts of retirement benefit asset recognized as part of Retirement asset under OtherResources (see Note 13) are determined as follows:BDO Unibank GroupParent Bank2011 2010 2011 2010Present value of the obligation (P 12,070 ) (P 10,130 ) (P 11,422) (P 9,658 )Fair value of plan assets 9,044 7,390 8,689 7,106Deficiency of plan assets ( 3,026 ) ( 2,740 ) ( 2,733) ( 2,552 )Unrecognized actuarial losses 4,520 3,821 4,252 3,650Transfer from the plan assets - ( 72 ) - ( 72 )Unrecognized net transition obligation - ( 11 ) - -P 1,494 P 998 P 1,519 P 1,026

The movements in the present value of the retirement benefit obligation recognized in thebooks follows:BDO Unibank GroupParent Bank2011 2010 2011 2010Balance at beginning of year P 10,130 P 8,459 P 9,658 P 7,913Current service and interest costs 1,609 1,490 1,524 1,413Actuarial losses 959 856 838 837Transfer to (from) plan assets 5 ( 141 ) 5 4Benefits paid by the plan ( 633) ( 534 )( 603 ) ( 509 )Balance at end of year P 12,070 P 10,130 P 11,422 P 9,658The movements in the fair value of plan assets are presented below.BDO Unibank GroupParent Bank2011 2010 2011 2010Balance at beginning of year P 7,390 P 4,357 P 7,106 P 4,114Contributions paid into the plan 1,815 2,435 1,730 2,357Benefits paid by the plan ( 633) ( 534 )( 603 ) ( 509 )Actuarial gains 69 857 67 813Transfer to plan assets 5 11 5 77Expected return on plan assets 398 264 384 254Balance at end of year P 9,044 P 7,390 P 8,689 P 7,106As at December 31, the composition (in percentages) of plan assets is presented below.BDO Unibank GroupParent Bank2011 2010 2011 2010Placements in debt instruments 65.4% 55.4% 65.5% 55.1%Deposits in other banks 8.2% 11.8% 8.2% 11.2%Loans and other receivables 8.4% 5.4% 8.4% 5.4%Other properties 18.0% 27.4% 17.9% 28.3%100.0% 100.0% 100.0% 100.0%Actual returns on plan assets were P477 and P451 in 2011 and P1,087 and P1,067 in 2010 inthe BDO Unibank Group and the Parent Bank financial statements, respectively.The amounts of retirement benefits recognized in profit or loss are as follows:BDO Unibank Group2011 2010 2009Current service costs P 774 P 725 P 515Interest costs 835 771 818Expected return on plan assets ( 399) ( 264) ( 259)Net actuarial losses recognized 109 112 111Net transition obligation (asset) recognized - ( 8) 124P 1,319 P 1,336 P 1,309www.bdo.com.ph 125

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Parent Bank2011 2010 2009 2Current service costs111P 7277 P 679 P 480Interest costs 797 734 761Expected return on plan assets ( 384) ( 254) ( 245)Net actuarial gain recognized 97 105 104Net transition obligation recognized - - 139P 1,237 P 1,264 P 1,239The movements in the retirement benefit asset (liability) recognized in the books follows:BDO Unibank Group Parent Bank2011 2010 2011 2010Balance at beginning of year P 998 ( P 97 ) P 1,026 (P 67)Expense recognized ( 1,319 )( 1,336 ) ( 1,237) ( 1,264 )Retirement benefit liability ofacquired subsidiaries - ( 4) - -Contributions paid 1,815 2,435 1,730 2,357Balance at end of year P 1,494 P 998 P 1,519 P 1,026Presented below are the historical information related to the present value of theretirement benefit obligation, fair value of plan assets and deficit in the plan as well asexperienced adjustments arising on plan assets and liabilities.BDO Unibank Group2011 2010 2009 2008Present value of the obligation P 12,070 P 10,130 P 8,459 P 7,086Fair value of the plan assets 9,044 7,390 4,357 3,460Deficit in the plan P 3,026 P 2,740 P 4,102 P 3,626Experience adjustmentsarising on plan liabilities P 417 P 316 P 985 P 967Experience adjustmentsarising on plan assets P 78 P 845 P 148 (P 179 )

Parent Bank2011 2010 2009 2008Present value of the obligation P 11,422 P 9,658 P 7,913 P 6,684Fair value of the plan assets 8,689 7,106 4,114 3,277Deficit in the plan P 2,733 P 2,552 P 3,799 P 3,407Experience adjustmentsarising on plan liabilities P 337 P 351 P 930 P 919Experience adjustmentsarising on plan assets P 67 P 813 P 137 (P 170 )The BDO Unibank Group expect to pay P81 as contributions to retirement benefit plans in2012.In determining the amounts of retirement benefits, the following actuarial assumptions wereused:BDO Unibank Group Parent Bank2011 2010 2011 2010Discount rates 6.33% 8.25% 6.33% 8.3%Expected rate of returnon plan assets 5.0% 5.0% 5.0% 5.0%Expected rate of salary increases 10.0% 10.0% 10.0% 10.0%Assumptions regarding future mortality experience are based on published statistics andmortality tables. The average remaining working lives of an individual retiring at the age of 60is 27.The overall expected long-term rate of return on assets is 5%. The expected long-term rate ofreturn is based on the portfolio as a whole and not on the sum of the returns on individualasset categories. The return is based exclusively on historical returns, without adjustments.www.bdo.com.ph 127

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)24. RELATED PARTY TRANSACTIONSIn the ordinary course of business, BDO Unibank Group has loans, deposits and othertransactions with its related parties and with certain directors, officers, stockholders andrelated interest (DOSRI) as described below.Transactions with and between subsidiaries have been eliminated in the consolidated financialstatements.(a) Loans to Related PartiesUnder existing policies of BDO Unibank Group, these loans are made on substantiallythe same terms as loans granted to other individuals and businesses of comparable risks.The General Banking Act and BSP regulations limit the amount of the loans granted by abank to a single borrower to 25% of equity. The amount of individual loans to DOSRI,of which 70% must be secured, should not exceed the amount of the unencumbereddeposit and book value of the investment in the BDO Unibank Group. In the aggregate,loans to DOSRI generally should not exceed the total equity or 15% of the total loanportfolio of BDO Unibank Group, whichever is lower.The following additional information relates to the DOSRI loans:BDO Unibank Group Parent Bank2011 2010 2011 2010Total DOSRI loans P 42,814 P 35,453 P 42,814 P 35,413Unsecured DOSRI loans 2,601 2,146 2,601 2,126% of DOSRI loans to totalloan portfolio 6.4% 6.6% 6.5% 6.7%% of unsecured DOSRI loans tototal DOSRI loans 6.0% 6.1% 6.1% 6.0%% of past due DOSRI loans tototal DOSRI loans 0.0% 0.0% 0.0% 0.0%% of non-performing DOSRI loansto total DOSRI loans 0.0% 0.0% 0.0% 0.0%DOSRI loans bear interest rates of 0% (Standby Letters of Credits or LCs) to 9.1% in2011 and 0% (Standby LCs) to 11.0% for both 2010 and 2009 for both BDO UnibankGroup and Parent Bank financial statements.(b) Deposits from Related PartiesAs of December 31, 2011 and 2010, total deposits made by the related parties to BDOUnibank Group amounted to P415,744 and P194,625, respectively. The related interestexpense from deposits amounted to P38, P10, and P6 in 2011, 2010 and 2009,respectively.

(c) Other Transactions with Related PartiesA summary of other transactions of the Parent Bank with subsidiaries and associates isshown below.(i) Loans and Advances to SubsidiariesThe Parent Bank grants noninterest-bearing advances to subsidiaries for workingcapital requirements, which are unsecured and without fixed repayment terms.Outstanding advances to subsidiaries recognized as part Advances to subsidiariesunder Other Resources in the Parent Bank statements of financial position amountedto P3,183 as of December 31, 2010 (nil in 2011) (see Note 13). On the other hand,outstanding advances to subsidiaries recognized as part of Accounts receivable underLoans and Other Receivables amounted to P198 and P1,397 as of December 31, 2011and 2010, respectively.The Parent Bank also grants interest-bearing loans to subsidiaries with outstandingbalance of P3,238 and P351 as of December 31, 2011 and 2010, respectively, and arepresented as part of Loans and discounts under Loans and Other Receivables in theParent Bank’s statements of financial position. Interest income recognized on theloans amounted to P115 in 2011, P1 in 2010 and P16 in 2009 and is presented as partof Net Interest Income in the Parent Bank’s statements of income.(ii) Loans and Advances to AssociatesAs of December 31, 2011 and 2010, outstanding loans and advances to associatesamounted to P814 and 421, respectively, in the BDO Unibank Group financialstatements and P44 and P414, respectively, in the Parent Bank financial statements,presented as part of Loans and discount and Accounts receivable under Loans andOther Receivables in the statements of position (see Note 10). The BDO UnibankGroup recognized P41 interest income on the loans in 2011 (nil in 2010 and 2009).(iii) Income to the Parent Banki. BDOSHI engaged the Parent Bank to provide various support such as humanresources management, audit, preparation and issuance of checks for and in behalfof BDOSHI, documentation and safekeeping/custodianship of securities andcollateral documents, accounting functions and review of financial statements forBDOSHI. The service agreement shall continue to be in force unless terminatedby either party through a written notice of either party at least 60 days prior to dateintended for termination. In 2011 and 2010, total service fees both amounted toP692 thousand and is presented as part of Service charges, fees and commissionsunder Other Operating Income in the Parent Bank’s statements of income(seeNote 22). BDOSHI also leases its office space from Parent Bank at P1.6 per year,shown as part of Rental income under Other Operating Income in the ParentBank’s statements of income (see Note 22).ii.Generali has an existing Investment Management Agreement with the BDOUnibank Group. For services rendered, Generali shall pay BDO Unibank Groupmanagement fees equivalent to 0.25% of managed funds and 0.10% of directedinvestments and custodianship which shall be based on the average daily balance ofthe fund type and shall be deducted quarterly from the fund. In 2011 and 2010,total service fees amounted to P24 and P22, respectively.www.bdo.com.ph 129

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)There are no outstanding balances arising from these transactions as ofDecember 31, 2011 and 2010.(iv) Expenses of the Parent Banki. On May 30, 2007, ECN, merged with BDOSHI in 2011 (see Note 26.01), enteredinto a service agreement with the Parent Bank. Under this agreement, ECN agreedto provide marketing, central operations, systems credit and collection support andfinance services to the Parent Bank in connection with the operations of the creditcard business. This agreement is pursuant to the terms and conditions of the MOAwhere ECN agreed to sell its rights, interests and obligations on its receivables andliabilities to the Parent Bank.ii. BDO Technology, merged with BDOSHI in 2011 (see Note 26.01), renderstechnical services and/or management consultation to the Parent Bank andaffiliates at substantially the same terms as transactions with third parties. Thetransactions amounted to P5 each in 2011 and 2010.iii.BDO Unibank Group leases space from related parties for its branch operations.For the years ended December 31, 2011, 2010 and 2009, total rent expense paid torelated parties amounted to P426, P349 and P315, respectively, and is included aspart of Occupancy account (see Note 22).(v) OthersThe Parent Bank has cost sharing agreements with subsidiaries as follows:i. The Parent Bank shall provide BDO Capital with various support servicesconsisting of the following:1) Traditional bank transaction processing functions;2) Preparation and maintenance of BDO Capital's books of accounts;3) Generation of required external regulatory reports and internal managementinformation;4) General and periodic examination of the books of BDO Capital's accounts;5) Advertising and marketing services;6) Information technology support services;7) Recruitment and selection of personnel;8) Preparation of payroll and benefit administration; and,9) Other administrative and general services.ii. On January 31, 2008, BDO Securities entered into a service agreement with theParent Bank. Under this agreement, the Parent Bank shall provide various supportservices such as general accounting, internal audit, human resources management,advertising and marketing services, information technology systems/processing,legal support and administrative and general services.Outstanding balances arising from these transactions as of December 31, 2011 and2010 both amounted to P6.

(vi) The salaries and other compensation given to BDO Unibank Group’s keymanagement are as follows:BDO Unibank Group2011 2010 2009Salaries and wages P 533 P 513 P 504Bonuses 262 255 239Social security costs andother benefits 28 33 34P 823 P 801 P 777Parent Bank2011 2010 2009Salaries and wages P 376 P 349 P 326Bonuses 189 178 165Social security costs andother benefits 20 25 19P 585 P 552 P 51025. TRUST OPERATIONSThe following securities and other properties held by BDO Unibank Group in fiduciary oragency capacity (for a fee) for its customers are not included in the accompanying BDOUnibank Group statements of financial position since these are not properties of BDOUnibank Group (see Note 31.03).BDO Unibank Group Parent Bank2011 2010 2011 2010Investments P 692,480 P 531,025 P 584,740 P 464,093Others 18,931 38,932 17,609 3,552P 711,411 P 569,957 P 602,349 P 467,645In compliance with the requirements of the General Banking Act relative to the Bank's trustfunctions:(a) Investment in government securities (shown as part of Held-to-maturity Investments)with a total face value of P7,043 and P5,887 as of December 31, 2011 and 2010,respectively, in BDO Unibank Group and P5,939 and P4,791 as of December 31, 2011and 2010, respectively, in the Parent Bank are deposited with the BSP as security for theBank's faithful compliance with its fiduciary obligations; and,(b) A certain percentage of the trust income is transferred to surplus reserve. This yearlytransfer is required until the surplus reserve for trust function is equivalent to 20% of theBDO Unibank Group’s authorized capital stock. As of December 31, 2011 and 2010, thereserve for trust functions amounted to P106 and P89, respectively, and is included aspart of Surplus Reserves in BDO Unibank Group equity.www.bdo.com.ph 131

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Income from trust operations, shown as Trust Fees under Other Operating Income,amounted to P1,727, P1,474, and P1,218, for the years ended December 31, 2011, 2010 and2009, respectively, in the BDO Unibank Group statements of income and P1,489, P1,273 andP1,089 for the years ended December 31, 2011, 2010 and 2009, respectively, in the ParentBank statements of income.26. MERGERS AND ACQUISITIONS26.01 Mergers Among SubsidiariesAs discussed in Note 13.01, the Parent Bank approved the five-way merger ofwholly-owned subsidiaries: BDOSHI, ECN, ESHC, BDO Technology, and SPHI, a subsidiaryof ESHC, with BDOSHI as the surviving corporation. The Merger was accounted for usingthe pooling-of-interests method since the merging entities are under the common control ofthe BDO Unibank Group (see Note 13.01.02).26.02 Acquisition of GE Money BankIn May 2009, the Parent Bank and GE Capital, a financial services unit of the General ElectricCompany, announced the signing of a definitive agreement to transfer GEMB in thePhilippines into the Parent Bank. As part of the agreement, GE Capital will also make aninvestment in the Parent Bank by acquiring a stake of approximately 1.5%. The transactionconsolidated GEMB’s business into the Parent Bank, including 30,000 customers, 350employees, a network of 31 branch licenses and 38 ATMs nationwide. On August 24, 2009,the Parent Bank completed the purchase of 98.81% of the issued and outstanding commonstock and 100% of the preferred stock of GEMB for a consideration of P2,000.The agreed price for the net assets of GEMB at the closing date amounted to P1,500. Hence,the Parent Bank recognized goodwill of P500 representing the excess of purchase price overthe fair value of GEMB’s net assets. The goodwill is included in the Other Resources accountin the statement of financial position. The acquisition was approved by the BOD and by theBSP on May 27, 2009 and July 30, 2009, respectively. On August 12, 2010, GEMB amendedits Articles of Incorporation and adopted the name BDO Elite Savings Bank, Inc.

27. TAXES27.01 Current and Deferred TaxesThe components of tax expense for the years ended December 31 follow:BDO Unibank Group2011 2010 2009Reported in profit or lossCurrent tax expense:Regular corporate income tax (RCIT) at 30% P 337 P 203 P 231Minimum corporate income tax (MCIT) at 2% 417 384 297Final taxes at 20%, 15%, 10% and 7.5% 759 965 9801,513 1,552 1,508Deferred tax expense relating toorigination and reversalof temporary differences 117 79 151P 1,630 P 1,631 P 1,659Reported in other comprehensive incomeMovements in fair value of AFS securities P 2 P 29 P 2Movements in revaluation increment ( 20) ( 6) ( 59)(P 18) P 23 ( P 57)Parent Bank2011 2010 2009Reported in profit or lossCurrent tax expense – MCIT at 2% P 369 P 359 P 273Current tax expense – RCIT at 30% 57 - -Final taxes at 20%, 15%, 10% and 7.5% 652 879 9031,078 1,238 1,176Deferred tax expense relating toorigination and reversal oftemporary differences 121 59 87P 1,199 P 1,297 P 1,263Reported in other comprehensive incomeMovements in revaluation increment (P 20 )( P 6) (P 54)Movements in fair value of AFS securities - - ( 26)( P 20) (P 6) ( 80)www.bdo.com.ph 133

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)The reconciliation of the tax on pretax profit computed at the statutory tax rates to tax expenseis shown below.BDO Unibank Group2011 2010 2009Tax on pretax profit at 30% P 3,665 P 3,154 P 2,328Adjustment for income subjected to lowerincome tax rates ( 191)( 444) ( 633)Tax effects of:Income exempt from tax ( 3,253) ( 3,037) ( 1,010)Non-deductible expenses 2,208 2,439 585Deductible temporary differences not recognized ( 1,043) 489 51Net operating loss carryover (NOLCO)not recognized ( 114)( 1,374) 14Tax-exempt income of FCDU - - ( 1,314)Others 358 404 1,638Tax expense reported in profit or loss P 1,630 P 1,631 P 1,659Parent Bank2011 2010 2009Tax on pretax profit at 30% P 3,046 P 2,919 P 2,286Adjustment for income subjected to lowerincome tax rates ( 133) ( 404) ( 531)Tax effects of:Deductible temporary differences not recognized ( 995) 477 1,439Income exempt from tax ( 2,966)( 2,960) ( 1,015)Non-deductible expenses 1,993 2,266 542NOLCO not recognized (applied) ( 115) ( 1,360) ( 458)Tax-exempt income of FCDU - - ( 1,314)Others 369 359 314Tax expense reported in profit or loss P 1,199 P 1,297 P 1,263The components of the net deferred tax assets (see Note 13) as of December 31 follow:Statements of Financial PositionBDO Unibank GroupParent Bank2011 2010 2011 2010Deferred tax assets:Allowance for impairment P 6,024 P 6,012 P 5,916 P 5,916Unamortized past service cost 577 564 576 560Lease income differential 82 74 82 74NOLCO 43 9 - -Others 13 36 - -6,739 6,695 6,574 6,550Deferred tax liabilities:Revaluation increment 480 499 477 497Lease income differential 189 180 - -Changes in fair values of AFS 63 62 - -Capitalized interest 56 58 56 58Others 466 312 455 3081,254 1,111 988 863Net Deferred Tax Assets P 5,485 P 5,584 P 5,586 P 5,687

Movements in net deferred tax assets for the year ended December 31 follows:BDO Unibank GroupStatements of Income2011 2010 2009Lease income differential P 1 P 31 P 169Allowance for impairment ( 12)( 24) 34Capitalized interest ( 2)( 2) ( 2)Unamortized past service costs ( 13)( 240) 56NOLCO ( 34) - 50Others 177 314 ( 156)Deferred Tax Expense P 117 P 79 P 151Parent BankUnamortized past service costs (P 16)(P 241) P 56Allowance for impairment - 1 22Capitalized interest ( 2)( 2) ( 2)NOLCO - - 11Others 139 301 -Deferred Tax Expense P 121 P 59 P 87Statements of Comprehensive IncomeBDO Unibank GroupParent Bank2011 2010 2011 2010Movements in fair valueof AFS securities P 2 P 29 P - P -Movements in revaluationincrement ( 20) ( 6)( 20)( 6)Deferred Tax Expense (Income) (P 18) P 23 (P 20)(P 6)BDO Unibank Group is subject to MCIT, which is computed at 2% of gross income, asdefined under tax regulations or RCIT, whichever is higher.The breakdown of NOLCO with the corresponding validity periods follows:BDO UnibankYear Group Parent Bank Valid Until2011 P 301 P - 20142010 6 - 20132009 39 - 2012In 2011 and 2010, NOLCO amounting to P383 and P4,534, respectively, were applied by theParent Bank.www.bdo.com.ph 135

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)The breakdown of MCIT with the corresponding validity periods follow:BDO UnibankYear Group Parent Bank Valid Until2011 P 369 P 369 20142010 367 359 20132009 283 273 2012P 1,019 P 1,001The amounts of unrecognized deferred tax assets arising from NOLCO and other temporarydifferences as of December 31, 2011 and 2010 are as follows:BDO Unibank Group2011 2010Tax Base Tax Effect Tax Base Tax EffectAllowance for impairment P 25,160 P 7,548 P 26,033 P 7,810NOLCO 203 61 1,793 538MCIT 1,019 1,019 713 713Others 3,782 1,134 677 203P 30,164 P 9,762 P 29,216 P 9,264Parent Bank2011 2010Tax Base Tax Effect Tax Base Tax EffectAllowance for impairment P 23,153 P 6,946 P 24,373 P 7,312NOLCO - - 1,711 513MCIT 1,001 1,001 710 710Others 3,781 1,134 599 18027.02 Optional Standard DeductionsP 27,935 P 9,081 P 27,393 P 8,715Effective July 2008, RA No. 9504 was approved giving corporate tax payers an option toclaim itemized deduction or optional standard deduction (OSD) equivalent to 40% of grosssales. Once the option is made at the beginning of the taxable year, it shall be irrevocable forthe taxable year for which the option was made. BDO Unibank Group claims itemizeddeduction for tax purposes.27.03 Change in Applicable Tax RateEffective January 1, 2009, in accordance with RA No. 9337, RCIT rate was reduced from 35%to 30% and non-allowable deductions for interest expense from 42% to 33% of interestincome subjected to final tax.

27.04 Gross Receipts Tax (GRT)/ Value-added Tax (VAT)Beginning January 1, 2003, the imposition of VAT on banks and financial institutions becameeffective pursuant to the provisions of RA No. 9010. The Parent Bank and BDO Privatebecame subject to VAT based on their gross receipts, in lieu of the GRT under Sections 121and 122 of the Tax Code which was imposed on banks, non-bank financial intermediaries andfinance companies in prior years.However, on January 29, 2004, RA No. 9238 reverted the imposition of GRT on banks andfinancial institutions.On May 24, 2005, the amendments on RA No. 9337 was approved amending, among others,the gross GRT on royalties, rentals of property, real or personal, profits from exchange and onnet trading gains within the taxable year on foreign currency, debt securities, derivatives andother similar financial instruments from 5% to 7% effective November 1, 2005.27.05 Documentary Stamp Tax (DST)Documentary stamp taxes (at varying rates) are imposed on the following:(a) Bank checks, drafts, or certificate of deposit not bearing interest, and other instruments;(b) Bonds, loan agreements, promissory notes, bills of exchange, drafts, instruments andsecurities issued by the Government or any of its instrumentalities, deposit substitute debtinstruments, certificates of deposits bearing interest and other not payable on sight ordemand;(c) Acceptance of bills of exchange and letters of credit; and,(d) Bills of lading or receipt.On February 7, 2004, RA No. 9243 was passed amending the rates of DST, the significantprovisions of which are summarized below.(a) On every issue of debt instruments, there shall be collected a DST of one peso on eachtwo hundred pesos or fractional part thereof of the issue price of any such debtinstrument. Provided, that for such debt instruments with terms of less than one year, theDST to be collected shall be of a proportional amount in accordance with the ratio of itsterm in number of days to 365 days. Provided further that only one DST shall beimposed on either loan agreement or promissory notes to secure such loan.(b) On all sales or transfer of shares or certificates of stock in any corporation, there shall becollected a DST of 75 centavos on each two hundred pesos, or fractional part thereof, ofthe par value of such stock.(c) On all bills of exchange or drafts, there shall be collected a DST of 30 centavos on eachtwo hundred pesos, or fractional part thereof, of the face value of any such bill ofexchange or draft.www.bdo.com.ph 137

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)(d) The following instruments, documents and papers shall be exempt from DST:Borrowings and lending of securities executed under the Securities Borrowing andLending Program of a registered exchange, or in accordance with regulationsprescribed by the appropriate regulatory authority;Loan agreements or promissory notes, the aggregate of which does not exceed P250thousand or any such amount as may be determined by the Secretary of Finance,executed by an individual for his purchase on installment for his personal use;Sale, barter or exchange of shares of stock listed and traded through the local stockexchange for a period of five years from the affectivity of RA No. 9243;Fixed income and other securities traded in the secondary market or through anexchange;Derivatives including repurchase agreements and reverse repurchase agreements;Bank deposit accounts without a fixed term or maturity; and,Interbank call loans with maturity of not more than seven days to cover deficiency inreserve against deposit liabilities.27.06 Supplementary Information Required by the Bureau of Internal RevenueOn December 9, 2011, the Bureau of Internal Revenue (BIR) issued RR 19-2011 whichprescribes the new form that will be used for income tax filing covering and starting withperiods ending December 31, 2011 and onwards. This recent RR requires schedules oftaxable revenues and other non-operating income, costs of sales and services, and itemizeddeductions, to be disclosed in the notes to financial statements.On November 25, 2010, the BIR issued RR No. 15-2010, which requires certain informationon taxes, duties and license fees paid or accrued during the taxable year to be disclosed as partof the notes to financial statements.The Parent Bank, however, presented this tax information required by the BIR as asupplementary schedule filed separately from the basic financial statements.

28. EARNINGS PER SHAREBasic earnings per share were computed as follows:BDO Unibank Group2011 2010 2009Net profit attributable to shareholdersof the Parent Bank P 10,531 P 8,825 P 6,035Dividends on preferred shares ( 330)( 330)( 84)Net profit available to common shares 10,201 8,495 5,951Divided by the weighted average numberof outstanding common shares (in millions) 2,607 2,522 2,315Basic earnings per share P 3.91 P 3.37 P 2.57Diluted earnings per share were computed as follows:BDO Unibank Group2011 2010 2009Net profit attributable to shareholdersof the Parent Bank P 10,201* P 8,495* P 6,035Divided by the weighted average numberof outstanding common shares (in millions):Outstanding common shares 2,607 2,522 2,315Potential common shares from assumedconversion of preferred shares * * 128Potential common shares from assumedconversion of stock option plan - - 1Total weighted average numberof common shares after assumedconversion of convertible preferred shares 2,607 2,522 2,444Diluted earnings per share P 3.91 P 3.37 P 2.47* Net profit attributable to shareholders of the Parent Bank is reduced by dividends on preferred shares as these werenot assumed to be converted. Potential common shares from assumed conversion of these preferred shares are antidilutivein 2011 and 2010.www.bdo.com.ph 139

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Basic earnings per share were computed as follows:Parent Bank2011 2010 2009Net profit P 8,954 P 8,433 P 6,356Dividends on preferred shares ( 330) ( 330)( 84)Net profit available to common shares 8,624 8,103 6,272Divided by the weighted average numberof outstanding common shares (in millions) 2,607 2,522 2,315Basic earnings per share P 3.31 P 3.21 P 2.71Diluted earnings per share were computed as follows:Parent Bank2011 2010 2009Net profit P 8,624* P 8,103* P 6,356Divided by the weighted average numberof outstanding common shares (in millions):Outstanding common shares 2,607 2,522 2,315Potential common shares from assumedconversion of convertible preferred shares * * 128Potential common shares from assumedconversion of stock option plan - - 1Total weighted average number ofcommon shares after assumed conversionof convertible preferred shares 2,607 2,522 2,444Diluted earnings per share P 3.31 P 3.21 P 2.60* Net profit attributable to shareholders of the Parent Bank is reduced by dividends on preferred shares asthese were not assumed to be converted. Potential common shares from assumed conversion of these preferredshares are anti-dilutive in 2011 and 2010.

29. SELECTED FINANCIAL PERFORMANCE INDICATORS(a) The following are some measures of the BDO Unibank Group and Parent Bank’sfinancial performance:BDO Unibank GroupReturn on average equity:2011 2010 2009Net profit 11.4% 11.3% 9.7%Average total capital accountsReturn on average resources:Net profit 1.0% 1.0% 0.7%Average total resourcesNet interest margin:Net interest income 3.5% 4.1% 4.1%Average interest earning resourcesReturn on common equity:*Net profit 11.7% 11.7% 10.4%Average common equityCapital to risk assets ratio*Combined credit, market andoperational risks 15.8% 13.8% 12.2%*Computed using balances prepared under FRSP for banksParent BankReturn on average equity:Net profit 10.4% 11.6% 11.0%Average total capital accountsReturn on average resources:Net profit 0.9% 1.0% 0.8%Average total resourcesNet interest margin:Net interest income 3.5% 4.0% 4.0%Average interest earning resourceswww.bdo.com.ph 141

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Parent BankReturn on common equity:2011 2010 2009Net profit 10.6% 12.0% 11.9%Average common equityCapital to risk assets ratio*:Combined credit, market andoperational risk 13.6% 12.1% 10.4%*Computed using balances prepared under FRSP for banks(b) Secured liabilities and resources pledged as security are shown below.BDO Unibank Group Parent Bank2011 2010 2011 2010Aggregate amountof secured liabilities P 14,939 P 23,997 P 14,939 P 23,997Aggregate amount of resourcespledged as security P 17,336 P 26,988 P 17,336 P 26,98830. EVENTS AFTER THE REPORTING PERIODOn February 16, 2012, BDO Unibank Group issued Senior Notes with a face value ofUS$300 million at a price of 99.448 or a total price of US$298 million. The Senior Notes,which will mature in February 16, 2017, bear a coupon rate of 4.5% per annum, witheffective yield of 4.625% per annum, and will be payable semi-annually every February 16and August 16 starting on August 16, 2012. The net proceeds from the issuance of SeniorNotes are intended for general funding and re-lending purposes.On January 28, 2012, the Parent Bank's BOD approved the declaration of annual cashdividends on peso denominated preferred shares at the rate of 6.5% per annum for a totaldividend of P330 which was approved by BSP on February 20, 2012.31. COMMITMENTS AND CONTINGENCIES31.01 LitigationsBDO Unibank Group has pending claims and/or is a defendant in various legal actionsarising from the ordinary course of business operations. As of December 31, 2011,management believes that no such legal proceedings are expected to have material adverseeffect on the BDO Unibank Group’s financial position. The Parent Bank is a respondent intwo arbitration proceedings under the International Chamber of Commerce (ICC) arisingfrom isolated transactions, i.e., the sale of its equity investments.

Sale of BankardBDO (as successor in interest of EPCIB), as respondent, and RCBC Capital Corporation(“RCBC Capital”), as claimant, were involved in international arbitration proceedings.The arbitration proceedings arose from the Sale and Purchase Agreement (“SPA”) executedbetween RCBC Capital and EPCIB in May 2000, whereby EPCIB sold to RCBC Capital its67% stake in the outstanding capital stock of Bankard, Inc. (“Bankard”). RCBC Capitalclaims an alleged breach of the BDO’s warranty on Bankard’s financial statements and askedfor rescission of its purchase and restitution of all amounts paid to EPCIB with damages or, ifrescission cannot be granted, damages of at least P586. EPCIB was of the position thatRCBC Capital’s claim is one for overpayment or price reduction that is time-barred since theSPA requires that demand for price reduction be presented in writing on or before December31, 2000. Despite actual due diligence, no such demand had been submitted.With one of the three arbitrators dissenting, the Arbitral Tribunal issued two partial awards(dated September 27, 2007 and May 28, 2008) and a Final Award dated June 16, 2010awarding to RCBC P349 and reimbursement of arbitration costs.In December 2010, the Court of Appeals (CA) reversed and set aside the confirmation of theSecond Partial Award, which ordered BDO to reimburse the costs advanced by RCBC anddeemed BDO’s counterclaim waived due to alleged non-payment of costs. RCBC Capital hasappealed this reversal to the Supreme Court where the matter remains pending.On July 1, 2010, BDO filed a petition to vacate the Final Award in accordance with law andthe rules of court applicable to arbitration. The Final Award was vacated or set aside by theRegional Trial Court of Makati (RTC Makati) in February 2011. RCBC Capital has appealedthis to the Court of Appeals where the case remains pending.RCBC Capital sought to confirm the same Final Award in a separate proceeding in RTCMakati on July 28, 2010. Despite questions on jurisdiction, RTC Makati (Branch 148)confirmed the final award last November 10, 2010. It also denied BDO’s motion forreconsideration in August 2011 and added interest charges not awarded by the ArbitrationTribunal. Execution pending appeal was also swiftly awarded and implemented lastSeptember 2011 in highly questionable and irregular procedure. BDO appealed theconfirmation and questioned the execution of the Final Award before the CA. In order tostop the implementation of the said writ of execution, BDO opted to tender onSeptember 13, 2011 the amount of P638, presented as part of Accounts receivable underLoans and Other Receivables (see Note 10), without prejudice to the outcome of the pendingappeals and cases.Management believes that RCBC Capital’s claim is baseless and without merit and that BDO’sposition will be sustained in the final resolution of the cases pending with the CA. In anycase, the resulting liability, if any, from such a claim, will not have a material adverse effect onthe financial position and performance of the BDO Unibank Group.www.bdo.com.ph 143

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)Sale of MaxicareBDO Unibank is a defendant/respondent in legal proceedings arising from the sale of its 60%stake in Maxicare in 2007. In January 2008, claimants filed a petition in the RTC Makati forthe issuance of a writ of preliminary Injunction and that “with respect to respondents Pin-AnHoldings Corporation and Antonio L. Go, in the remote event that a Deed ofAssignment/Sale has been executed, to declare such Deed null and void and to direct saidrespondents to deliver the aforementioned stock certificates representing the 120,000 sharesin Maxicare to Petitioners [Claimants].”The RTC Makati denied the TRO and writ of replevin on the ground that the Claimants haveno clear and unmistakable right over the shares, as there was no perfected contract of salebetween the Bank and the claimants. In April 2008, the RTC Makati also ruled that theBank’s sale of the shares to Pin-An Holdings is valid and its order declaring the validity of thesale of Maxicare shares has become final under said Interim Rules. The claimants did notappeal the dismissal. Their petition for certiorari with the CA was also dismissed and the CAheld that there was no grave abuse of discretion in the issuance of the RTC Makati ruling.The claimants filed their petition for review with the Supreme Court in July 2010. LastDecember 7, 2011, claimants withdrew this petition.After an unfavourable decision had been rendered against them in April 2008, the Claimantsfiled a Request for Arbitration with the ICC – International Court of Arbitration in Singaporein May 2008 on the same issue of the petitioners’ right to buy the shares. As of November 25,2009, the Singapore arbitration hearing has been suspended by virtue of a writ of injunctionissued by the RTC Makati restraining the parties, and their respective representatives fromparticipating and performing any act in connection with the arbitration case. The injunctionhas been issued in connection with the petition filed by Maxicare for a declaration as to therightful shareholder of its 60% outstanding shares. Claimants have questioned the issuance ofthe writ of preliminary injunction in the CA where their case remains pending.Last December 2011, a Second Request for Arbitration was filed by claimants against BDO,Maxicare, Pin An Go Holdings and several other individual respondents before the ICCinvolving the same sale of 120,000 shares. Claimants sought to nullify a series of purportedtransfers of shares in Maxicare Healthcare Corporation (“Maxicare”) that were made between2007 and 2009 by BDO and other Original Stockholders to Pin-An Holdings Corporation(“Pin-An”) which are null and void because they contravene provisions of the StockholdersAgreement dated 13 February 1998 (“SA”). Claimants also argued that in November 2011,Maxicare directors approved illegitimate amendments to Maxicare’s Articles of Incorporationand By-laws so as to indirectly circumvent Claimants’ rights under the stockholders’agreement.BDO has written the ICC raising its objections on jurisdiction, forum shopping and theexistence of a Philippine ruling on the validity of the sale of shares. The RTC also recentlyissued an order extending the injunction to the second request for arbitration. To date theICC has not yet directed the constitution of an arbitral tribunal.Management continues to believe that the above claim is baseless and without merit or thatthe resulting liability, if any, from such a claim, will not have a material adverse effect on theBDO Unibank Group’s financial position and financial performance.

PEACe BondsOn October 18, 2001, the Bureau of Treasury (BTr), through an auction, offeredten-year zero coupon treasury bonds, called the Poverty Eradication and AlleviationCertificates Bonds (PEACe Bonds), to Government Securities Eligible Dealers.Rizal Commercial Banking Corporation (RCBC) won the bid in the same year and wasawarded approximately P35,000 worth of government bonds. The PEACe Bonds weresubsequently purchased by investors, including the BDO Unibank, who relied in good faithon representations that the same are not subject to 20% Final Withholding Tax (20% FWT).On July 16, 2004, the Commissioner of Internal Revenue ruled that the mere issuance ofgovernment debt instruments and securities is deemed as falling within the coverage ofdeposit substitute irrespective of the number of lenders at the time of origination.Accordingly, government debt instruments and securities are not exempt from taxes.On October 7, 2011, or nearly ten years after the auction, the Commissioner of InternalRevenue, upon the request of the Secretary of Finance, issued a ruling stating that the PEACeBonds are not exempt from the 20% FWT.October 16, 2011, Eight Banks that purchased the PEACe Bonds filed a case in the SupremeCourt to enjoin the BTr and BIR from withholding or collecting the 20% final withholdingtax, upon payment at maturity, as well as from enforcing the 2011 ruling.On October 17, 2011, the BIR issued a second ruling stating that the 20% FWT should beimposed upon all subsequent holders of the PEACe Bonds.On October 18, 2011, the Supreme Court unanimously resolved, and issued a TemporaryRestraining Order (TRO) which enjoined the government from implementing 2011 rulingsthat the Peace Bonds were subject to 20% final withholding tax. The Supreme Courtinstructed that the disputed amount should be placed in escrow by the petitioning banks.On October 27, 2011, RCBC and RCBC Capital, as the original purchasers of the PEACeBonds filed a Motion for Leave of Court to Intervene, which was granted by the SupremeCourt on November 15, 2011On November 15, 2011, the Supreme Court required the Government to show cause whythey failed to comply with the October 18, 2011 TRO and, required them to comply with saidTRO within 10 days from notice, which would cause the return of the funds to the petitioningbanks, for the latter to place in escrow.The Government has requested additional time within which to file their Comment on thePetitions-in-intervention.Management believes that the petitioning banks have a strong case, and that the probability ofrecovery is high.www.bdo.com.ph 145

NOTES TOFINANCIAL STATEMENTSDECEMBER 31, 2011, 2010 AND 2009(Amounts in Millions of Philippine Pesos, Except Per Share Data or As Indicated)OthersThe BDO Unibank Group is also a defendant in various cases pending in courts for allegedclaims against the BDO Unibank Group, the outcomes of which are not fully determinable atpresent. As of December 31, 2011, management believes that, liabilities or losses, if any,arising from these claims would not have a material effect on the financial position and resultsof operations of BDO Unibank Group and will be recognized if and when a final resolutionby the courts is made on each claim.31.02 LeasesBDO Unibank Group leases the premises of its head office and most of its branch offices forperiods ranging from one to 15 years from the date of the contracts; terms are renewableupon the mutual agreement of the parties. Rent expense, reported as part of Occupancyunder Other Operating Expenses account in the statements of income, amounted to P1,889in 2011, P1,759 in 2010, and P1,651 in 2009 in the BDO Unibank Group financial statementsand P1,812 in 2011, P1,659 in 2010, and P1,531 in 2009 in the Parent Bank financialstatements (see Note 22).The estimated minimum future annual rentals for the next five years follow:31.03 OthersBDOYear Unibank Group Parent Bank2012 P 1,475 P 1,4122013 1,675 1,6062014 1,900 1,8282015 2,158 2,0842016 2,456 2,379P 9,664 P 9,309In the normal course of BDO Unibank Group’s operations, there are various outstandingcommitments and contingent liabilities such as guarantees, commitments to extend credit,etc., which are not reflected in the BDO Unibank Group financial statements. BDO UnibankGroup recognizes in its books any losses and liabilities incurred in the course of its operationsas soon as these become determinable and quantifiable. Management believes that, as ofDecember 31, 2011 and 2010, no additional material losses or liabilities are required to berecognized in the accompanying financial statements of BDO Unibank Group as a result ofthe above commitments and contingencies.

Following is a summary of BDO Unibank Group’s commitments and contingent accounts:BDO Unibank Group Parent BankNote 2011 2010 2011 2010Trust department accounts 25 P 711,411 P 569,957 P 602,349 P 467,645Forward exchange sold 188,610 162,503 162,359 134,715Forward exchange bought 151,892 143,723 125,642 115,927Committed credit lines 111,469 89,694 110,148 89,618Unused commercialletters of credit 33,391 30,991 33,391 30,991Republic of the Philippines warrants 15,021 15,021 15,021 15,021Interest rate swap receivable 8,832 25,971 8,044 5,481Interest rate swap payable 8,582 25,923 8,044 5,481Bills for collection 6,029 5,523 6,029 5,523Spot exchange sold 4,457 4,162 4,418 4,123Spot exchange bought 7,828 3,617 7,828 3,617Late deposits/paymentsreceived 2,208 1, 538 2,208 1,538Credit default swap 2,195 1,708 2,195 889Outstanding guaranteesissued 1,220 862 1,220 862Export letters of creditconfirmed 97 130 97 130Financial options sold - 1,320 - 1,320Other contingent accounts 5,775 5,123 5,773 5,123--- o ---www.bdo.com.ph 147

COMPANY HEADQUARTERSBDO Unibank, Inc.BDO Corporate Center7899 Makati Avenue, Makati City 0726, PhilippinesSTOCKHOLDER INQUIRIESBDO Unibank, Inc.’s common stock is listed and tradedin the Philippine Stock Exchange under the symbol “BDO”.Inquiries regarding dividend payments, account status, addresschanges, stock certificates, and other pertinent matters shouldbe addressed to the company’s transfer agent:Stock Transfer Service, Inc.34th Floor, Unit D, Rufino Pacific Tower6784 Ayala Ave., Makati City, 1200 PhilippinesTel. (+632) 403-2410 to 12 Fax (+632) 403-2414INVESTOR INQUIRIESBDO Unibank, Inc. welcomes inquiries from analysts,investors and the financial community.Please visit www.bdo.com.ph or contactBDO Investor Relations & Corporate Planning4th Floor, South Tower, BDO Corporate Center7899 Makati Avenue, Makati City 0726, PhilippinesTel. (+632) 840-7000 local 6069 or 4809Email: irandcorplan@bdo.com.ph