Having marked our 50th anniversary the year before, Security Bank began its next half-century of operations with a strong and vibrant financial performance, registering earnings growth for the third consecutive year. This was achieved in a difficult environment where business confidence and growth remained weak due to negative economic and political factors within and outside the country.

In the year 2002, even with prudent and selective lending, we successfully grew our loan portfolio while strengthening customer relationships with new and innovative credit and cash management products. We took significant trading gains, particularly on our investments in securities, as we continued to expand the bank’s low-cost funding base. We tightened controls and reduced operating expenses significantly, having embedded the principles of continuous improvement into our corporate culture. As a result, we ended the year with net profits of P508 million after substantial provisioning, a 20% improvement over last year. At the same time, we maintained our non-performing loan ratio well below the industry average.

Given the consistency in our financial performance, the Bank was able to pay our shareholders a cash dividend of P0.10 per share in July 2002, the first since we were publicly listed in 1995. As performance improved through 2002, another cash dividend payment of P0.10 per share was declared on October 2002 and paid out in January 2003.

These results are an affirmation of the soundness of initiatives taken over the past several years to strengthen the organization by investing in top talent and the right technology, while managing risks, relationships, and productivity. But we need to do more. In 2003, we shall focus on customer service excellence. Our aim is to deliver to our customers best-in-class products and services with unequalled service quality. At the heart of this undertaking is the recognition that every customer encounter is an opportunity to attract, retain, or deepen a customer relationship and that every delighted customer adds to the strength of our franchise and sustained growth in our earnings.

Good corporate governance remains a cornerstone of our organizational foundation; whether we are looking inward to ensure high standards of ethical conduct, or reaching out to the communities we operate in. All members of the board of the bank and its subsidiaries completed a program on corporate governance; in addition, your Chairman and President attended a Bangko Sentral ng Pilipinas program which focused on their specific roles in good governance. Subsequently, management issued a manual of corporate governance which emphasizes the principles of compliance, fairness, accountability, and transparency.

We also wish to update you on the changes in our Board of Directors. Please join me in welcoming new members of the Board: Mr. Efren P. Aranzamendez, Atty. Jose Perpetuo M. Lotilla, and Mr. Alberto S. Villarosa. Mr. Villarosa joins Security Bank as Chief Operating Officer. His experience and impressive track record in financial services positions him to lead your Bank’s deep bench of talented professionals to greater levels of achievement.

In closing, I would like to acknowledge, with great appreciation, the efforts of all Security Bankers during this difficult period. With their loyalty and dedication, your Bank shall continue to provide superior and lasting value to our customers, shareholders, and communities in both the best and worst of times.

FREDERICK Y. DY
Chairman

As is often the case in the business world, history tends to repeat itself. The year 2002 saw Security Bank improving on its operating and financial performance for the third straight year against an economic backdrop once again laden with daunting challenges. With growth in our lending and investments portfolio funded by expansion in our deposit base, total assets approached P69 billion. The Bank’s net income surpassed the half a billion level at P508 million, a robust 20% growth from the 2001 earnings level, increasing capital funds to P9.53 billion and bringing our capital adequacy ratio to 13.65%. The hike in our net income also translated to a return on average equity of 5.43%, an improvement of 64 basis points from the 2001 level.

Our success in growing the Bank’s business in 2002 was mainly the result of focus on deepening customer relationships with value-added product offerings, forging strategic alliances to broaden our scope of financial services and customer reach, operating efficiency improvements, efforts to better manage risks, and continuing investment in executive talent.

Across all customer segments and business lines, focus was applied to deepening business relationships. This was accomplished largely through value-added product offerings and service enhancements.

Completing its first full year of operation, Security DigiBanker, our highly successful internet-based corporate cash management system, matured into a key product offering for customers in the large corporate, multinational, and conglomerate class. Notwithstanding this, a number of enhancements were introduced to keep DigiBanker in step with the leaders in corporate cash management, allowing corporate users to collect company receivables and settle payables through electronic account transfers and selectively approve individual manager’s check issuances. Perhaps the most well-received of all the new DigiBanker features was eFPS RealTime, an electronic tax payments facility that allows large corporate taxpayers to settle their tax payments over the Internet via secure and direct electronic funds transfers to the Bureau of Internal Revenue. Despite a belated launch vis-à-vis other participating private banks, eFPS RealTime quickly became the choice of many large corporations because of its user-friendliness and superior design, averaging a billion pesos monthly in tax payments in only its first two months of operation and growing at a rapid clip since then.

A variety of new products catering to the Bank’s consumer and retail customers also came to the fore in 2002. Security SSSNet, an electronic banking application utilizing Bancnet’s Payment Gateway and allowing transmission of employers’ monthly contributions directly to the Social Security System, garnered 53 corporate customers and close to 20,000 individual remitters by the end of the year. For individual depositors, Bancnet Online was also introduced, allowing them the convenience of real-time banking via the Internet and effectively extending banking hours well beyond the conventional range. Security International Card Corporation, our credit card company, successfully soft-launched Security MasterCard in October, rounding out its product range with a card for the general market in addition to the more exclusively positioned Diners Card. Security MasterCard offers the best value in payment requirement terms with the lowest minimum payment amount for revolving credit.

As product development evolves further into a key management discipline at Security Bank, its primary functions of meeting key customer needs and delivering services more effectively will be continually emphasized in line with our drive towards enduring customer service excellence.
 

Forging Strategic Alliances

While there are many sound reasons to engage a strategic business partner, including expanded business and learning opportunities, foremost among these is the potential to better serve a broader spectrum of customers with a wider range of products than we could have operating on our own. This propels our efforts to align ourselves with world-class companies that share the same purpose.

One such vital associate is BMW Philippines Corporation, with whom Security Bank formalized an exclusive auto-financing partnership in 2002 to make existing and soon to be introduced BMW models available to Philippine buyers under innovative financing schemes. BMW brings into the partnership its knowledge of the Philippine car market, control of the BMW distribution network and dealer relationships, and global experience in automotive financing, while Security Bank complements this with streamlined credit operations and experience in the domestic consumer credit market and local risk management.

Completing the implementation of our consumer banking strategy of covering the four quadrants representing the key banking needs of our retail customers – cash management, investment, credit, and protection – brought us into a strategic distribution alliance with The Philippine American Life and General Insurance Company (Philamlife) for insurance and related products. Brought to life in a joint venture company, Security Philam Financial Solutions Insurance Agency Inc., which also serves as its marketing arm, the alliance capitalizes on each partner’s area of relative competence and expertise. These include Philamlife’s skills in innovation and sales of a diverse range of life insurance and related products, as well as Security Bank’s extensive distribution network.

Collectively, our conscious efforts to branch out into new products and markets and align ourselves with strategic partners have opened up new business opportunities and alternative sources of income for the bank. Perhaps more importantly, and in keeping with our customer focus initiative, they have also augmented our ability to serve more customers in better ways than ever before.

 

Operating Efficiency Initiatives

We sustained our investments in technology in 2002 with the end in mind of improving work processes and, ultimately, delivering better quality service to our customers. Our core banking system, Equation, was successfully upgraded to the latest version, and our new Retail Lending system, which effectively automates a multitude of calculations and reports came on-line, resulting in more efficient transaction processing.

Efforts to manage the Bank’s cost base necessitated a review of the profitability of distribution channels, products, and market segments. After carefully evaluating geographic business potential, relocation and renovation options, and possible changes in management, we decided to close six branches and consolidate four others with existing branches nearby. This careful rationalization of a more traditional yet unquestionably vital distribution resource resulted in significant savings in our variable costs without sacrificing our effective customer reach.

Existing products and services were likewise evaluated in terms of profitability and customer patronage, and the pricing structures of those that we decided to retain were carefully reviewed in order to ensure competitiveness in the industry and adequate coverage of related costs.

The Continuous Improvement Program (CIP), a bank-wide undertaking initiated in 2001 that encourages employees to suggest and develop work improvement projects focusing on internal processes, was once again a key contributor to expense reduction in 2002. Having already generated P22 million pesos in annual savings from 25 projects in its first year, additional CIP projects implemented in 2002 generated additional yearly cost savings of 19 million pesos.
 

Risk Management

The Bank’s risk management infrastructure has come a long way but remains a work in progress in order to retain its effectivity in good times and bad. Our Credit Policy Manual has been in place since the year 2000, but revisions are frequently incorporated to ensure that our policies are current and reflect the constantly changing spectrum and nature of risks we deal with in the course of doing business. In 2002 these updates centered on policies and action programs for identified alert accounts, credit diversification policy guidelines, and the management of remedial accounts. Risk adjusted pricing is now likewise being implemented by lending units, and an annual portfolio review is underway enlisting senior relationship managers for the cross review function. With the new Retail Lending System in place, Credit Risk Management Modules and Collateral Recording modules of Equation are now also under review.

The Market and Risk Management Committee (MRMC) has been active in evaluating and approving policy guidelines. Among the updates to policies and guidelines approved for the year were the process for approval of portfolio investments and investment terms and maturities. Actions taken by the MRMC are now discussed at meetings of the Board of Directors in order to update the Board on current market risk issues.

Our Treasury Group successfully implemented the swap front-end deal capture module of the OPICS system, which automates and greatly improves the capabilities of both our front and back office for deal capture, credit risk and position management, revaluation confirmation, settlement processing, and multi-currency accounting. This initiative also further supports the Bank’s application for an expanded derivatives license.

In the area of operations risk management, a review and formal documentation of operating manuals was conducted to ensure the presence of proper and sufficient controls, as well as inclusion of risk assessment as part of standard operating procedure.

 

Manpower Development

Having greatly improved the overall level of professional competence with investments in top talent over the past several years, this year more focus was applied to ensuring leadership continuity within the Bank going forward. To this end we rolled out the Competency Assessment and Succession Planning Program, which aims to identify the required competencies for key positions and determine the potential of incumbents to assume the corresponding responsibilities after first addressing any competency gaps via rigorous training.

Our Branch Heads underwent training on the Sales Leadership Process with emphasis on the effective development of their strategic business development plans. Executive development from within was a thrust of the Basic Supervisory Development Program and the Branch Manager Development Program, while training for risk appreciation and use of the Management Profitability Report as a performance management tool were offered to expand further our employees’ working knowledge of vital core concepts. Finally, in keeping with the thrust of improving computer literacy, computer-based training was made available not only to IT personnel, but to all interested Security Bankers.
 

Financial Results

At the end of 2002, Security Bank’s assets totaled P68.8 billion. Our loan portfolio grew 7% from the 2001 level to P37.3 billion on a gross basis, largely accounted for by commercial loans stemming from our active participation in loan syndication and origination of new borrowing names among multinational and large local corporations. The Bank’s portfolio of investment securities was in turn up slightly to P11.8 billion from the previous year’s level of P10.3 billion. On the liabilities side, deposits reached the P45 billion level on successful efforts to build up our low cost funding base in order to reduce funding costs.

The 91-day Treasury Bill rate averaged 5.43% in 2002, representing a decline of 443 basis points from the 2001 average of 9.86%. With interest rates at historic low levels, interest income on earning assets dropped in absolute terms despite volume growth and a deliberate reduction in our demand and savings account rates towards the middle of the year. The net interest differential income of the Bank therefore eased to P2.3 billion from the level of P2.6 billion earned in 2001.

The declining interest rates however also provided the Bank an opportunity to realize substantial trading gains on its inventory of higher yielding securities. In addition, increased transaction volumes, participation in various loan and investment deals, a reduction in income waivers, and the re-pricing of services to be at parity with competition resulted in an increase in service charges, fees and commissions. Other income therefore grew to P1.5 billion from P1.2 billion in 2001, and as a result, combined revenue from interest differential business and fee-based & other income sources was maintained at the 2001 level of P3.8 billion, as income from other sources compensated for the slack in net interest margins.

We continue to maintain superior risk asset quality with our non-performing loan (NPL) ratio at 12.9%, still significantly below the estimated industry average NPL ratio of 18%, even as we set aside P829 million in provisions for probable losses. Our sustained level of provisioning brought the balance of allowance for probable losses to P2.3 billion at the end of the year, and paired with successful efforts at accelerating our collection of non-performing loans, resulted in an NPL cover of 47%.

Operating expenses amounted to P2.3 billion, down 2.9% from 2001 levels, with the aggregate impact of rationalization of branches and savings realized from controllable expenses.

All told, income on a pre-provision and pre-tax basis registered a year-on-year increase to P1.5 billion, an improvement of P92.3 million, while net income for the year amounted to P508 million, representing a 19% improvement from the 2001 level. This translates to a return on average equity of 5.4%, or an improvement of 13% from the 4.8% return earned in 2001.

Sustaining Profitable Growth

Before concluding, we extend our heartfelt appreciation to the corps of dedicated Security Bankers who have been working hard to attain the aggressive business targets that they have been challenged with. We are likewise as always grateful for the confidence and loyalty of our customers, and for the leadership and guidance of our Board of Directors, particularly during these trying times wherein obstacles to consistently realizing our business objectives abound.

Despite the challenge of maintaining consistent performance in periods of uncertainty, we remain confident of replicating, if not exceeding, our past successes. Our confidence stems in part from the professional talent that we have acquired as well as developed over the years, the constant sharpening of the competitive edge we have attained by continued investment in and appropriate use of information technology, and our new strategic alliances with world-class partners, among others.

While these newfound capabilities can collectively seem quite formidable, it is how we leverage further on them and channel them towards creating the finest experience in banking and financial services in the country for our customers that will truly secure our place in the future. Refocusing the entire Security Bank organization on the customer in order to achieve this is not just a possibility in which we believe, but also a goal to which we are committed. And it is precisely from this commitment that our confidence in attaining consistent, sustainable, and meaningful improvement in our performance over time truly originates.

Go to top^