Our stock price peaked at P19.25 in the 4th quarter, from P9.90 during the 1st quarter of the year. Closing share price at year-end 2003 of P17.25 per share versus the year-end 2002 price of P10.50 per share translates to a significant 64% improvement year on year. Security Bank’s market capitalization improved to P5.7 billion from P3.4 billion at the beginning of 2003. With our strong earnings, we were able to increase our cash dividend to P0.30 per share from the P0.20 per share declared in 2002.

Once again, our successes in the past year have raised our bar of achievement. However, great organizations are always works in progress. We will continually strive to surpass our previous accomplishments as we continue to adhere to principles of good corporate governance.

With the objective of achieving a leadership position in profitability and favorable returns to our stakeholders, your Board approved a strategic plan covering the years 2004 to 2006. This blue print for the Bank’s progressive initiatives, called F.I.R.S.T. Priorities, has your Board’s full support and commitment.

Our Bank remains in the hands of able and seasoned leadership with the smooth transition from Mr. Rafael F. Simpao Jr., who retired as President and Chief Executive Officer, to Mr. Alberto S. Villarosa, who assumed the post in January 2004. We are thankful to Mr. Simpao who leaves the bank with a legacy of superior balance sheet and asset quality. The Board has placed their complete trust and confidence in Mr. Villarosa’s ability to steer Security Bank to a higher level of competitive performance.

I would like to acknowledge the Board of Directors’ unwavering support of our efforts towards making Security Bank a preferred bank in the industry. Our gratitude goes to the customers and shareholders for their loyalty and continued patronage of the Bank. For delivering outstanding results and their tenacity throughout difficult times, a well-deserved accolade goes to our officers and staff.

We have the plan, and the Board is committed to support this strategic roadmap with the required resources. With your support, we will effectively execute this plan to realize the ultimate goal of giving superior and enduring value to our employees, customers, shareholders and the communities that we serve.

 
A business organization by nature has to operate within the bounds of a larger group, be it the industry it is a part of, or the total market environment where it operates, or more significantly the international community where it strives for global competitiveness. And as always, the influence of the economic environment on the success of any organization is to be expected.

In year 2003, Security Bank was not exempt from this experience. While the economy showed a relatively robust GDP growth of 4.5%, fueled by strong consumer spending, a stable agricultural output and continued strength in OFW remittances, several factors posed challenges. There was the US-Iraq war, the SARS epidemic, political jitters and a failed military mutiny. Interest rates remained low, averaging 5.895% for the 91-day T-Bill, further compressing net interest margins.

Nonetheless, we managed to achieve considerable growth. It is truly a feat that against a seemingly difficult economic and political setting, the year saw commendable accomplishments for Security Bank.

The investments made in building and strengthening the infrastructure to gear Security Bank for sustainable growth in the future began to bear fruit.

We achieved an impressive increase in assets at P73.5 billion from last year’s P68.7 billion, funded by an 11% growth in deposits that reached close to P50 billion. Contributing to the asset build up was the 71% growth in the portfolio of investment securities totaling P20.2 billion from P11.8 billion of last year. Despite the anemic market loan demand, we maintained our loan volumes at P37 billion. The deposit-driven growth in the balance sheet, coupled with prudent and efficient asset deployment, more than compensated for the compression in spreads arising from the low interest rate environment. Our capital funds reached the P10-billion mark, translating to a Capital Adequacy Ratio (CAR) of 16.3% from 13.6% last year. Our CAR will further be strengthened with the issuance of the P3 billion in Tier 2 subordinated notes in January 2004. We are especially pleased that our Tier 2 issue was given a solid "BB -" rating by the international rating agency Fitch Ratings, reflecting the outstanding financial position of Security Bank.

Security Bank’s net income grew 26% to P630.5 million from last year’s P502.1 million. Income improvement therefore translated into a stronger Return on Equity of 6.4% from 5.4% last year and an Earnings per Share of P1.91 from P1.52 in 2002.

Our Bank achieved a strong revenue growth of P4.0 billion, up from last year’s P3.8 billion. We registered a strong net margin performance and sustained earnings from trading and securities gains. We generated significant cross-sell opportunities as we embarked on building customer base and relationships in all of our business lines.
  

Growing and Strengthening the Consumer Business

We launched the consumer business with Joven Hernandez joining the team as Senior Vice President for the Consumer Banking Group. The consumer banking proposition now aims to aggressively grow and strengthen its business franchise through a customer focused differentiation strategy.

We re-aligned the organization, separating the sales and marketing function from that of service and support at the branch level to achieve a more focused delivery of products and services to our customers. The initial success of this initiative is evident in the significant growth in our deposit base, which stood at P49.6 billion, up from last year’s P44.9 billion. We were likewise successful in growing the lower cost deposits, one of the key objectives in this effort.

We won the Bancnet award for best promotions in the Electronic Payment Channels category, ranking second in the most number of financial transactions. We also concluded the development and the successful pilot launch of a powerful product called Checkright, which is a cash management system targeted for small and medium enterprises.

 

Focusing on Total Relationship Management

In the area of Corporate Relationship Banking, with our focus on total relationship management, we successfully participated in major fund raising activities for large corporations, as well as in deepening existing customer relationships by increasing the number of accounts connected to Digibanker, our Internet-based corporate cash management system. In line with these efforts, our electronic corporate tax payment facility, eFPS RealTime, continued to aggressively build up market share, with throughput hitting twelve times the level we attained in 2002. Volume of payments for Check Payments Manager, our corporate payments outsourcing solution, also increased more than three-fold from the previous year.
 

Expanding the Ancillary Business Lines

SB Cards Corporation, formerly known as Security International Card Corporation, formally launched the Security Bank Mastercard to add to our Diners Club credit card. Since its launch, we have achieved a combined growth in cardholder base of 17%. The increase in cardholder base and the improved quality of customer service were all achieved as a result of systems upgrades and process improvements.

Security-Philam Financial Solutions, our joint venture company with Philamlife, started operations in June and launched its distribution of insurance products in Metro Manila. The net annual premium generated during the year was an indication of promising future sales opportunities.

We are equally proud of our Treasury Group as the volume of trading and investment increased more than 70% from the level in 2002, likewise increasing our total income from trading activities for the year and bringing it close to a billion pesos in earnings.

Also on the investment front, SB Equities, our fully owned brokerage house, ranked 8th among the 134 brokerage houses, and ranked second among bank-owned brokerage houses for year 2003 in terms of value turnover.

 

Managing Risks, Controlling Costs, Empowering People

Sustained profitability resulted from our success in maintaining superior margins and pushing other income businesses. A healthy asset balance was also ensured through proper management of risk assets. Our cost base was well managed as we continuously improved our processes to ensure highly efficient operations.

Significant among our major accomplishments was the progress made in our risk management efforts. A reduction to P4.2 billion in non-performing loans from a level of 4.8 billion in the previous year was achieved through aggressive collection efforts, translating to an NPL ratio of 7.6%. This ratio, far superior to the industry average of 14%, was an improvement over last year’s ratio of 9.7%. Despite the reduction in the absolute levels of non-performing loans, we continued to build up our provisions for loan losses, setting aside P929 million during the year compared to P829 million in 2002. As a result, our NPL cover is at a comfortable 56% from the cover of only 40% in 2002.

We further enhanced our credit policies, utilizing as inputs the lessons learned from our thorough analysis of loan delinquencies. We also developed and implemented a loss provisioning framework for bank-wide risk assets to gain a realistic estimate of the provisioning required. Likewise, we finalized the credit policy manual for the credit card business, which provides a comprehensive framework that would govern the credit processing, credit approval, collection and control for the Diners Club Card and the Security Bank MasterCard.

Our operating expenses continued to decline to P2.26 billion from last year’s P2.30 billion through continued improvement and reengineering of processes. Coupled with an increase in revenues, we now enjoy an improved cost-to-income ratio of 56% versus last year’s 61%.

All these achievements were made possible by our bank’s corps of competent and committed officers and staff, and will be carried forward to new heights with the implementation of Security Bank’s master plan for the years 2004 through 2006.

Capitalizing on Key Strengths for Accelerated Growth

Moving forward, we remain confident of further growth as we capitalize on key strengths that were built over the years. Our professional and highly capable management, healthy balance sheet, efficient operations, strong capitalization, and rising profitability are all contributory to achieving a higher growth trajectory in the future. These underlying strengths make us very confident in achieving the end result of a five-point growth strategy that we crafted during the year.

The strategies for growth are embodied in a three-year plan that we call F.I.R.S.T. Priorities, our roadmap to becoming one of the top performing banks. F.I.R.S.T stands for:

 Focus on Customers
 Innovation and Speed to Market
 Results Oriented Quality and Productivity
 Stakeholder Value Enhancement
 Teamwork

We want to become a bank of value and superior profitability before becoming a bank of size. The five-point growth strategy embodied in the three-year business development plan is both an institutionalization of past efforts and the start of a continuing process that will give the best to our stakeholders and make us a bank of greater value.

Security Bank will aggressively build its consumer banking business. We see significant potential in consumer-oriented businesses such as lending, insurance referrals, remittance, and the development of new products customized to the needs of the target market. Strategic alliances will be pursued on a sustained basis to better serve a broader spectrum of customers.

Our Corporate Relationship Group will continue to expand product offerings in its drive to build total banking relationships. More emphasis will be on fee-based transaction banking for the bank’s large corporate and middle market accounts.

Included in the five-point strategy is the optimization of service delivery channels, building up investor distribution and placement capabilities, and institutionalizing product and business development.

We will continue to support these business initiatives with programs and strategies in the areas of management information systems and processes and communications and marketing. We will continue to make aggressive but appropriate investments in information technology and people development.

The final and perhaps the most vital aspect of our 3-year plan is Teamwork. We will institutionalize this behavior by realigning performance management. Teamwork will be a shared value and most cherished behavior in our organization.

Our performance in 2003 and the prior years indicate that we are standing on a solid foundation with business growth on the upswing. But much remains to be done. With a well-crafted strategic plan and a team of committed professionals, we are confident that we can raise the performance bar further in the years to come, and still consistently surpass it.

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