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The
Pursuit of value
Each year organizations confront a host of external variables that litter the playing field with a basket of threats and
opportunities. In 2005,the global landscape experienced the effects of high oil prices and rising interest rates while on the domestic front a resiliently strong peso; continued expansion in gross domestic product (GDP) albeit at a slower
pace; easing inflation; low interest rates and fiscal consolidation set the
tone. Once again, political noise made its presence felt but was relegated to the background by the business community.
Value creation under these conditions ultimately depends upon the execution of a clearly de fined strategy and a sustainable business
model. While the external environment does provide interim opportunities with significant upside for those quick enough to
respond, the challenge is to navigate a course to sustained profitability.
In 2004, the maiden year of our detailed business plan called First Priorities, we set out on a five-pronged approach to improve
performance: focus on customers and markets; innovation
and speed to market; results-oriented quality and productivity; stakeholder
value enhancement; and finally teamwork. This
year, our second year under the plan, a review of the validity of our assumptions and our progress confirmed the soundness of our initial directions underscored by the Bank ’s exceptional performance over the last two years.
Financial Performance Summary
We are proud to report that in 2005, we achieved a level of profitability previously unequalled over the past 54 years of Security Bank. We repeated a second year of above average growth in our earnings, boosting net income after tax beyond the one billion peso mark to
P1.16 billion, an outstanding 50% improvement over the
P768.1 million achieved last year.
Revenues increased over last year by P1.2 billion or 25.7% to
P6.0 billion, outpacing industry’s 15% growth. Net interest income registered
P4.0 billion, a 16.1% improvement over the prior year’s
P3.5 billion. Growth in non-interest income was likewise exceptional as it increased 52% to
P1.9 billion versus the P1.2 billion the year earlier.
The vigorous earnings growth armed the Bank with the opportunity to moderately grow our operating expense base and yet continue the favorable improvement in the bank’s cost to income ratio from the 57% reflected in 2004 to 49% in 2005. The increased expenses were directed to investments for the future such as training, software and the upgrading of our distribution channels such as automated teller machines (ATMs). All told, net of some PAS-related adjustments such as impairment of Real & Other Properties Acquired (ROPA) and branch premises, operating expenses increased to
P2.93 billion, an increase of only 8.9% over the previous year.
The combination of exemplary revenue accretion and investment spending fueled pre-provision operating profits (PPOP) to
P2.7 billion, up by P1.62 billion over the previous year. Consequently, PPOP return on equity dramatically rose to 31.2% from the 11.7% achieved in 2004, a clear indication of the sustainable value and future performance prospects of Security Bank’s core business.
Strides made in building the deposit business outpaced industry’s 6% annual gain in deposit levels to close the year at
P66.2 billion from the P54.9 billion the previous year. Meanwhile, the industry-wide lackluster demand from acceptable credits combined with a self-imposed adherence to related risk management parameters, channeled the deposit growth to investment securities which grew a phenomenal 38% to
P48.1 billion from the P34.9 billion in 2004. The astute and timely positioning in securities resulted in a significant increase in unrealized gains of
P2.1 billion as reflected in Security Bank’s capital account. Overall asset growth also exceeded industry’s 6.6% annual increase to surpass the P- 100 billion mark, closing the year up 19% versus 2004 at P- 105 billion.
The forward-looking disciplined approach we have taken towards the resolution of our non-performing assets leaves the Bank distinctively well positioned to aggressively continue organic growth yet flexible enough to seize opportunities that arise from the industry’s current consolidation trend. From a peak post Asian Crisis non-performing loans (NPL) ratio of 10.6%, we have dramatically reduced this down to 5.25% at the end of 2005 a further improvement over last year’s 6.7%. Allowance for probable losses for these assets has tremendously improved to an NPL cover of 142% from the prior year’s 65%. The Bank’s non-performing assets (NPA) have likewise been reduced to 11.2% from the 13.4% level one year ago. NPA cover meanwhile has increased to 80% from last year’s 44%, a noteworthy accomplishment considering that in the year 2000 the NPA ratio was 16.8% with a corresponding cover of only 27%. Consequently, we expect a reduction in impairment provisioning moving forward and any incremental earnings should therefore filter more freely to our shareholders.
In addition, our asset quality certainly eased Security Bank’s transition towards improved financial transparency by fully adopting the newly prescribed rules for Philippine Accounting Standards (PAS) in line with corporate governance best practices. More importantly, we are delighted to disclose that this resulted in a very manageable impact to our earnings and capital base. In fact, post PAS, Security Bank’s capital adequacy ratio stood at 14.4% and its positive free capital base further improved 80% to
P7.9 billion from the 2004 level of P4.4 billion.
The Building Blocks of Value: Our Products and Services
Ultimately, our results would not be possible without the patronage of our customers. Bearing this in mind, we purposely designed into our core processes a product development discipline with the marching orders to provide a suite of innovative products and services expressly tailored to answer our customers’ distinctive financial needs. These were promptly mated with operating processes that, while structured to emphasize productivity and broad- based distribution, remained flexible enough to impart a personalized customer service experience.
In the financial services industry, beyond the service experience, product features tend to become diffused making differentiation an elusive goal. Our Corporate Relationship Group (CRG) has been exerting exceptional efforts to incorporate relevant customer focused differentiation. Security
Digibanker, the first completely internet-based real-time corporate cash management system in the
country, continued to push the envelope. Already a successful product
suite, it has opened the door to new corporate relationships garnering significant patronage for its various product modules and at present manages an estimated one-fourth of the corporate tax payments in the
country. In 2005,we continued to expand its capabilities by introducing the Importer Payments Summary System (I-Pass) that enables the online processing of customs duties and taxes and provides our clients with an online real-time facility to access detailed historical data of payments facilitating customs duties compliance audits.
Foreign exchange transaction services is another challenging area for relevant differentiation. Yet, our performance for the year reveals that we are making in-roads with our customers. Our treasury marketing unit, working in tandem with the corporate relationship and branch managers, grew Security Bank’s commercial foreign exchange significantly over the previous year. Transaction volume increased 38% while fees earned improved by 71%. For our efforts, we received international recognition. In Asiamoney’s September 2005 FX Polls, Security Bank was recognized among the top five
“Best Domestic Providers of FX Services.” In the same poll Security Bank consistently ranked number 1 in the poll’s various categories:
“Best for Innovative FX Products and Structured
Ideas”; “Best Single Electronic Trading
Platform.” We garnered second place in the categories:
“Best for Competitive and Prompt Spot and Forward
Pricing.” Finally, our efforts at seamlessly bundling service and product expertise also received top recognition in several service criteria, namely:
“Best Post-Trade Services Including Back-Office” and
“Best Customer Service.”
We have made headway in building our fixed income distribution
capability, a crucial support leg in our investment banking
business. Aware of the increased customer sophistication and demand for a variety of investment products beyond traditional
deposits, we organized our Fixed Income Securities Division (FISD)
catering to a mix of institutional and retail accounts. The
introduction of a number of packaged fixed income securities solutions such as our Secure Bonds Combo provided the needed edge to rapidly build the
business. These creative efforts have also received external
recognition. Asiamoney in its August 2005 Structured Products Poll cited Security Bank as the
“Best Domestic Provider for Local Currency Products.” At
present, we have increased total FISD transaction volumes by 61%and related income more than doubled over the previous
year. Once again our accomplishments received external recognition as Security Bank was cited by the Philippine Dealing Exchange Corporation
(PDEX) as the Best Securities Trading Participant for 2005.
Apart from the FISD activity, we have likewise launched peso and dollar unit investment trust
funds. Volumes for these products
have increased 24%over the previous year while related fee based revenues for the Trust Department increased 15%.
We sustained our efforts at building our consumer business in 2005,supported by a combination of product and service
introductions. Enhancing our customers ’ service experience and improving convenience factors is a never-ending
process. We rolled out the specialized retail banking center concept initiated in our Alabang branch to eleven other locations across the metropolis and to select provincial cities. More introductions are planned in the
future. We are constantly seeking to leverage performance through a variety of cost effective distribution
channels. In carrying out these objectives, we strive to keep customer convenience in mind when deciding on key service
attributes. Our recent introduction of a new set of automated teller machine
(ATMs) that permits CARDLESS bills payment transactions 24 X
7, the first local bank to do so, significantly increases customer
convenience. This feature caters to customers who would rather delegate bills payments to executive assistants or other employees without the fear normally associated with the need to provide their ATM card and confidential account information.
The Consumer Banking Group (CBG) has likewise introduced a number of deposit
products. We launched Secure Dollar Optima, a high yielding investment product cited in the 2005 Asian Banking
Awards, as the Most Outstanding Product in the Fund Sourcing Category.
We also introduced CheckOne an interest bearing checking account with several convenience and security
features. With the intention of enhancing customer satisfaction for payroll account clients, we introduced the Cashlink
Plus, a MasterCard Electronic Prepaid Credit Card that enables access to Security Bank ’s ATM
network, Bancnet and the entire MasterCard network of point of sale
machines. We also continue to focus on building our credit card business which holds a great deal of promise. In
fact, SBCards, our credit card subsidiary which manages our Diners Club credit card franchise was recognized as the
Best Corporate Credit Card for 2005 by Diners Club International. This follows its being recognized on its 25th year of existence in the country as the
Best Franchise in Asia Pacific for 2004.
Bright Prospects for 2006
Security Bank ’s performance for 2005 is most certainly
phenomenal. We have exceeded our performance plans for the past two years and this sets the stage for even better performance in 2006,Security Bank ’s 55th year of corporate
existence. This will also mark the last leg of our initial three-year plan and usher in the plans for the next three years covering 2007 to 2009.We are con fident of propelling the Bank towards even greater standards of performance in the year ahead. We have imbibed into our corporate ethos a discipline for customer focused and relevant product or service introductions. Our responsible and pragmatic approach to non-performing assets resolution or disposal has positioned the Bank as among a limited and highly distinct group of industry participants with an inherently strong balance sheet and positive free capital. This inherently sound and above average asset quality versus
industry, provides Security Bank with the flexibility to continue its upward trend in organic growth yet leave it in the unique position of having the freedom or luxury to pursue possible opportunities that may arise out of the current industry consolidation
trend. We usher in 2006 with an increased fervor riding high on the momentum of the past
year, we look forward to the challenges that lay ahead. We
are certainly off to a good start as our business performance for the first few months of the current year point towards another very promising year ahead for Security Bank and its stakeholders.
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