A RISK ASSESSMENT ON THE PHILIPPINE BANKING SECTOR

By

Maria Bernadette R. Cotas

Kristine Beatrice S. Cruz

A Practicum Report submitted to the School of Industrial Engineering and Engineering

Management in partial fulfillment of the requirements for the Degree

Bachelor of Science in Industrial Engineering

Mapua Institute of Technology

May 2013
 ABSTRACT

This study presents an assessment of the sub-factors, of the 8 core risks of the banking
industry, identified from a previous study. The Bangko Sentral ng Pilipinas (BSP) generally
recognizes eight (8) core risks that the Philippine banks encounter and these are: credit risk,
market risk, operational risk, liquidity risk, interest rate risk, compliance risk, reputation risk, and
strategic risk.

For preliminary data, the researchers surveyed risk management experts from each bank
using a questionnaire containing the financial impact, probability of occurrence and importance
of each risk factor. The results of the survey were analyzed using One-way ANOVA analysis and
Chi-square tests. The outcome of the ANOVA and Chi-square tests showed that banks from the
two categories give equal importance to each risk factor; and the financial impact and probability
of occurrence of each risk factor have no significant difference between the Universal and
Commercial banks in the Philippines. Financial impact and probability of occurrence survey
results were used in plotting the risk sub-factors on the risk assessment matrix. As a result, Price,
Foreign Exchange, IR Gap, Funding (Cash Flow), Asset Liquidity, External Fraud, and
Profitability were the risk sub-factors that needed to be addressed.

An analysis of the industry in general was made using PESTEL and Porter‘s Five Forces
Model. These tools enabled the researchers to understand the environment in which the banks
operate. It was a key to thoroughly understand the external operating environment in which they
operate and the internal culture of Universal and Commercial Banks. These external factors
provide positioning for the banking industry in terms of the countries‘ condition. The strengths
and weaknesses of the company provide room for opportunities and threats in the banks‘
business. These analyses were used in identifying the constraints and opportunities in the banks‘
operating environment and were used as guide in providing mitigation for the risk factors
identified and assessed as needed to be addressed. Also, peer comparison approach was used as a
first step in providing the risk mitigation. BDO and PVB were used as basis for Big and Medium
Banks, respectively, as case study for the risk mitigation. Risk Management Best Practices from
BDO and PVB were also presented for benchmarking purposes.
 ACKNOWLEDGEMENTS

We would like to take this opportunity to express our profound gratitude to the

following for aiding us in this undergraduate research study for without them, none of this would

have been possible:

• God for through Him all things are possible;

• Mr. Rene D. Estember, our adviser, for his exemplary guidance, monitoring and

constant encouragement throughout the course of this undergraduate research study;

• Our course instructor and panel of advisers, for their guidance and efforts in

helping us completing our tasks through various stages;

• Mr. Ananias S. Cornelio III, CRO of China Bank, for giving generously his

knowledge to help us understand more the banking industry as a whole. His teachings and

guidance shall carry us a long way in the journey of life on which we are about to embark;

• Bangko Sentral ng Pilipinas (BSP) for providing us with the core risks factors,

inflation reports, and financial data, etc. and the representatives of the banks included in the

study who gave their time in accommodating us for an interview and gave us an essential data

through answering our survey;

• Our family and friends, the COTAS and CRUZ family for the support, guidance,

and endless understanding they have given us throughout this entire endeavor; and last but not

the least

• Our co IE-EMG students, for always having our back. We made it and so will

you!
 TABLE OF CONTENTS

List of Tables

List of Figures

I. Chapter 1: Introduction

Background of the Study 1

Research Gap/ Problem Statement 4

Objectives of the Study 21

Scope and Limitations of the Study 22

Significance of the Study 23

II. Review of Related Literature

Bank Performance in the Philippines 24

Effects of Foreign Banks to the Local Banking Industry 26

Problems/ Issues Encountered by the Philippines‘ Banking Industry 27

PEST/ PESTEL Analysis in Banks 29

PORTER‘S Five Forces Analysis in Banks 31

Solutions and Practices in order to Overcome Banking Industry Struggles 33

Risk Management in Banks 35

Risk Assessment in Banking 37

Synthesis 39

III. Methodology

Conceptual Framework 41
 PESTEL Analysis – Political Factors 50

PESTEL Analysis – Economic Factors 54

PESTEL Analysis – Social Factors 68

PESTEL Analysis – Technological Factors 74

PESTEL Analysis – Environmental Factors 75

PESTEL Analysis – Legal Factors 78

Porter‘s Five Forces Analysis 80 - 83

Economic Analysis Summary 84

Risk Assessment: Financial Impact 87

Risk Assessment: Likelihood 88

Risk Assessment Summary 89

Risk Matrix and Risk Score 90

Banking Risk Mitigation: Discussion 92 – 95

Risk Mitigation Flowchart 96 – 97

Risk Mitigation Flowchart: Discussion 98

Risk Management Best Practice 111

IV. Conclusion 120

V. Recommendation 122

References 124

Appendices 127
 List of Tables

Table 1.1: Summary of ANOVA page 12

Table 1.2: Summary of Chi-Square Test: Financial Impact 14

Table 1.3: Summary of Chi-Square Test: Likelihood 15

Table 1.4 Consequences 18

Table 1.5 Probability of Occurrence 19

Table 3.1: Risk Factor Level of Likelihood & Financial Impact and Range 43

Risk Average Weighted Scores: Financial Impact 87

Risk Mean Weighted Scores: Likelihood 88

Risk Assessment Summary 89

Philippine Banks Annual Lending Rate 92

Loans to Asset Ratio 93

Past due Loans Ratio (NPL to TLP) 94

UKB‘s Loan Portfolio Breakdown 101

BDO‘s table of exposure and past due measurement 104

BDO‘s table of liquidity and profitability measurement 105

PVB‘s table of exposure and past due measurement 108

PVB‘s table of liquidity and profitability measurement 109

Risk Management Best Practice 111

 List of Figures

Figure 3.1 Conceptual Framework page 41

Political Risk Summary 52

Headline Inflation 2007 – Q2 2012 54

Consumer Confidence Index 68

Summary of Disaster Effects and Needs by Sector (in US$ million) 75

Porter‘s 5 Forces Model 80

Figure 3.3: Risk Assessment Matrix 90

Philippines Annual Lending Rate 92

Risk Mitigation Flowchart 96

Exposure to TLP (BDO) 103

Exposure to TLP (PVB) 107

Published Balance Sheet (BDO) 113

Balance of Payments 115

Volatility of Peso / Dollar 117

 Chapter I

INTRODUCTION

In the Philippines, the banking sector is reported to be the single largest component of the

financial system and it is likely to continue being the main source of finance to the private sector.

The Philippine banking system comprises universal and commercial banks, thrift banks, rural

and cooperative banks. Rural and cooperative banks, which are owned privately and by

cooperatives, respectively, cater largely to farmers and merchants in rural areas. Thrift banks,

which include savings and mortgage banks, and private development banks, focus their services

on small and medium-sized enterprises. Commercial banks have all the powers given to thrift

banks as well as the power to purchase and sell foreign currency, act as a broker for customers,

advise investment management accounts, loan safety deposit boxes, and engage in quasi banking

functions. Universal banks have the broadest scope of banking services. In addition to the

authority to carry out all the services rendered by other categories of banks, universal banks also

have the ability to conduct the functions of an investment house, whether directly or indirectly

through a subsidiary. Prior to 2000, the Philippine banking system had a ―pattern of frailty in the

face of adverse shocks.‖ In the aftermath of the 1997/98 Asian financial crisis, comprehensive

reforms in the banking system were implemented, which included the increasing of the minimum

capital requirements, strengthening the prudential and supervisory systems, as well as for

safeguarding the financial soundness of the banking system.

According to InfoSys Limited (2011), the Philippine banking industry weathered global

financial crisis of 2008-09 reasonably well, owing to a number of factors – very little exposure to
the U.S. sub-prime markets, banks‘ inherent resilience and strong balance sheets, conservative

risk management and disclosure practices, regulatory and reform. The industry‘s income touched

a high in 2007 before the crisis broke, and although it dipped the following year, by 2009, even

while the crisis was underway, Filipino banks registered a healthy performance all-around: in

lending, capital adequacy and profitability. The well-being of the industry is reflected in the

8.6% compounded annual growth in outstanding loans between 2006 and 2010. The outlook

remains bright as young, educated, upwardly mobile Filipinos embrace banking products and

services to add to the number of bankable households.

However, some risks prevail. Over the years, political instability and governance have

put a dampener on the banking industry‘s progress. The new government has a clear mandate to

ensure stability and root out corruption, themes that resonate among the youth and promise hope

and optimism in the coming years to this wonderful country.

The outlook on the Philippine banking system remains stable, as it has been since March

2010. In coming to this conclusion, the researchers take into account the negative implications of

persistently difficult global economic conditions; these conditions are pressuring exports and

implying slower economic growth ahead, with potential spillovers that could lower banks‘

profits from lending and trading. Nevertheless, economic growth is still expected to remain

positive, as is growth in loan demand, driven by domestic sources comprising both public and

private borrowers. On balance, this trend will help support banks‘ earnings and keep their other

performance metrics stable over the horizon of the outlook.

 Risk is inherent in any walk of life in general and in financial sectors in particular until

recently, due to a regulated environment; banks could not afford to take risks. But of late, banks

are exposed to the same competition and hence are compelled to encounter various types of

financial and non-financial risks. Risks and uncertainties form an integral part of banking which

by nature entails taking risks (Raghavan, 2003). When discussing the challenges faced by

financial institutions in managing risk, it is important to have a consistent definition of the term

―risk‖. For Kupper (1999), risk is defined as the volatility of a corporation‘s market value. In

practice, banks‘ exposures are asymmetric. This is particularly true for credit risk, where the

upside consists of a small positive yield, and the downside consists of a loss that could range

from zero to more than 100 per cent of the exposure. Given the importance of this downside risk,

banks tend to focus their energies on understanding and managing the key drivers that determine

financial loss.

There are both upside and downside risks to the Philippine‘s central scenario. Additional

growth supports may come from the government‘s potential spending on public sector projects

and the possibility of the central bank, Bangko Sentral ng Pilipinas (BSP), switching to a more

aggressive easing monetary policy. On the other hand, the growth projections could be subject to

prominent external headwinds. In particular, the ongoing problems in Europe and the US, as well

as the lingering effects of natural disasters in Japan, have contributed to the Philippines‘ recent

weakening in export performance. Going forward, deeper fallout in the Eurozone crisis, and/or a

further slowdown in China, the Philippines‘ second largest export destination, could exacerbate

external pressure on economic growth.

 This study focuses on the Philippine Banking Sector limiting its scope to 5 universal and

5 commercial banks. Although there have been studies on the risk management and assessment

of the Philippine Banking Sector in comparison with other country‘s banking industry, no other

studies have been related to comparing and assessing risk factors in different categories of banks

like universal and commercial banks. In relation with this study, the researchers will be

providing reliable measures on how to overcome such risks and vulnerabilities in terms of

developing a Risk Mitigation or Contingency Plan.

The Bangko Sentral ng Pilipinas (BSP) generally recognizes eight (8) core risks that the

Philippines banks encounter. These risks are:

1. Credit Risk

Credit risk arises from counterparty‘s failure to meet the terms of any contract with the

financial institution or otherwise perform as agreed. Credit risk is found in all activities where

success depends on counterparty, issuer, or borrower performance. It arises any time financial

institution funds are extended, committed, invested, or otherwise exposed through actual or

implied contractual agreements, whether reflected on or off the balance sheet. Credit risk is not

limited to the loan portfolio. In a bank‘s portfolio, losses stem from outright default due to

inability or unwillingness of a customer or counter party to meet commitments in relation to

lending, trading, settlement and other financial transactions. Alternatively, losses may result

from the reduction in portfolio value due to actual or perceived deterioration in credit quality.
Credit risk emanates from a bank‘s dealing with individuals, corporate, financial institutions or a

sovereign.

For most banks, loans are the largest and most obvious source of credit risk; however,

credit risk could stem from activities both on and off balance sheet. In addition to direct

accounting loss, credit risk should be viewed in the context of economic exposures. This

encompasses opportunity costs, transaction costs and expenses associated with a non-performing

asset over and above the accounting loss.

2. Market Risk

Market risk is the risk to earnings or capital arising from changes in the value of traded

portfolios of financial instruments. This risk arises from market-making, dealing, and position-

taking in interest rate, foreign exchange, equity and commodities markets.

Financial institutions may be exposed to Market Risk in a variety of ways. Market risk

exposure may be explicit in portfolios of securities/equities and instruments that are actively

traded. Conversely, it may be implicit such as interest rate risk due to mismatch of loans and

deposits. Besides, market risk may also arise from activities categorized as off-balance sheet

item. Therefore, market risk is potential for loss resulting from adverse movement in market risk

factors such as interest rates, foreign exchange rates, and equity and commodity prices.
3. Operational Risk

Operational risk is the current and prospective risk to earnings or capital arising from

fraud, error, and the inability to deliver products or services, maintain a competitive position, and

manage information. Risk is inherent in efforts to gain strategic advantage, and in the failure to

keep pace with changes in the financial services marketplace. Operational risk is evident in each

product and service offered. Operational risk encompasses: product development and delivery,

operational processing, systems development, computing systems, complexity of products and

services, and the internal control environment.

Operational risk is associated with human error, system failures and inadequate

procedures and controls. It is the risk of loss arising from the potential that inadequate

information system; technology failures, breaches in internal controls, fraud, unforeseen

catastrophes, or other operational problems may result in unexpected losses or reputation

problems. Operational risk exists in all products and business activities.

4. Interest Rate Risk

Interest rate risk is the risk that an investment's value will change due to a change in the

absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or

in any other interest rate relationship. Such changes usually affect securities inversely and can be

reduced by diversifying or hedging.

 Interest rate risk affects the value of bonds more directly than stocks, and it is a major

risk to all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that

as interest rates increase, the opportunity cost of holding a bond decreases since investors are

able to realize greater yields by switching to other investments that reflect the higher interest

rate. For example, a 5% bond is worth more if interest rates decrease since the

bondholder receives a fixed rate of return relative to the market, which is offering a lower rate of

return as a result of the decrease in rates.

5. Liquidity Risk

Liquidity risk is the current and prospective risk to earnings or capital arising from a

bank‘s inability to meet its obligations when they come due without incurring unacceptable

losses. Liquidity risk includes the inability to manage unplanned decreases or changes in

funding sources. Liquidity risk also arises from the failure to recognize or address changes in

market conditions that affect the ability to liquidate assets quickly and with minimal loss in

value.

6. Compliance Risk

Compliance risk is the current and prospective risk to earnings or capital arising from

violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal

policies and procedures, or ethical standards. Compliance risk also arises in situations where the

laws or rules governing certain FI products or activities of the FI‘s clients may be ambiguous or
untested. This risk exposes the FI to fines, payment of damages, and the voiding of contracts.

Compliance risk can lead to diminished reputation, reduced franchise value, limited business

opportunities, reduced expansion potential, and lack of contract enforceability.

Compliance risk also arises in situations where the laws or rules governing certain bank

products or activities of the Bank‘s clients may be ambiguous or untested. This risk exposes the

institution to fines, civil money penalties, payment of damages, and the voiding of contracts.

Compliance risk can lead to diminished reputation, reduced franchise value, limited business

opportunities, reduced expansion potential, and no ability to enforce contracts. Banking

compliance risk is considered a category of its own. IT governance compliance risk is now an

escalating concern for most companies, as they have to comply with government and industry

regulations regarding data security and web exposure.

7. Reputational Risk

Reputational risk is the current and prospective impact on earnings or capital arising from

negative public opinion. This affects the financial institution‘s ability to establish new

relationships or services or continue servicing existing relationships. This risk may expose the

financial institution to litigation, financial loss, or a decline in its customer base. In extreme

cases, financial institutions that lose their reputation may suffer a run on deposits. Reputation

risk exposure is present throughout the organization and requires the responsibility to exercise an

abundance of caution in dealing with customers and the community.

8. Strategic Risk

Strategic risk is the current and prospective impact on earnings or capital arising from

adverse business decisions, improper implementation of decisions, or lack of responsiveness to

industry changes. This risk is a function of the compatibility of an organization‘s strategic goals,

the business strategies developed to achieve those goals, the resources deployed against these

goals, and the quality of implementation. The resources needed to carry out business strategies

are both tangible and intangible. They include communication channels, operating systems,

delivery networks, and managerial capacities and capabilities. The organization‘s internal

characteristics must be evaluated against the impact of economic, technological, competitive,

regulatory, and other environmental changes.

Although the BSP identified these 8 core risk factors, each bank in the country is entitled

to identify sub factors. A previous study conducted by the Development Bank of the Philippines

(2009) identified significant risk sub factors to be effectively considered as the bank‘s ―risk

universe.‖ The objective of this study was to identify all the risk sub factors that the bank is

facing and eliminate these sub factors to the most significant ones in order to identify which

needs to be addressed. The identified significant risk sub factors were as follows:

1. Credit Risk
 Counterparty
 Credit Concentration

2. Market Risk
 Price
 Foreign Exchange
 Bond Trading

3. Interest Rate Risk

  IR Gap

4. Liquidity Risk
 Funding (Cash Flow)
 Asset Liquidity

5. Operational Risk
 Internal Fraud
 External Fraud
 Damage to physical assets
 Employee Retention
 Succession Planning
 Information & Security

6. Compliance Risk
 Compliance

7. Reputation Risk
 Reputation

8. Strategic Risk
 Profitability
 Mission and Direction
 Planning and Execution
 Socio-political Climate

The researchers conducted a preliminary survey (Please refer to Appendix A) to test

whether there is a significant difference on the level of importance of risk factors between

Universal and Commercial banks. The researchers used ANOVA to test whether there is a

significant difference in the mean importance rating of risk factors between Universal and

Commercial Banks. In statistics, analysis of variance (ANOVA) is a collection of statistical

models, and the associated procedures, in which the observed variance in a particular variable is

partitioned into components attributable to the different sources of variation. In its simplest form,

ANOVA provides a statistical test of whether or not the means of several groups are all equal,

and therefore generalizes t-test to more than two groups. Doing multiple two-sample t-tests
would result in an increased chance of committing a type I error. For this reason, ANOVAs are

useful in comparing two, three or more means. (Wikipedia)

One-Way ANOVA Test:

Ho: There is no significant difference between the mean importance ratings of

risk factors between Universal and Commercial Banks.

Ha: There is a significant difference between the mean importance ratings of risk

factors between Universal and Commercial Banks.

Based on the results of the one-way ANOVA, the researchers were able to identify

whether there is a significant difference between the mean importance rating of universal and

commercial banks on each risk factor. In the analysis of variance, the null-hypothesis is said to

be accepted if the F-value is less than the F-critical value; the null hypothesis is said to be

rejected if the F-value is greater than the F-critical value. The computation was done using

Microsoft Excel with a confidence level of 95%.

The table below shows the summary of the Analysis of Variance. As seen on this table,

all of the risk factors were not significant. This just means that the Universal and Commercial

Banks find an equal importance on the different risk factors.

Table 1.1 Summary of ANOVA

Summary of Analysis of Variance

Risk Type Risk Factor F-value F-Critical Do not Reject Ho Reject Ho
Credit Counterparty 0.00 5.32 X
Credit Concentration 0.40 5.32 X
Market Price 0.80 5.32 X
Foreign Exchange 2.25 5.32 X
Bond Trading 3.20 5.32 X
Interest Rate IR Gap 0.00 5.32 X
Liquidity Funding (Cash Flow) 0.80 5.32 X
Asset Liquidity 0.80 5.32 X
Operational Internal Fraud 0.20 5.32 X
External Fraud 1.80 5.32 X
Damage to Physical Assets 0.00 5.32 X
Employee Retention 0.53 5.32 X
Succession Planning 2.67 5.32 X
Info. Security & Technology 2.63 5.32 X
Compliance Compliance 0.40 5.32 X
Reputation Reputation 0.40 5.32 X
Strategic Profitability 1.00 5.32 X
Mission & Direction 1.00 5.32 X
Planning & Execution 0.00 5.32 X
Socio-Political Climate 0.00 5.32 X

With the results of the ANOVA, the researchers have proven that Universal and

Commercial banks see each risk factors of equal importance.

 For further analysis of the preliminary data, the researchers conducted a follow-up survey

(Please see Appendix B and C for the survey) to determine whether there is a significant

difference on the level of financial impact and likelihood of occurrence per risk factor between

the Universal and Commercial banks.

The researchers used a Chi-square test of independence for the financial impact and

likelihood survey. In a Chi-square test of independence, the null hypothesis is said to be not

rejected if the Chi-Square computed value is less than the Chi-Square critical value; the null

hypothesis is said to be rejected if the Chi-Square computed value is greater than the Chi-Square

critical value. The computation was done in Microsoft excel again with a confidence level of

95%.
Table 1.2: Summary of Chi-Square Test: Financial Impact

Summary of Chi-Square test for Financial Impact

Chi-Square Do
Legen not Reject
Risk Type Risk Factor
d Computed Critical Rejec Ho
Value Value t Ho
Credit C1 Counterparty 0.03 16.92 X
C2 Credit Concentration 0.22 16.92 X
Market M1 Price 0.55 16.92 X
M2 Foreign Exchange 0.15 16.92 X
M3 Bond Trading 0.00 16.92 X
Interest
I1
Rate IR Gap 0.43 16.92 X
Liquidity L1 Funding (Cash Flow) 0.15 16.92 X
L2 Asset Liquidity 0.26 16.92 X
Operational O1 Internal Fraud 0.09 16.92 X
O2 External Fraud 0.21 16.92 X
O3 Damage to Physical Assets 0.00 16.92 X
O4 Employee Retention 0.14 16.92 X
O5 Succession Planning 0.55 16.92 X
O6 Info. Security & Technology 0.05 16.92 X
Compliance to Rules &
C1
Compliance Regulation 0.37 16.92 X
Reputation R1 Reputation 0.13 16.92 X
Strategic S1 Profitability 0.21 16.92 X
S2 Mission & Direction 0.00 16.92 X
S3 Planning & Execution 0.07 16.92 X
S4 Socio-political Climate 0.28 16.92 X `

The table above shows the summary of results of the Chi-Square test of Financial Impact.

All of the factors got a Chi-Square computed value less than the Chi-Square value (at a 95%

confidence level) of 16.92. This means that the level of financial impact on the different risk

factors has no significant difference between the Universal and Commercial Banks.
Table 1.3: Summary of Chi-Square Test: Likelihood

Summary of Chi-Square test for Likelihood

Chi-Square Do
Legen not Reject
Risk Type Risk Factor
d Computed Critical Rejec Ho
Value Value t Ho
Credit C1 Counterparty 0.12 16.92 X
C2 Credit Concentration 0.04 16.92 X
Market M1 Price 0.09 16.92 X
M2 Foreign Exchange 0.03 16.92 X
M3 Bond Trading 0.14 16.92 X
Interest
I1
Rate IR Gap 0.13 16.92 X
Liquidity L1 Funding (Cash Flow) 0.55 16.92 X
L2 Asset Liquidity 0.28 16.92 X
Operational O1 Internal Fraud 0.37 16.92 X
O2 External Fraud 0.00 16.92 X
O3 Damage to Physical Assets 0.29 16.92 X
O4 Employee Retention 0.14 16.92 X
O5 Succession Planning 0.28 16.92 X
O6 Info. Security & Technology 0.14 16.92 X
Compliance to Rules &
C1
Compliance Regulation 0.56 16.92 X
Reputation R1 Reputation 0.37 16.92 X
Strategic S1 Profitability 0.03 16.92 X
S2 Mission & Direction 0.00 16.92 X
S3 Planning & Execution 0.51 16.92 X
S4 Socio-political Climate 0.14 16.92 X `

The table above shows the summary of results of the Chi-Square test of Likelihood. All

of the factors got a Chi-Square computed value less than the Chi-Square value (at a 95%

confidence level) of 16.92. This means that the likelihood of occurrence of the different risk

factors has no significant difference between the Universal and Commercial Banks.
 Based on the preliminary observation conducted, the researchers proved that Universal

and Commercial banks fall under a single provision and that only one homogenous risk

mitigation is needed for both. The study, thus, focused on understanding the performances of the

banking sector thru a macro and micro environment analysis to further recommend on mitigating

risk.

Risk management is simply the identification, assessment, and prioritization of risks,

followed by a coordinated and economical application of resources to minimize or control the

probability of occurrence and the impact of negative events, as well as to maximize the

realization of opportunities. Risk management tends to be pre-emptive and must be augmented

with business continuity planning (BCP) to deal with the consequences of realized residual risks.

The necessity of BCP arises because even very unlikely events will occur if given enough time.

Risk management and BCP are often mistakenly seen as rivals on overlapping practices. In fact,

these processes are so tightly tied together that such separation seems artificial. To be effective,

risk management must acknowledge that risk takes many forms and that all must be clearly

understood and effectively managed. Do not become fixated on asset-related risks-they are

important, but they have much less impact on overall performance than less spectacular failures

in the business and work processes that dictate the ability to meet market, financial, and overall

business goals. Business success and continuation depends on the ability to recognize and

manage these less-visible risks (Mobley, 2011).

Risk assessment is defined as the identification, evaluation, and estimation of the levels

of risks involved in a situation, their comparison against benchmarks or standards, and

determination of an acceptable level of risk. Risk assessment can also be used to determine more
intangible forms of risk, including economic and social risk, and can inform the scenario

planning process. The amount of risk involved in a specific course of action is compared to its

expected benefits to provide evidence for decision making.

The book entitled, ―A Risk Management Standard‖ (2002) published in UK by the

Institute of Risk Management (IRM), The Association of Insurance and Risk Managers

(AIRMIC) and ALARM The National Forum for Risk Management in the Public Sector

discussed the ways of achieving the objectives of risk management. It incorporated the process

of risk assessment, analysis, evaluation, reporting and communication, and treatment. To further

analyze the risk factors, the book presented the different measures of consequence and

probability that will suit their needs best. Risk estimation can be quantitative, semi quantitative

or qualitative in terms of the probability of occurrence and the possible consequence. For

example, possible consequences in terms of financial impact may be high, medium, or low.

Probability or likelihood of occurrences may also be high, medium, or low. Different

organizations will find that different measures of consequence and probability will suit their

needs best. For example many organizations find that assessing consequence and probability as

high, medium or low is quite adequate for their needs and can be presented as a 3 x 3 matrix.

Below are the tables for describing risk in terms of consequences and probability of occurrence.
Table 1.4 Consequences

Financial impact on the organization is likely to exceed by 80%

High
Significant impact on the organization‘s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80 %
Medium
Moderate impact on the organization‘s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low
Low impact on the organization‘s strategy or operational activities
Low stakeholder concern

Table 1.4 shows the qualitative rate for consequences in terms of financial impact. A high

risk factor means that an occurrence of the factor may cause a financial loss that is likely to

exceed by 80%. High impact risks may result in the high costly loss of assets; risks that

significantly violate, harm, or impede operations; or risks that cause human death or serious

injury. A medium risk factor means that an occurrence of the factor may cause a financial loss

between 20%-80%. Medium impact risks may result in the costly loss of assets; risks that

violate, harm, or impede operations; or risks that cause human injury. Lastly, a low risk factor

means that an occurrence of the factor may cause a financial loss less than 20%. Low impact

risks may result in the loss of some assets or may noticeably affect operations.
Table 1.5 Probability of Occurrence

Estimation Description Indicators

Likely to occur each year or more Potential of it occurring several times within
High than 25% of occurrence. the time period (10 years)
(Probable)

Likely to occur in a 10-year time Could occur more than once within the time
Medium period or less than 25% chance of period (10 years). Could be difficult to
(Possible) occurrence. control due to some external influences
Not likely to occur in a 10-year Has not occurred. Unlikely to occur.
Low period or less than 2% chance of
(Remote) occurrence.

Table 1.5 shows the qualitative rate for the probability or likelihood of occurrence. For

this risk estimation, the assessment was based on a span of 10 years, thus, a risk factor is

considered to have a high likelihood if it is likely to occur each year for 10 years. The threat's

source is highly motivated and sufficiently capable, and the controls that prevent the

vulnerability from being exercised are ineffective. A risk factor is considered to have a medium

likelihood if it is likely to occur every 10 years. The threat's source is motivated and capable, but

controls are in place that may impede a successful exercise of the vulnerability. Lastly, a risk

factor is considered to have a low likelihood if it is not likely to occur in 10 years. The threat's

source lacks motivation or capability, and controls are in place to prevent or significantly impede

the vulnerability from being exercised.

The book entitled, ―A Risk Management Standard‖ (2002) which presented tables for

describing risk in terms of consequences and probability of occurrence was used as a guide in

preparing the risk assessment for this study

 The end output of this study is a risk mitigation and contingency plan. Risk mitigation

and contingency planning is essential to ensure the business and continue to survive and thrive

after a crisis or disruptive event. It is a systematic approach to identifying what can go wrong in

a situation. Rather than hoping that everything will turn out OK or that "fate will be on one‘s

side", a planner should try to identify contingency events and be prepared with plans, strategies

and approaches for avoiding, coping or even exploiting them. Contingencies are relevant events

anticipated by a planner, including low-probability events that would have major impacts.

Contingency planning is a "What if?" skill important in all types of planning domains, but

especially in contested and competitive domains. The objective of contingency planning is not to

identify and develop a plan for every possible contingency. That would be impossible and a

terrible waste of time. Rather, the objective is to encourage one to think about major

contingencies and possible responses. Few situations actually unfold according to the

assumptions of a plan. However, people who have given thought to contingencies and possible

responses are more likely to meet major goals and targets successfully (Power, 2012).

For the risk mitigation, the researchers provided a case study about the credit quality of

banks because credit risk was treated as a central risk factor from which all other risk factors

emerged. The risk mitigation plan was presented in a flow chart form starting with the peer

comparison approach. Peer comparison approach is one of the most widely used and accepted

methods of equity analysis used by professional analysts and investors.

This study aims to achieve the following:

1. Conduct a macro-economic to micro-economic analysis (PESTEL and Porter‘s 5 forces

model) for a structured approach for risk recognition;

2. Identify risk factors for Universal and Commercial Banks;

3. Assess risk factors through a 3x3 risk assessment matrix and identify risk that should be

addressed;

4. Recommend a mitigation plan or contingency measures that can serve as the industry‘s

model in relation to risk management.

 This study considered five (5) banks each under Universal and Commercial banks as

listed by the Bangko Sentral ng Pilipinas (BSP). Due to confidentiality issues, some

representative from the banks chose not to write down their names in the survey forms that the

researchers have provided.

Universal Banks:

1. Bank of the Philippine Islands (BPI)

2. Banco De Oro Unibank, Inc. (BDO)

3. Development Bank of the Philippines (DBP)

4. Land Bank of the Philippines (LBP)

5. Philippine National Bank (PNB)

Commercial Banks:

1. Asia United Bank Corporation (AUB)

2. East West Banking Corporation

3. Maybank Philippines, Inc.

4. Philippine Bank of Communications (PBCOM)

5. Philippine Veterans Bank (PVB)

 This study could serve as a model for the companies in the Philippine banking sector in

improving their action plans in the form of a Risk Mitigation or Contingency Plan.

It is particularly important for the customers of the various banks because they will gain

better awareness of which bank actually performs better and might be more reliable.

Also, it could serve as a model for students and other researchers who wish to broaden

their knowledge on Risk Mitigation or Contingency Planning. Likewise, the researchers on

banking industry may use this study as a reference in coming up with their own.

This study is also particularly important for the Bangko Sentral ng Pilipinas in

determining the significant risk and how to conduct risk assessment to further improve the

performance of the Philippine Banking Sector as a whole.

Lastly, this study is mostly significant for the researchers of this study because it could

broaden their knowledge both on the Philippine Banking Sector and the Risk Mitigation or

Contingency Plan. This study will not only serve as a fulfillment of academic requirements of the

researchers but as a contribution to the Philippine Banking Industry as well.

 Chapter II

REVIEW OF RELATED LITERATURE

Bank Performance in the Philippines

The Philippines has introduced significant reforms into the financial system since the

early 1980s to improve the efficiency of the system and, at the same time, to strengthen the

safety and soundness of financial institutions. The banking system must not only be efficient in

carrying out its tasks as intermediaries in the financial market but it must also be financially

strong to withstand adverse shocks, such as a major policy change, a sharp asset price

adjustment, among others. It has been well documented in the literature that the efficient

functioning of the financial system particularly that of the banking system contributes

significantly to economic growth. However, the efficiency of the Philippine financial system, in

general, and the banking system, in particular, is often being questioned as the public becomes

wary over its performance in recent years. It is generally perceived that the cost of accessing

banking services has remained high, and that a great majority of enterprises, especially SMEs,

still do not have access to affordable banking services (Manlagñit, Lamberte, 2004). The public

is also wary about recent closures of several banks that dissipated hard earned income of many

depositors overnight. All rated Philippine banks reported improved ROAs in 2009 despite the

difficult operating environment, as the decline in interest rates led to a strong recovery in

treasury gains and enabled credit costs from bad assets to remain manageable. Good trading

gains largely continued due to a flattened yield curve, although such revenues may not be

sustainable as interest rates are at historical lows and are eventually expected to rise. Compared
with other markets in the region, operating costs in the Philippine banking sector are still high.

This is due to the wide branch networks required to cover the country‘s archipelago geography

and high staffing requirements arising from a lack of automation. The banking sector‘s

cost/income ratio was about 60% in 2009, down from about 70% in 2008 due to better trading

gains rather than much of an improvement in cost control (Chan, Srivastava, 2010).

Of the two government-owned banks, Development Bank of the Philippines (DBP) has

been the more profitable, thanks to the lean operating cost structure of its small branch network.

But in the case of Land Bank of the Philippines, it has survived for 40 years without requiring

bailouts to avoid bankruptcy, and it continues to serve a large and diverse rural clientele. In

contrast, most other government-owned agricultural/rural development banks around the world

have experienced episodes of bankruptcy that have required massive government and donor

bailouts (Goss, 2007). Also, LBP incurs high operating expenses on its nationwide branches to

support its agriculture-oriented objectives, but it also has a large market share of low-cost

deposits from the rural community. Of the top three local banks by assets, Bank of the Philippine

Islands (BPI) has a good earnings record with a diversified revenue base and better cost

discipline. Over the past three to four years, its ROA has been consistently higher than that of the

other two largest banks: Banco De Oro Unibank, Inc (BDO) and Metropolitan Bank and Trust

Company (Metro). Provisions, mostly relating to existing NPAs, continued to dampen the net

profits of both BDO and Metro, with such costs equalling 45%-50% of pre-provision earnings in

2009, higher than the 20% reported by BPI. Fitch also notes BDO‘s aggressive expansion plans

over the past few years, which have led to operating expenses weighing on its profitability.

(Chan, Srivastava, 2010).

 According to the 2011 Annual Report of BSP the Philippine banking system remained

resilient in 2011despite the challenging global economic environment that persisted throughout

the year. Healthy growth rates were sustained in lending, deposits, and profitability, while the

non-performing loans (NPL) ratio continued to improve, moving closer to their pre-Asian

financial crisis levels.

Effects of Foreign Banks to the Local Banking Industry

A significant number of foreign banks in the Philippines generally contribute to the

increase or decrease in the performance of the country‘s local banks. In the study done by Unite

and Sullivan (2004), they have found out that foreign bank entry is associated with a reduction in

interest rate spreads and bank profits, but only for those domestic banks that are affiliated to a

family business group. Foreign entry corresponds more generally with improvements in

operating efficiencies, but a deterioration of loan portfolios. Their study resulted to a conclusion

that foreign competition drives domestic banks to be more efficient, to focus operations due to

increased risk, and to become less dependent on relationship-based banking practices.

A study, conducted by Hapitan (2003), discussed some of the perceptions by local banks

on the entry of foreign banks in the country which are: a shift in competitive activity has

occurred after the entry of the foreign banks, the competitive activity that occurred was most

significant in the wholesale banking sector, specifically in loans, deposits, investment banking,

and foreign exchange transactions, lastly, fund sourcing and hiring of employees are some of the
―nonbanking‖ factors that were affected by foreign bank entry. The entry of foreign banks into

the emerging economies will insert more competitive pressure to the domestic financial

institutions and thus, indirectly boost the efficiency of domestic banks. Furthermore, the

utilization of modern technology and human capital from the parent companies indirectly

improve banking practices and hence, efficiency in the host country as the domestic banks is

exposed to the use of modern technology and expertise from a more developed banking system.

Nevertheless, there are concerns on foreign banks efficiency in the emerging markets especially

when they decide on their expansion strategy. This is due to the constraints imposed on

expansion policies as these banking markets are characterized with tight rules and regulations.

This might lead to increase in the cost of operations and thus, prevent foreign banks to operate

more efficiently (Chan, Karim, 2011). In addition, the number of entrants matters rather than the

market share. This indicates that the impact of foreign banks entry on local bank competition is

felt immediately upon entry rather than after they have gained substantial market share. The

relaxation of restrictions on foreign bank entry can have risks, however. In particular, by

increasing competition and thereby lowering the profits of domestic banks, foreign entry may

reduce charter values of domestic banks, making them more vulnerable (Claessens, et. al, 2000).

Problems/ Issues Encountered by the Philippines’ Banking Industry

Despite the Philippine banks‘ growth in recent years, the financial health of the banking

sector remains volatile due to the high levels of non-performing assets in the balance sheets of

banks, which have resulted in a slowdown in bank lending. Further, the profitability of
Philippine banks remains inferior and lags behind other Asian banks. Apart from its role in

financial intermediation, banks have been shown to contribute to general economic stability. This

integral link has been most evident in the Asian financial crisis where the economy was

adversely affected when banks were left weak and vulnerable to external shocks. Corporate

governance problems in the banking sector are evidenced by the prominence of a few bank

auditors, absence of domestic credit rating agencies, and lack of proper disclosure and reporting

of information, and compliance with international accounting standards. The presence of family

and conglomerate ownership coupled with the lack of stringent regulations poses risks of

distorting bank decisions to favour certain vested interests (Ladan, 2005).

During the 1990s, symptoms that badly hit the banking systems evidently occurred in the

aftermath of crisis and these were the following: macroeconomic volatility, high property

exposure, asset inflation, large amount of foreign liabilities, government directed lending,

related-party lending, and fragility in the case of some banks, weak supervision and under

regulation (Gochoco-Bautista, 2000). The effects of liberalization, Asian financial crisis and

mergers on banking industry efficiency can be examined in relation to regulatory and policy

reform. In terms of liberalization, with 18 foreign against 25 local banks as of 2005, foreign

banks continue to exert pressure on the domestic banks by forcing the latter to narrow the interest

rate spread (Unite and Sullivan, 2003), but in terms of concentration ratios, these dropped after

the liberalization but have since recovered and even exceeded their pre-liberalization levels due

to consolidation in the industry after the Asian financial crisis (Dacanay, 2008).
PEST/ PESTEL Analysis in Banks

A study from the London School of Commerce done by Saeed (2009), which is entitled

―Strategic Analysis of HSBC and RBS‖, deals with how the global banking Industry has turn

into powerhouse of economic growth creating ever more complex products that use risk and

securitization in business models. The two of the most important banks with respect to their

global operations are Royal Bank of Scotland and HSBC Holdings. There global presence and

diverse nature of operations, especially during current economic circumstances, provide an

opportunity to evaluate strategic management models. PESTEL Analysis was used in order

evaluate the external macro-environment and the factors that affect the firms. For the political

factors analysis, it was found that most of the countries that Royal Banks of Scotland Group Inc.

(RBS) and HSBC operate have a stable political environment such as USA, Europe and China.

Most countries in the world have well developed regulations to keep the financial system

in order. Those regulations and policies protect the organizations where they are operating. Such

as UK, the banking system has been highly regulated by Financial Services Authority (FSA). In

considering the economical aspect for the two banks, it was found out that majority of countries

that RBS and HSBC operated have been hit by The Global Financial Crisis that started in

summer 2007. It was triggered by the problems in the U.S. housing market. It causes the global

economy in recessionary trends. The Global GDP value declined to 3.7% in year 2008, from 5%

in year 2007 according to the International Monetary Fund (IMF). In social aspects, like many

organizations, HSBC is affected by situations and conditions of society as well. In order to retain

good reputation in the society, it is operating with a strong sense of corporate social

responsibility. According to HSBC, the reputations of them today owes to the high standards of
behavior set by their founders. For their technological side, RBS and HSBC implement the green

IT system in order to reduce their water and electricity consumption because they believe that

there are many benefits to operating environmentally sustainable IT systems especially during

recession. For their legal aspect, policies and regulations provided by the government, both local

and international allow the company to be more cautious in their business actions. To avoid

problems in line with their business practice, they see to it that all their actions are legal and

aspire to highest standards. Finally, environmental protection is one of the most essential aspects

to be considered by many businesses. In relation to this, HSBC develops environmental

protection strategies to adhere to this worldwide need. In addition, both companies are always

trying to join environmental protection campaign by sponsoring some organizations that have

this type of advocacy.

A study entitled ―Strategic management of Information: The Consultancy Report of the

International bank of Wessex‖ used PESTEL Analysis in order to briefly review the operational

environment of the international banking industry. The International Bank of Wessex is a large

international financial institution based in London; it has served trade and industry since the

British Empire. Political factors that were considered are: (a) the implementation of the New

Basel Capital Accord (Basel II), which aims to encourage banks to improve their risk

management systems beyond narrow compliance with a minimum capital ratio; (b) new market

in China and; (c) Merger and acquisition. For the economical aspect, factors that were considered

are: (a) financial globalization, the quickening pace of financial innovation and the decreasing

cost of communication that is the main driving force of financial globalization and; (b)

inflationary pressures remained muted. On the other hand, social-cultural factors that were
considered are: (a) acceptance of credit increasing; (b) reliance on state-owned banks; (c) rising

middle-class population; (d) bridging skill-gaps through foreign alliances and; (d) increasing

elderly population. Finally, factors that were considered in terms of technological aspect are: (a)

network solutions improving banking processes; (b) e-signature requires stricter norms; (c)

emergence of credit assessment apparatus and; (d) e-banking flourishing despite challenges.

(L.T. Pan, L.W. Kei, T.C Hong, W.Y. Fai; 2007)

PORTER’S Five Forces Analysis in Banks

A study conducted by Dr. Gabriel (2006), which is entitled ―Application of Porter‘s Five

Forces Framework in the Banking Industry of Tanzania: Determine, Develop and Deliver

Competitively‖, aimed to use the Porter‘s Five Forces model in order to assess the

attractiveness of Tanzania‘s banking industry. This model is defined by the five key forces which

are; Rivalry among the existing firms, Threat of new entrants, Threat of substitutes, Bargaining

power of suppliers and bargaining power of customers. The first among the five forces is the

competition among the existing fully-pledged banks. There are 22 banks, which are recognized

and licensed to operate in Tanzania (Bank of Tanzania report, 2005). Looking on the trend of

dates of commencement of business of these 22 banks, 19 of them commenced just within ten

years (1995 – 2005). This is 86% of the registered banks. This gives a clear signal that the

increase of the number of banks within the industry is fast and in any case there is now a great

struggle for banks to create and maintain a good market share. Though there might be an

increase of the number of customers, but that cannot dilute the fact that there is a tension of
competition between the existing rivals in the industry. Threat of new entrants and bargaining

power of customers is found to be unfavorable forces to the industry. Threat of substitutes and

bargaining power of suppliers are found to be favorable forces to the industry. The reason why

bargaining power of suppliers is found favorable mainly because the core business of the

banking industry is ‗service‘ which mainly focuses on the safety of wealth. The suppliers provide

some tangibles like cheque books, furniture, etc. However, the impact of this in business is not

significant since they are not really like the raw material. The industry is therefore of two starts,

hence, not attractive. Those who are already in the industry need to operate competitively by

using a differentiation strategy to win the confidence of the customers who have higher

bargaining power.

Saeed (2009) also used the Porter‘s Five Forces Model in order to analyze the operational

environment of HSBC in the banking industry. According to him, there have been many rivals in

the banking and financial sectors. HSBC used efficient strategies to ensure its leadership position

in the market among rivalries. In addition, due to the capabilities of other rival companies, HSBC

develops strategic plans to make sure that it is always be the number one choice of the customers

in banking and finance industries. The threats of new entrants, such as Tesco which is UK‘s

largest super-market and considers entering the in banking industry, sometimes make or break an

organization like HSBC. In this regard, HSBC has been able to establish some entry barriers to

ensure its competitive advantage. The company also uses strong branding images to make sure

that their customers will remain loyal. HSBC is also aware its competitors will provide new

products and services in the future. The threat that these substitute products gives to HSBC‘s

profitability allows the company to work hard to sustain its position. Through the strategy of
HSBC in focusing on four different customer segments, the company was able to provide needs

of each customer group which lessens the impact of other substitute products. Accordingly, the

buyer power is noted to be one of the two important forces which affects the occupation of the

value established by an organization. Herein, the vital determinants of this force include the size

as well as the customer concentration. It can be said that HSBC has been able to manage its

customers effectively which allows the company to gain customer‘s loyalty and satisfaction. The

strategy used enables HSBC to become the world leader in banking and financial sector. When it

comes to the bargaining power of supplier, it is said that supplier power reflects the buyer‘s

power. In this regard, the analysis of this force commonly focuses on the significant size and

concentration of suppliers which is also relative to the competitors. It also focuses on the degree

of differentiation in the materials being supplied. It can be said that HSBC has the ability to

charge its target markets different prices in accordance with the differences in the price

formulated for each of the buyers. This usually implies that the audience is described by high

supplier power.

Solutions and Practices in order to Overcome Banking Industry Struggles

There were a lot of solutions/ suggestions considered in order for the banking industry to

perform better and to increase the efficiency as service providers. A study conducted by

Gochoco-Bautista (2000) recommended some measures in order to address the Philippine

banking industry‘s weaknesses and these were: (a) strengthen banks to meet the increasing

requirements of globalization through the appropriate conduct of macroeconomic policy, (b)

Strengthen competition and efficiency in the banking industry by promoting contestable markets

and greater foreign entry while encouraging bank mergers and acquisitions; undertaking

privatization; strengthening the public listing requirements to improve corporate governance in

the banking industry; reducing or eliminating financial intermediation taxes, and removing

implicit financial intermediation taxes such as the liquidity reserve requirements, (c) Strengthen

prudential regulation and supervision by adopting a formal framework and common terminology

for risk assessment and risk management systems in banks; improving financial reporting,

disclosure, and transparency, and (d) Improve the financial infrastructure by strengthening the

legal/regulatory infrastructure on corporate and financial restructuring and bankruptcy.

Tarawneh (2006) suggested that there are three principal factors to be considered in order

to improve the financial performance of a bank and they are the institution‘s size, asset

management, and operational efficiency. Moreover, in order to evaluate the internal performance

of the firm, the bank should monitor the financial indicators which are constructed from its

financial statement and that includes the calculation of financial ratios like ROA, asset utilization

and operational efficiency. On the other hand, in the study conducted by Goss (2007) for the

Land Bank of the Philippines, the author stated that LBP is at a fine level in terms of providing

service because the firm has a good policy environment. It implements outreach and portfolio

diversification. It develops its own financial muscle through good performance, client support,

and deposit mobilization and they have good risk management and internal audit and control.

The practices mentioned above might help in resolving the struggles that the banking industry is

facing nowadays.
Risk Management in Banks

A working paper is about risk management was written by Mikes (2011). It is all about

implementation of simple steps for difficult situations in relation to risk management in banks,

stated that the practice of gauging risks seems basically of two types. The risk functions of some

organizations have a proclivity for ―quantitative enthusiasm‖, while others seem geared towards

―quantitative skepticism‖. Risk management at banks is abstract, analytical activity that draws

heavily on advances in statistics and financial economics. Much of the risk management within

banks is carried out using internally developed, proprietary models. Market and credit risks are

modeled, but the numbers are not seen as reflecting the underlying economic reality. And

operational risk is seen as largely immeasurable.

Another study about risk management in banks was conducted by Raghavan (2003). He

stated that risk management underscores the fact that the survival of an organization depends

heavily on its capabilities to anticipate and prepare for the change rather than just waiting for the

change and react to it. The functions of risk management should actually be bank specific

dictated by the size and quality of balance sheet, complexity of functions, technical or

professional manpower and the status of MIS in place in that bank. Also, the effectiveness of risk

measurement in banks depends on efficient Management Information System, computerization

and networking of the branch activities.

Risk management is needed for banks and financial institutions, mainly because it insures

a margin of safety that guarantees a levered financial firm's solvency. The unpredictability and
inherent risks associated with the financial markets makes it vital for financial institutions and

banks to implement risk management controls. The level of quality risk management policy and

controls can make or break banks or financial institutions. The whole concept of risk

management for banks and financial institutions is nullified by improper and risky speculative

activities. Risk management, if done in a proper and responsible way, can effectively mitigate

systemic and market risks, risks that are both inherent in today's global financial marketplace

(Nikolis, 2009).

Ellis and Harris (2003) stated in an article that ―a key factor in bank risk management is

the means to identify sources of risk and enact efficient plans to counteract it. Banks often

employ whole teams of risk management professionals that put the business through a cycling

process of identifying risk, crafting solutions, and implementing new strategies. Some experts

suggest that this cycling process helps prevent small issues from becoming large ones by

ensuring review of bank actions on a daily or weekly basis. One of the largest concerns in

banking risk management is the potential for financial loss through default. This occurs when

those who have loans, such as mortgages or credit lines, are unable to make payments and fall

into default‖.

In an article written by Stephen Kingston (2000) entitled ―Risk Management Framework:

All Steps‖, he stated the definition of risk communication. Risk communication is ―defined as

any two-way communication between stakeholders about the existence, nature, form, severity, or

acceptability of risks‖. The risks associated with ineffective risk communication include

irreplaceable loss of management credibility, unnecessary and costly conflicts with the
government, difficult and expensive approval process for project sites, bitter and protracted

debates and conflicts with stakeholders, diversion of management attention from important

problems to less important problems, non-supportive and critical employees, and unnecessary

human suffering due to high levels of anxiety and fear .Also, he stated six steps for a successful

risk management operation and these are: initiation, preliminary analysis, risk estimation, risk

evaluation, risk control, and monitoring.

Risk Assessment in Banking

In an article entitled ―Risk Assessment for Banking Systems‖ by Elsinger, Lehar and

Summer (2003), the authors used a new way of risk assessment for banks. Instead of looking

banks individually. They have analyzed risk at the level of banking system in Austria. Such a

perspective is necessary because the complicated network of mutual credit obligations can make

the actual risk exposure of the entire system invisible at the level of individual institutions. Using

standard risk management techniques in combination with a network model of inter-bank

exposures the authors analyze the consequences of macro-economic shocks for bank insolvency

risk. In particular, they have considered interest rate shocks, exchange rate and stock market

movements as well as shocks relate d to the business cycle.

In relation with the information system security for financial institutions, there is an

article entitled ―Risk Assessment Tools and Practices for Information System Security‖ which

provides background information and guidance on various risk assessment tools and practices
related to information security. Institutions using the Internet or other computer networks are

exposed to various categories of risk that could result in the possibility of financial loss and

reputational harm. Given the rapid growth of the Internet and networking technology, the

available risk assessment tools and practices are becoming more important for information

security. To ensure the security of information systems and data, financial institutions should

have a sound information security program that identifies, measures, monitors, and manages

potential risk exposure. Fundamental to an effective information security program is ongoing

risk assessment of threats and vulnerabilities surrounding networked and/or Internet systems.

Institutions should consider the various measures available to support and enhance information

security programs. The paper concluded that it is important for financial institutions to develop

and implement appropriate information security programs. Whether systems are maintained in-

house or by third-party vendors, appropriate security controls and risk management techniques

must be employed. A security program includes effective security policies and system

architecture, which may be supported by the risk assessment tools and practices discussed in this

guidance paper and appendix. Information security threats and vulnerabilities, as well as their

countermeasures, will continue to evolve. As such, institutions should have a proactive risk

assessment process that identifies emerging threats and vulnerabilities to information systems. A

sound information security policy identifies prevention, detection, and response measures.
SYNTHESIS:

The gathered related literature tackled about the performance of the banking sector in the

Philippines and the issues or problems it encountered over the past years and how it managed to

overcome them. Over the past years, the country‘s banking industry has been improving

especially in terms of how they manage risks and how they cope with the changing economic

environment. To be able to understand the country‘s banking system, the use of PESTEL and

Porter‘s five forces analysis could be a great help in order to gather important information

regarding the industry‘s performance in a macro and micro-environmental perspective,

respectively. In general, the gathered literatures define risk management as the process of

analyzing exposure to risk and determining how to best handle such exposure. On the other hand,

risk assessment is defined in many literatures as the identification, evaluation, and estimation of

the levels of risks involved in a situation, their comparison against benchmarks or standards, and

determination of an acceptable level of risk. In order for the financial institutions to overcome

risks and other issues, setting risk mitigation and contingency plan must be part of their

operational activities because of the fact that it will help them in controlling and avoiding risks to

happen.

Based from previous studies on the Philippine banking sector, they were focused only on

individual bank‘s risk management and assessment. Although there have been studies on the risk

management and assessment of the Philippine Banking Sector in comparison with other

country‘s banking industry, no other studies have been related to comparing, assessing, and

mitigating significant risk factors between different categories of banks like universal and

commercial banks.
 Chapter III

METHODOLOGY

Introduction

The various economic crises that the country has experienced have caused bankruptcy

leading to dissolution of some banks. The Philippine banking industry continues to be plagued

by poor asset quality, low profitability, and low capitalization. Thus, it arises for a greater need

for a better risk management and risk mitigation plan. The researchers conducted a preliminary

survey and found that Universal and Commercial banks should only have single risk mitigation

since there is no significant difference on the level of importance per risk factor. The researchers

found the need as well to assess each risk sub-factor to identify which to address. This chapter

discusses the methodology in coming up with the desired output.

Conceptual Framework:

Figure 3.1 Conceptual Framework

As seen on the figure above, a Macro-micro economic analysis was done in order to

observe and understand the industry to which the Universal and Commercial Banks belong. An

industry analysis was done to describe the behaviors of the various banking indicators which are

essential for risk mitigation. The researchers used risk factors identified from a previous study. A

survey was done for Risk Scores which were used in constructing the risk assessment matrix.

The results of the risk assessment were used as a guide for the risk mitigation plan.
Research Locale

The Researchers conducted the study from among the banks under the Universal and

Commercial Banks in the Philippines as listed by the Bangko Sentral ng Pilipinas.

Data Gathering

Data gathering was accomplished through conducting a survey to one of the Risk officers

of the different Universal and Commercial Banks. Interviews were also done to verify the

gathered data and for further justification and analysis of survey results.

Sample and Sampling Technique

The researchers used a purposive (non-random sampling) method. Quota sampling was

used as the sampling technique for this study where the researchers selected a quota of 5

respondents from the Universal and Commercial banks.

Instrumentation and Methods of Data Analysis

Interview

The researchers conducted an interview with the risk management experts of every bank

in order to identify and justify which among the given factors are applicable in their company.

The researchers have also conducted an interview with a risk management officer of Bangko

Sentral ng Pilipinas (BSP) in order for the researchers to validate the factors involved in

conducting the survey.

Survey questionnaires

Survey questionnaires were used to gather information from people for various

purposes. They are one of the most convenient and popular methods of doing so. This data was

then collated, processed and utilized according to the needs of the surveyor. (Survey

Questionnaire, Sample Questionnaire website) The researchers developed 2 surveys: a financial

impact survey and a likelihood survey. The Likelihood and Financial Impact survey were

patterned after the UK Risk Management Standards with High, Medium and Low as measures.

Please refer to Appendix B and C for the financial impact and likelihood survey, respectively.

Table 3.1: Risk Factor Level of Likelihood & Financial Impact and Range

Range Risk Factor Level Weight

1 – 1.66 L 1
1.67 – 2.33 M 2
2.34 – 3.0 H 3

Computation:
Economic Analysis: Micro and Macro Analysis

Every business faces risks throughout the life of the company. Some risks are known,

while many are unknown. When evaluating risks, it is important to consider both internal and

external threats to the company's operations and future success and profits. Studies in business

management and strategy have provided some nice frameworks for evaluating risks and

considering mitigation techniques. (Leigh Richards, 2001)

The terms ‘micro-‘ and ‘macro-‘ economics were first coined and used by Ragnar Fiscer

in 1933. Micro-economics studies the economic actions and behaviour of individual units and

small groups of individual units. In micro-economics, the researchers chiefly concerned with the

economic study of an individual household, individual consumer, individual producer, individual

firm, individual industry, particular commodity, etc. Whereas, when they are analysing the

problems of the economy as a whole, they found out it is a macro-economic study. In macro-

economics, they do not only study an individual producer or consumer, but also all the producers

or consumers in a particular economy.

Macro-economic Analysis: PESTEL

PESTEL is an acronym that stands for Political, Economic, Social, Technological,

Environmental and Legal. It is used to describe an analysis that is used for determining the

opportunities and risks of global expansion. Sometimes it is described as a PEST analysis.

 Political, Economic, Social, Technological, Environmental and Legal issues often differ

domestically and even more so internationally. As companies look to leverage the advantages

that the democratization of technology, information and finance, and grow beyond the national

borders that previously confined them, it is imperative that they consider a PESTEL analysis to

accompany their SWOT analysis.

The PESTEL analysis provides a strong framework used by global and multinational

corporations to set the stage to develop specific tactics to mitigate the risks involved in executing

their vision in unfamiliar environments. (Pestel-analysis.com)

There are many factors in the macro-environment that will affect the decisions of the

managers of any organization. Tax changes, new laws, trade barriers, demographic change and

government policy changes are all examples of macro change. To help analyze these factors

managers can categorize them using the PESTEL model. This classification distinguishes

between:

 Political factors. These refer to government policy such as the degree of intervention in

the economy. What goods and services does a government want to provide? To what

extent does it believe in subsidizing firms? What are its priorities in terms of business

support? Political decisions can impact on many vital areas for business such as the

education of the workforce, the health of the nation and the quality of the infrastructure of

the economy such as the road and rail system.

 Economic factors. These include interest rates, taxation changes, economic growth,

inflation and exchange rates. As seen throughout the book, "Foundations of Economics",

economic change can have a major impact on a firm's behavior.

For example:

o higher interest rates may deter investment because it costs more to borrow

o a strong currency may make exporting more difficult because it may raise the

price in terms of foreign currency

o inflation may provoke higher wage demands from employees and raise costs

o higher national income growth may boost demand for a firm's products

 Social factors. Changes in social trends can impact on the demand for a firm's products

and the availability and willingness of individuals to work. In the UK, for example, the

population has been ageing. This has increased the costs for firms who are committed to

pension payments for their employees because their staffs are living longer. It also means

some firms such as Asda have started to recruit older employees to tap into this growing

labor pool. The ageing population also has impact on demand: for example, demand for

sheltered accommodation and medicines have increased whereas demand for toys is

falling.

 Technological factors: new technologies create new products and new processes. MP3

players, computer games, online gambling and high definition TVs are all new markets

created by technological advances. Online shopping, bar coding and computer aided

design are all improvements to the way we do business as a result of better technology.
 Technology can reduce costs, improve quality and lead to innovation. These

developments can benefit consumers as well as the organizations providing the products.

 Environmental factors: environmental factors include the weather and climate change.

Changes in temperature can create an impact on many industries including farming,

tourism and insurance. With major climate changes occurring due to global warming and

with greater environmental awareness, this external factor is becoming a significant issue

for firms to consider. The growing desire to protect the environment is having an impact

on many industries such as the travel and transportation industries (for example, more

taxes being placed on air travel and the success of hybrid cars) and the general move

towards more environmentally friendly products and processes are affecting the demand

patterns and creating business opportunities.

 Legal factors: these are related to the legal environment in which firms operate. In recent

years in the UK, there have been many significant legal changes that have affected the

firms' behaviour. The introduction of age discrimination and disability discrimination

legislation, an increase in the minimum wage and greater requirements for firms to

recycle are examples of relatively recent laws that affect an organization's actions. Legal

changes can affect a firm's costs (e.g. if new systems and procedures have to be

developed) and demand (e.g. if the law affects the likelihood of customers buying the

good or using the service). (Oxford University Press)

Micro-economic analysis: Porter’s 5 forces model

The Porter's Five Forces tool is a simple but powerful tool for understanding where

power in a business situation lies. This is useful, because it helps to understand both the strength

of the current competitive position, and the strength of a position being considered moving into.

With a clear understanding where the power lies, one can take a fair advantage of a

situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes

it an important part of the planning toolkit.

Conventionally, the tool is used to identify whether new products, services or businesses

have the potential to be profitable. However it can be very illuminating when used to understand

the balance of power in other situations. (Mindtools.com) Five forces analysis assumes that there

are five important forces that determine the competitive power in a business situation. These are:

1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is

driven by the number of suppliers of each key input, the uniqueness of their product or

service, their strength and control over you, the cost of switching from one to another,

and so on. The fewer the supplier choices you have, and the more you need suppliers'

help, the more powerful your suppliers are.

2. Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down.

Again, this is driven by the number of buyers, the importance of each individual buyer to
 your business, the cost to them of switching from your products and services to those of

someone else, and so on. If you deal with few, powerful buyers, then they are often able

to dictate terms to you.

3. Competitive Rivalry: What is important here is the number and capability of your

competitors. If you have many competitors, and they offer equally attractive products and

services, then you'll most likely have little power in the situation, because suppliers and

buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-

one else can do what you do, then you can often have tremendous strength.

4. Threat of Substitution: This is affected by the ability of your customers to find a

different way of doing what you do – for example, if you supply a unique software

product that automates an important process, people may substitute by doing the process

manually or by outsourcing it. If substitution is easy and substitution is viable, then this

weakens your power.

5. Threat of New Entry: Power is also affected by the ability of people to enter your

market. If it costs little in time or money to enter your market and compete effectively, if

there are few economies of scale in place, or if you have little protection for your key

technologies, then new competitors can quickly enter your market and weaken your

position. If you have strong and durable barriers to entry, then you can preserve a

favorable position and take fair advantage of it.

Risk Mitigation and Contingency Plan

The main goal or the desired output of this research is to come up with a Business

continuity plan for the Philippine Banking Sector. Risk mitigations are steps on what you will do

should the risk materializes. A risk mitigation plan is improvised and is done when the risk

materializes. Risk contingency, on the other hand, is about planning what to do should a risk

materialize.

PESTEL Analysis

Political Factors

Political risks are moving higher as a result of negative impact that rising rice and other

food prices are likely to have on society. Although corruption is a major problem in a number of

Asian countries, it is more politicized in the Philippines than in most.

The rise in food prices potentially poses an even bigger challenge for the government

than corruption scandals. It has plenty of experience fending off allegations of graft, but the need

to respond to a growing number of people who are having difficulty putting food on the table

could be especially challenging. Cost pressures are likely to drive even more Filipinos to leave

the country in search of better paying jobs abroad, while at home there will be pressure to offer

relief to the poorest Filipinos, relief that government really cannot afford in economic terms but

which it might feel it has no choice but to provide due to political pressures.
Defects in the Political System

 Continued graft and corruption in key agencies

 Lack of transparency and accountability in governance

 Regulatory capture – agencies captured by vested interests

 The weakness of the electoral processes – prone to cheating and manipulation of results

 Dynasties and traditional politics

 Armed conflict

 Worsening human rights situation, particularly extra-judicial killings of journalists and

activists of the left

 Apathy or withdrawal from political engagement especially at the national level.

Political Initiatives

 Electoral Reforms.

 Advocacy for Human Rights

 Advocacy for Peace and Development

 Anti-Corruption Advocacy
 Although the country faces a high risk in terms of political factors, the banking sector

remains at a moderate political risk in terms of public sector finances. Regarding the public

sector finances, the fiscal deficit is likely to fall further in 2012. Public sector debt, which is

trending downwards, will remain at a sustainable level.

Banks are seeking guarantees for projects that are exposed to political risks, such as

social infrastructure initiatives, which could wipe out their investments. The four government

financial institutions, namely the Development Bank of the Philippines, Land Bank of the

Philippines, Government Service Insurance System, and the Social Security System were key to
providing risk guarantees for public-private partnership (PPP) projects that can become hostage

to politics. Below are also key points to manageable political risk for banks:

 The Philippines has worked to build close ties with neighboring countries in Southeast

Asia through the Association of Southeast Asian Nations (ASEAN).

 Domestic insurgencies, terrorism and security issues somehow do not impact the

Philippines‘ ability to attract much needed foreign investment. There are still a growing

number of foreign investors mostly from different Asian countries.

 There have been observed solid levels of growth from OFW remittances.

 The Philippines has worked to reduce its still relatively high government debt. These

fiscal consolidation efforts have prompted sovereign credit rating upgrades.

 President Benigno Aquino took office in 2010 under a strong public mandate to

implement economic and political reforms.

Economic Factors

Headline Inflation 2007 – Q2 2012 (Source: Bangko Sentral ng Pilipinas)

KEY POINTS:

As seen on the figure above, it was in the year 2008 where price pressures tremendously

increased. In Q1 2008, Average headline inflation rose to 5.6 percent from 3.3 percent in the

previous quarter. Rising inflation pressures stemmed mainly from the higher international prices

of oil and non-oil commodity products. Higher food prices, particularly of rice, continued to

drive the trend of headline inflation.

 Domestic interest rates displayed mixed trends in Q1 2008. Primary interest rates fell

while secondary market yields rose during the quarter. Rates were lower in the

primary market for government securities as the National Government rejected some
 bids because of its stable cash position. Secondary market yields, however, rose on

concerns of a prolonged slowdown in the US economy, and possibly the global

economy, as well as the continued uptrend in international oil and food prices. The

high inflation outturn during the first quarter of 2008 and worries about the possible

knock-on effects on the Philippine economy of a US economic slowdown contributed

to higher risk aversion.

 Investor sentiment was cautious. The equity market was bearish, with weaker trading

reflecting investors‘ cautious stance due to global economic concerns, rising inflation

pressures and local political noise. Meanwhile, the average monthly peso-dollar

exchange rate depreciated in March relative to the levels in the previous two months

as market uncertainty rose in February amid the turbulence in global financial

markets (please refer to appendix D for the peso-dollar exchange rate).

 Global financial markets continued to experience volatility during the review period.

The financial market strains have started to be felt in the real sector, with indicators

pointing to a slowing down of the US, Euro area, and Japanese economies. In

contrast, emerging Asian economies continued to expand, although they too are

vulnerable to the effects of weak global growth particularly if the duration of the

slowdown becomes longstanding. Meanwhile, the sustained elevated levels of oil and

non-oil commodity prices have pushed up inflation in most parts of the world.
  Domestic liquidity growth slowed down in February. The slowdown in the growth of

domestic liquidity can be traced to the decline in the net domestic assets (NDA) and

the slowdown in the growth of net foreign assets (NFA). The tapering off of M3

growth is also seen to reflect in part the impact of the measures implemented by the

BSP in May 2007.

Inflation accelerated in Q2 2008. Against the background of a continuous surge in energy

and food prices, average headline inflation rose to 9.7 percent from 5.6 percent in the previous

quarter. The strong price dynamics of food and oil have also started to feed into other prices. The

BSP‘s latest assessment is that inflation could settle above the 2008 and 2009 targets. Price

pressures have increased even as they are projected to ease starting late 2008. This developed as

concurrent and interrelated shocks to the economy—such as the persistent surge in oil prices and

spikes in commodity prices—have contributed to elevated inflation readings. The pass-through

from global prices is continuing and the global non-oil commodity price hikes appear prolonged

and are expected to take longer to unwind.

 Financial markets were affected by heightened risk aversion brought about by worries

over the global economy, as well as rising inflation. The peso weakened, activity in

the stock market turned bearish, and secondary market yields for government

securities rose across all tenors in Q2 2008 on news of an imminent recession in the

US and the resulting slowdown in the broader global economy, and the continuing

surge in international oil and food prices.

  Higher oil and non-oil commodity prices have resulted in an ―income crunch‖ across

the world. The recent run-up in commodity prices comes in the face of the weakness

in US economic activity and global financial market volatility, which are already

causing a slowdown in global expansion. Emerging market economies, however,

have so far been less affected by the financial market turbulence and have continued

to grow at a strong pace—particularly China and India—although economic activity

 The BSP believed that there were already indications of supply-driven pressures

beginning to feed into generalized pricing behavior. Given the early evidence of

second-round effects, as indicated in the uptrend in core inflation, rising prices of

services, upward shift in inflation expectations, and the earlier-than-expected wage

adjustments, the Monetary Board recognized the need to act promptly to rein in

inflationary expectations. Since monetary policy affects economic variables with a

time lag, the policy measure undertaken is expected to help address risks to inflation

in 2009.

Inflation continued to accelerate in Q3 2008. Inflation pressures intensified in July and

peaked in August, as headline inflation averaged higher during Q3 2008, driven in large part by

the momentum of the global commodity price increases. However, with the abatement of food

and oil prices toward the latter part of the quarter, inflation declined in September after 10

months of continued acceleration.

 The pace of real sector activity slows down amid the rising cost of fuel and other

basic commodities and the slump in the US economy and its spillovers to other

economies. The domestic economy grew at a slower pace in the second quarter,

reflecting the adverse impact of higher commodity prices and the slowdown in global

growth. Many demand indicators showed some cooling down: slowdown in

household spending, lower business and consumer confidence, declining energy sales,

and easing demand for energy related and -intensive goods.

 Financial market sentiment remains weak amid worsening global financial

developments. The peso weakened and activity in the stock market turned bearish on

heightened concerns about the worsening global financial turmoil. The yield curve of

the secondary market for government securities flattened in Q3 2008, reflecting partly

a ―flight to quality‖ market sentiment. In addition, bond spreads widened as the

financial market strains globally triggered a significant spike in risk aversion against

emerging market assets. This turn of events is expected to slow down domestic

economic activity further in the short term due to the negative feedback loops from

financial markets to the real sector.

 Global economic conditions weakened considerably amid the most severe global

financial crisis in decades. The global economy is facing its most difficult challenge

in many years, hit by the combination of an imminent economic slowdown, still

elevated inflation levels, and the most severe global financial turmoil in decades.
 Going forward, the global financial market upheaval may stunt global demand as a

credit crunch resonates through the global economy.

 Domestic liquidity growth, however, continued to increase in Q3 2008. The

expansion in domestic liquidity as of end-August was driven by net domestic assets,

as credits to the private sector accelerated. Meanwhile, the expansion in net foreign

assets slowed down due largely to the decline in the foreign assets of depository

corporations as banks‘ investments in foreign securities declined.

Headline inflation, which started going down in September, continued to drop during Q4

with the weakening of global economic activity and as supply conditions in both domestic and

international markets improved.

 The inflation outlook improved. Emerging forecasts showed a downward shift in the

inflation path to settle within the target ranges for both 2009 and 2010, driven mainly

by the expected easing of world oil prices, the lower-than-expected inflation outturn

for Q4 2008, and the impact of transport fare reductions. Retreating prices of

commodities and the recent string of low inflation numbers should relieve

inflationary pressures and keep the public‘s inflation expectations at bay.

 On balance, the risks to the inflation outlook are tilted to the downside, but upside

risks remain. Given the softening prices of commodities, the slowdown in core

inflation, lower inflation expectations and moderation in demand, the balance of risks
 to inflation is tilted to the downside. However, some upside risks to inflation

remained, including possible disruptions/reductions in oil supply due to geopolitical

tensions and cutbacks in production, higher electricity rates, and volatility in the

exchange rate. A resurgence of increases in the price of food could occur, as credit

strains or tight financial conditions could push farmers to plant less in the near term.

 Meanwhile, the marked weakening of global macroeconomic outlook contributes to

the risk-averse sentiment in financial markets. Caution characterized activity in the

Philippine equities market as investor sentiment remained weak due to global

financial concerns. The peso, along with most regional currencies, depreciated

sharply amid investors‘ heightened risk aversion and uncertainty about growth

prospects. Emerging bond market spreads remained elevated, influenced by

deteriorating global financial market conditions. However, the banking system

remained stable, while investors‘ ―flight to quality‖ sentiment drove banks‘ increased

appetite for government securities.

 Domestic liquidity continues to expand. Demand for money remained strong in Q4,

fueled by the growth of both net domestic assets (NDA) and net foreign assets (NFA).

Meanwhile, bank lending growth continued to be strong, driven by loans across all

major production activities. To preempt a possible credit tightening, the BSP doubled

its rediscounting budget, reduced the reserve requirement ratio, and opened a US

dollar repurchase facility.

  Central banks take decisive and coordinated moves to address the crisis brought about

by the global financial turmoil. Led by the advanced economies, monetary authorities

around the world reduced policy rates, injected liquidity into their financial markets,

delivered fiscal stimulus packages, and undertook other measures to strengthen

financial systems. These actions are expected to lift market confidence, improve

credit conditions, and promote a return to moderate economic growth over the

medium term.

 Given the favorable inflation outlook, the BSP has sufficient latitude to address

financial market stability as well as growth concerns. The downward shift in the

balance of risks associated with the declines in commodity prices and the fall in

inflation expectations allowed the Monetary Board to reduce key policy rates by 50

basis points during its December policy meeting. Going forward, guided by the

flexibility afforded by the inflation targeting framework in terms of range and

horizon, the BSP will carefully consider opportunities for monetary policy easing to

support growth to the extent that inflation remains within the target range.

Inflation decelerates further in Q1 2009. Headline inflation was lower in Q1 2009

compared to the previous quarter, reflecting subdued price pressures as prices of food and

energy-related items decreased. There have been further declines in domestic commodity prices

as global prices, especially of energy products, responded to weaker global demand.

 Economic conditions generally weaken. Signs of moderation in economic activity

were apparent based on the previous quarter‘s national accounts as consumption

slowed down, capital formation declined, and the growth of exports and imports

contracted markedly. First quarter 2009 leading economic indicators also showed the

same trend. Capacity utilization and energy sales decreased while unemployment

increased. Meanwhile, business and consumer surveys indicated continued bearish

outlook for the first and second quarters.

 While there are some tentative signs that the current global economic down cycle

may be nearing the bottom, forward momentum remains weak. Developments over

the past three months, which show severe financial deleveraging and a more

widespread downturn in many countries, indicate that the restoration of the global

financial system to normalcy may take some time. Meanwhile, the fragile state of

global financial markets continued to pose challenges to domestic financial markets.

Local equity and foreign exchange markets showed signs of strains in the first

quarter, even as volatility eased toward the end of the period.

 The peso weakens on a year-to-date basis. The peso depreciated against the US dollar

in the first quarter as heightened risk aversion gripped Asian currency markets. In

addition, concerns over the likelihood of deep contractions in advanced economies

and the effect of weak global demand on the export-driven Asian economies put

pressure on the peso during the quarter. Nonetheless, sustained overseas Filipino (OF)
 remittances as well as a generally improved market sentiment toward the latter part of

the period eased the pressure on the peso to some extent.

 Meanwhile, domestic liquidity continues to grow strongly. The double-digit growth

of domestic liquidity reflected, in part, the preemptive measures taken by the BSP

starting in the latter part of 2008, in addition to the reductions in policy rates. These

included the reduction in the reserve requirement ratio by two percentage points, the

increase in the rediscounting budget to P60 billion, and the liberalization of access to

the rediscounting facility of the BSP.

 Domestic interest rates decline. Primary and secondary market yields declined,

influenced by the reduction in the BSP‘s policy rates. Lending rates also declined, but

to a lesser extent than the BSP policy rates, as banks passed on partially the reduction

in policy rates. There were findings of a moderate tightening in credit standards based

on the first quarter preliminary results of the BSP‘s Senior Bank Loan Officers‘

Survey. Nonetheless, bank lending continued to grow at a solid pace.

 Going forward, the latest inflation forecasts continue to show moderating price

pressures, with inflation falling within the target ranges for 2009 and 2010. On

balance, inflation risks are slightly skewed to the downside, with increasingly weaker

global and domestic demand conditions and a lower probability of a significant near-

term recovery in commodity prices. The narrowing output gap also suggests some

moderation in demand-side price pressures while inflation expectations remain well

 anchored. Upside risks continue to revolve mainly around the volatility of oil prices

and the exchange rate, as well as possible increases in utility tariffs and food prices.

 The continued favorable inflation outlook provides scope for policy flexibility. This

allows the BSP to balance price stability objectives with the need to support the

financial system and the macroeconomy as economic headwinds continue. Monetary

policy remains an important policy lever which could minimize any further corrosive

feedback stemming from weakening economic and financial conditions. However,

monetary policy cannot single-handedly limit the contractionary effects of the global

crisis on the domestic economy. Monetary measures need to be complemented with

other measures, including an appropriately more stimulative fiscal policy in

supporting the economy through the downturn.

Average inflation for 2009 falls within target range, even as Q4 inflation increases.

Headline inflation for 2009 averaged lower at 3.2 percent, well within the Government‘s target

of 2.5-4.5 percent. Favorable developments in food and energy-related items in the first three

quarters of 2009 sustained the inflation downtrend which started in Q4 2008. However, inflation

rose in Q4 2009 as weather-related disturbances led to higher prices of food products and as the

price of oil increased in the global market. Higher inflation path in Q4 was also partly statistical

as base effects which contributed to low inflation readings during the earlier part of the year have

started to diminish.
 The prevailing inflation outlook likewise indicates within-target inflation over the

policy horizon, with near-term price pressures expected to remain manageable.

Inflation is expected to track a target-consistent path over the policy horizon, with the

latest baseline inflation forecasts for both 2010 and 2011 only slightly higher than the

forecast in the previous Inflation Report. Risks to domestic inflation are tilted slightly

upwards. On the one hand, potential sources of domestic inflationary pressures

include supply tightness in key agricultural products, and the pending adjustments in

domestic power charges. The impact of the El Niño weather conditions on domestic

food supply could also add some pressure on inflation in the near term. On the other

hand, downside price pressures are expected to stem from the modest improvement in

domestic demand, and well-contained inflation expectations. Large foreign exchange

inflows, including from overseas Filipinos‘ remittances and foreign investments,

could help stabilize the value of the peso and in the process, help contain price

pressures from imported commodities.

 Global price developments relate mainly to the outlook for global economic activity

and developments in world commodity prices. Global inflationary risks are expected

to be manageable as some major central banks have signaled their strong commitment

to safeguard price stability by preemptively considering the disengagement from

crisis intervention measures. At the same time, economic fundamentals, such as

moderate improvement in consumer demand, above-average inventory levels and

elevated spare capacity are expected to weigh down on global price developments.

However, an improvement in market sentiment may prompt a rebound in private

 demand for advanced economies and pose upside risks to global inflation. In addition,

structural weaknesses in the investment and operational environment in the oil and

agriculture sectors suggest possible resurgence in commodity prices in the near term

once global demand fully recovers.

 The economy continues to grow in Q4 2009, supported by a resilient domestic

demand and the gradual recovery in global economic conditions. Latest demand

indicators signaled a pick-up in demand activity starting Q4 2009 with vehicle and

energy sales increasing and capacity utilization of manufacturing reaching its highest

level since 2000. Strong demand from household and government spending provided

support to the economy. At the same time, the world economy has shown signs of

recovery, with leading indicators in the advanced and emerging economies in Q4

2009 pointing to a resumption of growth with the return of substantial net capital

inflows, resilient domestic demand, and strong recovery in external trade.

Nevertheless, there remains uncertainty regarding the sustainability of future growth

beyond the impact of the stimulus measures.

Lower food inflation drove down headline inflation. Average inflation decelerated to 2.9

percent in Q2 2012 compared to the quarter-ago and year-ago rates of 3.1 percent and 5.0

percent, respectively. This brought the year-to-date (ytd) average inflation rate to 3.0 percent,

which is at the low end of the Government‘s inflation target range of 3-5 percent for 2012. The

slower price increase in key food items, notably rice, corn, meat, and oils, due to ample domestic
supply helped pull down inflation. Lower inflation rates for electricity, gas and other fuels as

well as transport also supported the decline in inflation.

Domestic economic activity grew strongly in 2012. The Philippine economy posted

higher-than-expected growth in Q1 2012 at 6.4 percent from 4.0 percent (revised) in Q4 2011.

The expansion was driven largely by household consumption and exports on the expenditure

side. Government consumption also rebounded, driven by the increased spending for operating

expenditures as well as the continued spending on social protection programs. Meanwhile, on the

production side, GDP growth was led by services. Latest data also suggest continuing

improvements in local demand conditions. Energy sales have expanded further, driven by

increased consumption from all major sectors, while real estate continues to show brisk activity

owing largely to the growing demand from the offshoring and outsourcing (O&O) industry.

Vehicle sales also picked up on higher consumer demand.

Inflation expectations continue to be well anchored. Results of the BSP and private sector

surveys indicated lower inflation expectations for 2012-2013. Analysts were of the view that

declining world oil prices, ongoing strains in the euro area, and the continued strength of the

peso could help temper inflationary pressures going forward. Meanwhile, results of the latest

consumer expectations survey showed that consumers expect a slightly higher inflation over the

next 12months.
Social Factors

Consumer Confidence Index Declines in Q2, but Remains Positive in the Year Ahead

Consumer sentiment weakened in Q2 as respondents cited the following reasons:

 perceived high cost of goods and services

 rising unemployment

 low salary and income

 expected higher household expenditure

Consumer confidence improved to -13.3 in the third quarter of 2012 from -19.50 in the

second quarter of 2012. Historically, from 2007 until 2012, Philippines Consumer Confidence

averaged -27.22 reaching an all-time high of -8.50 in December of 2010 and a record low of -
52.80 in September of 2008. In Philippines, the Consumer Expectations Survey captures the

economic outlook of consumers as an indication of the country's future economic conditions.

The CES samples were drawn from the National Statistics Office‘s (NSO) Master Sample List of

Households, which is considered a representative sample of households nationwide.

Business Confidence is higher in Q2 2012

Businesses‘ outlook on the economy continued to improve in Q2 2012 due to the

following factors:

 increase in orders and new contracts/projects leading to higher volume of production

 expansion of businesses and new product lines

 increased government spending

 seasonal uptick in demand during summer and the enrollment and harvest seasons

 prevailing favorable macroeconomic conditions such as lower interest rates and

manageable inflation

 steady growth of overseas Filipinos‘ (OFs) remittances

The sentiment of businesses in the Philippines mirrored the improved business outlook

globally, particularly in the US, Germany, Australia, New Zealand, Hong Kong, Korea and

Singapore.
 Businesses anticipated economic expansion to continue in Q3 2012, although growth

could be slower as the next quarter CI remained positive but declined to 44.6% from 55.4% in

the previous quarter. This is due to expectations of slower demand and slack in business activity

during the rainy season in the industry, wholesale and retail trade and services sectors.

Firms engaged in international commodity trading were more optimistic in their outlook

in Q2 2012. Importers were the most bullish and the exporters manifested the biggest

improvement in sentiment, largely due to:

a) continued high metal prices

b) stronger production volumes

The optimism of dual-activity firms likewise increased in Q2 2012. For Q3 2012, even as

the overall business outlook was less optimistic, the outlook of exporting firms improved

compared to a quarter ago while those of the importers and dual-activity firms declined, similar

to the national trend.

Firms‘ sentiments across employment size were more favorable in Q2 2012. Large-sized

firms‘ business confidence was the most buoyant, followed by the medium- and small-sized

firms. However, for Q3 2012, the outlook of firms across employment size turned less upbeat.

Across sectors, the business outlook in Q2 2012 was broadly more bullish. Firms in the

construction sector were the most optimistic, followed by the services and industry sectors.
 For Q3 2012, except for the steady outlook of the construction sector, sentiments of firms

across sectors, while remaining positive, turned less favorable. The construction sector showed

heightened optimism among all sectors, registering an all-time high CI in Q2 2012, due to

brisker business in anticipation of the stronger implementation of the planned Public-Private

Partnership (PPP) projects this year. Businesses also expected other public infrastructure projects

and expansion plans of the private sector to be on stream during this quarter. The sentiment of

the services sector continued to improve in the current quarter, particularly for the business

activities, community and transport sub-sectors, due to:

a) favorable business conditions

b) upsurge in investment (both public and private)

c) robust consumer demand, owing in part to seasonal factors such as enrollment and

tourism

The industry sector attributed its more upbeat outlook to:

a) higher demand from both the domestic and overseas markets

b) planned business expansion

c) increased government infrastructure spending

d) stable prices of basic commodities

e) brighter growth prospects of the economy

 Meanwhile, the outlook of wholesale and retail trade firms declined slightly as business

prospects of some firms were constrained by high electricity costs and stiff domestic

competition.

On account of the mixed outlook on business activity for Q2 and Q3 2012, firms‘

confidence about their own operations across sectors did not show an improvement. Expectations

of firms in the services and construction sectors remained broadly steady while those in the

industry and wholesale and retail trade sectors declined.

Financial conditions outlook turned less pessimistic as the index, while staying in the

negative territory, continued to improve for the fourth consecutive quarter. Meanwhile, firms are

of the view that their liquidity requirements could be met through available credit as more

respondents continued to report easier access to credit relative to those who said otherwise

compared to a quarter ago. Another indicator supporting expectations of sustained growth in

2012 was the employment outlook index for the next quarter, which remained positive although

lower at 22.1%.

Respondents that expected inflation to go up continued to outnumber those with the

opposite view, but the number that said so declined in Q2 2012. For Q3 2012, the number of

respondents that anticipated higher inflation increased due to expectations of higher oil prices

given concerns of continuing tensions in the Middle East and pending petitions for electricity

rate adjustments. On the other hand, more respondents expected the peso to appreciate in Q2 and
Q3 2012. Expectations of the peso‘s sustained appreciation could be due to anticipated strong

inflows of:

a) overseas Filipinos‘ remittances

b) business process outsourcing (BPO) receipts

c) foreign investments

d) a recovery of export demand

Meanwhile, interest rates were expected to remain broadly steady in Q2 2012 but to rise

in Q3 2012. (Bangko Sentral ng Pilipinas)

Technological Factors

The Philippine banking sector has been far more open to technology than many of its

counterparts in the region. In fact, the industry is an early adopter, having upgraded its system 10

to 15 years ago to state of the art technology of that time. Since then, several banks have

revamped their technology platforms and as a result, improved customer service, reduced time to

market, created right selling opportunities and enhanced efficiency etc., on the way to

competitiveness and profitability.

The trend of core banking renewal, which started in 2004, prevails even today with

maybe 30 to 40 percent of Universal banks actively considering a change. Currently, the

microfinance industry is propelled by a solid distribution network of agents and intermediaries;

however, as microfinance institutions renew their core banking platforms and consequently

enlarge their options of electronic channels, they could leverage technology (especially mobile

devices) to reach their services to the last mile.

Banks are also looking at social media with interest as a channel to engage the country‘s

younger, technology-savvy generations. In future, banks may integrate social media with their

regular services to improve customer engagement, render customer service, draw insight, co-

create and perhaps even facilitate banking transactions.

Environmental Factors

The PDNA estimated that the damage and losses from Ondoy and Pepeng amounted to a

total of US$4.38 billion. The PDNA found that damage to physical assets in the affected areas

amounts to an estimated Php 68.2 billion, equivalent to US$1.45 billion. Associated losses in

production and other flows of the economy were estimated at nearly Php 137.8 billion or

US$2.93 billion, equivalent to two-thirds of the total disaster effects. While the destruction or

damage to assets occurred at the time of the storms, the associated changes in economic flows

will last beyond the present calendar year. In some sectors and cases, the effects will be felt in

2010 and 2011 depending on the speed and efficiency of the post-disaster recovery and

reconstruction activities.

Summary of Disaster Effects and Needs by Sector (in US$ million)

 The private sector has borne most of the impact of the disasters. The share of private

sector damage and losses is equivalent to 90 per cent of the total, while that of the public sector

constitutes the remaining 10 percent. It should be noted that in contrast to other disasters in

which destruction of infrastructure is predominant, nearly 95 percent of total damage and losses

were sustained by the productive and social sectors. Counting these losses is also the main

difference between the estimate of the PDNA and that of the National Disaster Coordinating

Council (NDCC), which only selectively counts losses (e.g., in agriculture) and does not take

into account private sector impacts, therefore yielding a lower estimate of total damage and

losses.

The assessment of damage and losses provides a basis for determining recovery and

reconstruction needs. The assessment of damage provides a basis for estimating reconstruction

requirements, while the estimation of losses provides an indication of the recovery needs to

address the reduction or decline in economic activity and in personal and household income. The

two estimates are then combined to establish overall needs to achieve full recovery of economic

activities at the macroeconomic level and at the individual or household level.

A total of US$ 942.9 million is required to meet recovery needs, and a total of US$ 3.48

billion is required for the reconstruction efforts over the short term (2009-10) to medium term

(2011-12). Larger investments, particularly in flood control and housing, may need to be

considered in the longer term. It should be noted that the human and community-based early

recovery needs identified by the IASC clusters and included in the Revised UN Flash Appeal are

included in the amount of total needs. The share of the public sector in implementing the
recovery and reconstruction program is estimated at 55 percent (US$ 2.44 billion), whereas

private sector execution amounts to 45 percent (US$ 1.99 billion). The exact public sector need

depends on the choices the government makes on the specific programs to implement, the timing

and pacing of those programs, and the effectiveness with which these programs are implemented.

Financing can come from a variety of sources, including the domestic budget, local government

budgets, private sector contributions, and grants and concessional loans from development

partners.

The needs for financing are large, but the cost of doing nothing would be larger still. This

PDNA estimates the total cost of recovery and reconstruction at US$ 4.42 billion. Given the very

limited capacity of the flood management system in Metro Manila and the possibility of

increased frequency and intensity of floods and typhoons, such costs can be expected to recur

more frequently unless urgent efforts are made to mitigate the effects of future disasters. For

example, Metro Manila‘s system of drainage was designed to withstand events of a 30-year

return period. Given the siltation, the presence of massive amounts of trash, and chronic lack of

maintenance, the actual capacity of the system is now much lower than it was when designed.

Coupled with the likely impacts of climate change, the drainage system can be expected to be

overwhelmed again within the lifetime of most Ondoy victims if these deficiencies are not

addressed. Because of the rapid increase in economic activity and concentration of people in

Metro Manila, the costs of disasters such as Ondoy warrant investments in much higher

protection against floods and other disasters than currently in place.

Legal (Regulatory Environment) Factors

The Philippine legal and regulatory environment is characterized by a comprehensive set

of law and capital market regulations. Two pieces of legislation principally govern corporate

activities - the Corporation Code, the general law on private corporations; and the Securities

Regulations Code, the principal law on securities and governs the rules and regulations of the

PSE. The SEC administers both laws and has supervisory responsibilities for all corporations.

The PSE in turn, supervises and regulates the stock market and all listed firms are

required to comply with the listing requirements. It is a self-regulatory corporate organization

that independently finances its operations through capital from members and fees collected for

listing and membership.

Financial institutions are governed by three laws: the General Banking Law, the Banko

Sentral ng Pilipinas (Central Bank, BSP) Law, and the charter of the Philippine Deposit

Insurance Corporation, which provides protection to depositors in case of bank insolvency. The

BSP has the supervisory responsibilities for banks and quasi banks.

The Bangko Sentral ng Pilipinas (BSP) announced that the country‘s universal and

commercial banks (U/KBs) will be required to adopt the capital adequacy standards under Basel

III starting 01 January 2014. This puts the Philippines alongside such jurisdictions as China,

Australia, Hong Kong SAR and Singapore which have announced similar Basel III

implementation plans.
 Basel III introduces a complex package of reforms designed to improve the ability of

bank capital to absorb losses, extend the coverage of financial risks and have stronger firewalls

against periods of stress. However, the Basel Committee on Banking Supervision (BCBS)

outlined a staggered implementation of Basel III stretching through the end of 2018 to allow

internationally-active banks time to raise capital organically.

The Monetary Board decided to adopt the capital adequacy standards in full by January

2014 without recourse to a staggered implementation or a gradual phase-out of ineligible capital

instruments. This recognizes the present strong capital position of the banking industry while

providing for a reasonable transition period.

The BSP had previously set its Basel implementation standard higher than the

international norm. While the Basel II Accord required a regulatory minimum for the Capital

Adequacy Ratio at 8%, the BSP set the standard in the Philippines at 10%.

With the new roadmap, the BSP has again set the local bar higher than the minimum

international standard. By adopting the capital adequacy standards by January 1, 2014, the BSP

effectively accelerates the implementation of the Basel III Accord for universal and commercial

banks, including their subsidiary banks and quasi-banks.

Porter’s 5 Forces Model

The Porter‘s 5 forces model discussed the relationship between the five forces acting

within the industry – rivalry, suppliers, substitutes, buyers, and new entrants.

Rivalry

There is a strong rivalry within the industry. This is because there are a lot of companies

in the financial sector. These include not only the various banks but also the small-time financing

institutions like pawnshops and cooperatives. The cutthroat competition among banks has

dramatically reduced interest rates especially on top-tier corporations. It is likewise much

cheaper to obtain consumer loans, such as when buying a new home or a car. Only the credit-

card business has defied gravity, with interest rates still hovering at 3 percent a month (or 36 a

year). In addition, buyer costs to switch banks are low. Consumers rely on word-of-mouth

hysteria and experiences in their preferences of banks and they find rather the process of

switching banks complex that‘s why they tend to stick to one they know they can trust.
Suppliers

With regard to materials & equipments, the suppliers generally provide the same products

such as pass books, atm cards & machines, deposit slips, and withdrawal slips, etc. There are

sufficient suppliers so it is fairly easy for a bank to switch suppliers. This takes away much of the

suppliers‘ bargaining power. With regards to investors, their bargaining power of the investors is

strong.

Substitutes

In this scenario, the substitutes are both within the industry and from the financial sector.

The substitutes include Rural banks, Thrift banks, cooperatives, pawnshops, microfinance and

loan sharks.

A rural bank is a financial institution that helps rationalize the developing regions or

developing country to finance their needs specially the projects regarding agricultural progress..

A thrift bank, or thrift, is a term for a financial service organization that specializes in

offering savings accounts and originating mortgage loans to consumers. Some are mutually

owned--that is, owned by their depositors--while others are owned by stockholders.

 Cooperative is a business owned and controlled equally by the people who use its

services or who work at it. Agusan del Norte Cooperative Bank, Bataan Cooperative Bank

Camiguin Cooperative Bank are some of the cooperatives here in the Philippines.

Pawnbroker (or pawnshop) is an individual or business that offers secured loans to

people, with items of personal property used as collateral. The word pawn is derived from the

Latin pignus, for pledge, and the items having been pawned to the broker are themselves called

pledges or pawns, or simply the collateral. M Lhuillier and Cebuana Lhuillier are some of the

well known pawnshops here in the Philippines.

Microfinance is the provision of financial services to low-income clients or solidarity

lending groups including consumers and the self-employed, who traditionally lack access

to banking and related services. More broadly, it is a movement whose object is ―a world in

which as many poor and near-poor households as possible have permanent access to an

appropriate range of high quality financial services, including not just credit but

also savings, insurance, and fund transfers.

Loan sharks are a person or body that offers unsecured loans at high interest rates to

individuals, often enforcing repayment by blackmail or threats of violence. They prey on those

who are in desperate need, who just close their eyes even if the interest rates are shamefully high

- from 5% to 20% per month.

 The bargaining power of substitutes is moderate. This is because the marginalized people

tend to go for small-time financing institutions because of cheaper interest and loan

requirements. But still, large values of activities still go to Universal and Commercial Banks,

thus these substitutes fairly do not affect the profitability of U/KB‘s.

Buyers

Main customers of banks are investors or businessmen, pensioners, loaners, as well as

ordinary people who want to open a bank account to secure their money and make it grow. The

bargaining power of buyers is high. Different U/KB‘s have started designing loaning and

investment programs that are fit for consumer lifestyle and payment capabilities.

New Entrants

The presence of new entrants is not a strong competitive pressure for Universal and

Commercial Banks. Top banks like BPI, Metrobank, and BDO dominate the industry with their

strong reputation and great performance for the past years. This makes it very difficult for new,

unknown entrants to start competing against existing banks. The barrier to entry is high due to

high fixed cost, strict compliance and high capital requirements.

Economic Analysis Summary

The SWOT and PESTEL analysis enabled the researchers to understand the environment

in which the banks operate. It was a key to thoroughly understand the external operating

environment in which they operate and the internal culture of Universal and Commercial Banks.

These external factors provide positioning for the banking industry in terms of the countries‘

condition. The strengths and weaknesses of the company provide room for opportunities and the

threats in the banks‘ business. These analyses are used in identifying constraints and

opportunities in the banks‘ operating environment and were used as guide in providing

mitigation for risk factors identified and assessed as needed to be addressed.

Operating Environment

The central scenario for the Philippine economy was to deliver real gross domestic

product (GDP) growth of 4.5% in 2011 and 5.0% in 2012, following a strong 7.6% growth in

2010 (BSP, 2012). The expected decline in the level of growth would be due to both a

pronounced weakening in export growth in 2011 and persistent under-spending by the

government, the result, in turn, of its fiscal consolidation efforts. Overall, foreign income inflows

drive domestic demand and maintain the Philippine‘s strong external balance in the coming year.

There are both upside and downside risks to the central scenario. Additional growth

supports may come from the government‘s potential spending on public sector projects and the

possibility of the central bank, Bangko Sentral ng Pilipinas (BSP), switching to a more
aggressive easing monetary policy. The on-going problems in Europe and the US, as well as the

lingering effects of natural disasters in Japan, have contributed to the Philippines‘ recent

weakening in export performance. Going forward, deeper fallout in the Eurozone crisis, and/or a

further slowdown in China, the Philippines‘ second largest export destination, could exacerbate

external pressure on economic growth. However, the economic analysis indicates that the banks

have the capacity to resist a significant negative shift in operating conditions.

Asset Quality

For the industry as a whole, expect the benign operating environment, as well as the

banks‘ improved risk underwriting and monitoring practices to keep non-performing loan

formation low. Moreover, stable asset quality suggests the system to be at little risk asset or

credit bubbles, hence limiting potential negative surprises in asset quality. Assuming a downside

scenario, however, banks would face asset quality pressure in their loans to export-oriented

borrowers, particularly manufacturers.

Further appreciation of the Peso, or a rise in risk premiums, may also increase these

borrowers‘ debt servicing burdens. While there is low export-related borrowers account on the

total system loans, the impact on individual banks may be magnified by some players‘ high

single-borrower concentrations.
Funding and Liquidity

In general, banks maintain excess and stable liquidity on their balance sheets with the

overall loans-to-assets ratio extremely low. In addition, banks tend to maintain adequate stocks

of liquid assets, like cash and local government securities, and they have not experienced any

difficulty raising long-term debt or equity capital through the domestic capital markets to fund

asset growth. Thus, we expect banks‘ liquidity profiles to remain strong and a supportive factor

for their credit fundamentals over the next 12-18 months.

Profitability and Efficiency

There is pressure on profitability from stronger price competition, in turn due to a slower

pace of overall loan growth, and loans being re-priced faster than deposits in a falling rate

environment. At the same time, profitability may benefit from growth in loan demand as

presented in the consumer confidence index. The inflation in the country has been stable from

the past 3 years, following a very strong improvement from 2009 after price pressures had

tremendously increased in the year 2008. Constant re-pricing of products due to interest rates and

foreign exchange rates fluctuation was the key to keeping the banks‘ profitable. Strategies/Risk

management from the various annual reports of the banks was excerpted for the risk mitigation

plan as related with the annual inflation reports of the BSP.

Risk Assessment

Risk Average Weighted Scores: Financial Impact

Weighted Weighted
Average
Universal Scores Commercial Scores Qualitative
Financial Impact weighted
Banks T ally (Frequency Banks T ally (Frequency x rate
scores
x Weights) Weights)
T ype Legend Risk Factors H M L 3 2 1 H M L 3 2 1 n = 10
Credit Risk C1 Counterparty 0 3 2 0 6 2 4 1 0 12 2 0 2.2 M
C2 Credit Concentration 1 2 2 3 4 2 3 2 0 9 4 0 2.2 M
Market Risk M1 Price 2 2 1 6 4 1 2 3 0 6 6 0 2.3 M
M2 Foreign Exchange 1 1 3 3 2 3 0 4 1 0 8 1 1.7 M
M3 Bond T rading 0 2 3 0 4 3 0 2 3 0 4 3 1.4 L
Interest Rate I1 IR Gap 1 1 3 3 2 3 2 2 1 6 4 1 1.9 M
Liquidity L1 Funding (Cash Flow) 1 3 1 3 6 1 4 1 0 12 2 0 2.4 H
L2 Asset Liquidity 2 1 2 6 2 2 4 1 0 12 2 0 2.4 H
Operational O1 Internal Fraud 1 1 3 3 2 3 1 4 0 3 8 0 1.9 M
O2 External Fraud 0 3 2 0 6 2 1 4 0 3 8 0 1.9 M
O3 Damage to Phyical Assets 1 0 4 3 0 4 0 0 5 0 0 5 1.2 L
O4 Employee Retention 2 0 3 6 0 3 0 2 3 0 4 3 1.6 L
O5 Succession Planning 1 2 2 3 4 2 0 2 3 0 4 3 1.6 L
O6 Information & Security 2 0 3 6 0 3 2 3 0 6 6 0 2.1 M
Compliance C1 Compliance 1 1 3 3 2 3 1 3 1 3 6 1 1.8 M
Reputation R1 Reputation 1 2 2 3 4 2 4 1 0 12 2 0 2.3 M
Strategic S1 Profitability 3 0 2 9 0 2 4 1 0 12 2 0 2.5 H
S2 Mission & Direction 0 3 2 0 6 2 0 4 1 0 8 1 1.7 M
S3 Planning & Execution 0 3 2 0 6 2 3 2 0 9 4 0 2.1 M
S4 Socio-political Climate 2 0 3 6 0 3 1 2 2 3 4 2 1.8 M
Source: Survey Results conducted appended in appendix E

The table above shows the risk average weighted scores and qualitative rate for the

financial impact survey. The qualitative rate for each risk factor was based on the given range in

Chapter 1. The qualitative rate was used in the risk assessment matrix.
Risk Mean Weighted Scores: Likelihood

Weighted Weighted
Commercia Average
Universal Scores Scores Qualitative
Likelihood l Banks weighted
Banks T ally (Frequency (Frequency x rate
T ally scores
x Weights) Weights)
T ype Legend Risk Factors H M L 3 2 1 H M L 3 2 1 n = 10
Credit Risk C1 Counterparty 2 1 2 6 2 2 0 0 5 0 0 5 1.5 L
C2 Credit Concentration 2 2 1 6 4 1 0 0 5 0 0 5 1.6 L
Market Risk M1 Price 3 1 1 9 2 1 0 4 1 0 8 1 2.1 M
M2 Foreign Exchange 3 0 2 9 0 2 0 4 1 0 8 1 2 M
M3 Bond T rading 2 0 3 6 0 3 0 2 3 0 4 3 1.6 L
Interest Rate I1 IR Gap 2 1 2 6 2 2 0 4 1 0 8 1 1.9 M
Liquidity L1 Funding (Cash Flow) 1 2 2 3 4 2 0 2 3 0 4 3 1.6 L
L2 Asset Liquidity 2 1 2 6 2 2 0 2 3 0 4 3 1.7 M
Operational O1 Internal Fraud 1 2 2 3 4 2 0 1 4 0 2 4 1.5 L
O2 External Fraud 0 4 1 0 8 1 0 3 2 0 6 2 1.7 M
O3 Damage to Phyical Assets 1 1 3 3 2 3 0 0 5 0 0 5 1.3 L
O4 Employee Retention 2 0 3 6 0 3 0 2 3 0 4 3 1.6 L
O5 Succession Planning 2 1 2 6 2 2 0 2 3 0 4 3 1.7 M
O6 Information & Security 2 0 3 6 0 3 0 2 3 0 4 3 1.6 L
Compliance C1 Compliance 1 1 3 3 2 3 0 1 4 0 2 4 1.4 L
Reputation R1 Reputation 1 2 2 3 4 2 0 1 4 0 2 4 1.5 L
Strategic S1 Profitability 3 0 2 9 0 2 0 4 1 0 8 1 2 M
S2 Mission & Direction 0 2 3 0 4 3 0 2 3 0 4 3 1.4 L
S3 Planning & Execution 1 1 3 3 2 3 0 2 3 0 4 3 1.5 L
S4 Socio-political Climate 2 0 3 6 0 3 0 2 3 0 4 3 1.6 L
Source: Survey Results conducted appended in appendix E

The table above shows the risk average weighted scores and qualitative rate for the

likelihood survey. The qualitative rate for each risk factor was based on the given range in

Chapter 1. The qualitative rate was used in the risk assessment matrix.
Risk Assessment Summary

Risk Assessment Table

Financial Risk
Type Legend Risk Factors Likelihood Assessment
Impact Score

Credit Risk C1 Counterparty M L 1 Acceptable Risk

C2 Credit Concentration M L 1 Acceptable Risk
Market Risk M1 Price M M 2 Must be Addressed
M2 Foreign Exchange M M 2 Must be Addressed
M3 Bond Trading L L 1 Acceptable Risk
Interest Rate I1 IR Gap M M 2 Must be Addressed
Liquidity L1 Funding (Cash Flow) H L 2 Must be Addressed
L2 Asset Liquidity H M 3 Must be Addressed
Operational O1 Internal Fraud M L 1 Acceptable Risk
O2 External Fraud M M 2 Must be Addressed
Damage to Physical
L
O3 Assets L 1 Acceptable Risk
O4 Employee Retention L L 1 Acceptable Risk
O5 Succession Planning L M 1 Acceptable Risk
O6 Information & Security M L 1 Acceptable Risk
Compliance C1 Compliance M L 1 Acceptable Risk
Reputation R1 Reputation M L 1 Acceptable Risk
Strategic S1 Profitability H M 3 Must be Addressed
S2 Mission & Direction M L 1 Acceptable Risk
S3 Planning & Execution M L 1 Acceptable Risk
S4 Socio-political Climate M L 1 Acceptable Risk

The table above shows the summary of risk assessment for each of the risk factors. The

assessment and risk score for each factor was based on the risk assessment matrix.
Risk Matrix and Risk Score

Figure 3.3: Risk Assessment Matrix

The figure above shows the result of the risk assessment matrix. As seen on the figure,

the risk factors that are plotted on the yellow to red area are the factors that need to be addressed.

These factors are Price, Foreign Exchange, IR Gap, Funding (Cash Flow), Asset Liquidity,

External Fraud and lastly, Profitability. These risk factors received medium to high scores of 2-3

and are provided with a risk mitigation plan. The remaining factors Bond Trading, Internal

Fraud, Damage to Physical Assets, Employee Retention, Succession Planning, Mission &

Direction, Planning & Execution, and Socio-political Climate, however, needs not to be

mitigated because they are considered to be at an acceptable risk level.

Risk Mitigation and Contingency Plan

Risk mitigation planning is the process of developing options and actions to enhance

opportunities and reduce threats to project objectives. Risk mitigation implementation is the

process of executing risk mitigation actions. Risk mitigation progress monitoring includes

tracking identified risks, identifying new risks, and evaluating risk process effectiveness

throughout the project.

Half of the battle when it comes to risk mitigation is simply identifying those risks that

are out there. Once you have identified the relevant risks, focus on the most serious and likely

risks first. The specific mitigation strategy will depend on the specific risk, but it is important to

have a well documented and well-communicated plan available in the event a risk arises, so that

a problem does not develop into a crisis.

The Risk mitigation plan presented includes the factors that were considered medium to

high risk.
Banking Risk Mitigation

A Bank is a financial institution which is involved in borrowing and lending money.

Banks take customer deposits in return for an annual interest payment. The banks then use the

majority of these deposits to lend to other customers for a variety of loans. The difference

between the two interest rates is effectively the profit margin for banks. We treat credit risk,

therefore, as the central risk factor from which all other risk factors will emerge.

Credit quality. Credit quality variables should be expected to be important determinants of

banks‘ soundness of risk management. Two variables are widely used for credit quality: the

nonperforming loan (NPL) ratio and the loan/asset ratio. The latter is used as loans are generally

considered to be riskier than other types of bank assets (eg cash, reserves, bonds) and therefore a

high loan/asset ratio is associated with lower credit quality. Both the NPL and loan/asset ratios

are also found to be positively associated with loan loss reserves (loan loss provisions).

Philippine Banks Annual Lending Rate

Philippines Annual Philippines Annual Lending Rate

Lending Rate 10
8.7 8.8 8.6
Year Rate 7.7
6.7
5
2007 8.7
2008 8.8
0
2009 8.6 2007 2008 2009 2010 2011
2010 7.7
Rate
2011 6.7
 According to BSP governor Amando Tetangco, Filipinos should take advantage of

favorable borrowing conditions while the government can still afford to bring down lending

rates. Now is a good time for consumers and corporations to borrow money as the Bangko

Sentral ng Pilipinas (BSP) reported lending rates at 6.7 percent since the start of the year 2011.

Bank lending rates have risen to 7.7 percent last year but have remained stable at the 6.7

percent average as of 2011. Two years ago, lending rates hit its highest point at an average of 8.8

percent which is due to the global economic crisis. The steadiness of bank lending rates, he said,

indicates how the economy is better positioned now than in the 1997 financial crisis, where the

average lending rate stood at 23.9 percent.

Loans to Assets Ratio

Year Total Loans Total Assets Loans/Assets

2007 2,194,780 33,740,202,851 0.00006505
2008 2,502,332 37,497,616,889 0.00006673
2009 2,724,870 44,205,983,034 0.00006164
2010 2,801,711 62,326,282,640 0.00004495
2011 3,221,775 75,123,093,542 0.00004289

The table above shows the annual loans to assets ratio of the Philippines UKB‘s. As seen

on the table above, the loans to assets ratio are extremely low. Thus, there is a favorable or very

good credit quality.

Past due Loans Ratio (NPL to TLP)

Gov't Foreign
Year Total UB's KB's
banks banks

2007 4.448 5.075 7.464 3.574 0.909

2008 3.524 3.923 6.296 2.266 1.489
2009 2.969 3.099 6.566 2.347 1.1
2010 2.863 2.973 5.875 3.018 0.742
2011 2.233 2.099 5.362 2.265 0.98
2012 2.083 2.089 5.254 2.178 0.97

Year
5
4.448
4
3.524
3 2.969 2.863
2 2.233 2.083
1
0
2007 2008 2009 2010 2011 2012

Year

The table above shows the past due ratio of Philippine UKB‘s for the past 5 years. The

standard ratio or acceptable level of past due loans for Philippines UKB‘s according to the

Bangko Sentral ng Pilipinas is only 3%, which means that for every bank that grows $1 billion,

there is a possibility to lose as much as $3 million.

The country‘s big banks kept their exposure to bad debts at a record low in August even

as they extended more loans to individual and corporate borrowers. According to the Bangko

Sentral ng Pilipinas, the ―comfortable‖ ratio of non-performing loans (NPL) was one of the
indications that the banking sector remained healthy and relatively unharmed by the crisis

confronting financial institutions in the eurozone.

Based on data from the BSP, universal and commercial banks‘ NPL ratio—the proportion

of bad debts to their total loan portfolio—stood at a historic low of 2.08 percent in August. The

latest ratio was unchanged from the previous month, but was even lower than the already

comfortable 2.52 percent recorded in August last year.

Regulators said banks are encouraged to lend more to help fuel faster growth of the

economy, but at the same time required to keep their exposure to bad debts within manageable

levels. Bank loans become ―bad debts‖ or are defined as ―non-performing‖ when these remain

unpaid for a specified period of time. Data further showed that outstanding loans of universal and

commercial banks amounted to P3.38 trillion by the end of August, up by about 10 percent from

P3.06 trillion as of the same period last year. Industry players said the increase in the loan

portfolios of banks proved that there is appetite for lending, especially since banks are currently

enjoying significant levels of liquidity. Of the outstanding loans as of end-August, some P70.43

billion was classified as non-performing. This was down year on year by nearly 5 percent from

P76.96 billion.

Central bank officials said the decline in NPLs showed that banks were keeping prudent

credit standards even as they move to lend out more to clients. Officials said credit growth in the

banking system partly aided the economy‘s favorable performance in the first semester, when it

grew by an above-target 6.1 percent.

Risk Mitigation Flow Chart
 The flowchart presented the steps on how risk factors emerged from treating credit risk as

a central risk factor and how to mitigate those risk factors. The researchers identified the total

loan portfolio breakdown in terms of sectors identified by the BSP. After identifying the total

loan portfolio breakdown, the next step was to measure the percentage of industry exposure to

the total loan portfolio. Then, measure the average past due ratio per industry.

Peer comparison approach was done in order to compare and analyze the average past

due ratio of the industry versus the bank‘s own past due ratio. If the average past due ratio of the

industry is greater than the bank‘s past due ratio, the exposure limit should be set within the

industry average and BSP standards. On the other hand, if the bank‘s own past due ratio is

greater than the industry average past due ratio, the exposure limit should be set based on type of

industry.

After establishing peer comparison of the bank to the industry, the next step is to measure

liquidity and profitability. To measure liquidity of each sector, subtract industry average past due

from the amount of exposure. If the result is negative, reprice products offered in order to avoid

losses. Then, test the profitability of each sector by dividing the level of exposure by industry

average past due. According to most bank risk department heads, sectors with profitability less

than or equal to 2.0 were considered alarming and should increase earnings by increasing the

interest rates of their products.

 The interest rate is affected by the level of foreign exchange exposure that is why it is

important to monitor products that are denominated in foreign currencies. If the foreign exchange

exposure exceeds BSP limits, increase price on a product where the banks can earn significantly.

Unfortunately, due to several constraints, the researchers couldn‘t provide Interest Rate measure

for better mitigation plans. It is also noted that banks have very unique loan portfolio regardless

of its type whether a Universal or Commercial bank. Last but not the least, banks should efforts

in order for them to avoid fraud risk. Collection efforts are immeasurable and we cannot define

the level by which banks should increase this effort. However, there are a lot of ways for banks

to increase collection efforts.

The key is to put a process in place that de-personalizes collection efforts while

maximizing your ability to be paid the money your business is owed. There are a lot of ways to

increase collection efforts.

 First, Establish and provide written terms. Bills of sale, contracts, invoices – any

agreements should clearly specify the terms extended to customers. Spell out not only

when you expect to be paid, but what happens if you are not paid on time. Consequences

could include penalties, interest charges, suspension of services, and formal collection

proceedings. In short, make sure customers know and understand your expectations.

 Establish progress payment terms. Keep track of work performed, goods and services

rendered, and bill on a pre-established schedule. If necessary, don't provide further

 services until prior invoices have been paid. This is especially important for long-term

projects or engagements.

 Contact slow-paying customers immediately. Don't wait – some will not make payment

arrangements until you contact them.

 Consider being flexible, especially with long-term customers. Almost every business

occasionally struggles; if you have developed a long-term relationship, try to find ways to

work with the customer while they overcome short-term cash flow issues. Before you do,

decide ahead of time how long you're willing to wait and how much you're willing to

bend, and let the customer know exactly what you are and are not willing to do.
 UKB‘s Loan Portfolio Breakdown
BSP Sectors Ave. Exposure to Ave. PD Ratio
TLP
Financial Intermediaries 7.10% 2.90%
Manufacturing 16.80% 3.80%
Wholesale and Retail Trade 12.90% 3.60%
Other Community, Social and
Personal Activities 10.20% 21.20%
Real Estate, Construction, Renting
and Business Activities 15.30% 11.70%
Transportation, Storage and
Communication 5.40% 1.10%
Agriculture, Fishing and Forestry 5.20% 16.00%
Others 1.50% 8.90%

The table above shows the average exposure to TLP and average past due ratio of the

UKB‘s per sector as categorized by the Bangko Sentral ng Pilipinas. The exposure to TLP is the

percentage of loan used for a loan category to the TLP. The past due ratio is the percentage of

NPL of a loan category to the TLP. The exposure of loans to the TLP is directly proportional to

the past due ratio. This means that the higher the limit set for a loan category, the higher the

probability that it will be past due or non-performing. This relationship will be our guide in

making a peer comparison approach for different bank sizes. The following were chosen based

on size:

 Banco De Oro (BDO) – Big

 Philippine Veterans Bank (PVB) - Medium

Peer comparison is one of the most widely used and accepted methods of equity analysis

used by professional analysts and by individual investors. It has been proven to be efficient and
effective, quickly showing which stocks may be overvalued, and which might make good

additions to a portfolio. This peer comparison will serve as the basis for exposure limit for each

loan category per bank size. The peer group is often made up of other firms in the same industry,

but peers can also be chosen based on other circumstances of the firm. It is a method of valuing a

firm by comparing standardized valuation metrics with those of similar companies, and it is

generally the starting point in peer comparison analysis. It is really quite simple: First, choose

relevant ratios, such as price-earnings (P/E), price-to-sales (P/S), enterprise value / EBITDA

(EV/EBITDA), or others that you deem relevant to the investment decision, then find these ratios

for each company in the peer group and see how each company stacks up to the rest.

(Investopedia)

In this study, the relevant ratio used was the past due ratio and the exposure of loan

category to the total loan portfolio. Historical averages of each are used as basis for setting

exposure limits.

Setting up Exposure Limits

Assumptions: The BSP have set the following limits

 A maximum limit of 35% exposure was set for the Wholesale and Retail Trade

 A maximum limit of 20% exposure was set for the Real Estate, Construction, Renting

and Business Activities

 A maximum limit of 10% exposure was set for the Financial Intermediaries

 A maximum limit of 25% exposure was set for the remaining industry sectors by the BSP
a) Banco De Oro (BDO)

% Exposure to TLP

Financial Intermediaries

Manufacturing

14%
26% Wholesale and Retail Trade
15%
1% Other Community, Social and
Personal Activities
9%
15% Real Estate, Construction, Renting
12% and Business Activities
8%
Transportation, Storage and
Communication
Agriculture, Fishing and Forestry

Others
 Industry
Past Industry BSP
Average Exposure
BSP Sectors % Exposure to TLP TLP Breakdown Past Due / NPL Due Assessment Exposure Exposure
Past Due Limit
Ratio Average Limit
Ratio
Financial 2.90%
Intermediaries 14.00% Php88,801,538,301.37 Php1,784,910,919.86 0.28% Satisfied 7.1 10 Within
Manufacturing 15.00% Php95,144,505,322.89 Php1,912,404,556.99 0.30% 3.80% Satisfied 16.8 25 Within
Wholesale and
Retail Trade 15.00% Php95,144,505,322.89 Php1,912,404,556.99 0.30% 3.60% Satisfied 12.9 35 Within
Other
Community,
Social and
Personal
Activities 8.00% Php50,743,736,172.21 Php1,019,949,097.06 0.16% 21.20% Satisfied 10.2 25 Within
Real Estate,
Construction,
Renting and
Business
Activities 12.00% Php76,115,604,258.31 Php1,529,923,645.59 0.24% 11.70% Satisfied 15.3 20 Within
Transportation,
Storage and
Communication 9.00% Php57,086,703,193.73 Php1,147,442,734.19 0.18% 1.10% Satisfied 5.4 25 Within
Agriculture,
Fishing and
Forestry 1.00% Php6,342,967,021.53 Php127,493,637.13 0.02% 16.00% Satisfied 5.2 25 Within
Others 26.00% Php164,917,142,559.68 Php3,314,834,565.45 0.52% 8.90% Satisfied 1.5 25 Within

Total Php634,296,702,152.61 Php634,296,702,152.61 Php12,749,363,713.27 2.01%

Table1. BDO‘s table of exposure and past due measurement.

The table above shows that each of the sectors has a past due ratio less than the industry average. Therefore, the exposure limit

was set to be within the industry exposure average and the BSP standards.
Measuring Liquidity and Profitability of BDO

Industry Impact on
% Exposure to Liquidity Profitability
Average Past Liquidity and Impact on
BSP Sectors TLP (Exposure - (Exposure / PD Prioritization
Due Ratio (PD Total Loan Profitability
(Exposure) PD Ratio) Ratio)
Ratio) Portfolio
Financial Intermediaries 14.00% 2.90% 11.10% Gain 4.83 Gain Normal
Manufacturing 15.00% 3.80% 11.20% Gain 3.95 Gain Normal
Wholesale and Retail
15.00% 3.60% 11.40% Gain 4.17 Gain Normal
Trade
May result to May reduce the
Other Community, Social
8.00% 21.20% -13.20% inadequate 0.38 chance of gaining Important
and Personal Activities
liquidity income
Real Estate, May result to May reduce the
Construction, Renting 12.00% 11.70% 0.30% inadequate 1.03 chance of gaining Important
and Business Activities liquidity income
Transportation, Storage
9.00% 1.10% 7.90% Gain 8.18 Gain Normal
and Communication
May result to May reduce the
Agriculture, Fishing and
1.00% 16.00% -15.00% inadequate 0.06 chance of gaining Important
Forestry
liquidity income
Others 26.00% 8.90% 17.10% Gain 2.92 Gain Normal
Table 1.1. BDO‘s table of liquidity and profitability measurement.

The table above shows the Liquidity and Profitability of BDO. Liquidity was measured thru subtracting the past due ratio from

the exposure. Profitability was measured thru dividing the exposure by the PD Ratio. Liquidity and profitability are considered

directly proportional to each other because if a business has adequate liquidity, there is also the possibility of improved profitability

through reduced interest expense or increased interest income.

 A normal level of prioritization means that there is a stable relationship between the

bank‘s exposure with the industry‘s past due rate and BDO should continue with the control

measures that they do for each sector in order to gain profit and have enough funds for future

transactions. On the other hand, if the level of prioritization is important, there is a great impact

on the bank‘s liquidity and profitability position and might result to a significant amount of loss.

The sectors which resulted negative liquidity and reduce the chance of the bank to gaining

income and have an important level of prioritization are the ones that are needed to be addressed.

These sectors are Agriculture, Fishing and Forestry, Other Community, Social and Personal

Activities and Real Estate, Construction, Renting and Business Activities. Based from the table

of exposure limit measurement, the bank might totally loss a combined amount of PHP

2,677,366,379.78 of the past due from the three sectors. The bank has a 1% exposure from the

Agriculture, Fishing and Forestry sector but a 16% past due rate of the industry has a great

impact on their liquidity which means that the 15% of the loans that they provided for this sector

might not be paid or returned on time because their increasing number of customers are having a

hard time to keep up with the payment of their loans due to failures and shortcomings in the

policy and institutional environment within which the sector operates. For the Other Community,

Social and Personal Activities, the past due rate is also high since there is an increasing number

of customers who uses credit cards and applies for loans for personal and developmental use. In

order for the bank to be gain income and avoid inadequate liquidity, they should increase their

collection efforts from these sectors to avoid high past due rates. On the other hand, Real Estate,

Construction, Renting and Business Activities sector exposure of the bank is slightly higher than

the industry‘s past due rate which means that there might still be a chance of losses.
b) Philippine Veterans Bank

PVB, % Exposure to TLP

Financial Intermediaries

Manufacturing

Wholesale and Retail Trade

36%
42%
Other Community, Social and
Personal Activities

4% Real Estate, Construction, Renting

8% and Business Activities
5%
Transportation, Storage and
Communication
1%
2% 2% Agriculture, Fishing and Forestry

Others
 Industry
Past Exposure BSP
Average Exposure
BSP Sectors % Exposure to TLP TLP Breakdown Past Due / NPL Due Assessment Industry Exposure
Past Due Limit
Ratio Average Limit
Ratio
Financial
42.01% Php10,884,715,473.14 Php633,490,440.54 2.44% 2.90% Satisfied 7.1 10 Within
Intermediaries
Manufacturing 1.56% Php404,225,147.77 Php23,525,903.60 0.09% 3.80% Satisfied 16.8 25 Within
Wholesale and
1.92% Php497,460,869.89 Php28,952,222.63 0.11% 3.60% Satisfied 12.9 35 Within
Retail Trade
Other
Community,
Social and 5.15% Php1,335,407,902.34 Php77,720,739.92 0.30% 21.20% Satisfied 10.2 25 Within
Personal
Activities
Real Estate,
Construction,
Renting and 8.37% Php2,167,728,226.50 Php126,161,782.78 0.49% 11.70% Satisfied 15.3 20 Within
Business
Activities
Transportation,
Storage and 0.94% Php243,364,847.73 Php14,163,834.14 0.05% 1.10% Satisfied 5.4 25 Within
Communication
Agriculture,
Fishing and 4.31% Php1,116,152,694.78 Php64,960,086.84 0.25% 16.00% Satisfied 5.2 25 Within
Forestry
Others 35.74% Php9,260,601,556.76 Php538,967,010.60 2.08% 8.90% Satisfied 1.5 25 Within

Total Php25,909,656,718.91 Php25,909,656,718.91 Php1,507,942,021.04 5.82%

Table 2. PVB‘s table of exposure and past due measurement.

The table above shows that each of the sectors has a past due ratio less than the industry average. Therefore, the exposure limit

was set to be within the industry exposure average and the BSP standards.
Measuring Liquidity and Profitability of PVB

Industry Impact on
% Exposure to Liquidity Profitability
Average Past Liquidity and Impact on
BSP Sectors TLP (Exposure - (Exposure / PD Prioritization
Due Ratio (PD Total Loan Profitability
(Exposure) PD Ratio) Ratio)
Ratio) Portfolio
Financial Intermediaries 42.01% 2.90% 39.1% Gain 14.49 Gain Normal
May result to May reduce the
Manufacturing 1.56% 3.80% -2.2% inadequate 0.41 chance of gaining Important
liquidity income
May result to May reduce the
Wholesale and Retail
1.92% 3.60% -1.7% inadequate 0.53 chance of gaining Important
Trade
liquidity income
May result to May reduce the
Other Community, Social
5.15% 21.20% -16.1% inadequate 0.24 chance of gaining Important
and Personal Activities
liquidity income
Real Estate, May result to May reduce the
Construction, Renting 8.37% 11.70% -3.3% inadequate 0.72 chance of gaining Important
and Business Activities liquidity income
May result to May reduce the
Transportation, Storage
0.94% 1.10% -0.2% inadequate 0.85 chance of gaining Important
and Communication
liquidity income
May result to May reduce the
Agriculture, Fishing and
4.31% 16.00% -11.7% inadequate 0.27 chance of gaining Important
Forestry
liquidity income
Others 35.74% 8.90% 26.8% Gain 4.02 Gain Normal

Table 2.1. PVB‘s table of liquidity and profitability measurement.

The table above shows the Liquidity and Profitability of PVB. Liquidity was measured thru subtracting the past due ratio from

the exposure. Profitability was measured thru dividing the exposure by the PD Ratio. Liquidity and profitability are considered

directly proportional to each other because if a business has adequate liquidity, there is also the possibility of improved profitability

through reduced interest expense or increased interest income.

 A normal level of prioritization means that there is a stable relationship between the

bank‘s exposure with the industry‘s past due rate and PVB should continue with the control

measures that they do for each sector in order to gain profit and have enough funds for future

transactions. On the other hand, if the level of prioritization is important, there is a great impact

on the bank‘s liquidity and profitability position and might result to a significant amount of loss.

The sectors which resulted negative liquidity and reduce the chance of the bank to gaining

income and have an important level of prioritization are the ones that are needed to be addressed.

These sectors are Manufacturing, Wholesale and Retail Trade, Other Community, Social and

Personal Activities, Real Estate, Construction, Renting and Business Activities, Transportation,

Storage and Communication, Agriculture, Fishing and Forestry. Unlike BDO, PVB has a very

significant problem when it comes to having adequate liquidity and gaining returns since

majority of the sectors that they accommodate for loan transactions resulted to a negative

percentage of liquidity, which means a loss for the bank, and a low value of profitability rate,

which means low chances of gaining income. The combined amount of past due from these

sectors and can be a loss for the bank if not addressed properly will be PHP 335,484,569.91.

Among the six sectors which resulted unfavorable values of liquidity and profitability, Other

Community, Social and Personal Activities, and Agriculture, Fishing and Forestry are the two

sectors that need to be monitored properly, same with BDO, because of the significant gap

between the bank‘s exposure and the industry‘s past due rate. Increasing collection efforts and

interest rate for every transaction that they accommodate might help improve their liquidity and

profitability position.
Risk Management Best Practice
Cause /
Risk Factors
Parameters
BDO
Liquidity Risk •Total Loans •BDO makes sure that they
•Non- hold sufficient liquid assets
performing of appropriate quality to
loans ensure short-term funding
•Total Assets requirements are met and
by maintaining a balanced
loan portfolio which is
repriced on a regular basis.
Foreign •Balance of •BDO Unibank Group
Exchange Risk Payments measures their net foreign
(Market Risk) exchange exposure by
subtracting their foreign
currency liabilities from
their foreign currency
assets.
Risk Management
Philippine Veterans Banks
•PVB executes the funding and
liquidity plan after the business
strategies of each business unit are
approved and consolidated. They
shall likewise ensure that liquidity is
maintained in the statement of
financial position and that the bank
shall have the ability to access
incremental funding.
•PVB implements liquidity planning
process which includes the
preparation of liquidity gap reports,
the diversification of sources of
funds and the Liquidity Contingency
Planning. The liquidity gap report
shows the mismatch in maturities
•PVB measures its foreign risk
exposures using the VaR
methodology. Their policy is to
maintain foreign currency exposure
within acceptable limits and within
existing regulatory guidelines.
•PVB monitors their total foreign
BEST PRACTICE
•In relation with the result of the liquidity
and profitability measurement of the two
banks, BDO has better risk management
practice and has more advantage when it
comes to controlling liquidity risk and it is
by holding sufficient liquid assets of
appropriate quality to ensure short-term
funding requirements are met and by
maintaining a balanced loan portfolio
which is repriced on a regular basis and
by carefully monitoring scheduled debt
servicing payments for short-term and
long-term financial liabilities as we ll as
cash outflows due in its day-to-day
business which is important for
maintaining adequate liquidity.
•Although both banks manage their foreign
currency exposures by maintaining within
the existing and acceptable regulatory
guidelines and standards, however the
Bangko Sentral ng Pilipinas (BSP)
suggests that the best way to control
foreign exchange risk is by hedging (Yap
 currency position through the daily & Bagsic, 2008), a risk management
BSP FX position reports. strategy that is used in limiting or
offsetting probability of loss from
fluctuations in the prices of commodities,
currencies, or securities. Thus, the bank
that best reflects this strategy is Banco de
Oro (BDO) because they minimize and
control their daily foreign exchange
transactions with their clients to reduce the
exposure of the bank to unfavorable trends
in the money market.
Interest Rate •Volatility of the •BDO Unibank Group •PVB measures the sensitivity of its •According to the Bank for International
Risk Peso/Dollar prepares gap analysis to assets and liabilities to interest rate Settlement (BIS), banks are expected to
measure the sensitivity of fluctuation by way of Earnings-at- use gap analysis by constructing a
its resources, liabilities and Risk (EaR) measurement. EaR maturity/repricing schedule that distributes
off-book items to interest measures the bank's susceptibility to interest-sensitive assets, liabilities and off-
rate fluctuations. This changes in interest rates. It calculates balance sheet positions into time bands
analysis would give the change in income over the next according to their maturity or time
management a glimpse of 12 months, given current exposures remaining to their next repricing in order
maturity and re-pricing that will result from a management for them to monitor and control their
profile of its interest selected and approved change in interest rate exposure (BIS, 2004). Thus,
sensitive resources and interest rate. both of the banks‘ (BDO and PVB) risk
liabilities. management practices can be considered as
best practices because they are using gap
analysis tools when it comes to dealing and
minimizing their interest rate risk
exposure.
 The following parameters are needed to be monitored in order to control the impact of

each type of risk and help banks to assess whether their risk management practices are effective

or not. They are essential to understanding the effects of such risks and might be the cause of

unfavorable events to the bank‘s operation.

Liquidity Risk
 Lending is the principal business activity for most commercial and universal banks. The

loan portfolio is typically the largest asset and the predominate source of revenue. As such, it is

one of the greatest sources of risk to a bank‘s safety and soundness. The goal of liquidity risk

management is to identify potential future funding problems. To do so, a firm must assess the

expected value of its net cash flows and the interchangeability of its assets. The published

balance sheet of BDO shows the loans as almost 60% of their total assets which is very

significant in terms of the bank‘s performance and financing capabilities. When a loan is made, it

is actually considered an asset to the bank. Because it is an obligation that is expected to be paid

back to the bank, with interest, a loan goes on the asset side of a bank balance sheet. However, if

a borrower stops paying, the value of the asset declines. A non-performing loan (which is

footnoted on the bank balance sheet) is indicative of an asset that has become riskier and could

become a loss. If a bank‘s non-performing loans reach three percent of its loan holdings, it could

mean that they are beginning to have problems in their loan portfolio. However, many banks can

still absorb non-performing loans at this level. A real threat comes when they reach five percent,

and banks with 10 percent or more of their loans classified as non-performing could be

considered unsafe or unstable, especially if capital reserves are at a minimum. Thus, it is

important for banks to monitor the movement of their non-performing loans because it is

considered as an indicator of a healthy bank.

Foreign Exchange Risk

 Balance of Payments

Changes in exchange rates are described as depreciations or appreciations.

A depreciation of the Philippine peso against the US dollar means the value of the

peso fell relative to the dollar. Exchange rates are determined by the demand and

supply for foreign exchange from the households, firms, and financial institutions

that buy and sell foreign currencies to make international payments. The market

by which international currency trading takes place is called the foreign exchange

market. The users of foreign currency (demand side) are weighed against the

sources of dollars (supply side) and their interaction determines the rate. Some of

the users are the importers and corporations with international transactions while

the sources are the exporters, foreign creditors, and the overseas contract workers.
If the users of dollar outweigh the sources, this means more people are demanding

dollars, thereby making it a more valuable currency over the peso. In terms of

currency pricing, this will put pressure on the dollar to appreciate relative to the

peso. An appreciation of the dollar is synonymous with a depreciation of the peso.

When the peso is appreciating, this means there is a strong demand for peso over

the dollar. The country‘s balance of payments (BOP) keeps a fairly good track of

the uses and sources of dollars.

The BOP is a useful parameter in monitoring Foreign Exchange favors for

banks. While important commodities like oil and heavy machineries are imported

favoring a stronger peso, electronic and garment manufacturers, together with

overseas contract workers, would vote for a depreciated peso. Foreign exchange

favors for banks will depend on its loan portfolio and so will its mitigation for

foreign exchange fluctuations.

Interest Rate Risk

 Volatility of Peso/Dollar

The BSP measures the fluctuations of Foreign Exchange in terms of

volatility. Foreign exchange fluctuations affect banks‘ profitability and this can be

controlled thru continuous repricing of interest rates. The figure above shows that

the exchange rates in 2010 were more volatile compared to the following year.

This means that the rates in 2010 were deviating more, and in large degree, from

the average level. This implies an unstable peso movement and needed a more

constant repricing of interest rates. Forecasting volatility of the foreign exchange

helps banks‘ in strategizing for repricing their interest rates.

 The researchers conducted a comparison of a medium and a large bank‘s risk

management strategies based on the risk factors presented in this study. The two banks‘ annual

report presented four major types of risk which they are facing and they are: credit risk, market

risk, liquidity risk and interest rate risk but only critical risk factors and their respective risk

management strategies presented in their annual reports were compared in this study. The critical

risk factors in the flowchart are Liquidity risk, Foreign Exchange risk and Interest rate risk.

The first critical risk that was discussed in both of the banks‘ annual reports was liquidity

risk. Basically, liquidity risk is the risk that the banks may not be able to adequately meet their

credit demands due to insufficient funds. BDO and PVB make sure that they hold enough funds

and resources to cater the demands of their consumers by monitoring their loan portfolio as well

as their assets and liabilities. However, based on the result of the liquidity and profitability

measurement table, BDO has a better risk management practice for liquidity risk and it is by

holding sufficient liquid assets of appropriate quality to ensure short-term funding requirements

are met and by maintaining a balanced loan portfolio which is re-priced on a regular basis and

carefully monitoring scheduled debt servicing payments for short-term and long-term financial

liabilities as well as cash outflows due in its day-to-day business which is important for

maintaining adequate liquidity.

The next one is foreign exchange risk. Foreign exchange risk is defined as the risk to

earnings or capital arising from changes in foreign exchange rates. BDO measures their FX

exposure by subtracting their foreign currency liabilities form their foreign currency assets. They

limit their foreign currency transactions by day-to-day, over-the-counter buying and selling of
foreign exchange in their branches as well as foreign exchange trading with corporate accounts

and other financial institutions. Moreover, BDO and PVB monitor their total foreign currency

position through BSP‘s daily FX position reports and its prescribed limits in terms of foreign

currency transactions. However, BDO has a better risk management practice since it reflects

BSP‘s standard in controlling foreign exchange risk and it is by hedging which means that they

limit their foreign currency transactions with their clients to reduce the risk of loss due to price

fluctuations.

The last critical risk presented in the two banks‘ annual report was interest rate risk.

Interest rate risk is the risk that an investment's value will change due to a change in the absolute

level of interest rates, in the spread between two rates, in the shape of the yield curve or in any

other interest rate relationship. BDO uses gap analysis in order to monitor their sensitivity from

interest rate fluctuations. This analysis would give management a glimpse of maturity and re-

pricing profile of its interest sensitive resources and liabilities. On the other hand, PVB uses EaR

(Earnings-at-Risk) in order to measure their sensitivity from interest rate fluctuations. EaR

measures a bank‘s susceptibility to changes in interest rates. It calculates the change in income

over the next 12 months, given current exposures that will result from a management selected

and approved change in interest rate. Both banks‘ risk management practices can be considered

as best practices since they are using gap analysis tools, which are prescribed by the Bank for

International Settlement, to control their interest rate risk exposure.

 Chapter IV

CONCLUSION

The ultimate objective of the study was to identify and examine the risk factors that

influence the performance of the Philippine banking sector. The analysis was confined to the

macro and micro environment of the Universal and Commercial banks that are currently

operating in the country. A preliminary data conducted by the researchers showed that Universal

and Commercial banks truly fall under a single provision and thus need single, general risk

mitigation.

A thorough analysis of the internal and external environment of the Universal and

Commercial Banks helped in achieving the objectives of the study. The PESTEL analysis and

Porter‘s 5 forces analysis were essential tools in providing reasons for the risk level of each

factor. The macro and micro environment analysis showed that there was growth in the

performance of the banking sector. It could be argued that the more profitable financial

institution will be able to offer more new products and services. To this end, the role of

technology advancement is particularly important given that a financial institution with relatively

more advanced technologies may have an added advantage over its peers. The continued success

of the Philippines banking sector depends on its efficiency, profitability, and competitiveness.

Furthermore, in view of the increasing competition attributed to the more liberalized banking

sector, bank managements as well as the policymakers will be more inclined to find ways to

obtain the optimal utilization of capacities while making the best use of their resources, so that

these resources are not wasted during the production of banking products and services.
 Moreover, the ability to maximize risk-adjusted returns on investment and sustaining

stable and competitive returns is an important element in ensuring the competitiveness of the

Philippine‘s banking sector. Thus, from a regulatory perspective, the performance of the

financial sector will be based on its efficiency and profitability. The policy direction will be

directed towards enhancing the resilience and efficiency of the financial institutions with the aim

of intensifying the robustness and stability of the financial sector. Thus, from the regulatory

perspective, the performance of the bank will be based on their effic iency and profitability.

The researchers used risk factors that were identified in a previous study. Risk factors

identified applicable for both Universal and Commercial banks were Counterparty, Credit

Concentration, Price, Foreign Exchange, Bond Trading, IR Gap, Funding (Cash Flow), Asset

Liquidity, Internal Fraud, External Fraud, Damage to Physical Assets, Employee Retention,

Succession Planning, Information Security & Technology, Compliance, Reputation, Profitability,

Mission & Direction, Planning & Execution, and Socio-political Climate.

A risk assessment score matrix was used in determining which of the risk factors should

be addressed. As a result price, foreign exchange, IR Gap, funding (cash flow), asset liquidity,

external fraud and lastly, profitability were considered of medium to high risk level. These

factors were provided with risk mitigation and contingency plans. Risk mitigation was the target

output of the study. Researchers used benchmarking in coming up with ways on mitigating risk.

The peer comparison approach suggested that banks are financially stable in terms of their total

loan portfolio. Each banks‘ past due ratio were within the prescribed BSP limits and did not

exceed industry average.

 Chapter V

RECOMMENDATION

The Philippine financial system consists of banks and non-bank financial institutions.

Within the banking sector, banks are further classified as expanded commercial or universal

banks, regular commercial banks, thrift banks and savings banks. Bank type is based largely on

capitalization, operation and, in some cases, market area covered. The Philippines has a

comprehensive banking system encompassing various types of banks, from large universal banks

to small rural banks and even non-banks. This study focused more on analyzing only on

universal and commercial banks and the survey showed that they are exposed with almost the

same type of risks. A future research related to the topic can include the analysis and assessment

of risk factors in the thrift and microfinance/ rural organizations in the country and test how the

significant risk factors identified by the BSP or other risk factors affect their efficiency as service

providers to smaller enterprises, individuals/merchants and investors and how they mitigate and

control such risks since the performance that these small institutions give might also affect the

country‘s financial growth or even downfall.

A risk assessment on the Philippine banking industry in relation with the Basel II

implementation and its effect on the performance and efficiency of every bank in the country

could also be done as a future research since Basel II, as required by BSP, is being used by the

banks as the primary guide in order for them to cope with risks and perform better. Basel II is the

second of the Basel Accords, which are recommendations on the banking laws and regulations

issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was
initially published in June 2004, is to create an international standard that banking regulators can

use when creating regulations about how much capital banks need to put aside to guard against

the types of financial and operational risks banks face while maintaining sufficient consistency

so that this does not become a source of competitive inequality amongst internationally active

banks.

In order to understand more about the Basel Accords and its impact on dealing with risks

being faced by the banking industry, further studies about the macroeconomic effects and impact

of implementing the new set of regulatory framework for banks or the Basel III could also be a

great way to fully understand the financial system of the country. Basel III is the latest

modification developed by the Basel Committee on Banking Supervision (BCBS). According to

the BIS Web site, Basel III aims to: improve the banking sector‘s ability to absorb shocks arising

from financial and economic stress, whatever the source; improve risk management and

governance; strengthen banks‘ transparency and disclosures.

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 APPENDIX A

Importance Survey

Please rate the following risk factors on a 5-likert scale:

5 = Very Important 3 = Moderately Important 1 = Unimportant

4 = Important 2 = of little Importance

Name: Department:
Company: Position:
I. Credit Risk
1. Counterparty 5 4 3 2 1
2. Credit Concentration 5 4 3 2 1

II. Market Risk

1. Price 5 4 3 2 1
2. Foreign Exchange 5 4 3 2 1
3. Bond Trading 5 4 3 2 1

III. Interest Rate Risk (IR Gap) 5 4 3 2 1

IV. Liquidity Risk

1. Funding (Cash Flow) 5 4 3 2 1
2. Asset Liquidity 5 4 3 2 1

V. Operational Risk
1. Internal Fraud 5 4 3 2 1
2. External Fraud 5 4 3 2 1
3. Damage to Physical Assets 5 4 3 2 1
4. Employee Retention 5 4 3 2 1
5. Succession Planning 5 4 3 2 1
6. Information Security & Technology 5 4 3 2 1

VI. Compliance Risk (Rules&Regulation) 5 4 3 2 1

VII. Reputation 5 4 3 2 1

VIII. Strategic Risk

1. Profitability 5 4 3 2 1
2. Mission and Direction 5 4 3 2 1
3. Planning & Execution 5 4 3 2 1
4. Socio-political climate 5 4 3 2 1
 APPENDIX B

Financial Impact Survey

Please choose the level of consequences on the organization of each factor:

Legend:

Financial impact on the organization is likely to exceed by 80%

High
Significant impact on the organization‘s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80 %
Medium
Moderate impact on the organization‘s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low
Low impact on the organization‘s strategy or operational activities
Low stakeholder concern
 Department
Name: :
Company Position:
I. Credit Risk ( x% of Gross Income)
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low

II. Market Risk ( x% of Gross Income)

1. Price High Medium Low
2. Foreign
High Medium Low
Exchange
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low

V. Operational Risk ( x% of Net Income)

1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical
High Medium Low
Assets
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of

High Medium Low
Expense)

VII. Reputation Risk ( x% of Expense) High Medium Low

VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in
general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
 APPENDIX C

Likelihood Survey

Please choose the probability of occurrence of each risk factor

Legend:

Estimation Description Indicators

Likely to occur each year Potential of it occurring several times
High
or more than 25% chance within the time period (for example -ten years).
(Probable)
of occurrence. Has occurred recently.
Likely to occur in a ten year time
period Could occur more than once within the
Medium or less than 25% chance time period (for example - ten years).
(Possible) of occurrence Could be difficult to control due to
some external influences.
Is there a history of occurrence?
Not likely to occur in a Has not occurred.
Low (Remote) ten year period or less than Unlikely to occur.
2% chance of occurrence
 Department
Name: :
Company Position:
I. Credit Risk ( x% of Gross Income)
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low

II. Market Risk ( x% of Gross Income)

1. Price High Medium Low
2. Foreign
High Medium Low
Exchange
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low

V. Operational Risk ( x% of Net Income)

1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical
High Medium Low
Assets
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of

High Medium Low
Expense)

VII. Reputation Risk ( x% of Expense) High Medium Low

VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in
general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
 APPENDIX D

Peso-Dollar Exchange Rates

 APPENDIX E

Accomplished Survey
Financial Impact Please choose the level of consequences on the organization of each factor.

Financial impact on the organization is likely to exceed by 80%

High
Significant impact on the organization’s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80%
Medium
Moderate impact on the organization’s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low
Low impact on the organization’s strategy or operational activities
Low stakeholder concern

I. Credit Risk ( x% of Gross Income)

1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk ( x% of Gross Income)
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk ( x% of Net Income)
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of Expense) High Medium Low
VII. Reputation Risk ( x% of Expense) High Medium Low
VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Likelihood Survey Please choose the probability of occurrence of each risk factor.

Estimation Description Indicators

High Likely to occur each year or more than Potential of it occurring several times w/in the time
(Probable) 25% chance of occurrence. period. Has occurred recently.
Could occur more than once w/in the time period.
Medium Likely to occur in a ten-year time period
Could be difficult to control due to some external
(Possible) or less than 25% chance of occurrence.
influences.
Low Not likely to occur in a ten year period Has not occurred.
(Remote) or less than 2% chance of occurrence. Unlikely to Occur.

I. Credit Risk
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk (IR Gap) High Medium Low

IV. Liquidity Risk

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk (Rules & Regulation) High Medium Low

VII. Reputation High Medium Low

VIII. Strategic Risk

1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Importance Survey
Please rate the following risk factors on a 5-likert scale:
5 = Very Important 3 = Moderately Important 1 = Unimportant
4 = Important 2 = of little Importance

I. Credit Risk
1. Counterparty 5 4 3 2 1
2. Credit Concentration 5 4 3 2 1

II. Market Risk

1. Price 5 4 3 2 1
2. Foreign Exchange 5 4 3 2 1
3. Bond Trading 5 4 3 2 1

III. Interest Rate Risk (IR Gap) 5 4 3 2 1

IV. Liquidity Risk

1. Funding (Cash Flow) 5 4 3 2 1
2. Asset Liquidity 5 4 3 2 1

V. Operational Risk
1. Internal Fraud 5 4 3 2 1
2. External Fraud 5 4 3 2 1
3. Damage to Physical Assets 5 4 3 2 1
4. Employee Retention 5 4 3 2 1
5. Succession Planning 5 4 3 2 1
6. Information Security & Technology 5 4 3 2 1

VI. Compliance Risk (Rules & Regulation) 5 4 3 2 1

VII. Reputation 5 4 3 2 1

VIII. Strategic Risk

1. Profitability 5 4 3 2 1
2. Mission and Direction 5 4 3 2 1
3. Planning & Execution 5 4 3 2 1
4. Socio-political climate 5 4 3 2 1
Financial Impact Please choose the level of consequences on the organization of each factor.

Financial impact on the organization is likely to exceed by 80%

High
Significant impact on the organization’s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80%
Medium
Moderate impact on the organization’s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low
Low impact on the organization’s strategy or operational activities
Low stakeholder concern

I. Credit Risk ( x% of Gross Income)

1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk ( x% of Gross Income)
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk ( x% of Net Income)
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of Expense) High Medium Low
VII. Reputation Risk ( x% of Expense) High Medium Low
VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Likelihood Survey Please choose the probability of occurrence of each risk factor.

Estimation Description Indicators

High Likely to occur each year or more than Potential of it occurring several times w/in the time
(Probable) 25% chance of occurrence. period. Has occurred recently.
Could occur more than once w/in the time period.
Medium Likely to occur in a ten-year time period
Could be difficult to control due to some external
(Possible) or less than 25% chance of occurrence.
influences.
Low Not likely to occur in a ten year period Has not occurred.
(Remote) or less than 2% chance of occurrence. Unlikely to Occur.

I. Credit Risk
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk (IR Gap) High Medium Low

IV. Liquidity Risk

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk (Rules&Regulation) High Medium Low

VII. Reputation High Medium Low

VIII. Strategic Risk

1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Importance Survey
Please rate the following risk factors on a 5-likert scale:
5 = Very Important 3 = Moderately Important 1 = Unimportant
4 = Important 2 = of little Importance

I. Credit Risk
1. Counterparty 5 4 3 2 1
2. Credit Concentration 5 4 3 2 1

II. Market Risk

1. Price 5 4 3 2 1
2. Foreign Exchange 5 4 3 2 1
3. Bond Trading 5 4 3 2 1

III. Interest Rate Risk (IR Gap) 5 4 3 2 1

IV. Liquidity Risk

1. Funding (Cash Flow) 5 4 3 2 1
2. Asset Liquidity 5 4 3 2 1

V. Operational Risk
1. Internal Fraud 5 4 3 2 1
2. External Fraud 5 4 3 2 1
3. Damage to Physical Assets 5 4 3 2 1
4. Employee Retention 5 4 3 2 1
5. Succession Planning 5 4 3 2 1
6. Information Security & Technology 5 4 3 2 1

VI. Compliance Risk (Rules&Regulation) 5 4 3 2 1

VII. Reputation 5 4 3 2 1

VIII. Strategic Risk

1. Profitability 5 4 3 2 1
2. Mission and Direction 5 4 3 2 1
3. Planning & Execution 5 4 3 2 1
4. Socio-political climate 5 4 3 2 1
Financial Impact Please choose the level of consequences on the organization of each factor.

Financial impact on the organization is likely to exceed by 80%

High
Significant impact on the organization’s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80%
Medium
Moderate impact on the organization’s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low
Low impact on the organization’s strategy or operational activities
Low stakeholder concern

I. Credit Risk ( x% of Gross Income)

1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk ( x% of Gross Income)
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk ( x% of Net Income)
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of Expense) High Medium Low
VII. Reputation Risk ( x% of Expense) High Medium Low
VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Likelihood Survey Please choose the probability of occurrence of each risk factor.

Estimation Description Indicators

High Likely to occur each year or more than Potential of it occurring several times w/in the time
(Probable) 25% chance of occurrence. period. Has occurred recently.
Could occur more than once w/in the time period.
Medium Likely to occur in a ten-year time period
Could be difficult to control due to some external
(Possible) or less than 25% chance of occurrence.
influences.
Low Not likely to occur in a ten year period Has not occurred.
(Remote) or less than 2% chance of occurrence. Unlikely to Occur.

I. Credit Risk
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk (IR Gap) High Medium Low

IV. Liquidity Risk

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk (Rules&Regulation) High Medium Low

VII. Reputation High Medium Low

VIII. Strategic Risk

1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Importance Survey
Please rate the following risk factors on a 5-likert scale:
5 = Very Important 3 = Moderately Important 1 = Unimportant
4 = Important 2 = of little Importance

I. Credit Risk
1. Counterparty 5 4 3 2 1
2. Credit Concentration 5 4 3 2 1

II. Market Risk

1. Price 5 4 3 2 1
2. Foreign Exchange 5 4 3 2 1
3. Bond Trading 5 4 3 2 1

III. Interest Rate Risk (IR Gap) 5 4 3 2 1

IV. Liquidity Risk

1. Funding (Cash Flow) 5 4 3 2 1
2. Asset Liquidity 5 4 3 2 1

V. Operational Risk
1. Internal Fraud 5 4 3 2 1
2. External Fraud 5 4 3 2 1
3. Damage to Physical Assets 5 4 3 2 1
4. Employee Retention 5 4 3 2 1
5. Succession Planning 5 4 3 2 1
6. Information Security & Technology 5 4 3 2 1

VI. Compliance Risk (Rules&Regulation) 5 4 3 2 1

VII. Reputation 5 4 3 2 1

VIII. Strategic Risk

1. Profitability 5 4 3 2 1
2. Mission and Direction 5 4 3 2 1
3. Planning & Execution 5 4 3 2 1
4. Socio-political climate 5 4 3 2 1
Financial Impact Please choose the level of consequences on the organization of each factor.

Financial impact on the organization is likely to exceed by 80%

High Significant impact on the organization’s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80%
Medium Moderate impact on the organization’s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low Low impact on the organization’s strategy or operational activities
Low stakeholder concern

I. Credit Risk ( x% of Gross Income)

1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk ( x% of Gross Income)
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk ( x% of Net Income)
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of Expense) High Medium Low
VII. Reputation Risk ( x% of Expense) High Medium Low
VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Likelihood Survey Please choose the probability of occurrence of each risk factor.

Estimation Description Indicators

High Likely to occur each year or more than Potential of it occurring several times w/in the time
(Probable) 25% chance of occurrence. period. Has occurred recently.
Could occur more than once w/in the time period.
Medium Likely to occur in a ten-year time period
Could be difficult to control due to some external
(Possible) or less than 25% chance of occurrence.
influences.
Low Not likely to occur in a ten year period Has not occurred.
(Remote) or less than 2% chance of occurrence. Unlikely to Occur.

I. Credit Risk
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk (IR Gap) High Medium Low

IV. Liquidity Risk

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk (Rules&Regulation) High Medium Low

VII. Reputation High Medium Low

VIII. Strategic Risk

1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Importance Survey
Please rate the following risk factors on a 5-likert scale:
5 = Very Important 3 = Moderately Important 1 = Unimportant
4 = Important 2 = of little Importance

I. Credit Risk
1. Counterparty 5 4 3 2 1
2. Credit Concentration 5 4 3 2 1

II. Market Risk

1. Price 5 4 3 2 1
2. Foreign Exchange 5 4 3 2 1
3. Bond Trading 5 4 3 2 1

III. Interest Rate Risk (IR Gap) 5 4 3 2 1

IV. Liquidity Risk

1. Funding (Cash Flow) 5 4 3 2 1
2. Asset Liquidity 5 4 3 2 1

V. Operational Risk
1. Internal Fraud 5 4 3 2 1
2. External Fraud 5 4 3 2 1
3. Damage to Physical Assets 5 4 3 2 1
4. Employee Retention 5 4 3 2 1
5. Succession Planning 5 4 3 2 1
6. Information Security & Technology 5 4 3 2 1

VI. Compliance Risk (Rules&Regulation) 5 4 3 2 1

VII. Reputation 5 4 3 2 1

VIII. Strategic Risk

1. Profitability 5 4 3 2 1
2. Mission and Direction 5 4 3 2 1
3. Planning & Execution 5 4 3 2 1
4. Socio-political climate 5 4 3 2 1
Financial Impact Please choose the level of consequences on the organization of each factor.

Financial impact on the organization is likely to exceed by 80%

High Significant impact on the organization’s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80%
Medium Moderate impact on the organization’s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low Low impact on the organization’s strategy or operational activities
Low stakeholder concern

I. Credit Risk ( x% of Gross Income)

1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk ( x% of Gross Income)
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk ( x% of Net Income)
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of Expense) High Medium Low
VII. Reputation Risk ( x% of Expense) High Medium Low
VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Likelihood Survey Please choose the probability of occurrence of each risk factor.

Estimation Description Indicators

High Likely to occur each year or more than Potential of it occurring several times w/in the time
(Probable) 25% chance of occurrence. period. Has occurred recently.
Could occur more than once w/in the time period.
Medium Likely to occur in a ten-year time period
Could be difficult to control due to some external
(Possible) or less than 25% chance of occurrence.
influences.
Low Not likely to occur in a ten year period Has not occurred.
(Remote) or less than 2% chance of occurrence. Unlikely to Occur.

I. Credit Risk
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk (IR Gap) High Medium Low

IV. Liquidity Risk

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk (Rules&Regulation) High Medium Low

VII. Reputation High Medium Low

VIII. Strategic Risk

1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Importance Survey
Please rate the following risk factors on a 5-likert scale:
5 = Very Important 3 = Moderately Important 1 = Unimportant
4 = Important 2 = of little Importance

I. Credit Risk
1. Counterparty 5 4 3 2 1
2. Credit Concentration 5 4 3 2 1

II. Market Risk

1. Price 5 4 3 2 1
2. Foreign Exchange 5 4 3 2 1
3. Bond Trading 5 4 3 2 1

III. Interest Rate Risk (IR Gap) 5 4 3 2 1

IV. Liquidity Risk

1. Funding (Cash Flow) 5 4 3 2 1
2. Asset Liquidity 5 4 3 2 1

V. Operational Risk
1. Internal Fraud 5 4 3 2 1
2. External Fraud 5 4 3 2 1
3. Damage to Physical Assets 5 4 3 2 1
4. Employee Retention 5 4 3 2 1
5. Succession Planning 5 4 3 2 1
6. Information Security & Technology 5 4 3 2 1

VI. Compliance Risk (Rules&Regulation) 5 4 3 2 1

VII. Reputation 5 4 3 2 1

VIII. Strategic Risk

1. Profitability 5 4 3 2 1
2. Mission and Direction 5 4 3 2 1
3. Planning & Execution 5 4 3 2 1
4. Socio-political climate 5 4 3 2 1
Financial Impact Please choose the level of consequences on the organization of each factor.

Financial impact on the organization is likely to exceed by 80%

High Significant impact on the organization’s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80%
Medium Moderate impact on the organization’s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low Low impact on the organization’s strategy or operational activities
Low stakeholder concern

I. Credit Risk ( x% of Gross Income)

1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk ( x% of Gross Income)
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk ( x% of Net Income)
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of Expense) High Medium Low
VII. Reputation Risk ( x% of Expense) High Medium Low
VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Likelihood Survey Please choose the probability of occurrence of each risk factor.

Estimation Description Indicators

High Likely to occur each year or more than Potential of it occurring several times w/in the time
(Probable) 25% chance of occurrence. period. Has occurred recently.
Could occur more than once w/in the time period.
Medium Likely to occur in a ten-year time period
Could be difficult to control due to some external
(Possible) or less than 25% chance of occurrence.
influences.
Low Not likely to occur in a ten year period Has not occurred.
(Remote) or less than 2% chance of occurrence. Unlikely to Occur.

I. Credit Risk
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk (IR Gap) High Medium Low

IV. Liquidity Risk

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk (Rules&Regulation) High Medium Low

VII. Reputation High Medium Low

VIII. Strategic Risk

1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Importance Survey
Please rate the following risk factors on a 5-likert scale:
5 = Very Important 3 = Moderately Important 1 = Unimportant
4 = Important 2 = of little Importance

I. Credit Risk
1. Counterparty 5 4 3 2 1
2. Credit Concentration 5 4 3 2 1

II. Market Risk

1. Price 5 4 3 2 1
2. Foreign Exchange 5 4 3 2 1
3. Bond Trading 5 4 3 2 1

III. Interest Rate Risk (IR Gap) 5 4 3 2 1

IV. Liquidity Risk

1. Funding (Cash Flow) 5 4 3 2 1
2. Asset Liquidity 5 4 3 2 1

V. Operational Risk
1. Internal Fraud 5 4 3 2 1
2. External Fraud 5 4 3 2 1
3. Damage to Physical Assets 5 4 3 2 1
4. Employee Retention 5 4 3 2 1
5. Succession Planning 5 4 3 2 1
6. Information Security & Technology 5 4 3 2 1

VI. Compliance Risk (Rules&Regulation) 5 4 3 2 1

VII. Reputation 5 4 3 2 1

VIII. Strategic Risk

1. Profitability 5 4 3 2 1
2. Mission and Direction 5 4 3 2 1
3. Planning & Execution 5 4 3 2 1
4. Socio-political climate 5 4 3 2 1
Financial Impact Please choose the level of consequences on the organization of each factor.

Financial impact on the organization is likely to exceed by 80%

High Significant impact on the organization’s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80%
Medium Moderate impact on the organization’s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low Low impact on the organization’s strategy or operational activities
Low stakeholder concern

I. Credit Risk ( x% of Gross Income)

1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk ( x% of Gross Income)
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk ( x% of Net Income)
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of Expense) High Medium Low
VII. Reputation Risk ( x% of Expense) High Medium Low
VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Likelihood Survey Please choose the probability of occurrence of each risk factor.

Estimation Description Indicators

High Likely to occur each year or more than Potential of it occurring several times w/in the time
(Probable) 25% chance of occurrence. period. Has occurred recently.
Could occur more than once w/in the time period.
Medium Likely to occur in a ten-year time period
Could be difficult to control due to some external
(Possible) or less than 25% chance of occurrence.
influences.
Low Not likely to occur in a ten year period Has not occurred.
(Remote) or less than 2% chance of occurrence. Unlikely to Occur.

I. Credit Risk
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk (IR Gap) High Medium Low

IV. Liquidity Risk

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk (Rules&Regulation) High Medium Low

VII. Reputation High Medium Low

VIII. Strategic Risk

1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Importance Survey
Please rate the following risk factors on a 5-likert scale:
5 = Very Important 3 = Moderately Important 1 = Unimportant
4 = Important 2 = of little Importance

I. Credit Risk
1. Counterparty 5 4 3 2 1
2. Credit Concentration 5 4 3 2 1

II. Market Risk

1. Price 5 4 3 2 1
2. Foreign Exchange 5 4 3 2 1
3. Bond Trading 5 4 3 2 1

III. Interest Rate Risk (IR Gap) 5 4 3 2 1

IV. Liquidity Risk

1. Funding (Cash Flow) 5 4 3 2 1
2. Asset Liquidity 5 4 3 2 1

V. Operational Risk
1. Internal Fraud 5 4 3 2 1
2. External Fraud 5 4 3 2 1
3. Damage to Physical Assets 5 4 3 2 1
4. Employee Retention 5 4 3 2 1
5. Succession Planning 5 4 3 2 1
6. Information Security & Technology 5 4 3 2 1

VI. Compliance Risk (Rules&Regulation) 5 4 3 2 1

VII. Reputation 5 4 3 2 1

VIII. Strategic Risk

1. Profitability 5 4 3 2 1
2. Mission and Direction 5 4 3 2 1
3. Planning & Execution 5 4 3 2 1
4. Socio-political climate 5 4 3 2 1
Financial Impact Please choose the level of consequences on the organization of each factor.

Financial impact on the organization is likely to exceed by 80%

High Significant impact on the organization’s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80%
Medium Moderate impact on the organization’s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low Low impact on the organization’s strategy or operational activities
Low stakeholder concern

I. Credit Risk ( x% of Gross Income)

1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk ( x% of Gross Income)
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk ( x% of Net Income)
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of Expense) High Medium Low
VII. Reputation Risk ( x% of Expense) High Medium Low
VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Likelihood Survey Please choose the probability of occurrence of each risk factor.

Estimation Description Indicators

High Likely to occur each year or more than Potential of it occurring several times w/in the time
(Probable) 25% chance of occurrence. period. Has occurred recently.
Could occur more than once w/in the time period.
Medium Likely to occur in a ten-year time period
Could be difficult to control due to some external
(Possible) or less than 25% chance of occurrence.
influences.
Low Not likely to occur in a ten year period Has not occurred.
(Remote) or less than 2% chance of occurrence. Unlikely to Occur.

I. Credit Risk
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk (IR Gap) High Medium Low

IV. Liquidity Risk

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk (Rules&Regulation) High Medium Low

VII. Reputation High Medium Low

VIII. Strategic Risk

1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Importance Survey
Please rate the following risk factors on a 5-likert scale:
5 = Very Important 3 = Moderately Important 1 = Unimportant
4 = Important 2 = of little Importance

I. Credit Risk
1. Counterparty 5 4 3 2 1
2. Credit Concentration 5 4 3 2 1

II. Market Risk

1. Price 5 4 3 2 1
2. Foreign Exchange 5 4 3 2 1
3. Bond Trading 5 4 3 2 1

III. Interest Rate Risk (IR Gap) 5 4 3 2 1

IV. Liquidity Risk

1. Funding (Cash Flow) 5 4 3 2 1
2. Asset Liquidity 5 4 3 2 1

V. Operational Risk
1. Internal Fraud 5 4 3 2 1
2. External Fraud 5 4 3 2 1
3. Damage to Physical Assets 5 4 3 2 1
4. Employee Retention 5 4 3 2 1
5. Succession Planning 5 4 3 2 1
6. Information Security & Technology 5 4 3 2 1

VI. Compliance Risk (Rules&Regulation) 5 4 3 2 1

VII. Reputation 5 4 3 2 1

VIII. Strategic Risk

1. Profitability 5 4 3 2 1
2. Mission and Direction 5 4 3 2 1
3. Planning & Execution 5 4 3 2 1
4. Socio-political climate 5 4 3 2 1
Financial Impact Please choose the level of consequences on the organization of each factor.

Financial impact on the organization is likely to exceed by 80%

High Significant impact on the organization’s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80%
Medium Moderate impact on the organization’s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low Low impact on the organization’s strategy or operational activities
Low stakeholder concern

I. Credit Risk ( x% of Gross Income)

1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk ( x% of Gross Income)
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk ( x% of Net Income)
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of Expense) High Medium Low
VII. Reputation Risk ( x% of Expense) High Medium Low
VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Likelihood Survey Please choose the probability of occurrence of each risk factor.

Estimation Description Indicators

High Likely to occur each year or more than Potential of it occurring several times w/in the time
(Probable) 25% chance of occurrence. period. Has occurred recently.
Could occur more than once w/in the time period.
Medium Likely to occur in a ten-year time period
Could be difficult to control due to some external
(Possible) or less than 25% chance of occurrence.
influences.
Low Not likely to occur in a ten year period Has not occurred.
(Remote) or less than 2% chance of occurrence. Unlikely to Occur.

I. Credit Risk
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk (IR Gap) High Medium Low

IV. Liquidity Risk

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk (Rules&Regulation) High Medium Low

VII. Reputation High Medium Low

VIII. Strategic Risk

1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Importance Survey
Please rate the following risk factors on a 5-likert scale:
5 = Very Important 3 = Moderately Important 1 = Unimportant
4 = Important 2 = of little Importance

I. Credit Risk
1. Counterparty 5 4 3 2 1
2. Credit Concentration 5 4 3 2 1

II. Market Risk

1. Price 5 4 3 2 1
2. Foreign Exchange 5 4 3 2 1
3. Bond Trading 5 4 3 2 1

III. Interest Rate Risk (IR Gap) 5 4 3 2 1

IV. Liquidity Risk

1. Funding (Cash Flow) 5 4 3 2 1
2. Asset Liquidity 5 4 3 2 1

V. Operational Risk
1. Internal Fraud 5 4 3 2 1
2. External Fraud 5 4 3 2 1
3. Damage to Physical Assets 5 4 3 2 1
4. Employee Retention 5 4 3 2 1
5. Succession Planning 5 4 3 2 1
6. Information Security & Technology 5 4 3 2 1

VI. Compliance Risk (Rules&Regulation) 5 4 3 2 1

VII. Reputation 5 4 3 2 1

VIII. Strategic Risk

1. Profitability 5 4 3 2 1
2. Mission and Direction 5 4 3 2 1
3. Planning & Execution 5 4 3 2 1
4. Socio-political climate 5 4 3 2 1
Financial Impact Please choose the level of consequences on the organization of each factor.

Financial impact on the organization is likely to exceed by 80%

High Significant impact on the organization’s strategy or operational activities
Significant stakeholder concern
Financial impact on the organization likely to be between 20% - 80%
Medium Moderate impact on the organization’s strategy or operational activities
Moderate stakeholder concern
Financial impact on the organization likely to be less than 20%
Low Low impact on the organization’s strategy or operational activities
Low stakeholder concern

I. Credit Risk ( x% of Gross Income)

1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk ( x% of Gross Income)
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk, IR GAP ( x% of Gross Margin) High Medium Low

IV. Liquidity Risk ( x% of Liquid Assets)

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk ( x% of Net Income)
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk to Rules & Regulation ( x% of Expense) High Medium Low
VII. Reputation Risk ( x% of Expense) High Medium Low
VIII. Strategic Risk ( x% of Financial Target i.e. profit, portfolio growth, capital, balance sheet size in general)
1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Likelihood Survey Please choose the probability of occurrence of each risk factor.

Estimation Description Indicators

High Likely to occur each year or more than Potential of it occurring several times w/in the time
(Probable) 25% chance of occurrence. period. Has occurred recently.
Could occur more than once w/in the time period.
Medium Likely to occur in a ten-year time period
Could be difficult to control due to some external
(Possible) or less than 25% chance of occurrence.
influences.
Low Not likely to occur in a ten year period Has not occurred.
(Remote) or less than 2% chance of occurrence. Unlikely to Occur.

I. Credit Risk
1. Counterparty High Medium Low
2. Credit Concentration High Medium Low
II. Market Risk
1. Price High Medium Low
2. Foreign Exchange High Medium Low
3. Bond Trading High Medium Low

III. Interest Rate Risk (IR Gap) High Medium Low

IV. Liquidity Risk

1. Funding (Cash Flow) High Medium Low
2. Asset Liquidity High Medium Low
V. Operational Risk
1. Internal Fraud High Medium Low
2. External Fraud High Medium Low
3. Damage to Physical Assets High Medium Low
4. Employee Retention High Medium Low
5. Succession Planning High Medium Low
6. Information Security & Technology High Medium Low

VI. Compliance Risk (Rules&Regulation) High Medium Low

VII. Reputation High Medium Low

VIII. Strategic Risk

1. Profitability High Medium Low
2. Mission and Direction High Medium Low
3. Planning & Execution High Medium Low
4. Socio-political climate High Medium Low
Importance Survey
Please rate the following risk factors on a 5-likert scale:
5 = Very Important 3 = Moderately Important 1 = Unimportant
4 = Important 2 = of little Importance

I. Credit Risk
1. Counterparty 5 4 3 2 1
2. Credit Concentration 5 4 3 2 1

II. Market Risk

1. Price 5 4 3 2 1
2. Foreign Exchange 5 4 3 2 1
3. Bond Trading 5 4 3 2 1

III. Interest Rate Risk (IR Gap) 5 4 3 2 1

IV. Liquidity Risk

1. Funding (Cash Flow) 5 4 3 2 1
2. Asset Liquidity 5 4 3 2 1

V. Operational Risk
1. Internal Fraud 5 4 3 2 1
2. External Fraud 5 4 3 2 1
3. Damage to Physical Assets 5 4 3 2 1
4. Employee Retention 5 4 3 2 1
5. Succession Planning 5 4 3 2 1
6. Information Security & Technology 5 4 3 2 1

VI. Compliance Risk (Rules&Regulation) 5 4 3 2 1

VII. Reputation 5 4 3 2 1

VIII. Strategic Risk

1. Profitability 5 4 3 2 1
2. Mission and Direction 5 4 3 2 1
3. Planning & Execution 5 4 3 2 1
4. Socio-political climate 5 4 3 2 1