chinabank 2004

COVER SHEET

4 4 3SEC Registration Number

C H I N A B A N K I N G C O R P O R A T I O N

(Company’s Full Name)

1 1 F C H I N A B A N K B L D G 8 7 4 5 P A S E O

D E R O X A S C O R V I L L A R S T M A K A T I(Business Address: No., Street City/ Town / Province)

ARSENIO L. LIM, JR. 885-5133Contact Person Company Telephone Number

0 4 0 8 1 7 - A 0 5 0 6Month Day FORM TYPE Month Day

Annual Meeting

Secondary License Type, If Applicable

C F DDept. Requiring this Doc. Amended Articles Number / Section

Total Amount of Borrowings1,840

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document ID Cashier

S T A M P S

Remarks: Please use BLACK ink for scanning purposes

8745 Paseo de Roxas cor. Villar St., 1226 Makati City

CHINA BANKChina Banking Corporation

SECURITIES AND EXCHANGE COMMISSIONSEC FORM 17-A

1. For the fiscal year ended December 31, 2004

2. SEC Identification Number NA (Exempt Securities)

3. BIR Tax Identification No. 320-000-444-210-NV

4. Exact name of registrant as specified in its charter CHINA BANKING CORPORATION

5. PHILIPPINES 6. Industry Classification Code Province, Country or other jurisdiction of (For SEC use only)

incorporation or organization

7. 8745 Paseo de Roxas corner Villar Street, Makati City 1226 P.O. 2182 Address of principal office Postal Code

8. 885-5555 Registrant’s telephone number, including area code

9. Not Applicable Former name, former address, and former fiscal year, if changed since last report

10. Securities registered pursuant to Sections 4 and 8 of the RSA Number of Shares of Common Stock

Title of Each Class Outstanding and Amount of Debt Outstanding

Common stock, P100 par value 36,542,512 shares

11. Are any or all of these securities listed on the Philippine Stock ExchangeYes [ x ] No [ ]

12. Check whether the registrant:

(a) has filed all reports required to be filed by Section 11 of the Revised Securities Act (RSA) and RSA Rule 1111 (a) - 1 thereunder and Sections 26 and 141 of the Corporation Code of the Philippines during the preceding 12months (or for such shorter period that the registrant was required to file such reports):

Yes [ x ] No [ ]

(b) has been subject to such filing requirements for the past 90 days?

Yes [ x ] No [ ]

13. Aggregate market value of the voting stock held by non-affiliates: Not ApplicablePortions of the Company’s 2004 Annual report to stockholders are incorporated by reference into Parts I & II of this report

CHINA BANKING CORPORATION SECURITIES AND EXCHANGE COMMISSION ... SEC FORM 17-A

PART I BUSINESS AND GENERAL INFORMATIONITEM 1. BUSINESSHistorical Background. China Bank was incorporated on July 20, 1920 and commenced business on August 16 of the sameyear as the first privately owned local commercial bank in the Philippines.

China Bank was listed on the local stock exchange in 1947 and became the first bank in Southeast Asia to process depositaccounts on-line in 1969, and the first Philippine bank to offer telephone banking in 1988. The Bank acquired its universalbanking license in 1991.

China Bank provides a wide range of domestic and international banking services and is one of the largest commercialbanks in the country in terms of assets and capital.

Business Milestones. Within a business arena dominated by intensified competition for market share, narrowing tradingmargins and regulatory pressure, in 2004, China Bank had a 3rd straight year of record income as it posted a profit after taxof P2.72 billion from P2.62 billion income in 2003. Another key financial milestone for 2004 was the P 11.9 billion increase inloans, its fastest pace in seven years. Comprehensive collection and restructuring efforts also cut past due loan level by P1.2 billion and non-performing loan ratio to 11.40% from 14.68%. CASA deposit base reached a new high of P 21.7 billion,with broader retention rates for newly acquired accounts. The launching of our CASA revival program last November shouldreinvigorate the thrust to build-up traditional funding sources. Return on owners’ equity after appraisal increment of 14.37%again surpassed industry benchmarks. Similarly, our exceptional capital adequacy ratio of 32.74% is reflective of the Bank’sstatus as one of the best capitalized banks in the industry. These indicators were among the key factors that underpinnedthe decision of credit rating agencies Fitch Ratings & Capital Intelligence to retain China Bank’s credit rating at C/D and BB-,respectively.

Despite an exigent environment, China Bank remained vigilant for fresh opportunities to improve market share andconsolidate its presence as a multi-category service provider. We clearly defined China Bank’s value to customers as theability to offer superior access to services and a selection of competitively priced fund- and fee-based products. In terms ofcustomer service delivery & profitability, the evaluation of our banking channel economics merited greater attention lastyear, as shifting clients to more convenient electronic channels would be mutually beneficial in the long-run. Given theconstraints on the opening of new branches, China Bank’s ATM network was expanded to 188 locations, while broadeningthe suite of available ATM- & Tellerphone-based services. By capturing client transactions across multiple touchpoints, ournon-traditional income streams were maximized. On the corporate banking side, our newly established cash managementunit became a significant engine for acquisition of business clients besides capturing payments flows from existingaccounts. Check warehousing was introduced in the middle of 2004 to complement our bills & tax payments services.

For retail banking, the centerpiece for 2004 was the implementation of the branch-based marketing program throughout thenetwork. By institutionalizing a set of quantifiable and consistent measures for all branches, network performance could bebetter monitored and targeted toward desired segments – maximizing the business potentials at each area. Establishmentof key metrics at all retail levels ensures that selling and cross-selling efforts become a collective responsibility. Given theconstraints on the opening of new branches, network expansion focused on in-branch and off-branch ATMs.

The Bank received recognition as “Outstanding Commercial Bank” by the Consumer Union of the Phils for 2004 and alsoby Parangal ng Bayan Foundation, Inc., National Consumer Excellence Awards for 2005. The Bank also launched thisyear its “Grateful at 85” promo in preparation for its 85th anniversary in 2005.

For improved client recall and to better highlight the affiliation with China Bank, the subsidiary company officially changed itsname from CBC Insurance Brokers, Inc. to Chinabank Insurance Brokers, Inc. Building on its strong performance from theprevious years, Chinabank Insurance Brokers, Inc. capped the year 2004 with business strategies and accomplishmentsgeared towards achieving business efficacy and customer satisfaction. The new name also signifies a new identity thatechoes the China Bank brand – “your success is our business” and “banking with principles”. The launch of the “My GreatLife Dollar Plan” paved the way for Chinabank Insurance’s first dollar denominated life insurance which is also aninvestment product.CHINA BANKING CORPORATION

SECURITIES AND EXCHANGE COMMISSION ... SEC FORM 17-A

This product innovation was introduced and offered in partnership with another industry leader, Great Pacific Life(GrepaLife) of the Yuchengco Group of Companies. Motor car insurance business was also reinforced by improving theclaims monitoring and service process turnaround. Their linkage with China Bank’s Consumer Banking Group Auto Loans’current computer system allows for a seamless service delivery system for motor car quotations.

Realizing the significant role technology plays in uninterrupted banking service to clients, China Bank – Properties andComputer Center, Inc. (CBC-PCCI) focused on providing the groundwork necessary to deliver effective and secure productsand services to clients and users. These are all attuned to the rapid technological changes in the industry.

For 2004, the Group implemented e-banking as China Bank’s answer to the demands of the advances in the internetbanking front. Technology Group put in place network security for Internet banking. This resulted in the certification ofexternal auditor SGV of our Bank upon passing the Network Assessment & Vulnerability Test or Ethical Hacking. TheGroup also successfully backed up the Online Clearing System accessed by unlimited users and which also links our MetroManila and provincial branches to the government institution, Philippine Clearing House. There were other significant ITprojects - Trade, Trust and Consumer which supported the overall positive performance of the Bank. Lastly, more tellerterminals in the branches were converted to Mosaic NT, the latest generation of software which allows for automaticupgrading and troubleshooting over the network.

CBC Forex Corp., another subsidiary of China Bank which handles the Bank’s business of dealing and broking in allcurrencies, registered a net income of P5.49 million in 2004.

(1) Business of Issuer

Principal Products and Services. The Bank’s products and services include deposits and related services, internationalbanking services, loans and credit facilities, trust, investment services, insurance products and other services such asacceptance of various bill payments and donations to charitable institutions. The income from these products/services aredivided into two categories, namely (1) interest income from the Bank’s deposit taking and lending/investment activitieswhich accounts for 80% of revenues and (2) other income (includes service charges, fees & commissions, trading gain,foreign exchange gain, trust fees, income from sale of acquired assets and other miscellaneous income) which account for20% of revenues.

Distribution Network. As of end 2004, China Bank distributed its products and services through its 141 branch network with79 branches in Metro Manila and 62 in the provinces. In 2004, Santiago City branch was opened in Feb. and two (2)branches were relocated namely Cebu-Banilad Branch and Cubao-Araneta Branch in order to improve network productivity,operational efficiency and customer service.

The Banks’ ATM service, known as CBC Tellercard, complements the branch network in delivering services to itscustomers. As of end 2004, there were 188 ATMs nationwide Twenty three (23) ATMs were installed this year, namely:(1) Dipolog Center Mall; (2) Gilmore IT Center; (3) Power Plant R3; (4) Market! Market! 1; (5) Medical City; (6) Pacific Mall;(7) Greenbelt 3; (8) Caltex SLX 1; (9) SM City-Marilao; (10) SM City-Batangas; (11) SM City-Baguio; (12) Malanday Branch;(13) Market! Market! 2; (14) Metropoint Mall; (15) Robinson’s Galleria; (16) Lorma Hospital; (17) Greenhills Lifestyle Center;(18) Alabang Mall; (19) Greenhills Theater Mall; (20) Gaisano Mall; (21) Glorietta 1; (22) Rockwell-Loft and (23) Shopwise-Araneta. As a founding member of the BancNet consortium, TellerCard holders have access to more than 3,000 ATMsnationwide of both BancNet and Megalink networks.

Status of New Products/Services. By 2004, China Bank offered and launched investment and cash managementproducts. The line of investment products included high-yielding instruments Money L.I.F.T. (Long-term Investment Free ofTax)-2 months and Diamond Savings Account, a term deposit product supported by a passbook. These high-yieldinginvestment options are available through its 141 branches nationwide. Consumer products such as the Contract to Sell(CTS) financing and salary loan were also offered this year. Cash management products were further boosted with thelaunching of the BIR Tax Payments (eFPs or electronic Filing and Payment system), payroll processing service, PDC’swarehousing and auto-debit arrangement.CHINA BANKING CORPORATIONSECURITIES AND EXCHANGE COMMISSION ... SEC FORM 17-A

Competition. As the 12th largest commercial bank among the 41 commercial banks in the Philippines, China Bank hadassets of P113.86 billion as of Dec 2004, which translated to a market share of about 2.95% of the commercial bankingsector.

The Bank mainly caters to the Chinese-Filipino commercial sector. Its core banking franchise stems mainly from its 84-yearhistory in the Philippines, a factor that has enabled it to become deeply entrenched within the socioeconomic fabric of theChinese-Filipino community. The Bank’s market comprises the corporate, commercial, middle and retail markets. The Bankalso tapped the consumer market through its housing and auto loan business and high net worth market through its PrivateBanking Unit.

Sources and Availability of raw materials and the names of principal suppliers. Not applicable.

Disclose how dependent the business is upon a single customer or a few customers. Not applicable.

Transactions with and/or dependence on related parties. In the ordinary course of business, the Bank has loans and othertransactions with its subsidiaries and affiliates, and with certain directors, officers, stockholders and related interest(DOSRI). These loans and other transactions are made on the same terms as with other individuals and business ofcomparable risks and in compliance with all regulatory requirements. Other related party transactions conducted in thenormal course of business include the availment of computer and general banking services of an affiliate to meet the Bank’sreporting requirements.

Trademarks, Licenses, Franchises, etc. China Bank is operating under a universal banking license obtained in 1991.

Need for any government approval of principal products or services. The Bank informs the BSP of all its products andservices.

Effect of existing or probable governmental regulations on the business. The bank strictly complied with the Bangko Sentralng Pilipinas (BSP) requirements in terms of reserves, liquidity position, limits on loan exposure, cap on foreign exchangeholdings, provision for losses, anti-money laundering provisions and other reportorial requirements.

Amount Spent on Research and Development Activities.(In ‘000) 2004 2003 2002

Education & Training P 5,698 P 4,976 P 4,527

Advertising Expenses 11,173 4,965 5,266 Technology 76,640 81,877 33,058

Cost and effect of compliance with environmental laws. Not applicable.

No. of Employees. As of Dec. 2004, China Bank has a total manpower of 2,738 and plans to hire additionalworkforce of 323 in 2005.

(A) Additional Requirements as to Certain Issues or Issuers. Not Applicable(i) Debt Issues(ii) Investment Company Securities

CHINA BANKING CORPORATIONSECURITIES AND EXCHANGE COMMISSION ... SEC FORM 17-AProducts & ServicesDEPOSITS AND RELATED SERVICESChinaCheck Plus AccountSavings AccountMoneyPlus Savings AccountDiamond Savings AccountCertificates of Time DepositsManager’s ChecksGift ChecksTellerCard (ATM Card)TellerPhone (Telephone banking)Government Securities5-Year Money L.I.F.T. (Long-Term Investment Free of Tax)

LOANS AND CREDIT FACILITIESAgricultural, Commercial and Industrial FinancingPersonal LoansPre-export Financing (Direct and Indirect Exporters)Special Lending Programs

Countryside Loan Fund (CLF)Agricultural Loan Fund (ALF)Industrial Guarantee and Loan Fund (IGLF)Japan Bank for International Cooperation - Industrial Support Service Expansion Program (ISSEP)

Japan Export Import Bank (JEXIM) for Private Sector Development FinancingIndustrial Restructuring Project Fund (IRPF)

TRUST AND INVESTMENT MANAGEMENT SERVICES

Investment Management Investment Advisory Investment AgencyCorporate Trust Collateral/Mortgage TrustEstate Planning Testamentary Trust Living Trust Life Insurance Trust Educational TrustEmployee Benefit Planning Retirement Plan Provident PlanOther Fiduciary Services Custodianship Escrow Agency Loan AgencyChina Bank Dollar Fund

Asian Development Bank FinancingIndustrial Investment Credit Project (IICP)Domestic Shipping Modernization Program (DSMP)Environmental Infrastructure Support Credit Program

(EISCP)SSS-GSIS Special Financing ProgramSSS Industry Loan ProgramSpecial Financing Program for Tourism ProjectsHospital Financing ProgramFinancing Program for Educational InstitutionsSpecial Financing Program for Vocational and

Technical SchoolsGuarantee Programs Small Business Guarantee Finance Corporation (SB Corp.) Trade and Investment Development Cooperation (Designated as Philippine Export and Import Credit Agency – PHILEXIM) Overseas Chinese Credit Guarantee Funds (OCCGF) Export - Import Bank of the United States (USEXIM) GuaranteeConsumer Loans HOMEPlus Real Estate Loan AUTOPlus Vehicle Loan

INTERNATIONAL BANKING SERVICESImport and Export FinancingForeign and Domestic Commercial Letters of CreditStandby Letters of CreditCollection of Clean and Documentary BillsBank Guaranty (Shipside Bond)Foreign and Domestic RemittancesPurchase and Sale of Foreign ExchangeTravel Funds Servicing of Foreign Loans and InvestmentsTrade InquiryTrust Receipt FacilityCorrespondent Banking Services LC Confirmations/LC Advising Cash Management Tie-ups with Foreign Correspondent Banks Cash Management Tie-ups with Non-Bank Money Transfer Service Providers Foreign Currency Checks and Drafts Clearing ServicesForeign Currency Deposit Unit Services US$ Savings and Time Deposit Foreign Currency Loans

INSURANCE PRODUCTSLife Insurance Endowment Plans, Group Life Insurance Mortgage Redemption Insurance/Term Insurance Dollar-Denominated Life Insurance PlansNon-Life Insurance Fire Insurance Building and Content Fire and Allied Perils Motor Car Insurance Surety/Fidelity Bond/Judicial Bonds Marine Insurance – Cargo / Hull Casualty Comprehensive General Liability (C.G.L.) Products Liability (Local and Export) Accident and Health Personal and Travel Insurance 1. Student Personal Accident Insurance 2. Group Personal Accident Insurance HMO Plans Contractor’s / Erector’s All Risk Insurance Industrial All Risk (IAR) Insurance Electronic Equipment Insurance Medical Insurance Specialized Insurance Programs Special Scheme – Captive Insurance Company Risk Management Services/Risk Survey Report

CASH MANAGEMENT SERVICESAutomatic Debit Arrangement (ADA) Multi-Channel Bills Payment Services (includes Over- the-Counter, ATM and TellerPhone) BancNet Payment System (ATM, Point-of-Sale and BancNet Online) Post-Dated Check Warehousing Service Cash and Check Deposit Pick-up Services Comprehensive Payroll Offering (Crediting and Outsourcing) BIR Online Tax Payments SSSNet Employee Contribution Facility SSS Sickness, Maternity and Employee’s Compensation (SMEC) Payment thru the Bank Program

ACCEPTANCE OF PAYMENTSCable TV Companies Home Cable Sky CableInsurance / Pre-need CBC Insurance Brokers Manila Bankers Insurance Pacific PlansLoans China Bank Loan Payments

ACCEPTANCE OF PAYMENTSCredit Cards AIG Visa/Mastercard Allied Bank Visa Banco Filipino Visa Bankard/RCBC Citibank Visa/Mastercard East West Card HSBC Cards Metrobank Card Security Bank Diners/Mastercard Standard Chartered Visa/MastercardTelecommunications Digitel Extelcom Globe Telecoms ICC – Bayantel Innove (formerly Islacom) PLDT Smart Communications Beeper 150 Mobiline PiltelUtility Company Meralco

Government Institutions BIR NSO Helpline Plus PhilHealth PNCC-Skyway PSC – EPass SSSInternet Edsamail Infocom

ACCEPTANCE OF DONATIONSBantay BataChurch of Jesus Christ of Latter Day SaintsKnowledge ChannelPiso Para sa Pasig

OTHER SERVICESSSS Pension AccountsDirect Deposit Facility for U.S. PensionersSafe Deposit BoxDomestic CollectionsWestern Union Money Transfer ServicePrepaid Card Reloads

Phonecards (Landline and Cellphone) Internet Cards Satellite TV Internet game

CHINA BANKING CORPORATIONSECURITIES AND EXCHANGE COMMISSION ... SEC FORM 17-AITEM 2. PROPERTIESThe Bank conducts its business in its Makati headquarters situated on a 2,977 square meter lot (2 parcels) with a multistorey building appraised at P1.8 BN, with business address at 8745 Paseo de Roxas cor. Villar St., Makati City. ItsBinondo operations are located at a 1,233 sq. m. lot at the corner of Dasmarinas and Juan Luna streets (4 parcels ofland with two multi-storey commercial buildings).

Other properties include land & buildings of the different branches such as1) Caloocan - 2-storey mezzanine commercial bldg situated at No. 167 Rizal Ave. Ext. and J.

Teodoro, Bgy. Calaanan, Caloocan City2) Baguio Penthouse - 3-level duplex residential building, Park Road, Baguio City

3) Davao - Phase 3 of the Ecoland Commercial Center, Matina, Davao4) San Juan - Brgy. San Pedro Cruz, Municipality of San Juan5) Cebu Bus. Park, Cebu - Samar loop cor. Panay Road, Cebu Business Park, Cebu City

6) Trece Martires, Cavite - Unnamed Road, Bo. San Agustin, Trece Martires, Cavite 7) Laguna Bel-Air - Lot 17, Blk 66, Road Lot 1-B Laguna Bel Air Subd., Sta Rosa, Laguna

8) Iloilo-Rizal Drive - Rizal cor. Gomez Sts. Brgy. Ortiz, Iloilo City9) Silang, Cavite - E. Aguinaldo Highway, Bo. Biuso, Silang, Cavite

10) Dolores, San Fernando - 460 sq.m. at Lazatin, Blvd., Dolores, San Fernando, Pampanga 11) Las Piñas - Alabang-Zapote Road cor. Aries, Pamplona, Las Piñas City12) Valenzuela - MacArthur Highway, Valenzuela City13) Rosario, Cavite - Gen. Trias Drive, Rosario, Cavite14) Imus, Cavite - Nueno Avenue, Tanzang Luma, Imus, Cavite15) Tarlac - Panganiban St., San Nicolas Tarlac City, Tarlac

16) Visayas Avenue - Visayas Ave., cor. Congressional Ext. Quezon City 17) Cabanatuan - Lot 6 Blk 3, Maharlika Highway, Dicarma, Cabanatuan City18) Libertad, Pasay City - No. 184 Libertad St., Pasay City 19) Dasmariñas, Cavite - Gen Emilio Aguinaldo Highway, Dasmariñas, Cavite20) Angeles City - 347.07 sq.m. 2 parcels of land

21) Roosevelt - # 291 Roosevelt Ave., San Francisco Del Monte, Quezon City 22) San Juan - No. 169 Blumentritt St., San Juan, Metro Manila 23) Navotas - No. 551 M. Naval St., Bankulasi, Navotas, MM 24) Cebu-Manalili - M. Velez cor. V. Rama Ave., Cebu City

25) Bacolod - Araneta St., Bacolod City26) Lapasan - C.M. Recto Ave. National Highway, Lapasan, Cagayan de Oro City

27) General Santos - 600 sq.m. lot at Bo. Lagao, Gen Santos City 28) Sorsogon - Ramon Magsaysay Ave., Sorsogon, Sorsogon 29) Zamboanga - Gov. Lim Avenue, Zamboanga City

30) Dipolog - Gen. Luna cor. G. Gonzales Sts., Dipolog City38) Davao (Recto) - C.M. Recto co. J.P. Rizal Sts., Davao City39) Cebu - Jakosalem & Magallanes St., Cebu City

40)Potrero - McArthur Highway, Potrero, Malabon City 41) West Avenue - No. 2 West Ave., Bgy. Philam, District of Diliman Quezon City 42)Talisay, Cebu - Talisay, Cebu City 43) Banilad, Cebu - Barangay of Banilad, Cebu City

44) San Fernando, Pampanga - V. Tiomico St., Sto. Rosario, San Fernando Pampanga 45) E. Rodriguez Sr. Blvd. - E. Rodriguez Sr. Ave. New Manila, Quezon City

46) Banawe - Banaue Ave., Quezon City 48) Cainta, Rizal - 415 sq.m. lot at Felix Ave., Cainta, Rizal (beside Sta Lucia East Mall) 49) Quiapo - No. 216-220 Villalobos St., Quiapo, Manila 50) Cubao-Aurora - Aurora Blvd. Cor. Miami, Cubao, Quezon City

51)San Pablo City - Rizal Ave., Poblacion, San Pablo City 52) General Santos - 500 sq.m. lot at Queennies Vill., Dadiangas Heights, Bo. Lagao, Gen. Santos

53) Cainta, Rizal - 623 sq.m. lot at Felix Ave., Cainta, Rizal (beside Sta Lucia East Mall) 54) Dolores, San Fernando - 900 sq.m. at Lazatin, Blvd., Dolores, San Fernando, Pampanga

These properties are free from any lien or encumbrance.

CHINA BANKING CORPORATIONSECURITIES AND EXCHANGE COMMISSION ... SEC FORM 17-A

Description of Property the Bank intends to acquire in the next 12 months. The Bank has no plans to acquire properties inthe next twelve (12) months.

The Bank’s schedule of Bank premises, furniture, fixtures & equipment as of Dec. 31, 2004:

Accounts Amount (In Million Pesos)Bank Premises-Land P 1,825Building under construction Bank Premises-Building 588Bank Premises-Appraisal 348Leasehold Rights & Improvements 75Furnitures, Fixtures & Equipment 1,876Less:Accumulated Depreciation-Bldg. 160Accumulated Depreciation-FFE 1,525

P 3,027

Cost of computer equipment is lodged with CBC-Properties & Computer Center, Inc.

ITEM 3. LEGAL PROCEEDINGS

• There are pending cases for and against the Bank arising from normal business activities. In the opinion of theBank’s management and legal counsel, there are no material pending legal proceedings to which the Bank orany of its subsidiaries or affiliates is a party or of which any of their property is the subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

• Annual Stockholders Meeting -- May 06, 2004• Directors Elected - Gilbert U. Dee, Chairman of the Board

Hans T. Sy, Vice Chairman and Chairman of the Executive CommitteePeter S. Dee, President and CEOPilar N. Liao, Independent DirectorJoaquin Dee, DirectorDy Tiong, DirectorHerbert T. Sy, Director

Henry T. Sy, Jr., DirectorHarley T. Sy, DirectorDonato T. Faylona, Independent DirectorAlberto S. Yao, Independent Director

Henry Sy, Sr., Advisor to the BoardRobert T. Dee, Jr., Advisor to the Board


PART II OPERATIONAL AND FINANCIAL INFORMATION

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(1) Market Information

• Principal market where the equity is traded -- Philippine Stock Exchange Inc. (PSE)

• Market Value 2003 HIGH LOW CLOSE.

Jan - Mar 566.67* 516.67* 554.17*Apr - Jun 633.33* 583.33* 604.16*Jul - Sept 670.00 608.30* 660.00

Oct - Dec 675.00 660.00 670.00

2004 HIGH LOW CLOSE.

Jan - Mar 680.00 650.00 665.00Apr - Jun 685.00 620.00 650.00Jul - Sept 555.00 520.00 530.00Oct - Dec 600.00 520.00 560.00

* - Adjusted for 20% stock dividend on 15 July 2003

2004 HIGH LOW CLOSE.

Jan - Mar 566.67** 541.67** 554.17**Apr - Jun 570.83** 516.67** 541.67**Jul - Sept 555.00 516.67** 530.00Oct - Dec 600.00 520.00 560.00

** - adjusted for 20% stock dividend on 19 July 2004

• Market value as of March 31, 2005 (last trading day): P685.00


(2) Holders• Top 20 Stockholders (As of 12/31/2004)

Name of Stockholders Number of Shares Percent Share 1. Sysmart Corporation 7,457,473 20.408 2. PCD Nominee Corporation (Filipino) 5,389,793 14.749 3. SM Investments Corporation 3,509,967 9.605 4. The Int’l. Commercial Bank of China 2,952,268 8.079 5. Shoe Mart, Inc. 2,461,744 6.737 6. Henry Sy, Sr. 2,021,761 5.533 7. CBC Employees Retirement Plan 914,469 2.502 8. Joaquin Dee &/or Leticia Ty Dee 877,635 2.402 9. JJACCIS Development 716,850 1.962 10. GDSK Development Corporation 618,714 1.693 11. PCD Nominee Corporation (Non-Fil) 395,330 1.082 12. Domingo T. Dee 226,896 0.621 13. Gilbert U. Dee 214,578 0.587 14. Estate of Allen Cham 170,757 0.467 15. Regina Y. Dee 162,518 0.445 16. Hydee Management & Resource Corp. 161,187 0.441 17. SM Development Corp. 147,002 0.402 18. Kuan Yan Tan’s Charity (Phil.), Inc. 123,030 0.337 19. The First Resources Mgt. & Sec. Corp. 112,197 0.307 20. Reliance Commodities, Inc. 106,539 0.292

TOTAL 28,740,708 78.650%

Total number of shareholders (As of 12/31/2004) – 1,852

(3) DividendsChinabank’s Dividend history has been mainly in the form of stock dividends.

2004 2003 2002 2001 2000Stock Dividend 20% 20% 10% 10%Cash Dividend 5% 5% 8%

Authorized and Issued Capital Authorized Capital - P5.0 billion divided into 50 million shares Issued Shares - 36,542,512 There is no restriction that limits the ability to pay dividends other than what is required in the CorporationCode. However, any dividends declared by the Bank are subject to the approval primarily of Bangko Sentral ngPilipinas, the Philippine Stock Exchange and the Securities and Exchange Commission.

(4) Unregistered Securities

There were no unregistered securities sold by the Bank for the past three (3) years, however there were new securitiesissued resulting from the declaration of stock dividend to come from the Bank’s unissued shares which were exempt fromregistration requirement under Sec 10.1 (d) of the Securities Regulation Code.


Compliance with leading practices on corporate governance

The Bank’s Manual on Corporate Governance has been revised to incorporate amendments introduced by variousgovernance-related circulars issued by the regulators which include among others, the creation of Corporate GovernanceCommittee, Risk Management Committee and Compensation or Remuneration Committee and the adoption ofcorresponding Committee Charter, and the PSE Revised Disclosure Rules.

Also, the Bank has an evaluation system for the Board of Directors and for the Individual Board, to determine and measurecompliance with the provisions and requirements of the Manual. This is done annually where the results are summarizedand reported to the Board of Directors by the Compliance Officer.

To enjoin compliance, a copy of the Bank’s Manual on Corporate Governance, as amended, is made available to allemployees. Also, orientation is conducted for supervisors and officers to raise the level of awareness and understanding ofthe principles, concepts and elements of good corporate governance.

ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

A. Management’s Discussion and Analysis (MD & A) or Plan of Operation

(1) Financial and Operating HighlightsHighlights of the balance sheet and income statement for the last three (3) fiscal years:

2004 2003 2002 (In Million Pesos) (As restated) (As restated)Gross Revenues 10,678 11,174 10,403 Gross Expenses 7,961 8,558 7,811 Net Income 2,717 2,616 2,592 Total Resources 113,860 103,350 107,931Loan Portfolio (Net) 48,458 38,209 34,351Total Deposits 85,806 72,112 83,151Capital Funds 19,641 17,093 14,562(In %)Return on Assets 2.46 2.57 2.73 Return on Average Equity 14.37 16.82 19.36 BIS Capital Adequacy Ratios 32.74 26.17 24.53Net Interest Margin 5.08 4.47 4.02

(2) Management’s Discussion and Analysis

The Bank posted a 3rd straight year of record income at P2.72 billion, 3.87% above 2003 figures and 4.83% from 2002figures. The resulting Return on Average Equity (ROE) of 14.37%, 16.82% and 19.36% and Return on Assets of 2.46%,2.57% and 2.73% in 2004, 2003 and 2002, respectively reflect industry best performance. Income was boosted by higherinterest margins coupled with lower provisioning at P856 million vs. P1.65 billion in 2003 and P2.32 billion in 2002.

Fund-based revenues reached P8.56 billion, expanding by 18.81% and 31.13% from 2003 and 2002 respectively, mainlyfrom interest income on loans, low-risk investment securities and IBCL. Interest expenses slightly declined by 0.52% in2004 from P3.52 billion in 2003 but was slightly up by P205 million from 2002 as a result of lower interest cost on dollardeposits and pay-offs of high yielding peso deposits such as More Than Double Your Money (MTDYM)-5 at the start of theyear. Consequently, net interest income expanded by 37.29% and 56.58% from P3.68 billion and P 3.23 billion in 2003 and2002, respectively to P5.05 billion in 2004. Net interest margin improved to 5.08% from 4.47% in 2003 and 4.02% in2002.


Fee-based revenues dropped by 46.60% from 2003 & 45.30% from 2002 to P2.12 billion in 2004 which can be attributedto the decline in trading gains by 87.74% and 89.47% from P2.46 billion in 2003 and P2.87 billion in 2002 respectively. Thiswas expected as a substantial part of the GS inventory was sold in 2004 and 2003. On the other hand, services, fees andcommissions grew by 33.91% from P467 million in 2003 and 34.97% in 2002. Higher in-clearing service charges such asno sufficient fund (NSF) and clearing house operating memo (CHOM) boosted service and collection charges. Foreignexchange gain also increased by 14.94% in 2004 from P642 million in 2003 and by 323.67% from P174 million in 2002 asour Treasury Group maximized opportunities from the higher peso-dollar exchange rate. Miscellaneous income alsoexpanded by 9.02% to P95.5 million in 2004 from P87.6 million in 2003 and by 21.22% from P95 million in 2002 .

Despite the drop in taxes and licenses by 10.05% to P385 million and slight increase by 2.06% from 2003, operatingexpenses grew to P3.28 billion or by 4.76% in 2004 from P3.13 billion in 2003 and 18.05% from P2.85 billion in 2002.Compensation and fringe benefits grew by P195 million to P1.22 billion in 2004 from P1.02 billion in 2003 and by P276million in 2004 from P943 million in 2002 mainly due to higher salary and other fringe benefits. Miscellaneousexpenses were down by 21.09% or P150.17 million to P561.90 million from P712.16 million in 2003 and up by 1.90% orP10.50 million from 2002 as a result of reclassification of accounts.

With substantial loan loss reserves already provided in the previous 2 years, China Bank’s provision for probable lossesslowed to P856 million. The resulting loan loss coverage ratio (ratio of reserves to bad loans) of 82.19%, remainedone of the highest in the industry. This brings cumulative loan loss reserves to P6.25 billion in 2004, down by 4.5%from 2003 due to write-offs effected by end of year. NPL ratio stood at 11.40% in 2004, better than last year’s 14.68% .

Going forward, changes in market/borrowing rates, volatility of peso/dollar exchange rates and other external factors arepotential concerns.

Total resources grew by P 10.51 billion to P 113.86 billion in 2004, mainly from higher loans volume and Investment inBonds and Other Debt Instruments (IBODI). The bank’s gross loan portfolio for 2004 grew by P11.9 billion from 2003 andP17.7 billion from 2002 due to additional exposure to prime companies in telecommunications, shipping, medical services,food and agribusiness and real estate as well as higher volume of retail loans (housing & auto).

Items on the asset side such as Cash & Other Cash Items increased by 22.79% from 2003 and 36.90% from 2002 due toyear-end build-up. There was a growth in Due from BSP of 86.35% which can be attributed to an increase in BSPreserves from higher deposits . Meanwhile, Due from Other Banks dropped by 57.31% and 71.30% from 2003 and 2002,respectively as a result of lower placements with other banks. Interbank loans also declined by 60.20% to P2.42 billionfrom P6.09 billion in Dec. 2003 due to lower overnight bank placements. For 2004, IBODI increased by 27.30% to P34.39billion in 2004 from P27.02 billion in 2003 and by 2.52% from P33.55 billion in 2002 from higher investment in governmentsecurities. Trading account securities (TAS) decreased by 26.55% from 2003 and 16.60% from 2002 due toreclassification of accounts.

On the liabilities side, total deposits was up by 17.30% to P85.81 billion in 2004 from P 72.11 billion in 2003 and 3.19%from P83.15 billion in 2002 which can be attributed to higher CASA deposits and the introduction of new high yielding long-term deposits. Again, year-on-year CASA growth was one of the best ever for the Bank, and signified the eighth straightyear of over P 1 billion build-up in low-cost CASA deposits.

Interbank loans payable dropped by 87.81% to P732 million from P6.00 billion in 2003 and 70.76% from P2.50 billion in 2002 as therewas no need for additional bank borrowings. Accrued Taxes, Interest & Other Expenses declined by 29.07% from 2003 and 4.20% from2002 due to the payout of accrual interest on maturing MTDYM deposits last January. Other liabilities grew by 6.12% from 2003 due toadjustments involving reclassification to proper accounts for the whole year 2004.Total capital funds reached P19.64 billion, up by 14.91% from 2003 and 29.07% from 2002. The BIS Capital Adequacy Ratio (CAR)reached a new high of 32.74%, reflective of the Bank’s status as one of the best capitalized banks in the industry. Again, this is animprovement from the CAR of 26.17% in 2003 and 24.53% in 2002.

Changes in market rates and borrowing costs as well as movements in the peso/dollar exchange rate may affect the Bank’s liquidity.


Despite an exigent environment, China Bank remained vigilant for fresh opportunities to hike market share and consolidateits presence as a multi-category service provider. On the corporate banking side, the Bank’s newly established CashManagement unit became a significant engine for acquisition of business clients through the launching/offering of servicessuch as BIR tax payments (electronic Filing and Payment system), payroll processing, check warehousing and auto-debitarrangements. For the retail banking, branch-based marketing program was implemented throughout the network.Consumer products were also introduced in 2004 such as the Contract to Sell (CTS) financing and salary loans. We havealso reorganized our support units such as the Centralized Operations Group which included the International Banking andLoans & Discounts. Another newly-formed group in 2004 was Credit Management, which includes Remedial Management,Securities Custodianship and Credit Division. Technology-related capital investment accounted for the bulk of the Bank’scapital expenditures for the year 2004. These include additional business applications, upgrade of computer mainframehardware (CPU and storage) for the core banking system and e-banking projects.

There were no key variable and other qualitative and quantitative factors which affected the Bank’s financial condition thatdid not arise from the Bank’s normal course of operations. Also, changes in the bank’s financial condition or operationsare due more to external factors such as interest rate movements and cost of borrowings rather than cyclical aspects.

In the normal course of the Bank’s operations, there are various outstanding commitments and contingent liabilities whichare not reflected in the accompanying financial statements. Management does not anticipate any material losses as aresult of these transactions.

The following is a summary of contingencies and commitments with their equivalent peso contractual amounts:2004 2003

Trust Department accounts P 38,184,795,281 P 33,560,644,456Forward exchange sold 7,729,720,647 13,071,690,696Unused commercial letters of credit 2,061,265,436 1,920,913,124Outstanding guarantees issued 2,637,888,695 1,342,660,084Deficiency claims receivable 779,131,078 491,142,262Late deposits/payments received 218,321,220 119,022,748Outward bills for collection 219,272,685 95,017,647Inward bills for collection 134,308,337 91,467,555Forward exchange bought 27,026,647 25,355,946Others 731,573,297 615,480,142

There are pending assessments and pre-assessments from the Bureau of Internal Revenue (BIR) pertaining to withholdingtax at source and DST for the years 1982 to 1986 and GRT for the years 1999 and 2000. In addition, the Bank has receivedtax assessments from the BIR on two industry issues. The Bank, through its tax counsel, is contesting these assessmentsand pre-assessments on the ground that the factual situations were not considered which, if considered, will not give rise tomaterial tax deficiencies. The Bank, together with other member banks of the Bankers’ Association of the Philippines (BAP), is contesting these pending assessments and pre-assessments of the BIR. Discussions are ongoing between the BAPand the BIR for the appropriate settlement and disposition of these tax issues. No provision has been made in theaccompanying financial statements for these contingencies.

Several suits and claims relating to the Bank’s lending operations and labor-related cases remain unsettled. In the opinionof management, these suits and claims, if decided adversely, will not involve sums having a material effect on the financialstatements of the Bank.


(3) Plan of Operations

Prospects for the banking industry and China Bank in particular could be tied to the resilience of the Philippine economy.In 2005, with the GDP forecast of 5.3%-6.3% p.a. and better outlook for the banking industry such as loans growth, strongerretail/consumer market, reduced NPL/NPA due to SPAV, China Bank believes a 10% p.a. growth would be a challenge.

To sustain its profitability, the Bank will continue to expand its market base and business volume through growth in CASAand loans. It will also intensify its revenue, pursue its replacement strategy through quality loans growth and build up offee-based income. The Bank will also improve its asset quality through reduced NPL, disposal of ROPOA andstrengthening of its credit management , change in lending process & structure.

Another priority for the Bank this year is the implementation of internet banking solutions and the full implementation of theSales Mgt. System to clearly target market segments, monitor performance as well as support customer acquisition &retention.

The Bank will also continue to improve its overall operating efficiency through superior technology and review of corebanking platform, implementation of automation projects and streamlining processes. Technology-related capitalinvestment will account for the bulk of the Bank’s capital expenditures for the year 2005. These include operating softwarefor insurance brokerage, upgrade of network and communications systems, automated solutions and e-banking projects.

ITEM 7. FINANCIAL STATEMENTSPlease refer to the attached Audited Financial Statements for 2004.

ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.

There were no changes and disagreements with our accountant on any matter of accounting and financial disclosure. Forthe last two (2) years, Mr. Wilson P. Tan, Partner, Sycip, Gorres Velayo & Co. (SGV), with office located at 6760 AyalaAvenue, Makati City, 1226 Philippines, has been our accountant/auditor.

PART III CONTROL AND COMPENSATION INFORMATION

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(1) Incumbent Directors and/or Nominees for the position of directors including independent directors and executiveofficers and the relevant data about them are listed hereunder:

a. Incumbent Directors and/or Nominees, including independent directors.1. Gilbert U. Dee (GUD) Incumbent – Nominee Director

2. Hans T. Sy (HS) Incumbent – Nominee Director3. Peter S. Dee (PSD) Incumbent – Nominee Director4. Joaquin Dee (JD) Incumbent – Nominee Director5. Dy Tiong (DT) Incumbent – Nominee Director6. Herbert T. Sy (HTS) Incumbent – Nominee Director7. Henry T. Sy, Jr. (HTS, Jr.) Incumbent – Nominee Director8. Harley T. Sy (HSY) Incumbent – Nominee Director9. Pilar N. Liao (PNL) Incumbent – Nominee Independent Director10. Donato T. Faylona (DTF) Incumbent – Nominee Independent Director *11. Alberto S. Yao (ASY) Incumbent – Nominee Independent Director12. Robert F. Kuan (RFK) Nominee Independent Director

* Per his letter dated April 6, 2005, he is declining his nomination as Director.CHINA BANKING CORPORATIONSECURITIES AND EXCHANGE COMMISSION ... SEC FORM 17-A

Gilbert U. Dee, 69, Chairman of the Board, holds a Bachelor of Science degree in Banking from De La Salle University. He obtained hisMBA in Finance from University of Southern California in 1959. He became the Chairman of the Board in 1989 and a Director since 1969.He has been a director/officer for more than five (5) years in companies engaged in banking, finance and investment, manufacturing andauto dealership. He holds directorships in affiliates/subsidiaries and other corporations such as CBC Properties & Computer Center, Inc.(CBC-PCCI), Union Motor Corp. and Super Industrial Corp., among other corporations. GUD and PSD are related within the 5th civil degreeby consanguinity.

Hans T. Sy, 49, Vice Chairman and Chairman of the Executive Committee (ExCom), holds a Bachelor of Science degree in MechanicalEngineering from De La Salle University. He became Vice Chairman and Chairman of the ExCom since 1989 and a Director since 1986.He has been director/officer for more than five (5) years in companies engaged in banking, retailing, real estate development, malloperations, construction, cement, food and rubber manufacturing, finance and investment, insurance and entertainment. He holdsdirectorships in affiliates/subsidiaries and other corporations such as Best Rubber Corp., ACE Hardware Phils. Inc., Family EntertainmentCenter, Inc., HS Food, Inc., Land Building Corp., Market-Watch Investors Co., Inc., Shoemart, Inc., Multi-Realty Dev’t. Corp., ShoppingCenter Mgt. Corp., SM Development Corp., SM Investments Corp., Wonderfoods, Inc., among other corporations. HS, HTS, HTS, Jr. andHSY are related within the 2nd civil degree by consanguinity.

Peter S. Dee, 63, President & Chief Executive Officer (CEO), holds a Bachelor of Science degree in Commerce from De La SalleUniversity/University of the East. He became President & CEO in 1989 and has been a Director since 1977. He has been a director/officerfor more than five (5) years in companies engaged in banking, paint, food and beverage, manufacturing, real estate development, financeand insurance. He holds directorships in affiliates/subsidiaries and other corporations such as CBC Properties & Computers Center, Inc.,CBC Forex Corp., Chinabank Insurance Brokers, Inc., Cityland Dev’t. Corp., Hydee Mgt. & Resources Corp., Sinclair (Phils.), Inc., CanLacquer, Inc. and GDSK Dev’t. Corp., among other corporations. PSD and GUD are related within the 5th civil degree by consanguinity.

Joaquin Dee, 69, Director, holds a Bachelor of Arts degree in Commerce from Letran College. He has been a Director since 1984 and hasbeen a director/officer for more than five (5) years in companies engaged in banking, liquor manufacturing, flour trading and real estatedevelopment. He holds directorships in the following corporations: JJACCIS Dev’t. Corp. and Enterprise Realty Corp., among othercorporations.

Dy Tiong, 75, Director, holds a Bachelor of Science degree in Business Administration from National Jean Kuan College. He has been aDirector since 1985. He has also been a director/officer for more than five (5) years in companies engaged in banking, finance, investment,insurance and education. He holds directorships in following corporations: Panelon Phils. and Chiang Kai Shek College, among othercorporations.

Herbert T. Sy, 48, Director, holds a Bachelor of Science degree in Management from De La Salle University. He has been a Director since1993 and has been a director/officer for more than five (5) years in companies engaged in banking, food retailing, rubber manufacturing,investment, car service and car accessories, real estate development and mall operations. He holds directorships in the followingcorporations: Best Rubber Corp., SM Autoservice & Car Accessories (Phils.), Inc., Café Elysee, Inc., SM Prime Holdings, Inc. andSupervalue, Inc., among other corporations. HTS, HS, HTS, Jr. and HSY are related within the 2nd civil degree by consanguinity.

Henry T. Sy, Jr., 51, Director, holds a Bachelor of Science degree in Management from De La Salle University. He has been a Directorsince June 2000. Mr. Sy, Jr. has been a director/officer for more than five (5) years in companies engaged in banking, real estatedevelopment, construction, mall operations, cement, food & rubber manufacturing, finance and investment. He holds directorships in thefollowing corporations: SM Prime Holdings, SM Investments Corp., SM Synergy Properties Holdings Corp., Shoemart Inc., Sysmart Corp.,Highlands Prime, Inc. & SM Development Corp., among other corporations. HTS, Jr., HS, HTS and HSY are related within the 2nd civildegree by consanguinity.

Harley T. Sy, 45, Director, holds a Bachelor of Science degree in Commerce, major in Finance from De La Salle University. He became aDirector in May 2001. He has been a director/officer for more than five (5) years in companies engaged in banking, retailing, food, realestate development, finance and investment. His directorships include the following: ACE Hardware Phils., SM Investments Corp.,Shoemart, Inc. and H.S. Food, Inc., among other corporations. HSY, HTS, HS and HTS, Jr. are related within the 2nd civil degree byconsanguinity.


Pilar N. Liao, 74, Director, holds a Bachelor’s degree in Home Economics from the College of the Holy Spirit. She becamea Director in May 1985. She has also been a director/officer for more than five (5) years in companies engaged in banking,office equipment, systems and supplies. She is also a Director of Speed Office System.

Donato T. Faylona, 57, has been engaged in the general practice of law since 1974. Presently, a partner in HerreraTeehankee Faylona & Cabrera Law Offices in-charge of litigation, a position he has held since joining the firm in 1988, hasextensively appeared in trial courts and administrative bodies such as the Securities and Exchange Commision, CivilAeronautics Board and House Land Use and Regulatory Board. Directly handled and supervised appellate practice in theCourt of Appeals and in the Supreme Court. Has likewise extensive practice in corporate law involving joint ventureagreements, mergers and acquisitions and maintenance of corporate books. His directorship include the following:Gendiesel Philippines, Inc., Dream 6750, Inc., Jadwani Int’l., Inc., VAJ Industries, Inc., VSD Realty and Dev’t. Corp., OrientWood Industrial Co., Inc., Tagum Agro-Industrial Corp., Phil-Gulf, Inc., and Casa Benita Dev’t. Corp.

Alberto S. Yao, 58, Director, holds a Bachelor of Science in Business Administration from Mapua Institute of Technology.He became a director in July 2004. He has been a director/officer for more than five (5) years in companies engaged inmanufacturing and distribution of tires, Mattel and other leading toys, infants and children’s footwear. His directorship/officership in other corporations include Richphil House, Inc., Megarich Property Ventures and Crestland Empire VentureCorporation.

Robert F. Kuan, 57, holds a Bachelor of Science degree in Business Administration from UP. He obtained his MBA fromAIM in 1975. He took up Top Management Program exclusively for company Presidents and Chief Executive Officers atBali, Indonesia in 1993. He has been the Chairman of the Board of Trustees of St. Luke’s Medical Center and Member ofBoard of Trustees of St Luke’s College of Medicine since 1996, and Brent International School of Manila since 1989. He isthe founder and the President of Chowking Food Corporation from 1985 until March 2000. He is a recipient of severalawards and citations in the field of business, such as Business Leadership Award (Pillar Category) from Aurelio Periquet,Jr. Foundation, TOFIL Awardee in the field of Business and Entrerpreneurship for the year 2003, 1999 FranchiseExcellence Awardee from the Philippine Franchise Association, 1999 Most Outstanding Professional Awardee in the field ofBusiness Administration from UP Alumni Association, among others.

GUD- Nominated by Linda Susan T. Mendoza, no relationHS-Nominated by SM Investments Corp./Shoemart, Inc./Henry Sy, Sr./Sysmart Corp.PSD – Nominated by Nancy D. Yang, sisterJD – Nominated by Christopher Dee, sonDT – Nominated by Johnny Cheng, T.K., Jr. son-in-lawHTS – Nominated by SM Investments Corp./ Shoemart, Inc./Henry Sy, Sr. / Sysmart Corp.HTS, Jr. – Nominated by SM Investments Corp./Shoemart, Inc./Henry Sy, Sr./Sysmart Corp.HSY – Nominated by SM Investments Corp./Shoemart, Inc./Henry Sy, Sr./Sysmart Corp.PNL – Nominated by Patrick Stephen Liao, sonASY – Nominated by Gregorio U. Kilayko, no relationDTF – Nominated by Regina Capital Development Corp. by Marita A. LiminganRFK – Nominated by Regina Capital Development Corp. by Marita A. Limingan

b. Principal Officers

Ricardo R. Chua, 53, Executive Vice President (EVP) and Chief Operating Officer (COO), holds a Bachelor’s Degree inCommerce, major in Accounting from the University of the East. He obtained his MBA from Asian Institute of Management(AIM) in 1975. He became the COO in December 1995. He has been involved in the banking industry for more than 5years. He is presently the President & COO of Chinabank Insurance Brokers, Inc. (CBC-IBI), Director of CBC Forex Corp.(CBC-CFC), Director and General Manager of CBC Properties and Computer Center, Inc. (CBC-PCCI).

Reynaldo L. Lao, 61, Senior Vice President (SVP) and Head of the Consumer Banking Group, holds a Bachelor’s degreein Management from University of the East. He obtained his MBA from Ateneo de Manila and graduated from the AsianInstitute of Management’s Management Development Program in 1972. He has been an SVP since 1995. He has beeninvolved in the banking industry for more than 5 years. He is a Director of Chinabank Insurance Brokers, Inc. (CBC-IBI).CHINA BANKING CORPORATIONSECURITIES AND EXCHANGE COMMISSION ... SEC FORM 17-A

Nancy D. Yang, 65, Senior Vice President (SVP) and Head of the Branch Banking Group, holds a Bachelor of Arts degreefrom PWU and a degree in Human Development & Child Psychology from Merill Palmer Institute, Detroit, Michigan, USA,

1960-61. She has been a SVP since 1995. She has been involved in the banking industry for more than 5 years. She is aDirector of CBC Properties & Computer Center, Inc. (CBC-PCCI) and Chinabank Insurance Brokers, Inc. (CBC-IBI). PSDand NDY are related within 2nd civil degree by consanguinity.

Samuel L. Chiong, 54, Senior Vice President (SVP), and Assistant Group Head of Branch Banking Group, holds aBachelor of Arts degree in Economics from Ateneo de Manila. He took the Advanced Bank Management Program from theAsian Institute of Management (AIM) in 1989. He has been involved in the banking industry for more than 5 years. Hebecame SVP in February 2004.

Antonio S. Espedido, Jr., 49, Senior Vice President (SVP), and Head of Treasury Group, holds a Bachelor of Science inBusiness Administration from University of San Francisco. He has been in the banking industry since 1984. He becameSVP in July 2004. He is a Director of CBC Forex Corporation (CBC-CFC).

Ramon R. Zamora, 55, Senior Vice President (SVP) and Head of the International Banking Group, holds a Bachelor of Artsdegree in Economics from Ateneo de Manila. He has been an SVP since April 2004. He has been involved in the bankingindustry for more than 5 years. He is a Director of CBC Forex Corp. (CBC-CFC).

Margarita L. San Juan, 51, First Vice President (FVP), Account Management Group, holds a B.S.B.A. Major in FinancialManagement degree from UP. She took the Advance Bank Management Program from Asian Institute Management (AIM)in 1992. She became FVP in January 1997.

Rene J. Sarmiento, 51, First Vice President (FVP) and Head of the Trust Group, holds a Bachelor of Science degree inCommerce, major in Accounting from De La Salle University. He obtained his MBA from AIM in 1978. He has been involvedin the banking industry for more than 5 years. He has been an FVP since July 2002.

Alexander C. Escucha, 48, First Vice President (FVP) and Head of Corporate Planning Division, holds a Bachelor of Artsdegree in Economics from UP. He has been involved in the banking industry for more than 5 years. He became FVP inSeptember 2002.

Rhodora Z. Canto, 55, First Vice President (FVP) and Head of Credit Management Group, holds a Bachelor of Science inBusiness Administration from University of the Philippines. She obtained her MBA from AIM in 1975. She has been in thebanking industry for more than 5 years. She became FVP in June 2004.

Note: To the best of our knowledge, no nominees for director (1) own directly/indirectly or a beneficial owner of more than 5% of the Bank’s outstandingshares (2) have any transaction with or involving the Bank or any of its subsidiaries in which a director-nominee and members of their immediate family havea direct/indirect material interest, and (3) have been involved for the past five (5) years in any legal proceeding affecting/involving themselves and/or a materialor substantial portion of their property before any court of law or administrative body in the Philippines or elsewhere, save in the usual routine cases particularlyof the Bank.

(2) Significant Employees

There is no person other than the executive officers who is expected to make a significant contribution tothe Bank.

(3) Family Relationships. (Please refer to Item 9 (1) )


(4) Involvement in Certain Legal Proceedings

To the knowledge and/or information of the Bank, there are no events that occurred during the past five(5) years that are material to an evaluation of the ability or integrity of any director, nominee for election asdirector, executive officer, underwriter or control person of the Bank.

Moreover, Criminal Case No. B-2003-345, RTC Branch 89, Bacoor, Cavite, formerly I.S. No. B-01-130supposedly against Mr. Harley T, Sy, among others, was considered withdrawn per Court Order dated 03August 2004 signed by Executive Judge Eduardo Israel Tanguanco, RTC, Bacoor, Cavite, signed xeroxcopy of which was furnished to OCS by Mr. Sy’s office, and which OCS, particularly, Ms. Amy De Leon andMr. Arsenio L. Lim, Jr. found to be the true xerox copy of the signed original thereof shown to them for thepurpose of comparison.

ITEM 10. EXECUTIVE COMPENSATION2005 a 2004 b 2003 b

Top 5 Senior Officers P 63,349,454.00 P 59,411,516.00 P 40,613,912.00

Regular Salaries P 20,056,416.00 P 18,570,756.00 P 17,092,752.00Regular Bonuses 3,342,736.00 3,095,126.00 23,521,160.00Profit Sharing 39,950,302.00 37,745,634.00

1. Gilbert U. Dee Chairman of the Board2. Peter S. Dee President & CEO3. Ricardo R. Chua Exec. Vice Pres. & COO4. Reynaldo L. Lao Sr. Vice Pres & Head, Consumer Banking Group5. Nancy D. Yang Sr. Vice-Pres. & Head, Branch Banking Group

Board of Directors & Officers P 485,534,627.00 P 455,876,247.00 P 349,558,479.00

Regular Salaries P 264.283,016.00 P 244,706,496.00 P 221,321,808.00Regular Bonuses 44,047,169.00 40,784,416.00 128,236,671.00Profit Sharing 177,204,442.00 170,385,335.00

a - Estimated b - Actual

Components of the 2004 Data are as follows: Components of the 2005 Data are as follows:1. Annual Salary consisting of 12 months Basic Salary 1. Annual Salary consisting of 12 months Basic Salary (December, 2004 figures) (2004 figures plus 8.0%)2. Regular Bonuses equivalent to 2 months Basic Salary 2. Regular Bonuses equivalent to 2 months Basic Salary (December, 2004 figures) (2004 figures plus 8.0%)3. Officers’ 2003 Profit Sharing (Taxable Portion) to be paid in 3. Officers’ 2004 Profit Sharing (Taxable Portion) to be paid in 2005 June 2004 (Actual 2003 PS paid in 2004, plus 10%)4. PSD/GUD’s 2003 Taxable PS (As Officer/EXCOM Member) 4. PSD/GUD’s 2004 Taxable PS (As Officer/EXCOM Member) Paid in 2004 (Actual 2003 PS paid in 2004, plus 10%)5. EXCOM Members’ 2003 Taxable PS paid in June 2004 5. EXCOM Members’ 2004 Taxable PS – actual 2003 PS paid in6. Directors’ 2003 Taxable PS paid in May 2004 2004 plus 10%

6. Directors’ 2004 PS to be paid in 2005 – same as actual 2003 PS paid in 2004

There are no compensation arrangements for members of the Board of Directors, other than four (4%) percent that isprovided under Article VIII , Sec. 1 (a) on the Distribution of Net Earnings and Five Hundred Pesos (P500.00) Per Diem perdirector per meeting attended under Article IV Sec. 11 of the Bank’s By-Laws, and there are no warrants/options held byCEO, the named executive officers, and all officers and directors as a group.


1ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(1) Security ownership of certain record & beneficial owners of more than 5%1) Title of Class 2) Name and Address

of record/beneficialOwner

3) Amount & Natureof record/beneficialownership ( indicateby “r” or “b”)

4) Percent of Class

Common Sysmart Corp.Rm. 326 Makati StockExchange Bldg., AyalaAve., Makati City

745,747,300.00 “r” 20.408

Common PCD Nominee Corp. (Fil.)G/F MSE Bldg.,6767 Ayala Avenue,Makati City

538,979,300.00 “r” 14.749

Common SM Investment Corp.Rm. 326 Makati StockExchange Bldg., AyalaAve., Makati City

350,996,700.00 “r” 9.605

Common The Int’l CommercialBank of China100 Chin Lin Road,Taipei, 10424 Taiwan,Republic of China

295,226,800.00 “r” 8.079

Common Shoemart, Inc.Rm. 326 Makati StockExchange Bldg., AyalaAve., Makati City

246,174,400.00 “r” 6.737

Common Henry Sy, Sr.Rm. 326 Makati StockExchange Bldg., AyalaAve., Makati City

202,176,100.00 “r” 5.533

HENRY SY, SR. is the record and beneficial owner of the following China Bank’s common shares as of December 31, 2004:No. ofShares

Percentageof Holdings

Direct Holdings: 2,021,761 5.53%

Indirect Holdings:1. Holdings from various brokers 80,916 .22%2. 25% ownership in SM Investment Corporation 1,488,100 4.07%3. 21.31% ownership in Shoemart, Incorporated 535,832 1.47%4. 99.98% ownership in Sysmart Corporation 7,571,377 20.72%

Total holdings direct and indirect 11,697,986 32.01%


Except as stated above, the Bank has no knowledge of any person or any group who directly or indirectly is thebeneficial owner of more than 5% of the Bank’s outstanding shares or who has a voting power, voting trust or anysimilar agreement with respect to shares comprising more than 5%of the Bank’s outstanding common stock.

HENRY SY, SR’s family are known to have substantial holdings in Shoemart, Inc., SM Investment and SysmartCorporation and as such, could direct the voting or disposition of the shares of said companies while Donato T. Faylonais the proxy and represents International Commercial Bank of China in the Board.

The Bank is not aware of any additional shares which the above-listed beneficial or record owners have the right, if any,to acquire within thirty (30)days, from options, warrants, rights, conversion privilege or similar obligation, or otherwise.

(2) Security Ownership of Management

1) Title of Class 2) Name and Position 3) Amount* and Nature of record/beneficial ownership (indicated by “r” or “b”)

4) Percentage of Class

A. Director

Common Gilbert U. Dee, Chairman 214,578 “r” 0.587Common Hans T. Sy, Vice-Chairman 43,526 “r” 0.119Common Peter S. Dee, President & CEO 106,290 “r” 0.291Common Joaquin Dee, Director 877,635 “r” 2.402Common Dy Tiong, Director 3,367 “r” 0.009Common Herbert T. Sy, Director 6,950 “r” 0.019Common Henry T. Sy, Jr., Director 33,549 “r” 0.092Common Pilar N. Liao, Director 198 “r” 0.001Common Harley T. Sy, Director 1,584 “r” 0.004Common Donato T. Faylona, Director 12 “b” 0.000Common Alberto S. Yao, Director 120 “b” 0.000

Total 1,287,809 3.524

B. Executive Officers

Common Ricardo R. Chua, EVP & COO 1,982 “r” 0.005Common Nancy Dee Yang, SVP 40,164 “r” 0.110Common Samuel L. Chiong 720 “r” 0.002Common Rene J. Sarmiento, FVP 360 “r” 0.001Common Margarita L. San Juan 1,296 “r” 0.004

Total 44,522 0.122

C. Directors and Principal Officers (as a group) 1,332,331 “r” 3.646

* The figures indicated in column 3 are those directly owned of record by the above-named Directors and Officers.There are no directors or officers who beneficially own more than 10% shares of the Bank as nobody among themindicated in SEC Form 23-A which we sent to them in writing and which upon inquiry they personally confirmed tous, own more than 10% shares of the Bank.


Schedule K Capital Stock (1)Title of issue Number of Number of Number of Number of Directors, Others

(2) sharesauthorized

sharesissued andoutstanding

at shownunderrelated

sharesreserved

for options,warrants

conversionand other

sharesheldby

affiliates(3)

officers andemployees

balancesheet

caption

rights

CHINA BANK 50,000,000 36,542,512 - NONE - - NONE - (SEE LIST BELOW)

Stockholdings of Officers and Employees as of December 31, 2004

Full Name PositionTotal Outstanding

Share 1. 2. 3. 4. 5.

6. 7. 8. 9.10.11.12.13.14.15.16.17.18.19.20.21.22.23.24.25.26.27.28.29.30.31.32.33.34.35.36.37.38.39.40.41.

Abello, Orlando MauricioAlameda, Evelyn Tumacder R.Alano, Ma. Hildelita P.Alvarez, Alejandro I., Jr.Aviles, Lucille M.Bernabe, Virginia ITF JohnBognot, Renito R.Capacio, VictoriaCariño, Lilibeth R.Carreon, Antonio R.Chua, Victoria L.Cruz, Remedios C.Cuevas, CharmaineDy, Patricia ChuaEncinas-Tiu, Mary Ann HabaloEscuadro, Ma. Stella Paz P.Evangelista, Adela A.Galang, Hyacinth M.Gamboa, Raul C.Gan, Rosemarie C.German, Mercedes E.Go, Patrick U.Hidalgo, Bienvenido C.Javier, Jose Leslie P.Labalan, Melecio C. Jr.Lazaro-Manuel, Gina TorresLee, Eric Y.Liamson, Estela A.Lim, Arsenio, Jr. L.Llorca, Marcelino J., Jr.Lopez, Jeanett J.Lucero, Mary Luz S.Marquez, DeliaMayor, Josefina G.Meniado, Maribel S.Miguel, Gigi Iluminada T.Milan, ZenaidaNgkaion, JamesNgo, Melanie K.Ochoco-Soriano, Anita C.Ong, Gloria T.

OfficerOfficerOfficerOfficerEmployeeOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerEmployeeOfficerOfficerEmployeeOfficerOfficerOfficerOfficerOfficerOfficer

1972721419

126434143626

2253361466

4014

12948

300434

8919

1,1901,008

48740

138149

1802812

19819

60012062

4531219

1,06542. Ong, Hermenegildo Supervisor 40

43.44.45.46.47.48.49.5051.52.53.54.55.56.57.58.59.60.61.62.63.64.65.66.67.68.69.70.71.72.73.74.75.76.77.78.

Orencia, Rafael C.Pacheco, Ma. RosarioPaggabao, Emma Z.Pajarillo, Maria Vida G.Purificacion, NoreenQua Tee, ElizabethQuintanilla, Alvin A.Ramirez, Betty ChoaRosario, Reylenita M. DelSan Diego, Nycette O.Santos, Estefania A.Say, Elizabeth C.Sia, Henry D. &/or Evelyn R. SiaSun, Antonio G.Sy, Celso M.Sy, Teresita GabaldonTam, Linda-Susan A.Tan, Annaliza M.Tan, Belenette C.Tan, Phillip M.Tan, Shirley T.Tan, William Winston O.Torralba, Edna A.Torres, Ruben M.Trinidad, Ferdinand C. &/or Salina E. TrinidadTsai, PhilipTy, Jasmin OngchanUy, Johnny L.Uy, Norberto L.Uy, Virginia YuUyquiengco, Roberto C.Virtusio, Ma. Cecilia E.Yabut, Rosario D.Yap, George C.Yong, Vivian L.Yuchenkang, Marilyn

OfficerOfficerOfficerEmployeeOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerEmployeeOfficerOfficerOfficerOfficerEmployeeOfficerOfficerEmployeeOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficerOfficer

3314141414

5481419161462

2257219

85633

216866833

2172,978

129115

721621633

5253182251322161440

318

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

There is no transaction with or involving the Bank or any of its subsidiaries in which a director, executive officer, orstockholder owning five (5%) percent or more of total outstanding shares and members of their immediate family had or is tohave a direct or indirect material interest.• The Bank retains the following law firms:

• Angara Abello Concepcion Regala & Cruz Law Offices• Cruz Durian Agabin Atienza Alday & Tuazon• Lim Vigilia Alcala Dumlao & Orencia

• External auditor -- Sycip, Gorres, Velayo & CompanyCHINA BANKING CORPORATIONSECURITIES AND EXCHANGE COMMISSION ... SEC FORM 17-A

PART IV EXHIBITS AND SCHEDULES

(a) Exhibits

Subsidiaries and Investments

(i) CBC Properties and Computer Center, Inc. - 40% owned by China Bank and renders computer servicessolely to China Bank. It was incorporated last April 14, 1982.

Ownership Structure

Name % Share

1. China Banking Corporation 40.02. Gilbert U. Dee 12.03. Peter S. Dee 12.04. Ricardo R. Chua 12.05. Honorio O. Reyes-Lao 12.06. Nancy D. Yang 12.0

100.0Officers:Gilbert U. Dee – Chairman of the Board / DirectorPeter S. Dee – President / DirectorRicardo R. Chua - General Manager / DirectorPhillip Tan – Vice PresidentEdith N. Young – Senior Assistant Vice PresidentAugusto P. Samonte – Assistant Vice PresidentArsenio L. Lim, Jr. – Corporate Secretary

No. Of Employees - 60

(ii) CBC Forex Corporation — is 100% owned by China Bank Corp. Its primary purpose is to engage in thebusiness of dealing and broking in all currencies; to enter into spot and forward foreign exchange contracts withlocal or foreign individuals and other entities; and to act as brokers for the purpose of bringing together sellers andbuyers of foreign exchange. It was incorporated last January 9, 1997.

Ownership Structure: % ShareChina Banking Corporation - 99.995Peter S. Dee - 0.001Ricardo R. Chua - 0.001Antonio S. Espedido, Jr. - 0.001Ramon R. Zamora - 0.001Minda A. Lim - 0.001

100.000Board of Directors:1. Peter S. Dee - Chairman of the Board2. Ricardo R. Chua - Director3. Ramon R. Zamora - Director4. Antonio S. Espedido, Jr. - Director5. Minda A. Lim – Director and President


Officers:Peter S. Dee - Chairman of the BoardMinda A. Lim - PresidentBelenette Ching Tan - Corporate SecretaryCharis Tepoot - Chief Dealer & Treasurer

(iii) Chinabank Insurance Brokers, Inc. — is 100% owned by China Bank Corp. Its primary purpose is to act asa broker in soliciting, procuring, negotiating, receiving, managing and forwarding applications for fire, casualty, plateglass, automobiles, trucks and other motor vehicles, accident, health, burglary, rent, marine, credit, disability, lifeinsurance, and all other kinds of insurance, including reinsurance contracts or in any other manner aiding in takingout insurance, collecting payment of premiums due on such policies and doing such other business as may bedelegated to brokers or such companies in the conduct of a general insurance brokerage business. It wasincorporated last January 16, 1998.

Ownership StructureName # of Shares

1. China Banking Corporation 14,995 2. Peter S. Dee 1 3. Ricardo R. Chua 1

4. Nancy D. Yang 15. Reynaldo L. Lao 16. Ramon R. Zamora 1

15,000

OfficersPeter S. Dee - Chairman of the Board

Ricardo R. Chua - President Ramon R. Zamora - Treasurer Gerard E. Reonisto - General Manager Omar D. Vigilia - Corporate Secretary

No. of Employees - 16


(b) Reports on SEC Form 17-CREPORT DATE REPORTED

Board of Directors’ approval of the RulesGoverning the Nomination and Election ofDirectors

February 04, 2004

Executive Committee’s approval of theretirement of Mr. Honorio Reyes Lao as SeniorVice President, and the promotion of Mr.Samuel L. Chiong from First Vice President toSenior Vice President

February 18, 2004

Board of Directors’ approval to adopt as part ofthe Bank’s Code of Corporate GovernanceSec. 4.2 of the PSE’s Revised DisclosureRules entitled “Selective Disclosure of MaterialInformation”

March 03, 2004

Executive Committee’s approval of thepromotion of Mr. Ramon R. Zamora from FirstVice President and Head, InternationalBanking Group to Senior Vice President andHead, International Banking Group

March 10, 2004

Nomination Committee’s approval to extendthe deadline of nomination for Directors toApril 05, 2004

March 24, 2004

Board of Directors’ approval to declare Twenty(20%) percent stock dividend to come from theBank’s unissued shares and Five (5%) percentcash dividend or Five Pesos (P5.00) per share

May 05, 2004

Election of Directors and Officers andconfirmation by the stockholders of the cashand stock dividend declaration

May 06, 2004

Amendment to report dated May 06, 2004, theelection of Ms. Pilar N. Liao, an independentdirector as Chairman of Audit Committee, inlieu of Mr. Joaquin Dee, and Mr. Joaquin Deeas Chairman of Compliance Committee in lieuof Mr. Dy Tiong

May 19,2004

Nomination Committee opened the nominationfor Directors and set the deadline forsubmission of nominees on June 01, 2004 incompliance with BSP’s requirements to have ashort list of nominees for directors to fillpossible vacancies

May 20, 2004


The resignation of Ms. Yvonne S. Yuchengcoas a Director

May 24, 2004

The Board of Directors’ acceptance of Ms.Yvonne S. Yuchengco’s resignation as aDirector

June 02, 2004

Executive Committee’s approval of theappointment of Ms. Rhodora Z. Canto as FirstVice President II and Head, CreditManagement Group effective June 16, 2004

June 09, 2004

Executive Committee’s approval of theappointment of Mr. Antonio S. Espedido, Jr.as Senior Vice President and Head, TreasuryGroup effective on July 01, 2004

June 16, 2004

BSP’s approval of the Twenty (20%) percentstock dividend and Five (5%) percent cashdividend

June 17, 2004

Nomination Committee’s approval to re-openthe nomination for independent and non-independent directors and set the deadline onJuly 06, 2004

June 17, 2004

Amendment on the report regarding theappointment of Mr. Antonio S. Espedido, Jr.

June 18, 2004

Appointment of Mr. Antonio S. Espedido, Jr. asSenior Vice President, and Head, TreasuryGroup effective July 16, 2004, in lieu of July01, 2004

June 23, 2004

Board of Directors’ resolution to - (a) elect Mr.Alberto S. Yao as Independent Director to takethe position vacated by Ms. Yvonne S.Yuchengco, and as Chairman of AuditCommittee in lieu of Ms. Pilar N. Liao (b) fixJuly 22, 2004 as record date and August 17,2004 as the payment/issuance dates of thecash and stock dividends, and the closing ofbooks from 23 July to 06 August 2004 (c)make CBC Properties and Computer Center,Inc. wholly owned subsidiary of the Bank, and

July 07, 2004

(d) change the business name of the Bank’ssubsidiary, CBC Insurance Brokers, Inc. toChinabank Insurance Brokers, Inc.


PSE’s approval of the listing of the Bank’sadditional common shares to cover the 20%stock dividend

August 09, 2004

Retirement from service of Mr. Danilo A.Alcoseba, Senior Vice President and Head,Treasury Group

August 20, 2004

Board of Directors’ approval of the organizationand incorporation initially of a wholly ownedSpecial Purpose Vehicle (SPV) with authorizedcapital of P500 million and Paid –up capital ofP31,250,000.00.

September 02, 2004

Board of Directors’ approval of the creation ofRisk Management Committee, Compensationor Remuneration Committee and CorporateGovernance Committee in compliance withBSP Circular No. 456, Series of 2004

December 09, 2004

SIGNATURES

Pursuant to the requirement of Section 17 of the Code and Section 141 of the Corporation Code, this report is signed onbehalf of the issuer by the undersigned, thereunto duly authorized, in the city of Makati on this 5th day of April 2005.

By:

(SGD) PETER S. DEE (SGD) RICARDO R. CHUA Principal Executive Officer Comptroller

(SGD) RICARDO R. CHUA (SGD) ZACARIAS B. ANTONIO Principal Operating Officer Principal Accounting Officer

(SGD) ANTONIO S. ESPEDIDO, JR. (SGD) ARSENIO L. LIM, JR. Principal Financial Officer Corporate Secretary

SUBSCRIBED AND SWORN to before me this 5th day of April 2005 affiant (s) exhibiting to me their Community TaxCertificates, as follows:

NAMES COMMUNITY DATE OF PLACE OFTAX CERT. NO. ISSUE ISSUE

PETER S. DEE 13997135 02/11/05 ManilaRICARDO R. CHUA 23044331 03/11/05 MandaluyongANTONIO S. ESPEDIDO, JR. 09572840 04/01/04 MuntinlupaZACARIAS B. ANTONIO 0217392 01/20/05 ManilaARSENIO L. LIM, JR. 15189755 01/18/05 Makati

Doc. No.: 43 (SGD) FLORA DE PANO-SOLLERPage No.: 10 Notary Public for Makati CityBook No.: 43 Appl No. M-101 until 31 DecemberSeries of 2005 11th Floor China Bank Building

Paseo de Roxas, Makati CityPTR# 9441574:01-07-05; Makati CityIBP# 631501;01-03-05; Quezon CityRoll of Attorneys No. 39191

STATEMENT OF MANAGEMENT’S RESPONSIBILITYFOR

FINANCIAL STATEMENTS

The Management of China Banking Corporation is responsible for all information and representations contained in theconsolidated financial statements for the years ended December 31, 2004 and 2003. The financial statements have beenprepared in conformity with generally accepted accounting principles and reflect amounts that are based on best estimatesand informed judgment of management with an appropriate consideration of materiality.

In this regard, management maintains a system of accounting and reporting which provides for the necessary internalcontrols to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized useor disposition and liabilities are recognized. The management likewise discloses to the company’s audit committee and to itsexternal auditor: (i) all significant deficiencies in the design or operation of internal controls that could adversely affect itsability to record, process, and report financial data; (ii) material weaknesses in the internal controls; and (iii) any fraud thatinvolves management or other employees who exercise significant roles in internal controls.

The Board of Directors reviews the consolidated financial statements before such statements are approved and submitted tothe stockholders of the company.

Sycip, Gorres, Velayo & Co., the independent auditors appointed by the stockholders, have examined the consolidatedfinancial statements of the Company in accordance with generally accepted auditing standards and have expressed theiropinion on the fairness of presentation upon completion of such examination, in their report to stockholders.

(SGD) Ricardo R. Chua (SGD) Peter S. Dee Executive Vice President & COO President & CEO

(SGD) Gilbert U. Dee Chairman of the Board

Republic of the Philippines Makati City S.S

Subscribed and sworn to before me this 22nd day of March, 2005, affiants exhibiting to me theirCommunity Tax Certifcates Nos. as follows:

Name Community Tax Certificate No. Date and Place of Issue Gilbert U. Dee 00011355 February 10, 2005, Manila Peter S. Dee 13997135 February 11, 2005, Manila Ricardo R. Chua 23044331 March 11, 2005, Mandaluyong City FLORA DE PANO-SOLLER

Notary Public Until December 31, 2005 PTR No.9441574:01-07-05; Makati IBP#631501; 01-03-05; Quezon City

Roll of Attorneys No. 39191Doc. No.: 43Page No: 10Book No: 43Series of 2005

CHINA BANKING CORPORATION

Financial StatementsDecember 31, 2004 and 2003and Years Ended December 31, 2004, 2003 and 2002

and

Report of Independent Auditors

The Stockholders and the Board of DirectorsChina Banking Corporation8745 Paseo de Roxas corner Villar StreetMakati City

We have audited the accompanying statements of condition of China Banking Corporation as of December 31,2004 and 2003 and the related statements of income, changes in capital funds and cash flows for each of thethree years in the period ended December 31, 2004. These financial statements are the responsibility of theBank’s management. Our responsibility is to express an opinion on these financial statements based on ouraudits.

We conducted our audits in accordance with auditing standards generally accepted in the Philippines. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financialposition of China Banking Corporation as of December 31, 2004 and 2003, and the results of its operations andits cash flows for each of the three years in the period ended December 31, 2004 in conformity with accountingprinciples generally accepted in the Philippines.

Wilson P. TanPartnerCPA Certificate No. 76737SEC Accreditation No. 0100-ATax Identification No. 102-098-469PTR No. 9404036, January 3, 2005, Makati City

March 30, 2005

SGV & Co is a member practice of Ernst & Young Global

SGV & CO SyCip Gorres Velayo &Co.6760 Ayala Avenue1226 Makati CityPhilippines

Phone: (632) 891-0307Fax: (632) 819-0872www.sgv.com.ph

BOA/PRC Reg. No. 0001SEC Accreditation No.

Report of Independent Auditors

The Stockholders and the Board of DirectorsChina Banking Corporation

We have audited the accompanying statements of condition of China Banking Corporation as of December 31,2004 and 2003 and the related statements of income, changes in capital funds and cash flows for each of thethree years in the period ended December 31, 2004. These financial statements are the responsibility of theBank’s management. Our responsibility is to express an opinion on these financial statements based on ouraudits.

We conducted our audits in accordance with auditing standards generally accepted in the Philippines. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financialposition of China Banking Corporation as of December 31, 2004 and 2003, and the results of its operations andits cash flows for each of the three years in the period ended December 31, 2004 in conformity with accountingprinciples generally accepted in the Philippines.

Wilson P. TanPartnerCPA Certificate No. 76737SEC Accreditation No. 0100-ATax Identification No. 102-098-469PTR No. 9404036, January 3, 2005, Makati City

March 30, 2005

CHINA BANKING CORPORATIONSTATEMENTS OF CONDITION

December 31

20042003

(As restated)RESOURCESCash and Other Cash Items (Note 9) P=2,168,590,090 P=1,766,041,157Due from Bangko Sentral ng Pilipinas (Note 9) 2,346,840,957 1,259,370,585Due from Other Banks 1,281,921,787 3,002,835,554Interbank Loans Receivable and Securities

Purchased Under Resale Agreement 2,423,410,000 6,088,600,000Trading and Investment Securities (Notes 3 and 9) 45,389,234,791 41,937,080,532Receivables from Customers - net (Note 4) 48,457,790,936 38,208,551,280Bank Premises, Furniture, Fixtures and Equipment

(Note 5)At cost 854,240,321 823,368,382At revalued amount 2,172,405,858 2,210,492,967

Equity Investments (Note 6) 245,499,158 193,896,087Real and Other Properties Owned or Acquired - net

of allowance for probable losses of P=696,627,547 in2004 and P=440,845,495 in 2003 4,372,636,805 4,329,598,020

Other Resources - net (Notes 7 and 16) 4,147,097,734 3,530,205,727P=113,859,668,437 P 103,350,040,291

LIABILITIES AND CAPITAL FUNDSLiabilitiesDeposit Liabilities (Notes 9 and 18)Demand P=13,159,345,624 P=11,218,629,625Savings 34,071,380,872 14,547,571,798Time 38,575,346,201 46,345,761,056

85,806,072,697 72,111,962,479Bills Payable (Note 10) 4,334,942,904 9,308,809,023Manager’s Checks 229,476,068 220,264,851Accrued Interest, Taxes and Other Expenses (Note

11)2,118,552,705

2,986,874,288Other Liabilities (Note 12) 1,729,340,326 1,629,545,704

94,218,384,700 86,257,456,345Capital FundsCapital stock (Note 13) 3,654,251,200 3,045,267,600Capital paid in excess of par value 671,504,726 671,504,726Surplus reserves (Notes 13 and 17) 363,312,450 327,886,436Surplus (Notes 2, 13 and 17) 13,669,066,767 11,748,201,737Net unrealized gain on available-for-sale securities

(Note 3)42,364,800

19,417,200Revaluation increment on land (Notes 2 and 5) 1,240,783,794 1,280,306,247

19,641,283,737 17,092,583,946P=113,859,668,437 P=103,350,040,291

See accompanying Notes to Financial Statements.

CHINA BANKING CORPORATIONSTATEMENTS OF INCOME

Years Ended December 312003 2002

2004 (As restated - Note 2)

INTEREST INCOME ONInvestment securities, interbank loans

receivable, deposits with banks and others P=4,685,773,819 P=3,990,798,315 P=3,349,643,509Receivables from customers 3,870,883,544 3,211,300,536 3,175,861,938

8,556,657,363 7,202,098,851 6,525,505,447

INTEREST EXPENSE ONDeposit liabilities, bills payable and others (Note

18)3,501,851,516

3,520,145,887 3,297,293,521

NET INTEREST INCOME 5,054,805,847 3,681,952,964 3,228,211,926

PROVISION FOR PROBABLE LOSSES (Note8)

855,526,1041,647,468,409 2,321,375,766

NET INTEREST INCOME AFTER PROVISIONFOR PROBABLE LOSSES 4,199,279,743 2,034,484,555 906,836,160

OTHER OPERATING INCOMEForeign exchange gain - net (Note 18) 737,844,804 641,931,528 174,155,240Service charges, fees and commissions (Note

18)625,805,479

467,316,308 463,669,384Trust fee income (Note 17) 354,260,137 293,210,797 268,568,793Trading and securities gain - net (Note 3) 301,807,713 2,462,222,188 2,866,285,109Equity in net earnings of investees (Note 6) 6,043,683 20,128,746 10,112,418Miscellaneous 95,500,908 87,600,303 95,003,730

2,121,262,724 3,972,409,870 3,877,794,674

OTHER OPERATING EXPENSESCompensation and fringe benefits (Note 14) 1,219,660,116 1,024,643,824 943,012,541Taxes and licenses 384,645,317 427,626,809 376,865,004Occupancy (Note 15) 365,787,191 329,047,794 318,987,051Entertainment, amusement and recreation

(Note 16)209,217,679

170,157,049 183,434,266Insurance 189,591,031 172,396,469 168,567,665Repairs and maintenance 189,420,713 133,924,528 129,038,348Depreciation and amortization (Note 5) 163,526,543 164,594,588 177,480,326Miscellaneous (Note 18) 561,989,529 712,160,100 551,485,405

3,283,838,119 3,134,551,161 2,848,870,606

INCOME BEFORE INCOME TAX 3,036,704,348 2,872,343,264 1,935,760,228

PROVISION FOR (BENEFIT FROM)INCOME TAX (Note 16) 319,166,324 256,036,026 (656,564,284)

NET INCOME P=2,717,538,024 P=2,616,307,238 P=2,592,324,512

Basic Earnings Per Share (Note 21) P=74.37 P=71.60 P=70.94


CHINA BANKING CORPORATIONSTATEMENTS OF CHANGES IN CAPITAL FUNDS

Years Ended December 31

20042003

(As restated)2002

(As restated)

CAPITAL STOCK (Note 13)Common stock - P=100 par value

Authorized - 50,000,000 sharesIssued and outstanding - 36,542,512 in

2004, 30,452,676 shares in 2003Balance at beginning of year P=3,045,267,600 P=2,537,784,300 P=2,537,784,300Stock dividends - 20% 608,983,600 507,483,300 –Balance at end of year 3,654,251,200 3,045,267,600 2,537,784,300

CAPITAL PAID IN EXCESS OF PAR VALUE 671,504,726 671,504,726 671,504,726

SURPLUS RESERVES (Notes 13 and 17)Balance at beginning of year 327,886,436 298,565,356 271,708,477Transfer from surplus 35,426,014 29,321,080 26,856,879Balance at end of year 363,312,450 327,886,436 298,565,356

SURPLUS (Notes 13 and 17)Balance at beginning of year, as previously

reported11,804,472,026

9,848,590,953 7,480,915,960Effect of change in accounting for operating

leases (Note 2) (56,270,289) (53,002,859) (47,772,755)Balance at beginning of year, as restated 11,748,201,737 9,795,588,094 7,433,143,205Net income 2,717,538,024 2,616,307,238 2,592,324,512Stock dividends - 20% (608,983,600) (507,483,300) –Cash dividends - P=5 per share in 2004

and 2003, P=8 per share in 2002 (152,263,380) (126,889,215) (203,022,744)Transfer to surplus reserves (35,426,014) (29,321,080) (26,856,879)Balance at end of year 13,669,066,767 11,748,201,737 9,795,588,094

NET UNREALIZED GAIN (LOSS) ONAVAILABLE-FOR-SALE SECURITIES(Note 3) 42,364,800 19,417,200 (21,770,800)

REVALUATION INCREMENT ON LAND(Notes 2 and 5)

Balance at beginning of year, as previouslyreported

1,882,803,3041,882,803,304 1,858,018,635

Effect of change in accounting for income taxes(Note 2) (602,497,057) (602,497,057) (594,565,963)

Balance at beginning of year, as restated 1,280,306,247 1,280,306,247 1,263,452,672Net increase (decrease) during the year (39,522,453) – 16,853,575Balance at end of year 1,240,783,794 1,280,306,247 1,280,306,247

P=19,641,283,737 P=17,092,583,946 P=14,561,977,923


CHINA BANKING CORPORATION STATEMENTS OF CASH FLOWS


20042003

(As restated)2002

(As restated)CASH FLOWS FROM OPERATING

ACTIVITIESIncome before income tax P=3,036,704,348 P=2,872,343,264 P=1,935,760,228Adjustments to reconcile income before income

tax to net cash provided by (used in)operations:Provision for probable losses (Note 8) 855,526,104 1,647,468,409 2,321,375,766Depreciation and amortization (Note 5) 163,526,543 164,594,588 177,480,326Unrealized market valuation gain on trading

account securities (Note 3) (23,099,283) (72,944,006) (136,946,006)Equity in net earnings of investees (Note 6) (6,043,683) (20,128,746) (10,112,418)Amortization of deferred charges 31,059 23,966 672,444Cash dividends from investees (Note 6) – 6,707,507 23,886,723Loss (gain) on sale of real and otherproperties

owned or acquired(51,685,032)

(66,806,962) 56,612,696Changes in operating resources andliabilities:

Decrease (increase) in amounts of:Trading account securities 3,969,257,203 (1,693,335,852) (12,021,461,736)Receivables from customers (10,019,917,609) (5,960,511,509) (1,018,573,790)Other resources (1,873,823,226) 388,013,536 225,146,678

Increase (decrease) in amounts of:Deposit liabilities 13,694,110,218 (11,039,472,447) 22,059,923,439Manager’s checks 9,211,217 (52,715,189) 61,784,670Accrued taxes, interest, and

other expenses

(883,481,329)686,420,655 649,368,937

Other liabilities (420,155,963) (210,490,238) (456,470,176)Net cash provided by (used in) operations 8,450,160,567 (13,350,833,024) 13,868,447,781Income taxes paid (196,402,193) (104,741,028) (203,656,930)Net cash provided by (used in) operating

activities8,253,758,374

(13,455,574,052) 13,664,790,851CASH FLOWS FROM INVESTING ACTIVITIESNet additions to:

Bank premises, furniture, fixtures andequipment (Note 5) (194,398,482) (196,942,484) (185,734,210)Equity investments (Note 6) (31,250,000) – (920,706)

Proceeds from sale of real and other propertiesowned or acquired 577,299,724 417,731,904 387,137,391

Decrease (increase) in:Investments in bonds and other debtinstruments

(7,375,364,579)6,530,096,270 (8,585,864,978)

Available-for-sale securities – – 14,656,044Net cash provided by (used in) investing

activities(7,023,713,337)

6,750,885,690 (8,370,726,459)

(Forward)

- 2 -


20042003

(As restated)2002

(As restated)CASH FLOWS FROM FINANCING

ACTIVITIESIncrease (decrease) in bills payable (4,973,866,119) P=4,071,340,479 P=307,791,669Payment of cash dividends (152,263,380) (126,889,215) (203,022,744)Net cash provided by (used in) financing

activities(5,126,129,499)

3,944,451,264 104,768,925NET INCREASE (DECREASE) IN CASH AND

CASH EQUIVALENTS (3,896,084,462) (2,760,237,098) 5,398,833,317CASH AND CASH EQUIVALENTS AT

BEGINNING OF YEARCash and other cash items 1,766,041,157 1,584,083,284 1,490,911,801Due from Bangko Sentral ng Pilipinas 1,259,370,585 3,271,480,210 1,626,247,405Due from other banks 3,002,835,554 4,466,935,953 1,444,245,371Interbank loans receivable and securities

purchased under resale agreement 6,088,600,000 5,554,584,947 4,916,846,50012,116,847,296 14,877,084,394 9,478,251,077

CASH AND CASH EQUIVALENTSAT END OF YEAR

Cash and other cash items 2,168,590,090 1,766,041,157 1,584,083,284Due from Bangko Sentral ng Pilipinas 2,346,840,957 1,259,370,585 3,271,480,210Due from other banks 1,281,921,787 3,002,835,554 4,466,935,953Interbank loans receivable and securities

purchasedunder resale agreement 2,423,410,000 6,088,600,000 5,554,584,947

P=8,220,762,834 P=12,116,847,296 P=14,877,084,394


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CHINA BANKING CORPORATIONNOTES TO FINANCIAL STATEMENTS

1. Corporate Information

China Banking Corporation (the Bank) is a publicly listed commercial bank, incorporated in the Philippines. TheBank acquired its universal banking license in 1991. It provides expanded commercial banking products andservices such as deposit products, loans and trade finance, domestic and foreign fund transfers, treasuryproducts, trust products, foreign exchange, corporate finance and other investment banking services through anetwork of 141 local branches.

The Bank’s principal place of business is at 8745 Paseo de Roxas corner Villar Street, Makati City. In 2004 and2003, the Bank had an average of 2,685 and 2,717 employees, respectively.

The financial statements were authorized for issue by the Board of Directors (BOD) on March 30, 2005.

2. Summary of Significant Accounting Policies

Basis of Financial Statement PreparationThe Bank’s financial statements have been prepared in accordance with the accounting principles generallyaccepted in the Philippines (Philippine GAAP) for the banking industry. These financial statements are preparedunder the historical cost convention modified by the fair value measurement of trading account securities (TAS),available-for-sale securities (ASS), underwriting accounts (UA), certain derivative financial instruments, and therevaluation of land account included under bank premises. The accompanying financial statements of the Bankreflect the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU).The financial statements individually prepared for these units are combined after eliminating inter-unit accounts.

For financial reporting purposes, FCDU accounts and foreign currency denominated accounts in RBU are translated into their equivalents in Philippine pesos based on the Philippine Dealing System weighted average

rate (PDSWAR) prevailing at the end of the year (for resources and liabilities) and at the average PDSWAR forthe year (for income and expenses). Foreign exchange differentials arising from foreign currency transactionsand restatements of foreign currency denominated resources and liabilities, except for past due receivables andnonmonetary assets, are credited to or charged against operations in the year in which the rates change.

The preparation of the financial statements in accordance with Philippine GAAP requires the Bank to makeestimates and assumptions that affect the reported amounts of resources, liabilities, income and expenses anddisclosure of contingent resources and liabilities. Future events may occur which will cause the assumptionsused in arriving at the estimates to change. The effects of any changes in estimates are reflected in thefinancial statements as they become reasonably determinable.

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Changes in Accounting PoliciesOn January 1, 2004, the following new accounting standards became effective and were adopted by the Bank:

• Statement of Financial Accounting Standards (SFAS) 12/International Accounting Standard (IAS) 12, Income Taxes, prescribes the accounting treatment for current and deferred income taxes. The standardrequires the use of the balance sheet liability method of accounting for deferred income taxes. It requiresthe recognition of a deferred tax liability and, subject to certain conditions, deferred tax asset for alltemporary differences with certain exceptions. The standard provides for the recognition of a deferred taxasset when it is probable that taxable income will be available against which the deferred tax asset can beused. The adoption of this standard resulted in a retroactive downward adjustment to capital funds as ofDecember 31, 2003 and 2002 amounting to P=602.5 million and P=594.6 million, respectively, representing thedeferred income tax on the revaluation increment on the Land account. Deferred tax liability increased bythe same amounts as of these dates.

• SFAS 17/IAS 17, Leases, prescribes the accounting policies and disclosures applicable to finance andoperating leases. The adoption of the standard resulted in the recognition of lease payments underoperating leases on a straight-line basis. Previously, all leases under operating lease are recognized in thestatements of income on the basis of the terms of the lease agreement. The adoption of this accountingstandard resulted in a retroactive downward adjustment to surplus as of December 31, 2003, 2002, and2001 amounting to P=56.3 million, P=53.0 million, and P=47.8 million, respectively. Net income decreased by P=3.3 million in 2003 and P=5.2 million in 2002.

Additional disclosures required by the new standards were included in the financial statements, whereapplicable.

New Accounting Standards Effective in 2005New accounting standards based on IASs and International Financial Reporting Standards (IFRS), referred toas Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS), respectively,will become effective in 2005. The Bank will adopt the following new accounting standards effective January 1,2005:

• PAS 19, Employee Benefits, provides for the accounting for long-term and other employee benefits. Thestandard requires the use of the projected unit credit method in determining the retirement benefits of theemployees and a change in the manner of computing benefit expense relating to past service cost and actuarialgains and losses. It requires the Bank to determine the present value of defined benefit obligations and the fairvalue of any plan assets with sufficient regularity that the amounts recognized in the financial statements do notdiffer materially from the amounts that would be determined at the statement of condition date.

The effect of adopting this standard will result in either a transition liability or asset with a correspondingadjustment to surplus as of January 1, 2005. The Bank will engage the services of a professionally qualifiedactuary to determine the quantitative impact of adopting this standard in 2005.

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• PAS 21, The Effects of Changes in Foreign Exchange Rates, provides restrictive conditions for thecapitalization of foreign exchange losses. The standard also addresses the accounting for transactions inforeign currency and translating the financial statements of foreign operations that are included in those ofthe reporting enterprise by consolidation, proportionate consolidation and equity method. The adoption ofthis standard will have no material impact on the financial statements.

• PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, providesfor the required disclosures and presentation in respect of the accounts of banks and similar financialinstitutions. It also provides that provision for general banking risks is treated as appropriation of surplusand should not be included in the determination of net income for the year. The required new disclosureswill be included upon adoption of this standard. Upon adoption of this standard, the Bank will evaluate thelevel of allowance for probable losses and consider their sufficiency to cover any losses from non-collectionor non-realization of its loans. Any excess in the general loan loss reserve will result in a retroactivedownward adjustment to retained earnings as of December 31, 2004. To date, the Bank has not yetdetermined the financial statement impact of adopting this standard.

• PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure and presentationof all financial instruments. The standard requires more comprehensive disclosures about the Bank’sfinancial instruments, whether recognized or unrecognized in the financial statements. New disclosurerequirements include terms and conditions of financial instruments used by the Bank, types of risksassociated with both recognized and unrecognized financial instruments (market risk, price risk, credit risk,liquidity risk, and cash flow risk), fair value information of both recognized and unrecognized financial assetsand financial liabilities, and the Bank’s financial risk management policies and objectives. The standard alsorequires financial instruments to be classified as liabilities or equity in accordance with its substance and notits legal form.

• PAS 39, Financial Instruments: Recognition and Measurement, establishes the accounting andreporting standards for the recognition and measurement of the Bank’s financial assets and financialliabilities. The standard requires a financial asset or financial liability to be recognized initially at fair value.Subsequent to initial recognition, the Bank should continue to measure financial assets at their fair values,except for loans and receivables and held-to-maturity investments, which are measured at cost or amortizedcost using the effective interest rate method. Financial liabilities are subsequently measured at cost oramortized cost, except for liabilities classified as “at fair value through profit and loss” and derivatives, whichare subsequently measured at fair value.

PAS 39 also covers the accounting for derivative instruments. The standard has expanded the definition ofa derivative instrument to include derivatives (derivative-like provisions) embedded in non-derivativecontracts. Under the standard, every derivative instrument is recorded in the statements of condition aseither an asset or liability measured at its fair value. Derivatives that are not hedges are adjusted to fairvalue through income. If the derivative is designated and qualifies as a hedge, depending on the nature ofthe hedge, changes in the fair value of the derivative are either offset against the change in fair value of thehedged assets, liabilities, or firm commitments through earnings, or recognized in capital funds until thehedged item is recognized in income. The Bank must formally document, designate, and assess theeffectiveness of derivative transactions that receive hedge accounting treatment.

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The Bank has established a task force that will implement the provisions of PAS 32 andPAS 39 and assess the implications of these standards on the Bank’s financial statements. To date, theBank has not yet determined the impact on the financial statements due to the following reasons:

• The Bank is still in the process of establishing policies, procedures and necessary systems related to theadoption of these standards.

• The system which will incorporate the requirements of PAS 32 and 39 has not yet been implemented.The Bangko Sentral ng Pilipinas (BSP), through BSP Monetary Board Resolution No. 1869 datedDecember 23, 2004, has given the banks and financial institutions until December 31, 2005 to makeready their infrastructures to be PAS 32 and 39 compliant. Interim reports that will be submitted to theBSP for 2005 need not be in compliance with the provisions of the said standards.

On the impact of account classification and related measurement, the Bank has already submitted to theBSP the proposed reclassification of its trading and investment securities portfolio. The effect of thereclassification will likely result in a retroactive adjustment to retained surplus as of December 31, 2004. Theimpact of reclassification will only be quantified after the detailed PAS 39 implementation has beensubstantially completed.

The effect of adopting the effective interest rate method in measuring amortized cost for loans, held-to-maturity investments and available-for-sale securities has not yet been quantified since the existing systemsof the Bank have not yet been reconfigured to adopt the effective interest rate method of amortization. Dueto the volume of transactions, it is impracticable to compute for the financial statement impact manually. TheBank will report the financial statement implication as soon as the information is available.

PAS 39 requires that if there is objective evidence that an impairment on loans and other financial assetscarried at amortized cost is incurred, the amount of loss is measured as the difference between the assets’carrying amount and the present value of future cash flows. The effect of adopting this provision will not bematerial to the financial assets and liabilities of the Bank, except for impaired loans and other receivables.Currently, the adequacy of allowance for probable losses on loans and other receivables is determinedbased onmanagement criteria and BSP requirements. The existing systems of the Bank have not yet beenprogrammed to adopt the discounted cash flow method. Due to the volume of transactions, it isimpracticable to compute for the financial statement impact manually. The Bank will report the financialstatement implication as soon as the information is available.

Currently, the Bank does not intend to adopt hedge accounting. Prior to 2005, the Bank has been followingthe fair value method for all its derivative transactions. The effect of adopting the standard will not result inany retroactive adjustment to capital funds.

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In 2005, the Bank will perform additional procedures to identify any derivative embedded in both financialand non-financial contracts that are required to be separately accounted for at fair value under PAS 39.

In general, the effect of adopting these standards will not result in a restatement of prior years’ financialstatements, as allowed by the Securities and Exchange Commission (SEC). Any cumulative effect ofadopting the standards, however, will be charged against the January 1, 2005 surplus. The disclosuresrequired by these standards will be reflected in the 2005 financial statements, where applicable.

• PAS 40, Investment Property, prescribes the accounting treatment for investment property and relateddisclosure requirements. This standard permits the Bank to choose either the fair value model or cost modelin accounting for investment property. Fair value model requires an investment property to be measured atfair value with fair value changes recognized directly in the statements of income. Cost model requires thatan investment property should be measured at depreciated cost less any accumulated impairment losses.Upon effectivity of PAS 40, the Bank will adopt the cost model and will carry its investment property(currently classified under Real and Other Properties Owned or Acquired or ROPOA) at depreciated costless any accumulated impairment losses. Existing valuation reserve determined under BSP rules will beevaluated and adjusted in accordance with PAS 40. Considering the number of the Bank’s ROPOA,detailed assessment will be made in 2005 in order to quantify the impact of PAS 40.

• PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, specifies the accounting for assetsheld for sale and the presentation and disclosure of discontinued operations. It requires assets that meetthe criteria to be classified as held-for-sale to be measured at the lower of carrying amount and fair valueless costs to sell, and the depreciation on such assets to cease. Furthermore, assets that meet the criteriato be classified as held-for-sale should be presented separately on the face of the statements of conditionand the results of discontinued operations to be presented separately in the statements of income. Theadoption of PFRS 5 will have no material impact on the financial statements of the Bank, except for thereclassification of ROPOA when they qualify as non-current assets held-for-sale.

The Bank will also adopt the following revised standards in 2005 which, except for PAS 27, are not expected tohave significant impact on the 2005 financial statements. Required disclosures will be included as applicable.

• PAS 1, Presentation of Financial Statements, provides a framework within which an entity assesseshow to present fairly the effects of transactions and other events; provides the base criteria for classifyingliabilities as current or noncurrent; prohibits the presentation of income from operating activities andextraordinary items as separate line items in the statements of income; and specifies the disclosures aboutkey sources of estimation uncertainty and judgments that management has made in the process of applyingthe entity’s accounting policies. It also requires changes in the presentation of minority interest in thestatements of condition and statements of income.

44

• PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, removes the concept offundamental error and the allowed alternative to retrospective application of voluntary changes in accountingpolicies and retrospective restatement to correct prior period errors. It defines material omission ormisstatements, and describes how to apply the concept of materiality when applying accounting policies andcorrecting errors.

• PAS 10, Events After the Balance Sheet Date, provides a limited clarification of the accounting fordividends declared after the statement of condition date.

• PAS 16, Property, Plant and Equipment, provides additional guidance and clarification on therecognition and measurement of items of property, plant and equipment. It also provides that each part ofan item of property, plant and equipment with a cost that is significant in relation to the total cost of the itemshall be depreciated separately.

• PAS 17, Leases, provides a limited revision to clarify the classification of a lease of land andbuildings and prohibits expensing of initial direct costs in the financial statements of lessors.

• PAS 24, Related Party Disclosures, provides additional guidance and clarity in the scope of thestandard, the definitions and the disclosures for related parties. It also requires disclosure of thecompensation of key management personnel by benefit type.

• PAS 27, Consolidated and Separate Financial Statements, reduces alternatives in accounting forsubsidiaries in consolidated financial statements and in accounting for investments in the separate financialstatements of a parent, venturer or investor. It also requires strict compliance with adoption of uniformaccounting policies and requires the parent to make appropriate adjustments to the subsidiary’s financialstatements to conform them to the parent’s accounting policies for reporting like transactions and otherevents in similar circumstances. The effect of adopting this standard will result in a decrease in both thecarrying amounts of the investments and total capital funds by P=47.5 million, equivalent to the undistributedretained earnings of said investees in the Bank’s separate financial statements.

• PAS 36, Impairment of Assets, establishes frequency of impairment testing for certain intangiblesand provides additional guidance on the measurement of an asset’s value in use. The standard alsorequires annual impairment test of intangible asset with an indefinite useful life, which includes goodwill,whether or not there is an indication of impairment.

Cash Equivalents

For purposes of reporting cash flows, cash equivalents include amounts due from BSP and other banks andinterbank loans receivable and securities purchased under resale agreement, with original maturities ofthree months or less from dates of placements and that are subject to insignificant risk of changes in value.

45

Repurchase and Resale Agreements and Lending SecuritiesRepurchase agreements, which are limited to transactions with BSP, are contracts under which a party sellssecurities and simultaneously agrees to repurchase the same securities at a specified future date at a fixedprice. Resale agreements are contracts under which a party purchases securities and simultaneously agrees toresell the same securities at a specified future date at a fixed price. Securities sold under repurchaseagreements (repos) are retained in the financial statements as trading or investment securities and thecounterparty liability is included in amounts due to other banks or bills payable, as appropriate. Securitiespurchased under resale agreements (reverse repos) are recorded as securities purchased under agreements toresell. The corresponding interest expense or interest income is accrued when incurred or earned. Securitieslent to counterparties are also retained in the financial statements.

Trading and Investment SecuritiesTrading Account SecuritiesTAS consisting of government and private debt and equity securities that are purchased and held principallywith the intention of selling them in the near term. These securities are carried at fair market value; realized andunrealized gains and losses on these instruments are recognized in “Trading and securities gain - net” underother operating income in the statements of income. Interest earned on debt instruments is reported as interestincome.

Available-for-Sale SecuritiesSecurities are classified as ASS when purchased and held indefinitely, that is, neither held to maturity nor fortrading purposes, where the Bank anticipates to sell in response to liquidity requirements or in anticipation ofchanges in interest rates or other factors.

ASS securities are carried at fair market value; unrealized gains and losses are excluded from the reported netincome and are reported as a separate component of capital funds. Realized gains and losses are included in“Trading and securities gain - net” under other operating income in the statements of income.

Investments in Bonds and Other Debt Instruments (IBODI)IBODI are debt securities which the Bank has the positive intent and ability to hold to maturity. These securitiesare carried at amortized cost. Realized gains and losses are included in “Trading and securities gain - net”under other operating income in the statements of income. Unearned discount for certain IBODI investment isrecognized as income over the term of the loan using the effective interest method.

The allowance for probable losses is established by a charge against income to reflect other-than-temporaryimpairment in value. Under current BSP regulations, IBODI shall not exceed 50% of adjusted statutory net worthplus 40% of total deposit liabilities.

When a debt security is transferred from ASS to IBODI, the unrealized holding gain or loss at the date of thetransfer is maintained as a separate component of capital funds and is amortized over the remaining life of thesecurity as an adjustment of yield in a manner consistent with the amortization of the premium or discount. Forother transfers of investment securities, the unrealized holding gain or loss at the date of transfer is consideredrealized and, accordingly, is credited to or charged against current operations.

46

Receivables from CustomersReceivables from customers are stated at the outstanding balance, reduced by unearned discounts andallowance for probable losses.

Receivables are classified as non-accruing or nonperforming in accordance with BSP regulations, or when, inthe opinion of management, collection of interest or principal is doubtful. Interest income on these receivables isrecognized only to the extent of cash collections received. Receivables are not reclassified as accruing untilinterest and principal payments are brought current or the receivables are restructured in accordance withexisting BSP regulations, and future payments appear assured.

Allowance for Probable LossesThe allowance for probable losses, which includes both specific and general loan loss reserves, representsmanagement’s estimate of probable losses inherent in the portfolio, after consideration of prevailing andanticipated economic conditions, prior loss experience, estimated recoverable values based on fair marketvalues of underlying collaterals and prospects of support from guarantors, subsequent collections andevaluations made by the BSP. The BSP observes certain criteria and guidelines based largely on theclassification of receivables in establishing specific loan loss reserves. To supplement the specific loan lossreserves, a general reserve on unclassified loans is set aside.

The allowance for probable losses is established through provisions for probable losses charged against currentoperations. Receivables are written off against the allowance for probable losses when management believesthat the collectibility of the principal is unlikely.

Bank Premises, Furniture, Fixtures and EquipmentParcels of land acquired and used by the Bank are stated at appraised values less any impairment in value.The appraised values were determined as of December 31, 2004 by the Bank’s professionally qualifiedappraisers. The appraisal increment resulting from the revaluation, net of deferred income tax, was credited toRevaluation Increment on Land shown in the statements of changes in capital funds. Buildings, furniture,fixtures and equipment and leasehold improvements are carried at cost less accumulated depreciation andamortization and any impairment in value. Depreciation and amortization is computed using the straight-linemethod over the estimated useful lives of the respective assets as follows:

EstimatedUseful Life

Buildings 50 yearsFurniture, fixtures and equipment 3 to 5 yearsLeasehold improvements Shorter of 6 years or the

related lease terms

The useful life and the depreciation and amortization method are reviewed periodically to ensure that the periodand the method of depreciation and amortization are consistent with the expected pattern of economic benefitsfrom items of bank premises, furniture, fixtures and equipment.

47

Costs of minor repairs and maintenance are charged as expense in the period incurred; significant renewalsand improvements are capitalized. When assets are retired or otherwise disposed of, the cost and the relatedaccumulated depreciation and amortization and any impairment in value are removed from the accounts andany resulting gain or loss is credited to or charged against current operations.

Equity InvestmentsThe combined total assets and the results of operations of subsidiaries where the Bank holds more than 50%equity interest and exercises control are not material (see Note 6). Thus, consolidated financial statements arenot presented, and such equity investments in subsidiaries in the Bank’s financial statements are accounted forunder the equity method.

Investments in unconsolidated subsidiaries and associates (investees) are accounted for under the equitymethod. An associate is an enterprise in which the Bank holds 20% to 50% of the voting power or over which itexercises significant influence and which is neither a subsidiary nor a joint venture. Under the equity method,investments in these investees are carried in the statements of condition at cost plus post acquisition changes inthe Bank’s share in the net assets of the investees, less any impairment in value. Post acquisition changesinclude the share in the investees’ net income or loss, reduced by dividends received. Unrealized gains arisingfrom transactions with an investee are eliminated to the extent of the interest in the investee against the equityinvestment account. Unrealized losses are eliminated similarly but only to the extent that there is no evidence ofimpairment of the asset transferred.

Under BSP regulations, the use of the equity method of accounting for investments in shares of stock isallowable only where ownership is more than 50%. The equity method of accounting for equity interest of 20%to 50% is used for financial reporting purposes to comply with the provisions of generally accepted accountingprinciples and is not intended for BSP reporting purposes.

When there is a significant and apparently permanent decline in value of an individual investment security, asindicated by a series of operating losses of an investee company or other factors, the carrying amount of theindividual investment is written down to fair value and impairment loss is charged to income.

Other equity investments where the Bank has no significant influence (other than investment securities) arecarried at cost less allowance for decline in value, if any. The allowance for decline in value is set up by acharge to income (included as provision for probable losses in the statements of income).

Real and Other Properties Owned or Acquired (ROPOA)These properties are stated at the total outstanding exposure at the time of acquisition or bid price, whichever islower, less allowance for probable losses. Nonrefundable taxes such as capital gains tax and documentarystamp taxes which were paid by the Bank are capitalized provided that the adjusted value of the foreclosedasset does not exceed fair market value. Holding costs subsequent to foreclosure or acquisition are chargedagainst operations as incurred. Allowance for probable losses is set up for any anticipated significant shortfallsfrom the recorded values based on appraisal reports and current negotiations and programs to dispose of theseproperties to other interested parties, including estimated selling cost.

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Deferred Income TaxDeferred income tax is provided using the balance sheet liability method on all temporary differences at thestatement of condition date between the tax bases of assets and liabilities and their carrying amounts forfinancial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences, including asset revaluations.Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused taxcredits from excess minimum corporate income tax (MCIT) and unused net operating loss carryover (NOLCO),to the extent that it is probable that taxable profit will be available against which the deductible temporarydifferences and carryforward of unused tax credits and unused NOLCO can be utilized. Deferred income tax,however, is not recognized when it arises from the initial recognition of an asset or liability in a transaction that isnot a business combination and, at the time of the transaction, affects neither the accounting profit nor taxableprofit or loss.

Deferred tax liabilities are not provided on non-taxable temporary differences associated with investments indomestic subsidiaries, associates and interests in joint ventures.

The carrying amount of deferred income tax assets is reviewed at each statement of condition date and reducedto the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of thedeferred income tax asset to be utilized.

Deferred income tax assets and liabilities are measured at the tax rates applicable to the period when the assetis realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantivelyenacted at the statement of condition date.

Revenue RecognitionRevenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and therevenue can be reliably measured. The following specific recognition criteria must also be met before revenueis recognized:

Interest IncomeInterest on receivables from customers are recognized based on the accrual method of accounting, except inthe case of non-accruing receivables where interest income is recognized only to the extent of cash collectionsreceived.

Unearned discount is recognized as income over the term of the loan. Interest income on non-discounted loansis accrued monthly as earned, except in the case of non-accruing accounts as required by existing regulationsof the BSP. Interest income on these non-accruing loans is recognized upon actual collection.

Interest on interest-bearing placements and securities are recognized as the interest accrues, taking intoaccount the effective yield on the assets.

Loan Fees and Service ChargesLoan commitment fees are recognized as earned over the terms of the credit lines granted to each borrower.

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Loan syndication fees are recognized upon completion of all syndication activities and where the Bank does nothave further obligations to perform under the syndication agreement.

Service charges and penalties are recognized only upon collection or accrued where there is a reasonabledegree of certainty as to their collectibility.

Foreign Exchange Translation and TransactionsAssets and liabilities denominated in foreign currencies are translated to Philippine pesos at the prevailingPDSWAR at the end of the year. Income and expense items are translated at rates at transaction dates.Foreign exchange differentials arising from foreign currency transactions and restatements of foreign currencydenominated assets and liabilities are credited to or charged against operations in the year in which the rateschange.

Derivative Financial InstrumentsThe Bank is a counterparty to forward exchange contracts. These contracts are entered into as a service tocustomers and as a means of reducing and managing foreign exchange as well as for trading purposes.Amounts contracted are recorded as contingent accounts which are not included in the statements of condition.

For a forward exchange contract designated as a hedge, the exchange difference between the contractedforward rate and the spot rate at contract date is deferred and recognized as income or expense over the termof the hedge instrument while gain or loss on the revaluation of the forward exchange contract is recognizedcurrently in the statements of income.

Realized and unrealized gains and losses on contracts which are not designated as hedges are credited to orcharged against current operations.

Retirement CostThe Bank determines its retirement cost using the projected unit credit method. Under this method, the currentservice cost is the present value of retirement benefits payable in the future with respect to services rendered inthe current period. The past service cost is the present value of any units of future benefits credited to theemployees for services in periods prior to the commencement or subsequent amendment of the plan.Unrecognized experience adjustments and past service costs are amortized over the expected remainingworking lives of employees.

Retirement costs include current service cost plus amortization of past service cost and unrecognizedexperience adjustments.

LeasesOperating lease payments are recognized as expense in the statements of income on a straight-line basis overthe lease term.

Impairment of AssetsAn assessment is made at each statement of condition date whether there is any indication of impairment of anylong-lived asset, or whether there is any indication that an impairment loss previously recognized for an asset inprior years may no longer exist or may have decreased. If any such indication exists, the asset’s recoverableamount is estimated. An asset’s recoverable amount is calculated at the higher of the asset’s value in use or itsnet selling price.

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An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. Animpairment loss is charged against current operations in the year in which it arises, unless the asset is carried ata revalued amount in which case the impairment loss is charged to the revaluation increment of the said asset.

A previously recognized impairment loss is reversed only if there has been a change in the estimates used todetermine the recoverable amount of an asset but not, however, to an amount higher than the carrying amountthat would have been determined (net of any depreciation) had no impairment loss been recognized for theasset in prior years.

A reversal of an impairment loss is credited to current operations, unless the asset is carried at a revaluedamount in which case the reversal of the impairment loss is credited to the revaluation increment of the saidasset.

Related PartiesParties are considered to be related if one party has the ability, directly or indirectly, to control the other party orexercise significant influence over the other party in making financial and operating decisions. Parties are alsoconsidered to be related if they are subject to common control or common significant influence. Related partiesmay be individuals or corporate entities.

ProvisionsProvisions are recognized when the Bank has a present obligation (legal or constructive) where, as a result of apast event, it is probable that an outflow of resources embodying economic benefits will be required to settle theobligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value ofmoney is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate thatreflects current market assessment of the time value of money and, where appropriate, the risks specific to theliability. Where discounting is used, the increase in the provision due to the passage of time is recognized as aninterest expense.

ContingenciesContingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility ofan outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in thefinancial statements but disclosed when an inflow of economic benefits is probable.

Earnings Per ShareBasic earnings per share amounts are computed based on the weighted average number of common sharesoutstanding after giving retroactive effect to stock dividends declared during the year. The Bank does not haveany dilutive potential common shares.

Segment ReportingThe Bank’s operating businesses are organized and managed separately according to the nature of theproducts and services provided, with each segment representing a strategic business unit that offers differentproducts and serves different markets. Financial information on business segment is presented in Note 20.The Bank’s resources producing revenues are located in the Philippines (i.e., one geographical location).Therefore, geographical segment information is no longer presented.

51

Subsequent EventsPost year-end events that provide additional information about the Bank’s position at the statement of conditiondate (adjusting events) are reflected in the financial statements. Post year-end events that are not adjustingevents are disclosed in the notes to the financial statements when material.

3. Trading and Investment Securities

2004 2003Trading account securities - including net

unrealized gain of P=23,099,283 in 2004andP=72,944,006 in 2003

P=10,916,838,980P=14,862,996,900

Available-for-sale securities - including netunrealized gain of P=42,364,800 andP=19,417,200 as of December 31, 2004and 2003, respectively 80,022,400 57,074,800

Investments in bonds and other debtinstruments - net of unearned discount ofP=302,935,350 as of December 31, 2004(see Note 17)

34,392,373,41127,017,008,832

P=45,389,234,791 P=41,937,080,532

As of December 31, 2004 and 2003, available-for-sale securities include convertible preferred shares ofPhilippine Long Distance Telephone Company (PLDT) amounting to about P=24.6 million, which were acquired inconnection with the debt restructuring of PLDT’s subsidiary, Pilipino Telephone Company (PILTEL). Thesepreferred shares are convertible into common shares within seven (7) years beginning June 4, 2001 (date ofissuance), and shall be mandatorily converted into common shares on the date immediately following theseventh anniversary of the date of issuance. Within 30 days following the mandatory conversion date, the Bankhas an option to put the common shares to PLDT at a strike price per common share of P=1,700 per share. Thepreferred shares are carried at the market value of PLDT common shares with the related net unrealized gain(loss) included in the statements of changes in capital funds. For BSP reporting purposes, the convertiblepreferred shares of PLDT are classified as equity investments.

The following table presents the breakdown of trading and investment securities by contractual maturity datesas of December 31, 2004 and 2003:

2004 2003

Due Within

One Year

Due Beyond

One Year Total

Due Within

One Year

Due Beyond

One Year Total

Trading account securities P=10,916,838,980 P=– P=10,916,838,980 P=14,862,996,900 P=– P=14,862,996,900

Available-for-sale securities – 80,022,400 80,022,400 – 57,074,800 57,074,800

Investments in bonds and

other debt instruments 3,302,307,528 31,090,065,883 34,392,373,411 25,146,461 26,991,862,371 27,017,008,832

P=14,219,146,508 P=31,170,088,283 P=45,389,234,791 P=14,888,143,361 P=27,048,937,171 P=41,937,080,532

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As of December 31, 2004 and 2003, the aggregate market value of IBODI was P=34.6 billion and P=27.2 billion,respectively. A significant portion of IBODI represents Philippine government debt securities with market valueof P=33.9 billion and P=24.2 billion as of December 31, 2004 and 2003, respectively.

On December 28, 2004, the Bank became a party to a purchase price sharing agreement (the Agreement) onthe sale of the assets of one of its corporate borrowers, National Steel Corporation (NSC) to a special purposevehicle (SPV).

Under the Agreement, the total consideration for NSC’s assets is P=13.3 billion with the following terms:

a. Cash downpayment of P=1.0 billion, andb. Issuance of zero coupon notes amounting to P=12.3 billion as follows:

i. P=2.0 billion notes payable in five (5) years (termed as Tranche A notes), andii. P=10.3 billion notes payable in eight (8) years (termed as Tranche B notes)

The downpayment and the notes shall be allocated among NSC’s secured creditor banks and its shareholdersafter deducting certain costs incurred for the maintenance of the mortgaged assets as well as other expensesincurred or to be incurred with the disposition of the assets. The remaining balance of the downpayment shallbe applied in the order of the following:

a. share of a foreign bank amounting to P=39.5 million of the Tranche A note;b. share of preferred claims as provided in the memorandum of agreement (MOA) executed between the

majority of NSC’s secured creditors and shareholders on November 22, 2002; andc. share of the remaining secured creditors pro rata in proportion to their respective outstanding claims and

NSC’s shareholders pro rata in proportion to their agreed shareholding in the SPV as contemplated inthe MOA.

The Agreement further states that the downpayment shall be deposited in an escrow account with a local bankpending the finalization of the actual amounts of expenses which shall be deducted therefrom.

The details of the Bank’s share in the notes issued by the SPV are as follows:

Tranche A note Tranche B noteAmount P=83,509,351 P=483,365,246Term 5 years 8 yearsInterest Zero interest Zero interestAnnual Principal Installment

2nd year P=9,501,332 –3rd year 12,092,344 –4th year 26,801,459 –5th year 35,114,216 P=52,197,6126th year – 80,277,6227th year – 81,359,1018th year – 269,530,911

P=83,509,351 P=483,365,246

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The notes shall be fully secured by a mortgage trust indenture (MTI) covering NSC’s assets with thecorresponding mortgage participation certificates to be issued equal to the outstanding balance of both TrancheA and B notes with a local bank as the trustee for the MTI.

All annual amortizations on both zero interest coupon notes will be covered by a stand-by letter of credit (L/C)initially for US$4.5 million effective up to October 15, 2005 to cover the first annual amortization on theoutstanding Tranche A note. On or before the expiry of the L/C, another L/C will be issued to cover subsequentannual amortizations.

As of December 31, 2004, the present value of the notes recorded in the Bank’s IBODI was P=263.9 million.The difference between NSC’s outstanding loan and the present value of the notes was charged to the specificallowance for probable losses maintained for the NSC loan account.

4. Receivables from Customers

2004 2003Loans and discounts P=50,465,733,871 P=39,573,891,161Customers’ liabilities under letters of credit

or trust receipts 5,661,320,247 4,803,559,898Bills purchased 1,137,085,697 996,527,011

57,264,139,815 45,373,978,070Unearned discounts (2,558,823,556) (621,642,969)Allowance for probable losses (see Note 8) (6,247,525,323) (6,543,783,821)

P=48,457,790,936 P=38,208,551,280

As of December 31, 2004 and 2003, the breakdown of secured and unsecured receivables from customers isas

follows:

2004 2003Amounts % Amounts %

Loans secured by:Real estate P=24,380,557,760 42.58 P=20,052,308,724 44.19Shares of stock of other

banks 2,315,515,634 4.04 2,365,839,999 5.22Chattel mortgage 1,255,391,257 2.19 1,212,246,248 2.67Deposit hold out 1,524,321,861 2.66 885,493,030 1.95Others 6,941,667,100 12.13 3,537,104,815 7.80

36,417,453,612 63.60 28,052,992,816 61.83Unsecured loans 20,846,686,203 36.40 17,320,985,254 38.17

P=57,264,139,815 100.00 P=45,373,978,070 100.00

As of December 31, 2004 and 2003, receivables from customers amounting to P=29.2 million and P=24.3 million,respectively, are pledged to secure certain bills payable to the BSP under the Bank’s rediscounting privileges(see Note 10).

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As of December 31, 2004 and 2003, information on the concentration of credit as to industry follows:

2004 2003Amounts % Amounts %

Manufacturing (various industries) P=14,575,350,810 25.45 P=11,472,810,003 25.29Wholesale and retail trade 10,935,573,550 19.10 10,215,629,292 22.52Financial intermediaries 9,855,003,772 17.21 7,800,749,933 17.19Real estate, renting and business

services 8,456,976,997 14.77 7,726,926,430 17.03Electricity, gas and water 5,942,793,607 10.38 720,519,000 1.59Transportation, storage and

communication 2,356,970,248 4.11 2,760,475,366 6.08Construction 1,681,850,948 2.94 1,371,052,117 3.02Agriculture 863,693,427 1.51 790,857,695 1.74Mining and quarrying 73,310,396 0.13 235,340,637 0.52Public administration and defense 9,404,583 0.01 10,510,571 0.02Others 2,513,211,477 4.39 2,269,107,026 5.00

P=57,264,139,815 100.00 P=45,373,978,070 100.00

The BSP considers that loan concentration exists when total loan exposure to a particular industry or economicsector exceeds 30% of total loan portfolio. As of December 31, 2004 and 2003, the Bank does not have creditconcentration in any particular industry.

Breakdown of receivables from customers by contractual maturity dates as of December 31, 2004 and 2003 isas follows:

2004 2003Due within one year P=32,599,679,386 P=28,641,560,413Due beyond one year 24,664,460,429 16,732,417,657

P=57,264,139,815 P=45,373,978,070

BSP Circular No. 351 allows banks to exclude from nonperforming classification receivables classified as “Loss”in the latest examination of the BSP which are fully covered by allowance for probable losses, provided thatinterest on said receivables shall not be accrued and that such receivables shall be deducted from the totalreceivable portfolio for purposes of computing non-performing loans. As of December 31, 2004 and 2003,nonperforming loans (NPLs) not fully covered by allowance for probable losses are as follows:

2004 2003Total NPLs P=7,600,918,313 P=8,794,070,738Less NPLs fully covered by allowance for

probable losses 682,019,895 988,757,623P=6,918,898,418 P=7,805,313,115

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5. Bank Premises, Furniture, Fixtures and Equipment

Changes in the bank premises, furniture, fixtures and equipment - at cost follow:

2004Furniture,

Fixturesand Equipment Buildings

LeaseholdImprovements

Building UnderConstruction Total

2003Total

At CostAt January 1 P=1,754,828,345 P=536,216,458 P=121,158,999 P=7,669,607 P=2,419,873,409 P=2,263,914,435Additions 176,864,056 53,212,956 8,474,364 150,468 238,701,844 201,662,596Disposals (55,523,678) (1,398,827) (123,171) (7,669,607) (64,715,283) (45,703,622)

At December 31 1,876,168,723 588,030,587 129,510,192 150,468 2,593,859,970 2,419,873,409

Accumulated depreciationand amortization

At January 1 1,415,260,145 143,328,222 37,916,660 - 1,596,505,027 1,461,201,531Depreciation and

amortization 129,496,475 17,621,135 16,408,933 - 163,526,543 164,594,588Disposals (19,586,585) (825,336) - - (20,411,921) (29,291,092)

At December 31 1,525,170,035 160,124,021 54,325,593 - 1,739,619,649 1,596,505,027

Net book value P=350,998,688 P=427,906,566 P=75,184,599 P=150,468 P=854,240,321 P=823,368,382

Depreciation and amortization amounting to P=163.5 million in 2004 and P=164.6 million in 2003,are included in the statements of income.

The following details relate to land carried at appraised values:

2004 2003At cost P=347,723,808 P=327,689,663At appraised value P=2,172,405,858 P=2,210,492,967

6. Equity Investments

Percentageof

Ownership2004

2003Equity investments - equity:

Acquisition cost:CBC Forex Corporation 100 P=49,999,500 P=49,999,500First Sovereign Asset Management,Inc.* 100

31,250,000–

CBC Finance, Inc. 40 6,000,000 6,000,000CBC Venture Capital Corporation 60 3,000,000 3,000,000CBC Insurance Brokers, Inc. 100 1,500,000 1,500,000CBC Properties and Computer

Center, Inc. 40 280,000 280,00092,029,500 60,779,500

*Special purpose entity created to avail of the benefits under the SPV act of 2002.

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2004 2003Accumulated equity in net earnings:

Balance at beginning of year P=41,488,903 P=28,067,664Equity in net earnings 6,043,683 20,128,746Cash dividends received – (6,707,507)Balance at end of year (see Note 13) 47,532,586 41,488,903

139,562,086 102,268,403Equity investments - at cost 310,167,634 310,167,634

449,729,720 412,436,037Less allowance for probable losses (seeNote 8)

204,230,562218,539,950

P=245,499,158 P=193,896,087

The combined total assets of subsidiaries where the Bank holds more than 50% of equity but which were notconsolidated, not being material amounts, constituted 0.13% and 0.12% of the total resources of the Bank as ofDecember 31, 2004 and 2003, respectively.

Equity investments include the Bank’s interest amounting to P= 31.2 million in a SPV created in 2004 to avail ofthe benefits provided under the SPV Act of 2002.

On November 7, 2001, the BOD and stockholders of CBC Finance, Inc. (CBCF) approved the shortening ofCBCF’s corporate existence to December 31, 2001 by amending its articles of incorporation. CBCF’s certificateof dissolution is still to be obtained from the SEC.

On July 6, 2000, the stockholders of CBC Venture Capital Corporation (CBC VCC) approved its dissolution and theeventual disposal of its real estate properties and the distribution of its retained earnings. In connection with itsliquidation, in January 2001, CBC VCC sold its real estate properties and terminated some of its employees. CBC

VCCis awaiting the approval of the regulatory authorities related to its liquidation.

7. Other Resources

20042003

(As restated)Accrued interest receivable P=1,529,443,707 P=1,162,606,020Deferred tax assets - net (see Note 16) 1,025,514,898 1,114,520,482Accounts receivable 445,327,796 320,015,462Sales contracts receivable 325,638,938 244,907,771Foreign currency notes and coins on hand 312,170,824 278,817,179Returned checks and other cash items in

process of collection 268,432,956 284,451,208Foreign currency checks and other cash items 84,907,482 85,984,969Miscellaneous 461,530,147 308,526,785

4,452,966,748 3,799,829,876Less allowance for probable losses (see Note 8) 305,869,014 269,624,149

P=4,147,097,734 P=3,530,205,727

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Breakdown of other resources by contractual maturity dates as of December 31, 2004 and 2003 is as follows:

20042003

(As restated)Due within one year P=4,435,582,400 P=3,761,905,299Due beyond one year 17,384,348 37,924,577

P=4,452,966,748 P=3,799,829,876

8. Allowance for Probable Losses

Changes in the allowance for probable losses are as follows:

2004 2003Balance at beginning of year:

Receivables from customers P=6,543,783,821 P=5,061,213,198ROPOA 440,845,495 348,197,968Equity investments 218,539,950 229,154,149Other resources 269,624,149 187,463,156

7,472,793,415 5,826,028,471Provisions charged to operations 855,526,104 1,647,468,409Accounts charged off and others (874,067,073) (703,465)Balance at end of year: 7,454,252,446 7,472,793,415

Receivables from customers 6,247,525,323 6,543,783,821ROPOA 696,627,547 440,845,495Equity investments 204,230,562 218,539,950Other resources 305,869,014 269,624,149

P=7,454,252,446 P=7,472,793,415

As discussed in Note 2, the Bank’s allowance for probable losses has been determined with due considerationof the BSP’s guidelines on probable loss provisioning. At the current level of allowance for probable losses,management believes that the Bank has sufficient allowance to cover any losses that may be incurred from thenon-collection or non-realization of its receivables from customers and other risk assets.

9. Deposit Liabilities

Of the total deposit liabilities of the Bank as of December 31, 2004 and 2003, 64.31% and 62.38%, respectively,are subject to periodic interest repricing. The remaining deposit liabilities earn annual fixed interest ratesranging from 1% to 12.375% in 2004 and 2003.

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Available reserves as of December 31, 2004 and 2003 per latest report submitted to the BSP are as follows:

2004 2003Cash and other cash items P=2,669,854,856 P=1,766,041,157Due from BSP 2,333,263,862 1,181,052,510IBODI 5,388,726,836 4,472,093,009

P=10,391,845,554 P=7,419,186,676

The following table presents the breakdown of deposit liabilities by contractual settlement dates as of December31, 2004 and 2003:

2004 2003Due within one year P=74,867,757,077 P=58,084,998,931Due beyond one year 10,938,315,620 14,026,963,548

P=85,806,072,697 P=72,111,962,479

10. Bills Payable2004 2003

BSP - rediscounting (see Note 4) P=29,239,007 P=24,271,501Others 4,305,703,897 9,284,537,522

P=4,334,942,904 P=9,308,809,023

Bills payable - others mainly represent fundings from the Development Bank of the Philippines, Land Bank ofthe Philippines, Government Service Insurance System and Social Security System in connection with certainfinancing programs of these institutions.

The following table presents the breakdown of bills payable by contractual maturity dates as of December 31,2004 and 2003:

2004 2003

Due Within

One Year

Due Beyond

One Year Total

Due Within

One Year

Due Beyond

One Year Total

BSP- rediscounting P=29,239,007 P=– P=29,239,007 P=24,271,501 P=– P=24,271,501

Others 821,522,286 3,484,181,611 4,305,703,897 6,018,288,000 3,266,249,522 9,284,537,522

P=850,761,293 P=3,484,181,611 P=4,334,942,904 P=6,042,559,501 P=3,266,249,522 P=9,308,809,023

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11. Accrued Interest, Taxes and Other Expenses

20042003

(As restated)Accrued interest payable P=1,473,998,863 P=2,391,679,485Accrued other expenses payable 599,244,153 565,044,860Accrued income tax payable 45,309,689 30,149,943

P=2,118,552,705 P=2,986,874,288

All accrued interest, taxes and other expenses are due within one year from the statement of condition dates.

12. Other Liabilities

2004 2003Accounts payable (see Note 18) P=541,295,362 P=913,395,903Other deferred credits 417,874,140 310,098,739Other credits - Dormant 278,021,619 265,714,365Acceptances payable 211,574,624 34,728,192Withholding taxes payable 55,389,168 32,851,690Due to BSP 34,789,147 12,400,675Margin deposits 9,897,760 23,802,891Miscellaneous 180,498,506 36,553,249

P=1,729,340,326 P=1,629,545,704

Breakdown of other liabilities by contractual maturity dates as of December 31, 2004 and 2003 is as follows:

20042003

(As restated)Due within one year P=1,729,340,326 P=1,348,524,142Due beyond one year – 281,021,562

P=1,729,340,326 P=1,629,545,704

13. Capital Funds

On May 5, 2004 the BOD approved the declaration of 20% stock dividends to stockholders of record as of July22, 2004. The BSP approved the dividend declaration on June 10, 2004.

On May 7, 2003, the BOD approved the declaration of 20% stock dividends to stockholders of record as of July18, 2003. The BSP approved the dividend declaration on June 10, 2003.

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Under existing BSP regulations, the determination of the Bank’s compliance with regulatory requirements andratios is based on the amount of the Bank’s “unimpaired capital” (regulatory net worth) reported to the BSP,determined on the basis of regulatory accounting principles, which differ from Philippine GAAP in some aspects.

Under current banking regulations, the combined capital accounts of a commercial bank should not be less thanan amount equal to ten percent (10%) of its risk assets. Risk assets consist of total assets after exclusion ofcash on hand, due from BSP, loans covered by hold-out or assignment of deposits, loans or acceptances underletters of credit to the extent covered by margin deposits, and other non-risk items as determined by theMonetary Board. Under BSP Circular No. 360, effective July 1, 2003, the capital-to-risk assets ratio is to beinclusive of a market risk charge. Using this formula, the Bank’s capital-to-risk assets ratio (CAR) as ofDecember 31, 2004 and 2003 were 31.52% and 26.07%, respectively. Under the previous computationprovided under BSP Circular No. 280, which BSP Circular No. 360 above amended, the CAR of the Bank was27.06% and 24.39% as of December 31, 2004 and 2003, respectively.

A portion of the Bank’s surplus corresponding to the accumulated equity in net earnings of investees amountingto P=47.5 million as of December 31, 2004 and P=41.5 million as of December 31, 2003 is not available fordividend declaration. The accumulated equity in net earnings becomes available for dividends upon receipt bythe Bank of cash dividends from the investees.

14. Retirement Plan

The Bank has a noncontributory and funded retirement plan covering all its officers and regular employees. Theretirement fund is administered by a Board of Trustees and is accounted for separately. The Bank’s annualcontribution to the retirement plan consists of a payment covering the current service cost for the year and theamortization of the past service cost. Total contributions charged to operations amounted to P=106.9 million in2004, P=173.4 million in 2003 and P=137.9 million in 2002, including past service costs of P=9.6 million in 2004 andP=50.5 million in 2003 and 2002.

As of December 31, 2003, the latest actuarial valuation, the actuarial accruedliability amounted to P=920.7 million. The fair value of the plan assets amounted to P=1,308.2 million. The principal actuarial assumptions used to determine retirementbenefits were a return on plan assets of 10% per annum (p.a.) and salary increasesof 10% p.a., both compounded annually. Actuarial valuations are made at leastevery two years.

15. Lease Contracts

The Bank leases the premises for most of its branches. The lease contracts are for periods ranging from 1 to25 years from the dates of contracts and are renewable under certain terms and conditions. Various leasescontracts include escalation clauses, most of which bear an annual rent increase of 10%.

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Annual rentals on these lease contracts amounted to P=100.8 million in 2004, P=122.1 million in 2003, and P=112.1million in 2002.

Future minimum rentals payable under non-cancelable operating leases are as follows:

2004 2003Within one year P=93,898,140 P=123,243,455After one year but not more than five years 263,384,039 291,676,781After more than five years 74,557,522 219,341,218

P=431,839,701 P=634,261,454

16. Income Taxes

Under Philippine tax laws, the Bank is subject to percentage and other taxes (presented as Taxes and Licensesin the statements of income) as well as income taxes. In 2002, percentage and other taxes paid consistprincipally of gross receipt tax (GRT) and documentary stamp taxes (DST). In January 1, 2003, the Bank wassubject to value added tax (VAT) instead of GRT. However Republic Act 9238 re-imposes GRT on banks andother financial intermediaries effective January 1, 2004.

Income taxes include the corporate income tax, as discussed below, and final tax paid at the rate of 20% ongross interest income from government securities and other deposit substitutes. These income taxes, as well asthe deferred tax benefits and provisions, are presented as “Provision for (benefit from) income tax” in thestatements of income.

Under current tax regulations, the corporate income tax rate is 32%. Interest allowed as a deductible expenseis reduced by an amount equivalent to 38% of interest income subjected to final tax. An MCIT of 2% onmodified gross income is computed and compared with the regular income tax. Any excess of the MCIT overthe regular income tax is deferred and can be used as a tax credit against future income tax liability for the nextthree years from the year of inception. In addition, the NOLCO is allowed as a deduction from taxable incomein the next three years from the year of inception.

Current tax regulations also provide for the ceiling on the amount of entertainment, amusement and recreation(EAR) expense that can be claimed as a deduction against taxable income. Under the regulations, EARexpense allowed as a deductible expense is limited to the actual EAR paid or incurred but not to exceed 1% ofthe Bank’s net revenue.

Effective in May 2004, Republic Act No. 9294 restores the tax exemption of FCDUs and offshore banking units(OBUs). Under such law, the income derived by the FCDU from foreign currency transactions withnonresidents, OBUs, local commercial banks including branches of foreign banks is tax-exempt while interestincome on foreign currency loans from residents other than OBUs or other depository banks under theexpanded system is subject to 10% gross income tax.

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The provision for (benefit from) income tax consists of:

20042003

(As restated)2002

(As restated)Current:

Final tax P=167,066,236 P=87,658,728 P=203,544,303MCIT 44,495,703 28,224,622 17,694,051

211,561,939 115,883,350 221,238,354Deferred 107,604,385 140,152,676 (877,802,638)

P=319,166,324 P=256,036,026 (P=656,564,284)

The components of net deferred tax assets (included under Other Resources account) are as follows:

20042003

(As restated)Deferred tax asset (liability) on:

Allowance for probable losses P=1,570,207,434 P=1,673,514,207Revaluation increment on land (583,898,256) (602,497,057)

Unamortized past service cost 39,205,720 43,503,332P=1,025,514,898 P=1,114,520,482

The Bank did not set up deferred tax assets on the following temporary differences:

20042003

(As restated)Allowance for probable losses P=1,623,072,642 P=1,264,291,383NOLCO 289,019,588 112,672,139MCIT 90,414,376 52,196,181Unrealized loss on conversion 62,370,400 62,370,400Accrued rent – 4,805,044

P=2,064,877,006 P=1,496,335,147

The Bank believes that it is highly probable that these temporary differences will not be realized in the future.

As of December 31, 2004 and 2003, deferred income tax liabilities have not been recognized on theundistributed earnings of certain subsidiaries since such amounts are not taxable. Such undistributed earningsamounted to P=47.5 million and P=41.5 million in 2004 and 2003, respectively.

As of December 31, 2004, the Bank’s NOLCO consists of:

Inception YearOriginalAmount

ExpiredAmount

AppliedAmount

RemainingBalance Expiry Year

2002 P=112,672,139 P=– P=– P=112,672,139 20052004 176,347,449 – – 176,347,449 2007

P=289,019,588 P=– P=– P=289,019,588

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As of December 31, 2004, the Bank’s MCIT consists of:

Inception YearOriginalAmount

ExpiredAmount

AppliedAmount

RemainingBalance Expiry Year

2001 P=6,277,508 P=6,277,508 P=– P=– 20042002 17,694,051 – – 17,694,051 20052003 28,224,622 – – 28,224,622 20062004 44,495,703 – – 44,495,703 2007

P=96,691,884 P=6,277,508 P=– P=90,414,376

The reconciliation of the statutory income tax to the provision for (benefit from) income tax follows:

20042003

(As restated)2002

(As restated)Statutory income tax P=971,745,391 P=919,149,845 P=619,443,273Tax effects of:

FCDU income (501,318,541) (244,106,843) (384,252,550)Nondeductible expenses 155,204,931 236,415,443 144,630,951Interest income subjected to

final tax (117,126,233) (888,743,943) (963,407,787)Others (189,339,224) 233,321,524 (72,978,171)

Provision for (benefit from) income tax P=319,166,324 P=256,036,026 (P=656,564,284)

17. Trust Operations

Securities and other properties (other than deposits) held by the Bank in fiduciary or agency capacities forclients and beneficiaries are not included in the accompanying statements of condition since these are notresources of the Bank (see Note 19).

In compliance with the requirements of current banking regulations relative to the Bank’s trust functions: (a)government securities with a total face value of P=365.5 million and P=302.5 million as of December 31, 2004 and2003, respectively, are deposited with the BSP as security for the Bank’s faithful compliance with its fiduciaryobligations; and (b) a certain percentage of the Bank’s trust fee income (included under Other Operating Incomein the statements of income) is transferred to surplus reserve. This yearly transfer is required until the surplusreserve for trust function equals 20% of the Bank’s authorized capital stock.

18. Related Party Transactions

In the ordinary course of business, the Bank has loans and other transactions with its subsidiaries and affiliates,and with certain directors, officers, stockholders and related interests (DOSRI). Under the Bank’s policy, theseloans and other transactions are made substantially on the same terms as with other individuals and businessesof comparable risks. The amount of individual

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loans to DOSRI, of which 70% must be secured, should not exceed the amount of their respective deposits andbook value of their respective investments in the Bank. In the aggregate, loans to DOSRI generally should notexceed the Bank’s total capital funds or 15% of the Bank’s total loanportfolio, whichever is lower. As of December 31, 2004 and 2003, the Bank has complied with all theseregulatory requirements.

BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts.

The following table shows information relating to the loans, other credit accommodations and guaranteesclassified as DOSRI accounts under regulations existing prior to said circular, and new DOSRI loans, othercredit accommodations granted under said circular

2004 2003Total outstanding DOSRI loans P=3,137,125,624 P=3,271,363,324Percent of DOSRI accounts granted under

regulations existing prior to BSP Circular No.423 4.46% –

Percent of DOSRI accounts granted under BSPCircular No. 423 0.91% –

Percent of DOSRI loans to total loans 5.48% 7.21%Percent of unsecured DOSRI loans to

total DOSRI loans 14.87% 7.94%Percent of past due DOSRI loans to

total DOSRI loans 3.34% 2.04%Percent of non-performing DOSRI loans to

total DOSRI loans – –

The following table shows information relating to the loans, other credit accommodations and guarantees, aswell as availments of previously approved loans and committed credit lines not considered DOSRI accountsprior to the issuance of said circular but are allowed a transition period of two years from the effectivity of saidcircular or until said loan, other credit accommodations and guarantees become past due, or are extended,renewed or restructured, whichever comes later, as of December 31, 2004:

2004Total outstanding non-DOSRI accounts prior to BSPCircular No. 423 P=59,251,783Percent of unsecured non-DOSRI accounts prior to BSP

Circular No. 423 to total loans 0.09%Percent of past due non-DOSRI accounts prior to BSPCircular No. 423 to total loans 0.02%Percent of non-performing non-DOSRI accounts prior toBSP Circular No. 423 to total loans 0.02%

Other related party transactions conducted in the normal course of business include the availment of computerand general banking services of an affiliate to meet the Bank’s reporting requirements.

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The year-end balances in respect of related parties (other than DOSRI) included in the financial statements areas follows:

Related Party Accounts 2004 2003CBC Insurance Brokers, Inc. Deposit liabilities P=4,336,828 P=4,630,104

Accounts payable 195,585 2,826,080CBC Properties and Computer Deposit liabilities 2,736,215 3,844,823

Center, Inc. Accounts payable 1,525,435 207,201CBC Forex Corporation Deposit liabilities 278,631 336,345

The income and expenses in respect of related parties included in the financial statements are as follows:

Related Party Nature of Transaction 2004 2003CBC Insurance Brokers, Inc. Interest expense P=– P=44,885CBC Properties and Computer

Center, Inc. Computer services 33,401,798 32,373,835CBC Forex Corporation Service fees 12,006 31,517

Income from foreign exchange

transactions–

36,766

19. Commitments and Contingent Liabilities

In the normal course of the Bank’s operations, there are various outstanding commitments and contingentliabilities which are not reflected in the accompanying financial statements. Management does not anticipateany material losses as a result of these transactions.

The following is a summary of contingencies and commitments with their equivalent peso contractual amounts:

2004 2003Trust department accounts (see Note 17) P=38,184,795,281 P=33,560,644,456Forward exchange sold 7,729,720,647 13,071,690,696Outstanding guarantees issued 2,637,888,695 1,342,660,084Unused commercial letters of credit 2,061,265,436 1,920,913,124Deficiency claims receivable 779,131,078 491,142,262Outward bills for collection 219,272,685 95,017,647Late deposits/payments received 218,321,220 119,022,748Inward bills for collection 134,308,337 91,467,555Forward exchange bought 27,026,647 25,355,946Others 731,573,297 615,480,142

There are pending assessments and pre-assessments from the Bureau of Internal Revenue (BIR) pertaining towithholding tax at source and DST for the years 1982 to 1986 and GRT for the years 1999 and 2000. Inaddition, the Bank has received tax assessments from the BIR on two industry issues. The Bank, through its taxcounsel, is contesting these assessments and pre-assessments on the ground that the factual situations werenot considered which, if considered, will not give rise

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to material tax deficiencies. The Bank, together with other member banks of the Bankers’ Association of thePhilippines (BAP), is contesting these pending assessments and pre-assessments of the BIR. Discussions areongoing between the BAP and the BIR for the appropriate settlement and disposition of these tax issues. Noprovision has been made in the accompanying financial statements for these contingencies.

Several suits and claims relating to the Bank’s lending operations and labor-related cases remain unsettled. Inthe opinion of management, these suits and claims, if decided adversely, will not involve sums having a materialeffect on the financial statements of the Bank.

20. Segment Information

The Bank’s operating businesses are recognized and managed separately according to the nature of servicesprovided and the markets served, with each segment representing a strategic business unit. The Bank’sbusiness segments are as follows:

Consumer Banking - principally handling housing and auto loans for individual and corporate customers;

Account Management - principally administering all the lending, trade finance and corollary banking productsand services extended to corporate and institutional customers;

Branch Banking - principally handling retail and commercial loans, individual and corporate deposits, overdraftsand fund transfer facilities, trade facilities and all other bank services for retail customers; and

Treasury - principally providing money market, trading and treasury services, as well as the management of theBank’s funding operations by use of government securities, placements and acceptances with other banks.

These segments are the basis on which the Bank reports its primary segment information. Other operations ofthe Bank include the operations and financial control groups. Transactions between segments are at estimatedmarket rates on an arm’s length basis. Interest is charged or credited to business segments based on a poolrate, which approximates the marginal cost of funds.

The following tables present relevant information regarding business segments as of and for the years endedDecember 31, 2004 and 2003.

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Segment information for the years ended December 31, 2004 and 2003 are as follows (in thousands):

Consumer Banking Account Management Branch Banking

2004 2003 2004 2003 2004 2003

Results of operations

Net interest income P=190,760 P=163,472 P=782,058 P=542,090 P=1,979,528 P=1,709,171

Other operating income (loss) 20,950 10,823 176,181 (8,866) 804,794 537,077

Total revenue 211,710 174,295 958,239 533,224 2,784,322 2,246,248

Other operating expense (71,402) (60,925) (208,886) (139,668) (1,622,211) (1,393,714)

Income before income tax 140,308 113,370 749,353 393,556 1,162,111 852,534

Income tax provision – – – – – –

Net income P=140,308 P=113,370 P=749,353 P=393,556 P=1,162,111 P=852,534

Total Assets P=4,562,663 P=3,578,923 P=26,892,138 P=32,482,099 P=45,473,334 P=37,184,077

Total Liabilities P=273,687 P=69,687 P=5,966,294 P=4,307,269 P=83,011,623 P=72,075,290

Depreciation and Amortization P=1,729 P=1,326 P=2,218 P=1,912 P=78,298 P=76,543

Capital Expenditures P=766 P=1,488 P=814 P=6,704 P=44,491 P=45,711

Treasury Others Total

2004 2003 2004 2003 2004 2003

Results of operations

Net interest income (loss) P=1,661,601 P=1,900,805 P=440,859 (P=633,585) P=5,054,806 P=3,681,953

Other operating income 939,451 3,181,619 179,887 251,757 2,121,263 3,972,410

Total revenue (loss) 2,601,052 5,082,424 620,746 (381,828) 7,176,069 7,654,363

Other operating expense (166,346) (278,185) (2,070,520) (2,909,528) (4,139,365) (4,782,020)

Income (loss) before income

tax

2,434,706 4,804,239 (1,449,774) (3,291,356) 3,036,704 2,872,343

Income tax provision – – 319,166 256,036 319,166 256,036

Net income (loss) P=2,434,706 P=4,804,239 (P=1,768,940) (P=3,547,392) P=2,717,538 P=2,616,307

Total Assets P=53,716,413 P=48,013,262 (P=16,784,880) (P=17,908,321) P=113,859,668 P=103,350,040

Total Liabilities P=6,443,377 P=9,202,479 (P=1,476,596) P=602,731 P=94,218,385 P=86,257,456

Depreciation and Amortization P=3,332 P=6,118 P=77,950 P=78,696 P=163,527 P=164,595

Capital Expenditures P=6,962 P=2,460 P=41,177 P=97,910 P=94,210 P=154,273

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21. Earnings Per Share (EPS)

Basic earnings per share amounts are calculated by dividing the net income for the year by the weightedaverage number of common shares outstanding during the year (adjusted for stock dividends).

The following reflects the income and share data used in the basic earnings per share computations:

2003 20022004 (As restated - Note 2)

a. Net income P=

2,717,538,024 P=2,616,307,238 P=2,592,324,512b. Weighted average number of

common shares outstanding 36,542,512 36,542,512 36,542,512c. Earnings per share (a/b)

Weighted average number of outstanding common shares in 2003 and 2002 was recomputed after giving retroactive effects to stock dividends

declared on May 5, 2004 and May 7, 2003 (see Note 13).

Before consideration of the 20% stock dividend declared in 2004 and 2003, the EPS for 2003 and 2002were P= 86.02 and P=102.36, respectively.

22. Financial Performance

The following basic ratios measure the financial performance of the Bank:

20042003

(As restated)2002

(As restated)Return on average equity 14.37% 16.82% 19.36%Return on average assets 2.46 2.57 2.73Net interest margin 5.08 4.47 4.02

23. Notes to Statements of Cash Flows

The following table presents supplemental cash flow disclosure on interest:

2004 2003 2002Interest received P=8,189,819,676 P=7,584,601,516 P=5,834,494,099Interest paid 4,419,532,137 3,014,927,959 2,778,750,200

chinabank 2004

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