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52 BANCO DE ORO3.28.4 Credit RiskCredit risk is the risk that the counterpart in a transaction may default and arises from lending, trade finance, treasury, derivatives and otheractivities undertaken by the Group. The Group manages its credit risk and loan portfolio through the CRMG, which undertakes severalfunctions with respect to credit risk management.The CRMG undertakes credit analysis and review to ensure consistency in the Group’s risk assessment process. The CRMG performs risk ratingsfor corporate accounts and risk scoring for consumer accounts. It also ensures that the Group’s credit policies and procedures are adequate tomeet the demands of the business. The CRMG is also responsible for developing procedures to streamline and expedite the processing of creditapplications.The CRMG also undertakes portfolio management by reviewing the Group’s loan portfolio, including the portfolio risks associated withparticular industry sectors, regions, loan size and maturity, and development of a strategy for the Group to achieve its desired portfolio mixand risk profile.The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, orgroups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual ormore frequent review. Limits on the level of credit risk by product, industry sector and by country are approved quarterly by the RMC.Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capitalrepayment obligations and by changing these lending limits when appropriate. Exposure to credit risk is also managed in part by obtainingcollateral and corporate and personal guarantees.The CRM reviews the Group’s loan portfolio in line with the Group’s policy of not having significant unwarranted concentrations of exposureto individual counterparties, in accordance with the BSP’s prohibitions on maintaining a financial exposure to any single person or group ofconnected persons in excess of 25% of its Net Worth.3.28.5 Cash Flow Interest Rate RiskThe Bank prepares gap analysis to measure the sensitivity of its resources, liabilities and off-statement of condition positions to interest ratefluctuations. The focus of analysis is the impact of changes in interest rates on accrual or reported earnings. This analysis would givemanagement a glimpse of maturity and re-pricing profile of its interest sensitive resources and liabilities. An interest rate gap report isprepared by classifying all assets and liabilities into various time buckets according to contracted maturities or anticipated repricing dates, andother applicable behavioral assumptions. The difference in the amount of resources and liabilities maturing or being repriced in any timeperiod category would then give the Group an indication of the extent to which it is exposed to the risk of potential changes in net interestincome.4. BUSINESS SEGMENTSIn the consolidated financial statements, the Group is organized into the following business segments:1) Commercial banking – handles the entire lending, trade financing and cash management services for corporate and retail customers;2) Investment banking – provides services to corporate clients outside the traditional loan and deposit products. These services includeloan syndications, underwriting and placing of debt and equity securities, and financial advisory services.3) Private banking – provides traditional and non-traditional investment and structured products to high net worth individuals andinstitutional accounts.4) Others – includes asset management, credit card operations, insurance, securities brokerage and realty management, none of whichconstitutes a separately reportable segment.Transactions between the business segments are on normal commercial terms and conditions.Funds are ordinarily allocated between segments, resulting in funding cost transfers disclosed in operating income. Interest charged forthese funds is based on the Group’s cost of capital. There are no other material items of income or expense between the businesssegments.Segment assets and liabilities comprise operating assets and liabilities including items such as taxation and borrowings.Internal charges and transfer pricing adjustments have been reflected in the performance of each business. Revenue sharing agreementsare used to allocate external customer revenues to a business segment on a reasonable basis.
2005 ANNUAL REPORT53Primary segment information (by business segment) as of and for the years ended December 31, 2005 and 2004 follow:December 31, 2005ConsolidatedCommercial Investment PrivateBanking Banking Banking Others Eliminations ConsolidatedInterest IncomeExternal P 13,612,319 P 69,804 P 885,000 P 217,683 P - P 14,784,806Inter-segment 56,321 917 948 7,323 ( 65,509) -Total interest income 13,668,640 70,721 885,948 225,006 ( 65,509) 14,784,806Interest ExpenseExternal 7,458,072 - 371,665 112,361 - 7,942,098Inter-segment 8,428 2,535 40,113 14,433 ( 65,509) -Total interest expense 7,466,500 2,535 411,778 126,794 ( 65,509) 7,942,098Net Interest Income P 6,202,140 P 68,186 P 474,170 P 98,212 P - P 6,842,708Profit for the Year P 2,470,362 P 106,287 P 477,611 (P 103,524) (P 407,219) P 2,543,517Statement of ConditionTotal resources P 215,772,422 P 1,207,216 P 15,339,287 P 10,838,472 (P 9,392,611) P233,764,786Total liabilities P 197,040,259 P 118,571 P 11,931,605 P 10,814,221 (P 6,374,175) P213,530,481December 31, 2004Interest IncomeExternal P 10,422,044 P 88,662 P 581,219 P 55,647 P - P 11,147,572Inter-segment 33,792 6,481 306 790 ( 41,369) -Total interest income 10,455,836 95,143 581,525 56,437 ( 41,369) 11,147,572Interest ExpenseExternal 6,001,935 3,431 156,080 25,112 - 6,186,558Inter-segment 7,150 - 32,747 1,472 ( 41,369) -Total interest expense 6,009,085 3,431 188,827 26,584 ( 41,369) 6,186,558Net Interest Income P 4,446,751 P 91,712 P 392,698 P 29,853 P - P 4,961,014Profit for the Year P 1,514,661 P 100,916 P 352,555 (P 123,431) P 127,933 P 1,972,634Statement of ConditionTotal resources P 173,484,766 P 1,370,602 P 9,304,366 P 813,574 ( P5,349,207) P179,624,101Total liabilities P 157,310,417 P 68,664 P 6,284,139 P 5,991,905 ( P6,689,194) P162,965,9315. CASH AND BALANCES WITH THE BSPThese accounts are composed of the following:ConsolidatedParent2005 2004 2005 2004Cash and other cash items P 6,621,220 P 5,627,066 P 6,620,667 P 5,626,974Due from BSPMandatory reserves 2,329,825 1,606,534 1,329,113 135,015Other than mandatory reserves 1,941,681 364,789 2,329,824 1,606,5344,271,506 1,971,323 3,658,937 1,741,549P 10,892,726 P 7,598,389 P 10,279,604 P 7,368,523Mandatory reserves represent the balance of the deposit account maintained with the BSP to meet reserve requirements and to serve asclearing account for interbank claims. Due from BSP bears annual interest rate of 4% for 2005 and 2004. Total interest income earnedamounted to P118,793 and P85,431 for 2005 and 2004, respectively, both in parent company and consolidated financial statements.
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Page 32 and 33: 30 BANCO DE OROThe following reconc
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