The turnaround in the Philippine economy which started in 2006 continued this year as the country reached a spectacular economic growth of 7.3 per cent. In a year marked by low inflation rate, low interest rates and a strong peso, the Philippines turned in its best performance in over thirty years.

The inflation rate in 2007 averaged at 2.8%, falling well below the previous year’s 6.2%. Interest rates hit record lows, as the government cut rates to meet its inflation target, hit its growth goal and also to curb the rapid rise of the peso. The interest rate of the 91-day Treasury bills which banks use as a benchmark for pricing loans, fell substantially, from an average of 4.837% at end 2006 to 3.672% at end 2007. In addition, after months of anticipation, the BSP finally cut in July, 2007 its overnight borrowing rate to 6.0% from 7.5% and the overnight lending rate to 8.0% from 9.75%. This was followed by three further cuts in the last quarter of the year. By year end 2007, a cumulative 225-basis point reduction in inter-bank transaction had been effected and saw interbank rates at 5.25% and 7.25% respectively -- the lowest since 1992.

On the other hand, the Philippine Peso was Asia’s best currency performer as it continued to show strength, settling at P41.280 versus the U.S. dollar at year’s end (from 2006’s P49.045), appreciating by 15.8%. It enabled the BSP to build up its international reserves, which reached a record high of $33.7 billion as of end-December. This improvement in the economy was likewise reflected in the performance of the Philippine Stock Exchange (PSE) as it ended the year with a bang, posting five new stock market records, including the main index, market capitalization, value turnover and proceeds from capital-raising activities. The PSE index, the main barometer of local stock price movements, surged 21.4% to 3,621.6 points at the end of 2007 from 2,982.5 in the previous year.

 

Worldwide, there was an economic slowdown amidst tightening credit conditions that were brought about by the crises in the sub-prime mortgage market sector in the United States, resulting in the U.S. Federal Reserve Board slashing its overnight interest rates by 100 basis points. In addition, the world had to contend with the rising cost of fuel after crude oil hit US$100 per barrel for the first time at the end of the year.

Against this backdrop, your bank ended the year with a net income of P1.8 million, a drop of 73.5% from the previous year’s level of P6.8 million. This was caused by lower interest income earned, dropping from P75.5M in 2006 to P69.0M this year. The reduction in interest income was accountable mainly by the drop in interest rates during the year. On the contrary, the bank’s Operating Expense remained stable, dipping by 1.8% from P55.3M to P54.3M. Employee benefits, occupancy and power, light and water all contributed to this decline.

Our five-year tax-exempt HGC Bonds (which were earning an average yield of 9.5%) matured in August, 2007, and due to the unavailability then of existing bonds or new issuance, the proceeds were invested temporarily in the lower-yielding inter-bank loans. (These were eventually reinvested in NFA bonds only in February, 2008 but at a taxable rate of only 6.75%). In addition, a large chunk of our direct loans had matured early in the year (P44.7 million matured in January alone) and were subsequently replaced by new but lower-yielding loans. Because of the lack of credit-worthy loans and government securities, all excess funds were invested temporarily in inter-bank loans.

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