China Bank is one of the well-known banks not only in the region but also worldwide.

It’s
known for its globally-competitive service causing thousands of stockholders to invest and
around millions of users to subscribe around the globe. With the continuance of quality services
offered, China Bank has been awarded and recognized for their widespread growth and
development. These are reasons why we want to analyze and show the differences that had
emerged in the corporation in order to identify possible problem areas and to allow the users to
make good economic decisions.

With the widespread growth of China Bank, it is best to utilize all the information about
the past performance and forecast profitability and reliability of the corporation not only for the
shareholders but also with regards to the knowledge of the general public. This analysis
provides further understanding on the movements that had transpired over the year 2014
through the financial statements. This focuses on the changes in the Shareholder’s Equity
particularly on the capital portion.

In January 1, 2014, China Bank has Php 20,000,000,000 authorized capital or

2,000,000,000 authorized shares at P10 par value and has 1,427,661,658 issued and
outstanding common shares at P10 par value or Php 14,276,616,580. During the year, the
following transactions transpired causing movements to the shareholder’s equity:

Authorization for Issuance of Stock Rights

On March 5, 2014, the Board of Directors authorized the Parent Company to conduct
rights issue by offering common shares to certain eligible shareholders because they wanted ​to
fund the growth in the bank’s loan portfolio, branch network expansion, and technology upgrades​.
800,000,000 stock rights were originally offered.
The increase in the number of authorized shares was a compliance for the externally
imposed capital requirements -- the new Basel III requirements that constructed healthy capital
ratios which supports its business and to maximize shareholder’s value.

Increase in the Authorized Capital Stock

On May 8, 2014, the BOD, with the ratification of the shareholders, approved to increase
their authorized capital stock from ₱20 billion to ₱25 billion. This ₱5 billion increase is composed
of 500 million common shares at ₱10 par value per share. This increase in authorized capital
stock was approved by the BSP and SEC a month thereafter.

Issuance of Stock Rights Previously Authorized

On May 13, 2014, the previously BSP approved offer of stock rights was publicly listed at
the Philippine Stock Exchange. From the 800,000,000 stock rights offered, only 161,609,878
common shares were subscribed and were afterwards issued. These shares yielded proceeds
of ₱7,999,688,961 with each share issued at ₱49.50. Out of this amount, ₱1,616,098,780 --
161,609,878 shares at par -- was designated under Capital Stock and the excess
₱6,383,590,181 (161,609,878 x ₱39.50) was attributed to Capital Paid in Excess of Par or,
simply, Share Premium. The net proceeds of the stock rights offering amounted to
₱7,932,158,358, net of stock issuance cost.

Share Issuance Cost

The issuance of shares had cost the bank to incur related expenses amounting to
₱67,530,603 which was deducted from additional paid in capital. This transaction had caused
the total Shareholder’s Equity to decrease.

Risk-based Capital Adequacy Framework

As we went through our analysis, we found out the following reasons why the bank has
issued rights as presented in its Notes to Financial Statements (Note 22).
The additional capital from the issuance of stock rights offered and listed at the
Philippine Stock Exchange on May 13, 2014, helped the entity to conform with the new Basel III
requirements which prevents financial institutions to excessively accumulate bank asset without
corresponding capital support.
The Basel III requirements include Guidelines on Minimum Capital Requirements, which
provides the implementing guidelines on the revised risk-based capital adequacy framework
particularly on the minimum capital. The risk-based capital adequacy framework includes a ratio
that must be met by a bank, expressed as a percentage of qualifying capital to risk-weighted
assets (RWA).
The regulatory qualifying capital of the entity consists of Tier 1 (core) capital and Tier 2
(supplementary) capital. Through the issuance of common shares, the Tier 1 capital increased
which resulted to the increase (15.41% ​(2013) to 16.11% ​(2014)​) of the ratio between the
qualifying capital and the RWA that conforms to the revised risk-based capital adequacy
framework.

Declaration of Stock Dividend

During the year, the capital balance was also increased by the distribution of 8% stock
dividends. The total stock dividends distributed was 127,142,781 which comprised of
127,141,723 common shares and 1,058 fractional shares. Below is the computation of the stock
dividends declared:

Percentage (Shares Issued & Outstanding, Beg. + Stock Rights Issued) = Full shares

8% (1,427,661,658 + 161,609,878) = 127,141,723

Full shares + Fractional Shares = Stock Dividends Issued at P10 par

​127,141,723 + 1,058 = 127,142,781

The 1,058 shares were the full shares that have been exercised from the accumulated fractional shares all
throughout the years.

Small stock dividend should be issued at fair value in accordance with the standards.
However, the 8% stock dividends declared were issued at par. We assumed that the small stock
dividends can also be issued at par value in either of the following circumstances:
a. The retained earnings is not sufficient if the dividends are issued at fair value; or
b. The issuance at par is at the discretion of the board of directors.
The retained earnings available for dividend declaration amounting to ₱31,489,977,481
is sufficient enough to absorb ₱6,293,567,659.50 (127,142,781 shares x ₱49.50) stock dividends
issued at fair value. After taking into consideration that the retained earnings is sufficient, we
assumed that the issuance at par is at the discretion of the board of directors.

Overall Effect on Shareholder’s Equity

After the following significant effects, the bank’s contributed capital had a net increase of
₱2,887,526,590 from 2013 to 2014. This increase will enable the Parent Company to pursue
growth strategies while ensuring that its capital adequacy levels remain above the new Basel III
requirements, particularly in light of the recent acquisition of PDB.
Decrease in the Percentage of Small Share Dividends Declared from 2013 to 2014
The Group managed its capital structure and made adjustments to it in light of changes
in economic conditions and the risk characteristics of activities. In order to maintain or adjust the
capital structure, the Group adjusted the amount of dividend payment to shareholders.

Decrease in the Number of Stockholders

The total number of stockholders is 1,980 and 1,998 as of December 31, 2014 and
2013, respectively, as reported by the Parent Company’s transfer agent, Stock Transfer, Inc.
Based from this given data, we can assume that 18 stockholders sold their owned shares to
other existing shareholders of the company since the amount of the capital stock has not
decreased.

Increase in Surplus Reserves

During the year 2014, the surplus reserves account has been increased by ₱24,937,150.
This is from the 10% of the trust fee income of ₱249,371,499 during the year. This is in the light
of being required by the BSP regulations to appropriate 10% of the profit from their trust
business until the surplus reserves for trust business equals ₱500,000,000 which is 20% of their
authorized capital stock.

Increase in Surplus
The beginning balance of the surplus account at the year 2014 is ₱29,261,041,727. On
May 8,2014, the BOD approved the declaration of 8.00% stock and P1.00 per share cash
dividends to stockholders of record as of September 19, 2014. The total amount of
₱2,860,699,346 was deducted from the surplus account for the dividends declared with
₱1,589,271,536 and ₱1,271,427,810 pertaining to the cash and stock dividends, respectively.
During 2014, the entity earned net income amounting to ₱5,114,572,250. The same amount is
forwarded to the surplus account. An amount of ₱24,937,150 which is 10% of the trust fee
income of ₱249,371,499 was appropriated from the surplus account to surplus reserve required
by the BSP regulations.
At the end of 2014, the surplus account has a net increase of ₱2,228,935,754
(₱31,489,977,481 - ₱29,261,041,727). This net increase is from the net income of the current
year less the dividends declared and the appropriation of a certain amount to surplus reserve.
Unrealized Gains on Available-for-Sale Financial Asset
The total FV gain for the year, net of tax is ₱730,007,192. Out of this amount,
₱541,652,784 was disposed and taken to Trading and Securities Gain (Note 20) resulting to a
net increase in the unrealized gains on Available-for-Sale financial asset of ₱188,354,408 --
when the security is disposed of, the cumulative gain or loss previously recognized in OCI is
recognized as ‘Trading and securities gain - net’ in the statement of income. The net increase,
₱188,354,408, during the year was accumulated to the fair value loss of ₱73,855,091 during the
year 2013. Thus, the ending balance of ₱144,499,317 gain was reflected during the year ended
2014.

Decrease in the Remeasurement Gain on Defined Benefit Asset

The Group has separate funded noncontributory defined benefit retirement plans
covering substantially all its officers and regular employees. Under these retirement plans, all
covered officers and employees are entitled to cash benefits after satisfying certain age and
service requirements. The Group’s annual contribution to the retirement plan consists of a
payment covering the current service cost, unfunded actuarial accrued liability and interest on
such unfunded actuarial liability. (Note 23)
Remeasurements comprising actuarial gains and losses, return on plan assets and any
change in the effect of the asset ceiling (excluding net interest on defined benefit liability) are
recognized immediately in OCI in the period in which they arise.
We assumed that the ₱312,902,399 decrease was the effect of the latest actuarial
valuation studies of the retirement plans. This amount reduced the beginning balance of
₱596,643,032 resulting to ₱283,740,633 which was shown in the balance sheet as of year end
2014.

Decrease in Cumulative Translation Adjustment

As at the reporting date, the assets and liabilities of the FCDU are translated into the
Parent Company’s presentation currency (the Philippine Peso) at the PDS closing rate
prevailing at the balance sheet date, and its income and expenses are translated at the
PDSWAR for the year. Exchange differences arising on translation are taken directly to the
Statement of Comprehensive Income under ‘Cumulative translation adjustment’.
 In 2013, the cumulative translation adjustment had a balance of ₱66,347,664. In the
Statement of Comprehensive Income, this account showed a decrease of ₱87,714,557, thus a
net decrease of ₱21,366,893 was reflected during the year 2014.
Basic/Diluted Earnings Per Share
Basic EPS amounts are calculated by dividing the net income for the year by the
weighted average 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:

2014

Net income attributable to equity holders of the parent ₱5,116,396,788

Weighted average number of common shares outstanding* 1,662,092,229

Basic/Diluted Earnings Per Share ₱3.08

*Weighted average number of outstanding common shares in 2014 was computed after reflecting the effects
of the stock rights and stock dividends distributed during 2014 (Note 22).

As of December 31, 2014, there were no outstanding dilutive potential common shares.
Before consideration of the stock rights and 8.00% stock dividends distributed in 2014. Thus,
the basic and diluted earnings per share are the same.