COVER SHEET U N I O N B A N K O F T H E P H I L I P P I N E S. (Company's Full Name) U N I O N B A N K P L A Z A M E R A L C O A V E N U E

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2 COVER SHEET S.E.C. Registration Number U N I O N B A N K O F T H E P H I L I P P I N E S (Company's Full Name) U N I O N B A N K P L A Z A M E R A L C O A V E N U E C O R O N Y X A N D S A P P H I R E S T R E E T S O R T I G A S C E N T E R, P A S I G C I T Y ( Business Address : No. Street City / Town / Province ) FRANCIS B. ALBALATE (632) Contact Person Company Telephone Number SEC FORM 17Q Month Day FORM TYPE Month Day Fiscal Year Annual Meeting UNDERWRITER OF SECURITIES Secondary License Type, If Applicable C F D Dept. Requiring this Doc. Amended Articles Number/Section Total Amount of Borrowings 4,957 Total No. of Stockholders Domestic Foreign To be accomplished by SEC Personnel concerned File Number LCU Document I.D. Cashier S T A M P S Remarks = pls. use black ink for scanning purposes

3 SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER 1. For the quarterly period ended : September 30, Commission identification number : BIR Tax Identification No. : Exact name of registrant as specified in its charter : UNION BANK OF THE PHILIPPINES 5. Province, country or other jurisdiction of incorporation or organization : PHILIPPINES 6. Industry Classification Code : (SEC Use Only) 7. Address of principal office : Unionbank Plaza, Meralco Avenue corner Onyx & Sapphire Roads, Ortigas Center, Pasig City 8. Registrant s telephone number, including area code : (632) Former name, former address and former fiscal year if changed since last report : Not Applicable 10. Securities registered pursuant to Section 8 and 12 of the Code, or Sections 4 and 8 of the SRC Number of Share of Common Amount of Debt Outstanding Title of Each Class Stock Outstanding (Unpaid Subscription) Common Stock 1,217,149,512 None P10 par value 11. Are any or all of the securities listed on a Stock Exchange? Yes ( x ) No ( ) If yes, state the name of such stock exchange and the classes of securities listed therein: Stock Exchange : Philippine Stock Exchange Class of Securities : Common Shares 12. Indicate by check mark whether the registrant: (a) Has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Section 11 of SRC and SRC Rule 11 (a)-1 thereunder and Section 26 and 141 of the Corporation Code of the Philippines during the preceding 12 months (or for such shorter period 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 ( )

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5 Annex 1 UNION BANK OF THE PHILIPPINES AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENT OF CONDITION (With Comparative Audited Figures as at December 31, 2017 (Amounts in Thousands of Philippine Pesos) September 30, 2018 December 31, 2017 (Unaudited) (Audited) ASSETS Cash and Other Cash Items 7,350,674 6,633,237 Due From Bangko Sentral Ng Pilipinas 62,177,179 66,276,960 Due From Other Banks 23,492,371 54,520,482 Interbank Loans Receivables 156,096 4,793,280 Trading and Investment Securities At fair value through profit or loss 3,729,342 3,182,040 At amortized cost 182,846, ,471,659 At fair value through other comprehensive income 4,353,981 43,783 Loans and Other Receivables - Net 315,313, ,034,759 Bank Premises, Furniture, Fixtures And Equipment - Net 4,877,132 3,765,796 Assets Held For Sale - Net 313,765 - Investment Properties 15,373,118 14,153,546 Goodwill 13,998,494 11,258,251 Other Assets 9,064,217 9,977,538 TOTAL ASSETS 643,046, ,111,331 LIABILITIES AND EQUITY Deposit Liabilities Demand 121,785, ,424,349 Savings 63,223,210 57,744,858 Time 250,372, ,447,006 Long term negotiable certificate of deposits 6,000,000 3,000,000 Total Deposit Liabilities 441,380, ,616,213 Bills Payable 54,111,742 43,070,825 Notes Payable 34,360,000 32,165,000 Other Liabilities 24,175,036 25,272,744 Total Liabilities 554,027, ,124,782 EQUITY Equity Attributable to the Parent Bank's Stockholders: Common stock 12,171,495 10,583,439 Additional paid-in capital 14,087,360 5,819,861 Surplus free 61,716,773 56,693,737 Surplus reserves 2,053,106 1,959,938 Net unrealized fair value gains on investment securities 100, Other reserves 50,121 50,121 Remeasurement of defined benefit plan (1,214,401) (1,175,320) Total Equity Attributable to the Parent Bank's Stockholders: 88,965,427 73,931,801 Non-controlling Interests 53,853 54,748 TOTAL EQUITY 89,019,280 73,986,549 TOTAL LIABILITIES AND EQUITY 643,046, ,111,331

6 UNION BANK OF THE PHILIPPINES AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands of Philippine pesos, Except per Share) FOR THE NINE MONTHS ENDED SEPTEMBER 30 QUARTERS ENDED SEPTEMBER (As Restated)** (As Restated)** INTEREST INCOME ON Loans and other receivables 14,786,311 12,192,576 5,203,924 4,277,706 Investment securities at amortized cost and FVOCI 5,632,369 4,818,986 2,018,555 1,813,897 Cash and cash equivalents 327, , ,097 83,160 Financial assets at fair value through profit and loss 13,771 52,425 10,928 7,529 Interbank loans receivable 95,122 50,344 19,394 14,394 20,854,770 17,390,676 7,359,898 6,196,686 INTEREST EXPENSE ON Deposit Liabilities 6,281,734 4,308,290 2,334,345 1,613,078 Bills payable and other liabilities 1,712, , , ,677 7,994,438 4,927,772 3,002,021 1,805,755 NET INTEREST INCOME 12,860,332 12,462,904 4,357,877 4,390,931 IMPAIRMENT LOSSES 266, , , ,929 NET INTEREST INCOME AFTER IMPAIRMENT LOSSES 12,594,172 11,960,355 4,241,883 3,961,002 OTHER INCOME(EXPENSE) Service charges, fees and commissions 2,826,979 3,368,395 1,170,905 1,131,683 Gain on sale of investment securities at amotized cost 152, , Gain(loss) on trading and non trading financial assets 1,240,255 (9,817) (65,359) (48,237) Miscellaneous 1,782,516 2,163, ,985 1,102,180 6,001,911 5,795,293 1,609,531 2,185,626 OPERATING EXPENSES Salaries and employee benefits 4,173,862 3,824,953 1,362,733 1,338,298 Taxes and licenses 1,927,447 1,515, , ,382 Depreciation and amortization 522, , , ,120 Occupancy 621, , , ,764 Miscellaneous 4,182,395 3,255,427 1,656,369 1,214,345 11,427,160 9,623,462 4,143,088 3,439,909 INCOME BEFORE INCOME TAXES 7,168,923 8,132,186 1,708,326 2,706,719 PROVISION FOR INCOME TAX 1,086,907 1,740, , ,000 NET INCOME 6,082,016 6,391,841 1,366,105 2,026,719 Net income attributable to: Equity holders of the Parent Bank 6,081,014 6,385,880 Non-controlling Interests 1,003 5,961 6,082,016 6,391,841 Basic/Diluted Earnings per Share Attributable to Equity Holders of the Parent Bank (EPS)* *Basic and Diluted EPS is based on annualized figures. Actual EPS amounted to P5.74 and P6.03 for the quarters ending September 30, 2018 and 2017 **Restated as a result of IFRS 15-Revenue from Contracts with Customers

7 UNION BANK OF THE PHILIPPINES AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands of Philippine Pesos, Except Earnings per Share) Annex 2 ANNEX 2 page 2 of 2 FOR THE NINE MONTHS ENDED SEPTEMBER 30 FOR THE QUARTERS ENDED SEPTEMBER NET INCOME 6,082,016 6,391,841 1,366,106 2,026,720 OTHER COMPREHENSIVE INCOME (LOSS) Items that will be reclassified subsequently to profit and loss Unrealized mark to market loss on investment securities at FVOCI 72,631 - (20,632) - Realized gain on sale of investment securities at FVOCI recognized in profit or loss (1,324,530) Items that will not be classified to profit and loss Loss on remeasurements of retirement obligation (55,830) (22,096) - - Tax income effect 16,749 6, (39,081) (15,467) - - Total Other Comprenhensive Income(Loss), net of tax (1,290,979) (15,467) (20,632) - TOTAL COMPREHENSIVE INCOME 4,791,037 6,376,374 1,345,474 2,026,720 Attributable to the: Parent Bank's Stockholders 4,790,034 6,370,413 Non-controlling Interests 1,003 5,961 4,791,037 6,376,374

8 UNION BANK OF THE PHILIPPINES AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (Amounts in Thousands of Philippine Pesos) Net Unrealized Fair Value Gains (Losses) on Remeasurements Additional Investment of Defined Other Non-controlling Total Common Stock Paid-in Capital Surplus Free Surplus Reserves Securities Benefit Plan Reserves Total Interests Capital Funds Balance at January 1, 2018, as previously reported 10,583,439 5,819,861 56,693,737 1,959, (1,175,320) 50,121 73,931,801 54,748 73,986,549 Effect of adoption of new standards 1,046,043 1,352,846 2,398,889 (1,898) 1,352,846 Balance at January 1, as restated 10,583,439 5,819,861 57,739,780 1,959,938 1,352,871 (1,175,320) 50,121 76,330,690 52,850 75,339,395 Total comprehensive income (loss) for the year 6,081,014 (1,251,898) (39,081) 4,790,035 1,003 4,791,037 Cash dividends (2,010,853) (2,010,853) - (2,010,853) Appropriations during the year (93,168) 93, Issuance of new shares 1,588,056 8,267,499 9,855,555 9,855, Balance at September 30, ,171,495 14,087,360 61,716,773 2,053, ,973 (1,214,401) 50,121 88,965,427 53,853 89,019,280 Balance at January 1, ,583,439 5,819,861 50,518,506 1,734, (1,139,658) 50,121 67,566,991 20,317 67,587,308 Total comprehensive income (loss) for the year 6,385,880 (15,467) 6,370,413 5,961 6,376,374 Cash dividends (2,010,853) (2,010,853) (2,010,853) Appropriations during the year (626,074) 626, Acquisition of shares of non-controlling interest during the period 26,082 26,082 - Balance at September 30, ,583,439 5,819,861 54,267,459 2,360, ,155,125 50,121 71,926,551 52,360 71,978,911

9 UNION BANK OF THE PHILIPPINES AND SUBSIDIARIES UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands of Philippine Pesos) For the Nine Months Ended September 30 (As restated) CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax 7,168,923 8,132,186 Adjustments for: Gain on sale of investment securities at FVOCI (1,324,530) - Unrealized foreign exchange loss(gain)-net 2,964,267 96,862 Depreciation and amortization 522, ,157 Gain on forclosure and sale of investment properties (183,805) (85,320) Fair value losses (gains) on investment properties (278,677) (386,506) Gain on sale of investment securities at amortized cost (152,161) (272,841) Provision for impairment losses 266, ,549 Gain on disposal of property and equipment (61) - Changes in operating assets and liabilities: Decrease (increase) in: Financial assets at fair value through profit and lo (547,302) 886,223 Loans and other receivables (45,687,707) (31,017,328) Other assets 1,059,796 (445,404) Increase (decrease) in: Deposit liabilities (1,815,722) 61,059,267 Other Liabilities (130,264) (568,365) Net cash provided by (used in ) operations (38,139,036) 38,393,480 Income taxes paid (1,249,457) (1,562,866) Net cash provided by (used in ) operating activities (39,388,493) 36,830,614 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Investment securities at FVOCI (1,633,565) - Investment securities at amortized cost (32,781,452) (45,298,559) Bank premises, furniture, fixtures and equipment (413,056) (466,607) Investment properties (225,374) (96,864) Proceeds from sale of: Investment properties 309,677 - Bank premises, furniture, fixtures and equipment 15,031 10,016 Proceeds from maturities/sale of: Investment securities at FVOCI 14,645,836 - Investment securities at amortized cost 16,024,868 - Acquisition of a subsidiary, net of cash acquired (5,728,022) - Net cash provided by (used in) investing activities (9,786,058) (45,852,014)

10 CASH FLOWS FROM FINANCING ACTIVITIES Payments of: Bills payable (204,503,479) (114,494,801) Cash dividends (2,010,853) (2,010,853) Proceeds from Notes payable 150,000 - Bills payable 212,708,143 74,817,334 Long Term Negotiable Certificate of Deposits 3,000,000 - Net cash used in financing activities 9,343,811 (41,688,320) EFFECT OF FOREIGN CURRENCT TRANSLATION ADJUSTMENT 783, ,634 NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (39,047,639) (50,401,085) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and Other Cash Items 6,633,237 6,021,358 Due from Bangko Sentral ng Pilipinas 66,276,960 56,151,239 Due from Other Banks 54,520,482 42,425,310 Interbank Loans Receivable 4,793,280 24,362, ,223, ,960,707 CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and Other Cash Items 7,350,674 5,500,495 Due from Bangko Sentral ng Pilipinas 62,177,179 59,019,983 Due from Other Banks 23,492,371 8,607,773 Interbank Loans Receivable 156,096 5,431,371 93,176,320 78,559,622

11 Annex 5 UNION BANK OF THE PHILIPPINES GENERAL NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, Corporate Information Union Bank of the Philippines (the Bank, UnionBank or the Parent Bank) was incorporated in the Philippines on August 16, 1968 and operates as a universal bank through its universal banking license acquired in July The Philippine Securities and Exchange Commission (SEC) has approved the Bank s amendment of its Articles of Incorporation on October 31, 2013 for the extension of the Bank s corporate life for another 50 years until August 16, The Bank s registered address, which is also its principal place of business, is at UnionBank Plaza, Meralco Avenue corner Onyx Street and Sapphire Roads, Ortigas Center, Pasig City. The Bank provides expanded commercial banking products and services such as loans and deposits, cash management, retail banking, foreign exchange, capital markets, corporate and consumer finance, investment management and trust banking. As of September 30, 2018, the Bank and its subsidiaries (collectively referred to as the Group ) has 433 branches and 304 on-site and 71 off-site automated teller machines (ATMs), located nationwide. The Bank s common shares are listed in the Philippine Stock Exchange (PSE). The Bank is effectively 49.36% owned by Aboitiz Equity Ventures, Inc. (AEVI), a company incorporated and domiciled in the Philippines. AEVI is the holding and management company of the Aboitiz Group of Companies. AEVI s registered address is located at NAC Tower, 32nd Street, Bonifacio Global City, Taguig City, Metro Manila. 2. Summary of Significant Accounting Policies Basis of Preparation The accompanying financial statements have been prepared on a historical cost basis except for financial assets at fair value through profit or loss (FVPL), financial assets at fair value through other comprehensive income (FVOCI), derivative financial instruments and investment properties that are measured at fair value. The unaudited interim condensed consolidated financial statements are presented in Philippine peso (P=). All values are rounded to the nearest thousands in peso except when otherwise indicated. Statement of Compliance The unaudited interim condensed consolidated financial statements of the Group have been prepared in accordance with PAS 34, Interim Financial Reporting. Accordingly, the unaudited interim condensed consolidated financial statements do not include all of the information and disclosures required in the annual audited financial statements and should be read in conjunction with the Groups annual audited financial statements as at and for the year ended December 31, Basis of Consolidation The Group s unaudited interim condensed financial statements comprise the accounts of the Parent Bank and its subsidiaries, after the elimination of material intercompany transactions. All intercompany assets and liabilities, equity, income, and expenses and cash flows relating to transactions with subsidiaries are eliminated in full. Unrealized profits and losses from intercompany UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 3

12 transactions that are recognized in the separate financial statements are also eliminated in full. Intercompany losses that indicate impairment are recognized in the Group s unaudited interim condensed financial statements. The Group controls the investee if and only if the Group has: Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee), Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns. The financial statements of the subsidiaries are prepared on the same reporting period as the Parent Company using consistent accounting policies. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group s accounting policies. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the Parent Company and to the non-controlling interests, even if this results in the non-controlling interest having a deficit balance. All significant intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full in the consolidation. The Bank s effective percentage of ownership over the subsidiaries (all incorporated in the Philippines) and the nature of the subsidiaries businesses as of September 30, 2018 and December 31, 2017 are as follows: Subsidiary Nature of Business Effective Percentage of Ownership City Savings Bank, Inc. (CSB) Thrift bank 99.78% First-Agro Industrial Rural Bank, Inc. Rural Bank (FAIR Bank)* 86.67% Philippine Resources Savings Bank Thrift Bank (PR)*** % Union Properties, Inc. (UPI) Real estate administration % First Union Plans, Inc. (FUPI)** Pre-need Insurance % First Union Direct Corporation (FUDC)** Financial products marketing % First Union Insurance and Financial Agent for insurance and Agencies, Inc. (FUIFAI) ** financial products % UBP Securities, Inc. (UBPSI) Securities brokerage % Interventure Capital Corporation (IVCC) Venture capital 60.00% * Newly acquired subsidiary in 2017 through CSB and UPI with 49% and 37.67% share in ownership, respectively. ** FUDC, FUPI and FUIFAI are wholly-owned subsidiaries of UPI. *** PR Bank, acquired in 2018, is a wholly-owned subsidiary of CSB UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 4

13 Business Acquisitions a. On March 17, 2017, CSB and UPI subscribed to 294,000 and 306,000 new common shares, respectively, of FAIR Bank at par value of P100 per share. As a result of the subscription, the percentage of ownership of UPI in FAIR Bank increased to 37.67% while CSB s ownership interest stood at 49%. b. On December 29, 2017, CSB signed a share purchase agreement (SPA) to acquire 100% of Philippine Resources Savings Banking Corp. (PR Savings Bank) from the Ropali Group. CSB acquired PR Savings Bank primarily to diversify its loan portfolios. The deal involves the purchase of 127,723,385 common shares held by the Ropali Group, which represent 66.27% of the total outstanding capital stock of PR Savings Bank. The total consideration for the sale of shares is 6.13 billion ( Purchase Price ), inclusive of capital gains tax and donor s tax. The purchase price shall be paid by CSB as follows: 1. The amount of 5.83 billion was deposited to an Escrow Account and released on Closing Date. 2. The balance of the purchase price in the amount of million shall be released by CSB directly to the Joint Venture (JV) Company within one (1) year from Closing date, or such longer period as the parties may agree upon in writing. In addition to the SPA above, on February 23, 2018, CSB and IFC entered into a Share Purchase Agreement ( Agreement ) for the 65,000,000 preferred shares of PR Savings Bank, with par value of ten pesos ( 10.00) or a total par value of million, which is equivalent to 33.72% of the total issued and outstanding capital stock. CSB and IFC completed the purchase of the shares on June 28, 2018 for million. CSB and PR Savings Bank intend to enter into a merger after CSB acquires 100% of the total issued and outstanding shares of stock PR Savings Bank, with CSB as the surviving entity. On April 5, 2018, The Philippine Competition Commission (PCC) approved the acquisition of PR Savings Bank by CSB. The acquisition was also approved by the Monetary Board (MB) of the BSP under MB Resolution No dated June 14, The transaction is accounted for as business combination, in which CSB is the accounting acquirer. The acquisition date, which is the final approval of the BSP, is on June 14, For convenience purposes, CSB used June 30, 2018 as the date of the business combination. UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 5

14 The fair values of the identifiable assets and liabilities acquired at the date of acquisition are as follows: Final fair value of the net assets recognized on acquisition date Assets Cash and other cash items P=58,692,819 Due from Bangko Sentral ng Pilipinas 352,563,087 Due from other banks 576,723,859 Loans and receivables 9,476,753,110 Equity investments 14,172,981 Property and equipment 820,937,572 Investment properties 926,208,190 Non-current assets held for sale 255,008,092 Other assets 768,643,890 Total assets 13,249,703,600 Liabilities Deposit liabilities 4,419,569,517 Bills payable 4,336,252,929 Other liabilities 218,122,389 Total liabilities 8,973,944,835 Net assets acquired P=4,275,758,765 The acquisition resulted in goodwill determined as follows: Consideration for the common shares P=6,127,727,240 Consideration for the preferred shares held by IFC 888,273,750 Purchase price 7,016,000,990 Fair value of net assets acquired 4,275,758,765 Goodwill P=2,740,242,225 The goodwill arising from the acquisition is attributed to expected synergies from combining operations of the acquire and the acquirer. PR Savings is the 14th largest thrift bank in the country, with assets of P=12.92 billion. Most of its 102 offices are located in Luzon offering motorcycle, agri-machinery, and salary loans to over 131,000 borrowers, mostly from the mass market segment. The transaction will enable CSB to expand its reach in Luzon, and enter into new market segments, such as motorcycle and agri-machinery financing. c. In February 2018, CSB and UPI signed an SPA with AEVI for the purchase of 2,461,338 common shares representing 51% ownership of AEVI on PETNET, Inc. (PETNET). On May 8, 2018, PCC approved the acquisition of PETNET, Inc. by CSB. As of September 30, 2018, the agreement is still subject to approval by the BSP. PETNET, more widely-known by its retail brand name PERA HUB, has the largest network of Western Union outlets in the Philippines. PETNET has over 2,800 outlets nationwide. It offers a variety of cashbased services including remittance, currency exchange and bills payment. UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 6

15 Non-controlling Interests Non-controlling interest represents the portion of profit or loss and net assets not owned, directly or indirectly, by the Parent Bank. Non-controlling interests are presented separately in the unaudited interim consolidated statements of income, unaudited interim consolidated statements of comprehensive income, and within equity in the unaudited interim consolidated statements of condition, separately from the Parent Bank s shareholders' equity. Any losses applicable to the non-controlling interests are allocated against the interests of the non-controlling interest even if this results in the non-controlling interest having a deficit balance. Changes in a parent s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby any difference between the amounts by which the non-controlling interests are adjusted and the fair value of the consideration paid or received shall be recognized directly in equity and attributed to the owners of the Parent Bank. Changes in Accounting Policies and Disclosures The accounting policies adopted in preparation of unaudited interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group s annual consolidated financial statements for the year ended December 31, 2017, except for the adoption of new standards and amendments effective as of January 1, The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The Group applied, PFRS 9 (2014), Financial Instruments, and PFRS 15, Revenue from Contracts with Customers, effective January 1, As required by PAS 34, the nature and effect of these changes are disclosed below. Several other amendments and interpretations apply for the first time in 2018, but do not have an impact on the unaudited interim condensed consolidated financial statements of the Group. PFRS 9 Financial Instruments PFRS 9 Financial Instruments (2014 version) replaces PAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after January 1, 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting. This new standard on financial instruments replaced PAS 39 and PFRS 9 (2009, 2010 and 2013 versions), herein referred to as PFRS 9. In addition to the principal classification categories for financial assets and financial liabilities, which were early adopted by the Group on January 1, 2014, PFRS 9 (2014) includes the following major provisions: limited amendments to the classification and measurement requirements for financial assets introducing a fair value through other comprehensive income (FVOCI) measurement for eligible debt securities; and an expected loss model in determining impairment of all financial assets that are not measured at fair value through profit or loss (FVTPL), which generally depends on whether there has been a significant increase in credit risk since initial recognition of a financial asset. The FVOCI category for debt instruments, both for government securities and corporate bonds are now available effective January 1, 2018, in addition to the financial assets at amortized cost and FVTPL categories of the previously adopted PFRS 9 (2010 version). Financial assets classified under the FVOCI category are both held in order to collect contractual cash flows and to realize fair value gains by selling the instruments. Changes in the fair value of FVOCI securities are recognized in other comprehensive income up until derecognition, when the fair value change will be recognized in profit or loss. As a result of this amendment to the standard, the Group adopted a business model where its objective is both to collect contractual cash flow and selling financial assets. On January 1, 2018, the Group reclassified securities under the hold-to-collect (HTC) business model to FVOCI category with a total fair value of P=19.4 billion. The difference of the amortized cost balance and fair UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 7

16 value of the reclassified securities amounting to P=1.4 billion, was taken to Net unrealized gains (losses) on investment securities as of January 1, The adoption of PFRS 9 has fundamentally changed the Group s accounting for impairment losses by replacing PAS 39 s incurred loss approach with a forward-looking Expected Credit Losses (ECL) approach. Thus, it is no longer required for a credit event to have occurred before credit losses are recognized. Instead, an entity calculates the ECL for all assets classified under Amortized Cost and FVOCI, which include, but are not limited to, corporate loans, consumer finance loans, and bonds. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive. The shortfall is then discounted at the asset s original effective interest rate. The ECL calculation is composed of three major components - probability of default (PD), loss given default (LGD), and exposure at default (EAD). PD captures the obligor or borrower risk. LGD reflects, in part, how collateral is being managed. EAD is largely the on-balance sheet amount and off-balance sheet amount (for committed lines) in the event of a default. The off-balance sheet amount to be included shall be computed through the credit conversion factor (CCF). The significant increase/improvement in credit risk (SICR) model is used to classify accounts into PFRS 9 ECL s three stages. A set of defined empirical-based rules and expert judgment that discriminate good and bad credit make up the SICR. The 12-month ECL is computed for Stage 1 accounts, while the lifetime ECL is calculated for Stage 2 and Stage 3 accounts. Accounts with evident impairment are classified under Stage 3 and shall follow the Bank s impairment methodology. On the other hand, Stage 1 and Stage 2 accounts shall use future values derived from the term structures of the PD, LGD, and CCF. These future values also take into consideration prospective business environment conditions through the inclusion of macroeconomic forecasts. Altogether, the resulting value is called the baseline ECL. In order to compute for the probabilityweighted ECL, calibration factors and scenario weights are embedded into the baseline model. Finally, risk management policies complement the application of probability-weighted ECL models. Together, ECL models and their corresponding policies, shall enhance the assessment and monitoring of accounts. At January 1, 2018, the Group determined the amount of provisions required under the ECL model, in accordance with its existing governance framework relevant to the proper implementation of PFRS 9. The Group continues to refine its processes to enhance its implementation of PFRS 9, subject to any further guidance to be provided by BSP. The Group applied modified retrospective application in adopting PFRS 9, which allowed the Group not to restate comparative periods for the effect of the adoption. The effect of adopting PFRS 9 is, as follows: As at January 1, 2018 Increase (Decrease) Trading and investment securities At amortized cost (P=18,084.42) At fair value through other comprehensive income 19, Loans and other receivables net 1, Deferred tax asset, included in Other Assets" (447.49) Total assets P=2, Surplus free P=1, Net unrealized fair value gains on investment securities 1, Non-controlling interests (1.90) Total Equity P=2, UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 8

17 PFRS 9 does not change the general principles of how an entity accounts for effective hedges. Applying the hedging requirements of PFRS 9 will not have a significant impact on the Group s consolidated financial statements. PFRS 15 Revenue from Contracts with Customers PFRS 15 supersedes PAS 11 Construction Contracts, PAS 18 Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. The five-step model is as follows: 1. Identify the contract(s) with a customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation. Under PFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with the customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The Group adopted PFRS 15, Revenue from Contracts with Customers, effective January 1, The Group operates various rewards program for its credit card business whereby reward entitlement varies according to the type of card and available points earned by the credit card holder. Prior to adoption of PFRS 15, the rewards program offered by the Group resulted in recognition of miscellaneous expense and accrued expense in relation to estimated points issued but not yet redeemed or expired. The new standard requires the Group to allocate a portion of the service fee (interchange fee) to the loyalty points awarded to the credit card holders, as the loyalty points give rise to a separate performance obligation. The allocated service fee for the loyalty points is recognized as revenue upon fulfillment of its obligation, i.e. actual redemption of the loyalty points. The Group s recognition of this standard resulted in reduction of service income and miscellaneous expense, pertaining to loyalty points earned by the credit card holders that were previously charged as an expense, net of redemption. Upon adoption of PFRS 15, these loyalty points earned shall be accounted for as a reduction in revenue. The net effect of these adjustments is nil in the profit and loss. UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 9

18 The Group adopted PFRS 15 using the full retrospective method of adoption. The effect of adopting PFRS 15 is, as follows: Impact on the unaudited interim consolidated statement of income for the nine months ended September 30, 2017: Increase (Decrease) Service charges, fees and commission under Other income P=6, Miscellaneous expenses 6, There is no impact on the statements of condition, statements of comprehensive income and statements of cash flows. PAS 40 (Amendment), Investment Property Reclassification To and From Investment Property. The amendment states that an entity shall transfer a property to, or from, investment property when, and only when, there is evidence of a change in use. A change of use occurs if property meets, or ceases to meet, the definition of investment property. A change in management s intentions for use of a property by itself does not constitute evidence of a change in use. The amendment provided a non-exhaustive list of examples constituting change in use. The adoption of this amendment had no significant impact on the Group s financial statements. 3. Significant Accounting Judgments and Estimates The preparation of the financial statements in accordance with PFRS requires the Group to make judgments and estimates that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and contingent liabilities, if any. Future events may occur which will cause the judgments and assumptions used in arriving at the estimates to change. The effects of any change in judgments and estimates are reflected in the financial statements as they become reasonably determinable. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Judgments, key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next reporting period are consistent with those applied in the most recent annual financial statements, except for those that relate to the adoption of PFRS 9 (2014 version). Selected critical judgments and estimates applied in the preparation of the unaudited interim condensed consolidated financial statements as discussed below: Judgments Evaluation of business model in managing financial instruments The Group manages its financial assets based on business models that maintain adequate level of financial assets to match its expected cash flows, largely arising from customers withdrawals and continuing loan disbursements to borrowers, while maintaining a strategic portfolio of financial assets for investment and trading activities consistent with its risk appetite. The Group developed business models which reflect how it manages its portfolio of financial instruments. The Group s business models need not be assessed at entity level or as a whole but UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 10

19 applied at the level of a portfolio of financial instruments (i.e., group of financial instruments that are managed together by the Group) and not on an instrument-by-instrument basis (i.e., not based on intention or specific characteristics of individual financial instrument). In determining the classification of a financial instrument under PFRS 9, the Group evaluates in which business model a financial instrument or a portfolio of financial instruments belong to taking into consideration the objectives of each business model established by the Group. With the introduction of the new FVOCI classification in the final version of PFRS 9, effective on January 1, 2018, the Parent Bank made certain changes in its investment policy, primarily in relation to management s assessment of liquidity and the risks surrounding it. The change in investment policy triggers realignment of its strategy for managing its HTC portfolio and introduction of a new portfolio with the objective of maximizing risk-adjusted returns, minimizing cost of liquidity and providing alternative outlet with better returns on liquid assets. Accordingly, in October 2017 and December 2017, the Bank s BOD approved the change in the Parent Bank s business model. As such, the Bank s business model includes HTC, FVOCI and FVTPL classification, where certain HTC securities were reclassified to the Financial assets at FVOCI category at the beginning of first quarter In addition, PFRS 9 emphasizes that if more than an infrequent and more than insignificant sale is made out of a portfolio of financial assets carried at amortized cost, an entity should assess whether and how such sales are consistent with the objective of collecting contractual cash flows. In making this judgment, the Group considers certain circumstances documented in its business model manual to assess that an increase in the frequency or value of sales of financial instruments in a particular period is not necessarily inconsistent with a held-to-collect business model if the Group can explain the reasons for those sales and why those sales do not reflect a change in the Group s objective for the business model. In 2018, the Bank participated in bond exchanges resulting in disposal of certain financial assets carried at amortized cost. The Parent Bank has assessed that such sales are not more than infrequent and are necessary in order to ensure that the outstanding securities remain of an acceptable liquid quality. The disposals are considered not inconsistent with the objective of hold to collect business model. The remaining securities in the affected portfolios continue to be measured at amortized cost as of September 30, UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 11

20 Testing the cash flow characteristics of financial assets and continuing evaluation of the business model In determining the classification of financial assets under PFRS 9, the Group assesses whether the contractual terms of the financial assets give rise on specified dates to cash flows that are Solely Payment of Principal and Interest (SPPI) on the principal outstanding, with interest representing time value of money and credit risk associated with the principal amount outstanding. The assessment as to whether the cash flows meet the test is made in the currency in which the financial asset is denominated. Any other contractual term that changes the timing or amount of cash flows (unless it is a variable interest rate that represents time value of money and credit risk) does not meet the amortized cost criteria. In cases where the relationship between the passage of time and the interest rate of the financial instrument may be imperfect, known as modified time value of money, the Group assesses the modified time value of money feature to determine whether the financial instrument still meets the SPPI criterion. The objective of the assessment is to determine how different the undiscounted contractual cash flows could be from the undiscounted cash flows that would arise if the time value of money element was not modified (the benchmark cash flows). If the resulting difference is significant, the SPPI criterion is not met. In view of this, the Group considers the effect of the modified time value of money element in each reporting period and cumulatively over the life of the financial instrument. Estimates Estimation of Impairment Losses on Loans and Other Receivables, Financial Assets at Amortized Cost and Financial Assets at Fair Value through other Comprehensive Income The measurement of impairment losses both under PFRS 9 and PAS 39 across all categories of financial assets requires judgment, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Parent Bank s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Significant factors affecting the estimates on the ECL model include: The Parent Bank s internal grading model, which assigns PDs to individual grades The Parent Bank s criteria for assessing if there has been a significant increase in credit risk and so allowances for financial assets should be measured on a Life Time Expected Credit Loss (LTECL) basis and the qualitative assessment The segmentation of financial assets when their ECL is assessed on a collective basis Development of ECL models, including the various formulas and the choice of inputs Determination of associations between macroeconomic scenarios and, economic inputs, such as unemployment levels and collateral values, and the effect on PDs, EADs and LGDs Definition of forward-looking macroeconomic scenario variables 4. Financial Risk Management Objectives and Policies Risks are inherent in the business activities of the Group. Among its identified risks are credit risk, liquidity risk, market risk, interest rate risk, foreign exchange risk, operational risk, legal risk, and regulatory risk. These are managed through a risk management framework and governance structure that provides comprehensive controls and management of major risks on an ongoing basis. Risk management is the process by which the Group identifies its key risks, obtains consistent and understandable risk measures, decides which risks to take on or reduce and how this will be done, and establishes procedures for monitoring the resultant risk positions. The objective of risk management is to ensure that the Group conducts its business within the risk levels set by the BOD while business units pursue their objective of maximizing returns. UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 12

21 Compared with December 31, 2017, there were no significant changes in the risk management policies and exposures of the Group during the nine months ended September 30, Risk Management Strategies The Group maintains a prudent risk management strategy to ensure its soundness and profitability. Business units are held accountable for all the risks and related returns, and ensure that decisions are consistent with business objectives and risk tolerance. Strategies, policies and limits are reviewed regularly and updated to ensure that risks are well-diversified and risk mitigation measures are undertaken when necessary. A system for managing and monitoring risks is in place so that all relevant issues are identified at an early stage and appropriate actions are taken. The risk policies, guidelines and processes are designed to ensure that risks are continuously identified, analysed, measured, monitored and managed. Risk reporting is done on a regular basis, either monthly or quarterly. Although the BOD is primarily responsible for the overall risk management of the Group s activities, the responsibility rest at all levels of the organization. The risk appetite is defined and communicated through an enterprise-wide risk policy framework. Risk Management Structure The BOD of the Parent Bank exercises oversight of the Parent Bank s risk management process as a whole and through its various committees. For the purpose of day-to-day management of risks, the Parent Bank has established independent Risk Management Units (RMUs) that objectively review and ensure compliance to the risk parameters set by the BOD. They are responsible for the monitoring and reporting of risks to senior management and the various committees of the Parent Bank. On the other hand, the risk management processes of its subsidiaries are handled separately by their respective BODs. The Parent Bank s BOD is primarily responsible for setting the risk appetite, approving risk parameters, credit policies, and investment guidelines, as well as establishing the overall risk taking capacity of the Parent Bank. To fulfill its responsibilities in risk management, the BOD has established the following committees, whose functions are described below. (a) The Executive Committee (EXCOM), composed of seven members of the BOD, exercises certain functions as delegated by the BOD including, among others, the approval of credit proposals, asset recovery and real and other properties acquired (ROPA) sales within its delegated limits. (b) The Risk Management Committee (RMC), composed of seven members of the BOD, is responsible for the development and oversight of the Parent Bank s risk management program. It assists the BOD in the management of identified risks and reviewing risk policies, strategies and procedures. It receives and reviews management reports on risk exposures and provides guidance when needed. The RMC also provides oversight, direction, and guidance to the other risk committees, specifically, the Market Risk Committee (MRC) and the Operations Risk Management Committee (ORMC). (c) The MRC, composed of nine members of the BOD, sets policies and standards for market risk identification, analysis and management. The MRC also monitors the sensitivity of the Group s financial condition to the effects of market volatility and adverse price changes on the Group s portfolio of financial instrument and oversee the Group s liquidity position through the Asset and Liability Committee (ALCO). (d) The ORMC reviews various operations risk policies and practices. The ORMC is composed of seven members of the BOD, four of these are independent directors, including the Chairman. UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 13

22 (e) The Audit Committee is a committee of the BOD that is composed of seven members, most of whom are with accounting, auditing, or related financial management expertise or experience. The skills, qualifications, and experience of the committee members are appropriate for them to perform their duties as laid down by the BOD. Four of these seven members are independent directors, including the Chairman. The Audit Committee serves as principal agent of the BOD in ensuring independence of the Bank s external auditors and the internal audit function, the integrity of management, and the adequacy of disclosures and reporting to stockholders. It also oversees the Bank s financial reporting process on behalf of the BOD. It assists the BOD in fulfilling its fiduciary responsibilities as to accounting policies, reporting practices and the sufficiency of auditing relative thereto, and regulatory compliance. Credit Risk Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligation to the Group. The risk may arise from lending, trade finance, treasury, investments, derivatives and other activities undertaken by the Group. Credit risk is managed through strategies, policies and limits that are approved by the respective BOD of the various companies within the Group. With respect to the Parent Bank, it has a well-structured and standardized credit approval process and credit scoring system for each of its business and/or product segments. The RMU undertakes several functions with respect to credit risk management. The RMU independently performs credit risk assessment, evaluation and review for its retail, commercial and corporate financial products to ensure consistency in the Parent Bank s risk assessment process. It also ensures that the Parent Bank s credit policies and procedures are adequate and are constantly updated to meet the changing demands or risk profiles of the business units. Liquidity Risk Liquidity risk is the risk that there are insufficient funds available to adequately meet the credit demands of the Group s customer and repay deposits on maturity. The ALCO and the Treasurer of the Group ensure that sufficient liquid assets are available to meet short-term funding and regulatory requirements. Liquidity is monitored by the Group on a daily basis and under stressed situations. A contingency plan is formulated to set out the amount and the sources of funds (such as unused credit facilities) that are available to the Group and the circumstances under which the Group may use such funds. The Group also manages its liquidity risks through the use of a Maximum Cumulative Outflow (MCO) limit which regulates the outflow of cash on a cumulative basis and on a tenor basis. To maintain sufficient liquidity in foreign currencies, the Group has also set an MCO limit for certain designated foreign currencies. The MCO limits are endorsed by the MRC and approved by the BOD. Market Risk Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rate, foreign exchange rates and equity prices. The Group classifies exposures to market risk into either trading book or banking book. The market risk for the trading portfolio is managed and monitored based on a Value-at-Risk (VaR) methodology. Meanwhile, the market risk for the non-trading positions are managed and monitored using other sensitivity analyses. The Group applies a VaR methodology to assess the market risk of positions held and to estimate the potential economic loss based upon a number of parameters and assumptions for various changes in market conditions. VaR is a method used in measuring financial risk by estimating the potential negative change in the market value of a portfolio at a given confidence level and over a specified time horizon. UNION BANK OF THE PHILIPPINES: 2018 SEC Form 17-Q 14