Free Essay

Public Securities Corporation

In: Business and Management

Submitted By peterandrew
Words 23871
Pages 96

Public Securities Corporation (PSC), a wholly-owned stock brokerage firm of the AFP Retirement and Separation Benefits System (AFP RSBS) envisions itself to be one of the top stock brokerage firms in the Philippines. The company was acquired by the AFP RSBS from a group of private individuals in 1994 with the main objective of taking advantage of the favorable prospects in the stock market and at the same time, to generate income for the mother company.

Value turnover at the Philippine Stock Exchange slowed by 30% and lost P383 billion from P1.2 trillion in 1997 to P817 billion in 1998 due to the Asian Financial crisis. The decline in value turnover resulted to less commission income generated from broking services that caused both local and foreign brokers to leave the Philippine equities market and applied for temporary suspension, while others opted to cease operations totally. Political instability also discouraged investors in Philippine equities during the Estrada Administration. Illegal trading activities, such as frontrunning, insider trading and “kiting” resulted to the loss of investors’ confidence towards the regulatory bodies, the Securities and Exchange Commission and the Philippine Stock Exchange.

This paper presents three frameworks to analyze the effectiveness of the company’s current strategy. Among the frameworks employed was PEST Analysis or Political, Economic, Social and Technological Analysis which was used to highlight the impact of economic, political, social and technological factors on the industry. In addition, the driving forces which affect the competitive landscape of the stock brokerage industry were also scrutinized, to wit, regulatory influences and government policy changes, as well as the subsequent departure of major players in the industry. Finally, the Key Success Factors (KSFs) were also used as framework to best explain the ability of certain brokerage firms to remain successful despite unfavorable market conditions. Among the KSFs identified were strong client base, managerial capability, superior workforce talent and access to financial capital.

Current strategic approaches of the company include strengthening of current revenue streams, cost and expense reduction, raising new capital, strengthening its internal controls and risk management functions and empowering its personnel. The author proposed to continue existing strategies while adhering and complying strictly to Corporate Governance. The strict compliance to the rules in corporate governance will guide the company towards the attainment of its vision, mission and strategic objectives.

Among the significant items in corporate governance that the company should focus on are risk management, proper identification of board functions, organizational planning and implementation of budgets and targets.

It is also deemed that the company considers reformulating its vision and mission statements. Public Securities’ original vision statement is “To be the number one stockbrokerage firm in the Philippines.” The reformulated vision statement states, “To be among the top stock brokerage firms in terms of value turnover and market share in the next 25 years, with the widest network of corporate and retail clients all over the country and overseas that ensures the provision of excellent service in areas of research, backroom operations and investment advice to all clients performed by empowered individuals.”

| | | |
| | | |
|1.0 |Executive Summary |1-2 |
|2.0 |Table of Contents |3-4 |
|3.0 |Industry Analysis |5 |
| |3.1 Industry Definition |5 |
| |3.2 Industry Value Turnover |6 |
| |3.3 Major Industry Players |8 |
| |3.4 Market Share of PSE Member Brokers (1995 – 2003) |11 |
| |3.5 Number of Stockbrokerage Firms in the Industry |12 |
| |3.6 Ease of Entry and Exit |15 |
| |3.7 Technology |16 |
| |3.8 Products and Services |17 |
| |3.9 Clientele and Customer Base |17 |
| |3.10 Financial Performance of Companies within the Industry |18 |
| |3.11 The Five Forces Model |21 |
| | 3.11.1 Rivalry Among Competing Brokerage Houses |21 |
| | 3.11.2 Competitive Pressures from Substitute Financial Products |23 |
| | 3.11.3 Competitive Pressures from Supplier Bargaining Power |23 |
| |Competitive Pressures from Client-Broker Collaboration | |
| |And Bargaining |24 |
| | 3.11.5 Potential Entry of New Stockbrokers |25 |
| |3.12 Conclusion of Industry Analysis |26 |
|4.0 |The Company |28 |
| |4.1 Nature of Business |28 |
| | 4.1.1 Organization |29 |
| | 4.1.2 Corporate Structure |31 |
| |4.2 Analysis of the Company’s Value Chain |31 |
| | 4.2.1 Primary Activities |31 |
| | 4.2.2 Support Activities |34 |
| |4.3 SWOT Analysis |35 |
| |4.4 TOWS Matrix |Annex A |
| |4.5 Financial Analysis |37 |
| | 4.5.1 Analysis of the Company’s Balance Sheet |37 |
| | 4.5.2 Analysis of the Company’s Income Statement |40 |
| | 4.5.3 Cashflow Analysis (1999 – 2003) |41 |
|5.0 |Public Securities Corporation Strategy |42 |
| |5.1 Vision and Mission |42 |
| |5.2 Objectives |43 |
| | 5.2.1 Strategic Objectives |43 |
| | 5.2.2 Financial Objectives |43 |
| |5.3 Generic Strategies |44 |
| |5.4 Public Securities Corp (Present Strategies) |45 |
| | 5.4.1 General Strategies |45 |

| | 5.4.2 Operating Strategies |45 |
| | 5.4.3 Implementing Plans and Programs |47 |
| |5.5 Proposed Strategies |48 |
| | 5.5.1 Reformulation of Vision and Mission Statement |50 |
| | 5.5.2 Strategic Objectives |50 |
| |Corporate Governance |53 |
|6.0 |Financial Projections |54 |
| |6.1 Political, Economic, Social and Technological (PEST) Analysis |54 |
| |6.2 Assumptions for the Income Statement Projections (2004 –2008) |57 |
| |6.3 Assumptions for the Balance Sheet Projections (2004 – 2008) |59 |
| | | |
| |Figure 1 Annual Value Turnover of the Philippine Stock Market | |
| |Industry |7 |
| |Figure 2 Public Securities Turnover v.s. Industry |32 |
| |Figure 3 Significant Events in the RP Stock Market |55 |
| | | |
| |Table 1 Cumulative Market Share Distribution by Category |11 |
| |Table 2 Number of Active Brokers by Category |12 |
| |Table 3 Foreign and Local Brokers Cumulative Market Share | |
| |Distribution |13 |
| |Table 4 Industry Total and Average Net Profit/(Loss) |18 |
| |Table 5 Current Assets Percentage Components |37 |
| |Table 6 Receivables Average Collection Period |38 |
| |Table 7 Current Liabilities Percentage Component |39 |
| |Table 8 PEST Analysis Summary |57 |
| | | |
| |ANNEXES | |



The stockbrokerage industry is a component of the total financial services industry in the country. The Philippine Financial Service Industry is composed of banking institutions and non-bank financial intermediaries, including commercial banks, specialized government banks, thrift and rural banks, offshore banking units, savings and loan associations, investment and brokerage houses, and finance companies. The Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission maintain regulatory and supervisory control. In the case of the local stockbrokerage industry, it is also regulated by the Philippine Stock Exchange (PSE). The Philippines had a relatively sophisticated financial service industry, however, the level of financial intermediation was low relative to the size of the economy.

The Philippine Stock Exchange, Inc. (PSE or Exchange) is a private organization that provides and ensures a fair, efficient, transparent and orderly market for the buying and selling of securities. PSE traces its roots from the country's two former bourses: the Manila Stock Exchange (MSE) and the Makati Stock Exchange (MkSE). Founded in March 1927, the MSE was the first stock exchange in the Philippines and one of the oldest in the Far East. Originally housed in downtown Manila, the MSE moved to Pasig City in 1992. The MkSE, on the other hand, was established in May 1963 and became the second bourse to operate in the country. It was based in Makati City, a budding district during those days.[1]

While trading the same listed issues, the two bourses remained as separate entities for almost thirty years. December 23, 1992 marked a milestone for the Philippine capital market when the MSE and MkSE joined forces and metamorphosed into what PSE is known today. Despite being the sole exchange in the Philippines, PSE still maintains two trading floors -- one in Makati City and another one in its head office in Pasig City. In June 1998, the Securities and Exchange Commission (SEC) granted PSE a Self-Regulatory Organization (SRO) status, allowing it to impose rules as well as implement penalties on erring trading participants and listed companies.

PSE regulates trading activities through the Floor Trading and Arbitration Committee which consists of PSE members. The committee oversees the proper conduct of trading activities in the Exchange from electronic trading to clearing and settlement activities. It reviews and recommends appropriate trading and settlement rules as well as regulate trading personnel.

Trading activities are being monitored through the surveillance terminal to ascertain that there are no illegal postings and dealings made in any of the issues listed in the Exchange. Through the Compliance and Surveillance Group, compliance of members to set rules and regulations are monitored.

A year after the enactment of the Securities Regulation Code in the year 2000 calling for the Exchange's conversion into a stock corporation, PSE was transformed from a non-stock, member-governed organization into a shareholder-based, revenue-earning company. Along with this rebirth comes the separation of the Exchange's ownership and trading rights, opening the doors for new market players. This as well as the subsequent listing of its own shares and ventures into new products such as debt securities are set to establish PSE as a more competitive organization with stable revenues and cutting-edge products and services.[2]

Even with two trading floors, PSE achieves a one-price, one-market Exchange through the MakTrade System. This is a single-order-book system that tallies all orders into one computer and ensures that these orders match with the best bid/best offer regardless of which floor the orders were placed, MakTrade likewise allows PSE to facilitate the trading of securities in a broker-to-broker market through automatic order and trade routing and confirmation. It also keeps an eye on any irregularity in the transactions with its market regulation and surveillance databases.


Value is the representation in financial terms of the total amount of shares traded within a given period at the Philippine Stock Exchange. The value turnover is the aggregate value of all buying and selling transactions executed at the PSE, while the Phisix is designed to measure the general market condition and reveals the overall situation and trend of the country’s stock market. The value turnover indicates how much money was turned over from trading stocks, to wit, special block sales, main board crosses, trade arbitrage and foreign buying and selling transactions.

From 1995 to 2003, the average market value turnover was posted at P809.4 billion. High value turnovers were recorded between 1996 to 1999 with the all time high of P1.6 trillion in 1999. Much of the trade volumes in 1999 were attributed to the block sales made on Philippine Commercial International Bank (PCIB) and Equitable Banking Corp. (EBC) as the Go Family clinched a deal by acquiring the PCIB shares owned by the Lopez and Gokongwei families. EBC bought 72% stake in PCIB through the help of GSIS and SSS. Moreover, on the same year huge block sales of San Miguel Corporation, Bank of the Philippine Islands, Far East Bank and Trust Co. and Manila Electric Co. shares changed hands in the local bourse.

Figure 1: Annual Value Turnover of the Philippine Stock Market Industry

Source: PSE Brokers’ Ranking Reports

The dramatic rise in trading volume from P755 billion in 1994 to P1.3 trillion in 1995 (up 77%) was accounted for by the issuances of the following Initial Public Offerings, namely, Benpres Corporation, Jollibee Corp, Petron Corp, Fil-Estate Land, Inc., Philippine Savings Bank, SM Prime Holdings, Inc. and many other big to medium ticket offerings. The years 1994 and 1995 saw the highest number of IPOs listed in the Exchange. The 21 IPOs in 1994 yielded a total gross proceeds of P37.4B while the 16 IPOs in 1995 was estimated to have gross proceeds of over P31.0B. However, towards the end of 1997 at the wake of the Asian Financial Crisis, trading volume decreased substantially by 30% from P1.2 trillion in 1997 to P817 billion in 1998. As earlier stated, trading volumes recovered in 1999 due to huge block sale transactions related to the buy-out, merger and acquisitions of Philippine banks.

From 2001 to 2003, the industry experienced huge declines in total value turnover with the 2003 trading volume being the lowest at only P290.7 billion. Daily trade volume plummeted to around P200 million to P300 million a day from the highs of P3.0 billion a day in 1993 and 1994. This was hardly surprising as the 9-11 took place in 2001 coupled with the BW bloodbath earlier on the same year. The height of the US-Iraq war transpired a year later in October 2002 and the SARS outbreak in early 2003 undermined the performance of many Asian economies. Further, in the local environment, the burgeoning fiscal deficit continued to hound investors confidence and most trading participants decided to stay on the sidelines given the uncertainties in the market. The year 2003 was also witness to the Oakwood mutiny where 300 soldiers set off a potentially bloody confrontation at the heart of the country’s financial business district in Makati. Hence, towards the end of 2nd Qtr 2003, the PSE or the Philippine Stock Exchange was Asia Pacific’s worst Performer.


As of June 2003, there are 151 local and 33 foreign Trading Participants (also called as Members of the Philippine Stock Exchange). These are individuals and corporate members of the exchange who are granted trading immediately prior to demutualization.

The report for the full year 2003 showed that more local brokerage firms were still in the PSE's 20 most active list, although foreign brokers still had a large share of the trading pie. Thirteen of the top 20 are local brokers while the rest were foreign-owned.

As of December 2003, the top five stockbrokers in terms of total value turnover were UBS Warburg, Deutsche Regis Partners, Inc., ATR-Kim Eng Securities, Inc., Philippine Equity Partners Inc. (formerly Merrill Lynch), and ING Securities (Phils), Inc. Sixth, was CLSA Philippines Inc., followed by BPI Securities, Wealth Securities, ABN Amro Asia Securities and JP Morgan Securities.

Completing the top 20 list for CY 2003 were: SB Equities; Asiasec Equities; AB Capital Securities; Westlink Global Equities; DBP-Daiwa; Abacus Securities Corporation; Mandarin Securities; Lucky Securities, Papa Securities Corporation and Angping & Associates Securities Inc.[3]

On the average since 1995 until the present, the floor is largely dominated by three foreign brokers, to wit, UBS Warburg, ING Securities and Deutsche Regis (formerly Morgan Grenfell). Overall, these three companies account for 22.48% to 4.47% of total value turnover for CY 2003. Based on business volumes alone, these three brokers were three to five times bigger than other members of the Philippine Stock Exchange (PSC).

Altogether, the top five ranking brokers accounted for 59.24% or P172 billion of the entire industry’s total value turnover of P291 billion in 2003, the remaining P119 billion was attributed to the other 179 member firms of the Philippine Stock Exchange.

ING Barings had the unprecedented lead among all trading participants for most of the years between 1995 to 2003. The brokerage firm took the lead five times and its weakest year was in 2000 when it ranked fifth with a value turnover of only P17 billion for the entire year. Its cumulative average market share was posted at 7.63% for the entire period or an annual average of P585 billion value turnover.

Another stockbrokerage firm that stood out in 2003 is ATR Kim Eng Securities, Inc., which continues to gain market share both on primary and secondary broking business. In the first nine months of 2003, the firm beefed up its trading volume to P18.2 billion through its involvement in nine transactions with a total value of P22.8 billion or US$41.5 million. It is also involved in another six transactions with a total value of P5.6 billion.

ATR Kim Eng strengthened further its shareholder base by securing the support of some of the country ’s leading market movers and leaders, such as John Gokongwei, Jr; Andres Soriano III, former San Miguel Corp chairman; George Drysdale, Jr, former Philippine-American Chamber of Commerce president and Loida Lewis of TLC Beatrice Foods and one of the most successful Filipino entrepreneurs in the US.

In 2003 alone, ATR netted a total value turnover of P 24.3 billion or 8.35% of the industry. Hence, on a cumulative basis, it was only in the years 2002 and 2003 that ATR made a headway in the Broker’s Ranking and ended up the third best in volume trades for two consecutive years.

Philippine Equity Partners (PEP) bagged the 4th spot and posted a total value turnover of P14.4 billion as of December 2003. PEP is a leading stockbrokerage house in the Philippines which was established only in 2001. The people behind PEP are the officers and staff of the former Merrill Lynch (Phils) Inc.. Merrill Lynch restructured its operations in 2001 by consolidating the asset management activities for the Asia Pacific region into its London Office, and it sold its equity brokerage operation in the Philippines to a local management team, which undoubtedly is PEP. Naturally, PEP captured all Merrill Lynch’s existing businesses and clientele in the region and it has been consistent in the Top Five List of the PSE since its incorporation in 2001.

While the number of houses competing in the stock market industry dwindled by an average of 8% in the last four years (or an average of almost 15 firms closing shop annually since CY2000 up to the third quarter of CY2004), Deutsche thrived and remained among the top in the industry. Since 2001, Deutsche Regis held onto the 2nd spot in terms of market turnover after barely making it to the top ten four years ago. The firm even edged out traditional heavyweights, ING Securities (Phils), Inc. and JP Morgan Securities in the race. In fact, the firm’s market share steadily climbed from a mere 2.4% in CY2000 to 19% as of December 2003. In the first 10 months of 2004, Deutsche’s market share has already grown to 22.06% and the firm would be capable of maintaining the lead towards the end of the year.


As competition among PSE member brokers intensified between 1997 to 2001, given the difficult business climate and declining business volumes, the top 10 ranking brokers in the industry continued to fill in the numbers for the relatively small members of the local bourse.

In 2003 the top ten ranking brokers had a combined market share of P214 billion or 74% of the total pie compared to only 62% in 2002 and 52% in 2001. It is evident that the bigger brokers are increasingly eating the market share of the smaller brokers.

The sharebroking business in the Philippines is in the consolidation and expansion mode. The big are getting bigger and the small are beginning to align with the big to adapt to the demands of the retail market. Three broad trends are visible. One, big brokerages are growing and acquiring scale by geographical expansion. Two, they are positioning themselves as retail financial services brands instead of merely banking on old client relationships to deliver business. And three, smaller players, whether former sub-brokers or distributors of other financial products, are opting to operate under the umbrella of big brands, through franchising and commission-sharing deals.

Majority of the PSE member brokers were small, family-owned firms. As shown in Table 1 below, there is a lopsided concentration of business volumes among the large and highly capitalized brokers. Based on their relative value turnovers, stockbrokers are categorized in three groups, namely, small, medium and large.

Of the 135 active members of the exchange in 2003, 89.6% or 121 brokers gained a market share of less than 1% or approximately equal to an average annual value turnover of only P636 million or less. Eleven brokers or 8.2% obtained a market share of between 1% to 5% each or P2.9 billion to 14.5 billion. Therefore, only 2.2%, or 3 stockbrokers achieved a market share of more than 5% or P24.0 billion to P65 billion value turnover.

Large volume brokers increasingly captured a huge share of the market, from a cumulative market share of 13% in 1995 to 49.83% in 2003. While medium-sized brokers’ share of the market declined from 52% in 1995 to 29% in 2003 the same was true for small-sized brokers which suffered a decline in their value turnover from a cumulative market share of 35% in 1995 to only 21.17% in 2003. Table 2 illustrates the number of brokers based on each category. The trend seems to show that the market share of small to medium-sized brokers are being slowly eaten up by the big-sized brokers.

Compared to large-sized brokers whose market shares have been increasing at a significant rate, Public Securities Corporation’s share of the market had remained at below 1% of the total value turnover of the industry. The company’s market share hardly moved for the past five years with the brokerage house catering mostly to retail investors and a few local institutional investors who are risk averse and who normally shift to fixed income instruments during the financial crisis.


The PSE membership seat is limited just to 184 members. Local houses comprised 80% of the PSE member brokers while 20% are foreign houses as of December 2003. Of the total member brokers, 27% were inactive or has filed temporary suspension of operations but still retain the trading rights and board seats.

Since 1998, 43 brokers have already filed for voluntary suspension, 23 have decided to cease operations while five brokers folded up due to violations.

As of 2003, there were 184 brokers, of which 134 were active. There were 12 foreign brokers and 122 local brokers (see Table 3). The numbers show that the stockbrokerage industry has been lucrative to foreign investors in the years 1995 to 1998 given the huge value turnover and trading activity during those years. The highest number of foreign brokerage firms recorded was in CY 1998 when the number of foreign houses at the PSE increased by 46.15% from 26 participants in 1995 to 38 participants in 1998.

The PSE had developed as a big money maker under the Ramos administration, with the Phisix reaching over 3400 points, the local bourse attracted a lot of investors, many of them foreigners. In fact, foreign brokerage houses have dominated the field in recent times, but the aftermath of the 1997 Asian financial crisis dulled the market. Today, while 7 of the top 20 brokers in the country are foreign brokerage houses, higher overhead costs of these foreign brokers make them more vulnerable to the drought in the market.

Between 1999 to 2000, ten foreign brokerage houses had decided to close down or trim their Philippine operations. These were Topwin Securities, UPCC Securities Corp., FEB Stock Brokers Inc., BNP Paribas, Securities 2000, UOB Securities, Nomura Securities, Orion Squire Capital Inc., OCBC Securities and Sun Hung Kai Securities. In August 2001, two top foreign brokerage houses left the country. Foreign brokerage firms Merrill Lynch Securities (Philippines) Inc. and Citicorp Securities International (RP) Inc. left the Philippine Stock Exchange (PSE), which has been described as the worst performing bourse in Asia at that time.

There were three critical issues that have led to the dismal performance of the local bourse for the past five years now. First is obviously the poor market conditions emanating from the slowdown in the global economy and the political uncertainties in the country. Even SEC Chair Lilia Bautista at that time admitted that the local bourse has been suffering from a lack of good securities to invest in. The second reason is the decision of the government to stop investing in the market, given the burgeoning fiscal deficit. The third reason is the new Securities Regulations Code (SRC) prohibiting brokerage houses from acting as dealers.

While over 13 foreign brokers have already exited the Philippine Market, there was no significant decline in the number of local participants which still stood at 122 as of December 2003.

It is also an accepted fact that foreign houses captured almost 70% to 80% of foreign trades. Foreign houses tended to keep their team intact, providing up-to-date research and financial advisory while building and maintaining client relationships. Moreover, their presence is far reaching in breadth given their global expertise and superior macro skills.

Hence, it is still uncertain whether foreign brokers will continue to dominate the top 20 list in the coming years since for the past two years, local brokerage firms has slowly made its ascent in PSE’s Top Twenty. History reveals though that foreign brokerage firms have always accounted for the bigger share of the market pie.

In 2001, foreign brokers still got the top three places, with ING Baring Securities (Phils.), now Macquarie Securities (Phils), Inc., getting the top slot with 23.6% of market transactions for the year. The Philippine Stock Exchange noted that most of the top brokers of in 2001 were those commissioned to execute the sale of the 82.3% stake of food and beverage giant RFM Corporation in softdrink manufacturer Cosmos Bottling Corporation to rival San Miguel Corporation. ING Baring Securities got the lion’s share of the transactions as its mother firm was the financial advisor of RFM in the Cosmos sale.

Prior to 2001, ING Baring was also able to close the $49million sale of Filinvest Development Corp. (FDC) to the Government of Singapore Investment Corporation, this represents 11.8% stake in FDC and was successfully placed by ING as a result of its pre-marketing efforts. It is to be noted that ING has already received several citations from Euromoney as the Best Equities House in the Philippines from 2000 to 2002, aside from bagging the Best Research House Award from Asia Money in 2002 also.

In the case of Philippine Equity Partners (PEP), which is the locally spun-off company of Merrill Lynch, it has been cornering 100% of Merrill Lynch’s trade in the country. PEP’s research output is reckoned to be the best in the industry and it still forms part of the circulation of Merrill Lynch’s Global Research. About 90% of PEP’s business were originated from foreign clients.


Barriers to entry include high capital requirement imposed by the SEC and the huge capital investment in technology. In order to operate as Broker/Dealer, the company should have a minimum capital of P100 million as an initial requirement for securing the stockbroker’s license[4]. Furthermore, currently licensed stockbrokerage firms should maintain a minimum capital requirement of P5.0 million. The same rule applies to both foreign and local brokers. In addition, membership at the Philippine Stock Exchange also referred to as “trading rights” is about P8.0 million.[5] On top of these, members have to pay monthly dues to the exchange. Other investments include human resource, technology and office space where prospective clients can transact.

Conversely, it is much easier to file for temporary suspension to operate at the exchange. Brokerage firms who intend to temporarily suspend its operations need to submit a letter to the Exchange announcing its plan to voluntary suspend operations at a specific date. PSE also requires a letter of undertaking to be executed by the stockbroker to inform their clients of the plan to suspend voluntarily its trading operations. Other requirements include newspaper publication and clearances from various institutions, such as, Clearing House, Philippine Central Depository, Compliance and Surveillance Group (CSG) and certificate of good standing from the exchange.


Technology plays an important role in the operational efficiency of the stockbrokerage firm. All companies depend on the front-end price monitoring system known as Maktrade which is currently linked with the PSE System.

As had been the practice throughout the Philippine Stock Exchange, trading was done on the auction basis with board trading and the outcry system. This system worked efficiently during the early development of the market but by 1992, the increasing volume of business signaled the end of an era. Clearly, computerized trading operations were needed to handle the sharply increasing activity.

On 4 January 1993, the Manila Stock Exchange started full operation of its computerized match trading system, the Stratus Trading System with Equicom. Shortly thereafter, on June 15, the Makati Stock Exchange, Inc. launched its automated trading system referred to as MakTrade, the same system being utilized by the Stock Exchange of Thailand and which was developed by the Chicago Stock Exchange. The successful computer link-up of the two systems on March 25, 1994 produced single Open and Close prices for all traded stocks although orders are queued on separate order books of the two trading systems.

On November 13, 1995, the last step in the unification process was taken when PSE implemented the Unified Trading System (UTS), using the MakTrade System. The UTS used the single-order-book system where all orders are posted and matched in one computer, and ensured that the trade orders were matched with the best bid/best offer (BBO) regardless of which floor the orders originated. The trading of bonds on PSE started on January 15, 2001. The MakTrade System, which enabled the electronic trading of equities, was modified to enable brokers to use the same MarketWorks trading terminal to trade bonds. Furthermore on the same date, the PSE-RoSS Interface System became operational, enabling the brokers to access online the Bureau of the Treasury’s Registry of Scripless Securities (BTr-RoSS).

Most top brokers have also access to various wire information systems like Bloomberg, Reuters, Technistock, Brokers’ Operating System and Thomson Financials. These wire systems enable stockbrokerage companies to get information ahead of the market, generate real-time world wide pricing of bonds and equities and break news and provide data, including filings of the SEC. It also includes “what if” scenarios that allow clients to compute the returns on alternative investments, it stores market data and transform it into a series of charts and technical analyses. Not all brokers can afford the luxury to subscribe to Bloomberg or Reuters. The high front-end fee and subscription price discourage most brokers to get any of these wire systems. Hence, brokers who generate pricing analytics thru the help of these wire systems, normally have competitive edge over the competition.


A stockbrokerage firm offers limited products and services. Brokerage mainly facilitates the buying and selling of stocks and bonds listed at the Exchange. Full service brokers provide additional services such as maintaining a research group providing technical and fundamental analysis to assist clients in their investment decisions. Normally, full service brokers charged higher commission rate in lieu of the value-added research services offered. Some full service companies also offer a wide range of investment options and advise clients in developing the correct investment strategy. Small brokers do not maintain research units nor draw financial plans for their clients, therefore, they can offer lower commission rates because of lower overhead costs.


The industry’s clientele is composed both of local institutional investors and foreign institutional investors and retail or individual investors. Some foreign houses strictly cater to institutional accounts only while majority of local houses, especially those which belong to the small and medium-sized categories, cater to retail and individual accounts.

Brokers compete with the same set of institutional clients such as Government Financial Institutions and Trust Units of several banks in the country which allocate a certain percentage of their portfolio to traded equities. Corporate accounts consist of corporations, retirement funds, pension funds, banks, insurance companies and investment firms. Retail investors could be business persons, employees or even housewives. Basically, the brokerage firms offer homogenous products to its clients by virtue of the broking service itself, hence, the major source of differentiation among trading participants lies on order execution, pricing, settlement and backroom services, and technology deployment in operations and research outputs.



The industy had its most profitable years between 1994 to 1996 and this was replicated in 1999. However, it experienced a “Fall from Grace” in 1997 and 1998 as a result of the Asian Financial Crisis. Consequently, member firms of the PSE netted negative bottomlines between -P2.8M and –P4.2M on the average during those years. The negative performance further aggravated during 2000 to 2001, upon which member firms further suffered from losses of - P5.3M to -P7.0M on the average. It was only in 2002 that the industry trimmed its losses to an average of –P1.6M.

As illustrated in Table 4, profitable years were mainly in 1995 to 1996 with stockbrokers posting an average net gains of P4.2M and P6.1M, respectively and on the average of P3.1M in 1999.

To substantiate the magnitude of losses incurred by PSE member brokers, the Table above shows that in 1998, 37% or 63 brokers were operating at a loss. It turned for the worse in the year 2000 with 70% of the brokers incurring losses from the business. From 2001 to 2003, the industry remains weak and huge losses were booked by around 81% or 117 member brokers in 2001, 73% or 104 brokers in 2002 and 64% or 86 brokers in 2003. Moreover, the Philippine Stock Exchange (PSE) itself reported a 51-percent drop in income before taxes in 2003, reflecting the sluggish interest in buying and selling stock shares and bonds.

The Industry is generally perceived as a reflection of a country’s health, and is also a looking glass of its political and economic ups and downs manifested by how publicly listed companies flourish through the good times and suffer through the bad. In fact, the stock market always anticipates the business cycle and the economy six months down the road such that, for example in early 1997, when the upward trend in stock market trades started to fizzle out, economic managers and fund managers pushed the panic button. They knew too well that a forthcoming financial crisis was going to hit, and true enough.

A stock market is robust only when there is promise of healthy profits. So, the question is: “Are there good securities to invest in these days?” US investment bank Salomon Smith Barney in a study as early as November raised questions on local listed companies’ ability to pay maturing obligations in light of a sluggish economy. An analysis completed a few months ago showed that Philippine companies are nearing a debt crisis, indicating investor doubts on the ability of Philippine-listed corporations to stay afloat.

While the local private sector on the whole "appears capable" of meeting its obligations, there are one or two stories from time to time that hint of defaults. Recently, there were talks within the banking community that holding firms such as Metro Pacific Corp., and even Benpres Holdings Corp., had started non-payment of maturing debts. In the case of publicly traded banking institutions, their biggest baggage is still the level of non-performing loans.

In the meantime, most analysts are in fact recommending a "hold" on most banking stocks. This simply means: don’t buy bank shares. The extension of trading hours has not helped boost trade in the bearish market we have. The Philippine bourse used to be one of the few remaining stock markets that operate on a half-day basis together with the bourses of Iran and Taiwan. The timing to extend trading hours would have been perfect in 2002 since our bourse emerged as top performer with the resurgence of foreign funds on the back of improving economic indicators. But all these have been soured by the growing concern about kidnappings and the general peace and order situation in the country. This makes the Philippines one of the few countries whose stock market can be affected by such issues.

One concern that the stock market is raising is the high cost of trading in the stock market. Documentary stamp tax (DST), Gross Receipt Tax (GRT), Value Added Tax and other charges of such kind, called friction costs, are expenses that do not help the stock market. PSE officials are now down on their knees begging Congress to please remove the unnecessary taxes that have made the RP bourse uncompetitive compared to the markets of our Asian neighbors.

On the other hand, the finance department is pleading for a postponement in the elimination of DSTs. With total earnings from DST from the bourse estimated at around P2 billion annually, the timing is deemed undesirable at the moment when the budget deficit has hit P132 billion. The PSE understandably contends that removing such restrictions and unnecessary costs would eventually lead to increased volume and value turnover, and ergo additional government revenues. And so the debate goes on and the stock market slide continues.

While the local bourse has been there for decades, it has never really grown to a wider and bigger investor base. Sensational issues such the BW Resources craze-cum-scam in the late 1990s have lured temporary players. Many have lost and few really won. Continued perceived unregulated insider trading coupled with stories of large losses by the uninitiated stock market greenhorn have further discouraged newcomers to join the stock trading game.

For its part, PSE has taken some initiatives to try and cure some of its ills. The election of non-member stockbrokers to the PSE board is a step in the right direction. Its demutualization in 2002 has made the bourse more transparent and more accountable to investors. In terms of image rebuilding, more improvements may have to be made to address the public perception brought about by the BW scandal. The local bourse may have to do more to prove it is an old boy’s club no more. But all of the above are mere cosmetics. And will not help one who is anemic and lethargic. The industry needs boosters and the fundamentals have to be revived and strengthened. And most of all, investors confidence must be regained.


1. Rivalry Among Competing Brokerage Houses

As cited earlier, trading participants are categorized based on their relative value turnovers. They could either be small, medium and large based on the average trade volumes which they generate.

Those whose market share are less than 1% or approximately equal to an average annual value turnover of only P636 million or less as of December 2003 are considered small. On one hand, those with market shares of between 1% to 5% or P2.9 billion to 14.5 billion of total 2003 value turnover belong to the medium-sized category. Finally, stockbrokers which posted a market share of more than 5% or P24.0 billion to P65 billion value turnover as of 2003 are considered large.

Large stockbrokers are normally in an indomitable position in the industry since their ranking in terms of total value turnover rarely move below the first five. They are also the major players in the industry and most foreign trades are cornered by these houses. There are only limited clients both in the region and globally and each of these large houses vies for their attention.

On the other hand, both the medium to small-sized brokerage houses clambered to solicit business from both local institutions and local individual players. Some of the medium-sized brokers managed to grabbed one or few foreign institutional clients on their own, nonetheless, around 90% of its clientele is local.

Some of the big local institutional clients being pursued by the smaller houses include San Miguel Corp Retirement Fund, GSIS, SSS, Pag-Ibig, Meralco Retirement Fund, PLDT Retirement Fund and Trust Accounts of big commercial banks. Among the 134 active members of the Exchange, 121 firms with market share of below 1% actively compete for these clients and mobilize their resources to reach to retail clients. It must be noted that competition in this defined market is more intense compared to the upper market segment dominated by foreign firms. Brokerage houses at this level are more aggressive and tend to use price cuts and commission incentives in order to increase their trade volumes or market share. Hence, the lowering of commission rates is mitigated by the fact that the “Exchange” has already imposed a ceiling on the least rate of commission that brokers can charge customers, that is 0.25 of 1%. Anything below the lowest prescribed commission rate is already onerous.

Rivalry of small-sized brokerage houses tends to be more dynamic since it costs more to give-up the trading rights and the membership at the Exchange than to stay in the business. Despite the fact that around 60% of the small-sized stockbrokers were registering negative bottomlines in the last five years, they continue to operate and use their license since it would be more expensive to suspend operations and raise another P100.0M as the company’s paid-up capital upon resumption of operations. As it is right now, stockbrokers who are already members of the PSE prior to the imposition of the P100M paid-up capital requirement are not compelled to comply with the capital restriction immediately.

The proliferation of small-sized stockbrokerage houses from 1994 onwards has made the playing field for brokerage houses a bit tight. Since most of them target the same customer segment, some houses have resorted to offer lower than market commission rates, although the floor price is set by the PSE at ¼ of 1.0% of the gross price. The industry rates for individual investors range between 1.5% to 0.75% while that of corporate clients, irregardless of volume, are pegged between 0.50% to 0.25% only. Also, they have also started to offer value added services to clients such as inviting customers to the PSE Trading Floor, employing a full service backroom settlement and after sales support, such as “point of sale” provisions of stocks position, statement of accounts and trading confirmations.

2. Competitive Pressures from Substitute Financial Products

Other financial products like mutual funds, common trust funds, fixed income securities (to include government securities, ROPs, corporate bonds and repos), are all considered as substitute financial products to traded equities. Hence, the propensity to invest in traded equities or stocks depends on the risk appetite of an individual or a corporation. The risk-return trade-offs for stocks investments are definitely higher than fixed income instruments. Most pension funds tend to limit their exposure on the stock market in view of the relative price volatilities associated with these kinds of investments. In fact, the standard weighting dictated by the World Bank for a Balanced Investment Portfolio among pension funds is set at 80% fixed income and 20% traded equities. Hence, more aggressive funds like the Equity Funds of Mutual Fund Companies, look for stocks that may rise sharply in value, rather than securities that offer shareholders steady income through dividends. Many of the funds invest in new issues or IPOs and fund managers often use options or other tools as part of their effort to boost the fund's return.

The threat of substitutability hinges also in the overall investment climate. In bad times or difficult economic situations, the propensity to go into stocks investments is lower versus Government Securities whose returns are guaranteed by the Republic of the Philippines.


There is no single known supplier that seems to exert pressure to the entire stockbrokerage industry since most of the logistics items needed by stockbrokers when it comes to office supplies and equipments are readily available in the open market from numerous suppliers with ample capability to fill orders. However, in the large-sized brokers category, certain competitive pressures among suppliers of technology or the so called wire information system are quite evident along with finding the right people who could bring business and trade volume for the company.

Technistock Finacial Terminal is slowly eating up the market share of Bloomberg and Reuters Terminals. In view of the relatively lower subscription price of Technistock, a locally incorporated company with equal capability as of Reuters and Bloomberg Terminals on its Philippine Equities Market Service, many brokers have been rationalizing its subscription to foreign wire information providers and have shifted to the Technistock Financial Terminal whose subscription price is three-fold much lower than Reuters and Bloomberg. It is also worth noting that while Technistock was continuously enhancing its market coverage, the company has also increased its subscription price on the average of 10% per annum in the last two years. The company is now in a position to price it service higher but still way below the list prices of foreign providers.

There is also competitive pressure in hiring the right people who could work in a very dynamic, fast-paced and volatile environment. Not only were traders, dealers and analysts more mobile and less likely to stay in one brokerage company for the length of their career, but the competition for topnotch human talent is somewhat fierce especially in a bull market.


One client can make or break any stockbrokerage entity. Big local institutional investors like GSIS, SSS, Kabuhayan Fund, Sun Life Financial and San Miguel Retirement Fund, as well as foreign retirement and pension funds like Calpers, Templeton, Barclays, Vanguard, Fidelity Trust and many others, have enough leverage to obtain price concessions and other value-added services from stockbrokers.

As cited earlier, most foreign clients have already a pre-arranged brokerage service agreement with some foreign houses that are registered at the PSE and about 80% of foreign trades are facilitated through their affiliate and arbitrage brokers. The same thing applies with local institutional investors which normally have a pool of accredited brokers.

Counterparty brokers are accredited and evaluated based on the following in their order, financial track record, management team, execution, research, backroom/settlement and pricing. Retail clients, on the other hand, give weight to pricing and execution only and do not really evaluate the brokerage houses extensively.

Thus, clients, whether big or small, virtually have discretion with whom to course their stocks transactions based on a given set of parameters. Brokers who meet the clients requirements are more in a better position to solicit business. And so, many brokerages that provide broking services to corporates and individuals find it in their mutual interests to collaborate closely on such matters as financial advisory, portfolio tracking and records management, research and more.


Between 1994 to 2003, the number of new entrants in the industry has been diminishing at a rapid pace. The registry of foreign trading participants at the PSE which went to a high of 111% from 1994 to 1998 diminished to 3% only from 1999 to 2001 and to practically zero from 2002 to 2003. On the other hand, local stockbrokers joining the market recorded an increase of 1.38% and 1.59%, respectively in 1996 and 2002 while the other years showed a period of non-activity.

The most obvious of all reasons, is the P100M peso investment in total paid-in capital to be put up by new entrants. This does not include yet the P8.0M trading rights and the P5.0M minimum capital requirement to be maintained by the firm.

Also, aside from the capital requirements, the capital outlay for overhead expenses such as the sales office (which ideally should be adjacent and adjoined to the trading floor), the price monitoring and wire information systems, manpower and research and integrated accounting system, all comprise the gamut of fixed and variable expense outlay involved in the operations of a stockbrokerage firm.

While the barriers to entry is quite high, there are also sanctions for suspension since it is a fairy regulated industry. Since 1998, 43 brokers have already filed for voluntary suspension, 23 have decided to cease operations while five brokers folded up due to violations.

There is also the learning and experience curve effects to consider. There are a lot of new entrants that folded up after two years of operations, these range from small to large capitalized firms that entered on a large scale at the outset, to wit, Philippine TA Securities, Inc., Securities 2000, Inc. and Sapphire Securities. Most of these entities had faced a significant disadvantage competing against existing firms with long track record already in the industry, such as, I. Ackerman & Co., Citisecurities, Inc., etc. Securities 2000, for instance, had to hire market practitioners at above market rates and install a research unit which entailed high overhead costs. This is typical of a new entrant trying to overcome the disadvantages of a small size by entering it big at the onset.

Nonetheless, whether barriers to entry is perceived as high or low, in the end it depends on the pool of resources of the aspiring entrant to tough it out, typical of these recent successful entrants are Abacus Securities (excellent infrastructure), Solar Securities (ample financing from owners of Solar Films) and Lucky Securities (identified to Henry Sy’s Group of Companies).


The Philippine Stock Exchange (PSE) operates a fairly standard electronic order book. However, it makes it easy for firms to have a very precise measure of their market share and those of their competitors. Since brokering is a networking business, market share is a critical competitive point. Firms with larger market shares, since they see more orders, can be assumed to be better informed about the current state of the market.

The brokerage houses in the Philippines have changed in the last few years from floor-based trading to computerized online and off-site trading, making them among the most modern and transparent, investor-friendly places to do business. Most brokerage houses are able to build competitive advantage by providing client-oriented service which covers net-based services to clients, ranging from their bills to their financial accounts which are accessible to them round the clock.

The sharebroking business in the country is in the consolidation and expansion mode. The big are getting bigger and the small are beginning to align with the big to adapt to the demands of the retail market. Three broad trends are visible. One, big brokerages are growing and acquiring scale by geographical expansion. Two, they are positioning themselves as retail financial services brands instead of merely banking on old client relationships to deliver business. And three, smaller players, whether former sub-brokers or distributors of other financial products, are opting to operate under the umbrella of big brands, through franchising and commission-sharing deals.

Although big business still comes from foreign clients, there is also a significant amount of interest in equities from local and retail investors. The only difference is that foreign fund managers are discretionary clients, they know what they want and big brokerages are able to offer a bouquet of services under one roof.

The main drivers of the change are two-fold: the rising cost of technology investment in broking, which makes the business unviable without scale and the entry of banks offering all financial products under one roof, from deposit products to insurance to mutual funds and, in the future, even post-office schemes. Small brokers and sub-brokers are taking up arbitrage arrangements to offer their clients better service. Brokerage houses that build brands rather than just relationships with clients have the advantage of being received better by small investors. Most big brokers are looking to tap also local institutions and high networth retail clients, where sub-brokers can help the business grow by bringing in their own clients. The deal typically involves revenue sharing, where the sub-broker sets up an office and invests in basic infrastructure like computers, furniture and manpower. The back-end and front-end software, risk management and billing are taken care of by the big brokerage house.

Smaller players prefer to go with bigger branded players because it is becoming increasingly difficult for them to keep pace with compliance and regulatory issues. Broking is now a highly capital-intensive business, with funds required for technology upgradation, margins and investments in other add-ons like research.

Like housewives moving up from tiangges to malls, the broking house customer is also looking for a more sophisticated experience when investing in financial products. The business is not only about issuing contract notes for deals that one executes for clients. It has to be a complete experience and investors prefer to go to known brokerage houses as they feel they will get the best service backed by the latest in terms of technology and information.

The overall customer experience and service are important factors in growing the business. A brokerage house builds it by focusing on good and reliable service to the client. Investors prefer to deal with known faces and the industry is very relationship-based. Right now, though, the small-is-beautiful tribe is growing smaller and they have to find ways on how to become more competitive in the near term.



Public Securities traces its roots in 1984, when it was incorporated by Mr. George L. Tsai, as a stockbrokerage firm. By October 02, 1984, it commenced operations as a member of the Makati Stock Exchange, Inc., now known as the Philippine Stock Exchange or the PSE, after the merger of the two bourses, the Manila Stock Exchange and the Makati Stock Exchange in December 1992.

In May 1994, the company was acquired by the Armed Forces of the Philippines Retirement and Separation Benefits System (AFP RSBS) in order to take advantage of the favorable prospects at the stock market at that time and to generate income for the mother company.

Public Securities Corporation is essentially a financial service company and operates as a securities broker/dealer. It is a non-bank financial intermediary and is engaged in the business of buying and selling securities and bonds listed with the Philippine Stock Exchange

The brokerage firm operates as a “retail” broking house catering to local clients and high networth individuals. Through the years, it has acquired institutional clients through its principal company AFP RSBS, and extending its business to the other members of the AFP family as well, to wit, AFP Mutual Benefits Association, Inc., AFP General Insurance Corporation, AFP Provident Fund and AFP Commissioned Officers Club.


Public Securities initially started operations with a 5-man team in 1994. At present, the company employs 15 full-time professionals and 2 commissioned sales agents.

a. Institutional Sales Team

The Institutional Sales Team of the company primarily services the AFP financial institutions which is essentially considered as a captured market given PSC’s affiliation with the AFPRSBS. It comprises three professionals and two dealers. The group is also responsible for soliciting arbitrage trades, foreign trades, sub-broking business and securities lending and borrowing. The last two have been growing in volume for the last three years.

b. Retail Sales Team

The Retail Sales Team is composed of around 3 sales persons and two commissioned agents as of date. They underwent a thorough and comprehensive training program as retail dealers and were required to take the SEC Authorized Dealer Certification Exam. Sales people were likewise oriented on internal procedures and processes in order to ensure proper dispensation and execution of broking services to the company’s highest standards. This group thrives in the offering of “margin trading facility” to its clientele, where Public Securities will advance the balance amount to meet full settlement obligations. The “Margin Trading Facility” or MTF means and refers to the facility pursuant to which part of the transaction value due to the Stock Exchange, at the time of purchase of shares, shall be paid by the broker on behalf of the Client on Client’s request, on such terms and conditions as contained in the MTF. The MTF arrangement is predominantly availed by retail clients and Public Securities is usually paid a certain amount of interest as stipulated in the MTF based on the amount of money advanced.

c. Customer Relations Unit

The unit consists of two organic personnel that handle client inquiries and concerns in a timely, professional and systematic manner. Public Secures ensures that its partners in business, its clients, receive the best investment advice, the best trade execution, and the best after sales service relative to settlement, account reconciliation and other backroom services as needed.

d. Information Technology

The company invests in technology and recently acquired an Integrated Financial Management System that can generate minute to minute statement of accounts and end of the day Financial Statements. The accounting system is basically linked to Oracle Financials while the dealing and settlement system were customized based on the functional requirement specifications of each unit. Moreover, the company subscribes also to Technistock Financials, for its wire info support system so as to better address clients’ inquiries with regard to historical macro data, up-to-date developments in the Philippine Financial Markets, filings of the Securities and Exchange Commission and other corporate and business information.

The IT staff is likewise responsible for evaluating the latest developments in execution and backroom systems and technology.

e. Personnel Strength

The rest of the workforce handle accounting, operations and messengerial services. One staff is specifically designated as Compliance Officer and liaises with the Compliance, Surveillance and Enforcement Department of the Philippine Stock Exchange.

2. CORPORATE STRUCTURE The Board of Directors of PSC is composed of seven members. The Chairman of the Board is also the Nominee of the Company at the Philippine Stock Exchange. Two of the Board of Directors are also officers of the mother company, the AFP RSBS. The President of the Company, who likewise serves as a Director, oversees and directs the company in terms of its strategic directions. The President heads the Executive Office at the Ayala Exchange Tower 1, where the Philippine Stock Exchange is also housed. The current corporate setting demonstrates that management deals with the strategic management functions and execution.

There is a second office at the Solidbank Building, Paseo De Roxas, Makati which houses the operations and backroom units. The processing of trade transactions as well as other administrative matters take place in this office. Finance, Operations, Human Resource, IT and Internal Control functions emanate from this Office too. The Internal Audit Head, also reports as Compliance Officer of the company.


|List of Directors and Officers |
| | |
|Name |Position |
|Reynaldo V. Reyes |Chairman |
|Marita F. Sablay |Director, Vice Chairman |
|Reynaldo V. Reyes |Nominee |
|Claro N. Lorredo |Director and President |
|Raul S. Nagrampa |Director |
|Guillermo G. Cunanan |Director |
|Evangeline J. Borja |Director |
|Ariel G. Palacios |Director |
|Rolando G. Borja |Corporate Secretary |
|Winona M. Encarnacion |Treasurer |
|Nanette C. Pablo |Operations Manager |
|Trinidad A. Quintana |Compliance Officer |
|Mary Jean Balondo |Chief Accountant |


REYNALDO V. REYES is the Chairman of the Board of Directors of Public Securities Corporation. A retired military general and a 1970 graduate of the Philippine Military Academy, he was the former Chief of the prestigious AFP Southern Command (SOUTHCOM) and was detailed at the AFP RSBS as Treasury Head from 1990 to 1992. He is also a Director in Resources and Investments Corporate House, Inc., another AFP RSBS subsidiary.

MARITA F. SABLAY is Vice Chairman and Director of Public Securities Corporation and has worked with various AFP RSBS subsidiaries for the past twenty years. She is a Certified Public Accountant with MBA and a Doctorate in Finance Degree from the Philippine School of Business Administration. She is the Executive Vice President of Resources and Investments Corporate House, Inc.

CLARO N. LLOREDO is Director and President of Public Securities Corporation and Director of Resources and Investments Corporate House, Inc. He holds a Master’s in Business Administration Degree from the Ateneo De Manila University. He served as Senior Vice President of PCI Capital Corporation from 1992 to 1996. He oversees PSC’s equity brokerage business and is responsible for setting up of strategies and directional plans of the company on a short to medium –term basis.

Mr. Lloredo has had extensive experience in the capital markets having been in the area of sales, research and administration for more than 15 years in various financial institutions. He has also been involved in investment banking activities particularly in the area of origination and underwriting of equities for Initial Public Offerings.

RAUL S. NAGRAMPA is Director of Public Securities. He was also a graduate of the Philippine Military Academy Batch ’82 and has obtained his Master’s in Business Administration Degree from the Asian Institute of Management. He passed the Chartered Financial Analyst (CFA) Level 1 on September 1998.

GUILLERMO G. CUNANAN is Director of Public Securities since July 2000. He was also a graduate of the Philippine Military Academy Batch ’70. He also served as a Member of the Board of Trustees of the AFP Savings and Loan Association (AFPSLAI) in 1997 to 1998.

EVANGELINE J. BORJA is a Director of Public Securities Corporation. She was a graduate of Commerce, major in Business Administration from the University of Sto. Tomas and is currently a candidate for the MBA Program of De La Salle University. She is currently the AVP for Subsidiary Holdings Department of the AFP RSBS.

ARIEL G. PALACIOS is a Director of Public Securities Corporation. He was also a graduate of the Philippine Military Academy Batch ‘74. He holds an MBA from the University of Virginia, USA. He is currently the Head of the Membership Department of the AFP RSBS.

ROLAND G. BORJA is the Corporate Counsel of Public Securities Corporation. He was also a graduate of the Philippine Military Academy Class ‘82. He is a member of the Philippine Bar and holds a Bachelor of Laws Degree from the University of the Philippines College of Law.

WINONA M. ENCARNACION is the Treasurer of Public Securities Corporation. She is a Certified Public Accountant from the Philippine School of Business Administration. She holds a Master’s in Business Administration Degree from De La Salle University. She has been the Corporate Treasurer of Public Securities Corporation since July 2000. She was formerly the Head of the Equities Investments Monitoring Unit of the AFP RSBS.

NANETTE C. PABLO is currently the Operations Manager of the Company. She is responsible for marketing traded equity issues to domestic institutional accounts and high net worth individuals. She started her career as a stock trader with the Company even prior to the AFP RSBS acquisition. She rose through the ranks and achieved the Operations Manager Title. She handled the House Account Development, foreign and arbitrage transactions and margin accounts management. She was a graduate of Business Administration from the University of the East.

TRINIDAD A. QUINTANA. A Junior External Auditor of Guzman, Bocaling & Co., CPAs, for five years, she joined Public Securities Corporation in 1994 as internal auditor. She is currently the Compliance Officer of the Company. She oversees the Accounting Unit of PSC.

MARY JEAN BALONDO is the Chief Accountant of Public Securities Corporation. Ms. Balondo is a Certified Public Accountant by Profession and she passed her CPA Exams in 1991. She holds a Bachelor of Science in Commerce, major in Accounting Degree, from the Philippine School of Business Administration.


Figure 3: PSC’s Value Chain Diagram 1. PRIMARY ACTIVITIES The Primary Activities inherent in the stockbroking business being essentially a service-oriented industry are focused mainly in the Sales and Marketing activities and After Sales Service of brokerage houses.

Sales and Marketing

As of date the company has two sales divisions, the Institutional Sales (IS) and Retail Sales Team (RS). The Institutional Team is in charge of the big corporate accounts and it caters mostly to the AFP Family consists of its mother company itself, the AFP-RSBS, AFP Mutual Benefits Association, Inc., AFP General Insurance Corp, AFP Provident Fund, and AFP Commissioned Officers Club. The sales desk is composed of three sales persons and two dealers. All sales personnel are long time market practitioners and have passed the SEC’s Certified Securities Representative Program, with respective licenses renewed every year.

The IS does the client call and updates regular clients on stock prices on a daily basis. Moreover, the sales persons were given discretion by the management in deciding appropriate commission rates for each corporate or institutional client. They take clients out and call on them on a regular basis and they always keep themselves abreast of market developments to notify clients about opportune and adverse market conditions. The team also does arbitrage trading and is primarily involved in the sourcing of counterparties for securities lending.

The Retail Sales Team, on the other hand, takes care of retail clients, to include military officials across ranks, civilian employees of the AFP and private individuals. Sales staff under the team are likewise SEC Certificated. It is composed of around 3 sales persons and two commissioned agents. This group thrives in the offering of “margin trading facility” to its clientele, where Public Securities will advance the balance amount to meet full settlement obligations. They employ direct marketing thru referrals and endorsements and receive rewards based on the company’s compensation and rewards system.

These two units are actually the major revenue drivers of Public Securities and it depends on the traders’ ingenuity and creativity to attract prospective new clients to augment PSC’s commission income.

Figure 4: Public Securities Turnover v.s. Industry


This is where the actual trades are done based on proper timing and execution. Posted orders are monitored tick by tick and are matched based on the bid and ask price range. Buy orders done within or below market averages usually earn approbation from clients and will normally merit repeat orders. The same thing is true with selling orders done at above market average.

The Operations unit oversees the “trade capture” after the transaction is executed by the sales and marketing staff. They re-confirm transactions by telephone/facsimile and document the same for distribution to respective clients the following day.

Settlement and Custody

These units take care of settlement and collection and transmit all done transactions to the Accounting Department. It acts both as a middle and backroom office that monitor the end of day stock positions of clients and the house account. The Settlement unit also closely coordinates with the Securities Clearing Corporation of the Philippines, which is the central settlement and clearing agency, using the depository service of Philippine Deposit and Trust Corporation to effect final settlement of the security element of the trade.

Further, the settlement unit ensures counterparty –broker and client compliance with all requirements for the transfer of underlying shares and must oversee the delivery of the corresponding stock certificates and all requisite documents to the relevant clearing house within the three business days from the trade date (T+3).

After Sales Service

Among the units which are involved in the after sales support are the customer service unit and the messengerial pool.

The Customer Service Unit extends support with regard to clients’ inquiries on their stock ledgers or statements of account, money balances and account reconciliations. They also entertain after sales inquiries and provide accurate market updates to clients. They arrange company briefings and investors’ forum for the clientele and send notices and reminders for Annual Stockholder’s Meetings. Overall, they ensure that its clients, receive the best investment advice, the best trade execution, and the best after sales service.

Finally, the messengerial pool take care of the outbound logistics and guarantee that clients receive their confirmation advice on time. They also ensure the confidentiality of all negotiable instruments to be delivered to each client. They likewise secure all documents while in transit and make sure that it arrive on time at the client’s doorstep.

All of the above are value creating activities and may be vital in developing the company’s competitive advantage. However, it is the integration of the front-end and back-end systems which remains to be the company’s goal at present. The company realizes that the integration will result in a more efficient and fastest operational support system that should readily be capable of handling over 1,000 transactions per day.


Support activities, while they are not directly involved in generating business, may increase effectiveness or efficiency of the company. Critical support units of PSC are the Accounting and IT units, and the Human Resource and Procurement units.

Accounting and Information Technology

The accounting department ensures that financial reporting is accurate, relevant and timely. Thus, Public Securities invested in an Integrated Financial Accounting System called Excalibur 6000 which is at the center of its backroom operations, providing real time information on changes in stocks positions, dividends, shares or moneys transferred, collateral covers and other fiduciary information on the client. Excalibur 6000 was developed and supported by Asian Institute of Technology, a leading software provider for stockbroking sytems in Malaysia and Philippines.

PSC also uses the Brokers’ Operating System (BOS), a front-end system developed and supported by DST Catalyst, a subsidiary of the Chicago Stock Exchange. Each sales officer is provided with an off-site on-line trading terminal that ensures quick, responsive and error free execution of trades.

PSC also uses the British Telephone (BT) PV 405 specifically for trading purposes. All telephone conversations are recorded in the institutional sales and retail dealing rooms.

PSC also subscribes to Technistock Financial Terminal which provide real time market information on local and world financial markets.

Human Resource & Procurement

Since PSC is a very lean organization, the company’ general services function is already integrated with Human Resource. HRD does the recruiting, developing, motivating and rewarding of the PSC workforce, the unit also oversees the sourcing and purchasing of materials and supplies.

The HRD likewise plans for the training programs and seminars of each employee across ranks and very recently, the unit introduced the concept of the "Balanced Scorecard" which encourages PSC to measure its performance at customer level and at employee level.

The company has also installed a Performance Appraisal System and a Compensation and Rewards system with Incentive Packages since 1995. Since the nature of the business is basically broking, sourcing of clients and financial service, there are perks associated at certain levels of trading volumes generated by the sales team, as well as profit sharing schemes once target performance is achieved each year.


A critical look at the company and its environment revealed that the following corporate circumstances classified as strengths, weaknesses, opportunities and threats will be determinants of success in its key result areas.


1. No debt. 2. Access to high-yielding AFP related outlets 3. Low manpower cost 4. Ring Fencing and Arbitrage Arrangement with other stockbrokers and investment houses. 5. Shared Ethical Values

Weakness 1. Low placement power. 2. Low market share 3. Low investment in skills development 4. Weak internal controls because of multi-tasking 5. Small-size effect


1. Large AFP market 2. Marketing of Securities Lending Business 3. Possible rise of the stock market 4. New products, IPOs and new exchange 5. Other Institutional Clients outside AFP


1. Good and big deals cornered by big brokers 2. Uncertain Corporate Life 3. Uncertain and Poor Economic Conditions 4. Strict Implementation of AMLA Code, Corporate Governance and SRC


To ensure that all the identified weakness and threats are addressed and that all strengths and opportunities are capitalized on in the strategies to be adopted by the company, strategies were formulated by accomplishing the TOWS matrix. The four quadrants of the matrix were filled up by strategies that simultaneously consider strengths and opportunities, strengths and threats, weaknesses and opportunities and weakness and threats. (Attached as Annex A is PSC’s TOWS matrix.)


1. Analysis of the Company’s Balance Sheet (1999-2003) Assets

The company’s current assets are composed of cash and cash equivalents, marketable securities, receivables from customers, non-customers, clearing house and others. For the five year period in review, total current assets remained flat at the P16.0M level. About 50 to 52% of the company’s current assets comprised of receivables from clients and it was only in 2003 when total dues from clients was reduced to 20% of PSC’s current assets at only P3.3M with marketable securities snatching a bigger share of about 57% of the total. Cash and cash equivalents account for 8.1% of total current assets on the average while Receivables from the Clearing House comprise 6.8% of current assets on the whole.

The quality and liquidity of the company’s receivables remain a major concern of PSC since it is the main component of its current asset base. As stipulated in the trading regulations of the Philippine Stock Exchange and the SEC, settlement of transactions is at T + 3 working day and it is tantamount for brokerage houses to keep a significant portion of its current assets in cash. The company has regularly maintained a positive working capital level of 6.07M for the past five years and it exhibited a steady capacity to meet its current obligations given an average Current Ratio of 1.56x per annum. Despite its current ratios hovering above 1.0x, the company should endeavour to meet the industry standard of 2.0x given its day-to-day settlement obligations to clients. Current Ratio is not only a measure of the company’s liquidity but it is also a measure of the margin of safety that management maintains in order to allow for the drastic change in the flow of funds through the current assets and current liabilities accounts. Table 6 shows that in 2002, it took more than 14 days to collect from customers despite the 3-day settlement period. However, it improved to 10 days in 2003 but still far from the average of 5 to 7 days in 1999 to 2001.

The company’s non-current assets comprise of the PSE Trading Rights, Property and Equipment and Deferred Tax Assets. Due to the conversion of PSE into a stock corporation, PSC, as its member, has received 50,000 shares of stock of PSE with a par value of P1.00 per share or total value of P50,000, but with a book value of P160 per share or total book value of P8,000,000.00 as determined at the time of demutualization of PSE on August 8, 2001. Moreover, PSC has retained its trading rights in the PSE with acquisition cost amounting to P4.3M. As part of its demutualization, the PSE has approved the trading of the said shares acquired by its stockholders, hence, PSC would be allowed to sell its PSE shares of stock.

In 2003, the PSE seat was split into Marketable Securities and Trading Rights amounting to P2,408,000.00 and P1,892,000, respectively, in accordance with PSE Memo No. 2004-065. In addition, trading rights are amortized equally over twenty (20) years, subject to impairment tests on a regular basis in accordance with SFAS provisions. Therefore, in 2003, the total value of PSC’s Trading Rights stood at P1,797,400 only. Liabilities

The company’s current liabilities consist of dues to customers, loans payables and accrued expenses and other payables. Public Securities long-term liability is practically zero and only its loans payables comprise 73.7% or P8.0M of its total current obligations on the average. In 2003, total loans payable accounted for 82.8% or P9.5M of the total and the second big ticket item, next to loans payables, is customers’ dues which accounted for about 22.0% of total current liabilities or P1.6M in 2003. This customer dues item synonymous with receivables from customers account are recurring components in both the current assets and current liabilities items in view of the dynamic interplay of intraday buy and sell transactions which is basically the core business and main activity of brokerage houses.

PSC’s short-term loan is actually obtained from its mother company, AFP RSBS. It is a subordinated loan from the mother company and this is secured by a real estate mortgage of the company’s condominium unit and 10,000 shares of common stock of the PSE. On the whole, loans payables comprise about 33.1% of PSC’s entire capital structure.

For the period in review, the company’s debt ratios remain below 1.0x and reached a high of 0.33x for the debt to asset ratio and 0.55x for the debt to equity ratio in 2003. On the five year average, Debt to Asset Ratio was posted at 0.19x while the D/E ratio at 0.29x. It might be noted that the numbers actually deteriorated recently and this was due to the 18.75% increase in total loans payable to P9.5M in 2003 from P8.0M in 2002. Capital Stock

From 1990 to 2003, the company’s paid-in capital uniformly stood at P69.9M. The proposed additional equity infusion of about P50M did not materialize in 2000 when the PSE relaxed its rule on the Brokers’ Net Capital Level. Hence, the company continuously incur a carryover deficit since 1999 and thus resulted to a much lower stockholder’s equity level of P28.7M in 2003.

2. Analysis of the Company’s Income Statements (1999-2003)

During the 5-year period in review, Public Securities Corporation continuously incurred a cumulative net loss of -P9.53M. The net loss grew two-fold to –P3.9M in 2003 alone from -P1.1M the previous year in view of the P4.3M provision charged for doubtful accounts. The successive operating losses incurred from 1999 to 2003 were brought about by the decline in market value of marketable securities, lower commission income, loss on sale of marketable securities and provisions for probable losses.

Commission income generated from broking services declined from P1.9M in 1999 to P0.3M in 2003. Moreover, the higher operating losses of -P6.8M in 2003 from -P1.2M in 2002 as a result of a confluence of factors, lower commission income, and provisioning for doubtful accounts, all contributed to the sharp decline in Return on Assets and Return on Equity of the firm. Its ROA was posted at –13.58% in 2003 from ---3.53% in 2002. Moreover, its Return on Equity dived to –22.62% on the same year from -5.20% the previous year.

From 1999 to 2003, PSC incurred losses of P1.9M per year on the average, this was below the industry average of -P2.7M at that time. Hence in 2003 alone, net loss stood at –P3.9M, this was further aggravated by the fact that PSC’s provisioning has been eating up a significant portion of the commission income generated by the company each year. The progressive decline in the volume of transactions led to lower commission income and therefore, huge losses for the company as well.

On the other hand, salaries and wages of personnel have been substantially lower by 47.7% from P1.5M in 1999 to P799K only in 2003. About five employees are hired on a commission basis while five personnel are seconded to the mother company. Hence, only six organic PSC employees are being paid regularly with corresponding benefits.

The general impression remains that as trade volumes of the company continued to decline as the industry suffered and continued to incur losses from 2000 onwards, PSC’s bottomline will remain at a precarious position.

3. Cashflow Analysis (1999 – 2003)

The graph (Fig. 5) below depicts the composition of the cash provided from operations, investing and financing.


For the past five years, the company has not been generating enough cash from its broking operations, in fact, for the entire period in review, PSC has registered a cumulative net loss on its bottomline from –1.9M in 1999 to –P3.9M in 2003. The huge reduction in payables to customers/brokers and clearing house and purchase of marketable securities greatly affected the company’s cashflow from operations. Furthermore, provisioning for the decline in the market values of its traded equities portfolio has been weighing heavily on the company’s bottomline. It is fairly noticeable also that PSC has been incurring trading losses on its house account for several years now. It was only in CY 1999 that PSC registered a positive cashflow from operations owing to higher trading volume on the year. The one time provisioning of P4.3M for doubtful accounts in 2003 severely hurt the company’s financial results.


Financing activities include loan acquisition/payment from mother company and issuance of capital stock. Loan from AFP RSBS is also called subordinated liability and is convertible into equity. The graph shows that when the operations of the company provided negative cashflows, it resorted into financing activities to support its working capital. For the entire period in review, the company last issued capital stock in CY 1999 for a total additional paid-in capital subscription of P2.9M


Investing activities, however, was not that significant in the company’s activities compared to financing and operating activities. Investing activities include the acquisition/sale of property and equipment, short-term investments, PSE seat and condominium unit and shares of stocks. Surprisingly, most of the time for the entire five year period, the company registered positive cashflows from investing activities except in 1999 when it booked a decrease in asset in the amount of P191.4K due to the sale of some Office equipments, furnitures and fixtures. Cashflows from this activity were generated mostly from interest income and dividends received from proprietary fixed income and traded equities investments.



To become the number one local stockbroker in the Philippines.


To be an active player in the Philippine Stock Exchange by delivering professional quality service to an optimal mix of retail and institutional clients.



To be a recognized player in the Philippine Equities Market through consistent and sustainable value turnover from its optimal client base.

To provide superior service and value to client.

To boost its network and reputation through the establishment of enduring relations with clients.

To promote the professional and personal growth of its personnel to better serve its clientele.


To achieve a 20% Growth in Revenues and Earnings

A more diversified revenue base


Low Cost Intermediary

Public Securities also aims to be a low-cost intermediary for a given level of transaction volume, but then, everyone else in the industry is already employing the cost leadership strategy, depending on the volume or size of orders for as long as it does not go below the 0.25% floor rate set by the Philippine Stock Exchange. PSC though, irregardless of volume, intends to set a fixed rate of 0.25% for institutional buyers while shouldering at the same time other minimal transaction fees like PCD (Philippine Central Depository) and SCCP (Securities Clearing Corp of the Philippines) Fees.

On the other hand, PSC only imposes a 0.50% commission rates for regular retail clients which is significantly lower than the industry’s rate of 1.50%. Hence, unlike the institutional buyers, PSC does not give concessions to retail clients relative to other relevant transaction fees. However, it offers margin account facility to retail investors.

Differentiated Product

Margin Account per se is no longer a novelty in the market, what makes it unique from PSC’s perspective is that the facility is being formally advertised by PSC to its clientele, unlike other brokers who tend to imply or silently suggest the facility only to preferred clients due to default risks associated with it. PSC during the years 1998 to 2000 thrived in the offering of “margin trading facility” to its clientele, where it advanced the balance in behalf of the client to meet full settlement obligations. This is documented by a “Margin Trading Facility” or MTF Agreement. The MTF arrangement is predominantly availed by retail clients and Public Securities is usually paid a certain amount of interest as stipulated in the MTF based on the amount of money advanced by the company, albeit as already stated, this is not really a new product in the marekt, PSC is just packaging it more attractively. Some of the reasons though, why brokers are not keen in offering this facility, aside from the high degree of default, most houses become saddled with non-performing stocks inventory when the client goes on default.



1. Niche Marketing 2. Market Penetration 3. Risk Management Enhancement 4. Competency Enhancement 5. Leveraging 6. Market Expansion 7. Product line Expansion 8. Portfolio Quality Enhancement


The above cited general strategies are operationalized through the adoption of the following operating strategies which characterize the short term business thrust of Public Securities Corp.

1. Niche Marketing

■ Actively participate as selling agents in deals with other investment houses and financial institutions which have established ring fencing and cross-selling agreements. ■ Exploit investment opportunities in identified growth businesses such as private placements, margin lending and even corporate lending. ■ Be a participating selling agent for upcoming IPOs to sell to ring-fenced clients. ■ Forge alliances with other brokerage houses.

2. Market Penetration

■ Offer fund management services, tie-ups or local representation to institutional clients. ■ Invest in marketing media to promote service quality and integrity. ■ Participate in book building of Traded Small Denominated Treasury Products.

3. Risk Management

■ Exhaust all available means to recover defaulted accounts. ■ Strengthen and formalize internal risk management system. ■ Strengthen the compliance function. ■ Enhance competencies in investment and credit evaluation.

4. Competence Enhancement

■ Enhance skills in portfolio management ■ Renew Licenses of Certified Securities Representatives ■ Sponsor employees to the Certified Financial Analyst Program

5. Leveraging

■ Leverage to increase power in portfolio investing ■ Fresh Capital infusion from mother company

6. Market Expansion

■ Expand ring fencing arrangement with other stockbrokers ■ Tap other prospective clients outside AFP ■ Pursue margin or micro-lending to soldiers, policemen, and other entities where automatic payroll deduction is possible.

7. Product line expansion

■ Pursue Securities Lending ■ Promote Margin Facility

8. Portfolio Quality Enhancement

■ Be a securities dealer for IPOs ■ Increase trading volume in selected listed issues ■ Implement divestment from non-performing stocks by employing the lower of market cost. ■ Exhaust all available means to recover defaulted accounts.

5.4.3 Implementing Plans and Programs

■ Host Investors’ Briefing with existing and prospective clients ■ Disseminate research materials and corporate news for existing and potential clients ■ Promote PSC through Internet Website ■ Consult with Research Group of Large-sized Brokerage Houses ■ Tie-up with other brokerage houses for possible arbitrage transactions ■ Send Personnel to economic briefings, investors for a, portfolio management training and other capital markets seminars. ■ Tap potential clients from the Fund Managers Association of the Philippines, Trust Officers Association of the Philippines, Investment Houses Association of the Philippines, FINEX and other social groups such as Rotaries, Jaycees and other Retirement Funds ■ Re-activate and get in touch to clients with existing stocks positions ■ Intensify Collections from Past Due Margin Accounts by initiating black listing of defaulted borrowers through announcements in the CIBI ■ Strictly enforce provision of the Administrative Manual through publication of office policies with priority on physical security. ■ Conduct employee orientation workshops on internal controls and code of discipline. ■ Intensify network with regulatory bodies, SEC, PSE, BIR, PDTC, etc.


“Companies that are losing money or are in a start up mode have a questionable business model, their strategies have yet to produce good bottom-line results, putting their viability in doubt.”

“Business competing in stagnant or declining industries must resign themselves to performance targets consistent with the available market opportunities. Cashflow and return on investment criteria are more appropriate than growth-oriented performance measures, but sales and market-share growth are by no means ruled out. Strong competitors may be able to take sales from weaker rivals, and the acquisition or exit of weaker firms creates opportunities for the remaining companies to capture greater market share.”

1. Reformulation of the Vision and Mission Statement


To become the number one local stockbroker in the Philippines.


To be an active player in the Philippine Stock Exchange by delivering professional quality service to an optimal mix of retail and institutional clients.


To be among the top stock brokerage firms in terms of value turnover and market share in the next 25 years, with the widest network of corporate and retail clients all over the country and overseas that ensures the provision of excellent service in areas of research, backroom operations and investment advice to all clients performed by empowered individuals.



Since October 1984, Public Securities Corp. has been a member of the Philippine Stock Exchange (PSE). The company provides stock brokerage service and assists investors in the purchase and sale of equity shares of listed companies and bond securities.


The company guarantees the efficient flow of processes involve in delivering payments and business correspondence. The company operates as a full service brokerage firm and offers investment guide to all clients. The ultimate goal of the company is to satisfy all service requirements of all our clients and to guide investors in the process of buying and selling shares.


As of year 2003, Public Securities Corporation ranked one hundred sixth with a value turnover of P66.3M and a market share of 0.02% among 184 member brokers. The company is confident to withstand external forces beyond its control by putting in place strategic initiatives to achieve its vision.


It is the company’s desire to be among the top stock brokerage firms in the country in terms of value turnover and market share, hence, we plan to attain this by listening to our customers and continuing to innovate. We strive to give them what they want when they want it. We are focused on creating a business that’s built to last, as we build our destination brand for the long term. The company ensures the provision of excellent service in the areas of research, backroom operations and investment guide to all clients, executed by empowered individuals.


After identifying the driving forces that influence the change in the industry’s competitive landscape, management would now be guided in formulating effective strategy for the company to achieve its mission. One of the company’s key success factor is its affiliation with the AFP market. It has a competitive edge over other brokers due to its strong relationship with the various AFP Financial Institutions and Cooperatives. PSC is assured of a strong network of client base with the AFP that promises to provide consistent stream of commission income. Thus, the company will implement the following strategic initiatives, strengthen its current revenue source, cost and expense reduction and strengthen its internal controls and empower its personnel.

a. Strengthen Current Revenue Stream

Increasing the company’s current customer base will effectively strengthen the company’s revenue source. To increase existing client base, the company needs to be persistent in opening new accounts and following-up on pending accreditation applications to previously untapped clients.

The company will continue to service clients of those brokers which ceased operations, such as Highland Securities and Orion Squire Capital, Inc. The company will pursue ring fencing and arbitrage arrangements with other brokers especially if it shares common clients with these brokers. Normally, arbitrage arrangements are done with 50/50 share of commission income with the third party brokers.

It will also pursue its margin lending to retail investors, hence safety measures shall be installed for these margin arrangements and PSC shall ensure that its exposure will be adequately covered by blue-chips and liquefiable stocks. Margin accounts are overdraft accounts and are interest bearing, the company generated good commission income from this scheme in the late 1990s, hence, the internal controls then were quite weak. The company will still consider this line of business, now fee-based and structured with sufficient safeguards for both clients and lender. This, however, like house account trading or monitoring of a proprietary PSC trading portfolio, will not form part of its core businesses such as broking and securities dealing.

One of the powerful industry driving force is the apparent decline in the industry growth rate that dramatically changed the industry’s competitive landscape. Thus, a consistent and steady source of revenue will keep the company afloat during difficult times.

Hence, in order to implement these action plans, the company would have to issue additional capital stock to be infused to the business. The company will file through SEC to increase its authorized capital stock from P69,921,336 to P125,000,000.00. The company will issue additional P50M capital stock at a par value of P100 per share or an additional 500,000 shares in December 2004 or in the first quarter of 2005. AFP RSBS will subscribe to the capital stock issued by PSC.

b. Operating Expense Reduction

The company was able to demonstrate its ability to control operating expenses. PSC successfully reduced its operating expenses by 56% from P2.6M in 1999 to P1.2M in 2002. However, it ballooned to P 6.8M in 2003 due to the one time charge of P4.3M provision for doubtful accounts. Without provision for doubtful accounts, however, operating expense would still be higher by 111% from P1.2M in 2002 to P2.5M in 2003. The company’s austerity measures were manifested in the reduced amount of company outlay on the following overhead expenses, transportation and travel, communication, membership dues and terminal dues, office supplies and other miscellaneous items.

c. Risk Management (Strengthening Internal Controls)

PSC recognizes that the client’s trust and confidence in a broking institution rests on the company’s financial strength. Financial strength is a result of sound strategy and good broking practices, where effective capital and risk management practices are key components. The broking business, allows the broker to identify businesses that provide the returns commensurate to the risks taken. An effective risk management framework, on the other, enables PSC to identify, measure and monitor its risks. In line with the risk management thrust, PSC intends to further strengthen its operational framework and implement it throughout the institution in order to foster the appropriate risk management culture across the organization.

PSC recognizes information technology (IT) as the main driver for furher improving its internal processes and controls. It looks forward for the implementation of an integrated front-end and back-end system solution that will capture, process and account for client’s ledgers, statement of account, limits and collaterals. The Integrated system shall be complemented by a financial software package for accounting. The information technology architecture is expected to result in more effective risk, performance and asset-liability management processes. Once the system is in place, PSC expects to better monitor cost drivers and productivity measures. It will also automate bookkeeping, enabling the controller function to concentrate on management accounting and cost management. Back Office processing is expected to be streamlined and more efficient. Moreover, PSC believes that the automation program will lead to a more competitive cost structure.

d. Organizational Competence

The company sees the trend towards increasing customer demands. The fast-paced developments in communication and information technology have brought about stock selling or the broking business to a new level, thus PSC believes that the ability to keep pace with these developments is a key element for gaining market share. The company will prioritize training to keep its workforce updated with capital market developments and the regulatory environment. Raising the overall competency level of its workforce will put them in a better position to increase sales, address customer requirements and optimize efficiency.


The company needs to improve on certain existing standards such as:

1. Enhance mechanisms to monitor the performance of the Board. 2. Critical Evaluation of organizational plans through intensive business planning and realistic budget targets. 3. Clear definition of the operational and financial performance measures that are incorporated in the plans 4. Critical evaluation of current risk management measures to ensure that risks are mitigated through effective risk management strategies . 5. The regular involvement of the Audit Committee in the oversight of financial management functions: managing credit, market, liquidity, operations, legal and other risks of corporation and crisis management.


Management should carefully cascade to its staff its ongoing plans and programs and be able to properly articulate its vision and mission to its employees. Moreover, it should be able to solicit contributive efforts that they have to employ to achieve targets and withstand the business crisis.


In strategic planning, we use framework as a tool to understand the mechanics and the dynamics of a company’s strategy based on generalizations or descriptions formulated by scholars through exhaustive diligent studies.

PEST analysis is one of the complementary tools for assessing the economic attractiveness of a particular growth opportunity. A scan of the external macro-environment in which the firm operates can be expressed in terms of the following factors: Political, Economic, Social and Technological.[9]

The performance of the Philippine equities market is highly dependent on economic and political factors. Negative economic news and turbulent political situation leads to negative sentiments that caused investors to shift from equities to traded fixed income instruments. Such a scenario will ultimately lead to lower trading volume and less income for brokerage firms. Sol Jose Vanzi of Philippine Headline News Online in Canada was quoted saying that in 2001, foreign brokerage houses are pulling out of the country because of the poor market conditions stemming from political uncertainties.[10]

a. Political Environment

Political Stability

The political stability of the country is one of the major considerations of any investor. Before investing in the equities market foreign investors consider the stability of the country’s political environment. The Oakwood Mutiny in July 2003 was a concrete example of the adverse effect of political instability to the equities market. The index lost a total of 79.48 pts. Or 6% in just four days after the Oakwood incident transpired.

Also political theories of business cycles attribute market fluctuations to politicians who manipulate fiscal or monetary policies in order to be re-elected. [11] Historically, presidential elections are sensitive to economic conditions in the year preceding the actual elections.

Figure 6: Significant events in the RP Stock Market

The semestral performance of the Phisix is shown in Fig 6. to highlight the impact of the leadership of the administrations of Ramos, Estrada and Arroyo in the Performance of Philippine Equities.

RAMOS ADMINISTRATION (May 1992 – May 1998)

In the wake of the administration of Pres. Fidel V. Ramos, the stock market recorded its all time high at 3,275 and an average of 2,720 for the entire six-year term of Ramos. The heavy trading volumes were supplied mainly by the Government Financial Institutions (GFIs). The GFIs played a critical role in the development of the Philippine Equities Market by participating in the block purchases of several listed stocks and IPO subscriptions. However, the market started to decline at the start of 1997 when the country was hit by the Asian Financial Crisis.

ESTRADA ADMINISTRATION (May 1998 – January 2001)

During the administration of former President Joseph Estrada, the stock market went into a dive. The Estrada years were characterized by illegal trading activities which involved the President itself and its cronies. In fact, some premiere institutions like GSIS and SSS were likewise implicated. Some of the most celebrated stock market scams include the “kiting” of BW Resources stock price, accumulation of Belle Resources Corp and influencing the merger of PCIBank and Equitable Bank. On the small scale, there was also the hyping of the Reynolds Philippine Corp stock price and the price rigging scandal of Global Equities, Inc.

The integrity of the Philippine Stock Exchange (PSE) was compromised with the BW fiasco after its stock price rose to P102 per share from P2 per share between January to October 1999. The investing public lost a lot of money over speculation on the BW hype and a number of stock brokers were suspended and reprimanded while authorized traders and dealers who executed the questionable transactions were charged with violating the Revised Securities Act (RSA).[12]

The peak performance of the index under the Estrada Administration was at 2,487 with an average of 1,669 for the entire three year period prior to his impeachment. The Phisix lost more than 40% of its value compared to its stellar performance during the Ramos Administration.

Adding to the market woes at that time, were the series of bombings which took place nationwide in December 1999, and thus bringing the index further down near the 1,200 level. The market suffered further beatings during the impeachment proceedings of Pres. Estrada and succumbed to its lowest level below 1,000 range in the wake of the Abu Sayaff kidnappings and the 9-11 scare in the United States.

ARROYO ADMINISTRATION (January 2001 - Present)

The 33-share Philippine Stock Index (PHISIX), after having bottomed out at around 1400 amidst the political crisis which culminated in the installation of President Macapagal-Arroyo, seemed to have bounced back and found a new trading floor of about 1650. Under PGMA’s administration, the stock market index reached a high of 1,446 shortly after she took reins over Malacañang. Her administration has been subjected to persistent criticism which adversely affected the capital market industry, and thus resulting to a roller coaster ride in the stock market. Hence, very recently the stock market has been on the rise owing to the following factors. For the first three weeks of January 2005, cumulative net foreign investments portfolio inflow surged to US$427.2M compared to a meager US$12.9M over the same period in 2004. The net foreign portfolio inflows nearly toppled the whole 2004 figure of US$486.8M, indicating the strong investor interest in the Philippines despite the recent downgrade in credit rating. Also, the recent conference on the Mining Sector after the passage of the Mining Act, reportedly yielded pledges of around US$3.0B which is a lot of money that is likely to keep investors moving. This development is likely to contribute to the strengthening of the peso and the stock market. In fact, the Phisix already breached the 2,000 level (5-year high) as of February 2005 albeit, this remains to be 24% off the FVR average record high of 2,720.

Peace and Order Situation

According to Asian Development Bank (ADB), the armed conflict in Mindanao resulted to a loss of business confidence in the region and in the nation as a whole. ADB said that the peace and order situation remains to be a major concern for investors in the country.[13] Moreover, the Makati Business Club (MBC) in its Executive Outlook Survey stated that peace and order remains to be one of the most important problems that PGMA should address because it is a deterrent to capital formation.[14]

Regulatory Framework

Regulating bodies include the Securities and Exchange Commission and the Philippine Stock Exchange. Hence, the industry remains vulnerable to regulatory influences and government policy changes. It was only in 2000 that the issue of corporate governance was brought to the country. Recently, the SEC ordered the PSE member brokers to submit a self-rating form of corporate governance. Public Securities submitted the form last July 31, 2003.

b. Economic Environment

Economic indicators such as interest rates, exchange rate, inflation and national income growth rates affect the performance of the stock market. Favorable growth and inflation rates and stable foreign exchange rate are positive news for the stock market. These indicators normally give boost to the market as they indicate sound economic conditions. Higher interest rates, on the other hand, push investors away from the market to other fixed income investments which offer guaranteed and risk-free returns.

GDP Growth Rates

Figure 7 shows the positive direct relationship between the PHISIX and the GDP Growth rates.

From 1994 to 1997, GDP growth rates and the stock market index trekked the same directions. GDP slowed to 3.6% year-on-year growth during the last quarter of 2000, after expanding by 4.5% or more during the second and third quarters. The deceleration had been widely expected in the midst of the political and economic uncertainties exacerbated by the gambling scandal implicating President Estrada and the uncertain fate of the subsequent impeachment trial.


Most of the previous research conclude that there is a negative effect of interest rate changes on stock prices. This implies that changes in interest rates will cause stock market prices to change. On the other hand, growth in stock market prices may lead to growth in economic activities (GDP) through increasing business investment and consumption, which in turn may lead to a restrictive monetary policy and higher interest rates.

Based on local experience, the negative impact of rising interest rates in equities investments is greater than the market’s potential upside when interest rates go down. The biggest recorded decline in the 91-d T-bill Rate was during in 2nd Qtr 1994, when rates fell to 8.85% from 14.64%, this caused the Phisix to jump 6% from 2,746 to 2,908 in the 3rd Qtr 1994. On the other hand, when interest rates soared to 18.05% during the Asian Financial Crisis from 9.5% in January 1997, it caused the Phisix to decline by 70% from 3,223 in the 1st Qtr of 1997 to 1,869 in the 4th Qtr 1997.


With political uncertainty hounding the markets in 4th Qtr 2000, It has been out of favor with investors for a long time, and has paid the price via a weak currency, high interest rates and sluggish business conditions. Net foreign portfolio investments are often on a declining trend during pre-election time. Foreign investors are motivated to invest in the country in times of relative stability. Under the Ramos Administration, the BSP tried to curb exchange rates at P26 to P27 to a dollar, however, the BSP was not able to control the exchange rate starting the 2nd Qtr 1997 when all other Asian currencies depreciated against the US dollar. From P26.38:USD1 in the second quarter of 1997, it depreciated to P39.50:USD1 in the 4th qtr of 1997. From that period, the peso continued to depreciate against the dollar by almost 50% to P54.87:USD1 at present.


Figure 10 depicts the negative relationship between the composite index and inflation rate. Rapid rise in the level of prices adversely affects the performance of the stock market while declining inflation rate, just like falling interest rates, is positive news for the stock market.

c. Social Environment

The primary issue concerning the social dimensions is the ethical issue involved in operating a brokerage firm, to wit, the broker/dealer account or PSC’s corporate social responsibility.

d. Technological Environment

A number of brokers already provide on-line trading facilitiy. These brokers have already established the necessary infrastructure to provide the so called electronic trading facility. However, one of the drawbacks of this on-line trades is that it is not directly entered into the PSE System, not real time, unlike when trades are executed using front-end systems such as Maktrade and the Brokers Operating System which are directly linked to the PSE. It has been observed also that electronic processing of transaction is not that widely accepted yet in the country, in fact, internet access, most of the time, is just used for e-mail and very few are using internet banking, auction and on-line trading. The reason for this lies on the not so well in place security infrastructure that hinder investors to execute on-line trade.


|POLITICAL | | | |
|ECONOMIC | | | |
|SOCIAL | | | |



Total value turnover of the industry since 1997 is on a declining trend, losing about 60% of its value since 1994. Supposing that the downward trend prevail and the appetite for traded equities investments wane, there will be fewer players in the industry since returns will no longer be attractive. The number of stock brokerage firms will tend to consolidate due to closures, mergers and joint ventures (JV). Those who can withstand the competitive pressures might remain, hence, the local situation all too clearly show that a significant number of brokers have filed for temporary suspension while others already ceased to operate.

Some illustrative examples of mergers and JVs[15] between two foreign brokers were that of Barings and ING which eventually becomes ING and MACQUARIE very recently. This was followed by the mergers between UBS and Warburg Dillon Read and JP Morgan Chase and Jardine Fleming. Meanwhile, mergers between ATR and Kim Eng Securities and Regis Partners and Deutsche sealed the union between foreign an local brokers. The possible continued decline in the demand for stock market investments is a powerful driving force which increases pressure among stock brokers either to search for opportunities to survive the feat or wallow in defeat.


a. ANTI-MONEY LAUNDERING ACT (AMLA) Consistent with the Anti-Money Laundering Act of 2001, the Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity and consistent with its foreign policy, the Philippines shall extend cooperation in transnational investigations and prosecutions of persons involved in money laundering activities wherever committed. The law covered Securities dealers, brokers, salesmen, associated persons of brokers or dealers, investment houses, investment agents and consultants, trading advisors, and other entities managing securities or rendering similar services. The AMLA has a profound effect on foreign investment capital flow since there is now more safeguards as to the source and tier-remittance flow.[16]

b. CORPORATE GOVERNANCE It was only in the year 2000 when the issue of corporate governance was brought to the Philippines. This was after The price manipulation scandal on BW Resources in 1999 which was probably the most devastating of all scams, as it left the Philippine Stock Exchange (PSE) on the brink of collapse. Investigations by the Securities and Exchange Commission (SEC) and PSE uncovered heavy buying and stock price manipulation by Dante Tan that left many investors with heavy losses and brokerage houses exposed to losses well beyond their capital. As a result, fines and penalties amounting to Php30.05 million from the infraction of the Securities Regulation Code (SRC), the Corporation Code, and related laws have been enforced.

Recently the SEC ordered PSE member brokers to submit a self-rating form of corporate governance. Public Securities Corp submitted the form last July 31, 2003.

The law on corporate governance is expected to contribute positively on equities investments. Upon implementation and proper monitoring by the SEC, Corporate Governance will prevent the repeat of the BW fraud and other illegal trading activities that stained the integrity of the Philippine Stock Exchange. Focusing on the rights and equitable treatment of shareholders will bring back the interest of the public and foreign investors. Listed companies are now required to adopt a Manual on Corporate Governance and a Code of Conduct. These companies were also required to submit a corporate governance rating form indicating their level of compliance with the new rules, as well as annual certifications on the companies’ compliance with their respective Manuals. All these can provide the necessary boost for the capital market. The attractiveness of a country to foreign investments are not influenced solely by cheap labor and package of fiscal incentives but rather by simple and clear rules of business that are enforced fairly and in a timely manner.


Twelve foreign brokerage houses had decided to close down and trim their Philippine operations. These are Topwin Securities, UPCC Securities Corp., DBS Vickers Securities, Sapphire Securities, FEB Stock Brokers Inc., BNP Paribas, UOB Securities, OCBC Securities, Rashid Hussein, Worldsec, Asian Capital Equities, Inc. and Sun Hung Kai Securities.

On the other hand 8 stock brokers filed for voluntary suspension, to wit:

1. Merill Lynch 5. Yamaichi Securities 2. Citicorp International Sec 6. Orion Squire Capital 3. Securities 2000 7. GK Goh Securities 4. Nomura Securities 8. HSBC James Capel Sec


|Changes in the Long-term Growth Rate | | | |
|Regulatory and Gov’t Policy Changes | | | |
|Exit of Major Firms | | | |

3. KEY SUCCESS FACTORS (KSF)[18] Distribution Related KSF: A STRONG NETWORK OF CLIENT BASE Revenue from commission generated through broking operations comprises the main source of income of brokerage firms. The absence of a strong client base will result to negative cashflows for the firm and thus making the company vulnerable to external financing. A strong customer base would provide a consistent stream of revenue for the company. Organizational Capability Related KSF: MANAGERIAL EXPERIENCE The management should be able to respond quickly to changing market conditions so as to keep the company afloat in times of crisis and be able to seize opportunities in times of improving market conditions. For example, in times of slack demand for stock market investments, the company can resort to proprietary trading or proprietary investments on selected counters with strong capital appreciation or high dividend yields and pay-outs or it can diversify its proprietary holdings and go into fixed income investments while awaiting the market to pick-up. Other important decisions include soliciting external capital, expansion programs and streamlining strategies. Skills Related KSF: SUPERIOR WORKFORCE TALENT Stockbrokers are rated based on trade execution, trading calls or recommendations, research and strategy reports and backroom operations.

Trade Execution Many firms use automated systems to handle the orders they receive from their customers. In deciding how to execute orders, the broker has a duty to seek the best execution that is reasonably available for its customers' orders. That means the broker must evaluate the orders it receives from all customers in the aggregate and periodically assess the likelihood of having the order executed. The opportunity for "price improvement" – which is the opportunity, but not the guarantee, for an order to be executed at a better price than what is currently quoted publicly – is an important factor that a broker should consider in executing its customers' orders. Other factors include the speed and the likelihood of execution. Corporate clients are extremely particular with the execution of trades. Clients expect better prices for their buying and selling orders. For buying orders, it should be at par or lower than market whereas for selling orders, it should be at par or higher than market. Hence, dealers and traders should fall along the character of “professional execution providers” who arrange for efficient and cost-effective “fills” and best execution of orders.

It is important for the brokers to provide the best execution to retain their customers most especially the big institutional accounts.

Trading Call, Research and Strategy Reports

A brokerage company should always provide sound advice on the market through its securities research analyst. Research teams need to entice clients to trade shares on the back of their fundamentally sound recommendations. Several organizations like the Fund Managers Association of the Philippines (FMAP) and the Trust Officers Association of the Philippines (TOAP) rate and assess brokers performance based on the content and timeliness of investment calls. Public Securities releases daily market notes, weekly market news and technical analysis reports. The company also cascades PSE circulars and dividend notices to its clients. Moreover, Public Sec. accompanies clients to investors’ briefings and Annual Stockholders’ Meetings.

Backroom Support and Operations

The Backroom Office infrastructure is comprised of the following units: settlements, custody and accounting. The Settlements Unit handles the processing of executed trades, generation and monitoring of stock positions, trade invoicing and monitoring of stock payables and receivables from clients. The Custodianship Unit monitors stock certificates inventory and coordinates with stock transfer offices and the Philippine Deposit and Trust Corporation (formerly PCD) with regard to the transfer, delivery and receipt of shares. The Accounting unit, on the other hand, facilitates the disbursement and collection to and from clients, as well as arbitrage brokers. Clients required that the check payment for sales transactions be delivered three days after the execution date. Confirmation invoices should be accurate and delivered a day after the transaction is made while an advanced copy of the invoice is sent via facsimile to the client. An efficient backroom unit is an important factor that buyers of stocks considered in choosing their brokers. ACCESS TO FINANCIAL CAPITAL

Finding money may be the brokerage business’ biggest concern and challenge, and rightfully so. Financial service firms are constantly planning capital needs and investing time with lenders and investors to source the needed capital. In times of market downturns, access to financial capital (both long-term and short-term) is crucial for the survival of the company. Financial capital access will also support the company in working capital management and capital expenditures for expansion projects.

|Strong Network of Client Base |50% |
|Managerial Experience |20% |
|Superior Workforce |20% |
|Access to Financial Capital |10% |


The company is still far off from its vision of becoming the number one stock brokerage firm in the country today. It has been consistently on the top 100 ranking stock brokers since 1999 based on value turnover. Its value turnover has likewise suffered from a slump, declining further to 55.50% and 36.54% in 2002 and 2003, respectively. As already cited earlier, the company belongs to the small-sized broker category with less than 1% share of the market.

Moreover, the company’s profitability record is also on a decline. From a positive growth of 97.04% in 1999, commission income further deteriorated by 51.82% and 47.82% in 2002 and 2003. This was evident by the low value turnover of the company since the year 2000. The trend in net profit margins is also unfavorable as operating expenses surged by 299% to P7.14M in 2003. Revenues from commission are often not enough to cover the company’s overhead and operating expenses.

Given the company’s current financial standing and negative growth rates, it appears that its current vision is no longer responsive to what the company really hoped to become in the future, which is to be the no.1 stock brokerage firm in the country. In order to work towards the fulfillment of its vision, there should be ‘”enablers” which should anchor the firm towards its goals. For one, it should maintain that the company should provide the best service to its clientele to retain and gain market share. The company should also value its greatest asset, its workforce, which perform the daily tasks and duties of the firm. The company should see to it that its goals are congruent to its financial objectives. For example, the company’s profits are more correctly an end result of what an entity does. Although it could be said that the company’s mission statement still supports the vision, it would be prudent to re-state the company’s vision and mission statements to, more or less align, the same with the company’s current plight and strategic thrusts.

Public Securities strategic thrusts include: strengthening revenue stream, rationalizing operating expenses, organizational competence and strengthening internal controls. It could be said that these strategic thrusts are still adaptive to present market conditions. Given the declining value turn over, the company was not able to achieve improved performance in terms of commission income which was on the downtrend since 2000. Hence, Public Securities was able to streamline its operating expenses since 1999 as the company became a leaner organization during that time.


1. Philippine Economic Outlook

The Philippine economy benefited from the global and regional expansion during 2004 and exhibited resilience, notwithstanding certain challenges. Economic growth surpassed both public and private sector expectations with Gross Domestic Product up 6.1% year-on-year, despite election-related jitters, rising global oil prices and domestic interest rates, and pressure on the peso. Growth may have slowed during the second half but full-year 2004’s economic expansion exceeded the Government’s targeted 4.9%-5.8% growth range.

On the fiscal front, the National Government kept within its deficit ceiling for the full year 2004 at P186.1B, 7% less than the 2003 level and 6% below the government’s target. The Government took several unpopular but necessary steps to move to more market-based pricing for the electricity sector measures that will help improve the dire financial condition of the Government’s National Power Corporation and make the privatization of its power generation and transmission business more attractive to potential investors. The stock market closed December 2004 up 26% from the end of 2003, buoyed by better-than expected corporate profits, the Philippine Monetary Board’s neutral monetary policy stance, and Government efforts to keep the fiscal deficit in check. The Government also enacted important legislation to help spur the development of the Philippine capital market and enhance banking sector stability.

Looking forward, the economy faces a more challenging economic environment in 2005, with high oil prices clouding the outlook for inflation and financing costs, as well as balance of payments prospects. The most pressing challenge over the coming year will be the Government’s political will to move forward aggressively with fiscal reforms to avert fiscal problems from potentially spilling over into a financial or economic crisis. Although the Philippines demonstrated considerable resilience during the Asian crisis, its ability to muddle through domestic and/or external shocks has been seriously hampered by a high and unsustainable debt level that, left unattended, threatens to throw the Philippines into a debt-deficit spiral. Meager resources and the large share of debt servicing are squeezing much-needed infrastructure spending and the delivery of basic socio-economic services such as health and education threatening the country’s ability to attract investors and compete in the global economy.

The downside brought by the subsequent ratings downgrades by international rating agencies were almost discounted by now after Moody's Investors Service cut the nation's debt rating by a more-than-expected two levels in February this year. The foreign- and local-currency ratings were reduced to B1, four steps below investment grade. Standard & Poor's in October 2004 also lowered its rating for the Philippines by one rung. Particularly disappointing to both rating companies and economists has been the seeming inability of President Gloria Macapagal Arroyo to push tax increases through Congress.

Meanwhile, the encouraging improvement in the local bourse's turnover may indicate that neophyte and seasoned investors alike have started to paint a clearer view on the Philippines' investment context despite prevailing global challenges. The Supreme Court and government's firm resolve to promote job generation with the affirmation of the Mining Act has elicited a commendable response from investors, on top of regulators' staunch resolve to improve receipts and balance the budget. Also, local monetary authorities' call to maintain interest rates is a welcome relief, as this should support recovery in succeeding months. Investors and other Philippine observers will be closely monitoring developments on the fiscal front as a crucial gauge of the Government’s commitment to broader reforms.

2. Philippine Political Outlook

After winning a congressional majority in elections last May 2004 that gave her a fresh six-year term in office, Arroyo proposed eight bills to increase taxes. But she has managed to pass only two, a watered-down version of a bill raising taxes on tobacco and alcohol and the VAT. Arroyo has been promising since taking office in 2001 to whittle down the budget deficit and most recently pledged to eliminate it by 2010. But her government's annual deficit targets have only fueled skepticism among analysts. Analysts say the government sets its deficit hurdles knee-high and then pushes them even lower when it appears unlikely to clear them. Whatever the target, each successive deficit only serves to raise the government's total debt.

Where the government did well in 2004 was in customs. Efforts to reduce corruption and inefficiency helped, but much of the increase, analysts said, was because the value of imported oil and petroleum products was rising, raising proceeds from tariffs on those products. Analysts said the government's customs haul on oil imports was likely to improve further this year. In February this year, the government raised the tariff on imported oil products to 5 percent of their value from 3 percent, a move that analysts estimate will add as much as 6 billion pesos in revenue. Arroyo did not seek to push the oil-tariff increase through Congress but increased the levy last July 2004 with a presidential executive order.

Notwithstanding a number of bright spots, the Philippines faces other challenges to achieving and sustaining a higher growth path that will make a dent in poverty alleviation. The country continues to struggle with low competitiveness and high corruption rankings, and with low domestic savings and investment rates. Although improving, banking-sector credit growth remains moderate thus far, hampered by the overhang of non-performing assets. The Central Bank continues to push for important legislative amendments that will strengthen its supervisory and prompt corrective action powers. President Gloria Macapagal-Arroyo has repeatedly stated that she will use her fresh electoral mandate to push for fiscal consolidation, including legislative passage of new revenue measures, as the top priority in her reform agenda.

In a paper for released after the election, the New York based Council on Foreign Relations warned that whatever the outcome of the polls, the winner will have little time to lose in addressing a number of serious challenges on several fronts: “long-term economic viability and social stability; competitiveness in the global economy; internal security; and ability to defend itself against growing transnational threats.” [19]

“The Philippines is not failing, but it is flailing. The most serious problems facing it today are some of the oldest: profound discrepancies in income and economic development within the country; endemic graft; and a minority population that has never been fully integrated into the broader society and economy. Some more recent problems, such as a daunting budget deficit, are equally difficult. These problems cannot be solved overnight, but a strong, clear national plan can improve the fiscal and security situations in the short to medium term”.[20]



TABLE 16: Public Securities Corp Financial Projections for CYs 2004 - 2008


The liquidity in the financial system is in a constant state of flux starting the beginning of this year. However, a growing concern is the volatility in the financial markets that large surges and ebbs of liquidity are currently creating. Like mini-tsunamis, these large changes in the flow of liquidity can trap a lot of investors. Fortunately, unlike the Asian Tsunami disaster of Dec04, investors can rely on early warning systems to manage the risks involved.

The difficulty, however, lies in interpreting the signals that are being generated by economic policy and other key variables. The current state of the financial markets can be summarized as such: rising inflation, falling interest rates, and appreciating peso. Contrary to what others may think, falling interest rates and appreciating peso is not always a positive sign for business. A downward shift in the yield curve would be negative for interest margins of financial institutions while a currency appreciation is detrimental to earnings of exports and companies that are hedged against depreciation. However, the negatives can be offset by positive owing to the multiplier effect of increased investments and a rise in aggregate spending. The net effect is likely to be a short-term negative with a long-term positive for the economy and corporate profits in general. The ebb and flow of liquidity is being reflected by the decline in interest rates and appreciation of the peso. The key driver, however, is confidence in the stock market and to some extent, continuing surge in OFW remittances. With big-ticket IPOs such as Manila Water Co. (MWCI) and SM Investments (recently we had Semirara Coal), both local and foreign investors are likely to be converging their funds into the system and may be kept as short-term deposits in banks. This excess liquidity in banks is effectively driving Treasury bill rates down while the influx of foreign portfolio investments is boosting the peso’s value.

The contravening variable in this case is the recent 25bps hike in Fed rates, which is once again widening the interest rate differential between US and Philippine Treasury yields. With the BSP still maintaining a neutral stance, concern is that the widening of the differential will result in a reversal of the peso’s gains. For the peso to maintain its strength, the BSP must tighten its grip on liquidity.

However, we are inclined to believe that this will not happen just yet. While a 1Q05 policy rate hike is our prediction, subsequent Monetary Board meetings will unlikely result in a change in policy stance. This is because of three reasons:

1. BSP still maintains that inflation is supply-cost driven and monetary policy will have no effect. 2. Inflation showed a slight decline to 8.4% from 8.6%, which could be indicative of a peaking of the CPI. 3. Liquidity is being channeled into asset reflation (a good thing) and not consumer inflation (a bad thing)

In any case, monetary policy is supportive of the current growth in the asset markets such as equities and properties. However, this is not to say that an all-accommodative monetary policy will run forever. A little tightening should still be expected in order to keep a fair grip on inflation should it spike. Under this scenario of an accommodative monetary policy and surging portfolio inflows, it is forecasted that by year-end, the 91-day T-bill rate may go back below 6% level, the peso-dollar rate reaches P53:US$, and inflation declining to 5%. The main risks to these forecasts, however, are: 1) Napocor (or Meralco) announces another rate hike, which could push up inflation again; 2) None of the large IPOs are implemented; and 3) BSP makes a rapid reversal of its neutral monetary policy.

3. FINANCIAL PROJECTION ASSUMPTIONS 1. ASSUMPTIONS FOR THE INCOME STATEMENT PROJECTIONS The Philippine Stock Market is off to a strong start this year after five years of doldrums characterized by very thin volumes and the dearth of good IPOs. Under normal circumstances, many analysts believe that the overall market trend remains positive as affirmed by the country’s successful stint at the Asean Forum 2005 this January. With the expectations of sound economic performance and strong fundamentals of listed companies, PSC’s income from broking commission is expected to increase by 10% from 2003 to P0.336M in 2004. In 2005, commission income is expected to increase eight-fold to P3.0M and an annual increase of 35% on the average is imputed from 2006 to 2008. This goes with the expectations that PSC would be able to gain a significant market share through an intensified marketing effort and ring fencing deals to be launched by the company starting 2005.

Despite the recent credit downgrades from International Rating Agencies, improving market conditions will redound to the increase in value of the company’s marketable securities. To take advantage of the projected positive gains to be generated from proprietary trading, allocation for investments in marketable securities will be increased. This will come from the projected P50.0M capital infusion from the mother company.

Depreciation expense is expected to increase by an annual rate of 10.0% while Salaries and Wages will increase by 15% per annum from 2004 to 2008. Expenditure on salaries and allowances will not dramatically increase since the company will still maintain its seconded employees to the AFP RSBS. Taxes and Licenses is projected to increase also by 10% per annum while membership dues and terminal fees to the Exchange are also estimated to rise by 10% per annum in the next five years.

Rental, utilities expense such as communication, light and water, taxes and licenses, repairs and maintenance and other operating expense are assumed to increase at an annual minimum rate of 7.6%, which is the current inflation rate for the month of December 2004. Professional Fees shall increase only by 10% per annum.

Representation, travel and entertainment is assumed to increase at an annual rate of 15.5%, this will cover for the renewed marketing campaign with existing clients and solicitation of business with new retail and institutional clients. The company will continue to provide allowance for doubtful accounts at an annual rate of 10% from 2005 to 2008. Improved market conditions will wipe out the provisions for losses which shall translate to market recoveries P1.2M to P3.2M in the near term.

Furthermore, the company is expected to continue to issue additional capital subscription of up to 300M on a staggered basis from 2004 to 2008. The new capital infusion will be used to intensify PSC’s marketing efforts, fund its working capital requirements and complement the company’s proprietary trading accounts. This will give the company enough elbow room to implement its action plans in the next five years.

Finally, revenues will be regularly augmented by dividend earnings both from its trading rights and dealer’s account registering an annual growth of 10% per annum, while trading gains from the proprietary portfolio is projected to generate a minimum yield of 10% per annum. On the other hand, interest income from securities lending and margin facilities will grow by 3% annually.

Overall, the company is expected to recover this year and post a net income of P6.3M by year-end. Further, the growth in earnings is projected to be sustained at 21% in the next three years. This will be anchored mainly by a robust increase in commission income and recoveries from the provisions for decline in market value of stocks held in the dealer account. Return on Equity is posted at 9.57% to 12.78% from CY 2005 to CY 2008.

2. ASSUMPTIONS FOR THE BALANCE SHEET PROJECTIONS Under normal circumstances, investments in Marketable Securities are expected to increase by five fold in 2005 as the company gears up for the expected economic recovery this year. Furthermore, as economic prospects point to a strong pick-up in employment growth and real income growth, the leading indicator of the perceived investment pick-up has been driven by the recovery in the stock market. It is an opportune time for Public Securities to beef up its marketable securities portfolio in order to take advantage of trading opportunities in the equities market. Cash on hand estimates, on the other hand, are pegged between 5% to 8% of total current assets from 2005 to 2008, respectively.

In view of the expected increase in market share on the back of a projected higher value turnover, dues from and to customers and dues from/to Clearing House are estimated to grow two-fold in 2004 and by 30% per annum thereafter. Moreover, prepaid expenses and other current assets are also expected to grow by at least 10% based on the cumulative average increase in insurance premiums, lease and rental fees in the NCR from 1996 to present. PPE is likewise expected to grow to P9.4421M in 2005 to account for the P2.0M capital outlay (hardware only) needed for the implementation of the Integrated Financial Management System (IFMS) in 2005. The PPE level is projected to increase by 10% in the succeeding years to cover for equipment upgrade and maintenance. Other assets will likewise increase by P5.0M to include the soft package of the entire IFMS project in 2005.

The company’s short term loans are expected to be reduced by more than 80% to about P1.2M only in 2005 and thereafter as PSC endeavours to settle its indebtedness via funds coming from the planned issuance of additional capital stock in December 2004 or towards the first quarter of 2005. Accrued Expenses and other short term payables are also projected to increase by 10% commensurate to the average increase of the prepaid items under the current assets portion. Revaluation increment in property and equipment will remain fixed at P4.172M. Hence, it is assumed that additional working capital will come from a portion of the first P50.0M projected additional subscription to PSC’s capital stock.

On the relevant financial ratios, Net Working Capital, which measures the ability of the firm to continue doing business after settling its immediate obligations, is projected to remain between P45.0 to P67.0M on account of substantial investments in marketable securities, to include both fixed income and stock market investments. In addition, PSC’s current ratios are projected to remain stable at above 3.0x. This means that its current assets can cover thrice as much its existing short term obligatios. Both Debt and Debt- to-Equity ratios are better than industry standards, the company has not been inclined to source financing through debts since its inception. Debt-to-Asset is steady at 0.01x while the D/E ratio is projected to fall within the range 0f 0.28x to 0.42x.

Return on Assets is also projected to register a compounded annual growth rate (CAGR) of 8.32% for the years 2005 to 2008. Similarly, the business will generate a steadily increasing Return on Equity figures of 9.57% to 12.78% for the next three years.

It will not be an easy feat for the company to turnaround its operations at a very short time, hence, there is no more any opportune time than the present for Public Securities to implement its strategic thrusts and action plans. There is now a revived interest in the traded equities market brought about by the focused drive by the government to attract investors into the moribund mining sector. Also, very recently, the Philippines was removed from the list of non-cooperative countries and territories by the Financial Action Task Force, the inter-governmental body to combat money laundering. Thus, in both the equity and foreign exchange markets, there has been roughly a doubling of trade volumes since the start of the year and while there has been an increased participation from both local and foreign investors in absolute levels, the greater increase has come from domestic investors. This augurs well for the stockbrokerage industry as investors sentiments continued to be buoyed on the macro levels by reforms being undertaken by the government on the fiscal side.



1) Atty. Rene G. Bañez,”Is Philippine Business Ready for Corporate Governance?”, January 3, 2003.

2) “Change or Continuity?”, Insights from Amando Doronila, KASAMA Vol. 18 No. 2 / April–May–June 2004 / Solidarity Philippines Australia Network.

3) “Foreign Stock Brokerage Houses Departing the Philippine Capital Market”, Sol Jose Vanzi, May 12, 2001, Philippine Headline News On-line, Canada.

4) Laura Brown and Tom Grundy, Demystifying Strategic Thinking, Chapter 1, p.30.

5) Membership Department, Philippine Stock Exchange (PSE).

6) Philippine Stock Exchange, Inc., CYs 1999 to 2003

7) Philippine Stock Exchange, Inc., CYs 1999 to 2003 Brokers’ Ranking

8) Philippine Stock Exchange, Inc., CYs 1999 to 2003 Brokers’ Ranking Anti-Money Laundering Act 2001.

9) Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press, 1983.

10) Securities Regulation Code (SRC) Republic Act 8799, Securities and Exchange Commission.

11) The Philippine Stock Exchange Roadshow, “ A New Start, A Conduit for Growth and Opportunities”, September 16, 2002.

12) Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts & Cases. Mc Graw Hill, 2003, 13th Ed., Chapter 3, Industry and Competitive Analysis.

13) Van Horne, James C., Financial Management and Policy, 8th Ed., Prentice Hall, Englewood Cliffs, New Jersey, USA, 1989.

14) W. Nordhaus, E. Tufte, Economics, 16th Ed., p.437.


[2] The Philippine Stock Exchange Roadshow, “ A New Start, A Conduit for Growth and Opportunities”, September 16, 2002.
[3] Philippine Stock Exchange, Inc., CY 2003 Brokers’ Ranking.
[4] Securities Regulation Code (SRC) Republic Act 8799, Securities and Exchange Commission.
[5] Membership Department, Philippine Stock Exchange (PSE).
[6] Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts & Cases. Mc Graw Hill, 2003, 13th Ed., Chapter 3, Industry and Competitive Analysis, pp.79-93.
[7] Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts & Cases. Mc Graw Hill, 2003, 13th Ed., Chapter 4, Evaluating Company Resources and Competitive Capabilities, pp.128-132.
[8] Atty. Rene G. Bañez, Is Philippine Business Ready for Corporate Governance?, January 3, 2003.
[9] Laura Brown and Tom Grundy, Demystifying Strategic Thinking, Chapter 1, p.30.
[10] “Foreign Stock Brokerage Houses Departing the Philippine Capital Market”, Sol Jose Vanzi, May 12, 2001, Philippine Headline News On-line, Canada.
[11] W.Nordhaus, E. Tufte, Economics, 16th Ed., p.437.
[12] Revised Securities Act, Batas Pambansa Blg. 178, Chapter 4, Sec. 29 on Fraudulent Transactions.
[13] KWR International, Advisor News Letter, Global Economic, Political and Financial Analysis, p.3, October 23, 2002.
[14] Makati Business Club Economic Research, “Bearish Mood Besets Business”, July 24, 2000.
[15] Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts & Cases. Mc Graw Hill, 2003, 13th Ed., Chapter 3, Industry and Competitive Analysis, pp.96.
[16] Anti-Money Laundering Act 2001
[17]Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts & Cases. Mc Graw Hill, 2003, 13th Ed., Chapter 3, Industry and Competitive Analysis, p.96.
[18] Thompson, Arthur and Strickland, A.J. Strategic Management: Concepts & Cases. Mc Graw Hill, 2003, 13th Ed., Chapter 3, Industry and Competitive Analysis, p.107.
[19] “Change or Continuity?”, Insights from Amando Doronila, KASAMA Vol. 18 No. 2 / April–May–June 2004 / Solidarity Philippines Australia Network.

[20] “Change or Continuity?”, Insights from Amando Doronila, KASAMA Vol. 18 No. 2 / April–May–June 2004 / Solidarity Philippines Australia Network.

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