DISCUSSION OF RESULTS

The Group's business is composed of three segments. (1) Retail Banking operations in Georgia principally provides consumer loans, mortgage loans, overdrafts, credit cards and other credit facilities, funds transfer and settlement services, and handling customers' deposits for both individuals as well as legal entities. Retail Banking targets mass retail and mass affluent segments, together with small and medium enterprises and micro businesses. (2) Corporate and Investment Banking comprises Corporate Banking and Investment Management operations in Georgia. Corporate Banking principally provides loans and other credit facilities, funds transfers and settlement services, trade finance services, documentary operations support and handles saving and term deposits for corporate and institutional customers. The Investment Management business principally provides private banking services to high net worth clients. (3) BNB, comprising JSC Belarusky Narodny Bank, principally provides retail and corporate banking services to clients in Belarus.

OPERATING INCOME
	GEL thousands, unless otherwise noted	2Q21	2Q20	Change y-o-y	1Q21	Change q-o-q		1H21	1H20	Change y-o-y
	Interest income	446,636	379,038	17.8%	428,580	4.2%		875,216	767,364	14.1%
	Interest expense	(218,387)	(204,102)	7.0%	(216,248)	1.0%		(434,635)	(395,347)	9.9%
	Net interest income	228,249	174,936	30.5%	212,332	7.5%		440,581	372,017	18.4%
	Fee and commission income	94,727	54,389	74.2%	76,446	23.9%		171,173	125,284	36.6%
	Fee and commission expense	(37,521)	(21,488)	74.6%	(27,796)	35.0%		(65,317)	(52,271)	25.0%
	Net fee and commission income	57,206	32,901	73.9%	48,650	17.6%		105,856	73,013	45.0%
	Net foreign currency gain	22,082	22,743	-2.9%	19,176	15.2%		41,258	53,404	-22.7%
	Net other income	27,438	9,081	NMF	23,482	16.8%		50,920	15,707	NMF
	Operating income	334,975	239,661	39.8%	303,640	10.3%		638,615	514,141	24.2%
	Net interest margin	4.7%	4.2%		4.5%			4.6%	4.6%
	Average interest earning assets	19,351,021	16,668,289	16.1%	18,932,570	2.2%		19,133,511	16,138,601	18.6%
	Average interest bearing liabilities	19,574,436	16,957,795	15.4%	19,345,778	1.2%		19,412,502	16,544,278	17.3%
	Average net loans and finance lease receivables, currency blended	14,852,631	12,862,536	15.5%	14,340,661	3.6%		14,595,985	12,486,425	16.9%
	Average net loans and finance lease receivables, GEL	6,230,683	4,984,078	25.0%	5,873,004	6.1%		6,054,977	4,987,437	21.4%
	Average net loans and finance lease receivables, FC	8,621,948	7,878,458	9.4%	8,467,657	1.8%		8,541,008	7,498,988	13.9%
	Average client deposits and notes, currency blended	13,889,287	11,115,351	25.0%	13,942,631	-0.4%		13,903,495	10,788,743	28.9%
	Average client deposits and notes, GEL	5,284,975	3,602,387	46.7%	5,313,836	-0.5%		5,319,952	3,516,911	51.3%
	Average client deposits and notes, FC	8,604,312	7,512,964	14.5%	8,628,795	-0.3%		8,583,543	7,271,832	18.0%
	Average liquid assets, currency blended	6,574,819	5,297,130	24.1%	6,732,512	-2.3%		6,608,636	5,299,872	24.7%
	Average liquid assets, GEL	2,652,100	2,341,763	13.3%	2,600,231	2.0%		2,641,984	2,280,286	15.9%
	Average liquid assets, FC	3,922,719	2,955,367	32.7%	4,132,281	-5.1%		3,966,652	3,019,586	31.4%
	Liquid assets yield, currency blended	3.3%	3.4%		3.1%			3.2%	3.7%
	Liquid assets yield, GEL	7.9%	7.5%		7.6%			7.8%	7.8%
	Liquid assets yield, FC	0.2%	0.1%		0.1%			0.2%	0.6%
	Loan yield, currency blended	10.4%	10.2%		10.4%			10.4%	10.6%
	Loan yield, GEL	14.9%	14.7%		14.8%			14.9%	15.2%
	Loan yield, FC	7.0%	7.3%		7.2%			7.1%	7.5%
	Cost of funds, currency blended	4.5%	4.8%		4.5%			4.5%	4.8%
	Cost of funds, GEL	7.8%	8.3%		7.8%			7.7%	8.1%
	Cost of funds, FC	2.7%	3.0%		2.8%			2.7%	2.9%
	Cost / income	36.4%	43.9%		35.4%			35.9%	41.1%

Performance highlights

§ The Group generated strong operating income of GEL 335.0mln in 2Q21 (up 39.8% y-o-y and up 10.3% q-o-q), ending six months of 2021 with operating income of GEL 638.6mln (up 24.2% y-o-y). The y-o-y and q-o-q increase in operating income was primarily driven by strong net interest income (up 30.5% y-o-y and up 7.5% q-o-q in 2Q21, and up 18.4% y-o-y in 1H21) and net fee and commission income (up 73.9% y-o-y and up 17.6% q-o-q in 2Q21, and up 45.0% y-o-y in 1H21) generation, on the back of the rebound in economic activity in the second quarter of 2021

§ Our NIM was 4.7% in 2Q21 (up 50bps y-o-y and up 20bps q-o-q) and 4.6% in the first half of 2021 (flat y-o-y). The y-o-y increase in NIM in 2Q21 was primarily due to the 20bps y-o-y increase in currency blended loan yields, coupled with 30bps decrease in cost of funds. On a six months basis, NIM was flat y-o-y in 1H21, reflecting 20bps decline in currency blended loan yields, offset by 30bps decline in cost of funds. The y-o-y decline in cost of funds both in 2Q21 and 1H21, primarily reflected the impact of the GEL 500mln local currency bonds repayment in June 2020, partially offset by the NBG's monetary policy rate changes). On a q-o-q basis, our NIM was up 20bps in 2Q21 (while both currency blended loan yields and cost of funds stood flat), primarily driven by successfully deploying the excess liquidity during the second quarter

§ Liquid assets yield. Currency blended liquid assets yield was 3.3% in 2Q21 (down 10bps y-o-y and up 20bps q-o-q) and 3.2% in 1H21 (down 50bps y-o-y). The local currency denominated liquid assets yield movement (up 40bps y-o-y and up 30bps q-o-q in 2Q21, and flat y-o-y in 1H21) directly reflected the NBG's monetary policy rate changes (NBG decreased monetary policy rate by a cumulative of 100bps since April 2020, but increased the policy rate twice by a cumulative of 150bps during 1H21). As for the foreign currency denominated liquid assets yield, 40bps y-o-y decline in 1H21 largely reflected the cut in the US Fed in March 2020 (the NBG accrues interest rate on banks' US Dollar obligatory reserves at the US Fed rate upper bound minus 50bps), while 10bps y-o-y and q-o-q increase in 2Q21, was primarily due to the local currency appreciation during the second quarter, resulting in a lower average balance of interest-earning liquid assets. Overall, y-o-y decrease of higher yielding local currency denominated liquid assets portion in total interest-earning liquid assets portfolio in 2Q21 and 1H21, resulted in y-o-y decline in currency blended liquid assets yields during these periods

§ Cost of funds was 4.5% in the second quarter of 2021 (down 30bps y-o-y and flat q-o-q) and in the first half of 2021 (down 30bps y-o-y). Local currency denominated cost of funds was down 50bps y-o-y in 2Q21, and down 40bps y-o-y in 1H21, reflecting the impact of the repayment of the GEL 500mln local currency bonds due in the beginning of June 2020, partially offset by the NBG's monetary policy rate changes. The cost of foreign currency denominated funds was down 30bps y-o-y and down 10bps q-o-q in 2Q21 and down 20bps y-o-y in 1H21, largely driven by the Libor rate decline as well as attracting certain borrowings from credit institutions at lower rates in 2021

§ Net fee and commission income reached GEL 57.2mln in 2Q21 (up 73.9% y-o-y and up 17.6% q-o-q) and GEL 105.9mln in 1H21 (up 45.0% y-o-y). The outstanding performance was mainly driven by a strong fee and commission income generation in our settlement operations on the back of the rebound in the economic activity during the second quarter, and increase in fees generated from guarantees and letters of credit issued by the Corporate and Investment Banking business

§ Net foreign currency gain was down 2.9% y-o-y and up 15.2% q-o-q in 2Q21, and down 22.7% y-o-y in 1H21. The movement in net foreign currency gain directly reflected the level of currency volatility and client-driven flows during the periods presented

§ Net other income in the second quarter and the first half of 2021 was mainly attributable to the net gains from the sale of real estate properties and net gains from the sale of investment securities

NET OPERATING INCOME BEFORE NON-RECURRING ITEMS; COST OF RISK; PROFIT
GEL thousands, unless otherwise noted	2Q21	2Q20	Change y-o-y	1Q21	Change q-o-q		1H21	1H20	Change y-o-y
Salaries and other employee benefits	(68,812)	(60,656)	13.4%	(60,223)	14.3%		(129,035)	(117,194)	10.1%
Administrative expenses	(30,068)	(22,450)	33.9%	(23,563)	27.6%		(53,631)	(49,470)	8.4%
Depreciation, amortisation and impairment	(22,354)	(21,139)	5.7%	(22,561)	-0.9%		(44,915)	(42,529)	5.6%
Other operating expenses	(584)	(913)	-36.0%	(1,012)	-42.3%		(1,596)	(1,974)	-19.1%
Operating expenses	(121,818)	(105,158)	15.8%	(107,359)	13.5%		(229,177)	(211,167)	8.5%
(Loss) /profit from associate	(4,299)	113	NMF	167	NMF		(4,132)	414	NMF
Operating income before cost of risk	208,858	134,616	55.2%	196,448	6.3%		405,306	303,388	33.6%
Expected credit loss on loans to customers	25,140	11,621	116.3%	(28,236)	NMF		(3,096)	(216,568)	-98.6%
Expected credit loss on finance lease receivables	(683)	(3,387)	-79.8%	(931)	-26.6%		(1,614)	(5,273)	-69.4%
Other expected credit loss and impairment charge on other assets and provisions	(10,424)	(18,455)	-43.5%	(14,950)	-30.3%		(25,374)	(29,782)	-14.8%
Cost of risk	14,033	(10,221)	NMF	(44,117)	NMF		(30,084)	(251,623)	-88.0%
Net operating income before non-recurring items	222,891	124,395	79.2%	152,331	46.3%		375,222	51,765	NMF
Net non-recurring items	(67)	(1,241)	-94.6%	17	NMF		(50)	(41,586)	-99.9%
Profit before income tax	222,824	123,154	80.9%	152,348	46.3%		375,172	10,179	NMF
Income tax (expense) / benefit	(20,654)	(8,470)	143.8%	(13,424)	53.9%		(34,078)	4,560	NMF
Profit	202,170	114,684	76.3%	138,924	45.5%		341,094	14,739	NMF

§ Operating expenses. We continued investing in IT-related resources as part of our agile transformation process, focus on digitalisation and investments in marketing, and at the same time maintained our focus on cost efficiencies. In the second quarter of 2020, we initiated cost optimisation measures, the impact of which has been reflected in subsequent quarters. Our cost to income ratio was 36.4% in 2Q21, down from 43.9% in 2Q20 and slightly up from 35.4% in 1Q21. On a six months basis, cost to income ratio improved to 35.9% in 1H21, down from 41.1% in 1H20

§ Although the Bank's Pillar 2 capital buffers are duly rebuilt, following the NBG's instruction in July 2021 that the discretionary remuneration of the Bank's management board for the year 2020 should not be awarded, the Remuneration Committee of Bank of Georgia Group PLC and the Remuneration Committee of the Bank's Supervisory Board had no choice but to comply resulting in the CEO's discretionary remuneration for the year 2020 (66,214 shares in the amount of US$ 1,060,814), and the Bank's management board's discretionary remuneration for the year 2020 (137,029 shares in the amount of US$ 2,078,774), each of which were subject to the NBG's relevant requirements, not being awarded. The expense already accrued in the first quarter of 2021 was not material, therefore, we did not restate the 1Q21 results

§ Cost of risk in 2Q21 and 1H21 reflected a combination of the following factors:

§ Cost of credit risk was a net gain of 0.6% in 2Q21 (a net gain of 0.2% in 2Q20 and cost of credit risk ratio of 0.8% in 1Q21) and cost of credit risk ratio of 0.1% in 1H21 (3.5% in 1H20). The 3.5% cost of credit risk ratio in 1H20 reflected the IFRS 9 ECL reserve builds, created for the full economic cycle in the first quarter of 2020, related to the deterioration of the macroeconomic environment and expected creditworthiness of borrowers as a result of the COVID-19 pandemic impact. The Group continuously revisits the assumptions to reflect better visibility and up-to-date macroeconomic forecast scenarios, as well as in-depth analyses of the financial standing and the creditworthiness of borrowers. The Group recorded additional ECL provisions on loans to customers and finance lease receivables in the amount of GEL 7.3mln for the Retail Banking business, and net ECL reversal of GEL 30.4mln for the Corporate and Investment Banking segment in 2Q21. The latter was primarily driven by the recovery of several corporate loans during the quarter. Given that we are operating in a rapidly changing environment with a high level of uncertainty with regard to both the length and the severity of the COVID-19 impact, we continue to monitor new facts and circumstances on a continuous basis

§ Expected credit loss and impairment charge on other assets and provisions. The Group recorded a GEL 10.4mln and a GEL 25.4mln ECL and impairment charge on other assets and provision in 2Q21 and 1H21, respectively. This mainly comprised expenses accrued for certain legal fees (these are not expected to be incurred going forward), which were partially offset by reversal of reserves on guarantees issued

§ Quality of the loan book. The y-o-y rise in NPLs to gross loans and decrease in NPL coverage ratios at 30 June 2021, was mainly driven by the gradual increase in non-performing borrowers since the second quarter of 2020 on the back of the COVID-19 pandemic outbreak, while the upfront ECL provisions for the full economic cycle on loan portfolio were created already in the first quarter of 2020

GEL thousands, unless otherwise noted	Jun-21	Jun-20	Change y-o-y	Mar-21	Change q-o-q
NON-PERFORMING LOANS
NPLs	524,964	355,260	47.8%	534,626	-1.8%
NPLs to gross loans	3.5%	2.7%		3.6%
NPLs to gross loans, RB	3.3%	1.9%		3.3%
NPLs to gross loans, CIB	3.6%	4.1%		4.0%
NPL coverage ratio	73.1%	115.7%		77.5%
NPL coverage ratio adjusted for the discounted value of collateral	122.2%	166.3%		127.8%

§ BNB - the Group's banking subsidiary in Belarus - continues to perform well and remain strongly capitalised, with capital adequacy ratios well above the requirements of the National Bank of the Republic of Belarus ("NBRB"). At 30 June 2021, total capital adequacy ratio was 16.2%, well above the 12.5% minimum requirement, while Tier I capital adequacy ratio was 11.1%, again above the NBRB's 7.0% minimum requirement. ROAE was 12.8% in 2Q21 (12.2% in 2Q20 and 10.1% in 1Q21) and 11.4% in 1H21 (5.9% in 1H20), reflecting the rebound in economic activity. For financial results highlights of BNB, see page 21

§ Net non-recurring items in the first half of 2020 primarily comprised GEL 39.7mln one-off net losses on modification of financial assets recorded mostly in March 2020. These losses were related to the three-month payment holidays on principal and interest payments offered to our retail banking clients to reduce the requirement for customers to physically visit the branches and reduce the risk of the spread of the virus. In addition, in 1Q20, the Bank incurred GEL 1.2mln one-off costs to finance and donate 20,000 COVID-19 laboratory tests, 10 ventilators, 50,000 face masks and 60,000 gloves to the Ministry of Health of Georgia, to help curb the spread of the virus. These costs were classified as non-recurring items

§ Overall, the Group recorded profit of GEL 202.2mln in 2Q21 (up 76.3% y-o-y and up 45.5% q-o-q) and GEL 341.1mln in 1H21 (compared with the profit of GEL 14.7mln in 1H20). The Group's ROAE was 29.4% in 2Q21 (21.8% in 2Q20 and 21.5% in 1Q21) and 25.6% in the first half of 2021 (1.4% in 1H20)

BALANCE SHEET HIGHLIGHTS
GEL thousands, unless otherwise noted	Jun-21	Jun-20	Change y-o-y	Mar-21	Change q-o-q
Liquid assets	5,904,270	5,447,730	8.4%	6,968,871	-15.3%
Liquid assets, GEL	2,388,405	2,461,639	-3.0%	2,515,544	-5.1%
Liquid assets, FC	3,515,865	2,986,091	17.7%	4,453,327	-21.1%
Net loans and finance lease receivables	14,789,371	12,599,092	17.4%	14,601,275	1.3%
Net loans and finance lease receivables, GEL	6,438,426	5,001,418	28.7%	6,029,913	6.8%
Net loans and finance lease receivables, FC	8,350,945	7,597,674	9.9%	8,571,362	-2.6%
Client deposits and notes	13,944,383	11,583,139	20.4%	14,003,209	-0.4%
Amounts owed to credit institutions	3,224,577	3,521,860	-8.4%	4,039,250	-20.2%
Borrowings from DFIs	1,927,225	1,755,656	9.8%	2,222,967	-13.3%
Short-term loans from central banks	398,186	847,213	-53.0%	772,647	-48.5%
Loans and deposits from commercial banks	899,166	918,991	-2.2%	1,043,636	-13.8%
Debt securities issued	1,515,511	1,561,933	-3.0%	1,653,399	-8.3%
LIQUIDITY AND CAPITAL ADEQUACY RATIOS
Net loans / client deposits and notes	106.1%	108.8%		104.3%
Net loans / client deposits and notes + DFIs	93.2%	94.5%		90.0%
Liquid assets / total assets	27.0%	28.4%		30.6%
Liquid assets / total liabilities	31.0%	32.1%		34.7%
NBG liquidity coverage ratio	124.5%	135.4%		149.3%
NBG (Basel III) CET1 capital adequacy ratio	12.5%	9.9%		11.2%
NBG (Basel III) Tier I capital adequacy ratio	14.4%	12.0%		13.3%
NBG (Basel III) Total capital adequacy ratio	19.1%	17.4%		18.6%

Our balance sheet remains highly liquid (NBG liquidity coverage ratio of 124.5%) and strongly capitalised (NBG Basel III CET1 capital adequacy ratio of 12.5%) with a well-diversified funding base (client deposits and notes to total liabilities of 73.2%) as at 30 June 2021.

§ Liquidity. Liquid assets stood at GEL 5,904.3mln at 30 June 2021, up 8.4% y-o-y and down 15.3% q-o-q. The notable increase over the year was mostly attributable to excess liquidity placed with credit institutions, as the Bank maintained excess liquidity since 2020 for risk mitigation purposes on the back of the current COVID-19 crisis. Q-o-q decrease in liquid assets is largely reflective of successfully deploying excess liquidity during the second quarter of 2021. As a result, the NBG Liquidity coverage ratio was 124.5% at 30 June 2021, down from 135.4% at 30 June 2020 and down from 149.3% at 31 March 2021, still comfortably above the 100% minimum requirement level

§ Loan book. Our net loan book and finance lease receivables reached GEL 14,789.4mln at 30 June 2021, up 17.4% y-o-y and up 1.3% q-o-q. Growth on a constant-currency basis was 13.7% y-o-y and 5.5% q-o-q. At 30 June 2021, the retail loan book represented 65.6% of the total loan portfolio (65.8% at 30 June 2020 and 65.5% 31 March 2021). Local currency portfolio experienced strong y-o-y and q-o-q growth of 28.7% and 6.8%, respectively, which was partially driven by the government's de-dollarisation initiatives and our goal to increase the share of local currency loans in our portfolio

§ Net loans to customer funds and Development Finance Institutions (DFI) ratio. Our net loans to customer funds and DFI ratio, which is closely monitored by management, stood at 93.2% at 30 June 2021, compared with 94.5% at 30 June 2020 and 90.0% at 31 March 2021

§ Diversified funding base. Debt securities issued decreased by 3.0% y-o-y and by 8.3% q-o-q at 30 June 2021. The y-o-y and q-o-q decrease was largely attributable to the appreciation of the local currency during the second quarter

§ Strong capital position and update on minimum capital requirements. In April 2020, the NBG announced its updated supervisory plan for the Georgian banking sector, which was mainly focused on the capital adequacy and liquidity initiatives that allowed the banking sector to support financially stressed customers through the COVID-19 pandemic. From a capital adequacy perspective, a number of capital buffers were released, which reduced the minimum regulatory capital requirements at the time. During the period that banks partially or fully utilised the reduced Pillar 2 and conservation buffers, banks have not been able to make any form of capital distribution. Subsequently, the NBG has announced a released capital buffers rebuild plan and has updated the timeline for the phase-in of additional Basel III capital requirements for the banking sector.

Throughout the pandemic, and the consequent significant reduction in economic activity, Bank of Georgia has delivered strong operating performance, with good operating income, well-managed costs, and robust asset quality. This has led to consistently delivering return on equity in excess of 20% over the last four quarters, and maintaining capital adequacy ratios comfortably above the minimum regulatory requirements.

Considering the Bank's strong capital position, to ensure flexibility on capital distribution to shareholders, the Bank confirmed to the NBG that since end of May 2021, the Bank is no longer utilising, or expects to utilise, any of the Pillar 2 or conservation buffers that were waived last year. Consequently, there is no longer any regulatory restriction for Bank of Georgia on making any capital distributions.

As a result of robust operating performance and strong internal capital generation, the Bank's Basel III Common Equity Tier 1, Tier 1 and Total capital adequacy ratios stood at 12.5%, 14.4% and 19.1%, respectively, at 30 June 2021, all comfortably above the minimum required levels of 11.1%, 13.4% and 17.7%, respectively. The movement in capital adequacy ratios in 2Q21 and the potential impact of a 10% devaluation of local currency on different levels of capital is as follows:

	31 March 2021	2Q21 profit	Business growth	GEL appreciation	Tier 2 facility impact	30 June 2021		Potential impact of 10% GEL devaluation
CET1 capital adequacy ratio	11.2%	1.3%	-0.7%	0.7%	-	12.5%		-0.8%
Tier I capital adequacy ratio	13.3%	1.3%	-0.8%	0.6%	-	14.4%		-0.7%
Total capital adequacy ratio	18.6%	1.3%	-1.0%	0.5%	-0.3%	19.1%		-0.6%

The Bank's ongoing minimum capital adequacy ratios reflecting the full phase-in of Basel III capital requirements, which remain subject to ongoing annual regulatory reviews, are currently expected to be as follows:

Expected minimum capital requirements for 2021-2023

 

	Dec-21	Dec-22	Dec-23
CET1 capital requirement	11.6%	11.9%	12.2%
Tier 1 capital requirement	13.8%	14.3%	14.7%
Total capital requirement	17.9%	17.9%	17.9%

§ Dividends. The Board today declared an interim dividend of GEL 1.48 per ordinary share in respect of the period ended 30 June 2021, payable to ordinary shareholders of Bank of Georgia Group PLC on the register of members at the close of business on 22 October 2021, in British Pounds Sterling, pursuant to the following timetable:

Ex-Dividend Date: 21 October 2021

Record Date: 22 October 2021

Currency Conversion Date: 22 October 2021

Payment Date: 5 November 2021

The NBG Lari/British Pounds Sterling average exchange rate for the period 18 to 22 October 2021 will be used as the exchange rate on the Currency Conversion Date.

DISCUSSION OF SEGMENT RESULTS

RETAIL BANKING (RB)

 

Retail Banking provides consumer loans, mortgage loans, overdrafts, credit card facilities and other credit facilities as well as funds transfer and settlement services and the handling of customer deposits for both individuals and legal entities (SME and micro businesses only). RB is represented by the following sub-segments: (1) mass retail segment, (2) the mass affluent segment (through our SOLO brand), and (3) SME and micro businesses - MSME.

GEL thousands, unless otherwise noted	2Q21	2Q20	Change y-o-y	1Q21	Change q-o-q		1H21	1H20	Change y-o-y
INCOME STATEMENT HIGHLIGHTS
Net interest income	135,064	102,667	31.6%	131,448	2.8%		266,512	220,934	20.6%
Net fee and commission income	44,223	22,184	99.3%	37,385	18.3%		81,608	51,581	58.2%
Net foreign currency gain	10,026	7,525	33.2%	11,109	-9.7%		21,135	29,159	-27.5%
Net other income	9,502	4,085	132.6%	8,841	7.5%		18,343	5,991	NMF
Operating income	198,815	136,461	45.7%	188,783	5.3%		387,598	307,665	26.0%
Salaries and other employee benefits	(48,230)	(41,826)	15.3%	(40,055)	20.4%		(88,285)	(82,394)	7.1%
Administrative expenses	(22,992)	(16,898)	36.1%	(18,393)	25.0%		(41,385)	(37,629)	10.0%
Depreciation, amortisation and impairment	(19,097)	(17,610)	8.4%	(18,914)	1.0%		(38,011)	(35,499)	7.1%
Other operating expenses	(429)	(550)	-22.0%	(630)	-31.9%		(1,059)	(1,103)	-4.0%
Operating expenses	(90,748)	(76,884)	18.0%	(77,992)	16.4%		(168,740)	(156,625)	7.7%
(Loss) / profit from associate	(4,299)	113	NMF	167	NMF		(4,132)	414	NMF
Operating income before cost of risk	103,768	59,690	73.8%	110,958	-6.5%		214,726	151,454	41.8%
Cost of risk	(10,435)	(5,757)	81.3%	(31,296)	-66.7%		(41,731)	(147,835)	-71.8%
Net operating income before non-recurring items	93,333	53,933	73.1%	79,662	17.2%		172,995	3,619	NMF
Net non-recurring items	211	(1,249)	NMF	156	35.3%		367	(40,178)	NMF
Profit before income tax	93,544	52,684	77.6%	79,818	17.2%		173,362	(36,559)	NMF
Income tax (expense) / benefit	(8,518)	(3,214)	NMF	(5,834)	46.0%		(14,352)	8,000	NMF
Profit	85,026	49,470	71.9%	73,984	14.9%		159,010	(28,559)	NMF
BALANCE SHEET HIGHLIGHTS
Net loans, currency blended	9,222,637	7,797,191	18.3%	9,048,924	1.9%		9,222,637	7,797,191	18.3%
Net loans, GEL	5,397,390	4,241,765	27.2%	5,001,447	7.9%		5,397,390	4,241,765	27.2%
Net loans, FC	3,825,247	3,555,426	7.6%	4,047,477	-5.5%		3,825,247	3,555,426	7.6%
Client deposits, currency blended	7,334,708	5,962,044	23.0%	7,414,743	-1.1%		7,334,708	5,962,044	23.0%
Client deposits, GEL	2,316,486	1,921,108	20.6%	2,240,838	3.4%		2,316,486	1,921,108	20.6%
Client deposits, FC	5,018,222	4,040,936	24.2%	5,173,905	-3.0%		5,018,222	4,040,936	24.2%
of which:
Time deposits, currency blended	4,459,824	3,574,598	24.8%	4,564,157	-2.3%		4,459,824	3,574,598	24.8%
Time deposits, GEL	1,184,271	973,050	21.7%	1,141,648	3.7%		1,184,271	973,050	21.7%
Time deposits, FC	3,275,553	2,601,548	25.9%	3,422,509	-4.3%		3,275,553	2,601,548	25.9%
Current accounts and demand deposits, currency blended	2,874,884	2,387,446	20.4%	2,850,586	0.9%		2,874,884	2,387,446	20.4%
Current accounts and demand deposits, GEL	1,132,215	948,058	19.4%	1,099,190	3.0%		1,132,215	948,058	19.4%
Current accounts and demand deposits, FC	1,742,669	1,439,388	21.1%	1,751,396	-0.5%		1,742,669	1,439,388	21.1%
KEY RATIOS
ROAE	22.1%	16.4%		20.7%			21.4%	-4.7%
Net interest margin, currency blended	4.5%	4.0%		4.6%			4.6%	4.4%
Cost of credit risk ratio	0.3%	0.2%		1.4%			0.8%	3.7%
Cost of funds, currency blended	5.5%	5.9%		5.4%			5.5%	5.9%
Loan yield, currency blended	11.1%	11.1%		11.1%			11.1%	11.5%
Loan yield, GEL	15.2%	14.9%		15.2%			15.2%	15.3%
Loan yield, FC	5.9%	6.6%		6.1%			6.0%	6.8%
Cost of deposits, currency blended	2.6%	2.9%		2.7%			2.7%	2.8%
Cost of deposits, GEL	5.8%	6.4%		5.9%			5.8%	6.0%
Cost of deposits, FC	1.2%	1.4%		1.3%			1.2%	1.4%
Cost of time deposits, currency blended	3.6%	4.3%		3.8%			3.7%	4.1%
Cost of time deposits, GEL	9.1%	10.3%		9.5%			9.3%	9.8%
Cost of time deposits, FC	1.7%	2.2%		1.9%			1.8%	2.1%
Current accounts and demand deposits, currency blended	1.0%	0.9%		1.1%			1.0%	0.9%
Current accounts and demand deposits, GEL	2.4%	2.3%		2.4%			2.4%	2.3%
Current accounts and demand deposits, FC	0.1%	0.1%		0.2%			0.2%	0.1%
Cost / income ratio	45.6%	56.3%		41.3%			43.5%	50.9%

 

Performance highlights

§ Retail Banking generated strong operating income reaching GEL 198.8mln in the second quarter of 2021 (up 45.7% y-o-y and up 5.3% q-o-q) and GEL 387.6mln in the first half of 2021 (up 26.0% y-o-y). Robust net interest income and net fee and commission income generation were the main contributors to the increase in operating income in both periods presented

§ Retail Banking net interest income was up 31.6% y-o-y and up 2.8% q-o-q in 2Q21 and up 20.6% y-o-y in 1H21, largely reflecting the 18.3% y-o-y growth in customer lending. RB NIM was 4.5% in 2Q21 (up 50bps y-o-y and slightly down 10bps q-o-q) and 4.6% in 1H21 (up 20bps y-o-y). The y-o-y increase in NIM both in 2Q21 and 1H21 was primarily reflecting a decline in the cost of funds (down 40bps y-o-y in 2Q21 and 1H21). Retail Banking net interest income also benefited from the growth of the local currency denominated loan portfolio, which generated 9.3ppts and 9.2ppts higher yield than the foreign currency denominated loan portfolio in 2Q21 and 1H21, respectively

§ Retail Banking net loan book reached GEL 9,222.6mln at 30 June 2021, up 18.3% y-o-y and up 1.9% q-o-q. On a constant currency basis, retail loan book increased by 15.5% y-o-y and by 5.0% q-o-q in 2Q21. The local currency denominated loan book increased by 27.2% y-o-y and by 7.9% q-o-q, while the foreign currency denominated loan book grew by 7.6% y-o-y and decreased by 5.5% q-o-q in 2Q21, the latter mainly reflecting the appreciation of the local currency during the quarter. As a result, the local currency denominated loan book accounted for 58.5% of the Retail Banking loan book at 30 June 2021, compared with 54.4% at 30 June 2020 and 55.3% at 31 March 2021. The consumer loan portfolio, which is typically most sensitive to foreign currency risk, is now almost completely de-dollarised, while the share of retail mortgage loans in local currency was 48.9% at 30 June 2021

§ The y-o-y and q-o-q loan book growth reflected continued strong loan origination levels in all segments of Retail Banking business, largely driven by the rebound in economic activity:

RETAIL BANKING LOAN BOOK BY PRODUCTS
GEL thousands, unless otherwise noted	2Q21	2Q20	Change y-o-y	1Q21	Change q-o-q		1H21	1H20	Change y-o-y
Loan originations
Consumer loans	642,450	143,060	NMF	455,590	41.0%		1,098,041	506,903	116.6%
Mortgage loans	453,211	63,195	NMF	420,064	7.9%		873,275	322,505	NMF
Micro loans	406,099	75,397	NMF	408,581	-0.6%		814,679	352,639	131.0%
SME loans	389,201	104,893	NMF	371,256	4.8%		760,457	402,407	89.0%
Outstanding balance
Consumer loans	1,981,332	1,652,327	19.9%	1,809,839	9.5%		1,981,332	1,652,327	19.9%
Mortgage loans	3,770,534	3,237,302	16.5%	3,812,962	-1.1%		3,770,534	3,237,302	16.5%
Micro loans	1,870,061	1,586,847	17.8%	1,783,166	4.9%		1,870,061	1,586,847	17.8%
SME loans	1,431,902	1,166,933	22.7%	1,505,649	-4.9%		1,431,902	1,166,933	22.7%

§ Retail Banking client deposits amounted to GEL 7,334.7mln at 30 June 2021, up 23.0% y-o-y and down 1.1% q-o-q. The dollarisation level of deposits stood at 68.4% at 30 June 2021, compared with 67.8% at 30 June 2020 and 69.8% at 31 March 2021. The cost of foreign currency denominated deposits was 1.2% in 2Q21 (down 20bps y-o-y and down 10bps q-o-q) and 1H21 (down 20bps y-o-y), while the cost of local currency denominated deposits was 5.8% in 2Q21 (down 60bps y-o-y and down 10bps q-o-q) and 1H21 (down 20bps y-o-y). The spread between the cost of RB's client deposits in GEL and foreign currency was 4.6ppts in 2Q21 (GEL: 5.8%; FC: 1.2%), compared with 5.0ppts in 2Q20 (GEL: 6.4%; FC: 1.4%) and 4.6ppts in 1Q21 (GEL: 5.9%; FC: 1.3%). On a six months basis, the spread was 4.6ppts both in 1H21 (GEL: 5.8%; FC: 1.2%) and 1H20 (GEL: 6.0%; FC: 1.4%)

§ Retail Banking net fee and commission income. Net fee and commission income generation was extremely strong, increasing by 99.3% y-o-y and by 18.3% q-o-q in the second quarter of 2021 and by 58.2% in the first half of 2021. The increase was mainly driven by strong performance in settlement operations, reflecting the rebound in economic activity during the second quarter

 

 

§ Retail Banking's cost of credit risk ratio was 0.3% in 2Q21 (up from 0.2% in 2Q20 and down from 1.4% in 1Q21) and 0.8% in 1H21 (down from 3.7% in 1H20). The 3.7% cost of credit risk ratio in 1H20 reflected the IFRS 9 ECL reserve builds created for the full economic cycle in the first quarter of 2020, related to the deterioration of the macroeconomic environment and expected creditworthiness of borrowers as a result of the COVID-19 pandemic impact. The Group continuously revisits the assumptions used in the reserve builds to reflect better visibility and up-to-date macroeconomic forecast scenarios, and the creditworthiness of borrowers. Based on the ongoing analyses, the Group recorded additional ECL reserves on loans to customers in the Retail Banking segment in 2Q21, resulting in a 0.3% cost of credit risk ratio during the quarter

§ Our Retail Banking business continued to further execute our strategy of continuous digitalisation, as demonstrated by the following performance indicators:

Volume information in GEL thousands	2Q21	2Q20	Change y-o-y	1Q21	Change q-o-q		1H21	1H20	Change y-o-y
Retail Banking customers
Number of new customers	47,809	27,214	75.7%	37,901	26.1%		72,189	59,010	22.3%
Number of customers	2,573,729	2,540,721	1.3%	2,641,237	-2.6%		2,573,729	2,540,721	1.3%
Cards
Number of cards issued	213,185	92,315	130.9%	191,547	11.3%		404,732	245,253	65.0%
Number of cards outstanding	2,079,783	2,178,053	-4.5%	2,111,254	-1.5%		2,079,783	2,178,053	-4.5%
Express Pay terminals
Number of Express Pay terminals	3,141	3,118	0.7%	3,125	0.5%		3,141	3,118	0.7%
Number of transactions via Express Pay terminals	20,052,212	13,849,756	44.8%	16,784,029	19.5%		36,836,241	36,783,825	0.1%
Volume of transactions via Express Pay terminals	2,847,236	1,550,286	83.7%	2,322,601	22.6%		5,169,837	3,577,132	44.5%
POS terminals
Number of desks	24,537	17,248	42.3%	22,889	7.2%		24,537	17,248	42.3%
Number of contracted merchants	15,839	8,513	86.1%	13,298	19.1%		15,839	8,513	86.1%
Number of POS terminals	33,772	23,788	42.0%	30,053	12.4%		33,772	23,788	42.0%
Number of transactions via POS terminals	36,300,567	21,114,390	71.9%	27,455,781	32.2%		63,756,348	43,726,284	45.8%
Volume of transactions via POS terminals	1,009,660	532,544	89.6%	705,118	43.2%		1,714,778	1,182,839	45.0%
Internet banking
Number of active users 2	129,521	247,342	-47.6%	133,237	-2.8%		129,521	247,342	-47.6%
Number of transactions via internet bank	992,560	973,336	2.0%	918,907	8.0%		1,911,467	2,080,409	-8.1%
Volume of transactions via internet bank	616,498	583,328	5.7%	584,089	5.5%		1,200,587	1,237,550	-3.0%
Mobile banking
Number of active users 2	763,365	619,519	23.2%	750,440	1.7%		763,365	619,519	23.2%
Number of transactions via mobile bank	25,334,501	13,335,918	90.0%	21,242,482	19.3%		46,576,983	25,789,755	80.6%
Volume of transactions via mobile bank	4,186,281	1,766,710	137.0%	3,279,566	27.6%		7,465,847	3,429,837	117.7%

§ Sustained client base of c.2.6 million customers at 30 June 2021 reflected continuous increased offering of cost-effective remote channels and improvements in our products and services in many key areas. Based on the independent research conducted in spring 2021, Bank of Georgia is regarded as the most trusted financial institution and top of mind bank in Georgia

§ The number of outstanding cards decreased by 4.5% y-o-y and by 1.5% q-o-q at 30 June 2021, mainly due to slower economic activity on the back of the COVID-19 pandemic. However, we already see a rebound in activity in the second quarter of 2021, reflected in strong issuances of new cards during the quarter. The number of Loyalty programme Plus+ cards reached 1,282,996 at 30 June 2021, up 34.1% y-o-y and up 5.4% q-o-q

§ Digital channels. We have continued to develop our digital channels and provide superior digital experiences to our customers. More than 96% of total daily transactions of individuals were executed through digital channels³ in 2Q21 and 1H21

-     mBank and iBank digital offloading. The Bank has continued to develop digital products and upgrade digital channels' functionalities to refine end-to-end digital journeys and incentivise transferring customer activity to digital channels. New innovative products and features have been introduced recently, including digital card, peer-to-peer payments, bill splitting and money request, fully digital consumer lending process, online instalment loans, digital onboarding, embedded online chat, and the fully redesigned iBank, among others. As a result of increased investments and efforts, the number of active users, as well as the number and volume of transactions through these channels, particularly, mBank, continue to expand rapidly. Furthermore, we see increased engagement of active users, as more than 40% of these customers are now using our mBank on a daily basis

-     The use of Express Pay terminals. The Bank has a large network of self-service terminals throughout Georgia, which are used extensively by our customers. Self-service terminals are viewed as the key transition channel from physical to digital, and the migration has been significant over the past few years. The increase in the number of transactions both y-o-y and q-o-q was primarily due to the rebound in economic activity during the second quarter of 2021

-     Business iBank and mBank. Since the release of a new business internet banking platform for our MSME and corporate clients, we have focused on making the Business iBank even more useful for business transactions to further incentivise the transfer of client activity to digital channels. In 2Q21, we have introduced new online chat to our customers. Furthermore, we launched the Business mBank application in 1Q21 to offer full digital experience to our business customers. Our goal is to make the Business mBank useful for immediate business transactions, payments, accounting, money transfers, and administration, taking into consideration customer preferences and best practices. Our business customers are now able to have a single view of their finances on-the-go. As a result, we saw a significant increase in number of active Business iBank and mBank users, reaching 41,243 users at 30 June 2021 (up 28.9% y-o-y and up 8.1% q-o-q).  We also saw a robust y-o-y and q-o-q increase in the number (up 39.2% y-o-y and up 25.8% q-o-q in 2Q21, and up 20.4% y-o-y in 1H21) and volume (up 64.7% y-o-y and 24.1% q-o-q in 2Q21, and 40.5% in 1H21) of transactions through Business iBank and mBank. Overall, c.97% of daily transactions of legal entities were executed through the Business iBank and mBank in the second quarter and the first half of 2021

-     Product offloading to digital channels. Having achieved high transactions offloading rate to digital channels, the next step and a big upside for us is to further boost product sales in digital channels. In the first half of 2021, our product offloading rate⁴ was around 21% and, as we add innovative digital products and design better end-to-end digital journeys, we plan to increase our product offloading rate to around 36% over the next 12 months

§ SOLO, our premium banking brand, continued its growth and investment in its lifestyle brand. We have 11 SOLO lounges, of which nine are located in Tbilisi, the capital of Georgia, and two in major regional cities of Georgia. The number of SOLO clients reached 65,746 at 30 June 2021 (56,207 at 30 June 2020 and 62,556 at 31 March 2021). At 30 June 2021, the product to client ratio for the SOLO segment was 4.7, compared with 2.2 for our retail franchise. While SOLO clients currently represent 2.6% of our total retail client base, they contributed 29.7% to our retail loan book, 38.2% to our retail deposits, 25.8% and 20.7% to our net retail interest income and to our net retail fee and commission income in 2Q21, respectively. The net fee and commission income from the SOLO segment was GEL 7.6mln in 2Q21 (up 37.5% y-o-y and up 11.9% q-o-q) and GEL 14.4mln in the first half of 2021 (up 23.3% y-o-y). At 30 June 2021, SOLO Club - a membership group within SOLO, which offers exclusive access to SOLO products and offers ahead of other SOLO clients at a higher fee - had 5,631 members, up 1.2% y-o-y and up 1.1% q-o-q

§ MSME banking. The number of MSME segment clients reached 239,501 at 30 June 2021, up 6.2% y-o-y and up 2.7% q-o-q. MSME's gross loan portfolio reached GEL 3,490.4mln (up 19.1% y-o-y and largely flat q-o-q) and client deposits and notes amounted to GEL 977.4mln (up 23.5% y-o-y and largely flat q-o-q) at 30 June 2021. The q-o-q change in both loan and deposit portfolios was mostly due to the local currency appreciation during the quarter. The MSME segment generated robust operating income of GEL 56.2mln in 2Q21 (up 36.8% y-o-y and up 5.4% q-o-q) and GEL 109.5mln in the first half of 2021 (up 19.6% y-o-y), primarily reflecting the strong rebound in economic activity during the quarter

§ Our digital ecosystem rests on four main business verticals: real estate, e-commerce, logistics, and point of sale. In 2019-1H21, we launched four platforms - real estate platform area.ge, online marketplace extra.ge, inventory management and point-of-sale solution for MSMEs Optimo and a full logistics services solution - IZiBox.

During the second quarter of 2021, the Group has further developed these platforms, enlarging its network of partners, introducing new features and products, and increasing its customer base through active campaigns and initiatives.

500 Georgia Acceleration programme (launched in 2020 in partnership with 500 Startups and Georgia's Innovation and Technology Agency to help accelerate the development of Georgian and international early stage startups operating in the region). During 2020 and the first half of 2021, 28 companies from ten different business verticals (fintech; healthcare; lifestyle; accounting services; auto and transportation; HR services; travel and hospitality; Adtech; Agtech; Natural Language Processing and communications) completed the programme, and joined our Digital Area ecosystem. Since the launch, the startups have raised more than US$ 8.4 million from external international investors and venture capital funds. In August 2021, four of the 28 startups will complete the final acceleration stage in San Francisco

During 2018-1H21, the Group has invested c.US$ 7.8 million in the development of the Digital Area Ecosystem. The Group plans an additional investment in the range of US$ 3-10 million during 2021-2023

§ Retail Banking recorded a profit of GEL 85.0mln in 2Q21 (up 71.9% y-o-y and up 14.9% q-o-q) and GEL 159.0mln in 1H21 (compared with the loss of GEL 28.6mln in 1H20), reflecting the rebound in economic activity in the second quarter of 2021. Retail Banking ROAE was 22.1% in 2Q21 (16.4% in 2Q20 and 20.7% in 1Q21) and 21.4% in the first half of 2021 (compared with negative profitability in 1H20)

 

 

 

 

 

 

 

 

² The users that log-in in internet and mobile bank at least once in three months.

³ Digital channels comprise mBank and iBank, Express Pay terminals, ATMs, web platforms and call center.

⁴ Share of cards, loans and deposits activations via digital channels.

 

 

CORPORATE AND INVESTMENT BANKING (CIB)

CIB provides (1) loans and other credit facilities to Georgia's large corporate clients and other legal entities, excluding SME and micro businesses; (2) services such as fund transfers and settlements services, currency conversion operations, trade finance services and documentary operations as well as handling savings and term deposits; (3) finance lease facilities through the Bank's leasing operations arm, the Georgian Leasing Company; (4) brokerage services through Galt & Taggart; and (5) Wealth Management private banking services to high-net-worth individuals and offers investment management products in Georgia and internationally through representative offices in London and Istanbul, and a subsidiary in Tel Aviv.

GEL thousands, unless otherwise noted	2Q21	2Q20	Change y-o-y	1Q21	Change q-o-q		1H21	1H20	Change y-o-y
INCOME STATEMENT HIGHLIGHTS
Net interest income	83,427	63,110	32.2%	72,532	15.0%		155,959	132,451	17.7%
Net fee and commission income	11,322	9,197	23.1%	9,655	17.3%		20,977	18,152	15.6%
Net foreign currency gain	9,027	11,431	-21.0%	4,521	99.7%		13,548	19,965	-32.1%
Net other income	18,176	4,825	NMF	15,069	20.6%		33,245	9,506	NMF
Operating income	121,952	88,563	37.7%	101,777	19.8%		223,729	180,074	24.2%
Salaries and other employee benefits	(14,498)	(14,170)	2.3%	(14,905)	-2.7%		(29,403)	(24,731)	18.9%
Administrative expenses	(4,978)	(3,488)	42.7%	(3,503)	42.1%		(8,481)	(7,954)	6.6%
Depreciation, amortisation and impairment	(2,020)	(2,434)	-17.0%	(2,492)	-18.9%		(4,512)	(4,907)	-8.0%
Other operating expenses	(166)	(227)	-26.9%	(271)	-38.7%		(437)	(523)	-16.4%
Operating expenses	(21,662)	(20,319)	6.6%	(21,171)	2.3%		(42,833)	(38,115)	12.4%
Operating income before cost of risk	100,290	68,244	47.0%	80,606	24.4%		180,896	141,959	27.4%
Cost of risk	23,407	(2,536)	NMF	(12,066)	NMF		11,341	(98,438)	NMF
Net operating income before non-recurring items	123,697	65,708	88.3%	68,540	80.5%		192,237	43,521	NMF
Net non-recurring items	(1)	32	NMF	(73)	-98.6%		(74)	(1,374)	-94.6%
Profit before income tax expense	123,696	65,740	88.2%	68,467	80.7%		192,163	42,147	NMF
Income tax expense	(10,914)	(4,246)	157.0%	(6,864)	59.0%		(17,778)	(2,398)	NMF
Profit	112,782	61,494	83.4%	61,603	83.1%		174,385	39,749	NMF
BALANCE SHEET HIGHLIGHTS
Net loans and finance lease receivables, currency blended	4,825,807	4,046,063	19.3%	4,752,895	1.5%		4,825,807	4,046,063	19.3%
Net loans and finance lease receivables, GEL	997,397	705,502	41.4%	982,124	1.6%		997,397	705,502	41.4%
Net loans and finance lease receivables, FC	3,828,410	3,340,561	14.6%	3,770,771	1.5%		3,828,410	3,340,561	14.6%
Client deposits, currency blended	6,185,302	5,042,772	22.7%	6,123,346	1.0%		6,185,302	5,042,772	22.7%
Client deposits, GEL	3,470,724	2,423,448	43.2%	2,934,200	18.3%		3,470,724	2,423,448	43.2%
Client deposits, FC	2,714,578	2,619,324	3.6%	3,189,146	-14.9%		2,714,578	2,619,324	3.6%
Time deposits, currency blended	3,090,526	2,552,135	21.1%	2,663,401	16.0%		3,090,526	2,552,135	21.1%
Time deposits, GEL	2,283,595	1,468,397	55.5%	1,678,355	36.1%		2,283,595	1,468,397	55.5%
Time deposits, FC	806,931	1,083,738	-25.5%	985,046	-18.1%		806,931	1,083,738	-25.5%
Current accounts and demand deposits, currency blended	3,094,776	2,490,637	24.3%	3,459,945	-10.6%		3,094,776	2,490,637	24.3%
Current accounts and demand deposits, GEL	1,187,129	955,051	24.3%	1,255,845	-5.5%		1,187,129	955,051	24.3%
Current accounts and demand deposits, FC	1,907,647	1,535,586	24.2%	2,204,100	-13.5%		1,907,647	1,535,586	24.2%
Letters of credit and guarantees, standalone (off-balance sheet item)	1,623,571	1,455,700	11.5%	1,640,556	-1.0%		1,623,571	1,455,700	11.5%
Assets under management5	2,917,029	2,534,113	15.1%	3,091,462	-5.6%		2,917,029	2,534,113	15.1%
RATIOS
ROAE	42.1%	31.5%		24.1%			33.4%	9.9%
Net interest margin, currency blended	4.1%	3.4%		3.6%			3.9%	3.7%
Cost of credit risk ratio	-2.5%	-1.7%		-0.2%			-1.4%	3.2%
Cost of funds, currency blended	2.8%	3.7%		3.3%			3.1%	3.6%
Loan yield, currency blended	8.5%	8.3%		8.6%			8.5%	8.7%
Loan yield, GEL	13.3%	12.4%		12.2%			12.8%	13.1%
Loan yield, FC	7.3%	7.5%		7.6%			7.5%	7.8%
Cost of deposits, currency blended	4.4%	4.2%		4.9%			4.6%	4.0%
Cost of deposits, GEL	7.4%	8.1%		8.1%			7.7%	7.5%
Cost of deposits, FC	1.4%	1.7%		1.5%			1.5%	1.7%
Cost of time deposits, currency blended	6.6%	6.4%		7.3%			6.9%	6.1%
Cost of time deposits, GEL	8.2%	9.5%		9.2%			8.6%	9.0%
Cost of time deposits, FC	3.6%	3.6%		3.6%			3.6%	3.7%
Current accounts and demand deposits, currency blended	2.6%	2.4%		2.6%			2.6%	2.2%
Current accounts and demand deposits, GEL	6.3%	6.4%		6.3%			6.3%	5.8%
Current accounts and demand deposits, FC	0.4%	0.4%		0.6%			0.5%	0.3%
Cost / income ratio	17.8%	22.9%		20.8%			19.1%	21.2%
Concentration of top ten clients	8.8%	7.3%		9.5%			8.8%	7.3%

 

 

 

 

 

⁵ We have amended the assets under management definition in the third quarter of 2020 to exclude certain illiquid assets that we hold in custody, and include only the most liquid assets that are being traded on an ongoing basis, and where we earn material fees on holding or trading such assets. The previous period balances have been restated accordingly. Previously disclosed amount of assets under management was GEL 2,834,975 thousand at 30 June 2020.

 

Performance highlights

§ Corporate and Investment Banking delivered outstanding quarterly results. CIB generated strong net interest and non-interest income during the second quarter and the first half of 2021, coupled with continuous cost discipline. As a result, the operating income before cost of risk reached GEL 100.3mln in 2Q21 (up 47.0% y-o-y and up 24.4% q-o-q) and GEL 180.9mln in 1H21 (up 27.4% y-o-y)

§ CIB's net interest income increased by 32.2% y-o-y and by 15.0% q-o-q during the second quarter of 2021 and increased by 17.7% in the first half of 2021, largely reflecting 19.3% y-o-y lending growth. CIB NIM was 4.1% in 2Q21 (up 70bps y-o-y and up 50bps q-o-q) and 3.9% in 1H21 (up 20bps y-o-y). In 2Q21, 70bps y-o-y increase in NIM was primarily driven by 20bps increase in currency blended loan yields, coupled with 90bps decline in cost of funds, while 50bps q-o-q increase in NIM was the result of 10bps decline in currency blended loan yields, offset by 50bps decrease in cost of funds. On a six months basis, currency blended loan yields were down by 20bps y-o-y, while cost of funds were also down 50bps, resulting in 20bps increase in NIM y-o-y in 1H21

§ CIB's net fee and commission income reached GEL 11.3mln in 2Q21 (up 23.1% y-o-y and up 17.3% q-o-q) and GEL 21.0mln in 1H21 (up 15.6% y-o-y). The growth in net fee and commission income in all periods presented was largely driven by strong income generation from guarantees and letters of credit issued and income from settlement operations

§ CIB's loan book and dollarisation. CIB loan portfolio totalled GEL 4,825.8mln at 30 June 2021, up 19.3% y-o-y and up 1.5% q-o-q. On a constant currency basis, CIB loan book was up 13.9% y-o-y and up 7.4% q-o-q. The concentration of the top 10 CIB clients was 8.8% at 30 June 2021 (7.3% at 30 June 2020 and 9.5% at 31 March 2021). Foreign currency denominated net loans represented 79.3% of CIB's loan portfolio at 30 June 2021, compared with 82.6% at 30 June 2020 and 79.3% at 31 March 2021. At 30 June 2021, 39.5% of total gross CIB loans were issued in foreign currency with exposure to foreign currency risk with regard to income, while 40.1% of total gross CIB loans were issued in foreign currency with no or minimal exposure to foreign currency risk

§ Dollarisation of CIB deposits was 43.9% at 30 June 2021, compared with 51.9% a year ago and 52.1% at 31 March 2021. De-dollarisation of CIB's deposit portfolio was primarily supported by 43.2% y-o-y and 18.3% q-o-q increase in local currency denominated deposits, as a result of significantly higher interest rates offered on local currency funds. The interest rates on both local and foreign currency denominated deposits declined in 2Q21 y-o-y and q-o-q, and the cost of deposits in local currency remained well above the cost of foreign currency deposits

§ Net other income generated in the second quarter and the first half of 2021 mainly comprised the net gains from the sale of real estate properties and net gains from the sale of investment securities

§ CIB's cost of risk in 2Q21 and 1H21 reflected a combination of the following factors:

§ Cost of credit risk. CIB's cost of credit risk was a net gain of 2.5% in 2Q21 (a net gain of 1.7% in 2Q20 and a net gain of 0.2% in 1Q21) and a net gain of 1.4% in 1H21 (cost of credit risk ratio of 3.2% in 1H20). The 3.2% cost of credit risk ratio in 1H20 reflected the IFRS 9 ECL reserve builds, created for the full economic cycle related to the deterioration of the macroeconomic environment and expected creditworthiness of borrowers as a result of the COVID-19 pandemic impact. The Group continuously revisits the assumptions used in the reserve builds to reflect better visibility and up-to-date macroeconomic forecast scenarios, as well as in-depth analyses of the financial standing and the creditworthiness of corporate borrowers. The Group recorded a GEL 30.4mln and a GEL 32.8mln ECL reversal on loans to customers and finance lease receivables in 2Q21 and 1H21, respectively, primarily driven by the recovery of several corporate loans during these periods

§ Expected credit loss and impairment charge on other assets and provisions in the second quarter and the first half of 2021 mainly comprised expenses accrued for certain legal fees (these are not expected to be incurred going forward), partially offset by ECL reversal on guarantees issued

§ As a result, CIB recorded a profit of GEL 112.8mln in the second quarter of 2021 (up 83.4% y-o-y and up 83.1% q-o-q) and GEL 174.4mln in the first half of 2021 (profit of GEL 39.7mln in1H20). CIB's ROAE was 42.1% in 2Q21 (31.5% in 2Q20 and 24.1% in 1Q21) and 33.4% in 1H21 (9.9% in 1H20, reflecting the COVID-19 pandemic impact)

Performance highlights of Investment Management operations

§ Our strong Investment Management franchise comprises the Bank's regional Wealth Management practice and the leading investment bank in Georgia, Galt & Taggart. Our strategic objective in Investment Management is to focus on profitable growth through diversifying our Wealth Management offerings, unlocking the retail brokerage potential, and fully digitalising brokerage services

§ The Investment Management's AUM reached to GEL 2,917.0mln as at 30 June 2021, up 15.1% y-o-y and down 5.6% q-o-q. This comprises: a) deposits of Wealth Management franchise clients, b) assets held at Bank of Georgia Custody, c) Galt & Taggart brokerage client assets, and d) Global certificates of deposit held by Wealth Management clients. The y-o-y increase in AUM mostly reflected the increase in client assets at Galt & Taggart, while the q-o-q decline largely reflected the appreciation of local currency in the second quarter of 2021

§ Strong international presence and diversified customer base across multiple geographies. We served 1,593 wealth management customers from 79 countries as at 30 June 2021, compared with 1,553 customers as at 30 June 2020 and 1,593 customers as at 31 March 2021

§ Wealth Management deposits amounted to GEL 1,433.1mln as at 30 June 2021, down 2.4% y-o-y and down 8.3% q-o-q, growing at a compound annual growth rate (CAGR) of 8.2% over the last five-year period. The cost of deposits was 2.6% in 2Q21 (down 40bps y-o-y and down 10bps q-o-q) and 2.7% in 1H21 (down 40bps y-o-y)

§ Galt & Taggart, which brings under one brand corporate advisory, debt and equity capital markets research and brokerage services, continues to develop local capital markets in Georgia

§ Our brokerage business demonstrated solid performance in the first half of 2021. Gross revenue of brokerage business was GEL 1.9mln in 2Q21 (up 10.9% y-o-y and down 6.8% q-o-q) and GEL 3.8mln in 1H21 (up 20.9% y-o-y). This was mostly driven by our online brokerage offered in partnership with Saxo Bank under a white label offering, which generated gross revenue of GEL 1.3mln in 2Q21 (down 10.9% y-o-y and down 16.5% q-o-q) and GEL 2.8mln in 1H21 (up 14.9% y-o-y)

-      We see significant upsides in the brokerage business in Georgia. Historically, we have focused on providing brokerage services to our wealth management customers, whereas the retail investor participation in the securities market has been limited. We are extending our offerings to the wider retail and mass affluent segments

-      In line with the Group's overall digital strategy, we are digitalising our brokerage offerings. Over the past few years we have significantly enhanced our back- and front-end processes to improve overall customer experience and engagement with brokerage services. Our single-view client dashboard, a product combining investment banking products into a single channel, continues to improve overall customer experience and reporting tools. In 2021, we plan to launch a mobile application to increase the usage and participation of the retail segment in this business and to further improve customer experiences

§ In April 2021, Galt & Taggart acted as a Co-manager and facilitated a successful pricing of Georgia's US$ 500 million 2.750% 5-year sovereign Eurobond. Goldman Sachs International and J.P. Morgan Securities plc acted as Joint Global Coordinators and Joint Bookrunners on the transaction along with ICBC Standard Bank plc, while two local investment banks acted as Co-managers. The Eurobond was met with strong investor demand, with orders reaching US$ 2.0 billion. This marks a historic transaction for Georgia as it secured financing at the lowest coupon and yield in the history of the country

§ In May 2021, Galt & Taggart, through a competitive bidding process, was awarded a contract to design and implement support mechanism for capital markets development in Georgia. The overall objective of this project is to increase access to finance for companies through debt and equity capital markets. The Project is funded by the Delegation of the European Union in Georgia and implemented by the Capital Markets Development team of European Bank for Reconstruction and Development

§ In June 2021, Galt & Taggart acted as a Co-manager and facilitated a successful pricing of Georgian Railway's US$ 500 million 4.0% 7-year Eurobond. Citigroup and J.P. Morgan acted as Joint Lead Managers and Joint Bookrunners on the transaction. The strong investor demand led to 8.4x oversubscription as orders reached US$ 4.2 billion. This marks a historic transaction for the issuer as it secured financing at the lowest coupon and yield in its history

 

 

§ Galt and Taggart is a leading research house in Georgia supporting our brokerage business and CIB activities with an in-depth quality macro and sector research coverage. Galt & Taggart publishes research reports on Georgia's and regional economies, key economic sectors in Georgia, regional fixed income securities, and global macro trends, among others. Currently, we have more than 6,500 unique subscribers, and our research is available on all major international platforms (Bloomberg, Capital IQ, Refinitiv, etc.)

SELECTED FINANCIAL AND OPERATING INFORMATION

 

INCOME STATEMENT	BANK OF GEORGIA GROUP CONSOLIDATED
GEL thousands, unless otherwise noted	2Q21	2Q20	Change y-o-y	1Q21	Change q-o-q		1H21	1H20	Change y-o-y
Interest income	446,636	379,038	17.8%	428,580	4.2%		875,216	767,364	14.1%
Interest expense	(218,387)	(204,102)	7.0%	(216,248)	1.0%		(434,635)	(395,347)	9.9%
Net interest income	228,249	174,936	30.5%	212,332	7.5%		440,581	372,017	18.4%
Fee and commission income	94,727	54,389	74.2%	76,446	23.9%		171,173	125,284	36.6%
Fee and commission expense	(37,521)	(21,488)	74.6%	(27,796)	35.0%		(65,317)	(52,271)	25.0%
Net fee and commission income	57,206	32,901	73.9%	48,650	17.6%		105,856	73,013	45.0%
Net foreign currency gain	22,082	22,743	-2.9%	19,176	15.2%		41,258	53,404	-22.7%
Net other income	27,438	9,081	NMF	23,482	16.8%		50,920	15,707	NMF
Operating income	334,975	239,661	39.8%	303,640	10.3%		638,615	514,141	24.2%
Salaries and other employee benefits	(68,812)	(60,656)	13.4%	(60,223)	14.3%		(129,035)	(117,194)	10.1%
Administrative expenses	(30,068)	(22,450)	33.9%	(23,563)	27.6%		(53,631)	(49,470)	8.4%
Depreciation, amortisation and impairment	(22,354)	(21,139)	5.7%	(22,561)	-0.9%		(44,915)	(42,529)	5.6%
Other operating expenses	(584)	(913)	-36.0%	(1,012)	-42.3%		(1,596)	(1,974)	-19.1%
Operating expenses	(121,818)	(105,158)	15.8%	(107,359)	13.5%		(229,177)	(211,167)	8.5%
(Loss) / profit from associates	(4,299)	113	NMF	167	NMF		(4,132)	414	NMF
Operating income before cost of risk	208,858	134,616	55.2%	196,448	6.3%		405,306	303,388	33.6%
Expected credit loss on loans to customers	25,140	11,621	116.3%	(28,236)	NMF		(3,096)	(216,568)	-98.6%
Expected credit loss on finance lease receivables	(683)	(3,387)	-79.8%	(931)	-26.6%		(1,614)	(5,273)	-69.4%
Other expected credit loss and impairment charge on other assets and provisions	(10,424)	(18,455)	-43.5%	(14,950)	-30.3%		(25,374)	(29,782)	-14.8%
Cost of risk	14,033	(10,221)	NMF	(44,117)	NMF		(30,084)	(251,623)	-88.0%
Net operating income before non-recurring items	222,891	124,395	79.2%	152,331	46.3%		375,222	51,765	NMF
Net non-recurring items	(67)	(1,241)	-94.6%	17	NMF		(50)	(41,586)	-99.9%
Profit before income tax	222,824	123,154	80.9%	152,348	46.3%		375,172	10,179	NMF
Income tax (expense) / benefit	(20,654)	(8,470)	143.8%	(13,424)	53.9%		(34,078)	4,560	NMF
Profit	202,170	114,684	76.3%	138,924	45.5%		341,094	14,739	NMF
Profit attributable to:
- shareholders of the Group	201,239	114,174	76.3%	138,214	45.6%		339,454	14,659	NMF
- non-controlling interests	931	510	82.5%	710	31.1%		1,640	80	NMF
Earnings per share (basic)	4.21	2.40	75.4%	2.87	46.7%		7.08	0.31	NMF
Earnings per share (diluted)	4.19	2.40	74.6%	2.87	46.0%		7.04	0.31	NMF

 

 

 

 

 

 

 

BALANCE SHEET	BANK OF GEORGIA GROUP CONSOLIDATED
GEL thousands, unless otherwise noted	Jun-21	Jun-20	Change y-o-y	Mar-21	Change q-o-q
Cash and cash equivalents	1,719,058	1,633,755	5.2%	2,361,663	-27.2%
Amounts due from credit institutions	2,035,487	1,700,075	19.7%	2,200,803	-7.5%
Investment securities	2,149,725	2,113,900	1.7%	2,406,405	-10.7%
Loans to customers and finance lease receivables	14,789,371	12,599,092	17.4%	14,601,275	1.3%
Accounts receivable and other loans	2,475	4,060	-39.0%	6,051	-59.1%
Prepayments	33,903	31,513	7.6%	33,921	-0.1%
Inventories	10,476	13,901	-24.6%	10,775	-2.8%
Right-of-use assets	81,865	89,758	-8.8%	81,056	1.0%
Investment property	235,649	212,182	11.1%	246,441	-4.4%
Property and equipment	387,014	396,272	-2.3%	385,352	0.4%
Goodwill	33,351	33,351	0.0%	33,351	0.0%
Intangible assets	138,341	116,355	18.9%	129,044	7.2%
Income tax assets	190	54,595	-99.7%	3,668	-94.8%
Other assets	189,311	139,945	35.3%	208,135	-9.0%
Assets held for sale	45,294	45,212	0.2%	44,305	2.2%
Total assets	21,851,510	19,183,966	13.9%	22,752,245	-4.0%
Client deposits and notes	13,944,383	11,583,139	20.4%	14,003,209	-0.4%
Amounts owed to credit institutions	3,224,577	3,521,860	-8.4%	4,039,250	-20.2%
Debt securities issued	1,515,511	1,561,933	-3.0%	1,653,399	-8.3%
Lease liabilities	91,670	96,878	-5.4%	97,488	-6.0%
Accruals and deferred income	54,626	37,257	46.6%	59,455	-8.1%
Income tax liabilities	74,704	70,171	6.5%	57,541	29.8%
Other liabilities	132,678	112,929	17.5%	154,253	-14.0%
Total liabilities	19,038,149	16,984,167	12.1%	20,064,595	-5.1%
Share capital	1,618	1,618	0.0%	1,618	0.0%
Additional paid-in capital	511,273	500,887	2.1%	532,787	-4.0%
Treasury shares	(52)	(54)	-3.7%	(34)	52.9%
Other reserves	11,975	25,417	-52.9%	61,857	-80.6%
Retained earnings	2,275,882	1,662,164	36.9%	2,079,362	9.5%
Total equity attributable to shareholders of the Group	2,800,696	2,190,032	27.9%	2,675,590	4.7%
Non-controlling interests	12,665	9,767	29.7%	12,060	5.0%
Total equity	2,813,361	2,199,799	27.9%	2,687,650	4.7%
Total liabilities and equity	21,851,510	19,183,966	13.9%	22,752,245	-4.0%
Book value per share	58.86	46.07	27.8%	55.59	5.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BELARUSKY NARODNY BANK (BNB)

 

INCOME STATEMENT HIGHLIGHTS	2Q21	2Q20	Change y-o-y	1Q21	Change q-o-q		1H21	1H20	Change y-o-y
GEL thousands, unless otherwise stated
Net interest income	9,752	9,157	6.5%	8,347	16.8%		18,099	18,626	-2.8%
Net fee and commission income	1,622	1,486	9.2%	1,570	3.3%		3,192	3,190	0.1%
Net foreign currency gain	3,029	3,787	-20.0%	3,546	-14.6%		6,575	4,280	53.6%
Net other income / (expense)	53	350	-84.9%	(237)	NMF		(184)	683	NMF
Operating income	14,456	14,780	-2.2%	13,226	9.3%		27,682	26,779	3.4%
Operating expenses	(9,656)	(8,098)	19.2%	(8,342)	15.8%		(17,998)	(16,804)	7.1%
Operating income before cost of risk	4,800	6,682	-28.2%	4,884	-1.7%		9,684	9,975	-2.9%
Cost of risk	1,061	(1,928)	NMF	(755)	NMF		306	(5,350)	NMF
Net non-recurring items	(277)	(24)	NMF	(66)	NMF		(343)	(34)	NMF
Profit before income tax expense	5,584	4,730	18.1%	4,063	37.4%		9,647	4,591	110.1%
Income tax expense	(1,222)	(1,010)	21.0%	(726)	68.3%		(1,948)	(1,042)	86.9%
Profit	4,362	3,720	17.3%	3,337	30.7%		7,699	3,549	116.9%

 

 

BALANCE SHEET HIGHLIGHTS	Jun-21	Jun-20	Change y-o-y	Mar-21	Change q-o-q
GEL thousands, unless otherwise stated
Cash and cash equivalents	122,271	187,920	-34.9%	192,338	-36.4%
Amounts due from credit institutions	56,967	13,605	NMF	66,673	-14.6%
Investment securities	95,899	93,549	2.5%	94,952	1.0%
Loans to customers and finance lease receivables	657,473	638,713	2.9%	705,261	-6.8%
Other assets	45,624	50,667	-10.0%	50,418	-9.5%
Total assets	978,234	984,454	-0.6%	1,109,642	-11.8%
Client deposits and notes	493,355	647,977	-23.9%	587,724	-16.1%
Amounts owed to credit institutions	329,063	144,815	127.2%	347,018	-5.2%
Debt securities issued	6,583	57,289	-88.5%	20,761	-68.3%
Other liabilities	15,696	12,873	21.9%	17,498	-10.3%
Total liabilities	844,697	862,954	-2.1%	973,001	-13.2%
Total equity	133,537	121,500	9.9%	136,641	-2.3%
Total liabilities and equity	978,234	984,454	-0.6%	1,109,642	-11.8%

 

 

 

 

KEY RATIOS	2Q21	2Q20	1Q21		1H21	1H20
Profitability
ROAA, annualised	3.6%	2.4%	2.5%		3.1%	0.2%
ROAE, annualised	29.4%	21.8%	21.5%		25.6%	1.4%
RB ROAE	22.1%	16.4%	20.7%		21.4%	-4.7%
CIB ROAE	42.1%	31.5%	24.1%		33.4%	9.9%
Net interest margin, annualised	4.7%	4.2%	4.5%		4.6%	4.6%
RB NIM	4.5%	4.0%	4.6%		4.6%	4.4%
CIB NIM	4.1%	3.4%	3.6%		3.9%	3.7%
Loan yield, annualised	10.4%	10.2%	10.4%		10.4%	10.6%
RB Loan yield	11.1%	11.1%	11.1%		11.1%	11.5%
CIB Loan yield	8.5%	8.3%	8.6%		8.5%	8.7%
Liquid assets yield, annualised	3.3%	3.4%	3.1%		3.2%	3.7%
Cost of funds, annualised	4.5%	4.8%	4.5%		4.5%	4.8%
Cost of client deposits and notes, annualised	3.5%	3.5%	3.8%		3.6%	3.3%
RB Cost of client deposits and notes	2.6%	2.9%	2.7%		2.7%	2.8%
CIB Cost of client deposits and notes	4.4%	4.2%	4.9%		4.6%	4.0%
Cost of amounts owed to credit institutions, annualised	6.9%	7.3%	6.2%		6.6%	7.5%
Cost of debt securities issued	7.0%	7.7%	6.9%		7.0%	7.7%
Operating leverage, y-o-y	23.9%	-13.6%	9.3%		15.7%	-11.2%
Operating leverage, q-o-q	-3.1%	-11.9%	10.9%		0.0%	0.0%
Efficiency
Cost / income	36.4%	43.9%	35.4%		35.9%	41.1%
RB Cost / income	45.6%	56.3%	41.3%		43.5%	50.9%
CIB Cost /income	17.8%	22.9%	20.8%		19.1%	21.2%
Liquidity
NBG liquidity coverage ratio (minimum requirement 100%)	124.5%	135.4%	149.3%		124.5%	135.4%
Liquid assets to total liabilities	31.0%	32.1%	34.7%		31.0%	32.1%
Net loans to client deposits and notes	106.1%	108.8%	104.3%		106.1%	108.8%
Net loans to client deposits and notes + DFIs	93.2%	94.5%	90.0%		93.2%	94.5%
Leverage (times)	6.8	7.7	7.5		6.8	7.7
Asset quality:
NPLs (GEL thousands)	524,964	355,260	534,626		524,964	355,260
NPLs to gross loans to clients	3.5%	2.7%	3.6%		3.5%	2.7%
NPL coverage ratio	73.1%	115.7%	77.5%		73.1%	115.7%
NPL coverage ratio, adjusted for discounted value of collateral	122.2%	166.3%	127.8%		122.2%	166.3%
Cost of credit risk, annualised	-0.6%	-0.2%	0.8%		0.1%	3.5%
RB Cost of credit risk	0.3%	0.2%	1.4%		0.8%	3.7%
CIB Cost of credit risk	-2.5%	-1.7%	-0.2%		-1.4%	3.2%
Capital adequacy:
NBG (Basel III) CET1 capital adequacy ratio	12.5%	9.9%	11.2%		12.5%	9.9%
Minimum regulatory requirement	11.1%	6.9%	7.8%		11.1%	6.9%
NBG (Basel III) Tier I capital adequacy ratio	14.4%	12.0%	13.3%		14.4%	12.0%
Minimum regulatory requirement	13.4%	8.7%	9.8%		13.4%	8.7%
NBG (Basel III) Total capital adequacy ratio	19.1%	17.4%	18.6%		19.1%	17.4%
Minimum regulatory requirement	17.7%	13.3%	13.8%		17.7%	13.3%
Selected operating data:
Total assets per FTE	2,863	2,671	3,054		2,863	2,671
Number of active branches, of which:	211	229	211		211	229
- Express branches	105	121	105		105	121
- Bank of Georgia branches	95	97	95		95	97
- SOLO lounges	11	11	11		11	11
Number of ATMs	972	940	963		972	940
Number of cards outstanding, of which:	2,079,786	2,178,053	2,111,255		2,079,786	2,178,053
- Debit cards	1,889,213	1,828,691	1,877,281		1,889,213	1,828,691
- Credit cards	190,573	349,362	233,974		190,573	349,362
Number of POS terminals	33,772	23,787	30,053		33,772	23,787
Number of Express pay terminals	3,141	3,118	3,125		3,141	3,183
FX Rates:
GEL/US$ exchange rate (period-end)	3.1603	3.0552	3.4118
GEL/GBP exchange rate (period-end)	4.3754	3.7671	4.6929

 

	Jun-21	Jun-20	Mar-21
Full time employees (FTE), of which:	7,633	7,181	7,450
- Full time employees, BOG standalone	6,050	5,693	5,889
- Full time employees, BNB	543	543	536
- Full time employees, other	1,040	945	1,025

 

Shares outstanding	Jun-21	Jun-20	Mar-21
Ordinary shares	47,578,565	47,536,332	48,130,454
Treasury shares	1,590,863	1,633,096	1,038,974
Total shares outstanding	49,169,428	49,169,428	49,169,428

 

 

 

 

 

 

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

In the Group's 2020 Annual Report and Accounts we disclosed the principal and emerging risks and uncertainties that are most likely to have an impact on our business model, strategic objectives, operations, future performance, solvency and liquidity. We also disclosed the potential impact, as well as the trends and outlook associated with these risks and the actions we take to mitigate them. We have updated this disclosure to reflect recent developments and this is set out in full below.

The order in which the principal risks and uncertainties appear does not denote their order of priority. It is not possible to fully mitigate all of our risks. Any system of risk management and internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Group is exposed to risks wider than those listed. Additional risks and uncertainties, including those that the Group is currently not aware of or deems immaterial, may also result in decreased revenues, incurred expenses or other events that could result in a decline in the value of the Group's securities. We disclose the risks that we believe are likely to have had the greatest impact on our business and which have been discussed in depth at the Group's recent Board, Audit or Risk Committee meetings.

 

MACROECONOMIC ENVIRONMENT
Principal risk / uncertainty	Macroeconomic factors relating to Georgia, including depreciation of the Lari against the US Dollar, may have a material impact on our loan book.
Key drivers / trends	The Group's operations are primarily located in, and most of its revenue is sourced from, Georgia. Macroeconomic factors relating to Georgia, such as changes in GDP, inflation and interest rates, may have a material impact on the quality of our loan portfolio, loan losses, our margins, and customer demand for our products and services. The estimated real GDP growth during the first half of 2021 was 12.7%, following a contraction of 6.2% in 2020. The growth was partly as a result of the low base in 2020, but also from a faster rebound than expected (the estimated real GDP growth compared to the first half of 2019 was 5.7%). This recovery was supported by robust exports and remittances and faster than expected recovery in tourism. That said, the pandemic still remains one of the key uncertainties in the growth outlook, but acceleration in vaccination process is expected to offset this risk. Uncertain and volatile global economic conditions could have substantial political and macroeconomic ramifications globally which, in turn, could impact the Georgian economy. In the first half of 2021, the Lari appreciated against the US Dollar by 3.5%, after depreciating by 14.3% in 2020. The volatility of the Lari against the US Dollar may adversely affect the quality of our loan portfolio, as well as increase the cost of credit risk and expected credit loss provisions. The creditworthiness of our customers may be adversely affected by the depreciation of the Lari against the US Dollar, which could result in them having difficulty repaying their loans. The depreciation of the Lari may also adversely affect the value of our customers' collateral. At 30 June 2021, approximately 41.3% and 79.6% of our gross Retail Banking and Corporate and Investment Banking loans, respectively, were denominated in foreign currency, while 6.7% of Retail Banking gross loans and 40.1% of Corporate and Investment Banking gross loans issued in foreign currency had no or minimal exposure to foreign currency risk. In the first quarter of 2020, following the COVID-19 pandemic outbreak, the Group created upfront provision for the full economic cycle in both Retail Banking and Corporate and Investment Banking businesses. This COVID-19-related charge was based on our expectations of future credit losses on our portfolio given the application of the future economic scenarios. The assumptions are being continuously revisited to reflect the macroeconomic forecast scenarios published by the NBG, and better visibility of the portfolio and the detailed review of creditworthiness of the borrowers. Based on these analyses, the reserves created in the first quarter of 2020 proved overall to be sufficient. As a result, our cost of credit risk ratio was 0.1% in the first half of 2021 compared to 3.5% in the first half of 2020. There still is uncertainty over the magnitude of the global slowdown that will result from the COVID-19 pandemic.
Mitigation	The Group continuously monitors market conditions and reviews market changes, and also performs stress and scenario testing to test its position under adverse economic conditions, including adverse currency movements. The Bank's Asset and Liability Management Committee sets our open currency position limits and the Bank's proprietary trading position limits, which are currently more conservative than those imposed by the NBG, our regulator. The Treasury department manages our open currency position on a day-to-day basis. The open currency position is also monitored by the Bank's Capital Adequacy and Financial Risk Management unit. In order to assess the creditworthiness of our customers, we take into account currency volatility when there is a currency mismatch between the customer's loan and the revenue. In line with the NBG requirements, we assign up to 75% additional risk weighting to the foreign currency loans of clients, whose source of income is in Lari (this requirement was temporarily decreased to 25% since April 2020 by the NBG on the back of the COVID-19 outbreak; however, we have not modified our approach with regard to underwriting principles and this change has not affected our pricing decisions). The Bank's Credit Committees and Credit Risk department set counterparty limits by using a credit risk classification and scoring system for approving individual transactions. The credit quality review process is continuous and provides early identification of possible changes in the creditworthiness of customers, including regular collateral revaluations, potential losses and corrective actions needed to reduce risk, which may include obtaining additional collateral in accordance with underlying loan agreements. In order to encourage responsible lending practices in the market, the NBG has in place macroprudential policy instruments that regulate lending conditions to individuals. The payment-to-income ratio (PTI) and the loan-to-value ratio (LTV) require the financial institutions to issue loans based on the rigorous assessment of clients' debt paying ability and aim at reducing high-risk products in the market. This initiative ensures the sustainability of the financial sector in the event of real estate price reductions and further reduces the risk of the loan portfolio quality. Since 2016, the NBG has actively implemented various measures to de-dollarise the Georgian economy. In January 2019, in order to hedge the borrowers against foreign currency risks, the NBG raised a threshold of small-sized loans that must be issued only in local currency from GEL 100,000 to GEL 200,000. Among the NBG's initiatives towards de-dollarisation and increasing access to long-term lending in the local currency is Liquidity Coverage Ratio (LCR) under the Basel III framework, effective since September 2017. The NBG's preferential treatment for the Lari is translated into 75% LCR for the local currency high-quality liquid assets, while the mandatory ratio stands at 100% for foreign currency as well as for all currencies in total. Moreover, since June 2018, in order to encourage the financial institutions to raise funding in the local currency, the NBG mandated changes in minimum reserve requirements on funds attracted in national and foreign currencies several times. Currently, 25% of customer deposits in foreign currencies are set aside as minimum reserves. In addition, the Bank maintains a minimum average balance of 5% of its customers' deposits in Lari at its correspondent account at the NBG. For Certificates of Deposit (CDs) and unsubordinated funding, the NBG requires the Bank to set aside 25% of CDs and borrowings in foreign currency with a remaining maturity of less than one year, 15% of CDs and borrowings in foreign currency with a remaining maturity of one to two years, and 5% of its unsubordinated local currency wholesale funding for borrowings with a remaining maturity of less than one year. There is no minimum reserves requirement for CDs denominated in local currency. In July 2021, to further support de-dollarisation of client deposits portfolio, the NBG mandated additional changes in minimum reserve requirements. The minimum reserve requirement of 25% and 15% on client deposits and notes attracted in foreign currencies mentioned above are applied in case the client deposits and notes portfolio dollarisation level is more than 70%. If the dollarisation falls to 40% or below, the minimum reserve requirement falls to 10%. For the dollarisation level between 40% and 70%, the reserve requirement is set within 10%-25% and 10%-15% range, respectively. Since the beginning of 2016, we have focused on increasing local currency lending. We actively work with International Finance Institutions to raise long-term Lari funding to increase our Lari-denominated loans to customers. Furthermore, in June 2017, we completed the inaugural local currency denominated international bond issuance in the amount of GEL 500mln to support local currency lending. From the beginning of 2017, the NBG expanded the list of assets that banks are permitted to use as collateral for REPO transactions, which provides an additional funding source for our Lari-denominated loan book. This list further expanded since the second quarter of 2020 as part of the NBG's response to the COVID-19 pandemic. The government and the NBG have appropriate tools to help mitigate the economic threat to a degree, and to try to support economic recovery to resume growth quickly. The Georgian economy is well-diversified, both by sector, and in terms of trading partner country dependence. However, if the virus leads to a continued global shutdown a significant negative impact on areas of the Georgian economy is expected. We continue to monitor the COVID-19 pandemic outbreak's impact and to consider our continued business resilience.
REGIONAL AND DOMESTIC INSTABILITY
Principal risk / uncertainty	The Georgian economy and our business may be adversely affected by regional and domestic tensions and instability. The Group's operations are primarily located in, and most of its revenue is sourced from, Georgia. The Georgian economy is well-diversified and there is no significant dependency on a single country. However, it is dependent on economies of the region, in particular Russia, Turkey, Azerbaijan and Armenia, which are key trading partners. There has been ongoing geopolitical tension, political and economic instability and military conflict in the region, which may have an adverse effect on our business and financial position. Furthermore, our business and financial position may be adversely affected by domestic political challenges and instability.
Key drivers / trends	Russian troops continue to occupy the Abkhazia and the Tskhinvali/South Ossetia regions, and tensions between Russia and Georgia persist. Russia is opposed to the Eastward enlargement of NATO, including the former Soviet republics such as Georgia. Therefore, Georgia's continued progression towards approximation to the EU and NATO may intensify tensions between Georgia and Russia. Developments such as the introduction of a free trade regime between Georgia and the EU in September 2014 and the visa-free travel in the EU granted to Georgian citizens in March 2017 similarly contribute to tensions. The government has taken certain steps towards improving relations with Russia but, as of the date of this announcement, these have not resulted in any formal or legal changes in the relationship between the two countries. In June 2018, as a result of early parliamentary and presidential elections, amendments to the Turkish constitution became effective. The amendments which grant the president wider powers are expected to transform Turkey's system of government away from a parliamentary system, which could have a negative impact on political stability in Turkey. On 8 July 2019, Russia's ban on direct flights to Georgia, imposed earlier in June over anti-occupation protests in Tbilisi, came into effect. The sanction affected the Georgian tourism sector; however, it also provided more incentives to further diversify the country's tourist base. We note that, after a two-month war between Azerbaijan and Armenia over Nagorno-Karabakh region, a ceasefire agreement was signed on 10 November 2020. The agreement confirmed territorial gains of Azerbaijan, opening a direct land link with Turkey. Soon after the agreement, the Turkish government announced plans to build a railway connecting to Azerbaijan directly. This decision may shift transportation routes in the region in the long term, which could negatively affect Georgia's aspiration to become the transport and logistics hub of the region. However, at this stage we do not assume that cargo flows will shift from the Georgian corridor in the medium term, considering the difficult landscape of this potential new route and uncertainties related to security. In addition, Georgia is currently experiencing certain political challenges. The domestic political situation escalated following attacks on media representatives on 5-6 July 2021 committed by a group of radicals, and experienced further strains at the end of July, when the ruling party pulled out from the EU-mediated agreement concluded in April 2021. An opposition boycott and media demands, and upcoming local elections in Autumn 2021, may result in further political tension, exacerbate uncertainty and negatively impact the recovery.
Mitigation	The Group actively monitors regional and local market conditions and risks related to political instability, and the Georgian government's response thereto. It performs stress and scenario tests to assess the impact on its financial position, and develops responsive strategies and action plans. While financial market turbulences and geopolitical tensions affect regional trading partners, Georgia's preferential trading regimes and well-diversified economy in terms of dependency on a single country, support the country to enhance resilience to regional external shocks. Although the COVID-19 pandemic had an adverse impact on the Georgian economy, which is highly dependent on tourism revenues, a series of state support measures aided by international financial institutions have partly mitigated the negative consequences of the pandemic. As a result, the Georgian economy contracted by 6.2% in 2020. We already see various sectors of the economy recovering on the back of a significant rebound in economic activity, resulting in y-o-y estimated real GDP growth of 12.7% during the first half of 2021, surpassing the 2019 pre-pandemic levels. Georgia is expected to surpass 2019 level of growth in 2021 as more people get vaccinated and tourism gradually comes back. We believe that Georgia's efforts to further diversify its economic linkages, use the potential of new large markets - the EU and China - and further enhance its institutions will enable the economy to deal with the external shocks relatively well. On 9 April 2021, the Executive Board of the International Monetary Fund (IMF) completed the Eighth Review of Georgia's economic reform programme supported by a four-year extended arrangement under the Extended Fund Facility (EFF). This was the last review under the arrangement and its completion released SDR 78 million (about US$ 111 million), bringing total disbursements to SDR 484 million (about US$ 687 million). On 19 July 2021, IMF concluded the 2021 Article IV Mission. Based on the IMF statement, as the recovery proceeds, the focus of fiscal policy should shift toward unwinding crisis support measures and bringing down the deficit and debt. The pandemic naturally led to sharp rise in the fiscal deficit and debt as the government provided support to businesses and households, and as revenues declined. Georgia's fiscal rule has been an essential anchor and source of policy credibility and the authorities' strong commitment to the fiscal rule is welcome. Faster than expected economic recovery has substantially improved the revenue outlook for 2021. In the planned supplementary budget, new revenues will largely finance additional healthcare costs as well as capital and other spending. Saving more of these revenues would help speed progress on the fiscal consolidation required to comply with the fiscal rule by 2023 and provide a buffer against risks. Accordingly, further revenue windfalls should be saved. The eventual unwinding of COVID-19 support measures as the pandemic recedes will help shrink the deficit, but additional adjustments are still needed. Faster deficit reduction in the 2022 budget would better balance the need for new revenue or saving measures over the next two years. The mission welcomes the NBG's appropriate increases in the monetary policy rate in March and April to help ensure that the temporary effects of commodity price increases and supply constraints remain transient and that inflation expectations stay anchored around the 3 percent target. With recovery now faster than expected, risks to inflation are tilted to the upside, and the NBG should be ready to promptly hike rates further if inflation expectations or core inflation suggest high inflation risks becoming entrenched. Overall, the inflation targeting framework and floating exchange rate regime have helped Georgia adjust to the COVID-19 shock and remain appropriate. Considering risks, including due to financial dollarisation, the NBG should continue prudent use of foreign exchange interventions to prevent disorderly market conditions. The recent introduction of differentiated reserve requirements on foreign exchange liabilities of banks could be a useful step to reduce deposit dollarisation. Notably, Fitch Ratings and S&P Global maintained Georgia's sovereign credit ratings unchanged in 2020 and 1H21, respectively, despite the COVID-19-induced economic crisis and sharp reduction of external earnings on the back of halt in international tourism. Both agencies underline Georgia's relatively strong institutional arrangements, in the regional context, and an ability to mobilise concessional financing from international financial institutions. Furthermore, on 6 August 2021, Fitch Ratings revised Georgia's sovereign credit rating outlook to Stable from Negative and affirmed at BB, which is a return to pre-pandemic indicator. According to Fitch Ratings, the outlook revision reflects a much-improved macroeconomic baseline, and confidence that the Georgian authorities will continue implementing policies supporting macroeconomic stability and medium-term sustainability of public finances. Fitch Ratings revised its 2021 real GDP growth estimate for Georgia upwards to 7.8% from 4.3%. For 2022-2023, the rating agency forecasts real GDP growth to average 5.4%, above the potential growth of 4.0-4.5%, supported by a more robust recovery in the tourism sector and an increase in investment. The Group closely monitors the current domestic political situation, related risks and the Georgian government's response thereto. The international community is closely involved in the process and acts as mediators between the government and the opposition parties. The desire to join the EU is likely to encourage Georgia's political players to put their differences behind them and to act more collaboratively.
LOAN PORTFOLIO QUALITY RISK
Principal risk / uncertainty	The Group may not be able to maintain the quality of its loan portfolio. The quality of the Group's loan portfolio may deteriorate due to external factors beyond the Group's control such as negative developments in Georgia's economy or in the economies of its neighbouring countries, the unavailability or limited availability of credit information on certain of its customers, any failure of its risk management procedures or rapid expansion of its loan portfolio. The Group's Corporate and Investment Banking loan portfolio is concentrated and to the extent that such borrowers enter into further loan arrangements with the Group, this will increase the credit and general counterparty risk of the Group, with respect to those counterparties and could result in deterioration of the Group's loan portfolio quality. Furthermore, the collateral values that the Group holds against the loans may decline, which may have an adverse effect on the business and financial position of the Group.
Key drivers / trends	Expected credit loss and, in turn, the Group's cost of credit risk could increase if a single large borrower defaults or a material concentration of smaller borrowers default. The Corporate and Investment Banking loan portfolio is concentrated, with the Group's top ten Corporate and Investment Banking borrowers accounting for 8.8% of gross loans to customers and finance lease receivables at 30 June 2021, as compared to 9.7% at 31 December 2020 and 9.9% at 31 December 2019. As at 30 June 2021, the Group held collateral against gross loans covering 84.9% of the total gross loans to customers. The main forms of collateral taken in respect of Corporate and Investment Banking loans are liens over real estate, property, plant and equipment, corporate guarantees, inventory, deposits and securities, and transportation equipment. The most common form of collateral accepted in Retail Banking loans is a lien over residential property. Downturns in the residential and commercial real estate markets, or a general deterioration of economic conditions in the industries in which the Group's customers operate, may result in illiquidity and a decline in the value of the collateral securing loans, including a decline to levels below the outstanding principal balance of those loans. In addition, declining or unstable prices of collateral in Georgia may make it difficult for the Group to accurately value collateral it holds. If the fair value of the collateral that the Group holds declines significantly in the future, it could be required to record additional provisions and could experience lower than expected recovery levels on collateralised loans. Further changes to laws or regulations may impair the value of such collateral. During the first half of 2021, the Group's cost of credit risk ratio was 0.1%, as compared to 3.5% in the first half of 2020. The latter was driven by additional expected credit losses created for the full economic cycle in both Retail and Corporate and Investment Banking segments, primarily related to deterioration of macroeconomic environment and expected creditworthiness of borrowers as a result of the impact of the COVID-19 pandemic, which further proved overall to be sufficient. As of 30 June 2021, 31 December 2020 and 31 December 2019, the Group's non-performing loans accounted for 3.5%, 3.7% and 2.1% of gross loans to customers and finance lease receivables, respectively.
Mitigation	The Group continuously monitors market conditions and reviews market changes, and also performs stress and scenario testing to test its position under adverse economic conditions. Our Credit Committees and Credit Risk department set counterparty limits by using a credit risk classification and scoring system for approving individual transactions. The credit quality review process is continuous and provides early identification of possible changes in the creditworthiness of customers, including regular collateral revaluations, potential losses and corrective actions needed to reduce risk, which may include obtaining additional collateral in accordance with underlying loan agreements. The Group continuously monitors the market value of the collateral it holds against the loans. When evaluating collateral for provisioning purposes, the Group discounts the market value of the assets to reflect the liquidation value of the collateral. In terms of Retail Banking loan portfolio, when disbursing the loans to retail customers the Group strictly adheres to PTI and LTV ratios set by the NBG based on the rigorous assessment of clients' debt paying ability. This further reduces the risk of the loan portfolio quality in the event of real estate price reductions. To respond to challenges caused by the COVID-19 pandemic, the Group has adjusted the credit assessment criteria, both for business as well as household loans. The Group applied sector specific discounts to financial forecasts, increased discounts applied to rental income and increased LTV requirements prior to these adjustments materialising into real impact. The Group also actively monitored portfolio of impacted customers and offered suitable loan payment schedule modifications to meet customers' cash flow needs for them to be able to meet their credit obligations. In addition, in order to manage the risk at an appropriate level, the Group has temporarily ceased the lending to high-risk retail and micro-express loans segments. In terms of Corporate and Investment Banking loan portfolio concentration, the Group aims to adhere strictly to the limits set by the NBG for client exposures, as well as internally-set limits, monitors the level of concentration in its loan portfolio and the financial performance of its largest borrowers, uses collateral to minimise loss given default on its largest exposures and maintains a well-diversified loan book sector concentration.
REGULATORY RISK
Principal risk / uncertainty	We are at risk of failing to identify, assess, correctly interpret, comply with, or manage regulatory requirements, leading to financial loss, legal or regulatory censure, and/or damage to the Group's reputation.
Key drivers / trends	The Group is subject to increasing regulatory requirements, and the competitive landscape in which we operate may change as a result of changes in regulation, the extent and impact of which may not be fully predicted. Since the Group is listed on the London Stock Exchange's main market for listed securities, it is subject to the UK Financial Conduct Authority regulations. The Group is subject to regulatory oversight of the National Bank of Georgia, which supervises the banking sector and the securities market in Georgia. Furthermore, the Group companies are also subject to relevant laws and regulations in Georgia, and the banking subsidiary in Belarus, BNB, is subject to regulatory oversight of the National Bank of the Republic of Belarus. Our ability to comply with existing or potential regulatory or legal requirements may be affected by a number of factors, including those outside of our control.
Mitigation	In order to ensure compliance with relevant regulations, the Group has established compliance policies and procedures that enable the integration of compliance risk management principles across the Group's operations. The Group compliance policies set the principles and standards for managing compliance risks across the Group and describe key roles and responsibilities of an independent group compliance function. The adherence to the policies is mandatory for all employees and is monitored through the relevant KPIs. In line with our integrated control framework, we carefully evaluate the impact of legislative and regulatory changes as part of our formal risk identification and assessment processes and, to the extent possible, proactively participate in the drafting of relevant legislation. As part of this process, we engage in constructive dialogue with regulatory bodies, where possible, and seek external advice on potential changes to legislation. We then develop appropriate policies, procedures and controls, as required, to meet our compliance obligations. The Bank has taken further steps to effectively and efficiently mature its compliance risk management framework, including the development of a robust toolkit for the timely implementation of new regulatory requirements, and the establishment of a formal link and coordinated process of communication with the regulator. The Bank has policies and processes in place to identify, assess, and monitor related party transactions. Our compliance risk management framework, at all levels, is subject to regular review by the Bank's Internal Audit department and external assurance service providers.
LIQUIDITY RISK
Principal risk / uncertainty	The Group is exposed to liquidity risk when the maturities of its assets and liabilities do not coincide, as well as funding risk. Although the Group expects to have sufficient funding over the next 12 months and beyond to execute its strategy and to have sufficient liquidity over the next 12 months and beyond, liquidity risk is nevertheless inherent in banking operations and may be heightened by a number of factors, including an over-reliance on, or an inability to access, a particular source of funding, changes in credit ratings or market-wide phenomena, such as financial market instability. Credit markets worldwide have in recent years experienced, and may continue to experience, a reduction in liquidity and long-term funding as a result of global economic and financial factors. The availability of credit in emerging markets, in particular, is significantly influenced by the level of investor confidence and, as such, any factors that affect investor confidence (for example, a downgrade in credit ratings of Bank of Georgia, Georgia, or state interventions or debt restructurings in a relevant industry) could affect the pricing or availability of funding for the Group companies, operating in any of these markets.
Key drivers / trends	The Group's current liquidity may be affected by unfavourable financial market conditions. If assets held by the Group in order to provide liquidity become illiquid or their value drops substantially, the Group may be required, or may choose, to rely on other sources of funding to finance its operations and future growth. Only a limited amount of funding, however, is available on the Georgian inter-bank market, and recourse to other funding sources may pose additional risks, including the possibility that other funding sources may be more expensive and less flexible. In addition, the Group's ability to access such external funding sources depends on the level of credit lines available to it, and this, in turn, is dependent on the Group's financial and credit condition, as well as general market liquidity. In terms of current and short-term liquidity, the Group is exposed to the risk of unexpected, rapid withdrawal of deposits by its customers in large volumes. Circumstances in which customers are more likely to withdraw deposits in large volumes rapidly include, among others, a severe economic downturn, a loss in consumer confidence, an erosion of trust in financial institutions or a period of social, economic or political instability. If a substantial portion of customers rapidly or unexpectedly withdraw their demand or term deposits or do not roll over their term deposits upon maturity, this could have a material adverse effect on the Group's business, financial condition and results of operations. Furthermore, should the COVID-19 pandemic continue to cause disruption to economic activity in Georgia and globally, there could be adverse impacts on the Group's liquidity and funding positions.
Mitigation	The Group manages its liquidity risk through the liquidity risk management framework, which models the ability of the Group to meet its payment obligations under both normal conditions and crisis. The Bank has developed a model based on the Basel III liquidity guidelines. It maintains a solid buffer on top of the LCR requirement of 100%, mandated by the NBG since September 2017. A strong LCR enhances the Group's short-term resilience. Moreover, the Bank holds a comfortable buffer on top of the Net Stable Funding Ratio (NSFR) requirement of 100%, which came into effect on 1 September 2019. A solid buffer over NSFR provides stable funding sources over a longer time span. This approach is designed to ensure that the funding framework is sufficiently flexible to secure liquidity under a wide range of market conditions. Notably, both LCR and NSFR measures as implemented by the NBG are already more conservative compared with the minimum levels required under the Basel III framework. As of 30 June 2021, 31 December 2020 and 31 December 2019, the LCR was 124.5%, 138.6%, and 136.7%, respectively, while NSFR was 136.8%, 137.5%  and 132.5%, at 30 June 2021, 31 December 2020 and 31 December 2019, respectively, all comfortably above the NBG's minimum regulatory requirement. Among other things, the Group maintains a diverse funding base comprising short-term sources of funding (including Retail Banking and Corporate and Investment Banking customer deposits, inter-bank borrowings and borrowings from the NBG) and longer-term sources of funding (including term Retail Banking and Corporate and Investment Banking deposits, borrowing from international credit institutions, and long-term debt securities). Client deposits and notes are one of the most important sources of funding for the Group. As at 30 June 2021, 31 December 2020 and 31 December 2019, 88.8%, 88.7%, and 90.4%, respectively, of client deposits and notes had contractual maturities of one year or less, of which 49.1%, 48.2%, and 55.2%, respectively, were payable on demand. As of the same dates, the ratio of net loans to client deposits and notes was 106.1%, 101.2%, and 118.4%, respectively, and the ratio of net loans to client deposits and notes and DFIs was 93.2%, 89.4%, and 103.2%, respectively. The Bank has strong support from International Financial Institutions. It has already attracted a number of new local and foreign currency long-term borrowings during 2020-2021 of more than US$ 200 million from the International Finance Corporation, the European Investment Bank, FMO - Dutch entrepreneurial development bank in collaboration with other participating lenders, and the European Bank for Reconstruction and Development, part of which has been drawn-down during 2020 and 2021. The Group currently has c.GEL 225mln undrawn long-term facilities from DFIs with up to five years of maturity, as well as strong pipeline to secure resources needed for the next 12 months. Furthermore, as part of its updated supervisory plan for the Georgian banking sector, aimed at elevating the negative financial and economic challenges created by the COVID-19 in Georgia, the NBG announced the readiness to revisit and reduce LCR requirements (on 1 May 2020, the NBG temporarily cancelled the 75% LCR requirement for local currency for a one-year period), as well as mandatory reserve requirements, if necessary. Moreover, the NBG has also introduced the FX swap instruments, and extended the eligibility criteria of collateral used for refinancing loan provided by the NBG; this may be revisited further, if necessary, to support the local currency liquidity.
CAPITAL RISK
Principal risk / uncertainty	The Bank faces the risk of not meeting the minimum capital adequacy requirements set by the NBG. The Bank, like all regulated financial institutions in Georgia, is required to comply with capital adequacy ratios set by the NBG. The failure to maintain the minimum capital adequacy requirements may have a material adverse effect on the Group and may compromise its strategic targets.
Key drivers / trends	Since December 2017, the Bank is subject to the NBG capital adequacy regulation, which is based on the Basel III guidelines of the Basel Committee of Banking Supervision, with regulatory discretion applied by the NBG due to the specifics of the local banking industry. The new increased requirements are phased-in gradually with fully loaded requirement of capital adequacy ratios of risk-weighted assets effective by end of March 2023 (as amended in March 2020, and subsequently, as part of the NBG's response to the COVID-19 pandemic outbreak). Our ability to comply with existing or amended NBG requirements may be affected by a number of factors, including those outside of our control, such as an increase in the Bank's risk-weighted assets, our ability to raise capital, losses resulting from deterioration in our asset quality and/or a reduction in income levels and/or an increase in expenses, local currency volatility, as well as weakening of global and Georgian economies. In March 2020, as a response to the emerging COVID-19 pandemic, in agreement with the NBG, the Bank created a c.GEL 400mln general provision under the Bank's local regulatory accounting basis that is used to calculate the capital adequacy ratios. This provision covers the NBG's expectation of estimated credit losses on the Bank's lending book for the full economic cycle. This resulted in a decline in capital ratios in 2020, which still stood comfortably above the minimum regulatory requirements. That said, should the COVID-19 pandemic continue to cause disruption to economic activity in Georgia and globally, there could be further adverse impact on the Bank's capital adequacy position.
Mitigation	The Group maintains an actively managed capital base to cover risks inherent to its business. As part of our capital adequacy management framework, we continuously monitor market conditions and review market changes, and perform stress and scenario testing to test our position under adverse economic conditions, market and regulatory developments. Capital position is continuously monitored by the management, as well as the Board, to ensure prudent management and timely actions, when necessary. In 2019, we underwent a capital optimisation exercise to strengthen the Bank's capital position and enable the realisation of the potential upsides. For that, in March 2019, the Bank issued inaugural US$ 100 million Additional Tier 1 Capital Notes, which marks the first ever AT1 transaction from Georgia. This issuance helped Bank of Georgia optimise its capital structure from a foreign currency perspective, and provided a natural hedge against operating in a dollarised economy. Further, in December 2019, the Bank signed a ten-year US$ 107 million subordinated syndicated loan agreement arranged by FMO - Dutch entrepreneurial development bank in collaboration with other participating lenders, which qualifies for the Tier 2 capital instrument under the NBG Basel III framework. In addition, in December 2020, the Bank signed an amendment to the syndicated Tier 2 facility on increasing the loan exposure by additional US$ 20 million. In March 2020, given the level of uncertainty with regard to the global impact of COVID-19 and the potential length of time of that impact, the Board of Directors decided not to recommend a dividend for the 2019 year to shareholders at the 2020 Annual General Meeting. Furthermore, as part of its updated supervisory plan for the Georgian banking sector, aimed at elevating the negative financial and economic challenges created by COVID-19 in Georgia, in April 2020, the NBG implemented certain measures in relation to capital adequacy requirements to allow the banks to use existing regulatory capital buffers to support customers in the current financially stressed circumstances, to continue normal business activities as far as possible, and to support the economy through ongoing lending operations. From a capital adequacy perspective, a number of capital buffers were released, which reduced the minimum regulatory capital requirements at the time. During the period that banks partially or fully utilised the reduced Pillar 2 and conservation buffers, banks have not been able to make any form of capital distribution. Subsequently, the NBG has announced a released capital buffers rebuild plan and has updated the timeline for the phase-in of additional Basel III capital requirements for the banking sector. Throughout the pandemic, and the consequent significant reduction in economic activity, the Bank has delivered strong operating performance, with good operating income, well-managed costs, and robust asset quality. This has led to consistently delivering return on equity in excess of 20% over the last four quarters, and maintaining capital adequacy ratios comfortably above our minimum regulatory requirements.  As a result, considering the Bank's strong capital position, the Bank has now confirmed to the NBG that we are no longer utilising, or expect to utilise, any of the Pillar 2 or conservation buffers that were waived in 2020. The Group's capital position remains robust, and comfortably above the minimum regulatory requirements. At 30 June 2021, the Bank's Basel III Common Equity Tier 1, Tier 1 and Total capital adequacy ratios stood at 12.5%, 14.4% and 19.1%, respectively, all comfortably above the minimum required levels of 11.1%, 13.4% and 17.7%, respectively.
FINANCIAL CRIME RISK
Principal risk / uncertainty	We are at risk of knowingly or unknowingly facilitating illegal activity, including money laundering, fraud, bribery and corruption, tax evasion, sanctions evasion, financing of terrorism and proliferation, through the Bank. We may be adversely affected if we fail to mitigate the risk of our products and services being used to facilitate financial crime, leading to financial loss, legal or regulatory censure and/or damage to our reputation.
Key drivers / trends	Financial crime risks continue to evolve globally. The Group faces stringent regulatory and supervisory requirements related to the management of financial crime risks. Failure to comply with these requirements may lead to enforcement action by the regulator, leading to financial loss and/or damage to the Group's reputation. Main sources of financial crime risk may arise from the following: -       An inherent risk related to providing products and services to customers that may expose the Group to financial crime; -       Inadequate controls to capture risk and/or reduce the residual impact and likelihood of financial crime risk; -       Business activities with an unacceptable level of risk exposure may not be adequately managed. Globally, increased volume and speed of transactions/payments and digital transformation in financial services are fueling following trends in financial crime risk management: -       Increased speed of service delivery ‒ transaction are being executed more quickly, and therefore, the primary line of defense needs to use more advanced detection techniques and data to mitigate risks; -       Identity fraud ‒ the number of identity fraud, account takeover, fabricated client accounts is expected to rise globally. The Group will need to combine breadth of information with a more advanced data analytics and machine learning capabilities to be able to mitigate the risk;  -       Diagnose products (new and nontraditional) for money laundering - criminals are more likely to shift their attention to more nontraditional products, including trade finance, securities and insurance, and thus the Group will need more advanced technological solutions and comprehensive policies to prevent and detect money laundering across the Group.
Mitigation	Within the scope of the Group-wide financial crime risk management programme, all business units, support functions and subsidiaries are expected to consider the impact of their activities on the risk profile of the Group and take effective measures to ensure alignment with the Group's risk taking approach for financial crime. We have an anti-money laundering (AML)/counter-terrorist financing (CTF) framework, which includes a risk-based approach (RBA) towards the ML/FT risks. The framework is designed to comply with the local legislation, international standards (Financial Action Task Force (FATF) recommendations), and international financial sanctions programmes. The Bank has standards that define Know Your Customer (KYC), transaction monitoring, transaction screening procedures to comply with international economic sanctions regulations, customer activity monitoring and filing for mandatory and suspicious activity reports, correspondent relationship assessment and monitoring, and training of relevant staff ML/FT policies. To strengthen our ability to prevent and detect financial crime, we continue to enhance our AML risk management function. We have invested significant resources to further improve our ML/FT risk management capabilities, including advanced analytics and transaction monitoring solutions. We use an established risk governance structure to mitigate risks related to ML/FT, which implies three lines of defense model. As an organisation that is fully committed to the prevention of bribery and corruption, Bank of Georgia ensures that appropriate policies and effective controls are in place. The Bank has Know Your Employee (KYE) procedures, based on which the Bank conducts different screening procedures at recruitment, employment and departure stages of the employment. In the first half of 2021, there was no bribery or corruption incident registered in the Bank, and the Bank did not incur any bribery or corruption fines. The Bank's Internal Audit function provides assurance on the adequacy and effectiveness of our risk management, internal controls and systems. Financial crime risks are on the regular agenda of the Audit and Risk Committees and are also frequently discussed at the Board level.
CYBER-SECURITY, INFORMATION SECURITY AND DATA PRIVACY RISK
Principal risk / uncertainty	We are at risk of failing to effectively govern, manage and control our data, as well as of experiencing the failure, unauthorised or erroneous use of information systems. These could lead to unethical decisions, disrupt our critical services, result in financial loss, have legal or regulatory implications, and/or negatively affect our reputation.
Key drivers / trends	Cyber and information security threats have continued to increase over the past few years. Although, to date, neither our operations have been materially affected nor have we suffered a data breach, the external threat profile is continuously changing, and we expect threats to continue to increase. In addition, local data protection legislation in Georgia, which is approximated to the General Data Protection Regulation, requires robust and multidisciplinary approach to privacy organisation. We are committed to ensuring that personal data is handled in accordance with the requirements of laws of Georgia and state-of-the-art principles. While the country has already taken steps to align its laws with EU data protection instruments, further legislative developments are underway. Over the past few years, as we have accelerated our focus on digitalisation, coupled with the shift to remote work due to the COVID-19 pandemic, we have seen an increase in electronic crime rate, including fraud, however losses have not been significant. Further, the risks will need to be balanced against the requirements driven by the local regulatory reforms on Open Banking, aimed at alignment with the EU's Second Directive on Payment Services (PSD2). The NBG has taken a phased approach to implementing the reforms, and the process is expected to be completed by the end of 2021.
Mitigation	We have an integrated control framework encompassing operational risk management, IT systems, and corporate and other data security, each managed by a separate department. We are committed to ensuring that personal data is handled in accordance with the requirements of the Georgian data protection legislation and state-of-the-art principles. We have established a rigorous information security and privacy programme, which is aligned with current business and regulatory requirements and an emerging threat landscape. Policies and standards: We have in place privacy and information security policies, which outline the basic contours of the measures to take in the processing and handling of personal data to preserve the integrity, confidentiality and availability of the data. Designated Governance and Risk Management unit develops and maintains a comprehensive set of information security policies and standards, which are regularly reviewed by the unit to ensure that they are up to date. These policies and standards are reviewed and approved by the relevant governance bodies on an annual basis, are aligned with recognised industry standards, such as those determined by the National Institute of Standards and Technology (NIST), the International Organisation for Standardisation (ISO) and the General Data Protection Regulation (GDPR), and are made available to all relevant personnel through internal channels. We have embedded robust privacy standards and practices within corporate operations and structure and maintain a comprehensive set of information security and privacy policies and standards. Internal and external information security checks: To ensure the adequacy and effectiveness of our risk management, internal controls and systems in place, we carry out regular information security checks internally as well as with the assistance of external consultants. Our Internal Audit department independently evaluates the Bank's overall control environment, issues recommendations and monitors the implementation of control measures. Once a year, we engage external auditors to conduct a cyber-security audit. In addition, we regularly initiate authorised simulated attacks on our system, have an internationally recognised vendor conduct a penetration test once a year, and carry out vulnerability assessments on a quarterly basis. Access management: We have established access controls that are based on general principles, such as principle of least privilege access, separation of duties, defence in depth, and privileges commensurate with a particular role's duties. We continuously strive to keep the existing controls up to date. In response to our employees working remotely due to the COVID-19 pandemic outbreak and to address information and cyber-security risks, we have developed new monitoring rules and alerts, modified thresholds to detect anomalous activity, and tightened security requirements for gaining remote access. Vendor security: While effective relationships with vendors are essential to our success, we understand that they may pose significant risks to our information security. In addition, under the local data protection legislation, organisations are responsible for personal data managed by their third-parties. To this end, we have established a comprehensive procedure for evaluating the maturity of vendors' information security, data protection and business continuity practices. As part of the selection process, vendors are subject to information security and data protection due diligence. In line with the findings of vendors' information security due diligence, necessary contractual and technical controls are implemented. Existing vendor relationships are subject to, at a minimum, annual monitoring and review to determine their fulfilment of information security requirements. Termination of a relationship with a vendor is subject to exit procedures to ensure the protection of our information's confidentiality, integrity and availability. Awareness programmes: Building a privacy and information security strategy means changing the mindset and perspective of the entire organisation. Awareness raising is one of the key aspects of our privacy and information security framework. As part of the privacy and cyber-security programme, we conduct awareness campaigns to enable our employees to recognise information security concerns and respond accordingly. Information security training, including cyber-security and data privacy, is mandatory for all employees as part of the onboarding process, and afterwards once a year. On a quarterly basis, the Information Security department initiates a phishing campaign to test the ability of our staff to detect phishing attacks and respond duly. On a periodic basis, the Information Security department sends awareness emails and shares posts through internal channels regarding current information security threats. In response to the COVID-19 pandemic outbreak, we have developed a mandatory special training course for our employees on how to work remotely in a secure manner and protect themselves from the emerging information security threats. Privacy Strategy: To evaluate where an organisation currently stands with respect to the local data protection legislation, the GDPR and industry best practices, we regularly perform privacy gap assessments. The outcome of this exercise is a specific risk-based implementation plan with priority steps required to improve privacy compliance within the Bank. This helps us make informed decisions on the use of personal data, develop assumptions at the Board level, and increase control over privacy risks. The Data Protection Officer regularly reports to the Board of Directors on the status of implementation and compliance with personal data protection laws. As a result, the Bank's senior management as well as the Board of Directors are aware of relevant data protection matters at all times. The Bank's Internal Audit function provides assurance on the adequacy and effectiveness of our risk management, internal controls and systems in place. Cyber-security and data privacy risks are on the Audit and Risk Committees' regular agenda and are also frequently discussed at the Board level.
OPERATIONAL RISK
Principal risk / uncertainty	We are at risk of incurring losses as a result of inadequate or failed internal processes, people and systems, or from external events. Operational risk may result in losses emerging from following events, among others: -     internal and external fraud, theft and unauthorised activity -     business disruption and system failures; -     employment practices; -     clients, products and business practices; -     damage to physical assets and infrastructure; -     execution, delivery and process management.
Key drivers / trends	We are highly dependent on the proper functioning of our risk management, internal controls and systems, and internal processes. The objective of the Group's operational risk management is to keep operational risk at appropriate levels relative to the characteristics of the Group's business, the markets, its capital and liquidity positions, and the competitive, economic and regulatory environment. Deficiencies or ineffectiveness in operational risk management may result in inaccurate financial, regulatory or risk reporting, which may have adverse effect on accurate and timely visibility of the Group's risk profile to our key stakeholders. This may deter the actions needed by each line of defense, including senior management and relevant committees to timely respond to the shift in the Group's risk profile and undertake corrective measures. The trends that are driving the need to transform other than above mentioned emerging risks stem from multiple sources: -     It is expected that regulation will continue to deepen and become more stringent as public becomes less tolerant of errors or inappropriate business practices; -     Customer expectations of banking products and services will change with the emergence of new technologies and new service models; -     Accelerating digitalisation and automation will make IT and data more sophisticated; -     The talent pool will need to shift to more IT, data savvy profiles to catch up with increased level of digitalisation and automation of processes. As a result, ORM will need to adapt and manage the evolution of new types of risks (e.g. model, contagion), all of which will require new skills, tools, and resources.
Mitigation	The Group has a comprehensive and diversified set of risk management and mitigation practices and strategies in place, including the use of risk models in analysing and monitoring various risk groups. The assumptions and judgments used in the existing risk models may not fully anticipate the timing or the specifics of every event in the Group's operating environment.  To manage operational risk, the Group has implemented and sustains a system of policies and procedures and has established a framework for anticipating, mitigating, controlling and communicating operational risks and the overall effectiveness of the internal control environment across the Group. Through effective alignment of roles and responsibilities related to operational risks among three lines of defense, the Group identifies, monitors, measures, reports on and manages risks and related controls. Internal controls: We have designed internal controls that ensure the Bank has efficient and effective operations, safeguards its assets, produces reliable financial reports, and complies with applicable laws and regulations. The following elements of the internal control framework enable us to mitigate operational risks: -     established clear authorities and processes for approval; -     close monitoring of key risk indicators and alert system to ensure adherence to thresholds or limits; -     infrastructure security; -     appropriate employee recruitment, learning and development practices to maintain expertise; -     continuous processes to identify business lines or products that appear to under or over perform in comparison with reasonable expectations; -     regular verification and reconciliation of transactions and accounts; and -     vacation policy that ensures that employees are absent from their duties for a period of not less than two consecutive weeks. Policies and standards: Operational risk management department develops and maintains a comprehensive set of policies and standards, which are regularly reviewed to ensure that they are up to date. These policies and standards are reviewed and approved by the relevant governance bodies to ensure they are aligned with recognised industry standards, such as Organisation for Standardisation (ISO), and are made available to all relevant employees through internal channels. Segregation of duties: The existing risk and control frameworks require that the appropriate segregation of duties is in place, so that the conflicting duties that potentially may result in the concealment of losses, errors or other inappropriate action are eliminated. Thus, one of the key objectives of ORM is to identify potential areas of conflict of interest and manage and monitor the risk. Technology risk: The use of technology related to products, activities, processes and delivery channels exposes us to strategic, operational, and reputational risks and the possibility of a material financial loss. We manage this risk with an integrated approach to identifying, measuring, monitoring and managing technology risks that use the same principles as operational risk management. Business resiliency and continuity: We are exposed to disruptive events, which could be severe and affect our inability to fulfil some or all of our business obligations. Incidents that damage the Bank's physical infrastructure, information technology infrastructures, or a pandemic that negatively impact human resources may result in significant financial losses for the Group, as well as for the industry. To provide resiliency against this risk, the Group has established a business continuity plan that is appropriate for the nature, size and complexity of our operations. The plan takes into account different types of scenarios to which the Group may be vulnerable. The Group continuously performs business impact analysis, recovery strategies, testing, training and awareness programmes, and communication and crisis management programmes. We identify and reassess critical business operations, cyclically or as needed, key internal and external dependencies and appropriate resilience levels. The identified plausible disruptive scenarios are assessed for their financial, operational and reputational impact, and the resulting risk assessment is the foundation for recovery objectives and measures and ultimately recovery plan. Outsourcing: The Group's sourcing policy ensures that outsourcing initiatives follow a defined process, including due diligence, risk evaluation and ongoing assurance. The following attributes support effective monitoring and management of the risk: -     standards that define whether and how activities can be outsourced; -     due diligence in the selection of potential service providers; process for identifying, managing and monitoring the associated risks, including the financial condition of the service provider; -     sound contracting of outsourcing arrangements; and -     establishment of viable contingency plans. Awareness programmes: We conduct awareness campaigns to enable our employees to recognise existing and potential risks and their role in risk management. Such training mandatory for all employees as part of the onboarding process and afterwards cyclically. The Bank's Internal Audit function provides assurance on the adequacy and effectiveness of our risk management, internal controls and systems. These types of operational risks are on the Audit and Risk Committees' regular agenda and are also frequently discussed at the Board level. The Group is committed to continuous improvement of its risk management programme and is constantly adapting to the evolving operating environment by becoming more agile and developing relevant talent pool as well as capabilities necessary to continue delivering on the Group's key strategic objectives.
COVID-19 PANDEMIC IMPACT RISK
Principal risk / uncertainty	The COVID-19 outbreak was declared as a global pandemic at the beginning of 2020 and continues to rapidly spread throughout the world. The spread of the virus has led to global shutdowns. Full lockdown in Georgia was introduced on 21 March 2020, and a state of emergency declared in the country, which lasted for around two months, after which the government started to gradually release restrictions and open the economy. The outbreak in Georgia at its early stage was not as severe as in many other countries, as the Georgian government took significant early actions to reduce the spread of the virus, which included early flight bans, and school and business closures, and continued with complete restrictions of all economic activities, other than essential stores and services. From mid-May 2020, businesses gradually reopened, but international flights resumed only to a limited number of countries from August 2020. A surge in COVID-19 cases in autumn resulted in further lockdown measures put in place in retail and hospitality sectors at the end of November 2020, as well as a curfew and a ban on public transportation, while avoiding a full-scale lockdown for other areas of the economy, unlike in April-May 2020. This has led to a decline in COVID-19 cases and allowed the gradual reopening of the domestic economy from March 2021. Virus cases have picked up again significantly in July-August 2021, and the government responded by re-introduction of restrictions in August, such as wearing face masks in public places, restricting large gatherings, concerts and other activities, and closing municipal transportation, among others. Although, vaccination rate is currently low, immunisation progress has significantly accelerated since end of July, which is encouraging, and the government has sufficient vaccine supplies secured for 2021. The COVID-19 pandemic still remains the key risk factor to derail the recovery unless more than half of the population is vaccinated by the end of the year. We are monitoring the impact on our business, customers and employees on an ongoing basis. There is still uncertainty over the magnitude of the global slowdown that will result from this pandemic. New COVID-19 variants and/or vaccination delays could derail the recovery as a result of required lockdowns and reduced external demand. The Georgian economy is well-diversified, both by sector and in terms of trading partner country dependence; however, if the virus leads to continued uncertainties, then a significant negative impact on the hospitality sector in Georgia is expected. This may also impact other areas of the Georgian economy, such as real estate. A prolonged COVID-19 spread, protectionism, and a protracted slowdown in major trading partners, along with intensified regional conflicts and security risks could harm investment and reduce external demand, especially tourism, for longer. Delays in structural reforms may deepen the damaging effects from the crisis.
Key drivers / trends	Economic activity in Georgia has slowed down significantly in 2020 in the wake of the COVID-19 pandemic, resulting in the real GDP contraction of 6.2% in 2020 on the back of the lockdown and the halt in international tourism. The government responded quickly to support businesses and households during each lockdown phases, including health-related spending, transfers targeting vulnerable households, and support to SMEs and businesses in hard-hit sectors. Georgian economy quickly regained its momentum during the first half of 2021, mainly supported by pent-up demand, strong goods exports, solid remittances, and a faster than expected rebound in tourism. Investments are also expected to contribute positively to growth in 2021 boosted by public infrastructure spending along with increased private sector activity. The estimated real GDP growth came in at 12.7% in the first half of 2021, beating market expectations, partly as a result of low base in 2020, but also from a faster rebound from external earnings (the estimated growth compared to the first half of 2019 was 5.7%). The rise in world commodity prices, utility price increases and faster than expected recovery resumed price pressures in 2021 with annual inflation coming at 11.9% in July 2021. The NBG responded by raising monetary policy rate three times this year, reaching 10.0% in August 2021. A high inflation is expected through the end of the year, before it declines in 2022 as temporary factors fade. Notably, strong recovery dynamics along with a tight monetary policy helped the local currency to partially regain its value against the US Dollar since May 2021, strengthening by 7.4% during the second quarter of 2021. Importantly, the international reserves remain high at US$ 3.9 billion as of 30 June 2021. The outlook remains subject to significant uncertainty as the vaccination rate is currently low and virus cases remain alleviated.
Mitigation	The Group has introduced a number of resilience protocols and a comprehensive Business Continuity Plan (BCP) aimed at curbing the spread of COVID-19 in Georgia and mitigating the negative impact on our business and the community. We started developing the BCP at the end of January 2020, such that all of our operations would be successfully adapted to the new operating environment, while establishing the health and safety of all our staff and customers as the number one priority. Our BCP was focused on four main pillars: operational continuity (employees and customers), supporting the public health system and communities, abundant liquidity, and strength of capital. Details of initiatives implemented as part of the BCP by the Group to respond to the COVID-19 pandemic outbreak are outlined in the Group's Annual Report 2020. We are monitoring the developing economic trends on the back of the COVID-19 pandemic and its impact on our business, customers and employees on an ongoing basis. There is still significant uncertainty over the magnitude of the global slowdown that will result from this pandemic, and we will continue to take appropriate actions to proactively manage evolving circumstances.
Emerging risk - Climate change
Principal risk / uncertainty	Climate-related risks are financial and non-financial risks that may arise from accelerating transition to a lower-carbon economy to meet the goals of the Paris Agreement as well as the actual physical damage that may materialise as a result of acute or chronic weather events on the back of changing climate.
Key drivers / trends	Climate-related risks for the Bank's operations are subject to increasing regulatory scrutiny and require additional risk assessment actions. There is growing demand for climate-related disclosures by key stakeholders, including investors and creditors for aspects such as climate risk assessment and greenhouse gas emission reporting. Beginning with financial year 2021, as a premium-listed UK company, we are required to make disclosures in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. We recognise climate change as an emerging risk and are beginning to consider and integrate climate-related risks, both physical and transition, into the overall risk management framework and decision-making processes across the Bank.
Mitigation	The Group's Environmental and Social Policy governs its environmental and social risk management procedures that enable us to identify, assess, manage, and monitor environmental and social risks in our lending and investment activities. Environmental and Social Risk Management procedures ensure that all commercial transactions are reviewed and evaluated against relevant Georgian environmental, social, health and safety, and labour laws and regulations as well as global ESG best practices. The Bank conducts extensive Environmental and Social Due Diligence on its clients and provides support and guidance where needed. We are committed to integrating sustainable finance principles into our credit risk management procedures, with our dedicated Environmental and Social team being part of the credit review process. In 2020, we expanded the Bank's consideration of climate-related issues and determined suitable next steps. In 2021, we have started an engagement with an external consultant to develop a comprehensive Climate Action Strategy and integrate climate-related risks into our risk management framework and business resilience assessments. We will be making climate-related disclosures in line with the TCFD recommendations for financial year 2021. We will address each of the four TCFD pillars - Governance, Strategy, Risk Management, and Metrics and Targets. Although we are just beginning our journey to better understand climate-related risks and opportunities and formulate our climate strategy, we will lay a solid groundwork in 2021 by focusing on the following key steps: -       ensure that climate-related governance is in place; -       raise climate awareness across the Bank and deepen our understanding of climate-related risks and opportunities; -       develop climate-related scenario analysis, including a 2°C scenario, and assess how climate-related risks, both transition and physical risks, may affect the Bank's business, strategies, and financial performance over time; -       consider climate-related opportunities across business segments; -       perform a gap analysis of existing practices against the TCFD recommendations to identify areas for improvements and formulate action plans; -       identify metrics for assessing climate-related risks and opportunities as well as information and data needs for climate-related disclosures; -     continue to report on Scope 1, 2 and 3 GHG emissions and consider portfolio GHG emissions.

 

 

 

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

We, the Directors, confirm that to the best of our knowledge:

 

§ The interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting", as adopted by the United Kingdom and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group;

§ This Results Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

§ This Results Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of related parties' transactions and changes therein).

 

After considering the Group's financial and cash flow forecasts and all other available information and possible outcomes or responses to events, the Board is satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future and therefore, the Directors considered it appropriate to adopt the going concern basis in preparing this Results Report.

 

 

The Directors of the Group are as follows:

 

Neil Janin

Archil Gachechiladze

Hanna Loikkanen

Alasdair Breach

Tamaz Georgadze

Jonathan Muir

Cecil Quillen

Véronique McCarroll

Mariam Megvinetukhutsesi

 

 

 

 

 

 

By order of the Board

 

 

 

Neil Janin                                                                                             Archil Gachechiladze

Chairman                                                                                              Chief Executive Officer

 

 

 

16 August 2021