Georgian Capital Market Development, Concepts and Opportunities

CENTRAL BANK OF ARMENIA

February 7, 2014

Page 1 About BG Capital JSC BG Capital - leader investment bank operating on the Georgian market since 2000 year, has been a member 2010 - The best Frontier of the Bank of Group since 2005. Market Investment Bank in Central & Eastern Europe BG Capital’s key services include: 2006 & 2007 - The best • Brokerage services in the securities sales & trading process brokerage Company in Georgia • Asset management and nominal ownership • IPOs and Private Placements • Mergers & Acquisitions (M&A) Global Access to Securities • Market analysis, business valuation ICSD (Through BOG Custody)

BG Capital’s access to the major stock exchanges, international brokers, and custodians allows us to provide: • Favorable prices on all securities to our clients • Expanding access to international markets • High professional standards and principles Through Trading Lines • Corporate Market-making

www.bankofgeorgia.ge/ir BG Capital also has an extensive experience in participating in debt securities primary and secondary market placements and transactions.

February 7, 2014 Page 2 About Georgian Stock Exchange

As of December 31, 20143 129 companies were admitted on GSE (3 of which V GSE are on A and B listing at GSE). In 2013 OTC trades of 38 securities were fixed 0.9% 0.2% 2.5% at GSE, total volume amounted USD 30mn. In the GSE system only 5 securities were traded during 2013 - total trade volume USD 305K. 53.7% - Bank of Georgia Number Trade Volume Ticker Securities 44.7% - Liberty Bank of trades (USD) 53.7% 2.5% - Caucasus Energy & GEB Bank of Georgia 40 160,777 44.7% BANK Liberty Bank 225 133,160 Infrastructure NRGY Caucasus Energy & Infrastructure 8 7,730 0.9% - Teliani Valley WINE 7 2,649 Teliani Valley 0.2% - Liberty Consumer GTC Liberty Consumer 3 565 Total 283 304,881 Total volume of trades (mn USD) Market capitalization of listed companies (mn USD) 60 1200

900 40

600

20 300

www.bankofgeorgia.ge/ir

0 0 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013 *GSE Capitalization is calculated including those companies which have GSE Trade volume (mn USD) OTC Trade volume (mn USD) not been traded for years

February 7, 2014 Page 3 Bond market Local Corporate bonds: Georgian Eurobonds: (sovereign and corporate) • 2005 – GEL 1,7mn Bank of Georgia 11% 09/07 • 2010 – US$ 250mn 9.875 % 07/15 GRAIL • 2006 – GEL 5mn Procredit Bank 15% 12/07 • 2011 – US$ 500mn Georgian Sovereign 6.875 % 04/21 GEORG • 2009 – GEL 25mn Georgian Railway 13.5% 12/11 • 2012 – US$ 400mn Bank of Georgia 7.75% 07/17 GEBGG *At the moment, there are no corporate bonds offered • 2012 – US$ 250mn Georgian Oil and Gas Corporation 6.875% 05/17 GEOROG • 2012 – US$ 500mn Georgian Railway 7.75% 07/22 GRAIL Last Auction results: Ministry of Finance of Georgia Treasury Bonds (1-year, 2-year, 5-year, 10-year) are issued in national currency, in Auction Date Period of Validity Average Yield % Issue Volume (GEL) immaterial form. The nominal value of a single security is 22/01/14 1 -Year 5.756 40,000,000 GEL1,000. The securities are sold via auctions, which are 15/01/14 2 -Year 6.188 25,000,000 organized by the . 18/12/13 5 -Year 7.511 8,000,000 20/11/13 10 -Year 10.04 10,000,000 1-Year T-bills Government Securities Portfolio GEL 110,000,000 9.000 900,000,000 100,000,000 8.000 800,000,000 90,000,000 7.000 80,000,000 700,000,000 6.000 70,000,000 600,000,000 60,000,000 5.000 500,000,000 50,000,000 4.000 400,000,000 40,000,000 3.000 300,000,000 30,000,000 2.000 200,000,000 20,000,000 1.000 100,000,000 10,000,000 www.bankofgeorgia.ge/ir - 0.000 0

Issue Amount Excess Demand T-bill, Weighted Average Yield G-Bonds T-Notes 10Y T-Notes 5Y T-Notes 2Y T-Bills

February 7, 2014 P 4 Objectives of Concept

• To develop long-term vision of development of Georgian capital Establishment of the long- market, by involvement and sharing ideas of financial institutions, term conceptual vision professional staff, experts and individuals who are interested in improvement of Georgian investment environment.

Support preparation of long- • To facilitate preparation of long-term strategic development plan and term capital market schedule of relevant activities, which would undertaken by Georgian development strategy and government’s economic group/team, legislative bodies and market action plan regulators

Assure the involvement of • To establish practice for implementation of all legislative changes public and industry according to the pre-determined plan and provide involvement of participants in the process of market participants, investors, issuers and all interested parties in the market development process of discussion of initiatives.

Facilitate introduction of www.bankofgeorgia.ge/ir• The best international practice and modern trends of development of financial markets must be analyzed and reflected in the concept , by international best practices taking into account economical scale and potential of the country.

February 7, 2014 Page 5 Main Issues/Problems

• Economic development of Georgia and expansion of business activities in the country

• Attracting foreign direct investments requires increasing effort because Georgian financial market is not developed

• According to the Global Competitiveness Report for improving the competitiveness of Georgia and development of business activities most problematic area is accessibility to financial resources/capital

• Securities market must be well-developed together with banking sector/industry for assuringwww.bankofgeorgia.ge/ir access to financial resources/capital

February 7, 2014 Page 6 Main Issues/Problems

SOLUTION • In order to raise capital at the Georgian market, the necessary appropriate and relevant environment should be developed, which may be defined as transparent and reliable investment environment, where market entry/exit mechanisms are ensured. • Its necessary to ensure transition from stakeholder to market model of holding. MAIN PRINCIPLES • Establishment of the mechanism for motivation of private sector participants to the securities market • Formation of competitive, transparent, fair and credible environment at the capital market • Development of culture forwww.bankofgeorgia.ge/ir investing in securities, motivating ownership dispersion and to easy investing process

February 7, 2014 Page 7 Diversity of Investment Instruments

Transparency and protection Diversity of investment Developed environment of of information instruments capital market operations It ensures the reduction of It provides an alternative capital It ensures easy enter-exit to information asymmetry raising mechanism and turnover financial markets

Reporting Support and Promotion of public Organized stock exchange availability/accessibility companies market with ensured liquidity

Legally enforced information Development of Debt securities confidentiality and protection of Developed Central Depository segment private property rights

Developed institutional Fair pricing Availability of Local risk-hedging mechanisms infrastructure

Integrated mechanisms of www.bankofgeorgia.ge/irEnsuring Transparent Process of Developed OTC market information dissemination Privatization

February 7, 2014 Page 8 Diversity of Investment Instruments

DEBT SECURITIES LOCAL RISK- • Secondary market of state HEDGING securities MECHANISMS • Corporate debt securities • Legislation of security • Other types of debt market for derivatives securities (e.g. municipal • Derivatives market bonds, options)

PUBLIC COMPANIES TRANSPARENT • Status of public companies PROCESS OF and legislative support PRIVATIZATION • Status of listing/listed • Privatization of state company and legislative enterprises through the support DIVERSITY OF stock exchange market • Legislative support to initial FINANCIAL public offerings INSTRUMENTS www.bankofgeorgia.ge/ir

February 7, 2014 Page 9 Structured Investment and Financial Markets with Ensured Liquidity

ORGANIZED LIQUID STOCK EXCHANGE THE CENTRAL DEPOSITORY MARKET • Increase the status of the Central Depository •Development of existed Stock Exchange • Development of ownership structure •Development of listing/listed companies (quantitatively and • Integration with other financial institutions qualitatively) • International Integration •Liquid financial instruments • Development of Trade rules, procedures, software •Development of market makers and development of electronic communication •Ensure secondary trading of State-issued securities means. •Development of Corporate and other debt securities •Development of Trade rules, procedures, software and development of electronic communication means.

DEVELOPED DEVELOPED OTC MARKET INSTITUTIONAL • The development of non-public INFRASTRUCTURE companies, an increase in the quality of financial reporting • Support development of Brokerage companies • Standardization of information about • The development of non-public Treasury securities, (certain EASY ENTRY standards of transparency) collective investment schemes www.bankofgeorgia.ge/ir AND EXIT

February 7, 2014 Page 10 Action Plan

Ensuring information transparency and protection by relevant regulation mechanisms • Changes in legislation, creating unified regulation of non-bank financial markets • Close cooperation and coordination with other field and anti-monopolistic regulators

Encouraging creation of various investment and financial instruments by information transparency and protection • Executing transparent process of privatization utilizing financial markets • Encouraging development of local risk hedging instruments, Encouraging IPOs for debt securities

Ensuring the liquidity of financial and investment instruments

• Encouraging financial infrastructure and market participants’ institutional development www.bankofgeorgia.ge/ir • Encourage development of competitive trading areas/systems to ensure financial and investment instruments circulation, Ensuring liquidity

February 7, 2014 Page 11 Action Plan – Corporate Debt Market

Ø Creation of foreign currency exchange risk insurance mechanisms and currency hedging liquid instruments

Ø Supporting Corporate bonds public issuance and admission to the Stock Exchange Listing

Ø Approval of public issuance prospectus and Listing the bonds on the Exchange should be allowed by considering a minimum amount and company's scale, rating, accountability and corporate governance standards of quality

Ø Liquidity requirements should be set-up for of listed companies and existence of market maker for corporate bonds is very important. www.bankofgeorgia.ge/ir

February 7, 2014 Page 12 Tax Policy and Benefits

Motivation for investors : – Zero or reduced income tax rate on dividend for shareholders of public companies – Zero or reduced income tax on capital gain from the listed securities – Considering the loss received from sale of the listed securities (for individuals) – The targeted tax breaks that are directed at specific sectors of the economy to invest in securities – Tax breaks for strictly regulated public companies in case of domestic corporate, compensation and investment scheme are developed

Motivation for issuance of companies: – Establishment of tax benefits system for public and/or listing companies

www.bankofgeorgia.ge/ir

February 7, 2014 Page 13 The leading bank in Georgia

Leading market position: No. 1 bank in Georgia by assets Only private entity to issue Eurobonds from the Caucasus: (34.1%), loans (33.8%), deposits (30.4%) and equity (35.5%)1 In November 2013 issued US$150 mln Eurobonds, which were consolidated forming a single series with the US$250 mln Underpenetrated market with stable growth perspectives: Eurobonds issued in July 2012. The bonds are currently trading Real GDP growth for 2004-2012 of 6.1% CAGR. IMF at a historical low yield of c.6% estimates 2.5% real GDP growth for 2013. Gross loans/GDP grew from 9.6% to 33.7% from 2004-2012, still below regional Sustainable growth combined with strong capital, average; Total deposits/GDP grew from 10.0% to 31.4% over liquidity and strong profitability the period Change Strong brand name recognition and retail banking US$ mln2 9M 2013 2012 2011 2010 2012/2011 franchise: Offers the broadest range of financial products to Total assets 3,577.5 3,413.8 2,793.1 2,259.1 22.2% the retail market through a branch network of 199 branches Loans to customers, net 1,972.8 1,866.6 1,566.4 1,334.7 19.2% 3 with more than 11 711 employees, more than 500 ATMs and Customer funds 1,719.8 1,625.5 1,637.6 1,143.0 -0.7% more than 1,000 Express Pay Self Service Terminals to more Total equity 703.5 639.5 486.5 391.1 31.5% Revenue4 240.9 299.0 244.7 194.6 22.2% than one million customers as of 30 September 2013 Profit 92.3 108.4 81.2 46.6 33.4% The only Georgian company with credit ratings from all three global rating agencies: S&P: ‘BB-’, Moody's: ‘B1/Ba3’ Experienced management with deep (foreign and local currency), Fitch Ratings: ‘BB-’; outlooks are understanding of local market and a strong track record: ‘Stable’ 9M 2013 30 Sep 2004 Change High standards of transparency and governance: First and Market capitalisation (US$ mln) 1,261.9* 20.7 61.0x still the only entity from Georgia to list on the London Stock Total assets (US$ mln) 3,577.5 151.8 23.0x Market share by total assets 34% 18% 16ppts Exchange since 2006 (in the form of GDRs since 2006 and www.bankofgeorgia.ge/ir *Market capitalisation for Bank of Georgia Holdings PLC, the Bank’s holding company, as of 5 February premium listing since February 2012) 2014, GBP/USD exchange rate of 1.6309

1 Market data based on standalone accounts as published by the National Bank of Georgia (NBG) as of 30 September 2013 www.nbg.gov.ge 3 Amounts due to customers 2 US$/GEL 1.6644, 1.6567, 1.6703 and 1.7728 as at 30 September 2013, 31 December 2012, 31 December 2011 and 31 December 2010, 4 Revenue adjusted for one-off currency gain by BNB in 2012 and one-off BYR hedge in 2011 respectively February 7, 2014 Page 14 The leading bank in Georgia - Securities Settlement and Custody Services

JSC Bank of Georgia (BoG) is leading provider of safekeeping and securities settlement services covering all type assets on the local market. The best custodial service provider on the Georgian market, award winner of the Global Finance “Best Sub-Custodian Bank Georgia 2012”

Bank of Georgia has launched custody service early in 2010, serving several non resident and resident individual and institutional clients and giving aces to the international as well as local markets.

As of December 31, 2013 assets under Bank of Georgia Custody on behalf of its clients were USD 75 mln (30% invested in local and 70% invested in foreign assets).

30% International www.bankofgeorgia.ge/ir70% Local

February 7, 2014 Page 15 Securities Settlement and Custody Services

Bank of Georgia custody is a member of two active depositories (CSD) on the local market as well international central securities depositories (ICSD)

Clearstream Bank

Euroclear Bank

National Bank of Georgia

Georgian Central Securities Depository

www.bankofgeorgia.ge/ir

February 7, 2014 Page 16 Securities Settlement and Custody Services - GCSD

On-exchange Steps: 1 to 4 OTC Steps: (bold Lines) A to D

· All settlement confirmations shown with orange dotted lines · This flow chart does not show any trade or settlement amendment · Settlement cycle for on exchange is T+0 and prefunding is necessary, settlement cycle for off exchange is T+ X (no overnight settlement is possible) · All instructions and Confirmations exchanged with investor goes through the Global Custodian if such exist in the process

www.bankofgeorgia.ge/ir

February 7, 2014 Page 17 Securities Settlement and Custody Services - NBG

On-exchange Steps: 1 to 5 OTC Steps: (bold Lines) A to D

· All settlement confirmations shown with orange dotted lines · This flow chart does not show any trade or settlement amendment · Settlement cycle for on exchange (primary market ) is T+1and prefunding is necessary, settlement cycle for off exchange is T+ X (no overnight settlement is possible) · Primary market participants can be only commercial banks · All instructions and Confirmations exchanged with investor goes through the Global Custodian if such exist in the process

www.bankofgeorgia.ge/ir

February 7, 2014 Page 18 Securities Settlement and Custody Services – Infrastructure and Regulations

Problems: Ø Infrastructure and System capabilities of the Georgian capital market Ø Mandatory Prefunding and T+0 settlement cycles Ø Failed trade mechanisms: buy-ins and trade protections like penalties Ø Standardized corporate action management

Solutions: Ø As developing Infrastructure and System capabilities is a long term goal for the market, we’ve automatized and standardized this part on our side which includes settlement, confirmation, corporate action managements (SWIFT ISO 15022 ) Ø We’ve removed prefunding requirements for the clients with high ratings and credit line/overdraft capabilities

www.bankofgeorgia.ge/ir

February 7, 2014 Page 19 Securities Settlement and Custody Services - Account Structure

Ø No Barriers for market entry/exit

Ø Preliminarily registration is not required

Ø Beneficiary disclosure is not required under the market level

Ø Omnibus and Segregated account structures

Ø Assets segregation

Ø No limits on foreign exchange transactions

Ø No restriction on currency repatriation

www.bankofgeorgia.ge/ir

February 7, 2014 Page 20 Elene Tskhadaia Irakli Kirtava Head of Custody and Securities Settlement General Director JSC Bank of Georgia JSC BG Capital 29a Gagarini Str., 0160, Georgia 7 Chavchavadze Ave., 0179 Tbilisi, Georgia +995 32 2444 787 +995 32 2444 681 [email protected] [email protected] www.bankofgeorgia.ge www.bgcapital.ge

THANK YOU

CENTRAL BANK OF ARMENIA

February 7, 2014

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