Bank Republic Group
Consolidated financial statements and Independent auditor’s report
For the year ended December 31, 2016 Bank Republic Group Consolidated financial statements
Contents
Independent auditor’s report
Consolidated financial statements
Consolidated statement of profit or loss and other comprehensive income ...... 1 Consolidated statement of financial position ...... 2 Consolidated statement of changes in equity ...... 3 Consolidated statement of cash flows ...... 4
Notes to the consolidated financial statements
1. Organisation ...... 6 2. Significant accounting policies ...... 6 3. Critical accounting judgments and key sources of estimation uncertainty ...... 18 4. Changes in accounting policies and adoption of new or revised standards and interpretations ...... 20 5. New Accounting Pronouncements ...... 21 6. Reclasifications ...... 22 7. Net interest income ...... 23 8. Allowance for impairment losses and other provisions ...... 23 9. Net gain on foreign exchange operations ...... 24 10. Fee and commission income and expense ...... 24 11. Other income ...... 24 12. Operating expenses ...... 25 13. Income taxes ...... 25 14. Cash and cash equivalents ...... 26 15. Mandatory cash balance with national bank of Georgia ...... 26 16. Due from financial institutions ...... 26 17. Loans to customers ...... 27 18. Investment securities ...... 30 19. Property and equipment ...... 32 20. Investment property ...... 33 21. Other assets ...... 33 22. Deposits by banks ...... 34 23. Deposits by customers ...... 34 24. Borrowed funds...... 35 25. Other liabilities ...... 36 26. Subordinated debt ...... 36 27. Equity ...... 36 28. Commitments and contingencies ...... 37 29. Transactions with related parties ...... 39 30. Fair value of disclosures ...... 41 31. Capital risk management ...... 45 32. Risk management policies ...... 46 33. Offsetting financial assets and financial liabilities ...... 64 34. Subsequent events ...... 64
Bank Republic Group Consolidated financial statements Consolidated statement of cash flows For the year ended December 31, 2016 (in thousands of Georgian Lari)
Year ended Year ended December 31, December 31, Notes 2016 2015 Cash flows from operating activities Interest received 176,141 138,790 Interest paid (61,234) (49,361) Fees and commissions received 17,982 17,069 Fees and commissions paid (7,818) (6,618) Recovery of asset previously written off 1,840 - Realized gain on foreign exchange operations 17,050 12,796 Other operating income received 1,238 3,223 Operating expenses paid (55,916) (52,199) Cash inflow from operating activities before changes in operating assets and liabilities 89,283 63,700
Changes in operating assets and liabilities (Increase)/decrease in operating assets Mandatory cash balance with the NBG (51,088) (20,204) Due from financial institutions (3,150) (1,392) Loans to customers (257,404) (309,688) Other assets (10,435) 842 Increase/(decrease) in operating liabilities Deposits by banks 123,845 63,830 Deposits by customers 82,030 105,605 Other liabilities 487 (892) Cash outflow from operating activities before taxation (26,432) (98,199)
Income taxes paid (8,515) (6,767) Net cash outflow from operating activities (34,947) (104,966)
Cash flows from investing activities Purchase of property and equipment, and intangible assets (3,731) (6,172) Dividends received 244 129 Income from lease of investment properties 1,925 860 Purchase of investment property - (3,341) Proceeds on disposal of investment property 20 3,492 4,215 Proceeds from redemption at maturity of investment securities loans and receivables 83,384 45,754 Proceeds from disposal of investment securities available for sale 3,481 - Acquisition of investment securities (120,850) (74,561) Net cash outflow from investing activities (32,055) (33,116)
The notes on pages 6-64 form an integral part of these consolidated financial statements. 4 Bank Republic Group Consolidated financial statements Consolidated statement of cash flows (continued)
Year ended Year ended December 31, December 31, Notes 2016 2015 Cash flows from financing activities
Repayment of borrowed funds (66,673) (98,276) Proceeds from borrowed funds 205,125 315,840 Subordinated debt received 16,830 - Repayment of subordinated debt (31,729) (2,736) Net cash inflow from financing activities 123,553 214,828
Effect of exchange rate changes on the balance of cash held in foreign currencies 638 1,463 Net increase in cash and cash equivalents 57,189 78,209
Cash and cash equivalents, beginning of the year 14 178,676 100,467 Cash and cash equivalents, end of the year 14 235,865 178,676
The notes on pages 6-64 form an integral part of these consolidated financial statements. 5 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
1. Organisation
Joint Stock Company Bank Republic (the “Bank”) is a joint-stock bank, which was incorporated in Georgia in 1992. The Bank is regulated by the National Bank of Georgia (the “NBG”) and conducts its business under general banking license number 5. The Bank’s primary business consists of commercial activities, originating loans and guarantees, attracting deposits by customers, trading with securities and foreign currencies.
The registered office of the Bank is located at 2 Grigol Abashidze Street, 0179, Tbilisi Georgia.
As at December 31, 2016 and 2015 the Bank had 8 branches and 33 service centers operating in Georgia.
The Bank is a parent company of a group (the “Group”) which consists of the following enterprises consolidated in the financial statements: Proportion of ownership interest/voting rights Country of (%) Type of Name operation 2016 2015 operation
JSC Bank Republic Georgia Parent Banking LLC Pirveli Mertskhali Georgia 100% 100% Operating leasing
As at December 31, 2016 and 2015, the following shareholders owned issued shares of the Group: December 31, December 31, Shareholders 2016, % 2015, %
JSC TBC Bank 100.00% - Societe Generale Group - 93.64% European Bank for Reconstruction and Development (“EBRD”) - 6.36% Total 100.00% 100.00%
The ultimate parent company of the Group for the year ended December 31, 2016 is TBC Bank Group PLC. TBC Bank Group PLC’s registered legal address is St. Andrew 6, London, United Kingdom EC4A3AE. Registered number of TBC Group PLC is 10029943. The ultimate parent company of the Group for the year ended December 31, 2015 was Societe Generale Group, Tour Societe Generale, La Defense, Paris (92972 Cedex).
As of 31 December 2016 and 31 December 2015 the Group had no ultimate controlling party.
2. Significant accounting policies
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”).
These consolidated financial statements are presented in thousands of Georgian Lari (“GEL thousand”), unless otherwise indicated.
These consolidated financial statements have been prepared on the historical cost basis except for the measurement at fair value of certain financial instruments, investment properties and the measurement at revalued amounts of land and buildings as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis.
In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: • Level 1 − quoted (unadjusted) market prices in active markets for identical assets or liabilities; • Level 2 − valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; • Level 3 − valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. 6 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
2. Significant accounting policies (continued)
Statement of compliance (continued)
The Bank and its consolidated companies are registered in Georgia and maintain their accounting records in accordance with Georgian law. These consolidated financial statements have been prepared from the statutory accounting records and have been adjusted to conform to IFRS.
The Group presents its consolidated statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the consolidated statement of financial position date (current) and more than 12 months after the consolidated statement of financial position date (non-current) is presented in Note 32.
Functional currency
Items included in the consolidated financial statements of each of the Group’s entities are measured using the currency of the primary of the economic environment in which the entity operates (“the functional currency”). The functional currency of the parent of the Group is the Georgian Lari (“GEL”). The presentational currency of the consolidated financial statements of the Group is the GEL. All values are rounded to the nearest thousand GEL, except when otherwise indicated.
The principal accounting policies are set out below.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Bank and entities controlled by the Bank and its subsidiaries. Control is achieved when the Bank: • has power over the investee; • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affect its returns.
The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.
When the Bank has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Bank considers all relevant facts and circumstances in assessing whether or not the Bank's voting rights in an investee are sufficient to give it power, including: • the size of the Bank’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; • potential voting rights held by the Bank, other vote holders or other parties; • rights arising from other contractual arrangements; and • any additional facts and circumstances that indicate that the Bank has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.
Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Bank gains control until the date when the Bank ceases to control the subsidiary.
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies.
All intra-group liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
Revenue recognition
Recognition of interest income and expense
Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably.
7 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
2. Significant accounting policies (continued)
Revenue recognition (continued)
Interest income and expense are recognised on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.
Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
Recognition of fee and commission income
Loan origination fees are deferred, together with the related transaction costs, and recognised as an adjustment to the effective interest rate of the loan. Where it is probable that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are deferred, together with the related direct costs, and recognised as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are recognised in profit or loss over the remaining period of the loan commitment. Where a loan commitment expires without resulting in a loan, the loan commitment fee is recognised in profit or loss on expiry. Loan servicing fees are recognised as revenue as the services are provided. Loan syndication fees are recognised in profit or loss when the syndication has been completed.
All other commissions are recognised when services are provided.
Recognition of dividend income
Dividend income from investments is recognised when the shareholder’s right to receive payment has been established (provided that it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably).
Recognition of rental income
The Group’s policy for recognition of income as a lessor is set out in the “Leases” section of this footnote.
Financial instruments
The Group recognizes financial assets and liabilities in its consolidated statement of financial position when it becomes a party to the contractual obligations of the instrument. Regular way purchases and sales of financial assets and liabilities are recognised using settlement date accounting. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities(other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.
Financial assets
Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (“FVTPL”), ‘held to maturity’ (“HTM”) investments, ‘available-for-sale’ (“AFS”) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.
8 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
2. Significant accounting policies (continued)
Financial assets (continued)
Financial assets at FVTPL
Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL.
A financial asset is classified as held for trading if: • It has been acquired principally for the purpose of selling it in the near term; or • On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or • It is a derivative that is not designated and effective as a hedging instrument.
A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: • Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.
Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend and interest earned on the financial asset and is included in the ‘other gains and losses’ and ‘interest income’ line item, respectively, in the statement of profit or loss and other comprehensive income.
Held to maturity investments
Investments held to maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity. Investments held to maturity are measured at amortised cost using the effective interest method less any impairment.
If the Group were to sell or reclassify more than an insignificant amount of investments held to maturity before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available-for-sale. Furthermore, the Group would be prohibited from classifying any financial asset as held to maturity during the current financial year and following two financial years.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated as available-for-sale or are not classified as (a) loans and receivables, (b) investments held-to-maturity or (c) financial assets at fair value through profit or loss.
The Group has investment in unlisted shares that are not traded in an active market and are classified as AFS financial assets.
AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period.
Loans and receivables
Loans and receivables (including cash and cash equivalents, mandatory cash balance with the National Bank of Georgia, due from financial institutions, loans to customers, investment securities: loans and receivables and other financial assets) that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.
9 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
2. Significant accounting policies (continued)
Offsetting
Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expense is not offset in the consolidated statement of profit or loss and other comprehensive income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group.
Impairment of financial assets
Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.
For unlisted equity investments classified as AFS, a significant or prolonged decline in the fair value of the security below its cost would be considered to be objective evidence of impairment.
For all other financial assets, objective evidence of impairment could include: • Significant financial difficulty of the issuer or counterparty; or • Breach of contract, such as default or delinquency in interest or principal payments; or • Default or delinquency in interest or principal payments; or • It becoming probable that the borrower will enter bankruptcy or financial re-organisation; or • Disappearance of an active market for that financial asset because of financial difficulties.
For certain categories of financial asset, such as loans and receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of loans and receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio, as well as observable changes in national or local economic conditions that correlate with default on receivables.
For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.
For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans and receivables, where the carrying amount is reduced through the use of an allowance account. When a loan or a receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss.
For financial assets measured at amortised cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.
Renegotiated loans
Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate.
Write off of loans and advances
Loans and advances are written off against the allowance for impairment losses when deemed uncollectible. Loans and advances are written off after management has exercised all possibilities available to collect amounts due to the Group. Subsequent recoveries of amounts previously written off are reflected as an offset to the charge for impairment of financial assets in the consolidated statement of profit or loss and other comprehensive income in the period of recovery.
10 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
2. Significant accounting policies (continued)
Impairment of financial assets (continued)
Derecognition of financial assets
The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.
On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain of loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit or loss.
On derecognition of a financial asset other than in its entirety (e.g. when the Group retains an option to repurchase part of a transferred asset), the Group allocates the previous carrying amount of the financial asset between the part it continues to recognize under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognised in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts.
Financial liabilities and equity instruments issued
Classification as debt or equity
Debt and equity instruments issued by a group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument.
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs.
Financial liabilities
Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’.
Financial liabilities at FVTPL
Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL.
A financial liability is classified as held for trading if: • It has been incurred principally for the purpose of repurchasing it in the near term; or • On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or • It is a derivative that is not designated and effective as a hedging instrument.
A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: • Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • The financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.
11 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
2. Significant accounting policies (continued)
Financial liabilities and equity instruments issued (continued)
Other financial liabilities
Other financial liabilities (including deposits by banks, deposits by customers, borrowed funds, subordinated debt and other financial liabilities) are initially measured at fair value, net of transaction costs.
Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.
Financial guarantee contracts
A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument.
Financial guarantee contracts issued by the Group are initially measured at their fair values and, are subsequently measured at the higher of: • The amount of the obligation under the contract, as determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets; and • The amount initially recognised less, where appropriate, cumulative amortisation recognised in accordance with the revenue recognition policies.
Performance guarantee contracts Performance guarantees are contracts that provide compensation if another party fails to perform a contractual obligation. Such contracts do not transfer credit risk. Performance guarantees are recorded off- balance sheet at initiation. Fee income is recognized as earned over the lifetime of a respective contract. . At the end of each reporting period, the provision for performance guarantee contracts are measured at the best estimate of expenditure required to settle the contract at the end of each reporting period, discounted to present value if the discounting effect is material. The Bank has the contractual right to revert to its customer for recovering amounts paid to settle the performance guarantee contracts. Such amounts are recognised as loans and receivables.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit and loss.
Derivative financial instruments
The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risk, including foreign exchange forward contracts, interest rate swaps and cross currency swaps.
The Group enters into offsetting deposits with its counterparty banks to exchange currencies. Such deposits, while legally separate, are aggregated and accounted for as a single derivative financial instrument (currency swap) on a net basis where (i) the deposits are entered into at the same time and in contemplation of one another, (ii) they have the same counterparty, (iii) they relate to the same risk and (iv) there is no apparent business purpose for structuring the transactions separately that could not also have been accomplished in a single transaction.
Derivatives are initially recognised at fair value at the date the derivative contract is entered into and are subsequently re-measured to their fair value at the end of each reporting period. 12 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
All derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are included in profit or loss as gains/(losses) on derivative financial instruments or as gain/(losses) from foreign currencies operations, depending on the nature of the instrument. The Group does not apply hedge accounting.
Finance lease receivables (Investment in finance lease). Where the Group is a lessor in a lease that substantially transfers all risks and rewards incidental to ownership to the lessee, the assets leased out are presented as investments in finance leases and carried at the present value of the future lease payments. Investments in finance leases are initially recognised at commencement (when the lease term begins) using a discount rate determined at inception (the early date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease).
13 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
2. Significant accounting policies (continued)
The difference between the gross receivable and the present value represents unearned finance income. This income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. Incremental costs directly attributable to negotiating and arranging the lease are included in the initial measurement of the finance lease receivable and reduce the amount of income recognised over the lease term. Finance income from leases is recorded within interest income in the profit or loss. Impairment losses are recognised in profit or loss when incurred as a result of one or more events (“loss events”) that took place after the initial recognition of investments in leases. The Group uses the same principal criteria to determine that there is objective evidence that an impairment loss has occurred as for loans carried at amortised costs disclosed earlier in this note. Impairment losses are recognised through an allowance account to write down the receivables’ net carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the interest rates implicit in the finance leases. The estimated future cash flows reflect the cash flows that may result from obtaining and selling the assets subject to the lease.
Receivables from terminated leases. The Bank recognizes receivables from terminated contracts at the moment of lease contract termination. These receivables are recognized at amount comprising difference between fair value of repossessed assets and outstanding balance of net investment in finance lease. Receivables are accounted for at amortised cost less impairment.
Prepayment for purchase of leasing assets. Prepayment for purchase of leasing assets comprises of interest bearing advance payments made to purchase assets for transfer into leases. Such advances are accounted for at amortized cost less impairment. On commencement of the leases, advances towards lease contracts are transferred into net investment in finance lease.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, unrestricted balances on corresponded and term deposits with the National Bank of Georgia with original maturity of less or equal to 90 days and amounts due from financial institutions with original maturity of less or equal to 90 days and are free from contractual encumbrances.
Mandatory cash balances with the National Bank of Georgia
Mandatory cash balances with the National Bank of Georgia are carried at amortised cost and represent mandatory reserve deposits which are not available to finance the Group’s day to day operations and hence are not considered as part of cash and cash equivalents for the purposes of the consolidated statement of cash flows.
Repurchase and reverse repurchase agreements and securities lending
Sale and repurchase agreements (“repos”) are treated as secured financing transactions. Securities sold under sale and repurchase agreements are retained in the consolidated statement of financial position and, in case the transferee has the right by contract or custom to sell or repledge them, reclassified as securities pledged under sale and repurchase agreements. The corresponding liability is presented within amounts due to credit institutions or customers. Securities purchased under agreements to resell (“reverse repo”) are recorded as amounts due from credit institutions or loans to customers as appropriate. The difference between sale and repurchase price is treated as interest income and accrued over the life of repo agreements using the effective interest method.
Securities lent to counterparties are retained in the consolidated statement of financial position. Securities borrowed are not recorded in the consolidated statement of financial position, unless these are sold to third parties, in which case the purchase and sale are recorded within gains less losses from trading securities in the consolidated statement of profit or loss. The obligation to return them is recorded at fair value as a trading liability.
Repossessed assets
Repossessed collateral represents non-financial assets acquired by the Group in settlement of overdue loans. The assets are initially recognised at fair value when acquired and included in premises and equipment, investment property or inventories within other assets depending on their nature and the Group’s intention in respect of recovery of these assets and are subsequently re-measured and accounted for in accordance with the accounting policies for these categories of assets. Inventories of repossessed assets are recorded at the lower of cost or net realizable value.
14 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
2. Significant accounting policies (continued)
Property and equipment
Land and buildings held for use in the supply of goods or services, or for administrative purposes, are stated in the consolidated statement of financial position at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the end of each reporting period.
Any revaluation increase arising on the revaluation of such land and buildings is recognised in other comprehensive income and accumulated in equity, except to the extent that it reverses a revaluation decrease for the same asset previously recognised in profit or loss, in which case the increase is credited to profit or loss to the extent of the decrease previously expensed. A decrease in the carrying amount arising on the revaluation of such land and buildings is recognised in profit or loss to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset.
Construction in progress is carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Such construction in progress is classified to the appropriate categories of property and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.
Freehold land is not depreciated.
Fixtures and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.
Depreciation is recognised so as to write off the cost or valuation of assets (other than freehold land and properties under construction) less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis at the following annual rates:
Buildings 1%-3.33% Office and computer equipment 10%-20% Vehicles 20% Other 20%
Leasehold improvements are amortised over the life of the related leased asset. Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization.
Depreciation on revalued buildings is charged to the consolidated statement of profit or loss and other comprehensive income. On the subsequent use of the revalued property, the attributable revaluation surplus remaining in the property revaluation reserve is transferred directly to retained earnings.
An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.
Intangible assets
Intangible assets acquired separately
Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives of 3 to 5 years. The estimated useful life and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
15 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
2. Significant accounting policies (continued)
Intangible assets (continued)
Derecognition of intangible assets
An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised.
Impairment of tangible and intangible assets other than goodwill
At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.
Intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
Investment property
Investment property is land or building or a part of building held to earn rental income or for capital appreciation and which is not used by the Group or held for the sale in the ordinary course of business. Property that is being constructed or developed or redeveloped for future use as investment property is also classified as investment property.
Investment property is initially recognised at cost, including transaction costs, and subsequently re-measured at fair value reflecting market conditions at the end of the reporting period. Fair value of the Bank’s investment property is determined on the base of various sources including reports of independent appraisers, who hold a recognised and relevant professional qualification and who have recent experience in valuation of property of similar location and category.
Investment property that is being redeveloped for continuing use as investment property or for which the market has become less active continues to be measured at fair value. Earned rental income is recorded in the consolidated income statement within other income. Gains and losses resulting from changes in the fair value of investment property are recorded in the consolidated income statement and presented within other income or other operating expense.
Subsequent expenditure is capitalized only when it is probable that future economic benefits associated with it will flow to the Bank and the cost can be measured reliably. All other repairs and maintenance costs are expensed when incurred. If an investment property becomes owner-occupied, it is reclassified to premises and equipment, and its carrying amount at the date of reclassification becomes its deemed cost to be subsequently depreciated.
16 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
2. Significant accounting policies (continued)
Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
Current tax
The tax currently payable is based on taxable profit for the year calculated in accordance with regulation of Georgia. Taxable profit differs from profit as reported in the consolidated statement of profit or loss and other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.
Deferred tax
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries, property and equipment, loans to customers and provisions, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with other assets and liabilities are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Current and deferred tax for the year
Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively.
Operating taxes
Georgia also has various other taxes, which are assessed on the Group’s activities. These taxes are included as a component of operating expenses in the consolidated statement of profit or loss.
17 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
2. Significant accounting policies (continued)
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material).
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
Contingencies
Contingent liabilities are not recognised in the consolidated statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognised in the consolidated statement of financial position but disclosed when an inflow of economic benefits is probable.
Foreign currencies
In preparing the financial statements of each individual group entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences on monetary items are recognised in profit or loss in the period in which they arise.
The exchange rates used by the Group in the preparation of the consolidated financial statements as at year-end are as follows:
December 31, December 31, 2016 2015
GEL / 1 US Dollar 2.6468 2.3949 GEL / 1 Euro 2.7940 2.6169
Amendments of the consolidated financial statements after issue. The Bank’s shareholder and management have the power to amend the consolidated financial statements after issue.
3. Critical accounting judgments and key sources of estimation uncertainty
In the application of the Group’s accounting policies the Group management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Critical judgments in applying accounting policies
The following are the critical judgments, apart from those involving estimations (see below), that the Group management has made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements.
18 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
3. Critical accounting judgments and key sources of estimation uncertainty (continued)
Going concern
The Group’s management has prepared these financial statements on a going concern basis. In making this judgement the management considered the Group’s financial position, current intentions, profitability of operations and access to financial resources, and it analysed the impact of the recent financial crisis on future operations of the Group.
On 20 October 2016, the Group’s 100% of the share capital has been purchased by JSC TBC Bank. Following this event, the Group continues to operate as an independent legal entity without any doubt upon the ability to continue as a going concern. In May 2017 it is planned to complete the legal and operational process of merging the Group with JSC TBC Bank. On the grounds that all assets, liabilities and operations of the Group will be taken over by JSC TBC Bank, these financial statements are prepared on a going concern basis.
Key sources of estimation uncertainty
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
Impairment of loans and receivables
The Group uses management’s judgment to estimate the amount of any impairment loss in cases where a borrower has financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Group estimates changes in future cash flows based on past performance, past customer behavior, observable data indicating an adverse change in the payment status of borrowers in a group, and national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans. The Group uses management’s judgment to adjust observable data for a group of loans to reflect current circumstances not reflected in historical data.
The allowances for impairment of financial assets in the consolidated financial statements have been determined on the basis of existing economic and political conditions. The Group is not in a position to predict what changes in conditions will take place in Georgia and what effect such changes might have on the adequacy of the allowances for impairment of financial assets in future periods.
As at December 31, 2016 and 2015 the gross loans to customers totalled GEL 1,476,999 and GEL 1,226,765, respectively, and allowance for impairment losses amounted to GEL 50,537 and GEL 42,669 respectively.
A 5% increase or decrease between actual loss experience and the loss estimates used will result in an additional or lower charge for allowance for impairment losses of GEL 2,527 (2015: GEL 2,133 thousand).
19 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
3. Critical accounting judgments and key sources of estimation uncertainty (continued)
Taxation
Tax legislation. The Group is subject to corporate income taxes in several jurisdictions and the calculation of the Group’s tax charge and provisions for corporate income taxes necessarily involves a degree of estimation and judgement. Refer to Note Error! Reference source not found..
Deferred and current income tax. On 13 May 2016 the Government of Georgia enacted the changes in the Tax Code of Georgia effective from 1 January 2017 or 1 January 2019, for commercial banks, credit unions, insurance organizations, microfinance organizations and pawnshops. The new code impacts the recognition and measurement principles of the Group’s income tax and it also affects the Group’s deferred income tax assets/liabilities. Companies do not have to pay income tax on their profit before tax (earned since 1 January 2017 or 1 January 2019 for commercial banks, credit unions, insurance organizations, microfinance organizations and pawnshops) until that profit is distributed in a form of dividend or other forms of profit distributions. Once dividend is paid, 15% income tax is payable at the moment of the dividend payment, regardless of whether in monetary or non-monetary form, to the foreign non-resident legal entities and foreign and domestic individuals. The dividends paid out to the resident legal entities are tax exempted. Apart from dividends’ distribution, the tax is still payable on expenses or other payments incurred not related to economic activities, free delivery of goods/services and/or transfer of funds and representation costs that exceed the maximum amount determined by the Income Tax Code of Georgia, in the same month they are incurred. As of 31 December 2016, deferred tax assets/liabilities are re-measured to the amount that is estimated to be utilized in the period from 1 January 2017 to 31 December 2018.
4. Changes in accounting policies and adoption of new or revised standards and interpretations
The adopted accounting policies are consistent with those of the previous financial year. There were no new or amended standards or interpretations that resulted in a change of the accounting policy.
20 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
5. New Accounting Pronouncements
Specific new standards and interpretations were issued as mandatory for the annual periods beginning on or after 1 January 2017 and not yet adopted by the Group. IFRS 9 “Financial Instruments: Classification and Measurement” (amended in July 2014 and effective for annual periods beginning on or after 1 January 2018). Key features of the new standard are: Financial assets are required to be classified into three measurement categories: (i) those to be measured subsequently at amortised cost, (ii) those to be measured subsequently at fair value through other comprehensive income (FVOCI) and (iii) those to be measured subsequently at fair value through profit or loss (FVPL). The classification for debt instruments is driven by the entity’s business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). If a debt instrument is held to collect, it may be carried at amortised cost if it also meets the SPPI requirement. Debt instruments in line with the SPPI requirement that are held in a portfolio where an entity both holds to collect assets’ cash flows and sells assets may be classified as FVOCI. Financial assets that do not contain cash flows that are SPPI must be measured at FVPL (for example, derivatives). Embedded derivatives are no longer separated from financial assets but will be included in assessing the SPPI condition. Investments in equity instruments are always measured at fair value. However, the management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss.
Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key difference is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. IFRS 9 introduces a new model for the recognition of impairment losses – the expected credit losses (ECL) model. There is a ‘three stage’ approach which is based on the change in credit quality of financial assets since initial recognition. In practice, the new rules mean that entities will have to record an immediate loss equal to the 12- month ECL on initial recognition of financial assets that are not credit impaired (or lifetime ECL for trade receivables). In case of a significant increase in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The model includes operational simplifications for lease and trade receivables. Hedge accounting requirements were amended to align more closely the accounting with the risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging.
The Group is currently assessing the impact of the new standard on its financial statements but expects the impact to be significant.
IFRS 15, Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2018). The new standard introduces the core principle that revenue must be recognized when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognized, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognized if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalized and amortized over the period when the benefits of the contract are consumed. The Group is currently assessing the impact of the new standard on its financial statements. IFRS 16, Leases (issued on 13 January 2016 and effective for annual periods beginning on or after 1 January 2019). The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also to access financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required to recognize: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the income statement. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. The Group is currently assessing the impact of the new standard on its financial statements.
21 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
5. New Accounting Pronouncements (continued) Disclosure Initiative ‒ Amendments to IAS 7 (issued on 29 January 2016 and effective for annual periods beginning on or after 1 January 2017). The amended IAS 7 will require disclosure of a reconciliation of movements in liabilities arising from financing activities. The Group will present this disclosure in its 2017 financial statements. The following other new pronouncements are not expected to have any material impact on the Group once adopted: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture ‒ Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB). Recognition of Deferred Tax Assets for Unrealised Losses ‒ Amendments to IAS 12 (issued on 19 January 2016 and effective for annual periods beginning on or after 1 January 2017). Amendments to IFRS 15, Revenue from Contracts with Customers (issued on 12 April 2016 and effective for annual periods beginning on or after 1 January 2018). Amendments to IFRS 2, Share-based Payment (issued on 20 June 2016 and effective for annual periods beginning on or after 1 January 2018). Amendments to IFRS 4, Insurance Contracts (issued on 12 September 2016 and effective for annual periods beginning on or after 1 January 2018). Annual Improvements to IFRSs 2014-2016 cycle (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2017 for amendments to IFRS 12, and on or after 1 January 2018 for amendments to IFRS 1 and IAS 28). IFRIC 22 - Foreign Currency Transactions and Advance Consideration (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2018. Transfers of Investment Property - Amendments to IAS 40 (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2018) Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group’s consolidated financial statements.
6. Reclasifications
Certain reclassifications have been made to the consolidated statement of profit and loss and other comprehensive income as at December 31, 2015 to conform to the presentation as at December 31, 2016. Management believes that current year presentation provides a better view of the consolidated statement of the profit and loss and other comprehensive income of the Group, follows to market practice and enhances comparability with financial statements of other financial institutions.
As previously Reclassification As reported amount reclassified 31 December 31 December 31 December 2015 2015 2015 Description Reclassification of income generated from Other income 10,835 (2,637) 8,199 penalty fee for prepayment of loan from other income to interest income
Reclassification of income generated from Interest Income 133,828 2,637 136,465 penalty fee for prepayment of loan from other income to interest income
Other liabilities 8,426 (822) 7,604 Reclassification of accrued interest on guarantees from other liabilities to Borrowings
Borrowings 468,708 822 469,530 Reclassification of accrued interest on guarantees from other liabilities to Borrowings
The opening Statement of Financial Position as of December 31, 2014 is not presented because the effect is immaterial.
22 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
7. Net interest income
2016 2015 Interest income comprises Interest income on financial assets recorded at amortised cost Interest income on individually impaired financial assets 769 1,623 Interest income on unimpaired financial assets 175,196 142,791 Total interest income 175,965 144,414
Interest income on financial assets recorded at amortised cost comprises Interest on loans to customers 162,509 136,465 Interest on balances due from financial institutions 1,288 797 Interest on investment securities: loans and receivables 12,168 7,152 Total interest income on financial assets recorded at amortised cost 175,965 144,414
Interest expense comprises Interest on financial liabilities recorded at amortised cost (63,499) (48,694) Total interest expense (63,499) (48,694)
Interest expense on financial liabilities recorded at amortised cost comprise Interest on deposits by banks (8,353) (5,587) Interest on deposits by customers (30,533) (23,130) Interest on borrowed funds (22,743) (17,312) Interest on subordinated debt (1,870) (2,665) Total interest expense on financial liabilities recorded at amortised cost (63,499) (48,694) Net interest income before provision for impairment losses on interest bearing financial assets 112,466 95,720
8. Allowance for impairment losses and other provisions
The movements in allowance for impairment losses on interest bearing assets were as follows: Loans to customers
January 1, 2015 37,982 Provision for impairment* 16,375 Write-off of assets (11,688) December 31, 2015 42,669
Provision for impairment* 21,793 Write-off of assets (13,925) December 31, 2016 50,537
*The provision for impairment during 2016 and 2015 differs from the amount presented in profit or loss for the year due to GEL 1,927 thousand and GEL 896 thousand respectively, recovery of amounts previously written off as uncollectible. The amount of the recovery was credited directly to the provisions line in profit or loss for the year.
The movements in other impairment allowances and provisions were as follows: Other financial assets- Guarantees Repossessed Accounts Legal and letter of assets receivable claims credits Total
January 1, 2015 952 799 − 270 2,021 Charge of provision − 40 260 1,218 1,518 Write-offs (952) (488) − − (1,440) December 31, 2015 − 351 260 1,488 2,099
Charge of provision − 50 66 1 117 Utilization of provision − - (326) − (326) December 31, 2016 − 401 - 1,489 1,890 23 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
8. Allowance for impairment losses and other provisions (continued)
Allowance for impairment of assets is deducted from the carrying amounts of the related assets. Provisions for claims, guarantees and letter of credits are recorded in liabilities.
9. Net gain on foreign exchange operations
Net gain on foreign exchange operations comprises:
2016 2015
Dealing, net 17,050 12,796 Translation differences, net 3,095 4,104 Total net gain on foreign exchange operations 20,145 16,900
10. Fee and commission income and expense
Fee and commission income and expense comprise:
2016 2015 Fee and commission income Plastic cards operations 5,128 4,942 Settlement operations 4,815 4,688 Documentary operations 4,395 3,212 Cash operations 2,372 2,432 Other 1,272 1,790 Total fee and commission income 17,982 17,064
Fee and commission expense Plastic card operations (3,517) (2,159) Settlement operations (1,196) (2,876) Documentary operations (974) (233) Cash operations (1,097) (483) Other fee and commission expenses (1,035) (867) Total fee and commission expense (7,819) (6,618)
11. Other income
Other income comprise:
2016 2015 Gain on sale of Credit Info Shares 3,251 − Gain on sale of Visa Shares 1,748 − Gain on sale of investment property 975 - Rent income 950 860 Reimbursement of legal costs 485 162 Dividend income 244 129 Gain on revaluation of investment property - 6,207 Gain on revaluation of land and buildings - 417 Other income 752 424 Total other income 8,405 8,199
24 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
12. Operating expenses
Operating expenses comprise:
2016 2015
Staff costs 34,563 31,598 Depreciation and amortization and impairment of intangible assets 4,997 5,438 Property and equipment maintenance 4,789 2,606 Operating leases 4,457 4,441 Professional services 3,144 3,480 Communications 1,563 1,237 Advertising costs 1,221 2,282 Utilities 965 897 Taxes, other than income tax 970 790 Stationary and other office expenses 895 1,658 Loss from disposal of investment property 659 603 Business trip expenses 376 361 Security expenses 298 326 Insurance 222 131 Charity and sponsorship expenses 80 214 Impairment of Repossessed Assets - 713 Other operating expenses 3,732 1,149 Total operating expenses 62,930 57,923
13. Income taxes
The Group measures and records its current income tax payable and its tax bases in its assets and liabilities in accordance with the tax regulations of Georgia where the Group and its subsidiaries operate, which differ from IFRS.
The Group is subject to certain permanent tax differences due to the non-tax deductibility of certain expenses and certain income being treated as non-taxable for tax purposes.
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Temporary differences as at December 31, 2016 and 2015 relate mostly to different methods/timing of income and expense recognition as well as to temporary differences generated by tax − book bases’ differences for certain assets.
The tax rate used for the reconciliations below is the corporate tax rate of 15% payable by corporate entities in Georgia on taxable profits (as defined) under tax law in that jurisdiction.
Income tax expenses comprises of the following:
2016 2015
Current tax charge 8,062 5,717 Deferred tax (credit)/charge (4,852) 1,816 Income tax expense for the year 3,210 7,533
The effective tax reconciliation is as follows for the years ended December 31, 2016 and 2015:
2016 2015
Profit before income tax 68,267 56,345 Theoretical tax charge at the statutory tax rate (15%) 10,240 8,452
Tax effect of items which are not deductible or assessable for taxation purposes: Income which is exempt from taxation (2,023) (1,194) Non-deductible expenses 230 275 Effect of change in tax legislation (Note 3) (5,237) - Income tax expense for the year 3,210 7,533
25 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
13. Income taxes (continued)
Deferred tax assets (liabilities) as at December 31, 2016 and 2015 and tax effect of the movements in deferred tax assets (liabilities) is detailed below and is recorded at the rate of 15%:
December 31, December 31, 2016 2015 Deferred tax assets/(liabilities) in relation to Property and equipment (816) (8,737) Investment property (689) (583) Available for sale investments - (433) Loans to customers (1,541) (1,678) Other provisions (191) (426) Other assets (167) (377) Other liabilities (408) (178) Net deferred tax (liabilities)/ assets (3,812) (12,412)
Deferred income tax assets/(liabilities) 2016 2015
As at January 1 − deferred tax assets − − As at January 1 − deferred tax liabilities (12,412) (9,560)
Change in deferred income tax balances recognized in other comprehensive income 3,748 (1,036) Change in deferred income tax balances recognized in consolidated profit or loss 4,852 (1,816) As at December 31 − deferred tax assets − − As at December 31 − deferred tax liabilities (3,812) (12,412)
In the context of the Group’s current structure and Georgian tax legislation, tax losses and current tax assets of different group companies may not be offset against current tax liabilities and taxable profits of other group companies and, accordingly, taxes may accrue even where there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity and the same taxation authority.
14. Cash and cash equivalents
December 31, December 31, 2016 2015
Cash on hand 65,314 54,177 Balances with the National Bank of Georgia 51,679 36,207 Correspondent accounts and time deposits with original maturities up to 90 days 118,872 88,292 Total cash and cash equivalent 235,865 178,676
15. Mandatory cash balance with national bank of Georgia
Credit institutions are required to maintain an interest earning cash deposit (obligatory reserve) with the NBG, the amount of which depends on the level of funds attracted by the credit institution. The Group’s ability to withdraw such deposit is restricted by the statutory legislation. In 2016 and 2015, the obligatory reserve on USD account bears interest at the rate of U.S. Federal Reserve System less 0.5%, on EUR account − the rate of the European Central Bank less 0.5%.
16. Due from financial institutions
As at December 31, 2016 and 2015 included in balances due from financial institutions are guarantee deposits placed by the Group for its operations with plastic cards totalling to GEL 5,541 and GEL 4,996 respectively and guarantee deposit under the letter of credit agreement totalling to GEL 4,396 and GEL 1,724 respectively.
26 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
17. Loans to customers
Loans to customers comprise: December 31, December 31, 2016 2015
Originated loans to customers 1,476,999 1,226,765 1,476,999 1,226,765
Less: allowance for impairment losses (50,537) (42,669) Total loans to customers 1,426,462 1,184,096
Movements in the allowance for impairment losses for the years ended December 31, 2016 and 2015 are disclosed in Note 8.
The table below summarizes carrying value of loans to customers analysed by type of collateral obtained by the Group. The amounts in the table represent the lower of the carrying value of the loan and collateral taken:
December 31, December 31, 2016 2015
Loans collateralized by pledge of real estate 915,959 867,503 Loans collateralized by guarantees 172,822 147,466 Loans collateralized by pledge of equipment 158,681 57,055 Loans collateralized by pledge of vehicles 45,407 18,126 Loans collateralized by pledge of cash 27,629 26,692 Unsecured loans 156,501 109,923 1,476,999 1,226,765
Less: allowance for impairment losses (50,537) (42,669) Total loans to customers 1,426,462 1,184,096
The table below summarizes loans to customers analysed by industries as at December 31, 2016:
Allowance for Allowance for impairment Gross loans impairment Net loans to losses to to customers losses customers gross loans Analysis by sector Individuals 1,061,998 (27,600) 1,034,398 2.6% Trade and service 233,498 (8,557) 224,941 3.7% Energy 50,874 (156) 50,718 0.3% Manufacturing 47,833 (2,572) 45,261 5.4% Construction 11,140 (1,095) 10,045 9.8% Agriculture 8,232 (307) 7,925 3.7% Transport and communication 2,658 (7) 2,651 0.3% Mining and metallurgy 2,479 (140) 2,339 5.6% Education 1,245 (7) 1,238 0.6% Other 57,042 (10,096) 46,946 17.7% 1,476,999 (50,537) 1,426,462 3.4% Total
27 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
17. Loans to customers (continued)
The table below summarizes loans to customers analysed by industries as at December 31, 2015:
Allowance for Allowance for impairment Gross loans impairment Net loans to losses to to customers losses customers gross loans Analysis by sector Individuals 821,662 (19,717) 801,945 2.4% Trade and service 218,151 (8,090) 210,061 3.7% Energy 74,334 (1,411) 72,923 1.9% Agriculture 16,918 (93) 16,825 0.6% Construction 7,283 (980) 6,303 13.5% Manufacturing 6,765 (393) 6,372 5.8% Transport and communication 3,227 (289) 2,938 9.0% Education 1,041 (4) 1,037 0.4% Mining and metallurgy 424 (2) 422 0.5% Other 76,960 (11,690) 65,270 15.2% Total 1,226,765 (42,669) 1,184,096 3.5%
As at December 31, 2016 loans to customers comprise the following products:
Allowance for Allowance for impairment Gross loans impairment Net loans to losses to to customers losses customers gross loans Loans to individuals Mortgage loans 550,034 (8,376) 541,658 1.52% Consumer loans 511,964 (19,224) 492,740 3.75% 1,061,998 (27,599) 1,034,398 2.60% Total
Loans to corporations Large legal entities 281,401 (13,207) 268,194 4.69% SME 65,456 (7,955) 57,501 12.15% Micro 68,144 (1,775) 66,369 2.61% 415,001 (22,937) 392,064 5.53% Total loans to corporations
As at December 31, 2015 loans to customers comprise the following products:
Allowance for Allowance for impairment Gross loans impairment Net loans to losses to to customers losses customers gross loans Loans to individuals Mortgage loans 375,235 (9,796) 365,439 2.61% Consumer loans 446,427 (9,921) 436,506 2.22% Total 821,662 (19,717) 801,945 2.40%
Loans to corporations Large legal entities 277,959 (14,235) 263,724 5.12% SME 77,744 (7,191) 70,553 9.25% Micro 49,400 (1,526) 47,874 3.09% Total loans to corporations 405,103 (22,952) 382,151 5.67%
28 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
17. Loans to customers (continued)
Analysis by credit quality of loans to customers outstanding as at December 31, 2016 was as follows: Allowance for Allowance for impairment Loans to customers Gross loans impairment Net loans to losses to As at December 31, 2016 to customers losses customers gross loans
Collectively assessed Borrowers with credit history over two years 820,802 (9,297) 811,505 1.13% New Borrowers 591,488 (5,450) 586,038 0.92% Overdue Up to 30 days 13,293 (2,542) 10,751 19.12% 31 to 60 days 5,503 (1,613) 3,890 29.31% 61 to 90 days 2,652 (905) 1,747 34.14% 91 to 120 days 3,335 (1,529) 1,806 45.85% 120 to 180 days 3,188 (1,930) 1,258 60.55% Over 180 days 13,207 (7,435) 5,772 56.29% Total collectively assessed loans 1,453,468 (30,701) 1,422,767 2.11%
Individually impaired Borrowers with credit history over two years 307 (307) - 100.00% New Borrowers - - - 0.00%
Overdue Up to 30 days - - - 0.00% 31 to 60 days - - - 0.00% 61 to 90 days - - - 0.00% 91 to 120 days 79 (8) 71 10.13% 121 to 180 days 17 (2) 15 11.76% Over 180 days 23,128 (19,519) 3,609 84.39% Total individually impaired loans 23,531 (19,836) 3,695 84.29% 1,476,999 (50,537) 1,426,462 3.42% Total Analysis by credit quality of loans to customers outstanding as at December 31, 2015 was as follows: Allowance for Allowance for impairment Loans to customers Gross loans impairment Net loans to losses to As at December 31, 2015 to customers losses customers gross loans
Collectively assessed Borrowers with credit history over two years 617,714 (9,138) 608,576 1.48% New Borrowers 542,022 (4,981) 537,041 0.92% Overdue Up to 30 days 11,417 (1,125) 10,292 9.87% 31 to 60 days 3,531 (337) 3,194 9.53% 61 to 90 days 3,072 (844) 2,228 27.49% 91 to 120 days 1,824 (571) 1,253 31.31% 120 to 180 days 2,253 (726) 1,527 32.21% Over 180 days 7,305 (2,291) 5,014 31.37% Total collectively assessed loans 1,189,138 (20,013) 1,169,125 1.68%
Individually impaired Borrowers with credit history over two years 2,939 (1,211) 1,728 41.20% New Borrowers 1,579 (403) 1,176 25.52% Overdue Up to 30 days - - - 0.00% 31 to 60 days - - - 0.00% 61 to 90 days - - - 0.00% 91 to 120 days 84 (24) 60 28.57% 120 to 180 days 857 (366) 491 42.71% Over 180 days 32,168 (20,652) 11,516 64.20% Total individually impaired loans 37,627 (22,656) 14,971 60.21% 1,226,765 (42,669) 1,184,096 3.48% Total
29 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
17. Loans to customers (continued)
The tables above show analysis of the loan portfolio based on credit quality. The Group’s policy for credit risk management purposes is to classify each loan as ‘neither past due nor impaired’ until specific objective evidence of impairment of the loan is identified. The primary factors by which the Group considers a loan as impaired are: overdue status of loan, financial position of a borrower and fair value of related collateral. The Group conducts impairment analysis of each individual loan on a quarterly basis. The details of credit risk assessment methodology is described in Note 32.
As at December 31, 2016 and 2015 the Group has exposure to one customer, totalling GEL 31,810 and GEL 30,337, respectively, which individually exceeds 10% and 12% of the Group’s equity respectively.
As at December 31, 2016 and 2015, 99% of loans were granted to companies operating in Georgia, which represents a significant geographical concentration in one region.
As at December 31, 2016 and 2015 carrying value of loans to customers included loans totalling GEL 77,843 and GEL 42,038, respectively, whose initial contractual terms were renegotiated, Out of these loans GEL 65,332 are classified as impaired as at December 31, 2016 (GEL 37,320 as of December 31, 2015 respectively).
As at December 31, 2016 loans to customers in the amount of GEL 26,488 (2015: GEL 31,162), were pledged as collateral under loans received from National Bank of Georgia (Note 24).
The table below summarizes an analysis of loans to customers by impairment:
December 31, 2016 December 31, 2015 Carrying Allowance Carrying Allowance value for value for before impairment Carrying before impairment Carrying allowance losses value allowance losses value
Loans to customers individually determined to be impaired 23,531 (19,836) 3,695 37,627 (22,656) 14,971 Loans to customers collectively assessed 1,453,468 (30,701) 1,422,767 1,189,138 (20,013) 1,169,125
Total 1,476,999 (50,537) 1,426,462 1,226,765 (42,669) 1,184,096
18. Investment securities
Investment securities: available-for-sale
Available-for-sale investment securities comprise:
December 31, 2016 December 31, 2015 Ownership Ownership interest Amount interest Amount
Visa Inc. - 1,782 JSC Credit info Georgia - 5.00% 1,159 JSC United Clearing Center 8.33% 54 8.33% 54 Total investments available-for-sale 54 2,995
The Group’s Investment securities in JSC Credit Info Georgia were classified to level 3 of the fair value hierarchy.
30 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
18. Investment securities (continued)
Investment securities: loans and receivables
December 31, December 31, 2016 2015 Amount Amount
Deposit Certificates of the National Bank of Georgia 5,884 9,209 Government treasury bills of the Ministry of Finance of Georgia 67,423 4,812 Government treasury bonds of the Ministry of Finance of Georgia 74,627 29,921
Total loans and receivables 147,934 43,942
As at December 31, 2016, investment securities loans and receivables totalling GEL 100,246 (2015: GEL 68,700), were pledged as collateral under loans received from National Bank of Georgia (Note 22).
Investment securities: held-to-maturity
December 31, December 31, 2016 2015 Amount Amount
Government treasury bonds of the Ministry of Finance of Georgia - 40,685
Total held-to-maturity - 40,685
Investment securities: pledged under repurchase agreement
As at December 31, 2015 Investment Securities pledged under repurchase agreement represent Government treasury bills of the Ministry of Finance of Georgia with balance value of GEL 28,639. There were no such securities as at December 31, 2016.
31 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
19. Property and equipment
Property and equipment comprise:
Office and Land and computer Construction buildings equipment Vehicles Other in progress Total At initial/revalued cost January 1, 2015 46,113 14,360 1,822 13,298 76 75,669 Additions − 2,214 − 1,078 1,609 4,901 Transfers 1,105 307 − 206 (1,618) − Reclassifications to investment property (259) − − − (259) Disposals (145) (1,044) (13) (160) − (1,362) Revaluation 2,953 − − − − 2,953 December 31, 2015 49,767 15,837 1,809 14,422 67 81,902
Additions 23 972 303 622 111 2,031 Transfers 37 61 44 (142) - Disposals - (23) (163) (186) December 31, 2016 49,827 16,847 1,949 15,088 36 83,747
Accumulated depreciation and impairment January 1, 2015 − (10,015) (1,127) (10,494) − (21,636) Depreciation charge (1,495) (1,666) (208) (985) − (4,354) Eliminated on disposals 3 993 13 156 − 1,165 Eliminated on revaluation 1,485 − − − − 1,485 Eliminated on reclassifications 7 − − − − 7 December 31, 2015 − (10,688) (1,322) (11,323) − (23,333)
Depreciation charge (498) (1,621) (234) (968) - (3,321) Eliminated on disposals 19 163 - - 182 December 31, 2016 (498) (12,290) (1,393) (12,291) − (26,472)
Net book value As at December 31, 2015 49,767 5,149 487 3,099 67 58,569 As at December 31, 2016 49,329 4,557 556 2,797 36 57,275
The Group revalues land and buildings every three years, unless based on indicators in real estate market it becomes evident that the changes in fair values of land and buildings might be significant, which would trigger more frequent revaluations. Land and buildings were revalued on December 31, 2015.
The valuation was carried out by an independent firm of valuers which holds a recognised and relevant professional qualification and who have recent experience in valuation of assets of similar location and category.
The following methods were used for the estimation of their fair value: discounted cash flow method (income approach), direct sales comparison method (comparative approach) and cost approach of valuation. As part of sales comparison method, at least three market comparatives were identified. As comparatives were somewhat different from the appraised properties, the quoted prices of the comparatives were further adjusted based on the differences in their location, condition, size, accessibility, age and expected discounts to be achieved through negotiations with the vendors. Comparative prices per square meter so determined were then multiplied by the area of the valued property to arrive at the appraised value of the property.
The Group’s buildings and lands are classified to level 3 of the fair value hierarchy. There were no transfers among the levels of the fair value hierarchy in 2016.
32 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
20. Investment property
Investment property comprises:
2016 2015 Cost As at January 1 22,118 6,726 Additions - 3,341 Disposals (3,492) (4,735) Transferred from repossessed assets 9,932 10,320 Transferred from property and equipment (Note 19) - 259 Gain/(loss) on revaluation (Note 11) - 6,207 As at December 31 28,558 22,118
Rental income from investment property for the year ended December 31, 2016 and 2015 totalled GEL 950 and GEL 860, respectively.
As at December 31, 2015 the Bank engaged an independent appraiser to determine the fair value of these properties. The appraiser is an industry specialist in valuing these types of investment properties.
The fair value of the property was determined based on the active market data. The market approach was used to determine the fair value, the income approach was used to validate the obtained value estimates, and the cost approach was used to determine the value of real property where no information on recent sales or lease rates for similar properties within the same area was available.
The Group’s investment property are classified to level 3 of the fair value hierarchy. There were no transfers among the levels of the fair value hierarchy in 2016 and 2015.
Where the Group is the lessor, the future minimum lease payments receivable under non-cancellable operating leases, were as follows:
2016 2015
Not later than 1 year 757 38 Later than 1 year and not later than 5 years 1,162 1,428
Total operating lease payments receivable 1,919 1,466
21. Other assets
Other assets comprise: December 31, December 31, 2016 2015 Other financial assets Accounts receivable 6,585 1,543 Other 131 138 6,716 1,681 Allowance for possible losses on other assets (401) (351) 6,315 1,330 Other non-financial assets Repossessed assets 2,586 3,636 Intangible assets 4,856 6,854 Prepaid expenses 2,693 1,575 Prepayments for property and equipment 183 256 Tax settlements, other than income tax 1,796 1,329 Other non-financial assets 562 500 12,676 14,150 Total other assets 18,991 15,480
33 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
21. Other assets (continued)
Changes in carrying value of intangible assets for the years ended December 31, 2016 and 2015 are as following:
Intangible assets At cost January 1, 2015 6,816 Additions 2,635 Disposals (439) December 31, 2015 9,012
Additions 334 Transfer 1,369 Write off (2,026) December 31, 2016 8,689
Accumulated amortisation and impairment January 1, 2015 (1,506) Amortisation charge for the year (1,084) Elminated on disposal 432 December 31, 2015 (2,158)
Amortisation charge for the year (1,675) December 31, 2016 (3,833)
Net book value December 31, 2015 6,855 December 31, 2016 4,856
22. Deposits by banks
Deposits by banks comprise: December 31, December 31, 2016 2015
Short-term loans from National Bank of Georgia 115,116 90,000 Deposits from international financial institutions and banks 155,873 30,751 Repurchase agreements - 27,550 Correspondent accounts of other banks 2,458 1,604 Total deposits by banks 273,447 149,905
As at December 31, 2016 and 2015 included in deposits by banks are short term loans from NBG in amount to GEL 115,116 and GEL 90,000 respectively (42%, and 60% of total deposits by banks), which represents a significant concentration.
23. Deposits by customers
Deposits by customers comprise: December 31, December 31, 2016 2015 Deposits by individuals Time deposits 147,641 151,748 Repayable on demand 181,824 180,600 329,465 332,348
Deposits by legal entities Time deposits 122,954 72,579 Repayable on demand 361,402 324,364 484,356 396,943 Total deposits by customers 813,821 729,291
34 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
23. Deposits by customers (continued)
As at December 31, 2016 and 2015 deposits by customers totaling GEL 11,528 and GEL 48,583, respectively were held as security against guarantees and letters of credit issued by the Group.
As at December 31, 2016 and 2015, accrued interest expenses included in deposits by customers amounted to GEL 4,061 and GEL 4,075, respectively.
As at December 31, 2016 and 2015 deposits by customers totaling GEL 307,441 and GEL 219,795 (37% and 30% of total deposits by customers), respectively, were due to top twenty and top eleven customers.
December 31, December 31, 2016 2015 Analysis by economic sector/customer type
Individuals 329,073 332,348 Trade and services 213,674 156,073 Transport and communication 67,336 69,573 Budget entities 32,853 40,660 Construction 40,199 44,305 Energy 22,644 26,964 Finance sector 43,376 19,495 Agriculture 7,886 7,048 Mining 7,604 4,721 Insurance 18,242 3,681 Education 2,378 1,951 Health sector 8,960 997 Other 19,596 21,475 Total deposits by customers 813,821 729,291
24. Borrowed funds
Borrowed funds comprise:
December 31, December 31, 2016 2015
International Finance Corporation (“IFC”) 155,152 163,628 European Fund for Southeast Europe (“EFSE”) 113,598 92,389 European Investment Bank (“EIB”) 108,254 106,894 Netherlands Development Finance Company “(FMO”) 78,617 - European Bank for Reconstruction and Development (the “EBRD”) 76,580 81,957 Blue Orchard Microfinance Fund (“BOMF”) 66,723 - Green For Growth Fund (“GGF”) 13,324 - Council of Europe Development Bank 247 24,234 Ministry of Education of Georgia 11 17 Ministry of Finance of Georgia - 411 Total borrowed funds 612,506 469,530
As at December 31, 2016 and 2015 accrued interest expenses included in borrowed funds amounted to GEL 6,195 and GEL 817, respectively.
The Group is obliged to comply with financial covenants in relation to certain balances due to banks disclosed above. These covenants include stipulated ratios, capital adequacy and various other financial performance ratios.
The Group was in compliance with these covenants as at December 31, 2016 and 2015.There were no breaches of borrowing covenants during reporting periods as well, except for the completed transaction – acquisition of Bank Republic Group by JSC TBC bank and Change of Control Covenants. The Group obtained respective consents and waivers from the Lenders.
35 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
25. Other liabilities
Other liabilities comprise: December 31, December 31, 2016 2015 Other financial liabilities Dividends Payable to JSC TBC Bank 17,000 - Payables to Societe Generale - 1,609 Settlements on other transactions 5,898 2,739 22,898 4,348 Other non-financial liabilities Bonuses payables 3,195 3,689 Other - 389 Total other liabilities 26,093 8,426
Dividends per share for the year ended December 31, 2016 is GEL 0.22.
26. Subordinated debt
Subordinated debt comprises:
Nominal Weighted Maturity interest average date rate effective December 31, December 31, Currency year % rate 2016 2015
December 29, TBC Bank Group PLC USD 2022 13.00% 13.00% 17,029 - Societe Generale USD March 26, 2018 5.08% 3.13% - 19,644 Societe Generale USD May 29, 2022 10.95% 4.21% - 12,085 Total subordinated debt 17,029 31,729
As at December 31, 2016 and 2015 accrued interest expenses included in subordinated debt amounted to GEL12 and GEL 367, respectively.
In the event of bankruptcy or liquidation of the Group, repayment of this debt is subordinate to the repayments of the Group’s liabilities to all other creditors.
During 2016 year the Group covered Societe Generale subordinated debt and obtained consent from National Bank of Georgia in regards of premature closure of subordinated debt.
The Group is obliged to comply with financial covenants in relation to certain balances due to banks disclosed above. These covenants include stipulated ratios, capital adequacy ratios and various other financial performance ratios.
The Group was in compliance with covenants as at December 31, 2016, 2015 and for the years then ended.
27. Equity
Share capital. As at December 31, 2016 and 2015 share capital authorized, issued and paid-in consisted of 760,308 and 760,308 shares, respectively, with par value of GEL 0.1 each. As at December 31, 2016 and 2015 share premium totaling GEL 39,914 and GEL 39,914, respectively, represents an excess of contributions received over the nominal value of shares issued. There was no movement in the balances of shares capital and share premium during the reporting period ended December 31, 2016 and 2015.
Revaluation reserve for property and equipment. The revaluation reserve for property and equipment is used to record increases in the fair value of buildings and decreases to the extent that such decrease relates to an increase on the same asset previously recognised in equity.
Unrealised gains (losses) on investment securities available-for-sale. This reserve recorded as of 31 December 2015 represented accumulated fair value changes on available-for-sale investments. During the year 2016 available-for-sale investments have been sold to third parties the reserve was recycled to P&L.
36 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
27. Equity (continued)
Dividends. In accordance with the Georgian legislation, dividends may only be declared to the shareholders of the Bank from the net income as shown in the Bank’s separate financial statements prepared in accordance with the NBG requirements. The NBG shall be informed regarding declaration of dividends and also shall be authorized to suspend or restrict payment of dividends, if a commercial bank has violated regulatory requirements of the NBG. The Bank declared dividend amounting GEL 17,000 million in 2016 to its shareholder JSC TBC Bank.
28. Commitments and contingencies
In the normal course of business, the Group is a party to financial instruments with off-balance sheet risk in order to meet the needs of its customers. These instruments, involving varying degrees of credit risk, are not reflected in the consolidated statement of financial position.
The Group’s uses the same credit control and management policies in undertaking off-balance sheet commitments as it does for on-balance operations.
As at December 31, 2016 and 2015 contingent liabilities and credit related commitments comprise: December 31, December 31, 2016 2015 Contingent liabilities and credit related commitments Performance guarantees issued 144,171 118,785 Financial guarantees issued 51,812 27,415 Letters of credit 24,199 74,741 Unused credit lines 97,949 70,730
Operating lease commitments Not later than 1 year 967 846 Capital expenditure commitments - 961 Provision for performance guarantees (282) (313) Provision for credit related commitments and financial guarantees (1,215) (1,175) Commitments and contingencies (before deducting collateral) 317,601 291,990
Less: deposits held as security against letters of credit (Note 23) (11,528) (48,583) Total contingent liabilities and credit commitments 306,073 243,407
Extension of loans to customers within credit line limits is approved by the Group on a case-by-case basis and depends on borrowers’ financial performance, debt service and other conditions.
Fair value of credit related commitments and financial guarantees were GEL 1,215 thousand as of 31 December 2016 (2015: GEL 1,175 thousand).
Legal proceedings. From time to time and in the normal course of business, claims against the Group are received from customers and counterparties in such case provision is made in the consolidated financial statements.
Taxation. Commercial legislation of Georgia, including tax legislation, may allow more than one interpretation. In addition, there is a risk of tax authorities making arbitrary judgments of business activities. If a particular treatment, based on management’s judgment of the Group’s business activities, was to be challenged by the tax authorities, the Group may be assessed additional taxes, penalties and interest.
Georgian transfer pricing legislation was amended starting from January 1, 2015 to introduce additional reporting and documentation requirements. The new legislation allows the tax authorities to impose additional tax liabilities in respect of certain transactions, including but not limited to transactions with related parties, if they consider transaction to be priced not at arm’s length. The impact of challenge of the Group’s transfer pricing positions by the tax authorities cannot be reliably estimated.
Such uncertainty may relate to the valuation of financial instruments, valuation of provision for impairment losses and the market pricing of deals. Additionally such uncertainty may relate to the valuation of temporary differences on the provision and recovery of the provision for impairment losses on loans to customers and receivables, as an underestimation of the taxable profit. The management of the Group believes that it has accrued all tax amounts due and therefore no allowance has been made in the consolidated financial statements.
37 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
28. Commitments and contingencies (continued)
Operating environment. Most of the Group’s business is based in Georgia. Emerging economies, such as Georgia’s, are subject to rapid change and are vulnerable to global market conditions and economic downturns. As a consequence, operations in Georgia may be exposed to certain risks that are not typically associated with those in developed markets. Nevertheless, over the last few years the Georgian government has embarked in a number of civil, criminal, tax, administrative and commercial reforms that have positively affected the overall investment climate of the country. Today Georgia has an international reputation as a country with a favourable investment environment. Georgia continued to progress in the report "Doing Business 2016: Understanding Regulations for Small and Medium-Size Enterprises" by the World Bank (WB) and International Financing Corporation (IFC), ranking as the 16th easiest country in the world to do business (out of 190), up by 7 steps compared to the previous year rankings. The country improved its ranking in almost all categories, confirming its position as regional leader and outperforming most of the EU economies. Georgia also boasts low corruption levels, a low tax burden, and high transparency of its institutions according to the number of surveys by international institutions. The Parliamentary elections in October, 2016 were ruled free and just by all of international observers. The vote marked the continuation of economic reforms and country’s pro-western orientation as affirmed by the ruling party. Peaceful elections positively influence the business confidence and further strengthen the image of Georgia as the country of democratic values and institutions.
In 2016 Georgian economy grew moderately by 2.4%, per initial estimates, below the initial growth target around 3- 3.5% indicated by most of the international financial institutions. The growth has been negatively affected by a y/y decline in the transport sector, reflecting the slowdown in regional trade volumes. The construction sector, which has been the primary driver of growth in last 2 years, also decelerated. The manufacturing sector, the economy’s second largest, showed improvements along with the recovery of exports.
By the end of 2016 the Georgian Lari depreciated against the U.S. Dollar by 10.5% y/y, mostly driven by the depreciation of the Turkish Lira. Over the same period the GEL lost 7% of its value against the EUR. Following the contraction over the last 2 years, exports and remittances started to recover in the second half of 2016, supported by the expanding geographic area for the Georgian exports as well as relatively stable economic conditions in Russia and Ukraine. On the other hand, the economic situation continued to deteriorate in Azerbaijan, Turkey and Armenia, thus negatively affecting Georgian exports to these countries. Despite the continued challenges in the region, tourism revenues posted solid growth with the number of visitors reaching 6.4 million, up by 8% y/y.
After the close to zero inflation (+0.6% y/y) in Q4 2016, inflation picked up in January to 3.9% y/y. Reversal in inflation was driven by increased excise taxes on tobacco, petroleum and cars, core inflation stood at 2.8% y/y. Higher excise taxes fed into higher inflation expectations in the economy. To respond to unexpected shift in inflation expectations NBG raised policy rate by 0.25 PPs from 6.5% to 6.75% by the end of January 2016 and promised additional 0.25 PP rate hike in the coming quarter. Given the inflation is primarily driven by one-off factors; NBG is not expected to over- react even if inflation goes temporarily above its target of 4% in 2017.
The fiscal policy remained pro-growth in 2016, with the fiscal deficit around 40%, financed mostly by the external liabilities. Despite this being over 3%, public debt levels remain, at around 45% of GDP, below the ceiling of 60% set out in the constitution. In line with the government’s debt management strategy, the share of domestic debt in total public debt is gradually increasing – it stood at 21% at the end of 2016 – which reduces exchange rate risk and strengthens the sustainability profile of public debt.
In 2017, fiscal deficit is projected at 4.2% of GDP. Despite remaining high, this is mostly driven by increased capital expenditures. The government’s long-term reform agenda centres on infrastructure development in the country, which should support long-term economic growth by reducing transportation costs and better harnessing the potential of Georgia’s regions. In addition, better transport infrastructure should strengthen the country’s position as the region’s transport and logistics hub.
Pensions and retirement plans
Post retirement employees receive pension benefits from the Government of Georgia in accordance with the laws and regulations of the country. As at December 31, 2016 and 2015, the Group was not liable for any supplementary pensions, post-retirement health care, insurance benefits, or retirement indemnities to its current or former employees.
38 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
29. Transactions with related parties
Transactions between the Group and its subsidiaries, which are related parties of the Group, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below:
December 31, 2016 December 31, 2015 Total category Total category as per the as per the consolidated consolidated financial financial Related party statements Related party statements balances caption balances caption
Cash and cash equivalents 33,672 235,865 76,205 178,676 - Shareholders 33,672 - 75,638 - - Other related parties - - 567 -
Loans to customers, gross 1,553 1,476,999 360 1,226,765 - Key management personnel of the Group or its shareholder (contractual interest rate: 6.6% -8.8%) 1,337 - 294 - -Significant Shareholders (contractual interest rate: 6.6% -8.8%) 216 - - - - Other related parties - - 66 -
Allowance for impairment losses on loans to customers - (50,537) (1) (42,669) - Other related parties - - (1) -
Deposits by banks 132,875 273,447 4 149,905 - Shareholders (contractual interest rate: 1%- 3%) 132,875 - 4 -
Deposits by customers 2,397 813,821 2,594 729,291 - Key management personnel of the Group or its shareholder (contractual interest rate: 0%-4%) 2,014 - 2,452 - - Significant shareholders (contractual interest rate: 0%-9.5%) 6 - - - - Other related parties (contractual interest rate: 0%) 377 - 142 -
Borrowed funds - 612,506 81,861 469,530 - Shareholders (contractual interest rate: 0%- 9.2%) - - 81,861 -
Other liabilities - 26,093 1,601 7,604 - Shareholders - - 1,601 -
Provisions - 1,489 - 1,748 - Other related parties - - - -
Subordinated debt 17,029 17,029 31,729 31,729 - Shareholders (contractual interest 5.1%- 13%) 17,029 - 31,729 -
Guarantees issued - 195,983 65 146,200 - Key management personnel of the Group or its shareholder - - 65 -
39 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
29. Transactions with related parties (continued)
Included in the consolidated income statement for the years ended December 31, 2016 and 2015 are the following amounts which were recognized in transactions with related parties:
Year ended December 31, 2016 Year ended December 31, 2015 Total category Total category as per the as per the consolidated consolidated financial financial Related party statements Related party statements transactions caption transactions caption
Interest income 112 175,965 56 144,414 - Key management personnel of the Group or its shareholder 44 − 30 − - Other related parties 68 − 26 −
Interest expense (6,006) (63,499) (5,625) (48,694) - Shareholders (5,895) − (5,570) − - Key management personnel of the Group or its parent (100) − (30) − - Other related parties (11) − (25) −
Recovery of provisions for impairment losses on interest bearing assets − (19,866) − (15,479)
Operating expenses (1,506) (62,930) (5,421) (57,923) - Key management personnel of the Group or its parent (1,351) − (3,360) − - Shareholders (153) − (1,984) − - Other related parties (2) − (77) −
In accordance with IAS 24 Related Party Disclosures, parties are considered to be related if the parties are under common control or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Due to the change of ultimate parent company during 2016, list of related parties of the Group changed. Refer to Note 1.
Key management personnel include members of the Supervisory Board and the Management Board.
Other related parties include entities under common control and close family member of key management personnel.
Parties with more than 10% of ownership stake in the parent company of the Group or with representatives in the Board of Directors are considered as Significant Shareholders.
The remuneration of management board and Supervisory Board of the Group management was as follows:
Year ended December 31, 2016 Year ended December 31, 2015 Total category Total category as per the as per the consolidated consolidated financial financial Related party statements Related party statements transactions caption transactions caption Key management personnel compensation - Short-term employee benefits 2,318 34,563 3,360 31,598 Total 2,318 34,563 3,360 31,598
40 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
30. Fair value of disclosures
IFRS defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgment is necessarily required to interpret market data to determine the estimated fair value. Georgia continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments.
Fair value hierarchy. For the purpose of fair value disclosures, the Group’s has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability. The following tables show analysis of assets and liabilities measured at fair value or for which fair values are disclosed by level of the fair value hierarchy:
At December 31, 2016 Level 1 Level 2 Level 3 Total
Assets measured at fair value Investment property - - 28,558 28,558 Revalued land and buildings 49,329 49,329
Assets for which fair values are disclosed Cash and cash equivalents 65,313 170,552 - 235,865 Mandatory cash balance with the NBG - 131,133 - 131,133 Amounts due from credit institutions - 9,937 - 9,937 Loans to customers - - 1,406,191 1,406,191 Other financial assets - - 6,315 6,315 Investment securities: - Loans and receivables - 150,450 - 150,450 Liabilities for which fair values are disclosed Deposits by banks - 273,447 - 273,447 Deposits by customers - - 813,608 813,608 Borrowed funds - 612,604 - 612,604 Subordinated loans - 17,029 - 17,029 Other financial liabilities - - 22,898 22,898
At December 31, 2015 Level 1 Level 2 Level 3 Total
Assets measured at fair value Investment securities: available-for-sale 1,782 - 1,159 2,941 Investment property - - 22,118 22,118 Revalued land and buildings - - 49,767 49,767
Assets for which fair values are disclosed Cash and cash equivalents 54,178 124,498 - 178,676 Mandatory cash balance with the NBG - 79,279 - 79,279 Amounts due from credit institutions - 6,720 - 6,720 Loans to customers - - 1,187,793 1,187,793 Other financial assets - - 1,330 1,330 - Investment securities: Loans and receivables - 43,312 - 43,312 Held-to-maturity - 39,058 - 39,058 Pledged under repurchase agreements - 28,450 - 28,450
Liabilities for which fair values are disclosed Deposits by banks - 149,905 - 149,905 Deposits by customers - - 729,561 729,561 Borrowed funds - 468,350 - 469,530 Subordinated loans - 31,237 - 31,237 Other financial liabilities - 7,205 7,205
41 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
30. Fair value disclosures (continued)
During the years ended December 31, 2016 and 2015, there have been no transfers between levels of fair value hierarchy
Fair value of financial assets and liabilities not carried at fair value
Set out below is a comparison by class of the carrying amounts and fair values of the Group’s financial instruments that are not carried at fair value in the consolidated statement of financial position, except for assets for which fair value approximates carrying value − those assets that are liquid or have a short term maturity (less than three months or bear floating interest rate).
Carrying Fair Unrecognised Carrying Fair Unrecognised value value gain/(loss) value value gain/(loss) 2016 2016 2016 2015 2015 2015 Financial assets Loans to customers 1,426,462 1,406,191 (20,271) 1,184,096 1,187,793 3,697 Investment securities: - Loans and receivables and held-to-maturity 147,934 150,450 2,516 84,627 82,370 (2,257) Government treasury bonds of the Ministry of Finance of Georgia 74,627 77,049 2,421 70,407 68,350 (2,057) Deposit Certificates of the National Bank of Georgia 5,884 5,878 6 9,409 9,209 (200) Government treasury bills of the Ministry of Finance of Georgia 67,422 67,523 (101) 4,811 4,811 - - Pledged under repurchase agreements - - - 28,639 28,450 (189)
Financial liabilities Amounts due to customers 813,821 813,608 (213) 729,291 729,561 270 Borrowed funds 612,506 612,604 98 468,708 468,350 (358) Subordinated loans 17,029 17,029 - 31,729 31,237 (492) Total unrecognised change in fair value (17,870) 671
The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are not already recorded at fair value in the consolidated financial statements.
Assets for which fair value approximates carrying value
For financial assets and financial liabilities that are liquid or have a short term maturity (less than three months) or bear floating interest rate, it is assumed that the carrying amounts approximate to their fair value.
Fixed rate financial instruments
The fair value of fixed rate financial assets and liabilities carried at amortised cost are estimated by comparing market interest rates when they were first recognised with current market rates offered for similar financial instruments. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money- market interest rates for debts with similar credit risk and maturity.
The following describes the methodologies and assumptions used to determine fair values for those financial instruments which are already recorded at fair value in the consolidated financial statements.
Derivatives
Derivatives valued using a valuation technique with market observable inputs are mainly interest rate swaps, currency swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including the credit quality of counterparties, foreign exchange spot and forward rates and interest rate curves.
42 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
30. Fair value disclosures (continued)
Property and equipment (buildings and land) and investment property
The market value of the property is determined based on the data available from public sources. The market approach is used to determine the fair value, the income approach is used to validate the obtained value estimates, and the cost approach is used to determine the value of real property where no information on recent sales or lease rates for similar properties within the same area is available.
Investment securities: available-for-sale
As of 31 December 2015 Investment securities available-for-sale is valued using valuation technique and specifically discounted cash flow model. The non-observable inputs to the models include assumptions regarding the future financial performance of the investee, discount rate and growth rate of the investee, minority adjustment for lack of control and minority adjustment for liquidity.
Discount rate. Discount rates represent the current market assessment of the risks specific to the Bank, regarding the time value of money and individual risks of the underlying assets which have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Bank and derived from its cost of capital calculated taking into account market benchmarks. An increase of 1% in the discount rate would have decrease the fair value by GEL 13.
Growth rate. Growth rate is used in order to calculate terminal cash flow of the investee. It is assumed that growth rate will remain stable in 2017 and going forward. A decrease of 1% in the growth rate would have decrease the fair value by GEL 68.
Minority Adjustment for lack of Control and for liquidity
Minority adjustment that has been applied for lack of control and for liquidity is in line with the market indicators and is based on the statistical data for the last fifteen and last ten years respectively.
An increase of 1% in minority adjustment for lack of control would have decrease the fair value by GEL 17.
An increase of 1% in minority adjustment for liquidity would have decrease the fair value by GEL 15.
Movements in level 3 financial instruments measured at fair value
The following tables show a reconciliation of the opening and closing amounts of level 3 financial assets which are recorded at fair value:
Total gains recorded in At January 1, other comprehensive At December 31, 2015 income 2015 Assets Investment securities: available-for-sale 54 2,887 2,941
Equity investment in JSC Clearing Center is carried at cost as at 31 December 2016 and 2015 in amount to GEL 54 and GEL 54 respectively and is not presented in the movement in level 3 financial instruments measured at fair value and is not disclosed in fair value hierarchy.
Movements in level 3 non-financial assets measured at fair value
All investment properties and revalued properties of property and equipment are of level 3. Reconciliations of their opening and closing amounts are provided in Notes 19 and 20 respectively.
43 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
30. Fair value disclosures (continued)
Description of significant unobservable inputs to valuations of non-financial assets
The following tables show descriptions of significant unobservable inputs to level 3 valuations of investment properties and revalued properties and equipment as of December 31, 2015. Management believes that valuation has not changed significantly from the last valuation date till December 31, 2016.
Significant Range Range Valuation unobservable (weighted Other key (weighted Sensitivity of the Amount technique inputs average) in information average) input to fair value Investment property 22,118
Land 2,555 Market Price per 0.00086- Square 376-110,000 10% increase (decrease) in the approach square metre 0.1269 metre (8,026) price per square metre would (0.1264) result in increase (decrease) in Georgian lari fair value by 217 Residential properties 5,670
5,066 Market Price per 0.1-2.9 Square 32.6-819 10% increase (decrease) in the approach square metre (0.94)Georgi metre (182) price per square metre would an lari result in increase (decrease) in fair value by 514 604 Cost Price per 0.002-0.31 Square 125-3,316 10% increase (decrease) in the approach square metre (0.077) metre (293) price per square metre would Georgian lari result in increase (decrease) in fair value by 5 Commercial properties 2,114 Market Price per 0.126-0.954 Square 16-1,109 10% increase (decrease) in the approach square metre (0.473) metre (298) price per square metre would Georgian lari result in increase (decrease) in fair value by 208
Non-Residential 11,779 properties 3,588 Market Price per 0.029-0.973 Square 110-10,700 10% increase (decrease) in the approach square metre (0.423) metre (1990) price per square metre would Georgian lari result in increase (decrease) in fair value by 354 8,191 Cost Price per 0.016-0.97 Square 1,252-2,210 10% increase (decrease) in the approach square metre (0.315) metre (1995) cap rate would result in increase Georgian lari (decrease) in fair value by 151
Revaluated land and premises 49,768
Land 9,109 Market Price per 0.384-1.433 Square 95-2,290 10% increase (decrease) in the approach square metre (0.850) metre (612) price per square metre would Georgian lari result in increase (decrease) in fair value by 910 Office buildings 36,535 Market Price per 0.609-2.755 Square 167-4,615 10% increase (decrease) in the approach square metre (24.108) metre (613) price per square metre would Georgian lari result in increase (decrease) in fair value by 4,526
2,278 Cost Price per 0.49-6.49 Square 151-1292 10% increase (decrease) in the approach square metre (2.97) metre (584) cap.rate would result in increase Georgian lari (decrease) in fair value by 417
Non-Residential 1,510 Cost Price per 0.28 Square 4,190 10% increase (decrease) in the properties approach square metre Georgian lari metre cap.rate would result in increase (decrease) in fair value by 333
Commercial 336 Cost Price per 0.79 Square 443 10% increase (decrease) in the properties approach square metre Georgian lari metre cap.rate would result in increase (decrease) in fair value by 35
44 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
31. Capital risk management
The Group manages its capital to ensure that it will be able to continue as a going concern while maximizing the return to stakeholders through the optimization of the debt and equity balance. The management and shareholder have the intention to further develop the Group and the Group’s management believes that the going concern assumption is appropriate for the Group due to its sufficient capital adequacy and based on historical experience that short-term obligations will be refinanced in the normal course of business.
The Supervisory Board reviews the capital structure on an annual basis. As a part of this review, the Board considers the cost of capital and the risks associated with each class of capital. Based on recommendations of the Board, the Group balances its overall capital structure through the payment of dividends, new share issues as well as the issue of new debt or the redemption of existing debt.
The adequacy of the Group’s capital is also monitored using the ratios established by the National Bank of Georgia. Under the current capital requirements set by the NBG banks have to: (a) hold the minimum level of share capital of GEL 12 million (b) maintain a ratio of regulatory capital to risk weighted assets (“regulatory capital ratio”) at or above a prescribed minimum of 11.4% (12% in 2014) and (c) maintain a ratio of tier-1 capital to the risk-weighted assets (the ‘Tier-1 capital ratio’) at or above the prescribed minimum of 7.6% (8% in 2014).
From June 2014, in addition to the above ratios, banks are also required to calculate capital adequacy in accordance with the regulation on capital adequacy requirements for commercial banks dated October 28, 2013 according which banks have to (a) maintain a ratio of common equity tier 1 capital to risk weighted assets at or above 7%, (b) maintain a ratio of tier 1 capital to risk weighted assets at or above 8.5%, (c) maintain a ratio of regulatory capital to risk weighted assets at or above 10.5%.
The Group was in compliance with capital adequacy ratios and all other regulatory requirements at 31 December 2016 except for coefficient for one outsider for which waiver letter has been received from National Bank of Georgia. The Group was in compliance with capital adequacy ratios and all other regulatory requirements at 31 December 2015.
The following table analyzes the Bank’s regulatory capital resources for capital adequacy purposes based on reports prepared in accordance with the NBG requirements. Ratios are calculated based on Basel I requirements:
2016 2015
Tier 1 capital 188,506 161,787 Tier 2 capital 108,049 89,803 Less: Investments in subsidiaries (7) (7) Total regulatory capital 296,548 251,583
Risk weighted assets 2,408,484 1,961,711
Tier 1 capital adequacy ratio 7.83% 8.25% Total regulatory capital adequacy ratio 12.31% 12.82%
As at December 31, 2016 and 2015, the Bank included in the computation of total regulatory capital for capital adequacy purposes the subordinated loan received, limited to 50% of Tier 1 capital. In the event of bankruptcy or liquidation of the Bank, repayment of this debt is subordinated to the repayments of the Bank’s liabilities to all other creditors.
As at December 31, 2016 and 2015, the Bank included in the computation of total regulatory capital for capital adequacy purposes the general provisions, limited to 1.25% of risk weighted assets.
Capital ratios in accordance with the National Bank of Georgia requirements under the new regulation on capital adequacy are as following:
2016 2015
Common equity tier 1 capital ratio 10.36% 10.51% Tier 1 capital ratio 10.36% 10.51% Regulatory capital ratio 12.23% 12.71%
45 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
31. Capital risk management (continued)
The Bank is also subject to minimum capital requirements established by lenders in loan agreements. The composition of the Bank’s capital calculated in accordance with Basel Capital Accord 1988 and lenders requirements is as follows:
2016 2015
Tier 1 capital 284,011 235,954 Tier 2 capital 53,678 66,890 Total regulatory capital 337,689 302,844
Risk weighted assets 1,420,350 1,200,676
Tier 1 capital adequacy ratio 20.00% 19.65% Total regulatory capital adequacy ratio 23.78% 25.22%
32. Risk management policies
Management of risk is fundamental to the Group’s banking business and is an essential element of the Group’s operations. The main risks inherent to the Group’s operations are those related to the following: • Credit risk; • Liquidity risk; • Market risk; • Operational risk.
To enable and apply high-performance risk policies, the Group has established a risk management framework, whose main purpose is to protect the Group from unacceptable level of risk and allow it to achieve its performance objectives. Through the risk management framework, the Group manages the following risks:
Credit risk
The Group is exposed to credit risk which is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.
The Bank operates based on a set of principles for the management of credit risks which prescribe, in particular, an exhaustive analysis of the debt capacity of an individual client, the avoidance of over-indebtedness on the part of the client, strict monitoring of the repayment of all outstanding credit exposures and rigorous problem credit exposure management.
Risk management and monitoring is performed within set limits of authority. Initial credit limit validation is processed through or validated by branch managers (only for limited exposures), Credit Processing Unit, Counterparty Risk Division, Risk Management Director and CEO.
Overall management and supervision of portfolio development and quality is carried out by Risk Committee conducted every six months.
Day to day management of the loan portfolio is under responsibility of Risk Management Director and divisions/departments supervised by him − Counterparty Risk division, Supervision and measurement Division and Collection and Defeasance Departments. Litigation and execution phase of the recovery process is being handled by Litigation Unit of the Bank’s Legal department.
The Group structures the level of credit risk it underwrites, by placing limitations on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to industry segments. Limits on the level of credit risk by a borrower, an industry sector and a product are reviewed regularly by the Risk management teams based on development of the portfolio composition and also external factors and at need they are reviewed by the Management Board. The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on and off-balance sheet exposures which are set by the final underwriter of the respective credit limit. Actual exposures against limits are monitored on a daily basis.
46 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
32. Risk management policies (continued)
Where appropriate, and in the case of most loan exposures, the Group obtains collateral and corporate and personal guarantee. However, there is a significant portion of loans is personal lending, where no such facilities can be obtained. Such risks are monitored on a continuous basis and subject to annual or more frequent reviews. Various aspects of portfolio development and its quality are monitored on daily, weekly or monthly basis via set of performance and risk indicators.
Commitments to extend credit represent unused portions of credit in the form of loans, guarantees or letters of credit. The credit risk on off-balance sheet financial instruments is defined as a probability of losses due to the inability of counterparty to comply with the contractual terms and conditions. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to a loss in an amount equal to the total unused commitments. However, the likely amount of the loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards and the group works towards establishing robust model for prediction of the credit conversion factor. The Bank applies the same credit policy to the contingent liabilities as it does to the balance sheet financial instruments, i.e. the one based on the procedures for approving the grant of loans, using limits to mitigate the risk, and current monitoring. The Group monitors the term to maturity of off- balance sheet contingencies, because longer term commitments generally have a greater degree of credit risk than short-term commitments.
Loan loss provisioning policies
The Bank calculates loan loss allowance applying internal policies on a monthly basis, respective calculations are submitted to the Management for review and subsequently provided to local reporting unit for processing.
The Bank applies an incurred loss approach for the calculation of impairment provisions, by following three main principles when estimating provisions for loan impairment: Bring in place adequate systems for measurement of impairment provisions across credit portfolio, so that the Bank’s aggregate amount of loss provisions is adequate to absorb incurred credit losses Recognize incurred losses in the credit portfolio as early as possible Ensure sufficient granularity of the credit exposures, so that provisions created for loan impairment are adequate considering specifics of the Bank’s credit portfolio The Bank analyses all on balance and off balance liabilities either to individuals or legal entities while assessing adequate level of provisions. Off-balance portfolio is divided into guarantees and undisbursed exposures.
The Bank classifies its borrowers as significant and non-significant ones for impairment allowance estimation purposes according to pre-defined thresholds of the total exposure (total exposure consists of the borrower’s on balance exposures, guarantees and committed undisbursed amounts excluding cash covered on balance and off balance exposures). Individually significant borrowers are assessed for impairment on an individual basis. Exposures that are not individually significant are assessed for impairment on a collective basis The whole pool of retail and non-retail clients is broken down into performing or impaired categories. An exposure is considered as impaired when: - There is one or more objective events of impairment („impairment triggers‟) that have occurred after the initial recognition of an exposure; and the present value of estimated future cash flows discounted at the exposure’s original effective interest rate is lower than its carrying amount.
47 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
32. Risk management policies (continued)
The table below outlines specific qualitative and quantitative events for evidence of impairment for individually and collectively assessed borrowers to ensure that loss event is identified as early as possible (the below list is not exhaustive, other factors can be classified as objective evidence of impairment if they can lead to significant loss, based on expert judgment of Risk Managers). Individually Collectively Quantitative # Events for evidence of impairment significant assessed /Qualitative exposures exposures Significant deterioration of borrowers’ financial standing, that may be due to: Significant decrease in sales 1 Increase in leverage X Qualitative Deterioration of liquidity Deterioration of borrowers’ profitability Or other factors specific to individual borrower
2 Overdue days on loan payments X 90days X 90days Quantitative
4 Bankruptcy proceedings X Qualitative Termination of significant contract (customer or 5 X Qualitative supplier) 6 Sales of significant assets of the company with loss X Qualitative
7 Fraud in the borrower’s business X Qualitative
8 Death of the borrower X Qualitative
9 Breach of the contract X Qualitative Call of off-balance sheet liabilities which was not 10 expected ahead and was not predetermined by credit X Qualitative project Initiation of legal proceedings that may result in 11 X Qualitative significant cash outflow
For estimation of objective evidence of impairment the Bank applies borrower based approach for corporate and SME borrowers and exposure based approach for retail and micro borrowers: in case one of the loans belonging to corporate or SME borrower is impaired, all loans of the given borrower are considered as impaired. As for retail and micro borrowers, impairment of borrower’s one exposure does not trigger impairment of other exposures; However in such cases the Bank considers borrowers’ remaining exposures to be infected and provisions them correspondingly.
For collective assessment purposes exposures are grouped into a homogenous risk pools based on similar credit risk characteristics. Common credit risk characteristics of the group include but are not limited to: type of counterparty (individual vs business), type of product, past-due status of the exposure, restructuring status and collateral type. Below we outline portfolio segmentation of performing and impaired loan aggregates assessed collectively.
48 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
32. Risk management policies (continued)
Performing loans pool is segmented as follows:
Performing portfolio
. Triggered but not impaired individually significant borrowers Corporate loans . Individually significant borrowers with no evidence of impairment . Individually non-significant borrowers . Triggered but not impaired individually assessed borrowers SME loans . Individually non-significant borrowers Fully performing loans Retail loans (Mortgage, Performing loans in arrears Consumer, POS loans, Credit Infected loans cards) Restructured loans Fully performing loans Micro loans (Agro loans, Performing loans in arrears Business loans, Consumer Infected loans loans) Restructured loans
Impaired loans pool is segmented as outlined in the table below.
Impaired portfolio Corporate loans Individually non-significant borrowers SME loans Individually non-significant borrowers Cured loans Retail loans (Mortgage, Consumer, POS loans, Credit cards), Current defaults Cured loans Micro loans (Agro loans, Business loans, Consumer loans) Current defaults
Below detailed description of each segment:
Performing exposures: Exposures which are performing fall in one of the following categories:
Triggered but not impaired individually significant borrowers - Triggered individually significant borrowers, for which individual assessment was performed and impairment allowance is estimated to be less than 2%. Individually significant borrowers without trigger event- Individually significant borrowers, for which evidence of impairment was not identified. Individually non-significant borrowers- Individually non-significant borrowers for which collective evidence of impairment was not identified Fully performing loans - Loans which are not past due as of reporting date Performing loans in arrears- This pool contains loans which are in overdue status as of reporting date, but are not impaired. These loans are categorized as follows: Loans with 1-30 days past due Loans with 31-60 days past due Loans with 61-90 days past due
Infected loans- Infected loans status is applicable for retail and micro borrowers, where the Bank applies exposure based approach. The exposure is considered to be infected, if the given exposure is performing, however the borrower has another exposure with more than 90 days past due as of reporting date. The Bank will ensure that the infected exposures will be applied at least the same provision rate as corresponding performing exposures. Based on expert judgment the Bank may apply additional margin in order to ensure that infected portfolio is provisioned adequately. Restructured exposures- The Bank consolidates all its restructured loans in one portfolio and provisions them respectively
49 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
32. Risk management policies (continued)
Impaired exposures Exposures which are impaired fall into the following categories:
Current defaults- Current defaults include loans: with more than 90 days past due as of reporting date exposures which were defaulted and have not been cured- In case the exposure has been defaulted in past and has not cured afterwards (has not repaid overdue liabilities in full), it will be included in current default even if number of days past due is less than 90 days. Cured exposures - Loans which have been defaulted are considered to be cured in case all overdue amount is repaid and the exposure is no longer in overdue.
For impairment allowance estimation the Bank is using different approaches for different business lines. Individual assessment is performed only for Corporate and SME exposures. For Retail and Micro segments, as well as not impaired Corporate and SME exposures collective assessment is performed.
Individual Assessment of Corporate and SME Borrowers
The Bank estimates whether there is evidence that a significant financial asset or group of financial assets are impaired during regular monitoring (each year monitoring plan is set up by the Corporate Counterparty Risk Assessment Department, where the intensity and regularity of each review is defined for each borrower).
The Bank uses its best estimates for assessment of future recoveries. Bank considers two types of sources for recoveries: cash recoveries and/or collateral recovery. For cash recoveries the estimated recoverable amount is equal to the present value of the estimated future cash flows. Collateral recoveries reflect the cash flows that may result from collateral foreclosure. Below details about collateral types used and accepted by the allowance estimation, their realization periods and respective haircuts applied.
Types of collateral Haircut Realization period
Land 40% 1 year
Residential Real Estate 30% 1 year
Non-Residential Real Estate 30% 1 year
Deposit 0% 0 year
Movable property 50% 1 year
In case the present value of the estimated future cash flows is lower than the asset’s carrying amount, impairment allowance is created in the amount of the difference between carrying amount and the present value of estimated future cash flows.
Borrowers for which impairment allowance is not created or provision allowance is less than 2% based on an individual assessment are classified as triggered and not impaired borrowers and are provisioned based on statistically estimated provision coverage rate.
Collective Assessment of Corporate and SME Borrowers
If the Bank determines that no objective evidence of impairment exists for individually significant borrowers, it includes these exposures in pools of assets with similar credit risk characteristics and collectively assesses them for impairment. The Bank divides Corporate and SME exposures in different pool for LGD (i) individually significant borrowers’ pool; which is further divided into (i1) triggered and not impaired individually significant borrowers and (i2) not triggered individually significant borrowers; and (ii) non-significant borrowers’ pool.
50 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
32. Risk management policies (continued)
(i1)Triggered and not impaired individually significant borrowers For triggered but not impaired individually significant borrowers the Bank uses the coverage rate, which is a weighted average of each period’s coverage ratios weighted with exposures that where triggered but not impaired at the beginning of the period. (i2)Not triggered individually significant borrowers and (ii) Non-significant borrowers’ pool Given a strict policy of re-evaluation of all real-estate collaterals and lands for SME and Corporate clients, which ensures the reliability and up-to-date valuation of collaterals, LGD for not triggered individually significant borrowers and non-significant borrowers’ pool is calculated based on the discounted market values of real estate collaterals and Land, using the discount rates described above Impairment allowance estimation for retail and micro portfolios Statistical parameters are estimated based on the available data since 2011. For retail and micro portfolios impairment allowance is estimated as: LLA= PD*LGD*CCF*LIP Where: PD -The probability of default during LIP period LGD – Loss given Default is estimated based on the recoveries for particular pool LIP – is 12 months CCF – is assumed to be 100% for all on-balance exposures, until the statistics is available
Impairment allowance for off balance sheet exposures The Bank divides it’s off balance portfolio into guarantees and undisbursed exposures. Guarantees include payment and operational guarantees. Estimation of impairment allowance for undisbursed exposures The Bank is distinguishing between committed and uncommitted undisbursed exposures. For uncommitted undisbursed exposures the Bank is not creating impairment allowance. CCF is considered 100% and thus calculated exposure is provisioned in the similar manner as corresponding on balance sheet exposures. Estimation of impairment allowances for guarantees For impairment estimation purposes guarantees are divided into (i) individually significant and (ii) non- significant guarantees. Individual significant guarantees are further divided into (i1) triggered and (i2) not triggered guarantees. CCF is considered 100% and thus calculated exposure is provisioned in the similar manner as corresponding on balance sheet exposures.
Maximum exposure of credit risk
The maximum exposure to credit risk for the components of the consolidated statement of financial position, including derivatives, before the effect of mitigation through the use of master netting and collateral agreements, is best represented by their carrying amounts.
Where financial instruments are recorded at fair value, the carrying value represents the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.
Off-balance sheet risk
The Group applies fundamentally the same risk management policies for off-balance sheet risks as it does for its on- balance sheet risks. In the case of commitments to lend, customers and counterparties will be subject to the same credit management policies as for loans and advances. Collateral may be sought depending on the strength of the counterparty and the nature of the transaction.
51 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
32. Risk management policies (continued)
Geographical concentration
The Operational Risk and Compliance Committee exercises control over the risk in the legislation and regulatory arena and assesses its influence on the Group’s activity. This approach allows the Group to minimize potential losses from the investment climate fluctuations in Georgia.
The geographical concentration of assets and liabilities is set out below:
Other December 31, non-OECD OECD 2016 Georgia countries countries Total Financial assets
Cash and cash equivalents 152,897 12 82,956 235,865 Mandatory cash balance with the NBG 131,133 - - 131,133 Due from financial institutions - - 9,937 9,937 Loans to customers 1,425,608 639 215 1,426,462 Investment securities: - Available-for-sale 54 - - 54 - Loans and receivables 147,934 - - 147,934 Other financial assets 4,876 1,439 - 6,315 Total financial assets 1,862,502 2,090 93,108 1,957,700
Financial liabilities
Deposits by banks 273,433 14 273,447 Deposits by customers 753,624 22,814 37,383 813,821 Borrowed funds 11 612,495 612,506 Other financial liabilities 22,898 - - 22,898 Subordinated debt 17,029 - - 17,029 Total financial liabilities 1,066,995 22,814 649,892 1,739,701 Net balance sheet position 795,507 (20,724) (556,784) 217,999 Performance guarantees 46,916 60,852 36,403 144,171 Credit related commitments 173,960 - - 173,960
Other December 31, non-OECD OECD 2015 Georgia countries countries Total Financial assets Cash and cash equivalents 91,952 327 86,397 178,676 Mandatory cash balance with the NBG 79,279 − − 79,279 Due from financial institutions − − 6,720 6,720 Loans to customers 1,183,765 306 25 1,184,096 Investment securities: - Available-for-sale 1,213 − 1,782 2,995 - Loans and receivables 84,627 − − 84,627 - Investment securities pledged under repurchase agreement 28,639 − − 28,639 Other financial assets 1,330 − − 1,330 Total financial assets 1,470,805 633 94,924 1,566,362
Financial liabilities Deposits by banks 149,890 11 4 149,905 Deposits by customers 685,021 33,472 10,798 729,291 Borrowed funds 428 − 468,280 468,708 Other financial liabilities 6,428 − 1,609 8,037 Subordinated debt − − 31,729 31,729 Total financial liabilities 841,767 33,483 512,420 1,387,670 Net balance sheet position 629,038 (32,850) (417,496) 178,692 Performance guarantees 48,779 41,420 28,586 118,785 Credit related commitments 172,886 - - 172,886 52 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
32. Risk management policies (continued)
Collateral
The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.
The main types of collateral obtained are as follows: • For commercial lending, charges over real estate properties, inventory and equipment. • For retail lending, mortgages over residential properties.
At December 31, 2016, the fair value of collateral that the Group holds relating to loans individually determined to be impaired amounts to GEL 79,373 (2015: GEL 68,933). The collateral consists of real estate, vehicles, equipment inventory, deposit and others.
Dedicated staff and management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses.
Credit quality by classes of financial assets
As at December 31, 2016:
Neither past due nor Past due but (Impairment impaired not impaired Impaired allowance) Total
Cash and cash equivalents 235,865 - - - 235,865 Mandatory cash balance with the NBG 131,133 - - - 131,133 Due from financial institutions 9,937 - - - 9,937 Loans to customers 1,409,357 19,703 47,939 (50,537) 1,426,462 Investment securities: - Available-for-sale 54 - - - 54 - Loans and receivables 147,934 - - - 147,934 Other financial assets 6,315 401 (401) 6,315
As at December 31, 2015: Neither past due nor Past due but (Impairment impaired not impaired Impaired allowance) Total
Cash and cash equivalents 178,676 − − − 178,676 Mandatory cash balance with the NBG 79,279 − − − 79,279 Due from financial institutions 6,720 − − − 6,720 Loans to customers 1,130,264 11,430 85,071 (42,669) 1,184,096 Investment securities: Available-for-sale 2,995 − − − 2,995 - Loans and receivables 43,942 − − − 43,942 - Held-to-maturity 40,685 − − − 40,685 - Investment securities pledged under repurchase agreement 28,639 − − − 28,639 Other financial assets 1,330 − 351 (351) 1,330
53 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
32. Risk management policies (continued)
Credit quality by classes of financial assets (continued)
The following table provides an aging analysis of past due but not individually impaired loans per class of financial asset.
As at December 31, 2016:
Less than 31 to 60 61 to 90 More than 30 days days days 90 days Total Loans to individuals Mortgage loans 3,146 996 134 - 4,276 Consumer loans 7,847 3,343 1,209 - 12,399 Total loans to individuals 10,993 4,339 1,343 - 16,675
Loans to corporations Large legal entities SME 122 - 189 - 311 Micro 1,283 610 824 - 2,717 Total loans to corporations 1,405 610 1,013 - 3,028
Total 12,398 4,949 2,356 - 19,703
As at December 31, 2015:
Less than 31 to 60 61 to 90 More than 30 days days days 90 days Total Loans to individuals Mortgage loans 1,803 747 60 - 2,610 Consumer loans 4,736 1,577 866 39 7,218 Total loans to individuals 6,539 2,324 926 39 9,828
Loans to corporations SME - 149 - - 149 Micro 1,041 412 - - 1,453 Total loans to corporations 1,041 561 - - 1,602
Total 7,580 2,885 926 39 11,430
Financial assets other than loans to customers are graded according to the current credit rating they have been issued by an internationally regarded agency such as Fitch, Standard & Poor’s and Moody’s. The highest possible rating is AAA.
54 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari)
32. Risk management policies (continued)
Credit quality by classes of financial assets (continued)
The following table details credit ratings of financial assets held by the Group as at December 31, 2016 Total at Not December 31, AAA AA A BBB Other financial assets − − − − − 6,315 6,315 - As at December 31, 2015: Total at Not December 31, AAA AA A BBB Cash and cash equivalents − 75,878 10,496 350 37,775 54,177 178,676 Mandatory cash balance with the NBG − − − − 79,279 − 79,279 Due from financial institutions − − 6,720 − − − 6,720 Loans to customers − − − − − 1,226,765 1,226,765 Investment securities: - Available-for-sale − 1,782 − − − 1,213 2,995 - Loans and receivables − − − 43,942 − 43,942 - Held-to-maturity − − − − 40,685 − 40,685 Other financial assets − − − − − 1,330 1,330 The banking industry is generally exposed to credit risk through its loans to customers and interbank deposits. With regard to the loans to customers this risk exposure is concentrated within Georgia. The exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines established by the Group’s risk management policy are not breached. The Group enters into numerous transactions where the counterparties are not rated by international rating agencies. The Group has developed internal models, which allow it to determine the rating of counterparties. Renegotiated loans and advances Loans and advances are generally renegotiated either as part of an ongoing customer relationship or in response to an adverse change in the circumstances of the borrower. The table below shows the carrying amount of renegotiated financial assets, by class: December 31, December 31, Financial asset class 2016 2015 Loans to customers 77,843 42,038 55 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari) 32. Risk management policies (continued) Liquidity risk Liquidity risk refers to the availability of sufficient funds to meet deposit withdrawals and other financial commitments associated with financial instruments as they actually fall due. The Assets and Liabilities Committee (“ALCO”) controls these types of risks by means of maturity analysis, amortization profile and currency analysis and determining the Group’s strategy for the next financial period. Current liquidity is managed by the Treasury Department, which deals in the money markets for current liquidity support and cash flow optimization. In order to manage liquidity risk, the Group performs daily monitoring of future expected cash flows on clients’ and banking operations, which is a part of assets/liabilities management process. The Management Board sets limits on the minimum proportion of maturing funds available to meet deposit withdrawals and on the minimum level on interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. Further is analysis of liquidity and interest rate risks: (a) term to maturity of financial liabilities, that are not derivatives, calculated for discounted cash flows on financial liabilities (main debt and interests) on the earliest date, when the Group will be liable to redeem the liability; however deposits by customers are allocated per expected time of the funds outflow in the gap analysis table on the basis of the statistical data accumulated by the Group during the previous periods and assumptions made regarding the “permanent” part of current account balances; (b) term to maturity of financial liabilities, that are derivatives, calculated for discounted cash flows on financial liabilities on the earliest date, when the Group will be liable to redeem the liability; and (c) estimated term till maturity of financial assets, that are not derivatives, calculated for discounted cash flows on financial assets (including interests), which will be received on these assets based on contractual terms of maturity, except the cases when the Group expects that cash flows will be received in the different time. Deposits by customers are allocated per expected time of the funds outflow in the gap analysis table on the basis of the statistical data accumulated by the Group during the previous periods and assumptions made regarding the “permanent” part of current account balances. 56 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari) 32. Risk management policies (continued) Liquidity risk (continued) An analysis of the liquidity by classes of financial assets and financial liabilities according to when they are expected to be recovered or settled and interest rate risks is presented in the following table. Demand December 31, Liquidity Gap and up to 1 month to 3 month to 1 year to Over 2016 As at December 31, 2016 1 month 3 months 1 year 5 years 5 years Total Financial assets Cash and cash equivalents 95,700 - - - - 95,700 Mandatory cash balance with the 131,133 - - - - 131,133 NBG Due from financial institutions 4,396 - - 5,541 - 9,937 Loans to customers 107,145 79,700 373,159 588,294 278,164 1,426,462 Investment securities: - Loans and Receivables 1,997 18,915 71,396 55,626 - 147,934 Total interest bearing financial 340,371 98,615 444,555 649,461 278,164 1,811,166 assets Cash and cash equivalents 140,165 - - - - 140,165 Investment securities: available-for- - - - - 54 54 sale Other financial assets 6,315 - - - - 6,315 Total non-interest bearing 146,480 - - - 54 146,534 financial assets 486,851 98,615 444,555 649,461 278,218 1,957,700 Total financial assets Financial liabilities Deposits by banks 266,178 - - - - 266,178 Deposits by customers 43,800 55,516 199,969 155,245 4,904 459,434 Borrowed funds 14,966 23,325 81,157 401,082 91,976 612,506 Subordinated debt - - - - 17,029 17,029 Total interest bearing financial 324,944 78,841 281,126 556,327 113,909 1,355,147 liabilities Deposits by banks 7,269 - - - - 7,269 Deposits by customers 206,258 5,234 23,663 119,232 - 354,387 Other financial liabilities 22,725 - 2 171 - 22,898 Total non-interest bearing 236,252 5,234 23,665 119,403 - 384,554 financial liabilities 561,196 84,075 304,791 675,730 113,909 1,739,701 Total financial liabilities Interest sensitivity gap 15,427 19,774 163,429 93,134 164,255 Cumulative interest sensitivity 11,03115,427 30,80535,201 194,234198,630 287,367291,764 451,622456,019 gap Liquidity gap (67,075)(74,345) (55,730) 14,540 139,76484,034 (26,269)57,764 222,073164,309 Cumulative liquidity gap (74,345)11,031 (59,805)30,805 194,234 79,959 287,367 53,690 451,622217,999 57 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari) 32. Risk management policies (continued) Liquidity risk (continued) Demand December 31, Liquidity Gap and up to 1 month to 3 month to 1 year to Over 2015 As at December 31, 2015 1 month 3 months 1 year 5 years 5 years Total Financial assets Cash and cash equivalents 16,464 − − − − 16,464 Mandatory cash balance with the NBG 79,279 − − − − 79,279 Due from financial institutions − − 1,724 4,996 − 6,720 Loans to customers 78,306 84,711 357,444 446,530 217,105 1,184,096 Investment securities: - Loans and Receivables 1,988 - 12,032 29,922 - 43,942 - Held-to-maturity - 2,594 23,568 14,523 - 40,685 - Investment Securities pledged under repurchase agreement - 28,639 - - - 28,639 Total interest bearing financial assets 176,037 115,944 394,768 495,971 217,105 1,399,825 Cash and cash equivalents 162,212 − − − − 162,212 Investment securities: available-for- sale − − − − 2,995 2,995 Other financial assets 1,330 − − − − 1,330 Total non-interest bearing financial assets 163,542 − − − 2,995 166,537 Total financial assets 339,579 115,944 394,768 495,971 220,100 1,566,362 Financial liabilities Deposits by banks 148,306 − − − − 148,306 Deposits by customers 145,449 47,465 155,409 141,239 4,010 493,572 Borrowed funds − 12,056 10,157 224,543 221,952 468,708 Subordinated debt − − − 19,644 12,085 31,729 Total interest bearing financial liabilities 293,755 59,521 165,566 385,426 238,047 1,142,315 Deposits by banks 1,599 − − − − 1,599 Deposits by customers 47,656 4,916 70,667 112,480 − 235,719 Other financial liabilities 2,739 1,609 3,689 − − 8,037 Total non-interest bearing financial liabilities 51,994 6,525 74,356 112,480 − 245,355 Total financial liabilities 345,749 66,046 239,922 497,906 238,047 1,387,670 Interest sensitivity gap (117,718) 56,423 229,202 110,545 (20,942) Cumulative interest sensitivity gap (117,718) (61,295) 167,907 278,452 257,510 Liquidity gap (6,170) 49,898 154,846 (1,935) (17,947) Cumulative liquidity gap (6,170) 43,728 198,574 196,639 178,692 58 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari) 32. Risk management policies (continued) Analysis of financial liabilities by remaining contractual maturities An analysis of liquidity and interest rate risk is presented in the following table. The amounts disclosed in these tables do not correspond to the amounts recorded in the consolidated statement of financial position as the presentation below includes a maturity analysis for financial liabilities that indicates the total remaining contractual payments (including interest payments), which are not recognised in the consolidated statement of financial position under the effective interest rate method. However, the Group expects that many customers will not request repayment on the earliest date the Bank could be required to pay and the table does not reflect the expected cash flows indicated by the Bank’s deposit retention history. Demand December 31, As of December 31, and up to 1 month to 3 month to 1 year to Over 2016 2016 1 month 3 months 1 year 5 years 5 years Total Financial liabilities Deposits by banks 273,731 - - - - 273,731 Deposits by customers 353,691 45,122 156,667 (91,159) 7,080 471,401 Borrowed funds 13,826 24,776 97,923 455,671 99,216 691,412 Subordinated debt - - - - 30,296 30,296 Total interest bearing financial liabilities 641,248 69,898 254,590 364,512 136,592 1,466,840 Deposits by banks 7,269 - - - - 7,269 Deposits by customers 206,258 5,234 23,663 119,232 - 354,387 Other financial liabilities 22,725 - 2 171 - 22,898 236,252 5,234 23,665 119,403 - 384,554 Total financial liabilities 877,500 75,132 278,255 483,915 136,592 1,851,394 Guarantees issued 195,983 - - - - 195,983 Letters of credit 13,354 146 8,719 1,980 - 24,199 Unused credit lines 97,949 - - - - 97,949 307,286 146 8,719 1,980 - 318,131 Total financial liabilities and commitments 1,184,786 75,278 286,974 485,895 136,592 2,169,525 Demand December 31, As of December 31, and up to 1 month to 3 month to 1 year to Over 2015 2015 1 month 3 months 1 year 5 years 5 years Total Financial liabilities Deposits by banks 148,493 - - - - 148,493 Deposits by customers 286,731 42,986 138,892 32,645 6,179 507,433 Borrowed funds 11,386 22,155 60,105 329,988 91,744 515,378 Subordinated debt - 487 1,827 25,960 13,960 42,234 Total interest bearing financial liabilities 446,610 65,628 200,824 388,593 111,883 1,213,538 Deposits by banks 1,599 - - - - 1,599 Deposits by customers 235,703 - - - 16 235,719 Other financial liabilities 2,739 1,609 3,689 - - 8,037 240,041 1,609 3,689 - 16 245,355 Total financial liabilities 686,651 67,237 204,513 388,593 111,899 1,458,893 Guarantees issued 146,200 - - - - 146,200 Letters of credit 13,688 609 52,404 8,040 - 74,741 Unused credit lines 70,730 - - - - 70,730 230,618 609 52,404 8,040 - 291,671 Total financial liabilities and commitments 917,269 67,846 256,917 396,633 111,899 1,750,564 The amounts included above for guarantees, letter of credit and unused credit lines contracts are the maximum amounts the Group could settle under the arrangements. Based on expectations at the end of the reporting period, the Group considers that it is more likely than not that no amount will be payable under the arrangement. However, this estimate is subject to change depending on the probability of the counterparty claiming under the contract. 59 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari) 32. Risk management policies (continued) Market risk Market risk is the risk that the Group’s earnings or capital or its ability to meet business objectives will be adversely affected by changes in the level or volatility of market rates or prices. Market risk covers interest rate risk, currency risk and other pricing risks that the Group is exposed to. There have been no changes as to the way the Group measures risk or to the risk it is exposed or the manner in which these risks are managed and measured. The Group is exposed to interest rate risks as the Group borrows funds at both fixed and floating rates. The risk is managed by the Group maintaining an appropriate mix between fixed and floating rate borrowings. The ALCO also manages interest rate and market risks by matching the Group’s interest rate position, which provides the Group with a positive interest margin. The Department of Financial Supervision conducts monitoring of the Group’s current financial performance, estimates the Group’s sensitivity to changes in interest rates and its influence on the Group’s profitability. The majority of the Group’s loan contracts and other financial assets and liabilities that bear interest are either variable or contain clauses enabling the interest rate to be changed at the option of the lender. The Group monitors its interest rate margin and consequently does not consider itself exposed to significant interest rate risk or consequential cash flow risk. The Bank’s deposits and most loans are at fixed interest rates, while a major portion of the Bank’s borrowings is at a floating interest rate. The Bank’s floating rate borrowings are, to a certain extent, hedged by the NBG paying a floating rate on the minimum reserves that the Bank holds with the NBG. The management also believes that the Bank’s interest rate margins provide a reasonable buffer to mitigate the effect of possible adverse interest rate movements. Currency risk Currency risk is defined as the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The ALCO controls currency risk by management of the open currency position on the estimated basis of Georgian lari devaluation and other macroeconomic indicators, which gives the Group an opportunity to minimise losses from significant currency rates fluctuations toward Georgian lari. The Treasury Department performs daily monitoring of the Group’s open currency position with the aim to match the requirements of the NBG and TBC Bank Group PLC. 60 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari) 32. Risk management policies (continued) Currency risk (continued) The Group’s open positions by the major currencies in which it holds the assets and liabilities are presented below: USD EUR December 31, USD 1 = EUR 1 = Other 2016 GEL GEL 2.5837 GEL 2.7351 currency Total Financial assets Cash and cash equivalents 88,378 30,922 111,614 4,951 235,865 Mandatory cash balance with the NBG 10 111,478 19,645 - 131,133 Due from financial institutions 5,541 4,396 9,937 Loans to customers 466,860 919,518 40,084 1,426,462 Investment securities: - Available-for-sale 54 - - - 54 - Loans and Receivables 147,934 - - - 147,934 Other financial assets 4,498 1,689 128 6,315 Total financial assets 707,734 1,069,148 175,867 4,951 1,957,700 Financial liabilities Deposits by banks 129,231 65,861 78,354 1 273,447 Deposits by customers 337,477 378,068 94,084 4,192 813,821 Borrowed funds 2,576 608,838 1,092 - 612,506 Other financial liabilities 22,205 642 32 19 22,898 Subordinated debt - 17,029 - - 17,029 Total financial liabilities 491,489 1,070,438 173,562 4,212 1,739,701 Open balance sheet position 216,245 (1,290) 2,305 739 Derivative financial instruments Gross settled: - currency swaps - 2,102 (1,537) (572) Open position 216,245 812 768 167 USD EUR December 31, USD 1 = EUR 1 = Other 2015 GEL GEL 2.3949 GEL 2.6169 currency Total Financial assets Cash and cash equivalents 67,429 17,354 83,942 9,951 178,676 Mandatory cash balance with the NBG 60,371 18,908 79,279 Due from financial institutions 3 6,717 − − 6,720 Loans to customers 437,668 717,979 28,449 − 1,184,096 Investment securities: Available-for-sale 1,213 1,782 − − 2,995 Held-to-maturity 40,685 - - - 40,685 Loans and receivables 43,942 - - - 43,942 pledged under repurchase agreement 28,639 28,639 Other financial assets 831 422 68 9 1,330 Total financial assets 620,410 804,625 131,367 9,960 1,566,362 Financial liabilities Deposits by banks 126,859 22,942 103 1 149,905 Deposits by customers 275,224 266,444 178,485 9,138 729,291 Borrowed funds 6,819 461,889 − − 468,708 Other financial liabilities 6,010 356 1,648 23 8,037 Subordinated debt − 31,729 − − 31,729 Total financial liabilities 414,912 783,360 180,236 9,162 1,387,670 Open balance sheet position 205,498 21,265 (48,869) 798 Derivative financial instruments Gross settled: - currency swaps (41,881) 41,881 − Open position 205,498 (20,616) (6,988) 798 61 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari) 32. Risk management policies (continued) Currency risk sensitivity The analysis in the table below calculated the effect of reasonably possible movement of the currency rate against the lari, with all other variables held constant on the consolidated income statement. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a reasonably possible change in foreign currency rates. Impact on net profit and equity based on asset values as at December 31, 2016 and 2015: December 31, 2016 GEL/EUR GEL/EUR GEL/USD GEL/USD -10% +10% -15% +15% Impact on profit before tax (182) 182 36 (36) Impact on equity (155) 155 31 (31) December 31, 2015 GEL/EUR GEL/EUR GEL/USD GEL/USD -16% +16% -15% +15% Impact on profit before tax 1,118 (1,118) 3,092 (3,092) Impact on equity 950 (950) 2,628 (2,628) Limitations of sensitivity analysis The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results. Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Group’s view of possible near-term market changes that cannot be predicted with any certainty; and the assumption that all interest rates move in an identical fashion. Operational risk Groups’ objective is to step up control of its operational risks and approach them from a risk/profitability perspective and the Bank applies operational risk management system in compliance with Basel Advanced Measurement Approach. Operational risk is inherent to all of products, activities, procedures and systems. Dealing with operational risks is an integral part of management positions at all levels. It notably includes the permanent supervision carried out by all divisions and the periodic controls performed through audits and inspections. While drawing on existing expertise, this system implies that operational risk is considered a risk category in its own right and thus subject to special detection and assessment methods, standardized follow-up and controls, all contributing to the development of appropriate risk reduction measures. Approaches to operational risk management are consistent with policies on managing other types of risks, and particularly credit and market risk (which are sometimes linked to operational risk). At one hand, there are monitoring systems established in the Group in order to timely detect unfavorable developments, on the other hand, preventive measures are systematically applied to avoid material losses. In order to ensure efficiency of day-to-day control process, so called Permanent Supervision system is established. The system ensures involvement of both, managerial and operational staff into control process, where role of manager is to define appropriate day-to-day controls and conduct periodical sample based verifications according to pre-validated control guidelines. Central risk team of the Group verifies reliability of permanent supervision declarations through on-site second level control missions. 62 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari) 32. Risk management policies (continued) Operational risk (continued) Risk and Control Self-Assessment takes place on bi-annual basis − period between exercises is used for implementation of corrective actions for identified high residual risks. Methodology of the exercise envisages assessment of so called intrinsic risks, efficiency of control environment and establishing action plan for high residual risks. Risk criticality is derived according to two dimensions − frequency and severity of the operational risk event. Historical loss data, Scenario Analysis results, number of detected anomalies are also taken into account. Key Risk Indicators are defined for high residual risk areas. The Risk and Control Self-Assessment exercise was conducted in the year 2016 and areas of attention were identified. Action plan was defined and its implementation was started respectively. New Product Committee, as a formal body for approval of important changes, serves as a prevention and risk limitation mechanism for the Group. Approval flow envisages involvement specialists of all main risks of the Group, such as compliance and money laundering, operational risks, structural risks and etc. Internal system of operational risk event declaration is established, involving network of correspondent. Materiality threshold is established for conducting formalized follow-up of loss events − envisaging definition and implementation of short and long term corrective measures. Business Continuity and Crisis Management devices are in place to mitigate impact in crisis situations. System is based on the Business Impact Analysis and consists of banking and IT parts of the business continuity. Special plans and resources are mobilized and regularly tested to ensure proper functioning in case of emergency. Training and awareness raising programs are in place for disseminating risk culture among employees of the Group. 63 Notes to the consolidated financial statements Bank Republic Group for the year ended December 31, 2016 (in thousands of Georgian lari) 33. Offsetting financial assets and financial liabilities Financial instruments subject to offsetting, enforceable master netting and similar arrangements at 31 December 2015 (31 December 2016: none) are as follows: Gross Gross Net Amounts subject to Net amount amounts amounts amount master netting and of exposure before set off after similar offsetting in the offsetting arrangements not in the statement in the set off in the statement of statement statement of of financial financial of financial position position position financial Financial Cash position instru- collater ments al In thousands of GEL (a) (b) (c) = (a) - (b) (d) (e) (c) - (d) - (e) ASSETS Investment securities: - Pledged under repurchase agreement 28,639 - 28,639 27,550 - 1,089 TOTAL ASSETS SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 28,639 - 28,639 28,639 - 1,089 LIABILITIES Deposits by banks: - Repurchase agreements 27,550 - 27,550 27,550 - - TOTAL LIABILITIES SUBJECT TO OFFSETTING, MASTER NETTING AND SIMILAR ARRANGEMENT 27,550 - 27,550 27,550 - - 34. Subsequent events On 16 January 2017 the Group has paid the declared divided to its shareholder JSC TBC Bank. Merger with JSC TBC Bank is planned to be completed on 8 May 2017. 64