Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information About us Bank of Georgia Group PLC Bank of Georgia Group PLC (“Bank of Georgia Group”, the “Group”, or “BOGG” and on the LSE: BGEO LN) is a UK incorporated holding company, the new parent company of BGEO Group PLC. The Group combined a Banking Business and an Investment Business prior to the Group Demerger on 29 May 2018, which resulted in the Investment Business’s separation from the Group effective from 29 May 2018. The Group comprises: a) retail banking and payment services, and b) corporate investment banking and wealth management operations in Georgia, and c) banking operations in Belarus (“BNB”). JSC Bank of Georgia (“Bank of Georgia”, “BOG” or the “Bank”), the leading universal bank in Georgia, is the core entity of the Group. The Group intends to benefit from significant growth of the Georgian economy through both its Retail Banking and Corporate Investment Banking services and aims to deliver on its strategy, which is based on at least 20% Return on Average Equity (ROAE) and 15-20% growth of its loan book. See page 22 for our current business model and page 20 for more on the Demerger. Find the digital version of this report on our corporate website at: ANNUAL REPORT 2018 REPORT ANNUAL www.bankofgeorgiagroup.com Annual Report 2018 Bank of Georgia Group PLC 01 Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information Contents Strategic Report 01-101 Financial Statements 154-283 Overview Independent Auditor’s Report 155 Financial Highlights 04 Consolidated Statement of Financial Position 166 Operating Highlights 05 Consolidated Income Statement 167 At a Glance 06 Consolidated Statement of Comprehensive Income 169 Chairman’s Statement 10 Consolidated Statement of Changes in Equity 170 Chief Executive Officer’s Statement 12 Consolidated Statement of Cash Flows 172 Separate Statement of Financial Position 174 Separate Statement of Changes in Equity 175 Strategy Separate Statement of Cash Flows 176 Industry and Market Overview 14 Notes to Consolidated and Separate Company Financial Statements 177 Group History 20 Current Business Model and Strategy 22 Delivering on Current Strategy 23 Superior Access to Funding 42 Additional Information 284-288 Key Performance Indicators 44 Risk Management 48 Principal Risks and Uncertainties 60 Abbreviations 285 Going Concern and Viability Statements 68 References 286 Resources and Responsibilities 70 Glossary 287 Shareholder Information 288 Performance Overview of Financial Results 86 Governance 102-153 Directors’ Governance Overview 103 Shareholder and Stakeholder Engagement 110 Board of Directors 111 Executive Management 115 Nomination Committee Report 117 Audit Committee Report 121 Risk Committee Report 126 Directors’ Remuneration Report 129 Statement of Directors’ Responsibilities 149 Directors’ Report 150 02 Annual Report 2018 Bank of Georgia Group PLC Annual Report 2018 Bank of Georgia Group PLC 03 Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information Financial highlights Operating highlights The effectiveness of our strategy is reflected 2018 operating highlights reflect the expanding in the strong 2018 financial results highlighted below footprint of our Banking Business in Georgia Revenue Cost to (GEL million) Banking Business income ratio Banking Business Number of Retail Banking clients Banking branches 2016 773.9 2016 37.7% 2.4mln 276 1,030.0 2017 909.3 36.7% 2017 37.7% +13.3% y-o-y 2018 1,030.0 -100 bps y-o-y 2018 36.7% +5.4% (over 2017) -10 (over 2017) Profit before non-recurring items and income tax Return on equity* (GEL million) Banking Business Banking Business Number of cards Express Pay terminals 2016 314.6 2016 22.2% 2.2mln 3,115 492.6 2017 400.4 26.1% 2017 25.2% (over 2017) +23.0% y-o-y 2018 492.6 +90 bps y-o-y 2018 26.1% -2.2% +273 (over 2017) Client deposits Net loans (GEL million) Banking Business (GEL million) Banking Business POS terminals ATMs 2016 5,755.8 2016 6,681.7 14,220 876 8,133.9 2017 7,078.1 9,397.7 2017 7,741.4 +14.9% y-o-y 2018 8,133.9 +21.4% y-o-y 2018 9,397.7 +929 (over 2017) +26 (over 2017) Basic earnings per share* Tier 1 capital ratio Transactions through Transactions through (GEL) Banking Business (NBG, Basel III)** Bank of Georgia remote channels* remote channels (%)* 2016 7.68 2016 9.1% 48.4mln 78.4% 9.92 2017 9.63 12.2% 2017 12.4% +3.0% y-o-y 2018 9.92 2018 12.2% +32.1% (over 2017) +3.5 ppts (over 2017) * 2018 results were adjusted for GEL 30.3mln Demerger-related costs, GEL 8.0mln Demerger-related corporate income tax gain, and GEL 30.3mln one-off impact of remeasurement of deferred tax balances. In addition, 9,784,716 Bank of Georgia Group shares were issued to Georgia Capital as part of the Demerger process in 2018. ** Tier 1 capital ratio at 31 December 2016 is presented in accordance with NBG BASEL II guidelines. * Excluding the transactions through teller-cashiers and Express Pay (self-service) terminals. 04 Annual Report 2018 Bank of Georgia Group PLC Annual Report 2018 Bank of Georgia Group PLC 05 Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information Retail Banking Client-centric, multi-brand strategy for more than 2.4 million clients We are the leading retail banking player in Georgia, serving more than 2.4 million customers through the widest network of 271 retail branches, 876 ATMs and 3,115 Express At a Glance Pay (self-service) terminals, a sales force of more than 3,000 people, along with our diverse products and services. Our Retail Banking business, the prominent component of our business, runs a client-centric, multi-brand strategy, which reaches the entire spectrum of retail customers through three well-established and recognised brands: Express designed to service emerging retail customers with minimal incremental operational costs through cost-efficient distance channels such as our Express Pay terminals, internet and mobile banking and technology-intensive Express branches. Bank of Georgia providing long-established traditional banking services to our mass retail clients. SOLO targeting mass affluent customers and providing a unique blend of banking and lifestyle products and services. MSME Bank of Georgia serves micro, small and medium-sized enterprises (MSME) through two respectively dedicated segments under the Retail Banking business. By the end of 2018, our MSME client base grew to 195,230 customers. Gross loan book Client deposits (GEL billion) Market share* (GEL billion) Market share* 6.4 37.5% 4.3 36.9% +24.5% y-o-y +32.8% y-o-y * Market shares by loans and by deposits to individuals, respectively. 06 Annual Report 2018 Bank of Georgia Group PLC Annual Report 2018 Bank of Georgia Group PLC 07 Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information Corporate Investment Banking Wealth Management Integrated solutions for our CIB clients We are an established leader of investment management services in Georgia Bank of Georgia has been active in asset and wealth management since 2005. Accommodating 1,528 local and international clients from 76 countries worldwide, our Wealth Management business provides private banking services to high-net worth individual clients and offers investment management products internationally through representative offices in Eastern Europe, the Middle East and the UK. Our superior service, along with local economic stability, business friendly environment, favourable tax regime, and confidential nature of banks in Georgia, provides our clients with the unique opportunity to invest in Georgia and many foreign customers find this proposition very attractive. The Bank believes that its Wealth Management franchise can benefit by focusing on the distribution of local debt. The Bank is a leading corporate lender in the country with deep sector knowledge and local expertise. Our corporate In May 2017, we held the first regional conference of Wealth banking business is characterised by outstanding flexibility in meeting our corporate clients’ needs and offers the most Management in Tbilisi. The event aimed to introduce Georgia AUM comprehensive range of products and services in the country. We are proud to accommodate c.2,500 businesses in as a regional hub for private banking services. The prospects (GEL billion) Number of customers Georgia and play our part in developing various sectors of the economy such as trade, energy, industry and tourism, and challenges of making Georgia a regional banking centre were among others. Corporate banking additionally serves as the country’s leading trade finance business and provides discussed within the framework of the conference, including the leasing services through the Bank’s wholly-owned subsidiary, Georgian Leasing Company (GLC). In 2018, GLC was investment climate in Georgia, as well as the country’s economy 1,528 assigned a Long Term Issuer Default rating of “B+” with a positive outlook by Fitch Ratings. and banking sector. In 2018, we sponsored a number of events 2.3 in Georgia and abroad. We plan to continue to actively support +22.3% y-o-y 76 We are at the forefront of capital markets development in Georgia. We aim to leverage our superior knowledge regional events in the future. and capital markets capabilities in the Georgian and neighbouring markets both in terms of reach and the expertise Number of countries that we have accumulated during the past several years through our corporate advisory, debt and equity capital market research and brokerage practices united under Galt & Taggart, a wholly-owned subsidiary of the Group. Our brokerage business serves regional and international markets, including hard-to-reach frontier economies.