HIGHLIGHTS BANK OF GEORGIA HIGHLIGHTS Statement of Income Figures Year Change GEL1 mln 2011 2010 Revenue 441 347 27% Operating Costs2 218 200 9% Cost of Credit (22) (48) -53% Net Operating Income 201 99 103% Profit3 151 83 83% Balance Sheet Highlights Year Change GEL mln 2011 2010 Loans4 2,616 2,366 11% Total Assets 4,665 4,005 16% Amount due to Customers 2,735 2,026 35% Total Liabilities 3,853 3,312 16% Equity 813 693 17% Selected Ratios Year Change 2011 2010 Cost to Income 49.3% 57.6% -14% ROAA5 3.6% 2.4% 50% ROAE6 20.4% 13.5% 51% Tier I Capital Adequacy Ratio (BIS)7 19.9% 17.5% 14% Total Capital Adequacy Ratio (BIS)7 28.5% 26.6% 7% Selected Operating Data8 Year Change 2011 2010 Branches 158 142 11% ATMs 426 405 5% Employees (full-time, consolidated) 7,301 5,610 30% Ratings Foreign Currency (Long-term/Short-term) Local Currency Standard & Poor’s BB-/B BB-/B Fitch Ratings BB-/B BB-/B Moody’s Investor Service B1/NP’ (FC) ‘Ba3/NP’ (LC) Exchange Rate (year-end) Year 2011 2010 GEL/USD 1.6703 1.7728 GEL/GBP 2.5776 2.7393 JSC Bank of Georgia (the Bank or Bank of Georgia) is the leading bank in Georgia based on total assets (with a 36% 9 market share); total gross loans (with a 35% market share) and total customer deposits (with a 36% market share) as of 31 December 2011. The Bank has one of the largest distribution networks in Georgia, with 158 branches, including full-service flagship branch- es, service centres and smaller-scale sales outlets; the largest ATM network in Georgia, a full-service remote banking platform and a modern call centre. Bank of Georgia offers a broad range of corporate banking, retail banking, wealth management, insur- ance and brokerage services to its clients. 1 Georgian Lari (GEL or Lari) is the currency of Georgia 2 Other operating non-interest expenses 3 Profit (loss) for the year from continuing operations 4 Loans include Net loans to customers and finance lease receivables 5 Return On Average Total Assets (ROAA) equals Net Profit for the period from continuing operations divided by monthly Average Total Assets for the same period 6 Return On Average Total Equity (ROAE) equals Net Profit for the period from continuing operations attributable to shareholders of the Bank divided by monthly Average Equity attributable to shareholders of the Bank for the same period 7 BIS Tier I and Total Capital Ratios are calculated on a standalone basis in accordance with the requirements of Basel Capital Accord I 8 For Georgia on a standalone basis, unless otherwise noted 9 According to data published by the National Bank of Georgia JSC BANK OF GEORGIA ANNUAL REPORT/2011 TABLE OF CONTENTS TABLE OF CONTENTS Letter of the Chairman of the Supervisory Board 1 Chief Executive’s Statement 3 Management Report 5 • Our Business 6 • Consolidated Results Discussion 9 • Shareholders 18 • Principal Risks and Uncertainties 19 • Risk Management Principals 29 Corporate Governance 37 • Board Composition 43 • Management Board 47 Responsibility Statement 51 Forward Looking Statements 52 Bank of Georgia and Subsidiaries Consolidated Financial Statements 53 Shareholder Information 150 JSC BANK OF GEORGIA ANNUAL REPORT/2011 LETTER OF THE CHAIRMAN OF THE SUPERVISORY BOARD LETTER OF THE CHAIRMAN OF THE SUPERVISORY BOARD Despite extremely challenging global economic conditions and low growth in many parts of the world, in 2011, Georgia achieved an estimated 7% real GDP growth to US$14 bn, and foreign exchange reserves that grew 25% to a record US$2.8 million. The country maintained external public debt at a comfortable level of 29% of GDP, decreased its budget deficit from 6.6% of GDP in 2010 to 3.7% in 2011 and annual inflation of 2%. The market-oriented reforms of the past several years have not only helped Georgia weather the crisis of 2008, but have created a solid foundation for the country’s development. Significant ongoing investment in infrastructure is aimed at enabling Georgia reap the benefits of being the transit and logistics hub of the region and substantially develop growth areas such as hydroelectric power and tourism; distinc- tive competitive advantages of the country. Already an es- tablished regional energy transit hub, Georgia serves as a transport corridor to two crude oil pipelines, one of them the world’s second largest, and two gas pipelines, transporting oil and gas to Europe through Turkey. NEIL JANIN As a cheap producer of hydroelectric power than its neigh- Chairman of the Supervisory Board of Bank of Georgia boring countries, Georgia, which enjoys significant untapped Chairman of Bank of Georgia Holdings plc Board hydropower capabilities is gearing up for taking full ad- vantage of these hydroelectric power opportunities. Ongo- Dear Shareholders, ing investments, both domestic and foreign, in hydropower generating plants and, more importantly, the completion of 2011 has been a remarkable year for your bank. Bank of a new power transmission line to Turkey, will allow Geor- Georgia joined the register of the London Stock Exchange gia to increase its total transmission capacity 15-fold from premium listed companies following the tender offer an- the current 1.3TWH and, as a result, will notably increase its nounced by its UK – incorporated holding company in De- electricity exports over the next few years. cember 2011. The high level of participation in the tender offer reflected strong support from shareholders and on 28 Bold investments in tourism-related infrastructure have been February 2012, a wide range of investors, previously re- bearing fruit for the second consecutive year. 2011 clearly stricted in trading overseas securities, gained access to the marks the come-back of Georgia, the top tourist destination extraordinary story of Bank of Georgia, which has great op- in Soviet times, as a desired place to visit, with number of portunities as a leveraged play on the vibrant and growing tourists rising from approximately 700,000 in 2006 to nearly economy of Georgia. 3 million in 2011. Foreign tourism revenues are estimated at US$937 million in 2011, a number that is expected to keep In my letter to you last year I talked about Georgia’s economy growing along with the expected increase in tourists, esti- as a success story in the eradication of corruption that could mated by the Government to reach 5 million per annum by serve as an example for many others. In 2011, Georgia con- 2015. tinued to stand out as a country that can boast one of the world’s lowest corruption and crime rates, well-functioning Tourism revenues, now approaching the level of net remit- public institutions, prudent banking regulation and a dynamic tances of US$1.2 billion, the more traditional source of capi- and growing private sector poised to benefit from the healthy tal inflow for the country, are expected to become a more fundamentals of the growth economy and significant inward significant source of capital inflow. Tourism revenues and investment into the country. This year, I would like to touch the steady increase in revenues from exports are expected upon selected economic metrics and main growth drivers of to gradually diminish Georgia’s reliance on the foreign direct this country that, I believe, is still one of the most notable and investment (FDI) and donor funding. In 2011, FDI reached rare examples of an investor and business friendly environ- circa US$1 billion and is estimated to reach US$1.6 billion ment. by 2015. Diversified across various sectors, FDI is support- ing ongoing investments in capital intensive areas (such as hydropower transmission assets), that are also benefiting from donor funding. Approximately US$2 billion of US$4.5 bn pledged donor funds remain undisbursed. 01 JSC BANK OF GEORGIA ANNUAL REPORT/2011 LETTER OF THE CHAIRMAN OF THE SUPERVISORY BOARD More importantly, strong support from the international com- Georgia’s achievements have not gone unnoticed by the in- munity took a more meaningful and tangible shape in 2011. ternational community. In the fourth quarter 2011, S&P and Free Trade Agreements with the EU, currently in the negotia- Fitch Ratings upgraded the country’s ratings at a time many tion phase and with the US, currently under discussion, once countries have been downgraded by the same agencies. S&P in place can significantly boost new markets for Georgian raised Georgia`s Long-Term Foreign and Local Currency Rat- products that will lead to further integration of the country ings to “BB-“ and Fitch Ratings upgraded Georgia’s Long- with the Western world translating into increased exports and term foreign and local currency Issuer Default Ratings to investments to Georgia from these countries. ‘BB-’ from ‘B+, noting the country’s strong growth perfor- Another important consideration for investors is the continu- mance, strong progress in controlling fiscal deficit and re- ation of Georgia’s liberal policy and ease of doing business. duction of inflation, among other factors. The country’s unrelenting commitment to market-oriented With these important elements in place, stemming from the development has been underpinned by the ratification of the far-reaching reforms enacted several years ago, Georgia of- Liberty Act that will ensure that, from 2014, Government ex- fers unique and rewarding opportunities for inward invest- penditure is capped at 30% of GDP, budget deficit below 3% ments. In this report, you will find more information on the of GDP and Government debt does not exceed 60% of GDP. stellar performance of your bank, which has an ever-growing role to play in the development of the Georgian economy.