TIDMBGEO
RNS Number : 6364W
Bank of Georgia Group PLC
20 August 2020
Bank of Georgia
Group PLC
2(nd) quarter and half-year 2020 results
Name of authorised official of issuer responsible for making
notification:
Natia Kalandarishvili, Head of Investor Relations and
Funding
www.bankofgeorgiagroup.com
ABOUT BANK OF GEORGIA GROUP PLC
The Group: Bank of Georgia Group PLC ("Bank of Georgia Group" or
the "Group" - LSE: BGEO LN) is a UK incorporated holding company,
which comprises: a) retail banking and payment services; and b)
corporate and 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. In the
medium to long-term, the Group targets to benefit from superior
growth of the Georgian economy through both its retail banking and
corporate and investment banking services and aims to deliver on
its strategy, which is based on at least 20% ROAE and c.15% growth
of its loan book.
2Q20 AND 1H20 RESULTS CONFERENCE CALL DETAILS
Bank of Georgia Group PLC announces the Group's consolidated
financial results for the second quarter and the first half of
2020. Unless otherwise noted, numbers in this announcement are for
2Q20 and comparisons are with 2Q19. The results are based on
International Financial Reporting Standards ("IFRS") as adopted by
the European Union, are unaudited and derived from management
accounts. This results announcement is also available on the
Group's website at www.bankofgeorgiagroup.com .
An investor/analyst conference call, organised by the Bank of
Georgia Group, will be held on 20 August 2020, at 14:00 UK / 15 :00
CEST / 09 :00 U.S Eastern Time .
Webinar instructions:
Please click the link to join the webinar: https://bankofgeorgia.zoom.us/j/95526745568
Webinar ID: 955 2674 5568
Or use the following international dial-in numbers available at:
https://bankofgeorgia.zoom.us/u/acFso2de3t
Webinar ID: 955 2674 5568#
Participants, who will be joining through the webinar, can use
the "raise hand" feature at the bottom of the screen to ask
questions. Participants, who will be joining through the
international dial-in number, can dial *9 to raise hand and ask
questions.
CONTENTS
4 Impact of COVID-19 global pandemic
5 2Q20 and 1H20 results highlights
7 Chief Executive Officer's statement
8 Discussion of results
13 Discussion of segment results
13 Retail Banking
17 Corporate and Investment Banking
20 Selected financial and operating information
24 Principal risks and uncertainties
37 Statement of Directors' responsibilities
38 Interim condensed consolidated financial statements
39 Independent review report
41 Interim condensed consolidated financial statements
46 Selected explanatory notes
79 Glossary
80 Company information
FORWARD LOOKING STATEMENTS
This announcement contains forward-looking statements,
including, but not limited to, statements concerning expectations,
projections, objectives, targets, goals, strategies, future events,
future revenues or performance, capital expenditures, financing
needs, plans or intentions relating to acquisitions, competitive
strengths and weaknesses, plans or goals relating to financial
position and future operations and development. Although Bank of
Georgia Group PLC believes that the expectations and opinions
reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations and opinions will
prove to have been correct. By their nature, these forward-looking
statements are subject to a number of known and unknown risks,
uncertainties and contingencies, and actual results and events
could differ materially from those currently being anticipated as
reflected in such statements. Important factors that could cause
actual results to differ materially from those expressed or implied
in forward-looking statements, certain of which are beyond our
control, include, among other things: macroeconomic risk, including
currency fluctuations and depreciation of the Georgian Lari;
regional instability; loan portfolio quality; regulatory risk;
liquidity and funding risk; capital risk; operational risk, cyber
security, information systems and financial crime risk; COVID-19
pandemic impact risk; climate change risk; and other key factors
that indicated could adversely affect our business and financial
performance, which are contained elsewhere in this document and in
our past and future filings and reports of the Group, including the
'Principal risks and uncertainties' included in Bank of Georgia
Group PLC's Annual Report and Accounts 2019 and in this
announcement. No part of this document constitutes, or shall be
taken to constitute, an invitation or inducement to invest in Bank
of Georgia Group PLC or any other entity within the Group, and must
not be relied upon in any way in connection with any investment
decision. Bank of Georgia Group PLC and other entities within the
Group undertake no obligation to update any forward-looking
statements, whether as a result of new information, future events
or otherwise, except to the extent legally required. Nothing in
this document should be construed as a profit forecast.
IMPACT OF COVID-19 GLOBAL PANDEMIC
The impact of the COVID-19 global pandemic over the last few
months has significantly tested the resilience and character of
Bank of Georgia, together with that of all of our colleagues and
customers. Our performance during the second quarter of 2020 was
therefore, significantly impacted by a number of factors:
-- Three very different economic realities in each different
month in the second quarter, with signs of recovery in May and
June
-- Extraordinary environment and measures implemented by the
Georgian Government to address the COVID-19 crisis
-- Actions implemented by the Group to address the COVID-19
crisis
The Georgian Government took significant early actions to reduce
the spread of the virus, which included flight bans, and school and
business closures, which were essential to what has, so far, been
an extremely well-managed response to the pandemic throughout the
country. From a macroeconomic perspective, there was clearly a
significant negative impact in all areas of the economy, resulting
in a reduction of economic activity in April and May on the back of
the lockdown restrictions put in force. However, the Government's
immediate and successful response to the evolving COVID-19 pandemic
enabled the domestic economy to reopen much faster than any other
economy in the region, and we already saw a rebound in economic
activity in June, after the release of restrictions and reopening
of domestic tourism throughout the country. This was further
followed by the announcement of the Government's anti-crisis
stimulus plan, which includes a social assistance package for
individuals, as well as tax exemptions and various funding
mechanisms for businesses, and stimulus plans for various sectors
of economy.
Local currency funding has experienced a significant pressure,
resulting in an increase in interest rates in April and May,
however, this impact was subsequently stabilised to more normal
levels as a result of the new local currency funding instruments
introduced by the National Bank of Georgia (the "NBG") to the
market in order to support the GEL liquidity.
We are now experiencing a better than expected recovery in
business activity, improving significantly in many key economic
areas to close to pre-COVID-19 levels: remittances improved in May
and grew significantly by 17.8% y-o-y in June; consumer demand
improved in June based on banking card payment activities; and VAT
turnover statistics (down 32.8% y-o-y in April, down 22.2% y-o-y in
May, and down 6.2% y-o-y in June) also demonstrated a recovery in
business activity, mostly in trade, construction, real estate and
manufacturing sectors.
During the second quarter of 2020, the Georgian Lari has
performed very well and appreciated by 7.0% against the US Dollar,
mostly supported by the NBG's interventions, external funding
support and strong remittance flows. There has been some careful
reopening of international borders, but we do not expect to see any
significant levels of international tourism during the remainder of
2020. As a result, we now expect to see the Georgian economy
contract by 5.1% during 2020, followed by the GDP growth of
c.5.0-5.5% in 2021, based on the estimates of our brokerage and
investment arm, Galt and Taggart.
In order to respond to the pandemic outbreak, the Group has
introduced a number of resilience protocols and a comprehensive
Business Continuity Plan aimed at curbing the spread of COVID-19 in
Georgia and mitigating the negative impact on our business and the
community. We have put in place a number of initiatives to reduce
physical interaction and prevent the spread of coronavirus, whilst
maintaining the full banking capability required to support and
assist our customers. This included additional safety measures and
protocols introduced in our everyday working environment, fully
moving back office staff to working from home in just two weeks,
significantly enhancing the capacity of the call centre,
temporarily closing the customer service support areas of express
branches (mostly re-opened in June), with only the self-service
terminals and ATM areas remaining open, implementing a three-month
grace period on principal and interest payments on all retail loans
to significantly reduce the requirement for customers to physically
visit branches, applying more stringent risk assessment procedures
during the lending process, incentivising the offloading of
customer activity to digital channels through temporary removal of
fees on transactions executed through our mobile and internet
banking platforms since mid-March 2020, for a two-month period,
among others.
The Bank maintained excess liquidity in the second quarter,
primarily for 1) risk mitigation purposes, on the back of the
ongoing COVID-19 crisis; and 2) the repayment of local currency
Eurobonds due at the beginning of June 2020.
Our second quarter results therefore have been significantly
impacted by the environment in which we operate and the measures we
have put in place to manage the crisis. This quarter has been
unprecedented and characterised by three different periods on the
back of the changing environment in April, May and June, as
described above. The largest impact was felt in the Retail Banking
business, which was impacted by the slow-down of economic activity
on the back of the Government's lock-down restrictions, temporary
closure of the express branches (mostly re-opened in June),
temporary removal of fees on transactions through digital channels,
slower lending activity, three-months grace periods on loans, more
expensive local currency funding, among others.
-- Net fee and commission income was down only 9.9% y-o-y in
June 2020 following bigger decreases of 42.5% y-o-y in April, and
21.2% in May. This demonstrates strong recovery dynamics in our fee
income generation since May, on the back of improved remittances in
May and June, increased consumer demand in June as measured by
banking card payment activities, and the recovery in VAT turnover
statistics of local business
-- Client deposits increased significantly by 6.9% during the
quarter (the growth on a constant-currency basis was 11.9% q-o-q),
which demonstrates that the immediate outflow of customer funds in
March 2020, was a temporary response to the COVID-19 outbreak
shock, which quickly stabilised
We next outline the Group's second quarter and the first half of
2020 results highlights, a summary of those highlights and then the
Chief Executive Officer's letter before going into the details.
2Q20 AND 1H20 RESULTS HIGHLIGHTS
Change Change Change
GEL thousands 2Q20 2Q19 y-o-y 1Q20 q-o-q 1H20 1H19 y-o-y
INCOME STATEMENT HIGHLIGHTS(1)
Net interest income 174,936 191,354 -8.6% 197,080 -11.2% 372,017 381,335 -2.4%
Net fee and commission
income 32,901 43,267 -24.0% 40,112 -18.0% 73,013 85,447 -14.6%
Net foreign currency gain 22,743 26,968 -15.7% 30,661 -25.8% 53,404 49,952 6.9%
Net other income / (expense) 9,081 (4,260) NMF 6,627 37.0% 15,707 (691) NMF
Operating income 239,661 257,329 -6.9% 274,480 -12.7% 514,141 516,043 -0.4%
Operating expenses (105,158) (98,558) 6.7% (106,008) -0.8% (211,167) (190,485) 10.9%
Profit from associates 113 254 -55.5% 301 -62.5% 414 442 -6.3%
Operating income before
cost of risk 134,616 159,025 -15.3% 168,773 -20.2% 303,388 326,000 -6.9%
Cost of risk (10,221) (35,476) -71.2% (241,403) -95.8% (251,623) (78,129) NMF
Net operating income /
(loss) before non-recurring
items 124,395 123,549 0.7% (72,630) NMF 51,765 247,871 -79.1%
Net non-recurring items (1,241) (2,538) -51.1% (40,345) -96.9% (41,586) (4,112) NMF
Profit / (loss) before
income tax and one-off
costs 123,154 121,011 1.8% (112,975) NMF 10,179 243,759 -95.8%
Income tax (expense) /
benefit (8,470) (9,871) -14.2% 13,030 NMF 4,560 (20,407) NMF
Profit / (loss) adjusted
for one-off costs 114,684 111,140 3.2% (99,945) NMF 14,739 223,352 -93.4%
One-off termination costs
of former CEO and executive
management (after tax) - (3,996) NMF - - - (14,236) NMF
Profit / (loss) 114,684 107,144 7.0% (99,945) NMF 14,739 209,116 -93.0%
GEL thousands Jun-20 Jun-19 Change Mar-20 Change
y-o-y q-o-q
BALANCE SHEET HIGHLIGHTS
Liquid assets 5,447,730 4,537,545 20.1% 5,379,132 1.3%
Cash and cash equivalents 1,633,755 936,106 74.5% 1,507,142 8.4%
Amounts due from credit
institutions 1,700,075 1,704,701 -0.3% 1,954,218 -13.0%
Investment securities 2,113,900 1,896,738 11.4% 1,917,772 10.2%
Loans to customers and
finance lease receivables(2) 12,599,092 10,579,710 19.1% 13,144,429 -4.1%
Property and equipment 396,272 358,921 10.4% 380,580 4.1%
Total assets 19,183,966 16,134,000 18.9% 19,663,693 -2.4%
Client deposits and notes 11,583,139 8,855,616 30.8% 10,835,918 6.9%
Amounts owed to credit
institutions 3,521,860 2,960,519 19.0% 4,144,701 -15.0%
Borrowings from DFIs 1,755,656 1,253,921 40.0% 1,689,610 3.9%
Short-term loans from
central banks 847,213 1,001,496 -15.4% 1,677,339 -49.5%
Loans and deposits from
commercial banks 918,991 705,102 30.3% 777,752 18.2%
Debt securities issued 1,561,933 2,137,239 -26.9% 2,294,431 -31.9%
Total liabilities 16,984,167 14,215,780 19.5% 17,616,438 -3.6%
Total equity 2,199,799 1,918,220 14.7% 2,047,255 7.5%
KEY RATIOS 2Q20 2Q19 1Q20 1H20 1H19
ROAA(1) 2.4% 2.9% -2.1% 0.2% 3.0%
ROAE(1) 21.8% 22.9% -18.6% 1.4% 23.7%
Net interest margin 4.2% 5.7% 5.0% 4.6% 5.8%
Liquid assets yield 3.4% 3.4% 3.9% 3.7% 3.6%
Loan yield 10.2% 11.8% 10.8% 10.6% 12.0%
Cost of funds 4.8% 4.5% 4.7% 4.8% 4.6%
Cost / income(3) 43.9% 38.3% 38.6% 41.1% 36.9%
NPLs to Gross loans to
clients 2.7% 3.2% 2.1% 2.7% 3.2%
NPL coverage ratio 115.7% 88.1% 147.2% 115.7% 88.1%
NPL coverage ratio, adjusted
for discounted value of
collateral 166.3% 131.5% 194.9% 166.3% 131.5%
Cost of credit risk ratio -0.2% 1.3% 7.4% 3.5% 1.5%
NBG (Basel III) CET1 capital
adequacy ratio 9.9% 11.0% 8.3% 9.9% 11.0%
NBG (Basel III) Tier I
capital adequacy ratio 12.0% 13.3% 10.6% 12.0% 13.3%
NBG (Basel III) Total capital
adequacy ratio 17.4% 16.7% 15.3% 17.4% 16.7%
(1) The income statement adjusted profit excludes GEL 4.0mln in
2Q19 and GEL 14.2mln in 1H19 one-off employee costs (net of income
tax) related to former CEO and executive management termination
benefits. The amount in 2Q19 is comprised of GEL 4.6mln (gross of
income tax) excluded from salaries and other employee benefits and
GEL 0.6mln tax benefit excluded from income tax expense. The amount
in 1H19 is comprised of GEL 12.4mln (gross of income tax) excluded
from salaries and other employee benefits, GEL 4.0mln (gross of
income tax) excluded from non-recurring items and GEL 2.2mln tax
benefit excluded from income tax expense. 2Q19 and 1H19 ROAE and
ROAA have been adjusted accordingly. Full IFRS income statement is
presented on page 20. Management believes that one-off costs do not
relate to underlying performance of the Group, and hence, adjusted
results provide the best representation of the Group's performance
during second quarter and first half of 2019
(2) Throughout this announcement, the gross loans to customers
and respective allowance for impairment are presented net of
expected credit loss (ECL) on contractually accrued interest
income. These do not have an effect on the net loans to customers
balance. Management believes that netted-off balances provide the
best representation of the loan portfolio position
(3) Cost/income ratio adjusted for GEL 4.6mln in 2Q19 and GEL
12.4mln in 1H19 one-off employee costs (gross of income tax)
related to termination benefits of the former executive
management
KEY RESULTS HIGHLIGHTS
-- Solid quarterly and half year performance notwithstanding the
COVID-19 pandemic impact. The Group delivered resilient operating
income before cost of risk of GEL 134.6mln during the second
quarter of 2020 and GEL 303.4mln in the first half of 2020
-- Net interest margin . NIM was significantly down in the
second quarter and the first half of 2020, primarily driven by
decline during April and May, as a result of the significant
reduction in retail lending activity and high levels of liquidity
during the quarter
-- Net fee and commission income. The y-o-y and q-o-q decrease
was mainly driven by decline in net fee and commission income from
settlement and cash operations, as a result of slower customer
activity due to COVID-19 pandemic , the temporary closure of our
express branches and the temporary removal of fees on transactions
executed through our mobile and internet banking platforms since
mid-March 2020, for a two-month period, in order to reduce customer
visits to branches and incentivise the transfer of customers'
activity to digital channels. The decline was partially offset by
the strong net fee generation from guarantees and letters of credit
issued by our Corporate and Investment Banking business. In June,
we have already seen strong recovery dynamics, as remittances
improved in May and grew significantly by 17.8% y-o-y in June, and
consumer demand improved in June as measured by banking card
payment activities. VAT turnover statistics have also demonstrated
a recovery in business activity, mostly in the trade, construction,
real estate and manufacturing sectors. We therefore expect fee
generation to improve going forward
-- Operating expenses increased by 6.7% y-o-y and were down 0.8%
q-o-q in 2Q20, and increased by 10.9% y-o-y in 1H20 due to
increased investment in IT and marketing , as well as some one-off
spend related to COVID-19 mitigation measures. In the second
quarter of 2020, we have initiated cost optimisation measures, the
impact of which has not yet been reflected in the first half of
2020 results, therefore, we expect improvement in our cost to
income ratio in the second half of the year
-- Net one-off loss on modification of financial assets. We
recorded a GEL 38.7mln and GEL 1.0mln one-off net loss on
modification of financial assets in March and April of 2020 in
relation to the three-month payment holidays on principal and
interest offered to our retail banking clients, as an immediate
response to COVID-19 pandemic outbreak, in order to reduce the
requirement for customers to physically visit Bank branches and
reduce the risk of the virus spread. The net loss incurred as a
result of these modifications has been classified as a
non-recurring item in the income statement during the first half of
2020. For the accounting treatment rationale, see page 11 of this
announcement
-- Loan book increased by 19.1% y-o-y and was down 4.1% q-o-q at
30 June 2020. Growth on a constant-currency basis was 14.7% y-o-y
and 0.2% q-o-q. The y-o-y loan book growth reflected continued
strong loan origination levels in Corporate, MSME and the mortgage
segments during the pre-COVID-19 period, while the q-o-q trend
reflects the slow-down of economic activity since March 2020 as a
result of the COVID-19 pandemic outbreak
-- Client deposits and notes increased by 30.8% y-o-y and by
6.9% q-o-q at 30 June 2020. On a constant-currency basis, client
deposits and notes grew by 25.8% y-o-y and by 11.9% q-o-q. Both
y-o-y and q-o-q increase in deposit balances reflects a gradual
increase in monthly deposit balances of both our individual and
business customers since May 2020
-- Asset quality. The cost of credit risk was a net gain of 0.2%
in 2Q20 (versus losses of 1.3% in 2Q19 and 7.4% in 1Q20) and was
3.5% 1H20 (1.5% in 1H19). The y-o-y increase in cost of credit risk
ratio during the first half of 2020 was primary driven by the
significant ECL provisions on loans to customers and finance lease
receivables created for the full economic cycle during the first
quarter of 2020, related to adverse macro-economic environment and
expected negative impact on creditworthiness of borrowers as a
result of the COVID-19 pandemic. These assumptions were further
revisited during the second quarter to reflect the better
visibility and the macro-economic forecast scenarios published by
the National Bank of Georgia in May 2020. See details on
assumptions used on page 10. The net gain of 0.2% of cost of risk
ratio in 2Q20 was mainly related to a small reversal of provisions
on the back of strengthening of local currency and amortisation of
the loan portfolio in 2Q20
-- The NPLs to gross loans increased to 2.7% at 30 June 2020
(3.2% at 30 June 2019 and 2.1% at 31 March 2020). The NPL coverage
ratio was 115.7% at 30 June 2020 (88.1% at 30 June 2019 and 147.2%
at 31 March 2020) and the NPL coverage ratio adjusted for the
discounted value of collateral was 166.3% at 30 June 2020 (131.5%
at 30 June 2019 and 194.9% at 31 March 2020). The q-o-q dynamic was
driven by the increase in non-performing borrowers during 2Q20, on
the back of COVID-19 crisis, while the ECL provisions for the full
economic cycle on loan portfolio were created already in the first
quarter of 2020
-- Solid capital adequacy position. The Bank's capital adequacy
ratios have been strong, and remain comfortably above minimum
regulatory requirements. The Bank's Basel III Common Equity Tier 1,
Tier 1 and Total capital adequacy ratios stood at 9.9%, 12.0% and
17.4%, respectively, all well above the minimum required levels of
6.9%, 8.7% and 13.3%, respectively, at 30 June 2020. The y-o-y
decline in capital ratios was primarily due to a GEL 400mln general
provision created in March 2020 under the local regulatory
accounting basis in agreement with the NBG (and consistent with
NBG's guidance for the Georgian banking sector in general) that
covers its current expectation of estimated credit losses on the
Bank's lending book for the whole economic cycle
-- Strong liquidity and funding position. The Bank's liquidity
and funding positions have remained strong. As at 30 June 2020, the
Bank's liquidity coverage ratio stood at 135.4% and net stable
funding ratio at 136.6%, compared to the 100% minimum required
level. The Bank maintained excess liquidity in 2Q20, primarily for
1) risk mitigation purposes, on the back of the ongoing COVID-19
crisis; and 2) the repayment of local currency Eurobonds due and
repaid at the beginning of June 2020. The Bank has strong support
from International Financial Institutions. It has already attracted
a number of new long-term borrowings both in local and foreign
currencies during the past few months of more than US$200 million,
part of which has already been drawn-down in the first half of
2020. Furthermore, we are actively working with our partner
financial institutions and expect to sign new long-term facilities
of around US$400 million over the next few months, which will
further improve our liquidity position and enable us to support our
customers and the economy in which we operate during these
unprecedented times
CHIEF EXECUTIVE OFFICER'S STATEMENT
The impact of the COVID-19 global pandemic over the last six
months has significantly tested the resilience and character of
Bank of Georgia Group, together with that of all of our colleagues
and customers. Over the last six months, however, I am delighted
with the way the Group has responded by supporting the Georgian
economy, our customers and our colleagues.
From a macro-economic perspective, there was a significant
reduction in economic activity in April and May this year on the
back of the lockdown restrictions in force. The Georgian
Government's immediate and successful response to the evolving
COVID-19 pandemic enabled the domestic economy to reopen much
faster than any other economy in the region. As a result, we are
now experiencing a better than expected recovery, with business
activity starting to improve significantly in June. During the
second quarter of 2020, the Georgian Lari has performed very well
and appreciated by 7.0% against the US Dollar, partly supported by
the NBG's interventions, external funding support and stronger than
expected remittance flows.
There has been some careful reopening of international borders,
but we do not expect to see any significant levels of international
tourism during the remainder of 2020. As a result, we now expect to
see the Georgian economy contract by 5.1% during 2020, followed by
the GDP growth of c.5.0-5.5% in 2021, based on the estimates of our
brokerage and investment arm, Galt and Taggart.
Bank of Georgia Group's performance has been very robust
throughout the first half of the year, having taken a significant
ECL provision in the first quarter that we continue to expect to
cover all expected credit losses through the full economic cycle,
relating to the COVID-19 impact. Our performance during the second
quarter of 2020 has been extremely resilient, delivering strong
profitability during a time when the Georgian economy has
experienced its worst reduction in economic activity for more than
a few decades:
-- The balance sheet has remained strong and stable. On a
constant currency basis, our customer lending has remained broadly
flat q-o-q, as expected, and client deposits increased
significantly by 11.9% during the quarter. Bank of Georgia is now
the clear market leader in retail deposits
-- Operating income has been very resilient . Despite an
extensive economic lockdown, operating income remained robust with
operating income down 12.7% q-o-q in 2Q20, but broadly flat y-o-y
on a six months basis in the first half of 2020
-- Net interest margin is now increasing. Having reduced
significantly during April and May, as a result of the significant
reduction in retail lending and high levels of liquidity, our net
interest margin in July and August so far has been running c.30
basis points higher than the 4.2% margin in the second quarter of
2020
-- Our lending portfolios are performing better than expected.
Asset quality is robust, and the significant ECL provision made in
the first quarter is proving to be sufficient, despite the expected
GDP contraction being slightly worse than initially anticipated.
Our corporate, SME and Solo portfolios have all performed better
than our initial expectations
-- Our capital ratios have improved significantly. During the
second quarter of 2020, our capital ratios increased significantly,
to levels well above our required minimum regulatory
requirements
-- Our Return on Average Equity returned to more normal levels.
In the second quarter of 2020, we delivered an annualised ROAE of
21.8%
Our mission and our strategy remain unchanged and we have
actively continued the further development of our fully integrated
digital strategy, an important focus for us, as we seek to digitise
our full banking platforms. The use of our mobile banking and
digital platforms has substantially increased throughout the period
of the economic lockdown, and our market leading digital and mobile
banking presence has become a significant source of competitive
advantage.
Bank of Georgia has two clear strategic targets over the medium
to long-term: to achieve at least 20% return on average equity, and
to deliver c.15% growth in the loan book. Given our clear Georgia
focus, our performance during 2020 will inevitably be affected by
the local COVID-19 impact, but we have already resumed the delivery
of our targeted profitability. Our performance and balance sheet is
demonstrating strong robustness, asset quality is resilient and we
remain comfortable, given our economic scenario stress-testing
assumptions, with the adequacy of the significant ECL provision
created in the first quarter. The Group is very well positioned for
the future, with an outstanding team, coupled with strong funding
and liquidity, and capital resources.
Archil Gachechiladze,
CEO, Bank of Georgia Group PLC
19 August 2020
DISCUSSION OF RESULTS
The Group's business is composed of three segments. (1) Retail
Banking operations in Georgia principally provides consumer loans,
mortgage loans, overdrafts, credit cards and other credit
facilities, funds transfer and settlement services, and handling
customers' deposits for both individuals as well as legal entities.
Retail Banking targets the emerging and mass retail and mass
affluent segments, together with small and medium enterprises and
micro businesses. (2) Corporate and Investment Banking comprises
Corporate Banking and Investment Management operations in Georgia.
Corporate Banking principally provides loans and other credit
facilities, funds transfers and settlement services, trade finance
services, documentary operations support and handles saving and
term deposits for corporate and institutional customers. The
Investment Management business principally provides private banking
services to high net worth clients. (3) BNB, comprising JSC
Belarusky Narodny Bank, principally provides retail and corporate
banking services to clients in Belarus.
OPERATING INCOME
GEL thousands, unless
otherwise Change Change Change
noted 2Q20 2Q19 y-o-y 1Q20 q-o-q 1H20 1H19 y-o-y
Interest income 379,038 342,224 10.8% 388,326 -2.4% 767,364 676,959 13.4%
Interest expense (204,102) (150,870) 35.3% (191,246) 6.7% (395,347) (295,624) 33.7%
Net interest income 174,936 191,354 -8.6% 197,080 -11.2% 372,017 381,335 -2.4%
Fee and commission income 54,389 68,025 -20.0% 70,894 -23.3% 125,284 130,556 -4.0%
Fee and commission expense (21,488) (24,758) -13.2% (30,782) -30.2% (52,271) (45,109) 15.9%
Net fee and commission
income 32,901 43,267 -24.0% 40,112 -18.0% 73,013 85,447 -14.6%
Net foreign currency gain 22,743 26,968 -15.7% 30,661 -25.8% 53,404 49,952 6.9%
Net other income /
(expense) 9,081 (4,260) NMF 6,627 37.0% 15,707 (691) NMF
Operating income 239,661 257,329 -6.9% 274,480 -12.7% 514,141 516,043 -0.4%
Net interest margin 4.2% 5.7% 5.0% 4.6% 5.8%
Average interest earning
assets 16,668,289 13,504,120 23.4% 15,827,796 5.3% 16,138,601 13,159,460 22.6%
Average interest bearing
liabilities 16,957,795 13,378,168 26.8% 16,339,697 3.8% 16,544,278 13,095,239 26.3%
Average net loans and
finance
lease receivables,
currency
blended 12,862,536 10,004,743 28.6% 12,274,814 4.8% 12,486,425 9,751,614 28.0%
Average net loans and
finance
lease receivables, GEL 4,984,078 3,977,481 25.3% 4,988,497 -0.1% 4,987,437 3,825,608 30.4%
Average net loans and
finance
lease receivables, FC 7,878,458 6,027,262 30.7% 7,286,317 8.1% 7,498,988 5,926,006 26.5%
Average client deposits and
notes, currency blended 11,115,351 8,673,526 28.2% 10,473,930 6.1% 10,788,743 8,487,934 27.1%
Average client deposits
and notes, GEL 3,602,387 2,860,563 25.9% 3,298,908 9.2% 3,516,911 2,793,175 25.9%
Average client deposits
and notes, FC 7,512,964 5,812,963 29.2% 7,175,022 4.7% 7,271,832 5,694,759 27.7%
Average liquid assets,
currency
blended 5,297,130 4,528,508 17.0% 5,322,430 -0.5% 5,299,872 4,461,800 18.8%
Average liquid assets,
GEL 2,341,763 2,049,163 14.3% 2,208,730 6.0% 2,280,286 2,065,576 10.4%
Average liquid assets,
FC 2,955,367 2,479,345 19.2% 3,113,700 -5.1% 3,019,586 2,396,224 26.0%
Liquid assets yield,
currency
blended 3.4% 3.4% 3.9% 3.7% 3.6%
Liquid assets yield, GEL 7.5% 6.1% 8.0% 7.8% 6.5%
Liquid assets yield, FC 0.1% 1.1% 1.0% 0.6% 1.1%
Loan yield, currency
blended 10.2% 11.8% 10.8% 10.6% 12.0%
Loan yield, GEL 14.7% 17.3% 15.6% 15.2% 17.8%
Loan yield, FC 7.3% 8.2% 7.5% 7.5% 8.2%
Cost of funds, currency
blended 4.8% 4.5% 4.7% 4.8% 4.6%
Cost of funds, GEL 8.3% 6.8% 7.9% 8.1% 6.9%
Cost of funds, FC 3.0% 3.2% 2.9% 2.9% 3.2%
Cost / income (4) 43.9% 38.3% 38.6% 41.1% 36.9%
(4) The cost/income ratio is adjusted for GEL 4.6mln in 2Q19 and
GEL 12.4mln in 1H19 one-off employee costs (gross of income tax)
related to termination benefits of the former executive
management
Performance highlights
-- The Group generated operating income of GEL 239.7mln in 2Q20
(down 6.9% y-o-y and down 12.7% q-o-q), ending six months of 2020
with operating income of GEL 514 . 1mln (largely flat y-o-y). The
y-o-y and q-o-q decline in o perating income in all periods
presented was primarily driven by the decrease in net interest
income and net fee and commission income, on the back of slow-down
of economic activity due to COVID-19 pandemic outbreak in March
2020
-- Our NIM was 4.2% in 2Q20 and 4.6% in 1H20. NIM was down
150bps y-o-y and 80bps q-o-q in 2Q20, and was down 120bps y-o-y in
1H20, primarily driven by decline in currency blended loan yields
(down 160bps y-o-y and down 60bps q-o-q in 2Q20, and down 140bps
y-o-y in 1H20) on the back of slower lending activity due to
pandemic, coupled with increase in cost of funds (up 30bps y-o-y
and up 10bps q-o-q in 2Q20, and up 20bps y-o-y in 1H20)
-- Loan yield. Currency blended loan yield was 10.2% in 2Q20
(down 160bps y-o-y and down 60bps q-o-q) and 10.6% in the first
half of 2020 (down 140bps y-o-y). Y-o-y and q-o-q decline in loan
yield during the second quarter of 2020 and the first half of 2020,
was driven by the decline in both local and foreign currency loan
yields, on the back of slow-down of lending activity due to
COVID-19 pandemic
-- Liquid assets yield. Currency blended liquid assets yield was
3.4% in 2Q20 (flat y-o-y and down 50bps q-o-q) and 3.7% in 1H20 (up
10bps y-o-y). On y-o-y basis both in 2Q20 and 1H20, liquid assets
yield level was driven by increase in local currency denominated
liquid assets yield, offset /partially offset by the decrease in
foreign currency denominated liquid assets yield. Q-o-q decline in
liquid assets yield in 2Q20 was due to decrease in both local and
foreign currency denominated liquid assets yields. The local
currency denominated liquid assets yield movement (up 140bps y-o-y
and down 50bps q-o-q in 2Q20, and up 130bps y-o-y in 1H20) directly
reflected the NBG's monetary policy rate movements ( NBG increased
monetary policy rate by cumulative of 250bps since September 2019,
and reduced the policy rate twice by cumulative of 75bps in the
second quarter of 2020). As for the foreign currency denominated
liquid assets yield (down 100bps y-o-y and down 90bps q-o-q in
2Q20, and down 50bps y-o-y in 1H20), it largely reflected the cut
in US Fed rate in March 2020 (NBG accrues interest rate on US
Dollar obligatory reserves of the banks at US Fed rate upper bound
minus 50bps)
-- Cost of funds. Cost of funds stood at 4.8% both in 2Q20 (up
30bps y-o-y and up 10bps q-o-q) and in 1H20 (up 20bps y-o-y).
Increase in cost of funds in all periods presented was primarily
driven by increase in cost of client deposits and notes (up 40bps
y-o-y and q-o-q in 2Q20, and up 20bps y-o-y in 1H20), coupled with
40bps y-o-y increase in cost of amounts owed to credit institutions
in 2Q20 and 1H20, partially offset by 30bps decrease in cost of
amounts owed to credit institutions q-o-q in 2Q20 (NBG increased
monetary policy rate by cumulative of 250bps since September 2019,
and decrease d policy rate twice by cumulative of 75bps in the
second quarter of 2020). In addition, 20bps y-o-y increase in cost
of debt securities issued also contributed to increase in cost of
funds during the first half of 2020, as a result of the issuance of
inaugural US$ 100 million Additional Tier 1 capital perpetual
subordinated notes at the end of March 2019
-- Net fee and commission income. Net fee and commission income
was GEL 32.9mln in 2Q20 (down 24.0% y-o-y and down 18.0% q-o-q) and
GEL 73.0mln in the first half of 2020 (down 14.6% y-o-y). Both
y-o-y and q-o-q decline in all periods presented was mainly driven
by decrease in net fee and commission income from settlement and
cash operations, as a result of slower customer activity due to
COVID-19 pandemic and temporary removal of fees on transactions
executed through our mobile and internet banking platforms since
mid-March 2020, for a two-month period, in order to decrease the
customer visits to branches and incentivise the transfer of
customers' activity to digital channels. This decline was partially
offset by the strong net fees and commission income generation from
guarantees and letters of credit issued by our Corporate and
Investment Banking business both in 2Q20 and in the first half of
2020. That said, we already see strong recovery dynamics since May
2020 (net fee and commission income was down 42.5% y-o-y in April,
down 21.2% in May and down only 9.9% in June 2020), as remittances
improved in May and June, and consumer demand improved in June as
measured by banking card payment activities. VAT turnover
statistics also demonstrated a recovery in business activity,
mostly in trade, construction, real estate and manufacturing
sectors. As such, we expect the fee generation to stabilise going
forward
-- Net foreign currency gain. Net foreign currency gain was down
by 15.7% y-o-y and by 25.8% q-o-q in 2Q20, primarily due to lower
currency volatility and client-driven flows during the second
quarter of 2020. On the other hand, the Group benefited from the
high level of currency volatility in the first quarter of 2020,
which contributed to a 6.9% y-o-y increase in net foreign currency
gain during the first half of 2020
-- Net other income. Significant y-o-y increase in net other
income in the second quarter and the first half of 2020, was
primarily driven by higher net real estate gains on the back of
higher income from operating leases in 2020. Furthermore, the Group
recorded GEL 2.4mln gain from revaluation of investment property in
the second quarter of 2020 (impact of changes in fair value on
certain investment properties due to the lapse of the repurchase
option granted to the former borrower), contributing to the
increase of net other income in 2Q20 and 1H20
NET OPERATING INCOME BEFORE NON-RECURRING ITEMS; COST OF RISK; PROFIT
/ (LOSS)
GEL thousands, unless
otherwise Change Change Change
noted (5) 2Q20 2Q19 y-o-y 1Q20 q-o-q 1H20 1H19 y-o-y
Salaries and other employee
benefits (60,656) (57,982) 4.6% (56,538) 7.3% (117,194) (110,399) 6.2%
Administrative expenses (22,450) (22,033) 1.9% (27,021) -16.9% (49,470) (44,774) 10.5%
Depreciation, amortisation
and impairment (21,139) (17,295) 22.2% (21,390) -1.2% (42,529) (32,983) 28.9%
Other operating expenses (913) (1,248) -26.8% (1,059) -13.8% (1,974) (2,329) -15.2%
Operating expenses (105,158) (98,558) 6.7% (106,008) -0.8% (211,167) (190,485) 10.9%
Profit from associate 113 254 -55.5% 301 -62.5% 414 442 -6.3%
Operating income before
cost of risk 134,616 159,025 -15.3% 168,773 -20.2% 303,388 326,000 -6.9%
Expected credit loss on
loans to customers 11,621 (32,436) NMF (228,189) NMF (216,568) (72,553) NMF
Expected credit loss on
finance lease receivables (3,387) (557) NMF (1,885) 79.7% (5,273) (1,003) NMF
Other expected credit loss
on other assets and
provisions (18,455) (2,483) NMF (11,329) 62.9% (29,782) (4,573) NMF
Cost of risk (10,221) (35,476) -71.2% (241,403) -95.8% (251,623) (78,129) NMF
Net operating income /
(loss)
before non-recurring items 124,395 123,549 0.7% (72,630) NMF 51,765 247,871 -79.1%
Net non-recurring items (1,241) (2,538) -51.1% (40,345) -96.9% (41,586) (4,112) NMF
Profit / (loss) before
income
tax and one-off costs 123,154 121,011 1.8% (112,975) NMF 10,179 243,759 -95.8%
Income tax (expense) /
benefit (8,470) (9,871) -14.2% 13,030 NMF 4,560 (20,407) NMF
Profit / (loss) adjusted
for one-off costs 114,684 111,140 3.2% (99,945) NMF 14,739 223,352 -93.4%
One-off termination costs
of former CEO and
executive
management (after tax) - (3,996) NMF - - - (14,236) NMF
Profit / (loss) 114,684 107,144 7.0% (99,945) NMF 14,739 209,116 -93.0%
(5) The adjusted profit in the table excludes GEL 4.0mln in 2Q19
and GEL 14.2mln in 1H19 one-off employee costs (gross of income
tax) related to the former CEO and executive management termination
benefits. The amount in 2Q19 is comprised of GEL 4.6mln (gross of
income tax) excluded from salaries and other employee benefits and
GEL 0.6mln tax benefit excluded from income tax expense. The amount
in 1H19 is comprised of GEL 12.4mln (gross of income tax) excluded
from salaries and other employee benefits, GEL 4.0mln (gross of
income tax) excluded from non-recurring items and GEL 2.2mln tax
benefit excluded from income tax expense
-- Operating expenses amounted to GEL 105.2mln in 2Q20, up 6.7%
y-o-y and down 0.8% q-o-q, and GEL 211.2mln in 1H20, up by 10.9%
y-o-y. The y-o-y increase both in 2Q20 and the first half of 2020
was primarily driven by increased investments in IT related
resources as part of the Agile transformation process, focus on
digitalisation and investments in marketing. In addition, we
incurred extraordinary expenses during the first half of 2020 in
relation to the safety measures implemented as a response to
COVID-19 outbreak
-- Asset quality. The cost of credit risk ratio stood at net
gain of 0.2% in 2Q20 (compared to losses of 1.3% in 2Q19 and 7.4%
in 1Q20) and was 3.5% in the first half of 2020 (compared to 1.5%
in 1H19). The significant increase in cost of credit risk ratio in
1H20 was driven by the reserve builds, created for the full
economic cycle in both Retail and Corporate and Investment Banking
segments in the first quarter of 2020, primarily related to
deterioration of macro-economic environment and expected
creditworthiness of borrowers as a result of the COVID-19 pandemic
impact. This reflected additional reserves for retail customers, as
well as borrowers operating across multiple sectors of the economy,
with the largest impacts in tourism, trade, transportation,
construction and real estate industries (see Group's 1Q20 results
announcement for details of assumptions used to estimate the amount
of reserves required for the whole economic cycle in the first
quarter of 2020). As a result of these assumptions, we created
additional reserves of GEL 220.2mln in the first quarter of
2020
In the second quarter of 2020, management revisited the
assumptions used to estimate the amount of ECL provision in the
first quarter to reflect the better visibility and the
macro-economic forecast scenarios published by the NBG in May 2020.
The following assumptions were used during the analysis in the
second quarter:
- We used macro parameters based on the National Bank of
Georgia's forecast scenarios - three scenarios (Baseline, Downside
and Upside) with macro parameters for a three-year horizon with
assigned respective probabilities. The weighted average of these
scenario results were further considered in estimating expected
credit losses (ECL):
Baseline (50% probability) Downside (25% probability) Upside (25% probability)
------------------------------ ------------------------------ ----------------------------
2020 2021 2022 2020 2021 2022 2020 2021 2022
Real GDP
growth -4.0% 4.5% 5.0% -9.0% 2.5% 4.0% -3.0% 6.0% 5.0%
CPI Inflation 4.5% 1.5% 2.5% 7.0% 2.0% 2.5% 5.5% 4.0% 3.0%
GEL/US$ rate 3.20 3.20 3.20 3.52 3.70 3.51 3.04 2.89 2.89
- Given the unprecedented nature of the COVID-19 pandemic and
the uncertainties associated with it, we re-considered the existing
impairment model and applied management overlays to the methodology
to reflect a COVID-19 effect in ECL. In particular, granting
three-month payment holidays to borrowers was not automatically
considered as a SICR event (i.e. a trigger to transfer the
exposures from Stage 1 to Stage 2). We performed a more in depth
analysis of the loan portfolio and identified pools of exposures
(tourism and hospitality sectors, among others, as well as some of
the retail customers) that are most likely to suffer from pandemic
consequences in the short to medium term, and transferred these
exposures to Stage 2. The same treatment was used for borrowers who
lost their job and income due to COVID-19 pandemic outbreak and who
were included on the list for Government compensation programme
- Further, to estimate the ECL for the above mentioned
borrowers, in the downside scenario we assigned them Probability of
Default (PD) of 1 and the ECL was calculated as a weighted average
of the scenario results
- We also applied a 5% haircut in Baseline and 15% haircut in
Downside scenarios to real estate collateral values in GEL to
reflect the NBG's forecast on real estate prices and adjusted Cure
and Recovery rates downwards
Based on these assumptions, the Group concluded that the
additional reserve of GEL 220.2mln, already created in the first
quarter of 2020, was sufficient. That said, the GEL 8.2mln net
reversal of ECL on loans to customers and finance lease receivables
in 2Q20, was primarily related to strengthening of local currency
and the amortisation of the loan portfolio in the second quarter of
2020
As for the cost of risk of GEL 10.2mln recorded in 2Q20, the
reversal of ECL on loan portfolio, was offset by ECL charges on
other assets and provisions, driven by additional reserves recorded
by the Group in respect of guarantees issued and other financial
assets, and expenses accrued for certain legal fees in 2Q20
Given that we are operating in a rapidly changing environment
with a high level of uncertainty with regards to both the length
and the severity of the COVID-19 impact, we are monitoring the new
facts and circumstances on a continuous basis and will be updating
the market on any significant changes in our assessments in the
coming months
-- Quality of our loan book is closely monitored by the below
presented metrics. The q-o-q increase in NPLs to gross loans and
decrease in NPL coverage ratios at 30 June 2020, was mainly driven
by the increase in non-performing borrowers during the second
quarter of 2020 on the back of COVID-19 pandemic outbreak, while
the ECL provisions for the full economic cycle on loan portfolio
were created already in the first quarter of 2020:
GEL thousands, unless otherwise Jun-20 Jun-19 Change Mar-20 Change
noted y-o-y q-o-q
NON-PERFORMING LOANS
NPLs 355,260 347,285 2.3% 284,038 25.1%
NPLs to gross loans 2.7% 3.2% 2.1%
NPLs to gross loans, RB 1.9% 2.1% 1.5%
NPLs to gross loans, CIB 4.1% 5.3% 2.9%
NPL coverage ratio 115.7% 88.1% 147.2%
NPL coverage ratio adjusted for
the discounted value of collateral 166.3% 131.5% 194.9%
-- BNB - the Group's banking subsidiary in Belarus - continues
to remain strongly capitalised , with capital adequacy ratios well
above the requirements of the National Bank of the Republic of
Belarus ("NBRB"). At 30 June 2020, total capital adequacy ratio was
14.9%, well above the 12.5% minimum requirement, while Tier I
capital adequacy ratio was 10.0%, again above the NBRB's 7.0%
minimum requirement. ROAE was 12.2% in 2Q20 (9.8% in 2Q19 and
negative 0.6% in 1Q20) and 5.9% in 1H20 (10.8% in 1H19), reflecting
the COVID-19 pandemic impact in the first quarter of 2020. For
financial results highlights of BNB, see page 22. We note the
political unrest that is currently occurring in Belarus. There has
so far been no material impact on the performance of our business
in Belarus, which is profitable and well-capitalised, but we will
continue to monitor the situation closely
-- Net non-recurring items. Significant y-o-y increase in net
non-recurring items during the first half of 2020 was primarily
attributable to GEL 38.7mln and GEL 1.0mln one-off net loss on
modification of financial assets in March and April of 2020,
respectively, in relation to the three-month payment holidays on
principal and interest offered to our retail banking clients, in
order to reduce the requirement for customers to physically visit
Bank branches and reduce the risk of COVID-19 virus spread.
Interest continued to accrue on the outstanding principal of the
loans and was distributed over the remaining period of each loan.
The modification terms did not compound three-month accrued
interest, and had therefore, under IFRS accounting, resulted in a
one-off net loss on modification of loans to customers. This type
of restructuring offered to our customers reflected the impact of
the Bank's immediate social response to COVID-19 in Georgia, which
management does not expect to recur. The net loss incurred as a
result of these modifications has been classified as a
non-recurring item in the income statement. In addition, in 1Q20,
the Bank incurred GEL 1.2mln one-off costs to finance and donate
20,000 COVID-19 laboratory tests, 10 respirators, 50,000 face masks
and 60,000 gloves to the Ministry of Health of Georgia, to support
the battle to prevent the virus spread. These costs are also
classified as non-recurring items
-- Overall, the Group recorded profit of GEL 114.7mln in 2Q20
(compared to profit adjusted for one-off costs of GEL 111.1mln(6)
in 2Q19 and a loss of GEL 99.9mln in 1Q20) and a profit of GEL
14.7mln in the first half of 2020 (compared to profit adjusted for
one-off costs of GEL 223.4mln(6) in 1H19). As such, the Group's
ROAE was 21.8% in 2Q20 (22.9%(6) in 2Q19 and negative profitability
in 1Q20) and 1.4% in the first half of 2020 (23.7%(6) in 1H19)
(6) Profit and ROAE exclude GEL 4.0mln in 2Q19 and GEL 14.2mln
in 1H19 one-off employee costs (gross of income tax) related to the
former CEO and executive management termination benefits
BALANCE SHEET HIGHLIGHTS
GEL thousands, unless otherwise Jun-20 Jun-19 Change Mar-20 Change
noted y-o-y q-o-q
Liquid assets 5,447,730 4,537,545 20.1% 5,379,132 1.3%
Liquid assets, GEL 2,461,639 2,094,928 17.5% 2,240,367 9.9%
Liquid assets, FC 2,986,091 2,442,617 22.2% 3,138,765 -4.9%
Net loans and finance lease receivables 12,599,092 10,579,710 19.1% 13,144,429 -4.1%
Net loans and finance lease receivables,
GEL 5,001,418 4,217,713 18.6% 4,978,238 0.5%
Net loans and finance lease receivables,
FC 7,597,674 6,361,997 19.4% 8,166,191 -7.0%
Client deposits and notes 11,583,139 8,855,616 30.8% 10,835,918 6.9%
Amounts owed to credit institutions 3,521,860 2,960,519 19.0% 4,144,701 -15.0%
Borrowings from DFIs 1,755,656 1,253,921 40.0% 1,689,610 3.9%
Short-term loans from central banks 847,213 1,001,496 -15.4% 1,677,339 -49.5%
Loans and deposits from commercial
banks 918,991 705,102 30.3% 777,752 18.2%
Debt securities issued 1,561,933 2,137,239 -26.9% 2,294,431 -31.9%
LIQUIDITY AND CAPITAL ADEQUACY RATIOS
Net loans / client deposits and
notes 108.8% 119.5% 121.3%
Net loans / client deposits and
notes + DFIs 94.5% 104.7% 104.9%
Liquid assets / total assets 28.4% 28.1% 27.4%
Liquid assets / total liabilities 32.1% 31.9% 30.5%
NBG liquidity coverage ratio 135.4% 114.3% 121.2%
NBG (Basel III) CET1 capital adequacy
ratio 9.9% 10.6% 8.3%
NBG (Basel III) Tier I capital adequacy
ratio 12.0% 13.3% 10.6%
NBG (Basel III) Total capital adequacy
ratio 17.4% 16.7% 15.3%
Our balance sheet remains highly liquid (NBG liquidity coverage
ratio of 135.4%) and strongly capitalised (NBG Basel III Tier I
capital adequacy ratio of 12.0%) with a well-diversified funding
base (client deposits and notes to total liabilities of 68.2%) at
30 June 2020.
-- Liquidity. Liquid assets stood at GEL 5,447.7mln at 30 June
2020, up 20.1% y-o-y and up 1.3% q-o-q. The notable increase over
the year was in cash on hand, combined with excess liquidity
deployed with credit institutions and in investment securities. The
Bank maintained excess liquidity in 2020 primarily for 1) risk
mitigation purposes on the back of the current COVID-19 crisis; and
2) the repayment of local currency Eurobonds due at the beginning
of June 2020. The NBG Liquidity coverage ratio was 135.4% at 30
June 2020 (114.3% at 30 June 2019 and 121.2% at 31 March 2020),
well above the 100% minimum requirement level
-- Loan book . Our net loan book and finance lease receivables
amounted GEL 12,599.1mln at 30 June 2020, up 19.1% y-o-y and down
4.1% q-o-q. As of 30 June 2020, the retail loan book represented 6
5 .8% of the total loan portfolio (67.2% at 30 June 2019 and 64.3%
at 31 March 2020). Both local and foreign currency portfolios
experienced solid y-o-y growth of 18.6% and 19.4%, respectively.
The local currency loan portfolio growth was partially driven by
the Government's de-dollarisation initiatives and our goal to
increase the share of local currency loans in our portfolio. On a
q-o-q basis, local currency denominated loan portfolio was largely
flat, primarily due to the slow-down of economic activity as a
result of the COVID-19 pandemic outbreak in March 2020, while
foreign currency denominated loan book decreased by 7.0% q-o-q,
mostly reflecting strengthening of the local currency during the
second quarter of 2020
-- Dollarisation of our loan book and client deposits. The
retail client loan book in foreign currency accounted for 45.6% of
the total RB loan book at 30 June 2020 (45.9% at 30 June 2019 and
47.7% at 31 March 2020), while retail client foreign currency
deposits comprised 67.8% of total RB deposits at 30 June 2020
(68.8% at 30 June 2019 and 71.5% at 31 March 2020). At 30 June
2020, 82.6% of CIB's loan book was denominated in foreign currency
(83.6% at 30 June 2019 and 82.5% at 31 March 2020), while 51.9% of
CIB deposits were denominated in foreign currency (63.2% at 30 June
2019 and 69.4% at 31 March 2020)
-- Net loans to customer funds and DFI ratio . Our net loans to
customer funds and DFI ratio, which is closely monitored by
management, stood at 94.5% at 30 June 2020 (104.7% at 30 June 2019
and 104.9% at 31 March 2020)
-- Diversified funding base . Debt securities issued decreased
by 26.9% y-o-y and by 31.9% q-o-q at 30 June 2020. Both the y-o-y
and q-o-q decrease was primarily driven by the repayment of GEL
500mln local currency Eurobonds at the beginning of June 2020. In
addition, local currency strengthening in the second quarter of
2020 also contributed to the q-o-q decrease in debt securities
issued at 30 June 2020
-- Solid capital position. At 30 June 2020, following the
measures put in place by the NBG as part of the COVID-19
supervisory plan in March 2020 (see details on page 22 of the
Group's 1Q20 results announcement), the Bank's Basel III Common
Equity Tier 1, Tier 1 and Total capital adequacy ratios stood at
9.9%, 12.0% and 17.4%, respectively, all comfortably above the
minimum required levels of 6.9%, 8.7% and 13.3%, respectively
- NBG supervisory plan - COVID-19 and related impact of the
Bank's capital position. The Bank's actual capital adequacy
position at 30 June 2020 consider the additional general provision
of GEL 400mln (approximately 3.3% of the Bank's lending portfolio
subject to provision under the local regulatory accounting
standards) booked in March 2020, under the Bank's local regulatory
accounting basis, which is used for calculation of the Bank's
capital ratios, reflecting NBG's expectation of estimated credit
losses on the Bank's lending book for the whole economic cycle,
given current economic expectations
- Internal capital generation and dividends. The Group has a
recent track record of strong profitability and capacity to
generate high levels of internal capital. In March 2020, given the
level of uncertainty with regard to the global impact of COVID-19
and the potential length of time of that impact, the Board of
Directors decided not to recommend a dividend to shareholders at
the 2020 Annual General Meeting, therefore, the Group will not be
distributing 2019 dividends to shareholders this year
- Strengthening capital position through Tier 2 capital
subordinated facility. In December 2019, the Bank signed a ten-year
US$ 107mln subordinated syndicated loan agreement arranged by FMO -
Dutch entrepreneurial development bank in collaboration with other
participating lenders (the Bank's existing and new partner
financial institutions). Of the total facility, US$ 52mln was
drawn-down by the Bank and the regulatory approval on
classification as a Bank Tier 2 capital instrument under the Basel
III framework was received in December 2019. The Bank drew-down the
second tranche of the facility in the amount of US$55mln and
received the regulatory approval on classification from NBG in
April 2020, which further improved the overall capitalisation of
the Bank
- Below is presented the movement in capital adequacy ratios
during the first half of 2020 considering the recent developments,
as well as showing the potential impact of an additional 10%
devaluation of GEL on different levels of capital:
Potential
1H20 impact
profit NBG general of
(excl. provision New Tier additional
31 December Business NBG general - COVID-19 GEL 2 facility 30 June 10% GEL
2019 growth provision) impact devaluation impact Other 2020 devaluation
----------- -------- ----------- ----------- ----------- ----------- ----- ------- -----------
CET1 capital
adequacy
ratio 11.5% -0.1% 1.7% -2.6% -0.3% - -0.3% 9.9% -0.6%
Tier I
capital
adequacy
ratio 13.6% -0.1% 1.7% -2.6% -0.3% - -0.3% 12.0% -0.5%
Total
capital
adequacy
ratio 18.1% -0.1% 1.7% -2.5% -0.3% 0.8% -0.3% 17.4% -0.4%
DISCUSSION OF SEGMENT RESULTS
RETAIL BANKING (RB)
Retail Banking provides consumer loans, mortgage loans,
overdrafts, credit card facilities and other credit facilities as
well as funds transfer and settlement services and the handling of
customer deposits for both individuals and legal entities (SME and
micro businesses only). RB is represented by the following
sub-segments: (1) the emerging and mass retail segment (through our
Express and Bank of Georgia brands), (2) SME and micro businesses -
MSME (through our Bank of Georgia brand), and (3) the mass affluent
segment (through our SOLO brand).
GEL thousands, unless
otherwise Change Change Change
noted 2Q20 2Q19 y-o-y 1Q20 q-o-q 1H20 1H19 y-o-y
INCOME STATEMENT
HIGHLIGHTS(7)
Net interest income 102,667 133,494 -23.1% 118,266 -13.2% 220,934 268,659 -17.8%
Net fee and commission
income 22,184 34,605 -35.9% 29,398 -24.5% 51,581 67,039 -23.1%
Net foreign currency gain 7,525 12,743 -40.9% 21,634 -65.2% 29,159 21,804 33.7%
Net other income / (expense) 4,085 (3,753) NMF 1,906 114.3% 5,991 (1,582) NMF
Operating income 136,461 177,089 -22.9% 171,204 -20.3% 307,665 355,920 -13.6%
Salaries and other employee
benefits (41,826) (36,691) 14.0% (40,568) 3.1% (82,394) (70,564) 16.8%
Administrative expenses (16,898) (14,992) 12.7% (20,732) -18.5% (37,629) (30,788) 22.2%
Depreciation, amortisation
and impairment (17,610) (14,492) 21.5% (17,889) -1.6% (35,499) (27,779) 27.8%
Other operating expenses (550) (753) -27.0% (551) -0.2% (1,103) (1,290) -14.5%
Operating expenses (76,884) (66,928) 14.9% (79,740) -3.6% (156,625) (130,421) 20.1%
Profit from associate 113 254 -55.5% 301 -62.5% 414 442 -6.3%
Operating income before cost
of risk 59,690 110,415 -45.9% 91,765 -35.0% 151,454 225,941 -33.0%
Cost of risk (5,757) (26,542) -78.3% (142,079) -95.9% (147,835) (65,930) 124.2%
Net operating income /
(loss)
before non-recurring items 53,933 83,873 -35.7% (50,314) NMF 3,619 160,011 -97.7%
Net non-recurring items (1,249) (64) NMF (38,929) -96.8% (40,178) (339) NMF
Profit / (loss) before
income
tax and one-off costs 52,684 83,809 -37.1% (89,243) NMF (36,559) 159,672 NMF
Income tax (expense) /
benefit (3,214) (6,323) -49.2% 11,215 NMF 8,000 (12,425) NMF
Profit / (loss) adjusted
for one-off costs 49,470 77,486 -36.2% (78,028) NMF (28,559) 147,247 NMF
One-off termination costs
of former CEO and executive
management (after tax) - (3,067) NMF - - - (10,142) NMF
Profit / (loss) 49,470 74,419 -33.5% (78,028) NMF (28,559) 137,105 NMF
BALANCE SHEET HIGHLIGHTS
Net loans, currency blended 7,797,191 6,771,223 15.2% 7,950,477 -1.9% 7,797,191 6,771,223 15.2%
Net loans, GEL 4,241,765 3,661,673 15.8% 4,157,645 2.0% 4,241,765 3,661,673 15.8%
Net loans, FC 3,555,426 3,109,550 14.3% 3,792,832 -6.3% 3,555,426 3,109,550 14.3%
Client deposits, currency
blended 5,962,044 4,987,611 19.5% 5,973,729 -0.2% 5,962,044 4,987,611 19.5%
Client deposits, GEL 1,921,108 1,553,653 23.7% 1,703,686 12.8% 1,921,108 1,553,653 23.7%
Client deposits, FC 4,040,936 3,433,958 17.7% 4,270,043 -5.4% 4,040,936 3,433,958 17.7%
of which:
Time deposits, currency
blended 3,574,598 2,866,525 24.7% 3,520,769 1.5% 3,574,598 2,866,525 24.7%
Time deposits, GEL 973,050 704,286 38.2% 865,443 12.4% 973,050 704,286 38.2%
Time deposits, FC 2,601,548 2,162,239 20.3% 2,655,326 -2.0% 2,601,548 2,162,239 20.3%
Current accounts and demand
deposits, currency blended 2,387,446 2,121,086 12.6% 2,452,960 -2.7% 2,387,446 2,121,086 12.6%
Current accounts and demand
deposits, GEL 948,058 849,367 11.6% 838,243 13.1% 948,058 849,367 11.6%
Current accounts and demand
deposits, FC 1,439,388 1,271,719 13.2% 1,614,717 -10.9% 1,439,388 1,271,719 13.2%
KEY RATIOS
ROAE (7) 16.4% 26.9% -25.5% -4.7% 26.2%
Net interest margin,
currency
blended 4.0% 6.2% 4.9% 4.4% 6.4%
Cost of credit risk ratio 0.2% 1.6% 7.4% 3.7% 2.0%
Cost of funds, currency
blended 5.9% 5.0% 5.8% 5.9% 5.2%
Loan yield, currency blended 11.1% 12.9% 11.8% 11.5% 13.2%
Loan yield, GEL 14.9% 17.7% 15.7% 15.3% 18.4%
Loan yield, FC 6.6% 7.3% 6.8% 6.8% 7.5%
Cost of deposits, currency
blended 2.9% 2.7% 2.6% 2.8% 2.7%
Cost of deposits, GEL 6.4% 5.2% 5.7% 6.0% 5.2%
Cost of deposits, FC 1.4% 1.5% 1.3% 1.4% 1.6%
Cost of time deposits,
currency
blended 4.3% 3.9% 3.9% 4.1% 3.9%
Cost of time deposits, GEL 10.3% 8.7% 9.3% 9.8% 8.7%
Cost of time deposits, FC 2.2% 2.3% 2.0% 2.1% 2.4%
Current accounts and demand
deposits, currency blended 0.9% 1.0% 0.9% 0.9% 1.0%
Current accounts and demand
deposits, GEL 2.3% 2.3% 2.3% 2.3% 2.2%
Current accounts and demand
deposits, FC 0.1% 0.2% 0.0% 0.1% 0.3%
Cost / income ratio (8) 56.3% 37.8% 46.6% 50.9% 36.6%
(7) The income statement adjusted profit excludes GEL 3.1mln in
2Q19 and GEL 10.1mln in 1H19 one-off employee costs (net-off income
tax) related to the former CEO and executive management termination
benefits. The amount in 2Q19 is comprised of GEL 3.5mln (gross of
income tax) excluded from salaries and other employee benefits and
GEL 0.4mln tax benefit excluded from income tax expense. The amount
in 1H19 is comprised of GEL 8.6mln (gross of income tax) excluded
from salaries and other employee benefits, GEL 2.9mln (gross of
income tax) excluded from non-recurring items and GEL 1.4mln tax
benefit excluded from income tax expense. The 2Q19 and 1H19 ROAE
have been adjusted accordingly
(8) The cost/income ratio is adjusted for GEL 3.5mln in 2Q19 and
GEL 8.6mln in 1H19 one-off employee costs (gross of income tax)
related to termination benefits of the former executive
management
Performance highlights
-- Retail Banking generated operating income of GEL 136.5mln in
2Q20 (down 22.9% y-o-y and down 20.3% q-o-q) and GEL 307.7mln in
1H20 (down 13.6% y-o-y) , reflecting the COVID-19 pandemic
impact
-- RB's net interest income was down 23.1% y-o-y and down 13.2%
q-o-q in 2Q20 and down 17.8% y-o-y in 1H20, primarily reflecting
the slow-down in economic activity on the back of COVID-19 pandemic
outbreak in March 2020. Net interest income still benefited from
the growth of the local currency loan portfolio during the
pre-COVID-19 period, which generated 8.3ppts and 8.5ppts higher
yields than the foreign currency loan portfolio in 2Q20 and in
1H20, respectively
-- Retail Banking net loan book reached GEL 7,797.2mln at 30
June 2020, up 15.2% y-o-y and down 1.9% q-o-q. On a constant
currency basis, retail loan book increased by 11.9% y-o-y and by
1.4% q-o-q in 2Q20. Local currency denominated loan book increased
by 15.8% y-o-y and by 2.0% q-o-q, while the foreign currency
denominated loan book grew by 14.3% y-o-y and was down by 6.3%
q-o-q. As a result, the local currency denominated loan book
accounted for 54.4% of the Retail Banking loan book at 30 June 2020
(54.1% at 30 June 2019 and 52.3% at 31 March 2020). Currently, the
part of the Retail Banking loan portfolio which is most sensitive
to foreign currency risk is largely de-dollarised
-- The loan portfolio composition reflects the shift towards a
higher quality, lower margin product mix on the back of tighter
lending conditions for unsecured consumer lending since 1 January
2019. The y-o-y loan book growth reflected strong loan origination
levels in MSME and mortgage segments, as well as secured consumer
lending during the pre-COVID-19 period. The y-o-y and q-o-q decline
in the loan originations is reflective of the slow-down of the
economic activity since March 2020 as a result of COVID-19 pandemic
outbreak:
RETAIL BANKING LOAN BOOK BY PRODUCTS
GEL million, unless
otherwise Change Change Change
noted 2Q20 2Q19 y-o-y 1Q20 q-o-q 1H20 1H19 y-o-y
Loan originations
Consumer loans 143,060 425,972 -66.4% 363,843 -60.7% 506,903 746,933 -32.1%
Mortgage loans 63,195 452,764 -86.0% 259,310 -75.6% 322,505 662,278 -51.3%
Micro loans 75,397 323,445 -76.7% 277,241 -72.8% 352,639 610,483 -42.2%
SME loans 104,893 239,418 -56.2% 297,514 -64.7% 402,407 453,938 -11.4%
Outstanding balance
Consumer loans 1,652,327 1,485,905 11.2% 1,631,298 1.3% 1,652,327 1,485,905 11.2%
Mortgage loans 3,237,302 2,814,827 15.0% 3,332,205 -2.8% 3,237,302 2,814,827 15.0%
Micro loans 1,586,847 1,408,359 12.7% 1,600,263 -0.8% 1,586,847 1,408,359 12.7%
SME loans 1,166,933 795,699 46.7% 1,233,054 -5.4% 1,166,933 795,699 46.7%
-- Retail Banking client deposits increased to GEL 5,962.0mln at
30 June 2020, up 19.5% y-o-y and remained largely flat q-o-q. The
dollarisation level of our deposits decreased to 67.8% at 30 June
2020, compared to 68.8% at 30 June 2019 and 71.5% at 31 March 2020.
The cost of foreign currency denominated deposits stood at 1.4% in
2Q20 (down 10bps y-o-y and up 10bps q-o-q) and in 1H20 (down 20bps
y-o-y), while the cost of local currency denominated deposits
increased by 120bps y-o-y and by 70bps q-o-q in 2Q20, and increased
by 80bps y-o-y during first half of 2020. The spread between the
cost of RB's client deposits in GEL and foreign currency widened to
5.0ppts during 2Q20 (GEL: 6.4%; FC: 1.4%), compared to 3.7ppts in
2Q19 (GEL: 5.2%; FC: 1.5%) and 4.4ppts in 1Q20 (GEL: 5.7%; FC:
1.3%). On a six months basis, spread widened to 4.6ppts in 1H20
(GEL: 6.0%; FC: 1.4%) compared to 3.6ppts in 1H19 (GEL: 5.2%; FC:
1.6%)
-- Retail Banking NIM was 4.0% in 2Q20 (down 220bps y-o-y and
down 90bps q-o-q) and 4.4% in 1H20 (down 200bps y-o-y). The y-o-y
and q-o-q decline in NIM in 2Q20 and 1H20 was mostly attributable
to lower loan yields (down 180bps y-o-y and down 70bps q-o-q in
2Q20, and down 170bps y-o-y in 1H20). In addition, the cost of
funds increased by 90bps y-o-y and by 10bps q-o-q in 2Q20, and by
70bps y-o-y in 1H20, primarily on the back of increased NBG
monetary policy rate (NBG increased monetary policy rate by
cumulative of 250bps since September 2019, although NBG reduced the
policy rate twice by cumulative of 75bps in the second quarter of
2020)
-- Retail Banking net fee and commission income . Net fee and
commission income generation decreased during the second quarter
and the first half of 2020. This was primarily driven by slower
customer activity due to COVID-19 pandemic and temporary removal of
fees on transactions executed through our mobile and internet
banking platforms since mid-March 2020, for a two-month period, in
order to decrease customer visits to branches and incentivise the
transfer of customers' activity to digital channels
-- RB's asset quality. Cost of credit risk ratio was 0.2% in
2Q20 (down from 1.6% in 2Q19 and from 7.4% in 1Q20) and 3.7% in
1H20 (up from 2.0% 1H19). The significant increase in cost of
credit risk ratio in 1H20 was due to the IFRS 9 reserve builds,
created for the full economic cycle in 1Q20, primarily related to
deterioration of the macro-economic environment and expected
creditworthiness of borrowers as a result of the COVID-19 impact.
These assumptions were further revisited during the second quarter
to reflect the better visibility and the macro-economic forecast
scenarios published by the NBG in May, resulting in additional ECL
for the Retail Banking segment in 2Q20
-- Our Retail Banking business continued to further focus our
strategy towards continuous digitalisation, as demonstrated by the
following performance indicators:
RETAIL BANKING PERFORMANCE INDICATORS
Volume information in Change Change Change
GEL thousands 2Q20 2Q19 y-o-y 1Q20 q-o-q 1H20 1H19 y-o-y
Retail Banking
customers
Number of new customers 27,214 41,175 -33.9% 31,796 -14.4% 59,010 81,020 -27.2%
Number of customers 2,540,721 2,475,292 2.6% 2,567,097 -1.0% 2,540,721 2,475,292 2.6%
Cards
Number of cards issued 92,315 183,106 -49.6% 152,938 -39.6% 245,253 359,191 -31.7%
Number of cards
outstanding 2,178,053 2,122,006 2.6% 2,160,942 0.8% 2,178,053 2,122,006 2.6%
Express Pay terminals
Number of Express Pay
terminals 3,118 3,177 -1.9% 3,183 -2.0% 3,118 3,177 -1.9%
Number of transactions
via Express Pay
terminals 13,849,756 27,499,428 -49.6% 22,934,069 -39.6% 36,783,825 54,250,566 -32.2%
Volume of transactions
via Express Pay
terminals 1,550,286 1,951,441 -20.6% 2,026,846 -23.5% 3,577,132 3,716,977 -3.8%
POS terminals
Number of desks 17,248 14,026 23.0% 16,123 7.0% 17,248 14,026 23.0%
Number of contracted
merchants 8,513 6,832 24.6% 7,764 9.6% 8,513 6,832 24.6%
Number of POS terminals 23,788 19,667 21.0% 22,472 5.9% 23,788 19,667 21.0%
Number of transactions
via POS terminals 21,114,390 20,805,141 1.5% 22,611,894 -6.6% 43,726,284 37,334,681 17.1%
Volume of transactions
via POS terminals 532,544 617,763 -13.8% 650,294 -18.1% 1,182,839 1,105,961 7.0%
Internet banking
Number of active users
(9) 247,342 268,357 -7.8% 287,301 -13.9% 247,342 268,357 -7.8%
Number of transactions
via internet bank 973,336 1,338,941 -27.3% 1,107,073 -12.1% 2,080,409 2,760,076 -24.6%
Volume of transactions
via internet bank 583,328 557,660 4.6% 654,221 -10.8% 1,237,550 1,048,117 18.1%
Mobile banking
Number of active users
(9) 619,519 418,155 48.2% 567,036 9.3% 619,519 418,155 48.2%
Number of transactions
via mobile bank 13,335,918 8,182,306 63.0% 12,453,837 7.1% 25,789,755 14,880,232 73.3%
Volume of transactions
via mobile bank 1,766,710 1,025,298 72.3% 1,663,128 6.2% 3,429,837 1,815,498 88.9%
(9) The users that log-in in internet and mobile bank at least
once in three months
-- Y-o-y growth in client base to 2,540,721 customers at 30 June
2020 was due to the increased offering of cost-effective remote
channels and substantially improving our positioning in many key
areas. Based on the latest research, Bank of Georgia is regarded as
the most trusted financial institution in Georgia
-- The number of outstanding cards increased by 2.6% y-o-y and
by 0.8% q-o-q at 30 June 2020. The number of Loyalty programme
Plus+ cards (launched in July 2017 as part of RB's client-centric
approach), reached 956,728 as at 30 June 2020, up 32.6% y-o-y and
up 5.5% q-o-q
-- Digital channels . We have actively continued the further
development of our digital strategy and therefore, 96% of total
daily transactions of individuals were executed through digital
channels during the second quarter of 2020
- mBank and iBank digital penetration. The Bank continued
introducing new features to mobile banking application and internet
bank and introducing dedicated digital spaces in our branches to
incentivise transferring client activity to digital channels. The
focus in this direction further increased after the COVID-19
pandemic outbreak, which the Bank responded to with various
activities, such as instructive videos, incentives and call centre
support for customers educating them how to use these digital
channels. As a result of increased investments and efforts in this
direction, the number of active users, as well as the number and
volume of transactions through these channels, mostly mobile bank,
continued to expand
- The utilisation of Express Pay terminals . The Bank has a
large network of self-service terminals throughout Georgia, which
are used extensively by its customers. The decline in number of
transactions both y-o-y and q-o-q in 2Q20 and in 1H20, was
primarily due to the continuous migration of customers to mobile
banking platform
-- Business iBank. In 2019, the Bank released a new business
internet banking platform for MSME and corporate clients, which
comes with many features designed to make its use an intuitive and
smooth experience. Since then, we have focused our efforts on
making the Business iBank even more useful for business
transactions to further incentivise transfer of client activity to
digital channels. In the second quarter of 2020, the number (down
10.6% y-o-y and down 7.1% q-o-q) and volume (down 6.5% y-o-y and
down 10.5% q-o-q) of Business iBank transactions declined,
primarily reflecting the slowdown in business activity on the back
of COVID-19 crisis and temporary lockdown of the economy during the
April-May period. On a six months basis, both the number and volume
of transactions through Business iBank still grew by 5.3% and 3.7%
y-o-y, respectively, and more than 96% of daily transactions of
legal entities were executed through the internet bank in 1H20
-- In August 2020, Global Finance Magazine named Bank of Georgia
Best Consumer Digital Bank in Georgia in 2020, including regional
awards in sub-categories such as Best Online Product Offering, Best
Online Investment Management Services, Best Digital Bank in Lending
and Best Trade Finance Services in Central and Eastern Europe for
2020
-- Digital ecosystem development . Currently, our digital
ecosystem rests on two pillars: retail and MSME. Under the retail
pillar, we launched two platforms in 2019 - real estate platform
area.ge and online marketplace platform extra.ge. Under the MSME
pillar, we launched Optimo in 2019 , a digital solution for MSME
customers to run their business sales and solutions
- In 1Q20, the Group in response to COVID-19 outbreak accepted
the social and commercial challenge to play a vital role in
addressing accelerated digital service demand. Due to social
distancing and restrictions imposed on commercial activities, the
Group's digital ecosystem arm proactively restructured its
operations and commercial offerings to adapt to the changing
environment. Core focus fell on extra.ge, which after its
acquisition in 2Q19, has been transformed into a vibrant and
dynamic platform, one of the largest full-scale digital
marketplaces in Georgia, and the full-scale re-launch was completed
as planned in the first quarter of 2020. During the second quarter
of 2020, extra.ge mainly focused on acquisition of market share.
Through different active campaigns and initiatives, the platform
doubled the network of merchants operating in the country to 400+
vendors, selling 42,000+ SKUs (Stock keeping units), as well as
significantly increased the number of registered users, delivering
50% increase in cashless payments. The platform undergoes
continuous upgrades to make the shopping experience more
user-friendly and easy for customers. The Group is also planning to
launch mobile application of extra.ge in the third quarter of
2020
- Following the COVID-19 outbreak, during the first quarter of
2020, the Group structured a unique digital solution for merchants
who were faced by customer scarcity and a heavy burden of
restrictions. With the packaged solution, branded as Adapter, the
Group is offering a best-in-class solution to the merchants, who
can now undergo fast and efficient transformation to digital sales
with just a simple plug-in. Adapter combines an integration of
Optimo, an effective inventory and order management platform, with
extra.ge, a digital marketplace, through which merchants can sell
their products directly to customers remotely. Adapter quickly
gained interest and popularity amongst market players, small
merchants, as well as large physical marketplaces, which is evident
through active negotiations and already onboarded partners. Adapter
was highly accepted by hundreds of retailers and producers,
exceeding initially planned targets. The Group has also completed
the development of Optimo RECA, tailored core inventory management
automation solution for restaurants, cafes and hotels, which is
planned to be launched in the third quarter of 2020
- COVID-19 outbreak has significantly decreased activity in the
real estate sector, therefore, directly impacting area.ge's
operations and performance. As such, in the second quarter of 2020,
area.ge has refocused its strategy towards facilitating and
accelerating the real estate sales. The team has developed multiple
solutions for real estate developer companies, which connect them
closely with brokers and other market players, such as banks and
financial institutions that provide mortgage loans as part of their
product offering. Currently, the team is working on multiple
solutions in relation to the subsidised mortgage loan programme
initiated by the Government of Georgia
- In the second quarter of 2020, the Group, 500 Startups and the
Georgia's Innovation and Technology Agency have launched 500
Startups Acceleration programme. The programme implies screening,
selecting and accelerating the development of both Georgian and
international early stage start-ups operating within the region. 14
companies from different business verticals have joined the
programme and with the participation of Digital Area ecosystem
around US$ 1 million is planned to be invested in the programme for
development of these companies till the end of this year
-- SOLO, our premium banking brand, was the least impacted
business from our Retail Banking segments, and continued its growth
and investment in its lifestyle brand. We have 11 SOLO lounges, of
which 9 are located in Tbilisi, the capital of Georgia, and 2 in
major regional cities of Georgia. The number of SOLO clients
reached 56,207 at 30 June 2020 (48,953 at 30 June 2019 and 56,327
at 31 March 2020). At 30 June 2020, the product to client ratio for
the SOLO segment was 5.0, compared to 2.1 for our retail franchise.
While SOLO clients currently represent 2.2% of our total retail
client base, they contributed 30.1% to our retail loan book, 39.4%
to our retail deposits, 25.7% and 33.7% to our net retail interest
income and to our net retail fee and commission income in 2Q20,
respectively. The fee and commission income from the SOLO segment
was GEL 5.5mln in 2Q20 (GEL 6.6mln in 2Q19 and GEL 6.1mln in 1Q20)
and GEL 11.7mln in first half of 2020 (GEL 12.4mln in 1H19). SOLO
Club, a membership group within SOLO, which offers exclusive access
to SOLO products and offers ahead of other SOLO clients at a higher
fee, continued to increase its client base. At 30 June 2020, SOLO
Club had 5,562 members, up 15.8% y-o-y and slightly down 1.0%
q-o-q
-- MSME banking. The number of MSME segment clients reached
225,480 at 30 June 2020, up 3.5% y-o-y and up 0.4% q-o-q. MSME's
gross loan portfolio reached GEL 2,929.4mln (up 23.2% y-o-y and
down 2.9% q-o-q) and client deposits and notes amounted to GEL
791.4mln (up 11.0% y-o-y and up 5.4% q-o-q) at 30 June 2020. The
MSME segment generated operating income of GEL 41.1mln in 2Q20
(down 17.7% y-o-y and down 18.6% q-o-q) and GEL 91.6mln in the
first half of 2020 (down 4.0% y-o-y in 1H19), decline primarily
driven by the slow-down in business activity on the back of
COVID-19 pandemic outbreak and the temporary lockdown of the
economy during April-May period
-- As a result, Retail Banking recorded a profit in the amount
of GEL 49.5mln in 2Q20 (compared to profit adjusted for one-off
costs of GEL 77.5mln(10) in 2Q19 and a loss of GEL 78.0mln in
1Q20), and a loss of GEL 28.6mln in the first half of 2020
(compared to profit adjusted for one-off costs of GEL 147.2mln(10)
in 1H19). Retail Banking ROAE was 16.4% in 2Q20 (compared to ROAE
of 26.9%(10) in 2Q19 and negative profitability in 1Q20). On a six
months basis, RB's profitability was negative in 1H20, compared to
outstanding ROAE of 26.2%(10) in 1H19. Loss and negative
profitability, respectively, in 1Q20 and 1H20, resulted primarily
from the increased cost of risk and non-recurring costs associated
with the COVID-19 pandemic impact recorded in the first quarter of
2020
(10) Profit and ROAE exclude GEL 3.1mln in 2Q19 and GEL 10.1mln
in 1H19 one-off employee costs (net of income tax) related to
termination benefits of the former CEO and executive management
CORPORATE AND INVESTMENT BANKING (CIB)
CIB provides (1) loans and other credit facilities to Georgia's
large corporate clients and other legal entities, excluding SME and
micro businesses; (2) services such as fund transfers and
settlements services, currency conversion operations, trade finance
services and documentary operations as well as handling savings and
term deposits; (3) finance lease facilities through the Bank's
leasing operations arm, the Georgian Leasing Company; (4) brokerage
services through Galt & Taggart; and (5) Wealth Management
private banking services to high-net-worth individuals and offers
investment management products in Georgia and internationally
through representative offices and subsidiaries in Tbilisi, London,
Budapest, Istanbul and Tel Aviv.
GEL thousands, unless
otherwise Change Change Change
noted 2Q20 2Q19 y-o-y 1Q20 q-o-q 1H20 1H19 y-o-y
INCOME STATEMENT
HIGHLIGHTS(11)
Net interest income 63,110 51,864 21.7% 69,341 -9.0% 132,451 100,405 31.9%
Net fee and commission
income 9,197 7,113 29.3% 8,955 2.7% 18,152 15,264 18.9%
Net foreign currency gain 11,431 11,262 1.5% 8,534 33.9% 19,965 21,504 -7.2%
Net other income / (expense) 4,825 (392) NMF 4,681 3.1% 9,506 994 NMF
Operating income 88,563 69,847 26.8% 91,511 -3.2% 180,074 138,167 30.3%
Salaries and other employee
benefits (14,170) (14,738) -3.9% (10,561) 34.2% (24,731) (27,177) -9.0%
Administrative expenses (3,488) (4,004) -12.9% (4,466) -21.9% (7,954) (8,031) -1.0%
Depreciation, amortisation
and impairment (2,434) (1,933) 25.9% (2,473) -1.6% (4,907) (3,634) 35.0%
Other operating expenses (227) (302) -24.8% (296) -23.3% (523) (505) 3.6%
Operating expenses (20,319) (20,977) -3.1% (17,796) 14.2% (38,115) (39,347) -3.1%
Operating income before cost
of risk 68,244 48,870 39.6% 73,715 -7.4% 141,959 98,820 43.7%
Cost of risk (2,536) (6,574) -61.4% (95,902) -97.4% (98,438) (8,398) NMF
Net operating income /
(loss)
before non-recurring items 65,708 42,296 55.4% (22,187) NMF 43,521 90,422 -51.9%
Net non-recurring items 32 - NMF (1,406) NMF (1,374) (72) NMF
Profit / (loss) before
income
tax and one-off costs 65,740 42,296 55.4% (23,593) NMF 42,147 90,350 -53.4%
Income tax (expense) /
benefit (4,246) (3,169) 34.0% 1,847 NMF (2,398) (7,032) -65.9%
Profit / (loss) adjusted
for one-off costs 61,494 39,127 57.2% (21,746) NMF 39,749 83,318 -52.3%
One-off termination costs
of former CEO and executive
management (after tax) - (929) NMF - - - (4,094) NMF
Profit / (loss) 61,494 38,198 61.0% (21,746) NMF 39,749 79,224 -49.8%
BALANCE SHEET HIGHLIGHTS
Net loans and finance lease
receivables, currency
blended 4,046,063 3,208,823 26.1% 4,391,652 -7.9% 4,046,063 3,208,823 26.1%
Net loans and finance
lease
receivables, GEL 705,502 526,572 34.0% 768,968 -8.3% 705,502 526,572 34.0%
Net loans and finance
lease
receivables, FC 3,340,561 2,682,251 24.5% 3,622,684 -7.8% 3,340,561 2,682,251 24.5%
Client deposits, currency
blended 5,042,772 3,427,166 47.1% 4,285,356 17.7% 5,042,772 3,427,166 47.1%
Client deposits, GEL 2,423,448 1,260,869 92.2% 1,310,129 85.0% 2,423,448 1,260,869 92.2%
Client deposits, FC 2,619,324 2,166,297 20.9% 2,975,227 -12.0% 2,619,324 2,166,297 20.9%
Time deposits, currency
blended 2,552,135 1,252,061 103.8% 1,740,893 46.6% 2,552,135 1,252,061 103.8%
Time deposits, GEL 1,468,397 403,114 NMF 583,015 151.9% 1,468,397 403,114 NMF
Time deposits, FC 1,083,738 848,947 27.7% 1,157,878 -6.4% 1,083,738 848,947 27.7%
Current accounts and demand
deposits, currency blended 2,490,637 2,175,105 14.5% 2,544,463 -2.1% 2,490,637 2,175,105 14.5%
Current accounts and
demand
deposits, GEL 955,051 857,755 11.3% 727,114 31.3% 955,051 857,755 11.3%
Current accounts and
demand
deposits, FC 1,535,586 1,317,350 16.6% 1,817,349 -15.5% 1,535,586 1,317,350 16.6%
Letters of credit and
guarantees,
standalone (off-balance
sheet
item) 1,455,700 1,141,715 27.5% 1,520,149 -4.2% 1,455,700 1,141,715 27.5%
Assets under management 2,834,975 2,504,280 13.2% 2,704,411 4.8% 2,834,975 2,504,280 13.2%
RATIOS
ROAE (11) 31.5% 22.0% -10.6% 9.9% 24.5%
Net interest margin,
currency
blended 3.4% 3.7% 4.0% 3.7% 3.7%
Cost of credit risk ratio -1.7% 0.7% 8.3% 3.2% 0.4%
Cost of funds, currency
blended 3.7% 4.2% 3.5% 3.6% 4.0%
Loan yield, currency blended 8.3% 9.5% 8.9% 8.7% 9.2%
Loan yield, GEL 12.4% 12.6% 13.7% 13.1% 12.0%
Loan yield, FC 7.5% 8.9% 7.8% 7.8% 8.7%
Cost of deposits, currency
blended 4.2% 3.5% 3.7% 4.0% 3.5%
Cost of deposits, GEL 8.1% 5.9% 7.3% 7.5% 5.9%
Cost of deposits, FC 1.7% 1.9% 1.6% 1.7% 1.9%
Cost of time deposits,
currency
blended 6.4% 5.7% 6.0% 6.1% 5.6%
Cost of time deposits,
GEL 9.5% 7.6% 9.4% 9.0% 7.5%
Cost of time deposits, FC 3.6% 4.4% 3.6% 3.7% 4.3%
Current accounts and demand
deposits, currency blended 2.4% 2.1% 2.0% 2.2% 2.1%
Current accounts and
demand
deposits, GEL 6.4% 4.8% 5.5% 5.8% 4.8%
Current accounts and
demand
deposits, FC 0.4% 0.3% 0.2% 0.3% 0.3%
Cost / income ratio (12) 22.9% 30.0% 19.4% 21.2% 28.5%
Concentration of top ten
clients 7.3% 9.1% 9.6% 7.3% 9.1%
(11) The income statement adjusted profit excludes GEL 0.9mln in
2Q19 and GEL 4.1mln in 1H19 one-off employee costs (net-off income
tax) related to the former CEO and executive management termination
benefits. The amount in 2Q19 is comprised of GEL 1.1mln (gross of
income tax) excluded from salaries and other employee benefits and
GEL 0.2mln tax benefit excluded from income tax expense. The amount
in 1H19 is comprised of GEL 3.8mln (gross of income tax) excluded
from salaries and other employee benefits, GEL 1.1mln (gross of
income tax) excluded from non-recurring items and GEL 0.8mln tax
benefit excluded from income tax expense. The 2Q19 and 1H19 ROAE
have been adjusted accordingly
(12) The cost/income ratio is adjusted for GEL 1.1mln in 2Q19
and GEL 3.8mln in 1H19 one-off employee costs (gross of income tax)
related to termination benefits of the former executive
management
Performance highlights
-- Corporate and Investment Banking delivered strong results.
CIB was least effected by the COVID-19 pandemic outbreak in terms
of operating activity in the first half of 2020 and generated
strong net interest income and net fee and commission income during
the period, coupled with efficient cost discipline. This resulted
in significant y-o-y increase in operating income before cost of
risk, which was up 39.6% y-o-y in 2Q20 and up 43.7% y-o-y in
1H20
-- CIB's net interest income increased by 21.7% y-o-y and was
down 9.0% q-o-q during the second quarter of 2020, and increased by
31.9% y-o-y in the first half of 2020. CIB NIM was 3.4% in 2Q20
(down 30bps y-o-y and down 60bps q-o-q) and remained flat at 3.7%
in the first half of 2020 . In 2Q20, 30bps y-o-y decline in NIM was
primarily driven by 120bps decrease in currency blended loan
yields, partially offset by 50bps y-o-y decline in cost of funds,
while 60bps q-o-q decline in NIM was the result of 60bps decline in
currency blended loan yields, coupled with 20bps increase in cost
of funds. On a six months basis, currency blended loan yields were
down 50bps y-o-y, partially offset by 40bps y-o-y decrease in cost
of funds, resulting in flat NIM in 1H20
-- CIB's net fee and commission income reached GEL 9.2mln in
2Q20, up 29.3% y-o-y and up 2.7% q-o-q, ending the first half of
2020 with GEL 18.2mln fee and commission income, up 18.9% y-o-y.
The growth in net fee and commission income in all periods
presented was largely driven by increased fees from guarantees and
letters of credit issued, settlement operations and higher
placement fees generated in 2020
-- CIB's loan book and dollarisation . CIB loan portfolio
reached GEL 4,046.1mln at 30 June 2020, up 26.1% y-o-y and down
7.9% q-o-q. On a constant currency basis, CIB loan book was up
19.7% y-o-y and down 2.2% q-o-q. The concentration of the top 10
CIB clients was 7.3% at 30 June 2020 (9.1% at 30 June 2019 and 9.6%
at 31 March 2020). Foreign currency denominated net loans
represented 82.6% of CIB's loan portfolio at 30 June 2020, compared
to 83.6% a year ago and 82.5% at 31 March 2020. At 31 March 2020,
39.7% of total gross CIB loans were issued in foreign currency with
exposure to foreign currency risk in regards of income, while 43.2%
of total gross CIB loans were issued in foreign currency with no or
minimal exposure to foreign currency risk
-- Dollarisation of CIB deposits decreased to 51.9% at 30 June
2020 from 63.2% a year ago and from 69.4% at 31 March 2020.
De-dollarisation of CIB's deposit portfolio was primarily supported
by notable, 12.0% q-o-q decrease in foreign currency denominated
deposits and 85.0% q-o-q growth in local currency denominated
deposits in the second quarter of 2020, as a result of significant
increase in interest rates offered on local currency funds. The
interest rates on local currency deposits increased significantly
(up 220bps y-o-y and up 80bps q-o-q in 2Q20, and up 160bps y-o-y in
1H20), while interest rates on foreign currency deposits mostly
declined (down 20bps y-o-y and up 10bps q-o-q in 2Q20, and down
20bps y-o-y in 1H20), and the cost of deposits in local currency
remained well above the cost of foreign currency deposits during
2020. The increase in interest rates on local currency deposits in
the second quarter was mainly driven by the pressure on local
currency funding in April and May, however, this impact was
subsequently stabilised to more normal levels as a result of the
new local currency funding instruments introduced by the NBG to the
market in order to support the GEL liquidity
-- Net other income. Significant y-o-y increase in net other
income was largely driven by higher net real estate gains on the
back of higher income from operating leases in 2020. Furthermore,
the Group recorded a gain on revaluation of investment property in
the second quarter of 2020 (impact of changes in fair value on
certain investment properties due to the lapse of the repurchase
option granted to the former borrower), contributing to the
increase of net other income in 2Q20 and 1H20
-- Cost of credit risk. CIB's cost of credit risk ratio stood at
net gain of 1.7% in 2Q20 (compared to losses of 0.7% in 2Q19 and
8.3% in 1Q20) and was 3.2% in the first half of 2020 (compared to
0.4% in 1H19). The significant increase in cost of credit risk
ratio in the first half of 2020 was driven by the IFRS 9 ECL
reserve builds, created for the full economic cycle in the first
quarter of 2020, primarily related to deterioration of the
macro-economic environment and expected creditworthiness of
borrowers as a result of the COVID-19 pandemic impact. This
reflected additional reserves for borrowers operating across
multiple sectors of the Georgian economy, with the largest impacts
in tourism, trade, transportation, construction and real estate
industries. These assumptions were further revisited during the
second quarter to reflect the better visibility and the
macro-economic forecast scenarios published by the NBG in May 2020.
Based on the analysis, the additional reserves booked in the first
quarter proved largely sufficient. In 2Q20, appreciation of local
currency and amortisation of the loan portfolio resulted in GEL
14.9mln net reversal of ECL on loans to customers and finance lease
receivables, leading to a net gain of 1.7% in 2Q20 in terms of cost
of credit risk ratio. As for the cost of risk of GEL 2.5mln
recorded in 2Q20, the reversal of ECL on loan portfolio, was offset
by ECL on other assets and provisions, driven by additional
reserves recorded by the Group in respect of guarantees issued and
other financial assets, and expenses accrued for certain legal fees
during the second quarter of 2020
-- As a result, CIB recorded a profit of GEL 61.5mln during the
second quarter of 2020 (compared to profit adjusted for one-off
costs of GEL 39.1mln(13) in 2Q19 and a loss of GEL 21.7mln in
1Q20), and profit of GEL 39.7mln in the first half of 2020
(compared to profit adjusted for one-off costs of GEL 83.3mln(13)
in 1H19). CIB's ROAE was 31.5% in 2Q20 (compared to ROAE of
22.0%(13) in 2Q19 and negative profitability in 1Q20) and 9.9% in
1H20 (compared to ROAE of 24.5%(13) in 1H19)
Performance highlights of investment management operations
-- The Investment Management's AUM increased to GEL 2,835.0mln
as at 30 June 2020, up 13.2% y-o-y and up 4.8% q-o-q. This includes
a) deposits of Wealth Management franchise clients, b) assets held
at Bank of Georgia Custody, c) Galt & Taggart brokerage client
assets, and d) Global certificates of deposit held by Wealth
Management clients. The y-o-y and q-o-q increase in AUM mostly
reflected increase in client assets at Galt & Taggart and
depreciation of the local currency during 2020
-- Wealth Management deposits reached GEL 1,469.0mln as at 30
June 2020, up 14.9 % y-o-y and down 11.4% q-o-q, growing at a
compound annual growth rate (CAGR) of 10.2% over the last five-year
period . The cost of deposits stood at 3.0% in 2Q20 (down 30bps
y-o-y and flat q-o-q) and at 3.1% in the first half of 2020 (down
10bps y-o-y)
-- We served 1,553 wealth management clients from 77 countries
as at 30 June 2020, compared to 1,531 clients as at 30 June 2019
and 1,563 clients as at 31 March 2020
-- Galt & Taggart, which brings under one brand corporate
advisory, debt and equity capital markets research and brokerage
services, continues to develop local capital markets in Georgia
-- During the first half of 2020 , Galt & Taggart acted as
a:
- lead manager for International Finance Corporation,
facilitating a public placement of GEL 100mln local bond issuance
in April 2020
- rating advisor for one of the microfinance organisations,
assisting in obtaining credit rating from Scope Ratings
-- In February 2020, Global Finance Magazine named Galt &
Taggart Best Investment Bank in Georgia for the sixth consecutive
year
-- Galt and Taggart Research activities in the first half of
2020:
- In March 2020, Galt & Taggart together with JSC Bank of
Georgia organised a web-conference to discuss the COVID-19 impact
on the Georgian economy and various economic scenarios for 2020.
The web-conference was attended by c.200 guests, including the
Bank's corporate clients and high-level representatives from the
Georgian Government. The presentation was followed by a Q&A
session, during which the Minister of Economy and Sustainable
Development of Georgia addressed participants and commented on the
Government's support measures for private sector
- In March 2020, Galt & Taggart continued its web-conference
series on COVID-19 developments and organised a web-conference,
this time for the Bank's SME clients, to discuss virus impact on
Georgian economy, which was followed by a Q&A session
- In May 2020, Galt & Taggart in collaboration with the
leading property guide portal in Georgia organised a web-conference
to discuss 1Q20 update on Tbilisi real estate market and future
outlook, followed by Q&A session. The web-conference was
attended by sector representatives via different social media
platforms
- In June 2020, Galt & Taggart hosted a web-conference and
discussed its report on tourism challenges and expectations for the
second half of 2020. The web-conference was attended by sector
representatives, government officials and business associations.
Additionally, live broadcasting via social media platforms was
available for any interested stakeholders
- In June 2020, Galt & Taggart published its view on
Georgia's growth model in the context of global change triggered by
COVID-19 pandemic
(13) Profit and ROAE are adjusted for GEL 0.9mln in 2Q19 and GEL
4.1mln in 1H19 one-off employee costs (net of income tax) related
to termination benefits of the former CEO and executive
management
SELECTED FINANCIAL AND OPERATING INFORMATION
INCOME STATEMENT BANK OF GEORGIA GROUP CONSOLIDATED
GEL thousands, unless otherwise Change Change Change
noted 2Q20 2Q19 y-o-y 1Q20 q-o-q 1H20 1H19 y-o-y
Interest income 379,038 342,224 10.8% 388,326 -2.4% 767,364 676,959 13.4%
Interest expense (204,102) (150,870) 35.3% (191,246) 6.7% (395,347) (295,624) 33.7%
Net interest income 174,936 191,354 -8.6% 197,080 -11.2% 372,017 381,335 -2.4%
Fee and commission income 54,389 68,025 -20.0% 70,894 -23.3% 125,284 130,556 -4.0%
Fee and commission expense (21,488) (24,758) -13.2% (30,782) -30.2% (52,271) (45,109) 15.9%
Net fee and commission income 32,901 43,267 -24.0% 40,112 -18.0% 73,013 85,447 -14.6%
Net foreign currency gain 22,743 26,968 -15.7% 30,661 -25.8% 53,404 49,952 6.9%
Net other income / (expense) 9,081 (4,260) NMF 6,627 37.0% 15,707 (691) NMF
Operating income 239,661 257,329 -6.9% 274,480 -12.7% 514,141 516,043 -0.4%
Salaries and other employee
benefits (excluding one-offs) (60,656) (57,982) 4.6% (56,538) 7.3% (117,194) (110,399) 6.2%
One-off termination costs
of former executive management
(1) - (4,570) NMF - - - (12,412) NMF
Salaries and other employee
benefits (60,656) (62,552) -3.0% (56,538) 7.3% (117,194) (122,811) -4.6%
Administrative expenses (22,450) (22,033) 1.9% (27,021) -16.9% (49,470) (44,774) 10.5%
Depreciation, amortisation
and impairment (21,139) (17,295) 22.2% (21,390) -1.2% (42,529) (32,983) 28.9%
Other operating expenses (913) (1,248) -26.8% (1,059) -13.8% (1,974) (2,329) -15.2%
Operating expenses (105,158) (103,128) 2.0% (106,008) -0.8% (211,167) (202,897) 4.1%
Profit from associates 113 254 -55.5% 301 -62.5% 414 442 -6.3%
Operating income before cost
of risk 134,616 154,455 -12.8% 168,773 -20.2% 303,388 313,588 -3.3%
Expected credit loss on loans
to customers 11,621 (32,436) NMF (228,189) NMF (216,568) (72,553) NMF
Expected credit loss on finance
lease receivables (3,387) (557) NMF (1,885) 79.7% (5,273) (1,003) NMF
Other expected credit loss
on other assets and provisions (18,455) (2,483) NMF (11,329) 62.9% (29,782) (4,573) NMF
Cost of risk (10,221) (35,476) -71.2% (241,403) -95.8% (251,623) (78,129) NMF
Net operating income / (loss)
before non-recurring items 124,395 118,979 4.6% (72,630) NMF 51,765 235,459 -78.0%
Net non-recurring items (excluding
one-offs) (1,241) (2,538) -51.1% (40,345) -96.9% (41,586) (4,112) NMF
One-off termination costs - - - - - - (3,985) NMF
of former CEO (2)
Net non-recurring items (1,241) (2,538) -51.1% (40,345) -96.9% (41,586) (8,097) NMF
Profit / (loss) before income
tax 123,154 116,441 5.8% (112,975) NMF 10,179 227,362 -95.5%
Income tax (expense) / benefit
(excluding one-offs) (8,470) (9,871) -14.2% 13,030 NMF 4,560 (20,407) NMF
Income tax benefit related
to one-off termination costs
of former CEO and executive
management (3) - 574 NMF - - - 2,161 NMF
Income tax (expense) / benefit (8,470) (9,297) -8.9% 13,030 NMF 4,560 (18,246) NMF
Profit / (loss) 114,684 107,144 7.0% (99,945) NMF 14,739 209,116 -93.0%
One-off items (1)+(2)+(3) - (3,996) NMF - - - (14,236) NMF
Profit / (loss) attributable
to:
- shareholders of the Group 114,174 106,642 7.1% (99,515) NMF 14,659 208,154 -93.0%
- non-controlling interests 510 502 1.6% (430) NMF 80 962 -91.7%
Earnings / (loss) per share
(basic) 2.40 2.23 7.6% (2.09) NMF 0.31 4.35 -92.9%
Earnings / (loss) per share
(diluted) 2.40 2.23 7.6% (2.08) NMF 0.31 4.34 -92.9%
BALANCE SHEET BANK OF GEORGIA GROUP CONSOLIDATED
GEL thousands, unless otherwise Jun-20 Jun-19 Change Mar-20 Change
noted y-o-y q-o-q
Cash and cash equivalents 1,633,755 936,106 74.5% 1,507,142 8.4%
Amounts due from credit institutions 1,700,075 1,704,701 -0.3% 1,954,218 -13.0%
Investment securities 2,113,900 1,896,738 11.4% 1,917,772 10.2%
Loans to customers and finance
lease receivables 12,599,092 10,579,710 19.1% 13,144,429 -4.1%
Accounts receivable and other loans 4,060 3,688 10.1% 3,460 17.3%
Prepayments 31,513 36,027 -12.5% 42,144 -25.2%
Inventories 13,901 11,748 18.3% 13,342 4.2%
Right-of-use assets 89,758 105,874 -15.2% 92,335 -2.8%
Investment property 212,182 178,764 18.7% 208,776 1.6%
Property and equipment 396,272 358,921 10.4% 380,580 4.1%
Goodwill 33,351 33,351 0.0% 33,351 0.0%
Intangible assets 116,355 93,515 24.4% 112,152 3.7%
Income tax assets 54,595 5,080 NMF 71,500 -23.6%
Other assets 139,945 149,233 -6.2% 134,578 4.0%
Assets held for sale 45,212 40,544 11.5% 47,914 -5.6%
Total assets 19,183,966 16,134,000 18.9% 19,663,693 -2.4%
Client deposits and notes 11,583,139 8,855,616 30.8% 10,835,918 6.9%
Amounts owed to credit institutions 3,521,860 2,960,519 19.0% 4,144,701 -15.0%
Debt securities issued 1,561,933 2,137,239 -26.9% 2,294,431 -31.9%
Lease liabilities 96,878 100,172 -3.3% 104,976 -7.7%
Accruals and deferred income 37,257 34,748 7.2% 34,470 8.1%
Income tax liabilities 70,171 30,361 131.1% 80,601 -12.9%
Other liabilities 112,929 97,125 16.3% 121,341 -6.9%
Total liabilities 16,984,167 14,215,780 19.5% 17,616,438 -3.6%
Share capital 1,618 1,618 0.0% 1,618 0.0%
Additional paid-in capital 500,887 493,890 1.4% 483,006 3.7%
Treasury shares (54) (49) 10.2% (54) 0.0%
Other reserves 25,417 46,743 -45.6% 7,141 NMF
Retained earnings 1,662,164 1,367,632 21.5% 1,546,456 7.5%
Total equity attributable to shareholders
of the Group 2,190,032 1,909,834 14.7% 2,038,167 7.5%
Non-controlling interests 9,767 8,386 16.5% 9,088 7.5%
Total equity 2,199,799 1,918,220 14.7% 2,047,255 7.5%
Total liabilities and equity 19,183,966 16,134,000 18.9% 19,663,693 -2.4%
Book value per share 46.07 40.06 15.0% 42.88 7.4%
BELARUSKY NARODNY BANK (BNB)
Change Change Change
INCOME STATEMENT HIGHLIGHTS 2Q20 2Q19 y-o-y 1Q20 q-o-q 1H20 1H19 y-o-y
GEL thousands, unless
otherwise stated
Net interest income 9,157 6,360 44.0% 9,469 -3.3% 18,626 12,945 43.9%
Net fee and commission
income 1,486 1,798 -17.4% 1,703 -12.7% 3,190 3,611 -11.7%
Net foreign currency
gain 3,787 4,779 -20.8% 493 NMF 4,280 8,734 -51.0%
Net other income 350 169 107.1% 334 4.8% 683 314 117.5%
Operating income 14,780 13,106 12.8% 11,999 23.2% 26,779 25,604 4.6%
Operating expenses (8,098) (8,890) -8.9% (8,706) -7.0% (16,804) (16,737) 0.4%
Operating income before
cost of risk 6,682 4,216 58.5% 3,293 102.9% 9,975 8,867 12.5%
Cost of risk (1,928) (1,536) 25.5% (3,422) -43.7% (5,350) (2,977) 79.7%
Net non-recurring items (24) (13) 84.6% (10) 140.0% (34) (63) -46.0%
Profit / (loss) before
income tax expense 4,730 2,667 77.4% (139) NMF 4,591 5,827 -21.2%
Income tax expense (1,010) (379) NMF (32) NMF (1,042) (950) 9.7%
Profit / (loss) 3,720 2,288 62.6% (171) NMF 3,549 4,877 -27.2%
BALANCE SHEET HIGHLIGHTS Jun-20 Jun-19 Change Mar-20 Change
y-o-y q-o-q
GEL thousands, unless
otherwise stated
Cash and cash equivalents 187,920 93,097 101.9% 150,349 25.0%
Amounts due from credit
institutions 13,605 18,301 -25.7% 13,141 3.5%
Investment securities 93,549 128,486 -27.2% 81,592 14.7%
Loans to customers and
finance lease receivables 638,713 512,126 24.7% 671,854 -4.9%
Other assets 50,667 57,098 -11.3% 54,981 -7.8%
Total assets 984,454 809,108 21.7% 971,917 1.3%
Client deposits and notes 647,977 503,309 28.7% 643,614 0.7%
Amounts owed to credit
institutions 144,815 146,855 -1.4% 143,374 1.0%
Debt securities issued 57,289 50,238 14.0% 51,063 12.2%
Other liabilities 12,873 7,044 82.8% 13,407 -4.0%
Total liabilities 862,954 707,446 22.0% 851,458 1.4%
Total equity 121,500 101,662 19.5% 120,459 0.9%
Total liabilities and
equity 984,454 809,108 21.7% 971,917 1.3%
KEY RATIOS 2Q20 2Q19 1Q20 1H20 1H19
Profitability
ROAA, annualised(14) 2.4% 2.9% -2.1% 0.2% 3.0%
ROAA, annualised (unadjusted) 2.4% 2.8% -2.1% 0.2% 2.8%
ROAE, annualised(14) 21.8% 22.9% -18.6% 1.4% 23.7%
RB ROAE (14) 16.4% 26.9% -25.5% -4.7% 26.2%
CIB ROAE (14) 31.5% 22.0% -10.6% 9.9% 24.5%
ROAE, annualised (unadjusted) 21.8% 22.1% -18.6% 1.4% 22.2%
Net interest margin, annualised 4.2% 5.7% 5.0% 4.6% 5.8%
RB NIM 4.0% 6.2% 4.9% 4.4% 6.4%
CIB NIM 3.4% 3.7% 4.0% 3.7% 3.7%
Loan yield, annualised 10.2% 11.8% 10.8% 10.6% 12.0%
RB Loan yield 11.1% 12.9% 11.8% 11.5% 13.2%
CIB Loan yield 8.3% 9.5% 8.9% 8.7% 9.2%
Liquid assets yield, annualised 3.4% 3.4% 3.9% 3.7% 3.6%
Cost of funds, annualised 4.8% 4.5% 4.7% 4.8% 4.6%
Cost of client deposits and
notes, annualised 3.5% 3.1% 3.1% 3.3% 3.1%
RB Cost of client deposits
and notes 2.9% 2.7% 2.6% 2.8% 2.7%
CIB Cost of client deposits
and notes 4.2% 3.5% 3.7% 4.0% 3.5%
Cost of amounts owed to credit
institutions, annualised 7.3% 6.9% 7.6% 7.5% 7.1%
Cost of debt securities issued 7.7% 7.6% 7.6% 7.7% 7.5%
Operating leverage, y-o-y(15) -13.6% -4.2% -9.2% -11.2% 0.3%
Operating leverage, q-o-q(15) -11.9% -7.7% 1.5% 0.0% 0.0%
Efficiency
Cost / Income(15) 43.9% 38.3% 38.6% 41.1% 36.9%
RB Cost / Income (15) 56.3% 37.8% 46.6% 50.9% 36.6%
CIB Cost /Income (15) 22.9% 30.0% 19.4% 21.2% 28.5%
Cost / Income (unadjusted) 43.9% 40.1% 38.6% 41.1% 39.3%
Liquidity(16)
NBG liquidity coverage ratio
(minimum requirement 100%) 135.4% 114.3% 121.2% 135.4% 114.3%
Liquid assets to total liabilities 32.1% 31.9% 30.5% 32.1% 31.9%
Net loans to client deposits
and notes 108.8% 119.5% 121.3% 108.8% 119.5%
Net loans to client deposits
and notes + DFIs 94.5% 104.7% 104.9% 94.5% 104.7%
Leverage (times) 7.7 7.4 8.6 7.7 7.4
Asset quality:
NPLs (in GEL) 355,260 347,285 284,038 355,260 347,285
NPLs to gross loans to clients 2.7% 3.2% 2.1% 2.7% 3.2%
NPL coverage ratio 115.7% 88.1% 147.2% 115.7% 88.1%
NPL coverage ratio, adjusted
for discounted value of collateral 166.3% 131.5% 194.9% 166.3% 131.5%
Cost of credit risk, annualised -0.2% 1.3% 7.4% 3.5% 1.5%
RB Cost of credit risk 0.2% 1.6% 7.4% 3.7% 2.0%
CIB Cost of credit risk -1.7% 0.7% 8.3% 3.2% 0.4%
Capital adequacy:
NBG (Basel III) CET1 capital
adequacy ratio 9.9% 11.0% 8.3% 9.9% 11.0%
Minimum regulatory requirement 6.9% 9.6% 6.9% 6.9% 9.6%
NBG (Basel III) Tier I capital
adequacy ratio 12.0% 13.3% 10.6% 12.0% 13.3%
Minimum regulatory requirement 8.7% 11.6% 8.7% 8.7% 11.6%
NBG (Basel III) Total capital
adequacy ratio 17.4% 16.7% 15.3% 17.4% 16.7%
Minimum regulatory requirement 13.3% 16.1% 13.3% 13.3% 16.1%
Selected operating data:
Total assets per FTE 2,671 2,184 2,676 2,671 2,184
Number of active branches,
of which: 229 276 233 229 276
- Express branches (including
Metro) 121 167 124 121 167
- Bank of Georgia branches 97 97 97 97 97
- SOLO lounges 11 12 12 11 12
Number of ATMs 940 890 939 940 890
Number of cards outstanding,
of which: 2,178,053 2,122,006 2,160,942 2,178,053 2,122,006
- Debit cards 1,828,691 1,634,843 1,791,937 1,828,691 1,634,843
- Credit cards 349,362 487,163 369,005 349,362 487,163
Number of POS terminals 23,787 19,667 22,472 23,787 19,667
Number of Express pay terminals 3,118 3,177 3,183 3,118 3,177
FX Rates:
GEL/US$ exchange rate (period-end) 3.0552 2.8687 3.2845
GEL/GBP exchange rate (period-end) 3.7671 3.6384 4.0725
Jun-20 Jun-19 Mar-20
Full time employees (FTE),
of which: 7,181 7,386 7,349
- Full time employees, BOG
standalone 5,693 5,786 5,851
- Full time employees, BNB 543 632 550
- Full time employees, other 945 968 948
Shares outstanding Jun-20 Jun-19 Mar-20
Ordinary shares 47,536,332 47,669,887 47,528,704
Treasury shares 1,633,096 1,499,541 1,640,724
Total shares outstanding 49,169,428 49,169,428 49,169,428
(14) The 2Q19 and 1H19 ratios are adjusted for one-off employee
costs related to termination benefits of the former CEO and
executive management
(15) The 2Q19 and 1H19 ratios are adjusted for one-off employee
costs related to termination benefits of the former executive
management
(16) We stopped reporting the NBG liquidity ratio since 1
January 2020 due to the phase-out of the requirement of this ratio
per NBG's regulations
PRINCIPAL RISKS AND UNCERTAINTIES
In the Group's 2019 Annual Report and Accounts we disclosed the
principal and emerging risks and uncertainties and their potential
impact, as well as the trends and outlook associated with these
risks and the actions we take to mitigate these risks. We have
updated this disclosure to reflect recent developments and this is
set out in full below. If any of the following risks occur, the
Group's business, financial condition, results of operations or
prospects could be materially affected. The order in which the
principal risks and uncertainties appear does not denote their
order of priority. It is not possible to fully mitigate all of our
risks. Any system of risk management and internal control is
designed to manage rather than eliminate the risk of failure to
achieve business objectives and can only provide reasonable and not
absolute assurance against material misstatement or loss.
The risks and uncertainties described below may not be the only
ones the Group faces. Additional risks and uncertainties, including
those that the Group is currently not aware of or deems immaterial,
may also result in decreased revenues, incurred expenses or other
events that could result in a decline in the value of the Group's
securities.
MACROECONOMIC ENVIRONMENT
PRINCIPAL RISK Macroeconomic factors relating to Georgia, including
/ UNCERTAINTY depreciation of the Lari against the US Dollar, may
have a material impact on our loan book.
----------------------------------------------------------------------
KEY DRIVERS The Group's operations are primarily located in, and
/ TRS most of its revenue is sourced from, Georgia. Macroeconomic
factors relating to Georgia, such as changes in GDP,
inflation and interest rates, may have a material impact
on the quality of our loan portfolio, loan losses, our
margins, and customer demand for our products and services.
During the first half of 20 20 , Georgia delivered an
estimated negative real GDP growth of 5.8% according
to Geostat, as the country is now facing a pronounced
economic slowdown due to the COVID-19 pandemic. Real
GDP is expected to decline by 4% in 2020 based on International
Monetary Fund (the "IMF") estimates, but projections
are subject to more than the usual level of uncertainty.
Lower exports, no external tourism, and weaker remittances
are expected to widen the current account deficit to
11.3% of GDP in 2020 according to IMF. Rising global
risk aversion is likely to reduce private financial
inflows and delay investment. The authorities have sought
to contain the COVID-19 pandemic and cushion its economic
impact, however, face a balance of payments gap. Notably,
the real GDP growth was 5.1% in 2019 and 4.8% in 2018,
according to Geostat. Uncertain and volatile global
economic conditions could have substantial political
and macroeconomic ramifications globally which, in turn,
could impact the Georgian economy.
In the first half of 2020, the Lari depreciated against
the US Dollar by 6 .5 %, after depreciating by 7.1%
in 2019. The volatility of Lari against the US Dollar
may adversely affect the quality of our loan portfolio,
as well as increase the cost of credit risk and expected
credit loss provisions. The creditworthiness of our
customers may be adversely affected by the depreciation
of the Lari against the US Dollar, which could result
in them having difficulty repaying their loans. The
depreciation of the Lari may also adversely affect the
value of our customers' collateral.
At 30 June 2020, approximately 82.6% and 45.6% of our
Corporate and Investment Banking and Retail Banking
loans, respectively, were denominated in foreign currency,
while 7.5% of Retail Banking gross loans and 43.2% of
Corporate and Investment Banking gross loans issued
in foreign currency had no or minimal exposure to foreign
currency risk.
In the first quarter of 2020, following the COVID-19
pandemic outbreak, the Group created a GEL 220.2 million
upfront provision for the full economic cycle in both
Retail and Corporate and Investment Banking businesses.
This COVID-19 related charge was based on our expectations
of future credit losses on our portfolio given the application
of the future economic scenarios. The assumptions were
further revisited during the second quarter to reflect
the better visibility and the macro-economic forecast
scenarios published by the NBG in May 2020. Based on
the analysis, additional reserves created in the first
quarter proved largely sufficient. In addition , the
depreciation of the local currency and the amortisation
of the loan portfolio in the second quarter resulted
in GEL 8.2mln net reversal of ECL on loans to customers
and finance lease receivables in 2Q20. As a result,
our cost of credit risk ratio was 3.5% in the first
half of 2020 compared to 1.5% in the first half of 2019.
There still is uncertainty over the magnitude of the
global slowdown that will result from the COVID-19 pandemic.
The Georgian economy is well-diversified, both by sector,
and in terms of trading partner country dependence,
however, if the virus leads to a continued global shutdown
a significant negative impact on areas of the Georgian
economy is expected.
----------------------------------------------------------------------
MITIGATION The Group continuously monitors market conditions and
reviews market changes, and also performs stress and
scenario testing to test its position under adverse
economic conditions, including adverse currency movements.
The Bank's Asset and Liability Management Committee
sets our open currency position limits and the Bank's
proprietary trading position limits, which are currently
more conservative than those imposed by the National
Bank of Georgia, our regulator. The Treasury department
manages our open currency position on a day-to-day basis.
The open currency position is also monitored by the
Bank's Quantitative Risk Management and Risk Analytics
department.
In order to assess the creditworthiness of our customers,
we take into account currency volatility when there
is a currency mismatch between the customer's loan and
the revenue. In line with the NBG's requirements, we
assign up to 75% additional risk weighting to the foreign
currency loans of clients, whose source of income is
denominated in Lari.
The Bank's Credit Committees and Credit Risk department
set counterparty limits by using a credit risk classification
and scoring system for approving individual transactions.
The credit quality review process is continuous and
provides early identification of possible changes in
the creditworthiness of customers, including regular
collateral revaluations, potential losses and corrective
actions needed to reduce risk, which may include obtaining
additional collateral in accordance with underlying
loan agreements.
In order to encourage responsible lending practice in
the market, NBG introduced macroprudential policy instruments
that modify lending conditions to individuals. The payment-to-income
ratio (PTI) and the loan-to-value ratio (LTV), effective
since 1 November 2018 for commercial banks and since
1 January 2019 for all loan issuers, require the financial
institutions to issue loans based on the rigorous assessment
of clients' debt paying ability and aim at reducing
high-risk products in the market. This initiative ensures
the sustainability of the financial sector in the event
of real estate price reductions and further reduces
the risk of the loan portfolio quality. NBG eased the
above mentioned regulation from April 2020 as part of
its response to COVID-19 pandemic. The changes mostly
apply to hedged borrowers, while the PTI and LTV thresholds
for unhedged borrowers remain more conservative.
Since 2016, NBG has actively implemented various measures
to de-dollarise the Georgian economy. In January 2019,
in order to hedge the borrowers against foreign currency
risks, NBG raised a threshold of small-sized loans that
must be issued only in local currency from GEL 100,000
to GEL 200,000.
Among NBG's initiatives towards de-dollarisation and
increasing access to long-term lending in the local
currency is Liquidity Coverage Ratio (LCR) under Basel
III framework, effective since September 2017. The NBG's
preferential treatment for Georgian Lari is translated
into 75% LCR for the local currency high-quality liquid
assets, while the mandatory ratio stands at 100% for
the foreign currency as well as for all currencies in
total.
Moreover, NBG mandated changes in minimum reserve requirements
on funds attracted in national and foreign currencies.
NBG raised the minimum reserve requirement on foreign
currency funds from 20% to 25% depending on maturity,
effective from 1 September 2018, and then further to
30%, effective by the end of May 2019, although the
requirement was subsequently reduced back to 25% in
October 2019. In June 2018, in order to encourage the
financial institutions to raise funding in the local
currency, NBG decreased minimum reserve requirements
on local currency funding from 7% to 5%.
Since the beginning of 2016, we have focused on increasing
local currency lending. We actively work with IFIs to
raise long-term Lari funding to increase our Lari-denominated
loans to customers. Furthermore, in June 2017, we completed
the inaugural local currency denominated international
bond issuance in the amount of GEL500 million to support
local currency lending.
Applicable from the beginning of 2017, the NBG expanded
the list of assets that banks are permitted to use as
collateral for REPO transactions, which provides an
additional funding source for our Lari-denominated loan
book. This list further expanded since second quarter
of 2020 as part of the NBG's response to COVID-19 pandemic.
The Government and NBG have appropriate tools to help
mitigate the economic threat to a degree, and to try
to maintain economic growth. We continue to monitor
the COVID-19 pandemic outbreak impact and to consider
our continued business resilience.
----------------------------------------------------------------------
REGIONAL INSTABILITY
PRINCIPAL RISK The Georgian economy and our business may be adversely
/ UNCERTAINTY affected by regional tensions and instability.
The Group's operations are primarily located in, and
most of its revenue is sourced from, Georgia. The Georgian
economy is well-diversified and there is no significant
dependency on a single country. However, it is dependent
on economies of the region, in particular Russia, Turkey,
Azerbaijan and Armenia who are key trading partners.
There has been ongoing geopolitical tension, political
and economic instability and military conflict in the
region, which may have an adverse effect on our business
and financial position.
----------------------------------------------------------------------
KEY DRIVERS Russian troops continue to occupy the Abkhazia and the
/ TRS Tskhinvali/South Ossetia regions, and tensions between
Russia and Georgia persist. Russia is opposed to the
eastward enlargement of the NATO, including the former
Soviet republics such as Georgia. Therefore, Georgia's
continued progression towards closeness to the EU and
NATO may intensify tensions between Georgia and Russia.
Developments, such as the introduction of a free trade
regime between Georgia and the EU in September 2014
and the visa-free travel in the EU granted to Georgian
citizens in March 2017, similarly contributes to tensions.
The Government has taken certain steps towards improving
relations with Russia but, as of the date of this announcement,
these have not resulted in any formal or legal changes
in the relationship between the two countries.
In June 2018, as a result of early parliamentary and
presidential elections, amendments to the Turkish constitution
became effective. The amendments which grant the president
wider powers are expected to transform Turkey's system
of government away from a parliamentary system which
could have a negative impact on political stability
in Turkey.
On 8 July 2019, Russia's ban on direct flights to Georgia,
imposed earlier in June over anti-occupation protests
in Tbilisi, came into effect. The sanction was expected
to affect the Georgian tourism sector, however, it also
provided more incentives to further diversify the country's
tourist base.
There is an ongoing conflict between Azerbaijan and
Armenia, which impacts the region.
----------------------------------------------------------------------
MITIGATION The Group actively monitors regional and local market
conditions and risks related to political instability,
and the Georgian Government's response thereto. It performs
stress and scenario tests in order to assess the impact
on its financial position, and develops responsive strategies
and action plans. While financial market turbulences
and geopolitical tensions affect regional trading partners,
Georgia's preferential trading regimes and well-diversified
economy in terms of dependency on a single country,
support the country to enhance resilience to regional
external shocks.
Economic growth remained strong in Georgia in 2019,
despite Russia banning direct flights to Georgia from
July 2019. Real GDP growth reached 5.1% in 2019 and
the current account deficit reached a historic low in
the second half of 2019, with deficit halved in 2019,
overall. Despite favourable current account dynamics,
the ban on flights from Russia weighed on GEL due to
negative expectations and increased political uncertainty.
Inflation accelerated from September 2019 and came in
at 7.0% in December 2019. The price growth reflected
higher tobacco excises and GEL's nominal depreciation.
The National Bank of Georgia intervened and sold foreign
currency and increased monetary policy rate to address
rising inflationary pressures. Notably, in October 2019,
S&P Global Ratings upgraded Georgia's credit rating
to BB, highlighting economic resilience towards the
challenging external environment, relatively high growth
prospects, prudent public finance management, higher
reserves, and a stable and healthy financial sector.
We believe that Georgia's efforts to further diversify
its economic linkages, use potential of new large markets
- the EU and China - and further enhance its institutions
to enable the economy to deal with the external shocks
relatively well.
In December 2019, the IMF's Executive Board approved
the extension of the US$285 million economic programme
with Georgia, approved in April 2017, by one year until
11 April 2021. The programme has not envisaged additional
financing, however, after the COVID-19 pandemic outbreak
the authorities have requested additional financial
assistance of about US$375 million. The authorities
have also secured additional donor assistance in the
amount of US$ 1.5 billion that is expected to close
the financing gap. On 1 May 2020, the Executive Board
of the IMF completed the Sixth Review of Georgia's programme.
The completion of the review released around US$ 200
million for budget support, to help Georgia meet urgent
balance of payments and fiscal needs stemming from the
COVID-19 pandemic, including increased spending on health
services and social protection. The fiscal deficit is
expected to temporarily widen to accommodate revenue
losses from containment measures and additional spending
to support economic activity. Monetary policy is expected
to remain flexible and dependent on inflation developments.
Exchange rate flexibility should continue to act as
a shock absorber, but excessive lari volatility should
be avoided as it could prove disruptive to financial
stability. Providing adequate liquidity and releasing
capital buffers by the National Bank of Georgia in financial
institutions would help sustain financial stability.
During the first half of 20 20 , Georgia delivered an
estimated negative real GDP growth of 5 .8%, as the
country is now facing a pronounced economic slowdown
due to the COVID-19 pandemic. Real GDP is expected to
decline by 4% in 2020 based on IMF estimates, but projections
are subject to more than the usual level of uncertainty.
Lower exports, no tourism, and weaker remittances are
expected to widen the current account deficit to 11.3%
of GDP in 2020, according to IMF. Rising global risk
aversion is likely to reduce private financial inflows
and delay investment. The authorities have sought to
contain the COVID-19 pandemic and cushion its economic
impact but face a balance of payments gap. Inflation
was retreating gradually since May 2020 and was 6.1%
in June, still above NBG's 3.0% target level. High inflation
is explained by strengthening influence of GEL depreciation
and disruption to supply chains due to COVID-19 pandemic.
Importantly, after sharp fall in remittances in April
2020, the reduction slowed to single digit in May 2020,
and rebounded strongly growing at a 17.8% y-o-y in June
2020, which supports demand in face of increased economic
uncertainty. As timeline for resuming regular international
flights is unclear due to unfavorable epidemiological
situation in Georgia's tourism source markets, tourism
remains a major weakness. However, our brokerage and
investment arm, Galt & Taggart expects Georgian tourists
to spend around US$500 million locally in the second
half of 2020 (of which US$ 300 million will be generated
from local residents not traveling abroad and US$ 200
million generated from ordinary local tourist spending),
bringing some relief to the industry. The NBG's foreign
currency sales in the amount of US$215 million in the
first half of 2020 largely offset the foreign currency
shortfall in the economy due to stalled tourism inflows.
Notably, despite these interventions, international
reserves are anticipated to increase from the current
US$3.6 billion by the end of 2020 as reserves are replenished
by borrowings from donors.
The Government's revised 2020 budget document was approved
by Parliament of Georgia in June 2020. The revised budget
incorporates the fiscal parameters agreed with the IMF,
US$1.5 billion in donor funding and fiscal stimulus
measures for businesses and households affected by the
coronavirus pandemic. The budget framework assumes negative
4.0% GDP growth in 2020 and sets the deflator at 4.8%.
The fiscal deficit is projected to increase to 8.5%
of GDP due to the shortfall in revenues (GEL 1.45 billion
reduction compared to the initial budget) and an increase
in expenditure for anti-crisis measures (GEL 1.4 billion
increase compared to the initial budget). To meet its
spending needs, the Government plans to increase external
borrowings by GEL 4.3 billion, and domestic debt is
set to rise by GEL 649 million, with total public debt
projected at 54.4% of GDP in 2020. The Government expects
to return to its pre-crisis debt parameters in the medium
term. Notably, the Government is borrowing more from
donors than it currently needs, building a fiscal buffer
totaling GEL 2.7 billion into the revised budget. Such
a buffer builds confidence as funds can be utilised
if the crisis deepens, or a recovery takes longer than
currently projected to materialise.
----------------------------------------------------------------------
LOAN PORTFOLIO QUALITY
PRINCIPAL RISK The Group may not be able to maintain the quality of
/ UNCERTAINTY its loan portfolio.
The quality of the Group's loan portfolio may deteriorate
due to external factors beyond the Group's control such
as negative developments in Georgia's economy or in
the economies of its neighbouring countries, the unavailability
or limited availability of credit information on certain
of its customers, any failure of its risk management
procedures or rapid expansion of its loan portfolio
.
The Group's Corporate and Investment Banking loan portfolio
is concentrated and to the extent that such borrowers
enter into further loan arrangements with the Group,
this will increase the credit and general counterparty
risk of the Group, with respect to those counterparties
and could result in deterioration of the Group's loan
portfolio quality.
Furthermore, the collateral values that the Group holds
against the loans may decline, which may have an adverse
effect on the business and financial position of the
Group.
----------------------------------------------------------------------
KEY DRIVERS Expected credit loss and, in turn, the Group's cost
/ TRS of credit risk could increase if a single large borrower
defaults or a material concentration of smaller borrowers
default. The Corporate and Investment Banking loan portfolio
is concentrated, with the Group's top ten Corporate
and Investment Banking borrowers accounting for 7.3%
of gross loans to customers and finance lease receivables
at 30 June 2020, as compared to 9.9% at 31 December
2019 and 9.8% at 31 December 2018.
At 30 June 2020, the Group held collateral against gross
loans covering 87.8% of the total gross loans to customers
and finance lease receivables. The main forms of collateral
taken in respect of Corporate and Investment Banking
loans are liens over real estate, property, plant and
equipment, corporate guarantees, inventory, deposits
and securities, and transportation equipment. The most
common form of collateral accepted in Retail Banking
loans is a lien over residential property.
Downturns in the residential and commercial real estate
markets, or a general deterioration of economic conditions
in the industries in which the Group's customers operate,
may result in illiquidity and a decline in the value
of the collateral securing loans, including a decline
to levels below the outstanding principal balance of
those loans. In addition, declining or unstable prices
of collateral in Georgia may make it difficult for the
Group to accurately value collateral it holds. If the
fair value of the collateral that the Group holds declines
significantly in the future, it could be required to
record additional provisions and could experience lower
than expected recovery levels on collateralised loans.
Further changes to laws or regulations may impair the
value of such collateral.
During the first half of 2020, the Group's cost of credit
risk ratio was 3.5%, as compared to 1.5% in the first
six months of 2019. The increase was driven by the reserve
builds, created for the full economic cycle in both
Retail and Corporate and Investment Banking segments
in the first quarter of 2020, primarily related to deterioration
of macroeconomic environment and expected creditworthiness
of borrowers as a result of the COVID-19 pandemic impact.
As of 30 June 2020, 31 December 2019 and 2018, the Group's
non-performing loans accounted for 2.7%, 2.1% and 3.3%
of gross loans to customers and finance lease receivables,
respectively.
----------------------------------------------------------------------
MITIGATION The Group continuously monitors market conditions and
reviews market changes, and also performs stress and
scenario testing to test its position under adverse
economic conditions.
Our Credit Committees and Credit Risk department set
counterparty limits by using a credit risk classification
and scoring system for approving individual transactions.
The credit quality review process is continuous and
provides early identification of possible changes in
the creditworthiness of customers, including regular
collateral revaluations, potential losses and corrective
actions needed to reduce risk, which may include obtaining
additional collateral in accordance with underlying
loan agreements.
The Group continuously monitors the market value of
the collateral it holds against the loans. When evaluating
collateral for provisioning purposes, the Group discounts
the market value of the assets to reflect the liquidation
value of the collateral.
In terms of Retail Banking loan portfolio, when disbursing
the loans to retail customers the Group strictly adheres
to PTI and LTV ratios set by NBG based on the rigorous
assessment of clients' debt paying ability. This further
reduces the risk of the loan portfolio quality in the
event of real estate price reductions.
In terms of Corporate and Investment Banking loan portfolio
concentration, the Group aims to adhere strictly to
the limits set by the NBG for client exposures, monitors
the level of concentration in its loan portfolio and
the financial performance of its largest borrowers,
uses collateral to minimise loss given default on its
largest exposures and maintains a well-diversified loan
book sector concentration.
----------------------------------------------------------------------
REGULATORY RISK
PRINCIPAL RISK The Group operates in an evolving regulatory environment
/ UNCERTAINTY and is subject to regulatory oversight of the National
Bank of Georgia, supervising the banking sector and
the securities market in Georgia.
The financial sector in Georgia is highly regulated.
The regulatory environment continues to evolve. We,
however, cannot predict what additional regulatory changes
will be introduced in the future or the impact they
may have on our operations.
----------------------------------------------------------------------
KEY DRIVERS Our banking operations must comply with prudential ratios
/ TRS set by our regulator, the NBG, including reserve requirements,
and mandatory financial ratios, as well as adhere to
required regular report filings. Our ability to comply
with existing or amended NBG requirements may be affected
by a number of factors, including those outside of our
control, such as an increase in the Bank's risk-weighted
assets, our ability to raise capital, losses resulting
from deterioration in our asset quality and/or a reduction
in income levels and/or an increase in expenses, decline
in the value of the Bank's securities portfolio, as
well as weakening of global and Georgian economies.
Since the Group is listed on the London Stock Exchange's
main market for listed securities, it is subject to
the UK Financial Conduct Authority regulations. Furthermore,
the Group companies are also subject to relevant laws
and regulations in Georgia.
----------------------------------------------------------------------
MITIGATION In order to ensure the full compliance with relevant
regulations, the Group has established systems and processes,
which are embedded in all levels of the Group's operations.
Continued investment in our people and processes enables
us to meet our current regulatory requirements and means
that we are well-placed to respond to any future changes
in regulation.
In line with our integrated control framework, we carefully
evaluate the impact of legislative and regulatory changes
as part of our formal risk identification and assessment
processes and, to the extent possible, proactively participate
in the drafting of relevant legislation. As part of
this process, we engage in constructive dialogue with
regulatory bodies, where possible, and seek external
advice on potential changes to legislation. We then
develop appropriate policies, procedures and controls,
as required, to fulfil our compliance obligations.
Our compliance framework, at all levels, is subject
to regular review by the Bank's Internal Audit department
and external assurance service providers.
----------------------------------------------------------------------
LIQUIDITY AND FUNDING RISK
PRINCIPAL RISK The Group is exposed to liquidity risk when the maturities
/ UNCERTAINTY of its assets and liabilities do not coincide, as well
as funding risk.
Although the Group expects to have sufficient funding
over the next 18 months and beyond to execute its strategy
and to have sufficient liquidity over the next 18 months
and beyond, liquidity risk is nevertheless inherent
in banking operations and may be heightened by a number
of factors, including an over-reliance on, or an inability
to access, a particular source of funding, changes in
credit ratings or market-wide phenomena, such as financial
market instability.
Credit markets worldwide have in recent years experienced,
and may continue to experience, a reduction in liquidity
and long-term funding as a result of global economic
and financial factors. The availability of credit in
emerging markets, in particular, is significantly influenced
by the level of investor confidence and, as such, any
factors that affect investor confidence (for example,
a downgrade in credit ratings of the Bank, Georgia,
or state interventions or debt restructurings in a relevant
industry) could affect the price or availability of
funding for the Group companies, operating in any of
these markets.
----------------------------------------------------------------------
KEY DRIVERS The Group's current liquidity may be affected by unfavourable
/ TRS financial market conditions. If assets held by the Group
in order to provide liquidity become illiquid or their
value drops substantially, the Group may be required,
or may choose, to rely on other sources of funding to
finance its operations and future growth. Only a limited
amount of funding, however, is available on the Georgian
inter-bank market, and recourse to other funding sources
may pose additional risks, including the possibility
that other funding sources may be more expensive and
less flexible. In addition, the Group's ability to access
such external funding sources depends on the level of
credit lines available to it, and this, in turn, is
dependent on the Group's financial and credit condition,
as well as general market liquidity.
In terms of current and short-term liquidity, the Group
is exposed to the risk of unexpected, rapid withdrawal
of deposits by its customers in large volumes. Circumstances
in which customers are more likely to withdraw deposits
in large volumes rapidly include, among others, a severe
economic downturn, a loss in consumer confidence, an
erosion of trust in financial institutions or a period
of social, economic or political instability. If a substantial
portion of customers rapidly or unexpectedly withdraw
their demand or term deposits or do not roll over their
term deposits upon maturity, this could have a material
adverse effect on the Group's business, financial condition
and results of operations.
Furthermore, should the COVID-19 pandemic continue to
cause disruption to economic activity in Georgia and
globally, there could be adverse impacts on the Group's
liquidity and funding positions.
----------------------------------------------------------------------
MITIGATION The Group manages its liquidity risk through the liquidity
risk management framework, which models the ability
of the Group to meet its payment obligations under both
normal conditions and crisis.
The Bank has developed a model based on the Basel III
liquidity guidelines. It maintains a solid buffer on
top of Liquidity Coverage Ratio (LCR) requirement of
100%, mandated by NBG since September 2017. A strong
LCR enhances the Group's short-term resilience. Moreover,
the Bank holds a comfortable buffer on top of Net Stable
Funding Ratio (NSFR) requirement of 100%, which came
into effect on 1 September 2019. A solid buffer over
NSFR provides stable funding sources over a longer time
span. This approach is designed to ensure that the funding
framework is sufficiently flexible to secure liquidity
under a wide range of market conditions. As of 30 June
2020, 31 December 2019 and 31 December 2018, the LCR
was 135.4%, 136.7 %, and 120.1 %, respectively, while
NSFR was 136.6% and 132.5 %, at 30 June 2020 and 31
December 2019, respectively, all comfortably above the
NBG's minimum regulatory requirements.
Among other things, the Group maintains a diverse funding
base comprising of short-term sources of funding (including
Retail Banking and Corporate and Investment Banking
customer deposits, inter-bank borrowings and borrowings
from the NBG) and longer-term sources of funding (including
term Retail Banking and Corporate and Investment Banking
deposits, borrowing from international credit institutions,
sales and purchases of securities, and long-term debt
securities).
Client deposits and notes are one of the most important
sources of funding for the Group. As of 30 June 2020,
31 December 2019 and 31 December 2018, 88.1%, 90.4%,
and 90.8%, respectively, of client deposits and notes
had contractual maturities of one year or less, of which
48.6%, 55.2%, and 55.1%, respectively, were payable
on demand. However, as of the same dates, the ratio
of net loans to client deposits and notes was 108.8%,
118.4%, and 115.5%, respectively, and the ratio of net
loans to client deposits and notes and DFIs was 94.5%,
103.2%, and 99.6%, respectively.
The Bank has strong support from International Financial
Institutions. It has already attracted a number of new
long-term borrowings both in local and foreign currencies
during the past few months in 2020 of more than US$200
million from International Finance Corporation, European
Investment Bank, FMO - Dutch entrepreneurial development
bank (in collaboration with other participating lenders)
and European Bank for Reconstruction and Development,
part of which has been drawn-down during the first half
of 2020. Furthermore, we are actively working with our
partner financial institutions and expect to sign new
long-term facilities of around US$400 million during
following months, which will further improve our liquidity
position and enable us to support our customers and
the economy in which we operate during these unprecedented
times.
Furthermore, as part of its updated supervisory plan
for Georgian banking sector, aimed at elevating the
negative financial and economic challenges created by
the COVID-19 in Georgia, the NBG announced the readiness
to revisit and reduce LCR requirements (on 1 May 2020,
NBG temporarily cancelled the 75% LCR requirement for
local currency for a one-year period, or until further
communicated by NBG), as well as mandatory reserve requirements,
if necessary. Furthermore, NBG has already extended
the eligibility criteria for repo-eligible securities
and this may be revisited further, if necessary, to
support the local currency liquidity.
----------------------------------------------------------------------
CAPITAL RISK
PRINCIPAL RISK The Bank faces the risk of not meeting the minimum capital
/ UNCERTAINTY adequacy requirements set by the NBG.
The Bank, like all regulated financial institutions
in Georgia, is required to comply with certain capital
adequacy ratios set by the NBG. The failure to maintain
the minimum capital adequacy ratios may have a material
adverse effect on the Group and may compromise its strategic
targets.
----------------------------------------------------------------------
KEY DRIVERS Since December 2017, the Bank is subject to NBG capital
/ TRS adequacy regulation, which is based on Basel III guidelines
of the Basel Committee of Banking Supervision, with
regulatory discretion applied by the NBG due to the
specifics of the local banking industry. The new increased
requirements are phased-in gradually with fully loaded
requirement of capital adequacy ratios of risk-weighted
assets effective by end of 2022 (temporarily amended
in March 2020 as described further below as NBG's response
to COVID-19 pandemic outbreak).
Our ability to comply with existing or amended NBG requirements
may be affected by a number of factors, including those
outside of our control, such as an increase in the Bank's
risk-weighted assets, our ability to raise capital,
losses resulting from deterioration in our asset quality
and/or a reduction in income levels and/or an increase
in expenses, local currency volatility, as well as weakening
of global and Georgian economies.
In March 2020, as a response to emerged COVID-19 pandemic,
in agreement with NBG, the Bank created a GEL 400 million
general provision under the Bank's local regulatory
accounting basis that is used to calculate the capital
adequacy ratios. This provision covers the NBG's current
expectation of estimated credit losses on the Bank's
lending book for the whole economic cycle. This resulted
in a decline in capital ratios in 2020, which still
stood comfortably above the minimum regulatory requirements.
That said, should the COVID-19 pandemic continue to
cause disruption to economic activity in Georgia and
globally, there could be further adverse impact on the
Group's capital adequacy position.
----------------------------------------------------------------------
MITIGATION The Group maintains an actively managed capital base
to cover risks inherent to its business. As part of
our capital adequacy management framework, we continuously
monitor market conditions and review market changes,
and perform stress and scenario testing to test our
position under adverse economic conditions, market and
regulatory developments. Capital position is continuously
monitored by the management, as well as the Board, to
ensure prudent management and timely actions, when necessary.
In 2019, we underwent the capital optimisation exercise
to strengthen the Bank's capital position and enable
the realisation of the potential upsides. For that,
in March 2019, the Bank issued inaugural $100 million
Additional Tier 1 Capital Notes, which marks the first
ever AT1 transaction from Georgia. This issuance helped
Bank of Georgia optimise its capital structure from
a foreign currency perspective, and provided a natural
hedge against operating in a dollarised economy. Further,
in December 2019, the Bank signed a ten-year US$107
million subordinated syndicated loan agreement arranged
by FMO - Dutch entrepreneurial development bank in collaboration
with other participating lenders, which qualifies for
the Tier 2 capital instrument under the NBG Basel III
framework.
In addition, in March 2020, given the level of uncertainty
with regard to the global impact of COVID-19 and the
potential length of time of that impact, the Board of
Directors decided not to recommend a dividend for the
2019 year to shareholders at the 2020 Annual General
Meeting. As a result of the ongoing uncertainties, the
Board has confirmed that the Group will not be distributing
a 2019 dividend to shareholders.
Furthermore, as part of its updated supervisory plan
for Georgian banking sector, aimed at elevating the
negative financial and economic challenges created by
the COVID-19 in Georgia, NBG implemented certain measures
in relation to capital adequacy requirements to allow
the banks to use existing regulatory capital buffers
to support customers in the current financially stressed
circumstances, to continue normal business activities
as far as possible, and to support the economy through
ongoing lending operations:
* Combined buffer - the conservation buffer requirement
of 2.5% of risk-weighted assets has been reduced to
0% indefinitely
* Pillar 2 requirements:
* Currency induced credit risk buffer (CICR)
requirement reduced by 2/3rds indefinitely
* The phase-in of additional credit portfolio
concentration risk buffer (HHI) and net General risk
assessment program (GRAPE) buffer requirements on
Common Equity Tier 1 (CET1) and Tier 1 capital,
planned at the end of March 2020, has been postponed
indefinitely
* The possibility of fully or partially releasing the
remaining requirements of Pillar 2 buffers (HHI, CICR,
net GRAPE), if necessary, remains open
* During the period the banks are allowed to partially
or fully use the Pillar 2 and conservation buffers,
the banks are restricted to make capital distribution
in any form
* The banks will be given sufficient time to build-up
capital buffers back to pre-crisis level
The Group's capital position remains robust, and comfortably
above our minimum regulatory requirements. At 30 June
2020, having absorbed the full upfront GEL 400 million
local regulatory accounting general provision, the Bank's
Basel III Common Equity Tier 1, Tier 1 and Total capital
adequacy ratios stood at 9.9%, 12.0% and 17.4% respectively,
all still comfortably above the minimum required levels
of 6.9%, 8.7% and 13.3%, respectively.
----------------------------------------------------------------------
OPERATIONAL RISK, CYBER-SECURITY, INFORMATION SYSTEMS AND FINANCIAL
CRIME
PRINCIPAL RISK We are at risk of experiencing cyber-attacks, attempts
/ UNCERTAINTY of unauthorised access to our systems and financial
crime, or failures in our banking activity processes
or systems or human error, which could disrupt our customer
services, result in financial loss, have legal or regulatory
implications and/or affect our reputation.
We are highly dependent on the proper functioning of
our risk management, internal controls and systems,
and internal processes including those related to data
protection, IT and information security in order to
manage these threats.
We may be adversely affected if we fail to mitigate
the risk of our products and services being used to
facilitate a financial crime.
----------------------------------------------------------------------
KEY DRIVERS Information-security threats have continued to increase
/ TRS over the past few years and we have seen a number of
major organisations subject to cyber-attacks. Fortunately,
our operations have not been materially affected and
we have not suffered a data breach. The external threat
profile is continuously changing, and we expect threats
to continue to increase.
Over the past few years, as our operations have expanded
and our focus has been directed towards more digitalisation
of banking products and services, we have seen an increase
in electronic crimes, including fraud, although losses
have not been significant. Money laundering (ML) and
Terrorism financing (FT) risks , which the Bank has
measures in place to guard against, continue to evolve
globally. The Bank continues to face stringent regulatory
and supervisory requirements related to the fight against
ML/TF. Failure to comply with these requirements may
lead to enforcement action by the regulator, which can
result in a pecuniary penalty and negatively impact
the Group's reputation .
----------------------------------------------------------------------
MITIGATION We have an integrated control framework encompassing
operational risk management, IT systems, corporate and
other data security, each of which is managed by a separate
department.
We have an anti-money laundering (AML)/counter-terrorist
financing (CTF) framework which includes a risk-based
approach (RBA) towards the ML/FT risks, Know Your Customer
(KYC), transaction monitoring, sanctions and transaction
screening, transaction reporting, correspondent relationship
assessment and monitoring, and training programmes.
The framework is designed to comply with the local legislation,
international standards (Financial Action Task Force
(FATF) recommendations), and international financial
sanctions programmes. We continue to enhance our AML
compliance function by strengthening the Bank's AML
compliance framework, policies and procedures (including
ML/FT risk management policy, KYC and Customer Acceptance
Policy). We have invested significant resources to further
improve our ML/FT risk management capabilities, including
transaction monitoring solutions. We have a regulatory
change management process in place ensuring timely compliance
with the new regulations.
We identify and assess operational risk categories within
our risk management framework, identify critical risk
areas or groups of operations with an increased risk
level, and develop policies and security procedures
to mitigate these risks.
In a view of continuous technological advancements,
which inevitably lead to the change of the cyber-threat
landscape, we are committed to implementing preventative
and reactive measures to protect information in all
of its forms from loss, unauthorised access, use, disclosure,
modification or destruction. To this end, we have established
a rigorous information security programme, which in
aligned with current business and regulatory requirements,
and an emerging threat landscape.
Policies and standards. Designated Governance and Risk
Management unit develops and maintains a comprehensive
set of information security policies and standards,
which are regularly reviewed by this unit to ensure
that they are up-to-date. These policies and standards
are reviewed and approved by the relevant governance
bodies on an annual basis, are aligned with recognised
industry standards, such as those determined by the
National Institute of Standards and Technology (the
"NIST") and the International Organisation for Standardisation
(the "ISO"), and are made available to all relevant
personnel through internal channels.
Internal and external information security checks .
To ensure the adequacy and effectiveness of our risk
management, internal controls and systems in place,
we carry out regular information security checks internally,
and with the assistance of external consultants. Our
Internal Audit department independently evaluates the
Bank's overall control environment, issues recommendations
and monitors the implementation of control measures.
Once a year, we engage external auditors to conduct
cyber-security audit. In addition, we regularly initiate
authorised simulated attacks on our system, have an
internationally recognised vendor conduct a penetration
test once a year, and carry out vulnerability assessments
on a quarterly basis.
Access management . We have access controls in place
that are based on the general principles, such as least
privilege access, separation of duties, defence in depth
and privileges commensurate with particular role's duties.
We continuously strive towards maintaining the existing
controls up-to-date. In response to our employees working
remotely due to the COVID-19 pandemic outbreak, to address
remote work related information and cyber-security risks,
we developed new monitoring rules and alerts, and modified
thresholds to detect anomalous activity, while working
from unprotected home networks, and we tightened security
requirements for gaining remote access.
Vendor security . While the effective relationships
with vendors are essential for our continued success,
we understand that they can pose significant risks to
our information security. We have established a comprehensive
procedure for evaluating the maturity of vendors' information
security and business continuity practices. As part
of the selection process, vendors are subject to information
security due diligence assessment. In line with the
findings of vendor's information security due diligence
assessment, necessary contractual and technical controls
are implemented. Existing vendor relationships are subject
to, at a minimum, annual monitoring and review to determine
their fulfilment of information security requirements.
Termination of a relationship with a vendor is subject
to exit procedures to ensure protection of our information's
confidentiality, integrity, availability and accountability.
Awareness programs . We conduct awareness campaigns
to help personnel recognise information security concerns
and respond accordingly. Information security training
is a requirement for all of our personnel as part of
on-boarding process, and afterwards once a year. On
a quarterly basis, Information Security department initiates
a phishing campaign to test the ability of our personnel
to detect phishing attacks and respond duly. On a periodic
basis, Information Security department sends awareness
e-mails and shares posts through internal channels regarding
current information security threats.
In response to COVID-19 pandemic outbreak, we developed
a mandatory specialised training course for our personnel
about working remotely in a secure manner, to protect
themselves against the emerging information security
threats (phishing e-mails claiming to contain information
about COVID-19, among others).
The Bank's Internal Audit function provides assurance
on the adequacy and effectiveness of our risk management,
internal controls and systems in place. These types
of operational risk are on the Audit and Risk Committees'
regular agenda and are also frequently discussed at
the Board level.
----------------------------------------------------------------------
COVID-19 PANDEMIC IMPACT RISK
PRINCIPAL RISK The coronavirus (COVID-19) was declared as a global
/ UNCERTAINTY pandemic in the beginning of 2020 and continues to rapidly
spread throughout the world. The spread of the virus
has led to global shutdowns. Full lockdown in Georgia
was introduced on 21 March 2020, and state of emergency
declared in the country, which lasted for around two
months, after which the Government started to gradually
release restrictions and open the economy. We are monitoring
the impact on our business, customers and employees
on an ongoing basis.
The outbreak in Georgia has not been as severe as in
many other countries, as the Georgian Government took
significant early actions to reduce the spread of the
virus, which included early flight bans, and school
and business closures, continued with complete restrictions
of all economic activities, other than essential stores
and services.
There is still uncertainty over the magnitude of the
global slowdown that will result from this pandemic.
The Georgian economy is well-diversified, both by sector,
and in terms of trading partner country dependence,
however, if the virus leads to a continued global shutdown
a significant negative impact on hospitality sector
in Georgia is expected. This may also impact other areas
of the Georgian economy, such as real estate.
----------------------------------------------------------------------
KEY DRIVERS With the COVID-19 pandemic, Georgia's economic outlook
/ TRS has clearly deteriorated. The IMF expects real GDP to
decline by 4% in 2020. The economic slowdown is expected
to have significant negative effect on hospitality sector,
as well as on other sectors of Georgian economy. Falling
exports, halt of tourism inflows and weaker remittances
are expected to widen the current account deficit in
2020.
Several measures were taken by the Georgian authorities
in order to respond effectively to COVID-19 crisis.
Safety measures implemented at early stage played a
critical role in containing the virus spread so far.
This was followed by the announcement of anti-crisis
stimulus plan, which includes a social assistance package
for individuals, as well as tax exemptions and various
funding mechanisms for businesses, and stimulus plans
for various sectors of economy, among others. Georgian
authorities have mobilised US$3.0 billion financing
from the IMF and other international partners (US, EU,
World Bank, KFW, AFD, EBRD, EIB, ADB, etc.). US$1.5
billion (9.9% of GDP) of this funding is earmarked for
the public sector and US$1.5 billion for the private
sector. With this support, the estimated stimulus in
2020 will be substantial at 11-15% of GDP, which will
help to finance healthcare and macroeconomic stabilisation
initiatives.
At the end of March 2020, NBG introduced an updated
supervisory plan for the Georgian banking sector, aimed
at alleviating the negative financial and economic challenges
created by the global COVID-19 pandemic in Georgia.
The measures, which were introduced with immediate effect,
were mainly focused on capital adequacy and liquidity
initiatives that allow banks to use existing regulatory
capital buffers to support customers in the current
financially stressed circumstances, to continue normal
business activities as far as possible, and to support
the economy through ongoing lending operations.
See pages 21-23 of the Group's 1Q20 results announcement
for detailed outline of initiatives implemented by the
Government of Georgia and the National Bank of Georgia
as a response to COVID-19 pandemic outbreak.
Our baseline scenario is that the pandemic fades and
the economy reopens in the second half of 2020, however,
the projections are subject to more than usual uncertainty.
----------------------------------------------------------------------
MITIGATION The Group has introduced a number of resilience protocols
and a comprehensive Business Continuity Plan (the "BCP")
aimed at curbing the spread of COVID-19 in Georgia and
mitigating the negative impact on our business and the
community. We started developing the BCP at the end
of January 2020, such that all of our operations would
be successfully adapted to the new operating environment,
while establishing the health and safety of all our
staff and customers as the number one priority. Our
BCP was focused on three main pillars: operating continuity
and efficiency (employees, customers and community),
capital, and liquidity and funding positions.
Operating continuity and efficiency: We have put in
place a number of initiatives to reduce physical interaction
and prevent the spread of coronavirus, whilst maintain
the full banking capability required to support and
assist our customers. This included additional safety
measures and protocols introduced in everyday working
environment, moving back office staff to working from
home, significantly enhancing the capacity of the call
centre, temporarily closing the customer service support
areas of express branches, with only the self-service
terminals and ATM areas remaining open, implementing
a three-month grace period on principal and interest
payments on all retail loans to significantly reduce
the requirement for customers to physically visit branches,
incentivising the offloading of customer activity to
digital channels, among others. See pages 23 and 24
of the Group's 1Q20 results announcement for detailed
outline of initiatives implemented as part of its BCP
by the Group to respond to COVID-19 pandemic outbreak.
Capital, liquidity and funding positions: As result
of extensive stress and scenario testing analysis, we
have put in place certain initiatives to ensure the
Group has sufficient liquidity and capital to meet regulatory
requirements, ensure the operational continuity of the
business and financial support of its customers. Furthermore,
NBG implemented countercyclical measures to support
the financial stability of the banking system to be
able to adequately respond to the crisis. See detailed
plans and initiatives put in place by the Bank to further
strengthen our capital and liquidity and funding positions,
as well as NBG's response plan to COVID-19 crisis, above,
in Mitigation section of Capital risk and Liquidity
and Funding risk.
Furthermore, as mentioned above, the Government of Georgia
has managed the pandemic well, with strong containment
of the disease, which has been acknowledged by the international
community. Through mobilisation of financing from international
organisation and its Anti-crisis stimulus plan, Government
announced a series of support measures and packages
to mitigate the negative economic impact of COVID-19.
We are monitoring the developing economic trends on
the back of the COVID-19 pandemic and its impact on
our business, customers and employees on an ongoing
basis. There is still significant uncertainty over the
magnitude of the global slowdown that will result from
this pandemic, and we will continue to take appropriate
actions to pro-actively manage evolving circumstances.
----------------------------------------------------------------------
Emerging risk - Climate change
PRINCIPAL RISK Financial risks resulting from the process of adjustment
/ UNCERTAINTY towards a lower carbon economy and from weather-related
events both extend across multiple categories such as
revenues, expenditures, assets and liabilities, capital
and financing and operations.
----------------------------------------------------------------------
KEY DRIVERS We consider sustainability to be integral to the growth
/ TRS of business. We are pioneering sustainability practices
in operations in Georgia, for example through our Environmental
and Social Risk Management System.
There is increased focus on these risks by key stakeholders
such as international institutions, customers and investors.
Further the regulatory landscape is evolving to reflect
climate change risk and will become subject to new reporting
requirements and regulatory guidance.
----------------------------------------------------------------------
MITIGATION We are raising climate awareness across the Group and
deepening our understanding of climate risks and opportunities.
Our dedicated Environmental and Social team is part
of our credit review process and supports our customers.
We have established a working group with overall responsibility
of assessing current disclosures and identifying alignment
and gaps.
We will assess if and how internal processes may need
to be modified for assessing climate related risks and
opportunities.
----------------------------------------------------------------------
STATEMENT OF DIRECTORS' RESPONSIBILITIES
We, the Directors, confirm that to the best of our
knowledge:
-- The interim condensed consolidated financial statements have
been prepared in accordance with International Accounting Standard
(IAS) 34 "Interim Financial Reporting" as adopted by the European
Union, and give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Group;
-- This Results Report includes a fair review of the information
required by Disclosure Guidance and Transparency Rule 4.2.7R
(indication of important events during the first six months and
description of principal risks and uncertainties for the remaining
six months of the year); and
-- This Results Report includes a fair review of the information
required by Disclosure Guidance and Transparency Rule 4.2.8R
(disclosure of related parties' transactions and changes
therein)
After considering the Group's financial and cash flow forecasts
and all other available information and possible outcomes or
responses to events, the Board is satisfied that the Group has
adequate resources to continue in operational existence for the
foreseeable future and therefore, the Directors considered it
appropriate to adopt the going concern basis in preparing this
Results Report.
The Directors of the Group are as follows:
Neil Janin
Archil Gachechiladze
Hanna Loikkanen
Alasdair Breach
Tamaz Georgadze
Jonathan Muir
Cecil Quillen
Véronique McCarroll
By order of the Board
Neil Janin Archil Gachechiladze
Chairman Chief Executive Officer
19 August 2020
INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
CONTENTS
INDEPENT REVIEW REPORT
Interim condensed consolidated statement of financial
position..................................................................................................
41
Interim condensed consolidated income
statement........................................................................................................................
42
Interim condensed consolidated statement of comprehensive
income.........................................................................................
43
Interim condensed consolidated statement of changes in equity
..................................................................................................
44
Interim condensed consolidated statement of cash flows
.............................................................................................................
45
SELECTED EXPLANATORY NOTES TO INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. Principal activities
2. Basis of preparation
3. Summary of significant accounting policies
4. Significant accounting judgements and estimates
5. Segment information
6. Cash and cash equivalents
7. Amounts due from credit institutions
8. Investment securities
9. Loans to customers and finance lease receivables
10. Taxation
11. Client deposits and notes
12. Amounts owed to credit institutions
13. Debt securities issued
14. Commitments and contingencies
15. Equity
16. Net interest income .
17. Net fee and commission income
18. Expected credit loss .
19. Net non-recurring items
20. Risk management
21. Fair value measurements
22. Maturity analysis of financial assets and liabilities
23. Related party disclosures
24. Capital adequacy
INDEPENT REVIEW REPORT TO BANK OF GEORGIA GROUP PLC
Introduction
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report as at
and for the six months ended 30 June 2020 which comprises Interim
Condensed Consolidated Statement of Financial Position, Interim
Condensed Consolidated Income Statement, Interim Condensed
Consolidated Statement of Comprehensive Income, Interim Condensed
Consolidated Statement of Changes in Equity, Interim Condensed
Consolidated Statement of Cash Flows and related notes 1 to 24. We
have read the other information contained in the half yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the company in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
company, for our work, for this report, or for the conclusions we
have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34, "Interim
Financial Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report as at and for the six months
ended 30 June 2020 is not prepared, in all material respects, in
accordance with International Accounting Standard 34 as adopted by
the European Union and the Disclosure Guidance and Transparency
Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
London
1 9 August 2020
Notes:
1. The maintenance and integrity of the Bank of Georgia Group
PLC's web site is the responsibility of the directors; the work
carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for
any changes that may have occurred to the financial statements
since they were initially presented on the web site.
2. Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
As at 30 June 2020
(Thousands of Georgian Lari)
As at
--------------------------------
Notes 30 June 31 December
2020 (unaudited) 2019
------ ------------------ ------------
Assets
Cash and cash equivalents 6 1,633,755 2,153,624
Amounts due from credit institutions 7 1,700,075 1,619,072
Investment securities 8 2,113,900 1,786,804
Loans to customers and finance
lease receivables 9 12,599,092 11,931,262
Accounts receivable and other
loans 4,060 3,489
Prepayments 31,513 42,632
Inventories 13,901 12,297
Right-of-use assets 89,758 96,095
Investment properties 212,182 225,073
Property and equipment 396,272 379,788
Goodwill 33,351 33,351
Intangible assets 116,355 106,290
Income tax assets 10 54,595 282
Other assets 139,945 143,154
Assets held for sale 45,212 36,284
Total assets 19,183,966 18,569,497
================== ============
Liabilities
Client deposits and notes 11 11,583,139 10,076,735
Amounts owed to credit institutions 12 3,521,860 3,934,123
Debt securities issued 13 1,561,933 2,120,064
Lease liability 96,878 94,616
Accruals and deferred income 37,257 52,471
Income tax liabilities 10 70,171 37,918
Other liabilities 112,929 102,662
Total liabilities 16,984,167 16,418,589
------------------ ------------
Equity 15
Share capital 1,618 1,618
Additional paid-in capital 500,887 492,072
Treasury shares (54) (64)
Other reserves 25,417 (7,481)
Retained earnings 1,662,164 1,655,256
Total equity attributable to shareholders
of the Group 2,190,032 2,141,401
Non-controlling interests 9,767 9,507
------------------ ------------
Total equity 2,199,799 2,150,908
------------------ ------------
Total liabilities and equity 19,183,966 18,569,497
================== ============
The financial statements on page 41 to 78 were approved by the
Board of Directors on 19 August 2020 and signed on its behalf
by:
Archil Gachechiladze
Chief Executive Officer
19 August 2020
Bank of Georgia Group PLC
Registered No. 10917019
INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT
For the six months ended 30 June 2020
(Thousands of Georgian Lari)
For the six months
ended
---------------------------------------
Notes 30 June 30 June
2020 (unaudited) 2019 (unaudited)*
------ ------------------ -------------------
Interest income calculated using
EIR method 751,436 665,752
Other interest income 15,928 11,207
Interest income 767,364 676,959
Interest expense (390,473) (291,797)
Deposit insurance fees (4,874) (3,827)
Net interest income 16 372,017 381,335
------------------ -------------------
Fee and commission income 125,284 130,556
Fee and commission expense (52,271) (45,109)
------------------ -------------------
Net fee and commission income 17 73,013 85,447
------------------ -------------------
Net foreign currency gain 53,404 49,952
Net other (expense) income 15,707 (691)
Operating income 514,141 516,043
------------------ -------------------
Salaries and other employee benefits (117,194) (122,811)
Administrative expenses (49,470) (44,774)
Depreciation and amortisation (42,529) (32,983)
Other operating expenses (1,974) (2,329)
------------------ -------------------
Operating expenses (211,167) (202,897)
------------------ -------------------
Profit from associates 414 442
Operating income before cost of
risk 303,388 313,588
------------------ -------------------
Expected credit loss /impairment
charge on
loans to customers 18 (216,568) (72,553)
Expected credit loss /impairment
charge on
finance lease receivables 18 (5,273) (1,003)
Other expected credit (loss) /
recovery 18 (21,744) (1,014)
Impairment charge on other assets
and provisions (8,038) (3,559)
------------------ -------------------
Cost of risk (251,623) (78,129)
------------------ -------------------
Net operating income before non-recurring
items 51,765 235,459
------------------ -------------------
Net non-recurring items 19 (41,586) (8,097)
------------------ -------------------
Profit before income tax expense 10,179 227,362
Income tax benefit (expense) 10 4,560 (18,246)
Profit for the period 14,739 209,116
================== ===================
Total profit attributable to:
- shareholders of the Group 14,659 208,154
- non-controlling interests 80 962
-------------------
14,739 209,116
================== ===================
Basic earnings per share 15 0.3080 4.3505
Diluted earnings per share 15 0.3079 4.3350
*Certain amounts do not correspond to the 2019 interim condensed
consolidated financial statements as they reflect the
reclassification adjustments made as described in Note 3.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME
For the six months ended 30 June 2020
(Thousands of Georgian Lari)
For the six months
ended
--------------------------------------
Notes 30 June 30 June
2020 (unaudited) 2019 (unaudited)
------ ------------------ ------------------
Profit for the period 14,739 209,116
------------------ ------------------
Other comprehensive loss from continuing
operations
Other comprehensive loss from continuing
operations to be reclassified to profit
or loss in subsequent periods:
- Net change in fair value on investments
in debt instruments measured at fair value
through other comprehensive income (FVOCI) 8 34,171 12,961
- Realised gain on financial assets measured
at FVOCI (1,323) (6,361)
-Change in allowance for expected credit
losses on investments in debt instruments
measured at FVOCI reclassified to the
consolidated income statement 205 1,727
- (Loss) gain from currency translation
differences (4,789) 13,200
Net other comprehensive income (loss)
from continuing operations to be reclassified
to profit or loss in subsequent periods 28,264 21,527
Other comprehensive (loss) income from
continuing operations not to be reclassified
to profit or loss in subsequent periods:
- Net loss on investments in equity instruments
designated at FVOCI (828) 185
Net other comprehensive (loss) income
from continuing operations not to be reclassified
to profit or loss in subsequent periods (828) 185
Other comprehensive loss for the period,
net of tax 27,436 21,712
------------------ ------------------
Total comprehensive income (loss) for
the period 42,175 230,828
================== ==================
Total comprehensive income attributable
to:
- shareholders of the Group 41,943 229,727
- non-controlling interests 232 1,101
------------------ ------------------
42,175 230,828
================== ==================
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
EQUITY
For the six months ended 30 June 2020
(Thousands of Georgian Lari)
Attributable to shareholders of the Group
------------------------------------------------------------------------------ ---------------- ----------
Reserves
of
disposal
group
Additional held
Share paid-in Treasury Other for Retained Non-controlling Total
capital capital shares reserves sale earnings Total interests equity
-------- ----------- --------- --------- --------- ---------- ---------- ---------------- ----------
31 December
2018 1,618 480,555 (51) 30,515 - 1,277,732 1,790,369 7,904 1,798,273
======== =========== ========= ========= ========= ========== ========== ================ ==========
Profit for
the six months
ended 30 June
2019
(unaudited) - - - - - 208,154 208,154 962 209,116
Other
comprehensive
income for
the six months
ended 30 June
2019
(unaudited) - - - 16,229 - 5,344 21,573 139 21,712
Total
comprehensive
income for
the six months
ended 30 June
2019
(unaudited) - - - 16,229 - 213,498 229,727 1,101 230,828
Increase in
equity arising
from
share-based
payments - 37,893 13 - - - 37,906 - 37,906
Purchase of
treasury shares - (24,558) (11) - - - (24,569) - (24,569)
Dividends to
shareholders
of the Group
(Note 15) - - - - - (123,598) (123,598) - (123,598)
Dividends of
subsidiaries
to
non-controlling
shareholders - - - - - - - (621) (621)
30 June 2019
(unaudited) 1,618 493,890 (49) 46,744 - 1,367,632 1,909,835 8,384 1,918,219
======== =========== ========= ========= ========= ========== ========== ================ ==========
31 December
2019 1,618 492,072 (64) (7,481) - 1,655,256 2,141,401 9,507 2,150,908
======== =========== ========= ========= ========= ========== ========== ================ ==========
Profit for
the six months
ended 30 June
2020
(unaudited) - - - - - 14,659 14,659 80 14,739
Other
comprehensive
income for
the six months
ended 30 June
2020
(unaudited) - - - 32,899 - (5,615) 27,284 152 27,436
Total
comprehensive
income for
the six months
ended 30 June
2020
(unaudited) - - - 32,899 - 9,044 41,943 232 42,175
Increase in
equity arising
from
share-based
payments - 28,137 21 - - - 28,158 - 28,158
Purchase of
treasury shares - (19,322) (11) - - - (19,333) - (19,333)
Dividends to
shareholders
of the Group
(Note 15) - - - - - (2,136) (2,136) - (2,136)
Increase in
share capital
of subsidiaries - - - 9 - - 9 18 27
Dilution of
interests in
subsidiaries - - - (10) - - (10) 10 -
30 June 2020
(unaudited) 1,618 500,887 (54) 25,417 - 1,662,164 2,190,032 9,767 2,199,799
======== =========== ========= ========= ========= ========== ========== ================ ==========
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended 30 June 2020
(Thousands of Georgian Lari)
For the six months
ended
--------------------------------------
Notes 30 June 30 June
2020 (unaudited) 2019 (unaudited)
------ ------------------ ------------------
Cash flows from operating activities
Interest received 578,260 655,576
Interest paid (378,469) (292,660)
Fees and commissions received 140,288 108,728
Fees and commissions paid (52,271) (45,109)
Net cash inflow (outflow) from real 6,284 -
estate
Net realised gain from foreign currencies 52,059 44,354
Recoveries of loans to customers previously
written off 9 14,592 1,727
Other income received (expense paid) (3,442) 8,443
Salaries and other employee benefits
paid (89,036) (89,147)
General and administrative and operating
expenses paid (61,418) (29,435)
Cash flows from operating activities
before changes in operating assets
and liabilities 206,847 362,477
Net (increase) decrease in operating
assets
Amounts due from credit institutions 29,290 (278,765)
Loans to customers and finance lease
receivables (194,329) (779,163)
Prepayments and other assets 6,895 (9,271)
Net increase (decrease) in operating
liabilities
Amounts due to credit institutions (528,940) (124,375)
Debt securities issued (652,905) 306,397
Client deposits and notes 1,007,920 273,561
Lease liability - (1,093)
Other liabilities (41,188) (13,322)
------------------ ------------------
Net cash flows from operating activities
before income tax (166,410) (263,554)
Income tax paid (17,500) (2,369)
------------------ ------------------
Net cash flows from operating activities (183,910) (265,923)
------------------ ------------------
Cash flows from (used in) investing
activities
Net sales (purchases) of investment
securities (288,691) 131,599
Proceeds from sale of investment properties
and
assets held for sale 23,512 19,813
Proceeds from sale of property and
equipment and
intangible assets 317 2,913
Purchase of property and equipment
and intangible assets (65,233) (50,543)
Dividends received 632 210
------------------ ------------------
Net cash flows from (used in) investing
activities (329,463) 103,992
------------------ ------------------
Cash flows from (used in) financing
activities
Cash payments for the principal portion (2,502) -
of the lease liability
Dividends paid (2,164) (123,765)
Purchase of treasury shares (19,333) (24,569)
Net cash from (used in) financing
activities (23,999) (148,334)
------------------ ------------------
Effect of exchange rates changes on
cash and cash equivalents 17,445 30,509
Effect of expected credit losses on
cash and cash equivalents 58 63
Net increase (decrease) in cash and
cash equivalents (519,869) (279,693)
------------------ ------------------
Cash and cash equivalents, beginning
of the period 6 2,153,624 1,215,799
Cash and cash equivalents, end of
the period 6 1,633,755 936,106
Bank of Georgia Group PLC and Subsidiaries
Selected Explanatory Notes to Interim Condensed Consolidated
Financial Statements
(Thousands of Georgian Lari)
1. Principal activities
Bank of Georgia Group PLC ("BOGG") is a public limited liability
company incorporated in England and Wales with registered number
10917019. BOGG holds 99.55% of the share capital of JSC Bank of
Georgia (the "Bank") as at 30 June 2020, representing the Bank's
ultimate parent company. Together with the Bank and other
subsidiaries, the Group makes up a group of companies (the "Group")
and provides banking, leasing, brokerage and investment management
services to corporate and individual customers. The shares of BOGG
("BOGG Shares") are admitted to the premium listing segment of the
Official List of the UK Listing Authority and admitted to trading
on the London Stock Exchange PLC's Main Market for listed
securities, effective 21 May 2018. The Bank is the Group's main
operating unit and accounts for most of the Group's activities.
JSC Bank of Georgia was established on 21 October 1994 as a
joint stock company ("JSC") under the laws of Georgia. The Bank
operates under a general banking license issued by the National
Bank of Georgia ("NBG"; the central bank of Georgia) on 15 December
1994.
The Bank accepts deposits from the public and extends credit,
transfers payments in Georgia and internationally, and exchanges
currencies. Its main office is in Tbilisi, Georgia. At 30 June
2020, the Bank has 229 operating outlets in all major cities of
Georgia (31 December 2019: 272). The Bank's registered legal
address is 29a Gagarini Street, Tbilisi 0160, Georgia.
BOGG's registered legal address is 84 Brook Street, London, W1K
5EH, England.
As at 30 June 2020 and 31 December 2019, the following
shareholders owned more than 3% of the total outstanding shares of
BOGG. Other shareholders individually owned less than 3% of the
outstanding shares.
As at
--------------------------------
30 June 31 December
Shareholder 2020 (unaudited) 2019
------------------ ------------
JSC Georgia Capital** 19.90% 19.90%
Harding Loevner Management LP 4.88% 4.78%
JP Morgan Asset Management 3.35% 3.52%
Van Eck Associates Corporation 3.33% 2.78%
Dimensional Fund Advisors (DFA)
LP 3.03% 2.90%
Others 65.51% 66.12%
Total* 100.00% 100.00%
================== ============
* For the purposes of calculating percentage of shareholding,
the denominator includes total number of issued shares, which
includes shares held in the trust for the share-based compensation
purposes of the Group.
** JSC Georgia Capital will exercise its voting rights at the
Group's general meetings in accordance with the votes cast by all
other Group Shareholders, as long as JSC Georgia Capital's
percentage holding in Bank of Georgia Group PLC is greater than
9.9%.
2. Basis of preparation
General
The financial information set out in these interim condensed
consolidated financial statements does not constitute Bank of
Georgia Group PLC's statutory financial statements within the
meaning of section 434 of the Companies Act 2006. Statutory
financial statements were prepared for the year ended 31 December
2019 under IFRS, as adopted by the European Union and reported on
by BOGG's auditors and delivered to the Registrar of Companies. The
auditor's report was unqualified and did not contain a statement
under section 498 (2) or (3) of the Companies Act 2006.
These interim condensed consolidated financial statements of
Bank of Georgia Group PLC represent continuation of consolidated
financial statements of BGEO Group PLC prepared in accordance with
International Financial Reporting Standards ('IFRS') as adopted by
the European Union ("EU").
These interim condensed consolidated financial statements for
the six months ended 30 June 2020 were prepared in accordance with
International Accounting Standard (IAS) 34 "Interim Financial
Reporting", as adopted by the European Union, and the Disclosure
and Transparency Rules of the Financial Conduct Authority.
The preparation of the interim condensed consolidated financial
statements requires management to make estimates and assumptions
that affect the reported income and expense, assets and liabilities
and disclosure of contingencies at the date of the interim
condensed consolidated financial statements. Although these
estimates and assumptions are based on management's best judgment
at the date of the interim condensed consolidated financial
statements, actual results may differ from these estimates.
Assumptions and significant estimates other than disclosed in
these interim condensed consolidated financial statements are
consistent with those applied in the preparation of the Group's
annual consolidated financial statements for the year ended 31
December 2019.
The interim condensed consolidated financial statements do not
include all the information and disclosures required in the annual
consolidated financial statements, and should be read in
conjunction with the Group's annual consolidated financial
statements as at and for the year ended 31 December 2019, signed
and authorized for release on 16 March 2020.
These interim condensed consolidated financial statements are
presented in thousands of Georgian Lari ("GEL"), except per share
amounts, which are presented in Georgian Lari, and unless otherwise
noted.
The interim condensed consolidated financial statements are
unaudited, reviewed by the auditors and their review conclusion is
included in this report.
Going concern
The Board of Directors of BOGG has made an assessment of the
Group's ability to continue as a going concern which also included
assessment of forecast cash flows as a result of COVID-19 pandemic.
Based on this, the Board of Directors is satisfied that it has the
resources to continue in business for a period of at least 12
months from the date of approval of the interim condensed
consolidated financial statements. Furthermore, management is not
aware of any material uncertainties that may cast significant doubt
upon the Group's ability to continue as a going concern for the
foreseeable future. Therefore, the interim condensed consolidated
financial statements continue to be prepared on the going concern
basis.
3.
3. Summary of significant accounting policies
Basis of consolidation
The accounting policies and methods of computation applied in
the preparation of these interim condensed consolidated financial
statements are consistent with those disclosed in the annual
consolidated financial statements of the Group as at and for the
year ended 31 December 2019
Amendments effective from 1 January 2020
Amendments to IFRS 16: Covid-19-Related Rent Concessions
Accounting consequences of changes in lease payments depend on
whether that change meets the definition of a lease modification,
which IFRS 16 Leases defines as "a change in the scope of a lease,
or the consideration for a lease, that was not part of the original
terms and conditions of the lease.
Amendment provided lessees with an exemption from assessing
whether a COVID-19-related rent concession is a lease modification.
If lessee applies the exemption, COVID-19-related rent concessions
should be accounted as if they were not lease modifications. The
amendment is effective for annual reporting periods beginning on or
after 1 June 2020.
The amendment did not have material effect on Group's interim
condensed consolidated financial statements.
Amendments to IAS 1 and IAS 8: Definition of Material
The amendments provide a new definition of material that states
that information is material if omitting, misstating or obscuring
it could reasonably be expected to influence decisions that the
primary users of general purpose financial statements make on the
basis of those financial statements, which provide financial
information about a specific reporting entity. The amendments are
effective for annual reporting periods beginning on or after 1
January 2020.
The amendment did not have material effect on Group's interim
condensed consolidated financial statements.
Reclassifications
As at 31 December 2019 the Group revisited the presentation of
the effects of certain cross-currency swap agreements to hedge net
interest rate risk on Euro-denominated lending. Considering that
during 2019 such contracts reached significant volume, the Group
revisited the presentation of the effects of these agreements in
its income statement. As a result, the Group concluded that certain
reclassification is required to better reflect the risk management
objective of the Group. The following reclassifications were made
to the interim condensed consolidated income statement for the
period ended 30 June 2019. The Group believes that such
presentation provides better information to the users of the
Group's financial statements regarding the Group's risk management
strategy:
Consolidated income statement for As previously Reclassification As reclassified
the period ended reported
30 June 2019
-------------- ----------------- ----------------
Interest expense (308,569) 16,772 (291,797)
Interest element of cross-currency
swaps - 16,772 16,772
Net foreign currency gain 66,724 (16,772) 49,952
4. Significant accounting judgements and estimates
In the process of applying the Group's accounting policies, the
Board of Directors and management use their judgement and make
estimates in determining the amounts recognised in the interim
condensed consolidated financial statements.
Given the unprecedented nature of the COVID-19 pandemic and the
uncertainties associated with it, the Group re-considered the
existing accounting judgements and estimates and applied management
overlays to the methodology. As a result, the Group has made a
number of changes in the significant judgements that were applied
as at the end of the previous reporting date. The most significant
changes were as follows:
Allowance for impairment of financial assets
Significant Increase in Credit Risk (SICR)
In response to COVID-19 outbreak the Group implemented an
initiative to grant 3 months payment holidays to its borrowers in
order to significantly reduce the requirement for customers to
physically visit Bank branches.
Given the unprecedented nature of the COVID-19 pandemic and the
uncertainties associated with it, the Bank re-considered the
existing impairment model and applied management overlays to the
methodology to reflect a COVID-19 effect in ECL. In particular,
granting the three-month payment holidays to the borrowers was not
automatically considered as SICR event (i.e. a trigger to transfer
the exposures from Stage 1 to Stage 2) and was only transferred to
stage 2 where there was an observable evidence of financial
difficulties of the borrower indicating that the level of risk has
increased significantly since loan origination.
In assessing whether the credit risk has significantly increased
as a result, the Group has identified a series of qualitative and
quantitative criteria based on undertaking the holistic analysis of
various factors including those which are specific to a particular
financial instrument or to a borrower as well as those applicable
to particular sub-portfolios.
Further, for the borrowers for which the credit risk was
considered as significantly increased, Probability of Default (PD)
of 1 were assigned in the downside scenario and the ECL was
calculated as a weighted average of the scenario results.
Measurement of expected credit losses
Loss given default (LGD): The determination of the LGD takes
into account expected future cash flows from credit enhancements
and other collateral which is adjusted to reflect the effect of
COVID-19 in interim condensed consolidated financial statements. In
particular, the Group initially applied a 15% haircut to the
expected future cash flows from the real estate collateral values
in USD in baseline and upside scenarios and a 30% haircut in the
downside scenario, respectively. In second quarter of 2020 based on
the macro-economic forecast scenarios published by the NBG, these
assumptions were reassessed to a 5% haircut in baseline and 15%
haircut in Downside scenarios to the expected future cash flows
from the real estate collateral values in GEL, respectively.
Further we have adjusted Cure and Recovery rates by 20%
downwards.
Forward-looking information
Forward-looking variable assumptions
To incorporate forward-looking information into the Group's
allowance for credit losses, the Group uses the macroeconomic
forecasts provided by National Bank of Georgia for Group companies
operating in Georgia, while data used by Belarusky Narodny Bank
("BNB") is provided by a non-governmental research centre operating
in Belarus. Macroeconomic variables covered by these forecasts and
which the Group incorporated in its ECL model, include: GDP growth,
foreign exchange rate and inflation rate which are updated for
anticipated impact of COVID-19 pandemic.
The most significant period end assumptions used for ECL
estimate as at 30 June 2020 per geographical segments are set out
below. The scenarios "base", "upside" and "downside" were used for
all portfolios.
Georgia
Key ECL Assigned As at 30 June Assigned As at 31 March Assigned As at 31 December
drivers scenario weight 2020 weight 2020 weight 2019
----------- ---------- --------- -------------------- --------- -------------------- --------- --------------------
2020 2021 2022 2020 2021 2022 2020 2021 2022
----------- ---------- --------- ------ ----- ----- --------- ------ ----- ----- --------- ----- ----- ------
GDP growth
in %
Upside 25% -3.0% 6.0% 5.0% 10% 2.1% 7.0% 6.0% 25% 5.5% 6.0% 5.0%
Base
case 50% -4.0% 4.5% 5.0% 50% -2.7% 5.5% 5.0% 50% 4.5% 5.0% 5.0%
Downside 25% -9.0% 2.5% 4.0% 40% -7.0% 2.5% 3.5% 25% 2.5% 3.5% 4.5%
GEL/USD
exchange
rate
Upside 25% 3.04 2.89 2.89 10% 3.05 2.80 2.80 25% 2.76 2.62 2.62
Base
case 50% 3.20 3.20 3.20 50% 3.30 2.95 2.90 50% 2.90 2.90 2.90
Downside 25% 3.52 3.70 3.51 40% 3.80 3.30 3.20 25% 3.19 3.35 3.18
CPI
inflation
rate in %
Upside 25% 5.5% 4.0% 3.0% 10% 4.2% 3.0% 3.0% 25% 4.5% 3.5% 3.0%
Base
case 50% 4.5% 1.5% 2.5% 50% 4.7% 3.5% 3.0% 50% 4.5% 2.5% 3.0%
Downside 25% 7.0% 2.0% 2.5% 40% 7.0% 5.0% 4.5% 25% 7.0% 5.0% 3.0%
4. Significant accounting judgements and estimates
(continued)
Forward-looking variable assumptions (continued)
Belarus
Key drivers ECL Assigned As at 30 June 2020 As at 31 December 2019
scenario weight
--------------- ----------- ---------
2021Q1 2021Q2 2021Q3 2021Q4 2020Q1 2020Q2 2020Q3 2020Q4
--------------- ----------- --------- ------- ------- ------- ------- ------- ------- ------- -------
GDP growth
in %
Upside 25% 2.0% 2.0% 2.0% 2.0% 3.4% 2.9% 3.2% 3.6%
Base
case 50% 0.0% 1.0% 1.0% 1.0% 1.6% 0.8% 1.0% 1.2%
Downside 25% -2.0% 0.0% 0.0% 0.0% -0.3% -1.3% -1.3% -1.3%
BYN/USD
exchange
rate %
Upside 25% 0.0% 0.0% 0.0% 0.0% -5.1% -5.4% -4.7% -3.3%
Base
case 50% 0.0% 0.0% 0.0% 0.0% -0.6% 0.7% 2.7% 2.8%
Downside 25% -3.6% 0.0% 0.0% 0.0% 3.9% 6.7% 10.0% 8.5%
CPI inflation
rate in
%
Upside 25% 1.5% 0.2% 0.2% 0.2% 1.5% 0.4% -0.3% 0.5%
Base
case 50% 1.5% 0.7% 0.7% 0.7% 2.1% 1.0% 0.3% 1.6%
Downside 25% 1.5% 1.3% 1.3% 1.3% 2.6% 1.5% 0.9% 2.7%
All other parameters held constant, increase in GDP growth,
appreciation of local currency and decrease of inflation would
result in decrease in ECL, with opposite changes resulting in ECL
increase. GDP growth input has the most significant impact on ECL,
followed by foreign exchange rate and inflation. Retail portfolio
ECL is less affected by foreign exchange rate inputs due to larger
share of GEL-denominated exposures. However, retail portfolio ECL
is affected by inflation, which does not have a significant impact
on corporate ECL.
The table below shows the sensitivity of the recognised ECL
amounts to the forward looking assumptions used in the model. For
these purposes, 100% weight is assigned to each macroeconomic
scenario separately and respective ECL is recalculated.
Sensitivity of ECL to forward looking assumptions
As at 30 June 2020
-----------------------------------------------------------
Reported Reported ECL coverage by scenarios
ECL ECL coverage
--------- -------------- --------------------------------
Key drivers Upside Basecase Downside
--------- -------------- -------- ---------- ----------
Commercial loans 166,954 3.78% 3.45% 3.48% 4.70%
Residential
mortgage loans 44,324 1.35% 1.01% 1.02% 2.34%
Micro and SME
loans 99,954 3.45% 2.53% 2.58% 6.11%
Consumer loans 121,936 5.62% 5.08% 5.12% 7.18%
Gold - pawn
loans 409 0.43% 0.43% 0.43% 0.44%
Fair value of financial instruments
Where the fair values of financial assets and financial
liabilities recorded in the interim condensed consolidated
statement of financial position cannot be derived from active
markets, they are determined using a variety of valuation
techniques that include the use of mathematical models. The input
to these models is taken from observable markets where possible,
but where this is not feasible, a degree of judgement is required
in establishing fair values (Note 21). No specific adjustment due
to COVID-19 was applied.
Measurement of fair value of investment properties
The Group performs valuation of its investment properties with a
sufficient regularity to ensure that the carrying amount does not
differ materially from that which would be determined using fair
value at the end of the reporting period. The last date of
valuation of investment properties was 31 December 2019.
In order to identify any significant changes in the real estate
market as a result of COVID-19 that could indicate that investment
properties are not stated at fair value as at the reporting date,
the Group hired an independent valuator to perform real estate
market research. The research results have revealed that although
COVID-19 has negatively affected the market in terms of number of
transactions, prices have not been largely affected, therefore, no
revaluation was applied as at the reporting date.
5. Segment information
The Group disaggregated revenue from contracts with customers by
products and services for each of the segments, as the Group
believes it best depicts how the nature, amount, timing and
uncertainty of revenue and cash flows are affected by economic
factors.
In 2020 the Group allocated holding company operation results to
the respective segments, the comparative periods were not restated
as the change was not material and the information is still
comparable.
For management purposes, the Group is organised into the
following operating segments based on products and services as
follows:
RB - Retail Banking (excluding Retail Banking of BNB) -
principally provides consumer loans, mortgage loans, overdrafts,
credit cards and other credit facilities, funds transfers and
settlement services, and handling of customers' deposits for both
individuals and legal entities. The Retail Banking business targets
the emerging retail, mass retail and mass affluent segments,
together with small and medium size enterprises, and micro
businesses.
CIB - Corporate Investment Banking - comprises Corporate Banking
and Investment Management operations in Georgia. Corporate Banking
principally provides loans and other credit facilities, funds
transfers and settlement services, trade finance services,
documentary operations support and handles saving and term deposits
for corporate and institutional customers. The Investment
Management business principally provides private banking services
to high-net worth clients.
BNB - Comprising JSC Belarusky Narodny Bank, principally
providing retail and corporate banking services in Belarus.
Management monitors the operating results of its segments
separately for the purpose of making decisions about resource
allocation and performance assessment. Segment performance, as
explained in the table below, is measured in the same manner as
profit or loss in the Consolidated Income Statement.
Transactions between operating segments are on an arm's length
basis in a similar manner to transactions with third parties.
The Group's operations are primarily concentrated in Georgia,
except for BNB, which operates in Belarus.
No revenue from transactions with a single external customer or
counterparty amounted to 10% or more of the Group's operating
income in 2020 or 2019.
5. Segment information (continued)
The following table presents the income statement and certain
asset and liability information regarding the Group's operating
segments as at and for the six month period ended 30 June 2020:
Retail Corporate BNB Eliminations Group
Banking investment Total
Banking
------------ ---------
Net interest income 220,934 132,451 18,626 6 372,017
Net fee and commission
income 51,581 18,152 3,190 90 73,013
Net foreign currency
gain (loss) 29,159 19,965 4,280 - 53,404
Net other (expense)
income 5,991 9,506 683 (473) 15,707
Operating income 307,665 180,074 26,779 (377) 514,141
----------- ------------ --------- ------------- -----------
Operating expenses (156,625) (38,115) (16,804) 377 (211,167)
Profit from associates 414 - - - 414
Operating income (expense)
before
cost of risk 151,454 141,959 9,975 - 303,388
Cost of risk (147,835) (98,438) (5,350) - (251,623)
Net operating income
(loss) before
non-recurring items 3,619 43,521 4,625 - 51,765
----------- ------------ --------- ------------- -----------
Net non-recurring
expense/loss (40,178) (1,374) (34) - (41,586)
Profit (loss) before
income tax (36,559) 42,147 4,591 - 10,179
----------- ------------ --------- ------------- -----------
Income tax expense 8,000 (2,398) (1,042) - 4,560
Profit (loss) for
the period from
continuing operations (28,559) 39,749 3,549 - 14,739
----------- ------------ --------- ------------- -----------
Profit (loss) for
the period (28,559) 39,749 3,549 - 14,739
----------- ------------ --------- ------------- -----------
Assets and liabilities
Total assets 11,887,434 6,358,037 984,454 (45,959) 19,183,966
Total liabilities 10,623,981 5,543,191 862,954 (45,959) 16,984,167
Other segment information
Property and equipment 39,644 4,494 222 128 44,488
Intangible assets 17,082 1,627 971 935 20,615
----------- ------------ --------- ------------- -----------
Capital expenditure 56,726 6,121 1,193 1,063 65,103
Depreciation, amortisation
and impairment (35,499) (4,907) (2,123) - (42,529)
=========== ============ ========= ============= ===========
5. Segment information (continued)
The following table presents the income statement and certain
asset and liability information regarding the Group's operating
segments as at and for the six month period ended 30 June 2019 and
as at 31 December 2019:
Retail Corporate BNB Other Eliminations Group
banking investment Total
banking
------------ --------- ---------
Net interest income 268,659 100,405 12,945 (686) 12 381,335
Net fee and commission
income 67,039 15,264 3,611 (478) 11 85,447
Net foreign currency
gain (loss) 21,804 21,504 8,734 (2,090) - 49,952
Net other (expense)
income (1,582) 994 314 55 (472) (691)
Operating income 355,920 138,167 25,604 (3,199) (449) 516,043
----------- ------------ --------- --------- ------------- -----------
Operating expenses (139,060) (43,120) (16,737) (4,429) 449 (202,897)
Profit from associates 442 - - - - 442
Operating income (expense)
before
cost of risk 217,302 95,047 8,867 (7,628) - 313,588
Cost of risk (65,930) (8,398) (2,977) (824) - (78,129)
Net operating income
(loss) before
non-recurring items 151,372 86,649 5,890 (8,452) - 235,459
----------- ------------ --------- --------- ------------- -----------
Net non-recurring
expense/loss (3,220) (1,176) (63) (3,638) - (8,097)
Profit (loss) before
income tax 148,152 85,473 5,827 (12,090) - 227,362
----------- ------------ --------- --------- ------------- -----------
Income tax expense (11,047) (6,249) (950) - - (18,246)
Profit (loss) for
the period 137,105 79,224 4,877 (12,090) - 209,116
----------- ------------ --------- --------- ------------- -----------
Assets and liabilities
Total assets 11,304,456 6,339,367 943,070 85,426 (102,822) 18,569,497
Total liabilities 10,095,635 5,461,859 833,874 130,043 (102,822) 16,418,589
Other segment information
Property and equipment 34,850 3,738 693 44 - 39,325
Intangible assets 14,156 1,316 861 - - 16,333
----------- ------------ --------- --------- ------------- -----------
Capital expenditure 49,006 5,054 1,554 44 - 55,658
Depreciation & amortisation (27,779) (3,634) (1,568) (2) - (32,983)
=========== ============ ========= ========= ============= ===========
5. Cash and cash equivalents
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Cash on hand 627,019 663,580
Current accounts with central banks,
excluding obligatory reserves 396,140 405,560
Current accounts with credit institutions 328,929 463,498
Time deposits with credit institutions
with maturities of up to 90 days 281,742 621,120
Cash and cash equivalents 1,633,830 2,153,758
================== ============
Less - Allowance for expected credit
loss (75) (134)
Cash and cash equivalents 1,633,755 2,153,624
================== ============
As at 30 June 2020, GEL 436,261 (31 December 2019: GEL 845,606)
was placed on current and time deposit accounts with
internationally recognised OECD banks and central banks that are
the counterparties of the Group in performing international
settlements. The Group earned up to 0.12% interest per annum on
these deposits (31 December 2019: up to 2.20%). Management does not
expect any losses from non-performance by the counterparties
holding cash and cash equivalents, and there are no material
differences between their book and fair values.
6. Amounts due from credit institutions
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Obligatory reserves with central
banks 1,687,912 1,577,911
Time deposits with maturities of
more than 90 days 6,463 5,404
Deposits pledged as security for
open commitments 6,110 5,691
Inter-bank loan receivables - 30,413
Amounts due from credit institutions 1,700,485 1,619,419
================== ============
Less - Allowance for expected credit
loss (410) (347)
Amounts due from credit institutions 1,700,075 1,619,072
================== ============
Obligatory reserves with central banks represent amounts
deposited with the NBG and National Bank of the Republic of Belarus
(the "NBRB"). Credit institutions are required to maintain cash
deposits (obligatory reserve) with the NBG and with the NBRB, the
amount of which depends on the level of funds attracted by the
credit institution. The Group's ability to withdraw these deposits
is restricted by regulation. The Group earned up to 1.25% interest
on obligatory reserves with NBG and NBRB for the years ended 30
June 2020 (31 December 2019: 1.25%).
As at 30 June 2020, inter-bank loan receivables include no
deposits placed with non-OECD banks (31 December 2019: GEL
Nil).
7. Investment securities
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Investment securities measured at
FVOCI - debt instruments 2,110,790 1,783,437
Investment securities designated
as at FVOCI - equity investments 3,110 3,367
Investment securities 2,113,900 1,786,804
================== ============
8. Investment securities (continued)
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Ministry of Finance of Georgia treasury
bonds* 956,431 647,886
Ministry of Finance of Georgia treasury
bills** 67,980 120,519
Foreign treasury bonds 118,934 66,961
Certificates of deposit of central
banks - 8,912
Other debt instruments*** 967,445 939,159
Investment securities measured at
FVOCI - debt instruments 2,110,790 1,783,437
================== ============
* GEL 508,872 was pledged for short-term loans from the NBG
(2019 GEL 576,017).
** GEL 6,419 was pledged for short-term loans from the NBG
(2019:74,564).
*** GEL 581,472 was pledged for short-term loans from the NBG
(2019: GEL 684,546).
Other debt instruments as at 30 June 2020 mainly comprises bonds
issued by the European Bank for Reconstruction and Development of
GEL 312,594 (2019: GEL 309,351), GEL-denominated bonds issued by
The Netherlands Development Finance Company of GEL 163,343 (2019:
GEL 156,494), GEL-denominated bonds issued by Black Sea Trade and
Development Bank of GEL 151,863 (2019: GEL 150,865),
GEL-denominated bonds issued by International Finance Corporation
of GEL 204,210 (2019: GEL 208,948), GEL-denominated bonds issued by
Asian Development Bank of GEL 61,513 (2019: GEL 58,863).
Foreign treasury bonds comprise of US Treasury Notes in amount
of GEL 49,922 (2019: Nil ) and Ministry of Finance of Belarus
treasury bonds in amount of GEL 69,012 (2019: GEL 66,961).
9. Loans to customers and finance lease receivables
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Commercial loans 4,417,104 4,101,950
Residential mortgage loans 3,289,186 3,066,683
Micro and SME loans 2,893,403 2,660,220
Consumer loans 2,171,451 2,085,108
Gold - pawn loans 94,978 85,540
Loans to customers at amortised cost,
gross 12,866,122 11,999,501
Less - Allowance for expected credit
loss (433,577) (225,133)
Loans to customers at amortised cost,
net 12,432,545 11,774,368
================== ============
Finance lease receivables, gross 173,427 159,191
Less - Allowance for expected credit
loss (6,880) (2,297)
Finance lease receivables, net 166,547 156,894
================== ============
Total loans to customers and finance
lease receivables 12,599,092 11,931,262
================== ============
As at 30 June 2020, loans to customers carried at GEL 808,497
(31 December 2019: GEL 577,246) were pledged for short-term loans
from the NBG.
9. Loans to customers and finance lease receivables (continued)
Expected credit loss
Movements of the gross loans and respective allowance for
expected credit loss / impairment of loans to customers by class
are provided in the table below, within which the new financial
asset originated or purchased and the assets repaid during the six
months include the effects from revolving loans and increase of
exposure to clients, where existing loans have been repaid with new
contracts issued during the six months. All new financial assets
are originated either in Stage 1 or POCI category. Utilisation of
additional tranches on existing financial assets are reflected in
Stage 2 or Stage 3 if the credit risk of the borrower has
deteriorated since initiation. Resegmentation relates to loans
transferred between classes due to change of borrower and/or
product types. Currency translation differences relate to loans
issued by the subsidiaries of the Group whose functional currency
is different from the presentation currency of the Group, while
foreign exchange movement relates to foreign currency denominated
loans issued by the Group. Net other changes in gross loan balances
includes the effects of changes in accrued interest. Net other
measurement of ECL includes the effect of changes in ECL due to
changes in PDs and other inputs, as well as the effect from ECL
attributable to changes in accrued interest.
Commercial loans at amortised
cost, gross: As at 30 June 2020
--------------------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
------------ ---------- -------- ------ ------------
Balance at 1 January
2020 3,583,051 349,494 161,744 7,661 4,101,950
New financial asset originated
or purchased 1,274,881 29,387 - - 1,304,268
Transfer to Stage 1 239,313 (239,313) - - -
Transfer to Stage 2 (292,276) 296,107 (3,831) - -
Transfer to Stage 3 (727) (36,618) 37,345 - -
Assets derecognised due
to pass-through arrangement (21,592) (6,620) - - (28,212)
Assets repaid (1,121,366) (95,010) (8,502) (676) (1,225,554)
Resegmentation 17,856 - - - 17,856
Impact of modifications (744) 30 (6) (7) (727)
Write-offs - - (6,483) - (6,483)
Recoveries of amounts
previously written off - - 3,045 291 3,336
Unwind of discount - - 5,964 (259) 5,705
Currency translation
differences (18,510) (655) (1,316) - (20,481)
Foreign exchange movement 214,212 15,675 7,213 421 237,521
Net other changes 20,664 155 6,684 422 27,925
Balance at 30 June 2020 3,894,762 312,632 201,857 7,853 4,417,104
============ ========== ======== ====== ============
Individually assessed - - 193,949 - 193,949
Collectively assessed 3,894,762 312,632 7,908 7,853 4,223,155
Balance at 30 June 2020 3,894,762 312,632 201,857 7,853 4,417,104
============ ========== ======== ====== ============
Commercial loans at amortised
cost, ECL: As at 30 June 2020
--------------------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
------------ ---------- -------- ------ ------------
Balance at 1 January
2020 16,903 3,414 77,995 298 98,610
New financial asset originated
or purchased 1,959 919 - - 2,878
Transfer to Stage 1 2,892 (2,892) - - -
Transfer to Stage 2 (353) 1,028 (675) - -
Transfer to Stage 3 (9) (7,547) 7,556 - -
Impact on ECL of exposures
transferred between stages
during the year (212) (544) 12,288 - 11,532
Assets derecognised due
to pass-through arrangement (5) (48) - - (53)
Assets repaid (5,832) (989) (4,201) (443) (11,465)
Resegmentation 72 - - - 72
Impact of modifications 1 8 (6) - 3
Write-offs - - (6,483) - (6,483)
Recoveries of amounts
previously written off - - 3,045 291 3,336
Unwind of discount - - 5,964 (259) 5,705
Currency translation
differences (267) (52) (318) - (637)
Foreign exchange movement 885 (180) 2,512 (25) 3,192
Net other measurement
of ECL 16,145 22,167 21,148 804 60,264
Balance at 30 June 2020 32,179 15,284 118,825 666 166,954
============ ========== ======== ====== ============
Individually assessed - - 115,616 - 115,616
Collectively assessed 32,179 15,284 3,209 666 51,338
Balance at 30 June 2020 32,179 15,284 118,825 666 166,954
============ ========== ======== ====== ============
9. Loans to customers and finance lease receivables (continued)
Expected credit loss (continued)
Consumer loans at amortised
cost, gross: As at 30 June 2020
------------------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
---------- --------- --------- -------- ----------
Balance at 1 January 2020 1,856,795 110,158 108,414 9,741 2,085,108
New financial asset originated
or purchased 636,546 2,427 740 1,539 641,252
Transfer to Stage 1 77,934 (70,217) (7,717) - -
Transfer to Stage 2 (183,949) 196,774 (12,825) - -
Transfer to Stage 3 (25,517) (19,810) 45,327 - -
Assets repaid (558,235) (32,097) (28,991) (1,414) (620,737)
Resegmentation (230) - 93 - (137)
Impact of modifications (13,560) (1,912) (2,074) (146) (17,692)
Write-offs - - (11,666) (4) (11,670)
Recoveries of amounts previously
written off - - 8,367 11 8,378
Unwind of discount - - 2,053 25 2,078
Currency translation differences (9,627) (25) (50) - (9,702)
Foreign exchange movement 12,741 1,288 1,178 196 15,403
Net other changes 63,288 10,177 5,394 311 79,170
Balance at 30 June 2020 1,856,186 196,763 108,243 10,259 2,171,451
========== ========= ========= ======== ==========
Individually assessed - - 1,232 - 1,232
Collectively assessed 1,856,186 196,763 107,011 10,259 2,170,219
Balance at 30 June 2020 1,856,186 196,763 108,243 10,259 2,171,451
========== ========= ========= ======== ==========
Consumer loans at amortised
cost, ECL: As at 30 June 2020
------------------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
---------- --------- --------- -------- ----------
Balance at 1 January 2020 16,823 6,345 49,325 214 72,707
New financial asset originated
or purchased 8,006 562 528 3 9,099
Transfer to Stage 1 7,652 (4,914) (2,738) - -
Transfer to Stage 2 (7,444) 13,004 (5,560) - -
Transfer to Stage 3 (219) (2,376) 2,595 - -
Impact on ECL of exposures
transferred between stages
during the year (3,510) (3,831) (1,813) - (9,154)
Assets repaid (9,954) (2,023) (17,763) (58) (29,798)
Resegmentation - - - - -
Impact of modifications (510) (279) (1,086) (11) (1,886)
Write-offs - - (11,666) (4) (11,670)
Recoveries of amounts previously
written off - - 8,367 11 8,378
Unwind of discount - - 2,053 25 2,078
Currency translation differences (36) (6) (47) - (89)
Foreign exchange movement (68) (12) (129) (15) (224)
Net other measurement of
ECL 25,402 18,482 37,818 793 82,495
Balance at 30 June 2020 36,142 24,952 59,884 958 121,936
========== ========= ========= ======== ==========
Individually assessed - - 257 - 257
Collectively assessed 36,142 24,952 59,627 958 121,679
Balance at 30 June 2020 36,142 24,952 59,884 958 121,936
========== ========= ========= ======== ==========
9. Loans to customers and finance lease receivables (continued)
Expected credit loss (continued)
Micro and SME loans at
amortised cost, gross: As at 30 June 2020
----------------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
---------- --------- --------- ------ ----------
Balance at 1 January 2020 2,426,866 113,130 118,475 1,749 2,660,220
New financial asset originated
or purchased 763,397 3,775 - 303 767,475
Transfer to Stage 1 76,933 (74,821) (2,112) - -
Transfer to Stage 2 (455,075) 462,052 (6,977) - -
Transfer to Stage 3 (8,784) (36,135) 44,919 - -
Assets repaid (621,945) (31,496) (16,890) (172) (670,503)
Resegmentation (17,844) - - - (17,844)
Impact of modifications (6,684) (909) (1,229) (4) (8,826)
Write-offs - - (9,219) (919) (10,138)
Recoveries of amounts
previously written off - - 2,612 68 2,680
Unwind of discount - - 883 22 905
Currency translation differences (7,717) (985) (518) - (9,220)
Foreign exchange movement 102,170 5,560 4,009 108 111,847
Net other changes 48,676 11,385 6,204 542 66,807
Balance at 30 June 2020 2,299,993 451,556 140,157 1,697 2,893,403
========== ========= ========= ====== ==========
Individually assessed - - 20,158 - 20,158
Collectively assessed 2,299,993 451,556 119,999 1,697 2,873,245
Balance at 30 June 2020 2,299,993 451,556 140,157 1,697 2,893,403
========== ========= ========= ====== ==========
Micro and SME loans loans
at amortised cost, ECL: As at 30 June 2020
----------------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
---------- --------- --------- ------ ----------
Balance at 1 January 2020 12,890 5,803 24,976 876 44,545
New financial asset originated
or purchased 861 587 - - 1,448
Transfer to Stage 1 4,125 (3,695) (430) - -
Transfer to Stage 2 (4,442) 5,973 (1,531) - -
Transfer to Stage 3 (76) (1,866) 1,942 - -
Impact on ECL of exposures
transferred between stages
during the year (1,026) (211) 1,328 - 91
Assets repaid (4,617) (864) (5,633) (95) (11,209)
Resegmentation (72) - - - (72)
Impact of modifications (152) (125) (490) - (767)
Write-offs - - (9,219) (919) (10,138)
Recoveries of amounts
previously written off - - 2,612 68 2,680
Unwind of discount - - 883 22 905
Currency translation differences (142) (140) (492) - (774)
Foreign exchange movement 60 100 465 53 678
Net other measurement
of ECL 14,175 29,417 28,590 385 72,567
Balance at 30 June 2020 21,584 34,979 43,001 390 99,954
========== ========= ========= ====== ==========
Individually assessed - - 7,325 - 7,325
Collectively assessed 21,584 34,979 35,676 390 92,629
Balance at 30 June 2020 21,584 34,979 43,001 390 99,954
========== ========= ========= ====== ==========
9. Loans to customers and finance lease receivables (continued)
Expected credit loss (continued)
Residential
mortgage loans
at amortised
cost, gross: As at 30 June 2020
---------------------------------------------------------------------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
------------------- -------------------- -------------------- ------------------- -------------------
Balance at 1
January 2020 2,764,959 160,038 109,413 32,273 3,066,683
New financial
asset
originated
or purchased 348,647 335 60 4,835 353,877
Transfer to
Stage 1 103,303 (99,161) (4,142) - -
Transfer to
Stage 2 (275,155) 293,588 (18,433) - -
Transfer to
Stage 3 (19,989) (18,360) 38,349 - -
Assets repaid (272,680) (17,097) (15,699) (3,033) (308,509)
Resegmentation 218 - - - 218
Impact of
modifications (12,886) (1,297) (1,297) (810) (16,290)
Write-offs - - (1,720) (114) (1,834)
Recoveries of
amounts
previously
written off - - 122 58 180
Unwind of
discount - - 215 84 299
Currency
translation
differences (1,732) (1) (2) - (1,735)
Foreign
exchange
movement 112,847 4,215 5,371 1,482 123,915
Net other
changes 57,264 10,178 3,640 1,300 72,382
Balance at 30
June 2020 2,804,796 332,438 115,877 36,075 3,289,186
=================== ==================== ==================== =================== ===================
Individually
assessed - - 139 - 139
Collectively
assessed 2,804,796 332,438 115,738 36,075 3,289,047
Balance at 30
June 2020 2,804,796 332,438 115,877 36,075 3,289,186
=================== ==================== ==================== =================== ===================
Residential
mortgage loans
at amortised
cost, ECL: As at 30 June 2020
---------------------------------------------------------------------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
------------------- -------------------- -------------------- ------------------- -------------------
Balance at 1
January 2020 461 160 6,588 1,808 9,017
New financial
asset
originated
or purchased 483 - 2 10 495
Transfer to
Stage 1 632 (573) (59) - -
Transfer to
Stage 2 (828) 1,874 (1,046) - -
Transfer to
Stage 3 (25) (395) 420 - -
Impact on ECL
of exposures
transferred
between stages
during the
year (158) (848) 708 - (298)
Assets repaid (842) (140) (1,874) (489) (3,345)
Resegmentation - - - - -
Impact of
modifications (44) (43) (179) (48) (314)
Write-offs - - (1,720) (114) (1,834)
Recoveries of
amounts
previously
written off - - 122 58 180
Unwind of
discount - - 215 84 299
Currency
translation
differences (16) - - - (16)
Foreign
exchange
movement (258) (51) (323) (101) (733)
Net other
measurement of
ECL 6,525 8,267 20,772 5,309 40,873
Balance at 30
June 2020 5,930 8,251 23,626 6,517 44,324
=================== ==================== ==================== =================== ===================
Individually - - - - -
assessed
Collectively
assessed 5,930 8,251 23,626 6,517 44,324
Balance at 30
June 2020 5,930 8,251 23,626 6,517 44,324
=================== ==================== ==================== =================== ===================
9. Loans to customers and finance lease receivables (continued)
Expected credit loss (continued)
Gold - pawn loans at amortised
cost, gross: As at 30 June 2020
---------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
--------- ------ -------- ----- ---------
Balance at 1 January 2020 80,794 1,114 3,632 - 85,540
New financial asset originated
or purchased 49,721 - - - 49,721
Transfer to Stage 1 1,103 (533) (570) - -
Transfer to Stage 2 (4,417) 4,805 (388) - -
Transfer to Stage 3 (2,061) (307) 2,368 - -
Assets repaid (39,963) (702) (1,644) - (42,309)
Resegmentation - - (93) - (93)
Impact of modifications - - - - -
Write-offs - - (58) - (58)
Recoveries of amounts
previously written off - - 18 - 18
Unwind of discount - - (4) - (4)
Currency translation differences - - - - -
Foreign exchange movement 93 (3) (171) - (81)
Net other changes 1,678 171 395 - 2,244
Balance at 30 June 2020 86,948 4,545 3,485 - 94,978
========= ====== ======== ===== =========
Individually assessed - - - - -
Collectively assessed 86,948 4,545 3,485 - 94,978
Balance at 30 June 2020 86,948 4,545 3,485 - 94,978
========= ====== ======== ===== =========
Gold - pawn loans at amortised
cost, ECL: As at 30 June 2020
---------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
--------- ------ -------- ----- ---------
Balance at 1 January 2020 9 1 244 - 254
New financial asset originated - - - - -
or purchased
Transfer to Stage 1 20 (3) (17) - -
Transfer to Stage 2 (8) 25 (17) - -
Transfer to Stage 3 - - - - -
Impact on ECL of exposures
transferred between stages
during the year (17) (1) - - (18)
Assets repaid (9) 2 (57) - (64)
Resegmentation - - - - -
Impact of modifications - - - - -
Write-offs - - (58) - (58)
Recoveries of amounts
previously written off - - 18 - 18
Unwind of discount - - (4) - (4)
Currency translation differences - - - - -
Foreign exchange movement (1) - - - (1)
Net other measurement
of ECL 51 (8) 239 - 282
Balance at 30 June 2020 45 16 348 - 409
========= ====== ======== ===== =========
Individually assessed - - - - -
Collectively assessed 45 16 348 - 409
Balance at 30 June 2020 45 16 348 - 409
========= ====== ======== ===== =========
9. Loans to customers and finance lease receivables (continued)
Concentration of loans to customers
As at 30 June 2020, the concentration of loans granted by the
Group to the ten largest third-party borrowers comprised GEL
1,202,642 accounting for 9% of the gross loan portfolio of the
Group (2019: GEL 1,199,596 and 10% respectively). An allowance of
GEL 11,368 (2019: GEL 9,634) was established against these
loans.
As at 30 June 2020, the concentration of loans granted by the
Group to the ten largest third-party group of borrowers comprised
GEL 1,834,958 accounting for 14% of the gross loan portfolio of the
Group (2019: GEL 1,771,490 and 15% respectively). An allowance of
GEL 16,411 (2019: GEL 10,211) was established against these
loans.
As at 30 June 2020 and 31 December 2019, loans were principally
issued within Georgia, and their distribution by industry sector
was as follows:
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Individuals 6,944,093 6,507,095
Manufacturing 1,307,452 1,315,154
Trade 1,340,926 1,264,111
Real estate 826,460 717,063
Construction 627,905 572,159
Hospitality 521,354 399,148
Transport & communication 271,201 248,210
Service 201,934 222,179
Mining and quarrying 131,576 117,801
Financial intermediation 76,183 85,814
Electricity, gas and water supply 61,710 50,318
Other 555,328 500,449
Loans to customers, gross 12,866,122 11,999,501
Less - Allowance for expected credit
loss (433,577) (225,133)
Loans to customers, net 12,432,545 11,774,368
================== ============
Loans have been issued to the following types of customers:
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Individuals 6,944,093 6,507,095
Private companies 5,906,350 5,477,804
State-owned entities 15,679 14,602
Loans to customers, gross 12,866,122 11,999,501
Less - Allowance for expected credit
loss (433,577) (225,133)
Loans to customers, net 12,432,545 11,774,368
================== ============
9. Loans to customers and finance lease receivables (continued)
Finance lease receivables
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Minimum lease payments receivable 237,630 220,543
Less - Unearned finance lease income (64,203) (61,352)
------------------ ------------
173,427 159,191
Less - Allowance for expected credit
loss / impairment loss (6,880) (2,297)
Finance lease receivables, net 166,547 156,894
================== ============
.
The difference between the minimum lease payments to be received
in the future and the finance lease receivables represents unearned
finance income.
As at 30 June 2020 , finance lease receivables carried at GEL
59,905 were pledged for inter-bank loans received from several
credit institutions (31 December 2019: GEL 74,489).
As at 30 June 2020, the concentration of investment in the five
largest lease receivables comprised GEL 19,463 or 11% of total
finance lease receivables (31 December 2019: GEL 16,249 or 10%) and
finance income received from them for the six month period ended 30
June 2020 comprised GEL 1,626 or 10% of total finance income from
lease (31 December 2019: GEL 2,226 or 9%).
Future minimum lease payments to be received after 30 June 2020
and 31 December 2019 are as follows:
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Within 1 year 102,122 85,815
From 1 to 5 years 132,669 130,700
More than 5 years 2,839 4,028
Minimum lease payment receivables 237,630 220,543
================== ============
9. Loans to customers and finance lease receivables (continued)
Finance lease receivables (continued)
Movements of the gross finance lease receivables and respective
allowance for expected credit loss/impairment of finance lease
receivables are as follows:
Finance lease receivables,
gross As at 30 June 2020
------------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
--------- --------- -------- ----- ---------
Balance at 1 January 2020 130,232 12,498 16,461 - 159,191
New financial asset originated
or purchased 43,477 - - - 43,477
Transfer to Stage 1 38,983 (36,788) (2,195) - -
Transfer to Stage 2 (90,735) 91,675 (940) - -
Transfer to Stage 3 (3,163) (35,132) 38,295 - -
Assets repaid (24,005) (684) (2,884) - (27,573)
Resegmentation - - - - -
Impact of modifications - (973) (199) - (1,172)
Write-offs - - (6,006) - (6,006)
Recoveries of amounts previously - - - - -
written off
Unwind of discount - - (4) - (4)
Currency translation differences (1,308) (70) (90) - (1,468)
Foreign exchange movement 3,805 1,342 1,317 - 6,464
Net other changes 829 (81) (230) - 518
Balance at 30 June 2020 98,115 31,787 43,525 - 173,427
========= ========= ======== ===== =========
Individually assessed - - 873 - 873
Collectively assessed 98,115 31,787 42,652 - 172,554
Balance at 30 June 2020 98,115 31,787 43,525 - 173,427
========= ========= ======== ===== =========
Finance lease receivables,
ECL: As at 30 June 2020
------------------------------------------------
Stage Stage Stage
1 2 3 POCI Total
--------- --------- -------- ----- ---------
Balance at 1 January 2020 759 95 1,443 - 2,297
New financial asset originated
or purchased 137 - - - 137
Transfer to Stage 1 144 (140) (4) - -
Transfer to Stage 2 (255) 256 (1) - -
Transfer to Stage 3 (168) (2,555) 2,723 - -
Impact on ECL of exposures
transferred between stages
during the year 232 2,492 2,806 - 5,530
Assets repaid (270) (13) (96) - (379)
Resegmentation - - - - -
Impact of modifications - (1) (18) - (19)
Write-offs - - (618) - (618)
Recoveries of amounts previously - - - - -
written off
Unwind of discount - - (4) - (4)
Currency translation differences (47) (6) (15) - (68)
Foreign exchange movement - 2 (85) - (83)
Net other measurement of
ECL 14 40 33 - 87
Balance at 30 June 2020 546 170 6,164 - 6,880
========= ========= ======== ===== =========
Individually assessed - - 42 - 42
Collectively assessed 546 170 6,122 - 6,838
Balance at 30 June 2020 546 170 6,164 - 6,880
========= ========= ======== ===== =========
10. Taxation
The corporate income tax credit (expense) comprises:
For the six months
ended
----------------------------------------
30 June 30 June
2020 (unaudited) 2019 (unaudited)
------------------- -------------------
Current income expense 38,255 (16,201)
Deferred income tax credit (expense) (33,695) (2,045)
Income tax credit (expense) 4,560 (18,246)
=================== ===================
The income tax rate applicable to most of the Group's income is
the income tax rate applicable to subsidiaries' income, which
ranges from 15% to 25% (31 December 2019: from 15% to 27%).
As at 30 June 2020 and 31 December 2019, income tax assets and
liabilities consist of the following:
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Current income tax assets 54,401 75
Deferred income tax assets 194 207
Income tax assets 54,595 282
================== ============
Current income tax liabilities 243 1,563
Deferred income tax liabilities 69,928 36,355
Income tax liabilities 70,171 37,918
================== ============
.
11. Client deposits and notes
The amounts due to customers include the following:
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Time deposits 6,627,992 5,042,851
Current accounts 4,955,147 5,033,884
Client deposits and notes 11,583,139 10,076,735
================== ============
Held as security against letters
of credit and guarantees (Note14) 121,345 90,346
At 30 June 2020, amounts due to customers of GEL 1,885,215 (16%)
were due to the ten largest customers (31 December 2019: GEL
828,952 (8%)).
Amounts due to customers include accounts with the following
types of customers:
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Individuals 6,859,544 6,460,756
Private enterprises 3,581,861 3,253,970
State and state-owned entities 1,141,734 362,009
Client deposits and notes 11,583,139 10,076,735
================== ============
The breakdown of customer accounts by industry sector is as
follows:
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Individuals 6,859,544 6,460,756
Government services 1,130,787 320,470
Financial intermediation 673,495 502,513
Trade 601,341 533,483
Transport & communication 592,766 427,529
Construction 479,609 632,389
Service 280,597 287,975
Manufacturing 271,579 269,684
Real estate 106,991 125,719
Electricity, gas and water supply 76,749 93,757
Hospitality 33,131 62,084
Other 476,550 360,376
Client deposits and notes 11,583,139 10,076,735
================== ============
Growth in government services deposits were mainly driven by
deposits placed by Ministry of Finance of Georgia and Pension
Agency during the six month period ended 30 June 2020 .
12. Amounts owed to credit institutions
Amounts due to credit institutions comprise:
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Borrowings from international credit
institutions 1,519,872 1,387,318
Short-term loans from National Bank
of Georgia 847,213 1,551,953
Time deposits and inter-bank loans 343,371 234,962
Correspondent accounts 150,875 263,974
Other borrowings* - 34,423
2,861,331 3,472,630
Non-convertible subordinated debt 660,529 461,493
Amounts due to credit institutions 3,521,860 3,934,123
================== ============
* Other borrowings represent borrowings from JSC Georgia Capital
on arm's length terms.
During the six month period ended 30 June 2020, the Group paid
up to 6.00% and on average 4.59% on US$ borrowings from
international credit institutions (2019: up to 6.50% and on average
5.03%). During the six months ended 30 June 2020, the Group paid up
to 11.13% and on average 9.10% on Dollar subordinated debt (2019:
up to 11.13% and on average 9.92%).
Some long-term borrowings from international credit institutions
are received upon certain conditions (the "Lender Covenants") that
the Group maintains different limits for capital adequacy,
liquidity, currency positions, credit exposures, leverage and
others. At 30 June 2020 and 31 December 2019 , the Group complied
with all the Lender Covenants of the significant borrowings from
international credit institutions.
On 2 April 2020, the Bank drew-down the second tranche of the
US$107 million subordinated syndicated loan facility signed in
December, 2019, in the amount of US$55 million. The Bank received
the NBG's approval on classification of the facility as a Bank Tier
2 capital instrument under the Basel III regulation since April,
2020 and will further improve the overall capitalisation of the
Bank.
On 13 March 2020, the Bank drew-down EUR 15 million of total EUR
50 million loan facility from European Investment Bank ("EIB")
signed in December, 2019. The loan was drawn in Georgian Lari with
maturity of five years. Up to 50% of the total facility can be
drawn in Georgian Lari, while the remaining amount will be
denominated in Euros or US Dollars. The local currency tranche is
also supported by the Neighbourhood Investment Facility of the
European Union. The purpose of the credit is to finance investment
projects promoted by micro, small and medium sized and mid
capitalisation enterprises in Georgia and support the
implementation of projects important for the local private sector
development.
On 14 April 2020, the Bank drew-down GEL 100 million loan
facility from International Finance Corporation ("IFC"), signed in
January 2020, with maturity of five years. The facility will
support the local currency needs of Georgian micro, small and
medium sized enterprises.
13. Debt securities issued
Debt securities issued comprise:
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Eurobonds and notes issued 1,008,600 1,406,200
Additional Tier 1 capital notes issued 301,061 282,407
Local bonds 93,805 87,921
Certificates of deposit 158,467 343,536
Debt securities issued 1,561,933 2,120,064
================== ============
On 1 June 2020 the Bank repaid GEL 500 million GEL-denominated
11.00% notes.
14. Commitments and contingencies
Legal
Sai-invest
As at 30 June 2020, the Bank was engaged in litigation
proceedings with Sai-Invest LLC in relation to a deposit pledge in
the amount of EUR 7 million used to reduce the outstanding loan of
LTD Sport Invest towards JSC Bank of Georgia. The dispute is
currently pending before the court of appeals after being returned
back from the Supreme Court in late 2019. The Bank's management is
of the opinion that the possibility of incurring material losses on
this claim is low, and, accordingly, no provision has been made in
these Consolidated Financial Statements.
Rustavi Azoti
At 30 June 2020, the Bank was engaged in litigation proceedings
with East-West United Bank S.A., Agrochim S.A. and Systema Holding
Limited (claimants) in relation to foreclosure on security (movable
and immovable property and intangible assets) through auction on a
defaulted loan of Rustavi Azoti LLC. Claimants request
reinstatement of the title to the property owned by Rustavi Azoti
LLC and compensation of damages in the amount of around USD 93.6m.
In June 2020, Tbilisi City Court refused the claim of the Claimants
on all grounds. The Claimants have since launched an appeal and the
claim is currently pending before Tbilisi Court of Appeals. No
provision has been made as the Bank's management believes that the
claim is groundless, and it is extremely unlikely that any
significant loss will eventuate from this claim.
At 30 June 2020, BGEO Group Limited (former BGEO Group PLC), was
engaged in litigation proceedings in the High Court of Justice of
England and Wales (Commercial Court) with Roman Pipia (claimant),
who asserts that BGEO Group Limited is liable to the claimant under
Georgian law in relation to the loss of the Rustavi Azoti plant,
which he alleges he formerly beneficially owned. The Bank had
initiated the sale of collateral pledged by Rustavi Azoti LLC and
its parent company to secure loans granted by the Bank following
default by the borrowers in 2016. Based on the revised claim
submitted in December 2018, claimant claims minimum loss and damage
of US$286m or US$291m. No provision has been made as the Group
believes that the claim is groundless, and it is extremely unlikely
that any significant loss will eventuate from this claim.
In the ordinary course of business, the Group is subject to
legal actions and complaints. Management believes that the ultimate
liability, if any, arising from such actions or complaints will not
have a material adverse effect on the financial condition or the
results of future operations of the Group or BOGG.
14. Commitments and contingencies (continued)
Financial commitments and contingencies
As at 30 June 2020 and 31 December 2019 , the Group's financial
commitments and contingencies comprised the following:
As at
--------------------------------
30 June 31 December
2020 (unaudited) 2019
------------------ ------------
Credit-related commitments
Guarantees issued 1,386,909 1,347,841
Undrawn loan facilities 251,072 281,615
Letters of credit 98,583 54,815
1,736,564 1,684,271
------------------ ------------
Less - Cash held as security against
letters of credit and
guarantees (Note 11) (121,345) (90,346)
Less - Provisions (14,241) (6,154)
Capital expenditure commitments 4,720 4,279
------------------ ------------
15. Equity
Share capital
As at 30 June 2020, issued share capital comprised 49,169,428
common shares of BOGG (30 June 2019: 49,169,428 of BOGG), all of
which were fully paid. Each share has a nominal value of one (1)
British Penny. Shares issued and outstanding as at 30 June 2020 and
30 June 2019 are described below:
Number of Amount of
ordinary ordinary
shares shares
----------- ----------
31 December 2018 49,169,428 1,618
----------- ----------
30 June 2019 (unaudited) 49,169,428 1,618
----------- ----------
31 December 2019 49,169,428 1,618
----------- ----------
30 June 2020 (unaudited) 49,169,428 1,618
15. Equity (continued)
Treasury shares
Treasury shares are held by the Group solely for the purpose of
future employee share-based compensation.
The number of treasury shares held by the Group as at 30 June
2020, comprised 1,633,096 (31 December 2019: 1,958,552), with
nominal amount of GEL 54 (31 December 2019: GEL 64).
Dividends
Shareholders are entitled to dividends in Pounds Sterling.
In 2020 the Group distributed dividends on the shares vested and
exercised during 2020.
On 17 May 2019, the shareholders of the Bank of Georgia Group
PLC declared an interim dividend for 2018 of Georgian Lari 2.55 per
share. The currency conversion date was set at 31 May 2019, with
the official GEL : GBP exchange rate of 3.5337, resulting in a
GBP-denominated final dividend of 0.7216 per share. Payment of the
total GEL 123,705 final dividends was received by shareholders on
28 June 2019.
Nature and purpose of other reserves
Unrealised gains (losses) on investment securities
This reserve records fair value changes on investment
securities.
Unrealised gains (losses) from dilution or sale / acquisition of
shares in existing subsidiaries
This reserve records unrealised gains (losses) from dilution or
sale / acquisition of shares in existing subsidiaries.
Foreign currency translation reserve
The foreign currency translation reserve is used to record
exchange differences arising from the translation of the financial
statements of subsidiaries with functional currency other than
GEL.
Movements on this account during the years ended 30 June 2020
and 31 December 2019, are presented in the statements of other
comprehensive income.
Earnings per share
For the six months
ended
----------------------------------------
30 June 30 June
2020 (unaudited) 2019 (unaudited)
------------------- -------------------
Basic earnings per share
Profit for the period attributable to
ordinary shareholders of the Group 14,659 208,154
Weighted average number of ordinary shares
outstanding during the period 47,596,373 47,846,288
Basic earnings per share 0.3080 4.3505
For the six months
ended
----------------------------------------
30 June 30 June
2020 (unaudited) 2019 (unaudited)
------------------- -------------------
Diluted earnings per share
Effect of dilution on weighted average
number of ordinary shares:
Dilutive unvested share options 7,857 170,395
Weighted average number of ordinary shares
adjusted for the effect of dilution 47,604,230 48,016,683
Diluted earnings per share 0.3079 4.3350
16. Net interest income
For the six months
ended
----------------------------------------
30 June 30 June
2020 (unaudited) 2019 (unaudited)
------------------- -------------------
Interest income calculated using
EIR method 751,436 665,752
From loans to customers 662,851 593,257
From investment securities 79,512 68,448
From amounts due from credit institutions 14,050 10,656
Net loss on modification of financial
assets (4,977) (6,609)
Other interest income 15,928 11,207
From finance lease receivable 15,888 11,015
From loans and advances to customers
measured at FVTPL 40 192
Interest income 767,364 676,959
------------------- -------------------
On client deposits and notes (191,705) (135,964)
On amounts owed to credit institutions (141,766) (95,683)
On debt securities issued (83,432) (74,504)
Interest element of cross-currency
swaps 29,267 16,772
On lease liability (2,837) (2,418)
Interest expense (390,473) (291,797)
------------------- -------------------
Deposit insurance fees (4,874) (3,827)
Net interest income 372,017 381,335
=================== ===================
17. Net fee and commission income
For the six months
ended
30 June 30 June
2020 (unaudited) 2019 (unaudited)
Total Total
Settlements operations 94,669 103,186
Guarantees and letters of credit 14,410 11,220
Cash operations 5,673 6,611
Currency conversion operations 4,846 4,115
Brokerage service fees 3,193 1,895
Advisory 592 1,225
Other 1,901 2,304
Fee and commission income 125,284 130,556
Settlements operations (42,967) (36,856)
Cash operations (4,276) (3,816)
Guarantees and letters of credit (250) (683)
Insurance brokerage service fees (2,013) (1,129)
Currency conversion operations (1,281) (604)
Advisory (36) (83)
Other (1,448) (1,938)
Fee and commission expense (52,271) (45,109)
Net fee and commission income 73,013 85,447
18. Expected credit loss
The table below shows ECL charges on financial instruments for
the year recorded in the income statement:
As at 30 June 2020
Stage 1 Stage 2 Stage 3
Individual Collective Individual Collective Individual Collective POCI Total
Cash and cash
equivalents - 58 - - - - - 58
Amounts due from
credit
institutions - (66) - - - - - (66)
Investment
securities
measured at
amortised
cost - debt
instruments - (85) - - - - - (85)
Investment
securities
measured at FVOCI
- debt
instruments - (920) - - - - - (920)
Loans to customers
at amortised cost - (49,255) - (67,957) (40,396) (52,888) (6,072) (216,568)
Finance lease
receivables - 166 - (81) 28 (5,386) - (5,273)
Other financial
assets - (12,660) - - - - - (12,660)
Financial
guarantees - (6,041) - (544) 845 (10) - (5,750)
Letter of credit
to customers - (1,490) - (215) 12 - - (1,693)
Other financial
commitments - (658) - (18) 48 - - (628)
for the period
ended 30 June
2020 - (70,951) - (68,815) (39,463) (58,284) (6,072) (243,585)
19. Net non-recurring items
For the six months
ended
30 June 30 June
2020 (unaudited) 2019 (unaudited)
------------------- -------------------
Modification loss of financial assets* (39,730) -
Corporate social responsibility
expense** (1,454) -
Termination benefits - (3,985)
Other (402) (4,112)
Net non-recurring expense/loss (41,586) (8,097)
* Modification loss of financial assets: in response to the
COVID-19 outbreak, the Group implemented an initiative to grant a 3
month grace period to its borrowers with the interest accrued for
grace period being deferred and either allocated over the original
repayment schedule till maturity on a straight line basis (i.e. no
compounding applied) or in some cases beyond maturity (i.e.,
maturity extended by 3 months). The payment holiday was intended to
reduce customer traffic to branches and thus reduce chances of the
rapid spread of the virus in the country. The noted immediate
social response to COVID-19 pandemic resulted in modification loss
in amount of GEL 39,730. Given the initiative was driven by high
social responsibility motives and was similar to a CSR cost with
high degree of abnormality and extraordinary nature, such
modification losses were presented as non-recurring item in the
Group's interim condensed consolidated financial statements.
** Corporate social responsibly expense : in order to assist in
the fight against the COVID-19 the Group purchased and donated
laboratory tests, respiratory equipment, etc. to the Government of
Georgia on a one-off basis.
20. Risk management
Emerging Risks
Information compiled from all the businesses is examined and
processed in order to analyse, control and identify emerging
risks.
The coronavirus (COVID-19) has been identified as an emerging
risk since the start of 2020 and the Group is continuing to monitor
its impact on its business, customers and employees. The outbreak
of the pandemic is having at least a short-term negative impact on
the country's overall economic activity and has resulted in a
global economic slowdown. As of the reporting date a number of
economic sectors, including tourism, hospitality and entertainment
were identified to be specifically affected by the consequences of
the virus outbreak in the country. A considerable amount of funding
and other forms of assistance was injected by the Financial
Institutions and the Government to support the country's economy
and reduce the effect of recession.
To mitigate the impact of the pandemic on its activities the
Group has put in place a business continuity plan. A
distance-working opportunity continues to be available for the
employees as of the reporting date. To decrease the number of
customers in the branches and therefore reduce the risk of
contagion, the Group has encouraged its customers to switch to
digital channels as absolute majority of operations are available
without the need to visit a branch. In addition to above, the Group
is engaged in continuous negotiations with its customers to support
them in alleviating the consequences of the pandemic. The diverse
portfolio base helps the Group to decrease the adverse effect of
the virus outbreak on its operations and profitability.
Liquidity risk and funding management
Liquidity risk is the risk that the Group will be unable to meet
its payment obligations when they fall due under normal and stress
circumstances. To limit this risk, management has arranged
diversified funding sources in addition to its core deposit base,
manages assets with liquidity in mind, and monitors future cash
flows and liquidity on a regular basis. This incorporates an
assessment of expected cash flows and the availability of
high-grade collateral which could be used to secure additional
funding if required.
The Group maintains a portfolio of highly marketable and diverse
assets that can be easily liquidated in the event of an unforeseen
interruption of cash flow. The Group also has committed lines of
credit that it can access to meet liquidity needs. In addition, the
Group maintains a cash deposit (obligatory reserve) with the NBG,
the amount of which depends on the level of customer funds
attracted.
The liquidity position is assessed and managed by the Group
primarily on a standalone Bank basis, based on certain liquidity
coverage ratios established by the NBG. The banks are required to
maintain a liquidity coverage ratio, which is defined as the ratio
of high-quality liquid assets to net cash outflow over the next 30
days. The order requires that, absent a stress-period, the value of
the ratio be no lower than 100%. The liquidity coverage ratio as at
30 June 2020 was 135.4% (31 December 2019: 136.7%).
The Bank maintained excess liquidity in 2020 primarily for risk
mitigation purposes on the back of the current COVID-19 crisis; and
the repayment of local currency Eurobonds due at the beginning of
June 2020.
The Bank holds a comfortable buffer on top of Net Stable Funding
Ratio (NSFR) requirement of 100%, which came into effect on 1
September 2019. A solid buffer over NSFR provides stable funding
sources over a longer time span. This approach is designed to
ensure that the funding framework is sufficiently flexible to
secure liquidity under a wide range of market conditions. NSFR was
136.6% and 123.5%, at 30 June 2020 and 31 December 2019,
respectively, all comfortably above the NBG's minimum regulatory
requirements.
The Group also matches the maturity of financial assets and
financial liabilities and imposes a maximum limit on negative gaps
compared with the Bank's standalone total regulatory capital
calculated per NBG regulation. The ratios are assessed and
monitored monthly and compared against set limits. In the case of
deviations, amendment strategies / actions are discussed and
approved by ALCO.
21. Fair value measurements
Fair value hierarchy
For the purpose of fair value disclosures, the Group 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, except for cash and short-term deposits
for which fair value approximates to their carrying value:
At 30 June 2020 Level Level Level Total
1 2 3
Assets measured at fair value
Total investment properties - - 212,182 212,182
Land - - 52,270 52,270
Residential properties - - 72,288 72,288
Non-residential properties - - 87,624 87,624
Investment securities 1,698 2,110,864 1,338 2,113,900
Other assets - derivative
financial assets - 13,579 - 13,579
Other assets - trading securities
owned 5,330 978 - 6,308
Assets for which fair values
are disclosed
Amounts due from credit institutions - 1,700,075 - 1,700,075
Loans to customers and finance
lease receivables - - 12,681,729 12,681,729
Liabilities measured at fair
value
Other liabilities - derivative
financial liabilities - 41,844 - 41,844
Liabilities for which fair
values are disclosed
Client deposits and notes - 11,599,744 - 11,599,744
Amounts owed to credit institutions - 2,505,648 1,016,212 3,521,860
Debt securities issued - 1,279,445 251,403 1,530,848
Lease liability - 5,320 91,352 96,672
At 31 December 2019 Level Level Level Total
1 2 3
Assets measured at fair value
Total investment properties - - 225,073 225,073
Land - - 56,909 56,909
Residential properties - - 75,328 75,328
Non-residential properties - - 92,836 92,836
Investment securities 2,316 1,783,515 973 1,786,804
Other assets - derivative
financial assets - 34,559 - 34,559
Other assets - trading securities
owned 7,493 - - 7,493
Amounts due from credit institutions - 1,619,072 - 1,619,072
Loans to customers and finance
lease receivables - - 12,082,385 12,082,385
Liabilities measured at fair
value
Other liabilities - derivative
financial liabilities - 10,836 - 10,836
Liabilities for which fair
values are disclosed
Client deposits and notes - 10,077,542 - 10,077,542
Amounts owed to credit institutions - 3,597,035 337,088 3,934,123
Debt securities issued - 1,746,408 431,940 2,178,348
Lease liability - - 95,487 95,487
21. Fair value measurements (continued)
Fair value hierarchy (continued)
The following is a description of the determination of fair
value for financial instruments which are recorded at fair value
using valuation techniques. These incorporate the Group's estimate
of assumptions that a market participant would make when valuing
the instruments.
Derivative financial instruments
Derivative financial instruments valued using a valuation
technique with market observable inputs are mainly interest rate
swaps, currency swaps, forward foreign exchange contracts and
option contracts. The most frequently applied valuation techniques
include forward pricing and swap models, using present value
calculations, as well as standard option pricing models. The models
incorporate various inputs including the credit quality of
counterparties, foreign exchange spot and forward rates, interest
rate curves and implied volatilities.
Trading securities and investment securities
Trading securities and a certain part of investment securities
are quoted equity and debt securities. Investment securities valued
using a valuation technique or pricing models consist of unquoted
equity and debt securities. These securities are valued using
models which sometimes only incorporate data observable in the
market and at other times use both observable and non-observable
data. The non-observable inputs to the models include assumptions
regarding the future financial performance of the investee, its
risk profile, and economic assumptions regarding the industry and
geographical jurisdiction in which the investee operates.
Fair value of financial instruments that are carried in the
financial statements not 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
carried in the financial statements. The table does not include the
fair values of non-financial assets and non-financial liabilities,
fair values of other smaller financial assets and financial
liabilities, or cash and short-term deposits, fair values of which
are materially close to their carrying values.
Unrecognised
Carrying gain Fair
value Fair value (loss) Carrying value Unrecognised
gain
30 June 30 June 30 June value (loss)
2020 2020 2020 2019 2019 2019
Financial assets
Amounts due from
credit institutions 1,700,075 1,700,075 - 1,619,072 1,619,072 -
Loans to customers
and finance lease
receivables 12,599,092 12,681,729 82,637 11,931,262 12,082,385 151,123
Financial liabilities
Client deposits
and notes 11,583,139 11,599,744 (16,605) 10,076,735 10,077,542 (807)
Amounts owed to
credit institutions 3,521,860 3,521,860 - 3,934,123 3,934,123 -
Debt securities
issued 1,561,933 1,530,848 31,085 2,120,064 2,178,348 (58,284)
Lease liability 96,878 96,672 206 94,616 95,487 (871)
Total unrecognised
change in unrealised
fair value 97,323 91,161
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), it is
assumed that the carrying amounts approximate to their fair value.
This assumption is also applied to demand deposits, savings
accounts without a specific maturity, and variable rate financial
instruments.
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. For financial assets and
financial liabilities maturing in less than a year, it is assumed
that the carrying amounts approximate to their fair value.
22. Maturity analysis of financial assets and liabilities
The table below shows an analysis of financial assets and
liabilities according to their contractual maturities, except for
current accounts as described below.
At 30 June 2020
On Up to Up to Up to Up to Up to Over Total
demand 3 months 6 months 1 year 3 years 5 years 5 years
Financial assets
Cash and cash
equivalents 1,352,034 281,721 - - - - - 1,633,755
Amounts due from
credit institutions 1,680,011 350 529 - 4,060 1,520 13,605 1,700,075
Investment securities 809,431 904,512 875 63,773 41,920 240,797 52,592 2,113,900
Loans to customers
and finance lease
receivables - 2,211,166 840,813 1,471,334 3,324,564 1,920,745 2,830,470 12,599,092
Total 3,841,476 3,397,749 842,217 1,535,107 3,370,544 2,163,062 2,896,667 18,046,822
Financial liabilities
Client deposits
and notes 1,729,673 2,642,002 1,138,427 4,694,799 842,770 484,297 51,171 11,583,139
Amounts owed to
credit institutions 150,875 1,233,635 187,889 334,664 604,005 674,445 336,347 3,521,860
Debt securities
issued - 112,951 25,483 83,392 284,587 881,221 174,299 1,561,933
Lease liability - 9,654 5,592 11,019 33,187 21,890 15,536 96,878
Total 1,880,548 3,998,242 1,357,391 5,123,874 1,764,549 2,061,853 577,353 16,763,810
Net 1,960,928 (600,493) (515,174) (3,588,767) 1,605,995 101,209 2,319,314 1,283,012
Accumulated gap 1,960,928 1,360,435 845,261 (2,743,506) (1,137,511) (1,036,302) 1,283,012
At 31 December 2019
On Up to Up to Up to Up to Up to Over Total
demand 3 months 6 months 1 year 3 years 5 years 5 years
Financial assets
Cash and cash
equivalents 1,532,542 621,082 - - - - - 2,153,624
Amounts due from credit
institutions 1,570,495 30,858 720 880 2,860 750 12,509 1,619,072
Investment securities 299,242 1,235,995 4,840 4,632 64,495 129,861 47,739 1,786,804
Loans to customers
and finance lease
receivables - 1,671,794 804,885 1,577,849 3,334,464 1,855,284 2,686,986 11,931,262
Total 3,402,279 3,559,729 810,445 1,583,361 3,401,819 1,985,895 2,747,234 17,490,762
Financial liabilities
Client deposits and
notes 2,082,989 1,761,206 860,222 4,406,906 832,150 86,038 47,224 10,076,735
Amounts owed to credit
institutions 263,974 1,768,062 134,427 403,354 603,096 411,165 350,045 3,934,123
Debt securities issued - 71,714 638,293 102,763 299,807 843,903 163,584 2,120,064
Lease liability - 5,899 5,703 10,496 33,592 21,438 17,488 94,616
Total 2,346,963 3,606,881 1,638,645 4,923,519 1,768,645 1,362,544 578,341 16,225,538
Net 1,055,316 (47,152) (828,200) (3,340,158) 1,633,174 623,351 2,168,893 1,265,224
Accumulated gap 1,055,316 1,008,164 179,964 (3,160,194) (1,527,020) (903,669) 1,265,224
The Group's capability to discharge its liabilities relies on
its ability to realise equivalent assets within the same period of
time. In the Georgian marketplace, where most of the Group's
business is concentrated, many short-term credits are granted with
the expectation of renewing the loans at maturity. As such, the
ultimate maturity of assets may be different from the analysis
presented above. To reflect the historical stability of current
accounts, the Group calculates the minimal daily balance of current
accounts over the past two years and includes the amount in the 'Up
to 1 year' category in the table above. The remaining current
accounts are included in the 'On demand' category. To match the
coverage of short-term borrowings from the NBG with the investment
securities pledged to secure it, those securities are included in
the 'On demand' category.
22. Maturity analysis of financial assets and liabilities (continued)
The Group's principal sources of liquidity are as follows:
-- deposits;
-- borrowings from international credit institutions;
-- inter-bank deposit agreements;
-- debt issues;
-- proceeds from sale of securities;
-- principal repayments on loans;
-- interest income; and
-- fees and commissions income.
As at 30 June 2020, client deposits and notes amounted to GEL
11,583,139 (31 December 2019: GEL 10,076,735) and represented 68%
(31 December 2019: 61%) of the Group's total liabilities. These
funds continue to provide a majority of the Group's funding and
represent a diversified and stable source of funds. As at 30 June
2020, amounts owed to credit institutions amounted to GEL 3,521,860
(31 December 2019: GEL 3,934,123) and represented 21% (31 December
2019: 24%) of total liabilities. As at 30 June 2020, debt
securities issued amounted to GEL 1,561,933 (31 December 2019: GEL
2,120,064) and represented 9% (31 December 2019:13%) of total
liabilities.
In the Board's opinion, liquidity is sufficient to meet the
Group's present requirements.
The table below shows an analysis of assets and liabilities
analysed according to when they are expected to be recovered or
settled , except for current accounts which are included in up to 1
year time bucket, noting that respective contractual maturity may
expand over significantly longer periods :
At 30 June 2020 At 31 December 2019
Less More Total Less More Total
than than than than
1 year 1 year 1 year 1 year
Cash and cash equivalents 1,633,755 - 1,633,755 2,153,624 - 2,153,624
Amounts due from credit
institutions 1,680,890 19,185 1,700,075 1,602,953 16,119 1,619,072
Investment securities 1,778,591 335,309 2,113,900 1,544,709 242,095 1,786,804
Loans to customers and
finance lease receivables 4,523,313 8,075,779 12,599,092 4,054,528 7,876,734 11,931,262
Accounts receivable
and other loans 4,060 - 4,060 3,489 - 3,489
Prepayments 27,771 3,742 31,513 40,906 1,726 42,632
Inventories 13,901 - 13,901 12,297 - 12,297
Investment properties - 212,182 212,182 - 225,073 225,073
Right-of-use assets - 89,758 89,758 - 96,095 96,095
Property and equipment - 396,272 396,272 - 379,788 379,788
Goodwill - 33,351 33,351 - 33,351 33,351
Intangible assets - 116,355 116,355 - 106,290 106,290
Income tax assets 54,401 194 54,595 75 207 282
Other assets 119,077 20,868 139,945 128,267 14,887 143,154
Assets held for sale 45,212 - 45,212 36,284 - 36,284
Total assets 9,880,971 9,302,995 19,183,966 9,577,132 8,992,365 18,569,497
Client deposits and
notes 10,204,901 1,378,238 11,583,139 9,111,323 965,412 10,076,735
Amounts owed to credit
institutions 1,907,063 1,614,797 3,521,860 2,569,817 1,364,306 3,934,123
Debt securities issued 221,826 1,340,107 1,561,933 812,770 1,307,294 2,120,064
Lease liability 26,249 70,629 96,878 22,098 72,518 94,616
Accruals and deferred
income 17,805 19,452 37,257 42,223 10,248 52,471
Income tax liabilities 243 69,928 70,171 1,563 36,355 37,918
Other liabilities 112,929 - 112,929 102,662 - 102,662
Total liabilities 12,491,016 4,493,151 16,984,167 12,662,456 3,756,133 16,418,589
Net (2,610,045) 4,809,844 2,199,799 (3,085,324) 5,236,232 2,150,908
23. Related party disclosures
In accordance with IAS 24 "Related Party Disclosures", parties
are considered to be related if one party has the ability to
control the other party or 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.
Related parties may enter into transactions which unrelated
parties might not, and transactions between related parties may not
be affected on the same terms, conditions and amounts as
transactions between unrelated parties. All transactions with
related parties disclosed below have been conducted on an arm's
length basis.
The volumes of related party transactions, outstanding balances
as at 30 June 2020 and 30 June 2019, and related expenses and
income for the six months are as follows:
At 30 June 2020 (unaudited) At 30 June 2019 (unaudited)
Key Key
management management
Associates personnel* Associates personnel*
Loans outstanding at
1 January, gross - 6,718 - 1,756
Loans issued during the
year - 3,585 - 2,529
Loan repayments during
the year - (3,399) - (2,087)
Other movements - 481 - 337
Loans outstanding at
30 June, gross - 7,385 - 2,535
Less: allowance for impairment
at 30 June - (16) - -
Loans outstanding at
30 June, net - 7,369 - 2,535
Interest income on loans - 169 - 93
Expected credit loss - (23) - (14)
Deposits at 1 January 3 30,475 809 14,748
Deposits received during
the year 83 7,429 712 20,791
Deposits repaid during
the year - (8,561) - (2,955)
Other movements - 1,862 (401) (1,105)
Deposits at 30 June 86 31,205 1,120 31,479
Interest expense on deposits - (654) - (447)
* Key management personnel includes members of BOGG's Board of
Directors and key executives of the Group.
Compensation of key management personnel comprised the
following:
For the six months
ended
30 June 30 June
2020 (unaudited) 2019 (unaudited)
Salaries and other benefits 6,847 5,084
Share-based payments compensation
* 12,980 26,712
Social security costs - 11
Total key management compensation 19,827 31,807
* In 2019, share-based compensation included an amount of GEL
3,985 for key management personnel reflected in the non-recurring
items.
Key management personnel do not receive cash-settled
compensation, except for fixed salaries. The major part of the
total compensation is share-based. The number of key management
personnel at 30 June 2020 was 20 (31 December 2019: 16).
24. Capital adequacy
The Group maintains an actively managed capital base to cover
risks inherent to the business. The adequacy of the Group's capital
is monitored using, among other measures, the ratios established by
the NBG in supervising the Bank.
During six month period ended 30 June 2020, the Bank and the
Group complied in full with all its externally imposed capital
requirements.
The primary objectives of the Group's capital management are to
ensure that the Bank complies with externally imposed capital
requirements and that the Group maintains strong credit ratings and
healthy capital ratios in order to support its business and to
maximise shareholder value. The Group manages its capital structure
and makes adjustments to it in the light of changes in economic
conditions and the risk characteristics of its activities. In order
to maintain or adjust the capital structure, the Group may adjust
the amount of dividend payment to shareholders, return capital to
shareholders or issue capital securities. No changes were made in
the objectives, policies and processes from the previous years.
NBG (Basel III) capital adequacy ratio
In December 2017, the NBG adopted amendments to the regulations
relating to capital adequacy requirements, including amendments to
the regulation on capital adequacy requirements for commercial
banks, and introduced new requirements on the determination of the
countercyclical buffer rate, on the identification of
systematically important banks, on determining systemic buffer
requirements and on additional capital buffer requirements for
commercial banks within Pillar 2. The NBG requires the Bank to
maintain a minimum total capital adequacy ratio of risk-weighted
assets, computed based on the Bank's standalone special-purpose
financial statements prepared in accordance with NBG regulations
and pronouncements, based on Basel III requirements.
At the end of March 2020, NBG introduced an updated supervisory
plan for the Georgian banking sector, aimed at alleviating the
negative financial and economic challenges created by the global
COVID-19 pandemic in Georgia. Following capital adequacy
initiatives were introduced:
-- Combined buffer - the conservation buffer requirement of 2.5%
of risk-weighted assets has been reduced to 0% indefinitely
-- Pillar 2 requirements:
o Currency induced credit risk buffer (CICR) requirement reduced
by 2/3rds indefinitely
o The phase-in of additional credit portfolio concentration risk
buffer (HHI) and net GRAPE buffer requirements on Common Equity
Tier 1 (CET1) and Tier 1 capital, planned at the end of March 2020,
has been postponed indefinitely
o The possibility of fully or partially releasing the remaining
requirements of Pillar 2 buffers (HHI, CICR, net GRAPE), if
necessary, remains open
-- During the period the banks are allowed to partially or fully
use the Pillar 2 and conservation buffers, the banks are restricted
to make capital distribution in any form.
NBG requested the Georgian banks to create general provisions
under the local accounting basis in the first quarter of 2020, the
accounting basis is that used for calculation of capital adequacy
ratios. The specific quantum of the provision reflects the NBG's
current expectation of estimated credit losses on the lending book
of the banking system for the entire economic cycle, given current
economic expectations. The NBG considers the banking system capital
ratios to be sufficiently in excess of the expected minimum capital
requirements, to be able to absorb this upfront general provision,
whilst maintaining sufficiently comfortable buffers over the
required minimum capital ratios.
As at 30 June 2020 and 31 December 2019, the Bank's capital
adequacy ratio on this basis was as follows:
30 June 31 December
2020 (unaudited) 2019
Tier 1 capital 1,695,146 1,887,571
Tier 2 capital 761,999 616,113
Total capital 2,457,145 2,503,684
Risk-weighted assets 14,099,110 13,868,169
Tier 1 capital ratio 12.0% 13.6%
Total capital ratio 17.4% 18.1%
Min. requirement for Tier 1
capital ratio 8.7% 12.2%
Min. requirement for Total capital
ratio 13.3% 17.1%
GLOSSARY
-- Alternative performance measures (APMs) In this announcement
the management uses various APMs, which they believe provide
additional useful information for understanding the financial
performance of the Group. These APMs are not defined by
International Financial Reporting Standards, and also may not be
directly comparable with other companies who use similar measures.
We believe that these APMs provide the best representation of our
financial performance as these measures are used by management to
evaluate the Group's operating performance and make day-to-day
operating decisions;
-- Cost of funds Interest expense of the period divided by
monthly average interest bearing liabilities;
-- Cost of credit risk Expected loss on loans to customers and
finance lease receivables for the period divided by monthly average
gross loans to customers and finance lease receivables over the
same period;
-- Cost to income ratio Operating expenses divided by operating
income;
-- Interest bearing liabilities Amounts owed to credit
institutions, client deposits and notes, and debt securities
issued;
-- Interest earning assets (excluding cash) Amounts due from
credit institutions, investment securities (but excluding corporate
shares) and net loans to customers and finance lease
receivables;
-- Leverage (times) Total liabilities divided by total
equity;
-- Liquid assets Cash and cash equivalents, amounts due from
credit institutions and investment securities;
-- Liquidity coverage ratio (LCR) High quality liquid assets (as
defined by NBG) divided by net cash outflows over the next 30 days
(as defined by NBG);
-- Loan yield Interest income from loans to customers and
finance lease receivables divided by monthly average gross loans to
customers and finance lease receivables;
-- NBG (Basel III) Common Equity Tier I (CET1) capital adequacy
ratio Common Equity Tier I capital divided by total risk weighted
assets, both calculated in accordance with the requirements of the
National Bank of Georgia instructions;
-- NBG (Basel III) Tier I capital adequacy ratio Tier I capital
divided by total risk weighted assets, both calculated in
accordance with the requirements of the National Bank of Georgia
instructions;
-- NBG (Basel III) Total capital adequacy ratio Total regulatory
capital divided by total risk weighted assets, both calculated in
accordance with the requirements of the National Bank of Georgia
instructions;
-- Net interest margin (NIM) Net interest income of the period
divided by monthly average interest earning assets excluding cash
for the same period;
-- Non-performing loans (NPLs) The principal and interest on
loans overdue for more than 90 days and any additional potential
losses estimated by management;
-- NPL coverage ratio Allowance for expected credit loss of
loans and finance lease receivables divided by NPLs;
-- NPL coverage ratio adjusted for discounted value of
collateral Allowance for expected credit loss of loans and finance
lease receivables divided by NPLs (discounted value of collateral
is added back to allowance for expected credit loss);
-- Operating leverage Percentage change in operating income less
percentage change in operating expenses;
-- Return on average total assets (ROAA) Profit for the period
divided by monthly average total assets for the same period;
-- Return on average total equity (ROAE) Profit for the period
attributable to shareholders of the Group divided by monthly
average equity attributable to shareholders of the Group for the
same period;
-- NMF Not meaningful
COMPANY INFORMATION
Bank of Georgia Group PLC
Registered Address
84 Brook Street
London W1K 5EH
United Kingdom
www.bankofgeorgiagroup.com
Registered under number 10917019 in England and Wales
Secretary
Link Company Matters Limited
65 Gresham Street
London EC2V 7NQ
United Kingdom
Stock Listing
London Stock Exchange PLC's Main Market for listed
securities
Ticker: "BGEO.LN"
Contact Information
Bank of Georgia Group PLC Investor Relations
Telephone: +44(0) 203 178 4052; +995 322 444444 (9282)
E-mail: ir@ bog.ge
Auditors
Ernst & Young LLP
25 Churchill Place
Canary Wharf
London E14 5EY
United Kingdom
Registrar
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS13 8AE
United Kingdom
Please note that Investor Centre is a free, secure online
service run by our Registrar, Computershare,
giving you convenient access to information on your
shareholdings.
Investor Centre Web Address - www.investorcentre.co.uk .
Investor Centre Shareholder Helpline - +44 (0)370 873 5866
Share price information
Shareholders can access both the latest and historical prices
via the website
www.bankofgeorgiagroup.com
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR VKLFFBVLEBBK
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August 20, 2020 02:00 ET (06:00 GMT)
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