Bank Of Georgia Group Regulatory News (BGEO)

BGEO Group PLC

1st quarter 2017 results

www.BGEO.com

Name of authorised official of issuer responsible for making notification:

Giorgi Alpaidze, Head of Finance, Funding and Investor Relations

BGEO Group PLC 1Q 2017 Results Earnings call

BGEO Group PLC ("BGEO" or the "Group") will publish its financial results for the 1st quarter 2017 at 07:00 London time on Wednesday, 10 May 2017. The results announcement will be available on the Group's website at www.bgeo.com. An investor/analyst conference call, organised by BGEO, will be held on, 10 May 2017, at 14:00 UK / 15:00 CET / 9:00 U.S Eastern Time. The duration of the call will be 60 minutes and will consist of a 15-minute update and a 45-minute Q&A session.

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 BGEO 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: currency fluctuations, including depreciation of the Georgian Lari, and macroeconomic risk; corporate loan portfolio exposure risk; regional tensions; regulatory risk; cyber security, information systems and financial crime risk; investment business strategy risk; and other key factors that we have 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, including the 'Principal Risks and Uncertainties' included in BGEO Group PLC's Annual Report and Accounts 2016. No part of these results constitutes, or shall be taken to constitute, an invitation or inducement to invest in BGEO Group PLC or any other entity, and must not be relied upon in any way in connection with any investment decision. BGEO Group PLC undertakes 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.

TABLE OF CONTENTS

About BGEO Group

The Group: BGEO Group PLC ("BGEO"- LSE: BGEO LN) is a UK incorporated holding company of a Georgia-focused investment platform. BGEO invests, via its subsidiaries, in the banking and non-banking sectors in Georgia (BGEO and its subsidiaries, the "Group"). BGEO aims to deliver on a 4x20 strategy: (1) at least 20% ROAE; (2) at least 20% growth of our Banking Business retail loan book; (3) at least 20% IRR; and (4) up to 20% of the Group's profit from its Investment Business.

Banking Business: Our Banking Business comprises at least 80% of the Group's profit. JSC Bank of Georgia ("BOG" or the "Bank") is the main entity in the Group's Banking Business. The Banking Business consists of Retail Banking, Corporate Banking and Investment Management businesses at its core and other banking businesses such as P&C Insurance ("Aldagi"), leasing, payment services and banking operations in Belarus ("BNB"). The Group strives to benefit from the underpenetrated banking sector in Georgia especially through its Retail Banking services.

Investment Business: Our Investment Business comprises up to 20% of the Group's profit and consists of Georgia Healthcare Group ("Healthcare Business" or "GHG") - an LSE (London Stock Exchange PLC) premium listed company, m2 Real Estate ("Real Estate Business" or "m2"), Georgia Global Utilities ("Utility and Energy Business" or "GGU") and Teliani Valley ("Beverage Business" or "Teliani"). Georgia's fast-growing economy provides opportunities in a number of underdeveloped markets and the Group is well positioned to capture growth opportunities in the Georgian corporate sector.

BGEO Group PLC announces the Group's first quarter 2017 consolidated results. Unless otherwise indicated, numbers are for the first quarter 2017 and comparisons are with the first quarter 2016. The results are based on International Financial Reporting Standards ("IFRS") as adopted by the European Union, are unaudited and derived from management accounts.

BGEO highlights

§ 1Q17 profit was GEL 108.2mln (US$ 44.2mln/GBP 35.6mln), up 24.3% y-o-y

§ 1Q17 basic earnings per share ("EPS") was GEL 2.64 (US$ 1.08 per share/GBP 0.87 per share), up 25.7% y-o-y

§ Book value per share was GEL 58.0, up 15.5% y-o-y

§ Total equity attributable to shareholders was GEL 2,208.9mln, up 14.2% y-o-y

§ Total assets increased to GEL 12,606.5mln, up 25.1% y-o-y

§ As of 5 May 2017, GEL 321.1mln1 liquid assets were held at the holding company level, of which, GEL 173.7mln was unallocated

§ 1Q17 GDP growth was 5.0%, while inflation was 4.2% and the Lari appreciated by 7.6% against the US Dollar

1Of GEL 321.1mln at 5 May 2017, GEL 99.5mln is earmarked for regular dividends in respect of 2016 financial year, while GEL 47.9mln is pledged as collateral for borrowings from Georgian commercial banks

Banking Business highlights

1Q17 performance

§ Revenue was GEL 221.4mln (up 20.2% y-o-y and down 4.8% q-o-q)

§ Net Interest Margin ("NIM") was 7.4% (down 10 bps y-o-y and down 20 bps q-o-q)

§ Loan Yield stood at 14.0% (down 40 bps y-o-y and down 40 bps q-o-q)

§ Cost of Funds stood at 4.6% (down 40 bps y-o-y and flat q-o-q)

§ Cost to Income ratio was 36.1% (37.9% in 1Q16 and 37.5% in 4Q16)

§ Cost of credit risk stood at GEL 48.3mln (up 37.8% y-o-y and down 31.9% q-o-q)

§ Cost of Risk ratio was 2.4% (2.3% in 1Q16 and 4.2% in 4Q16)

§ Profit was GEL 86.9mln (up 24.7% y-o-y and up 15.4% q-o-q)

§ Return on Average Assets ("ROAA") was 3.2% (3.0% in 1Q16 and 2.9% in 4Q16)

§ Return on Average Equity ("ROAE") was 23.5% (21.2% in 1Q16 and 20.1% in 4Q16)

Balance sheet strength supported by solid capital and liquidity positions

§ The net loan book reached GEL 6,470.8mln, up 19.9% y-o-y and down 3.2% q-o-q. The growth on a constant-currency basis was 17.4% y-o-y and 2.1% q-o-q

§ Customer funds increased to GEL 5,591.7mln, up 12.7% y-o-y and down 2.4% q-o-q. The growth on a constant-currency basis was 10.1% y-o-y and 3.5% q-o-q

§ Net Loans to Customer Funds and DFI ratio stood at 96.1% (91.6% at 31 March 2016 and 95.3% at 31 December 2016)

§ Leverage was at 6.4-times as at 31 March 2017, compared to 6.1-times at 31 March 2016

§ NBG (Basel 2/3) Tier I and Total CAR stood at 11.2%2 and 16.3%, respectively, at 31 March 2017

§ NBG Liquidity Ratio was 37.4% at 31 March 2017, compared to 47.3% at 31 March 2016

2Capital adequacy ratios include GEL 99.5mln distributed as dividend from the Bank to the holding level on 29 December 2016. These funds are earmarked for regular dividends in respect of the 2016 financial year and will be paid on 7 July 2017, subject to approval by the shareholders at BGEO's AGM on 1 June 2017. Excluding this amount, NBG (Basel 2/3) Tier I and Total CAR would be 10.1% and 15.2%, respectively

Resilient growth momentum sustained across major business lines

§ Retail Banking ("RB") continues to deliver strong franchise growth. Retail Banking revenue reached GEL 141.2mln in 1Q17, up 32.8% y-o-y and down 4.4% q-o-q

§ The Retail Banking net loan book reached GEL 3,891.1mln as of 31 March 2017, up 34.1% y-o-y and down 0.3% q-o-q. The growth on a constant-currency basis was 31.8% y-o-y, well above our strategic target of 20%+, and 4.2% q-o-q. As a result, retail loan book's share accounted for 62.6% of Bank's gross loan book of at 31 March 2017 (56.5% as of 31 March 2016)

§ Retail Banking client deposits increased to GEL 2,393.8mln as of 31 March 2017, up 25.9% y-o-y and down 0.8% q-o-q. The growth on a constant-currency basis was 22.9% y-o-y and 5.3% q-o-q

§ The number of Retail Banking clients reached 2.2mln at the end of 1Q17, up 8.2% from 2.0mln at the end of 1Q16

§ Solo - our premium banking brand - continues its strong growth. Solo, which offers a fundamentally different approach to premium banking and targets the mass affluent client segment, more than doubled its client base since April 2015, when we launched Solo in its current format. As of 31 March 2017, the number of Solo clients reached 21,657. Our goal is to significantly increase our market share in the mass affluent segment, which stood below 13% at the beginning of 2015, when we launched Solo in its current format

§ Our Retail Banking product to client ratio remained at 2.0 in 1Q17, flat y-o-y and q-o-q. As we complete the transformation of our retail banking operations from the product-based model into the client-centric model we expect that it will have a positive impact on the Retail Banking's product to client ratio in the future. We completed the implementation of the client-centric model in 28 branches as of 31 March 2017 and are currently in process of converting eight additional branches. We have seen outstanding sales growth in transformed branches, with the number of products sold to our clients increasing by over 100% compared to the base-line figures

§ Corporate Investment Banking ("CIB") is successfully delivering its risk deconcentration strategy, having reduced the concentration of our top 10 CIB clients to 11.3% at the end of 1Q17, down from 12.1% a year ago. The CIB's net loan book amounted to GEL 2,226.9mln at 31 March 2017, up 3.9% y-o-y, and down 7.0% q-o-q. On a constant-currency basis, the loan portfolio was largely flat y-o-y and q-o-q. The CIB's net fee and commission income was GEL 5.7mln or 9.9% of the total CIB revenue in 1Q17 compared to GEL 7.0mln or 11.9% a year ago. The decline was mainly driven by the decrease in fee and commission income from guarantees and letters of credit as we reduced our large guarantee and letters of credit exposures (refer to the Banking Business discussion below for more detailed discussion). CIB's ROAE increased to 18.3% in 1Q17 from 17.6% in 1Q16, primarily as a result of improved cost of risk. We continue to target a) further reductions in the CIB's loan portfolio concentration, b) growth of our fee income business, and c) improvements of CIB ROAE

§ Investment Management's Assets Under Management ("AUM") increased to GEL 1,568.6mln3, up 16.7% y-o-y, reflecting higher bond issuance activity by our brokerage arm Galt & Taggart, as our clients increasingly access these new products

3Wealth Management client deposits, Galt & Taggart client assets, Aldagi Pension Fund and Wealth Management client assets under Bank of Georgia's custody

Investment Business Highlights

§ Our Investment Business contributed GEL 21.3mln or 19.7% to the Group's profits in 1Q17, up from GEL 17.4mln a year ago and GEL 13.4mln a quarter ago. GEL 14.0mln from the 1Q17 Investment Business profit was attributable to shareholders of the Group, while the rest primarily related to non-controlling shareholders of GHG

§ During March 2017, we sold 1,013,317 GHG shares (the "Disposal"), representing approximately 0.8% of GHG's issued share capital. The Disposal was achieved through private sales transactions conducted on an arms-length and commercial basis. Following the Disposal, we continue to hold 84,618,503 shares of GHG, or 64.3% of GHG's issued share capital. As a result of the Disposal, the Group received total gross proceeds of GEL 11.3mln (US$ 4.5mln/GBP 3.7mln) and realized a gain of GEL 7.4mln (US$ 3.0mln), which was recorded through an increase in shareholders' equity in 1Q17

§ Our healthcare business, Georgia Healthcare Group PLC ("GHG") continued to deliver strong revenue performance across all business lines. GHG recorded net revenue of GEL 186.0mln (up 157.7% y-o-y and up 37.5% q-o-q). During 1Q17, GHG achieved further diversification of its revenues. GHG's total net revenue mix was 34.1%, 58.4% and 7.5% from the healthcare services business, the pharma business and the medical insurance business, respectively. GHG delivered quarterly EBITDA of GEL 25.1mln, up 46.3% y-o-y. This growth was primarily driven by GHG's expansion into the Pharmaceutical business by acquiring controlling equity stakes in JSC GPC ("GPC"), Georgia's third-largest chain of pharmacies, in May 2016 and JSC ABC Pharmacia ("ABC" or "Pharmadepot"), Georgia's fourth largest chain of pharmacies, in January 2017. These acquisitions resulted in GHG becoming the number one player in the pharma market, similar to GHG's positions in the healthcare services and the medical insurance markets. Consequently, GHG reported net profit of GEL 13.0mln in 1Q17 (up 8.4% y-o-y)

§ Our real estate business, m2 Real Estate ("m2") continued its strong project execution and sales momentum in 1Q17. In 1Q17, m2 achieved sales of US$ 10.1mln, selling a total of 143 apartments, compared to US$ 5.5mln sales and 53 apartments sold in 1Q16. In 1Q17, m2 recognised revenue of GEL 2.6mln and delivered a net profit of GEL 0.6mln

§ Effective 1 January 2017, the Group, inclusive of m2, early adopted the new revenue recognition standard, IFRS 15, which requires revenue recognition according to the percentage of completion method. Prior to 1 January 2017, m2 recognized revenues under IAS 18 upon completion and handover of the units to customers. As a result, comparison of 1Q17 figures to those in 2016 needs to take into consideration the material impact of the adoption of the new revenue recognition standard

§ Our utility and energy business, Georgia Global Utilities ("GGU"), delivered stable revenue and cost performance in 1Q17 and achieved revenue of GEL 28.6mln (up 0.1% y-o-y), EBITDA of GEL 14.8mln (up 1.8% y-o-y) and profit of GEL 7.7mln (up 39.4% y-o-y). The significant y-o-y increase in GGU's profit was primarily driven by the absence of GEL 1.2mln income tax expense resulting from the change in corporate tax legislation in Georgia (please see BGEO's 4Q16 and full year 2016 preliminary results announcement available on our web-site, www.BGEO.com, for more details regarding the change in corporate tax legislation). Since BGEO owned 25% of GGU's equity stake until July 2016, we reported our share of GGU's profits under "profit from associates" in our income statement during this period. We started consolidating GGU's financial results from 21 July 2016, when we completed the acquisition of the remaining 75% equity stake in GGU, as part of our Investment Business and included it in the segment results discussion as a separate business

§ Our beverages business, Teliani, is on track to launch beer production in 2Q17 on the back of completion of the beer brewery construction in 2016. Teliani will brew Heineken under a ten-year exclusive licence agreement to sell Heineken brands in Georgia, Armenia and Azerbaijan

CHIEF EXECUTIVE OFFICER'S STATEMENT

I am pleased to report that each of the Group's businesses has made good progress in implementing key strategic priorities during the first quarter of 2017, and that the Group maintained its earnings momentum in the seasonally quiet start of the year. Our profit of GEL 108.2 million in the quarter increased by 24.3%, compared to the first quarter of 2016, whilst basic earnings per share increased by 25.7% to GEL 2.64 over the same period. Banking business profits grew by 24.7% year-on-year, supported by excellent franchise growth in the retail bank, where we now have 2.2 million customers, resilient margins and a strong cost performance. There was a similarly strong performance in the Group's investment businesses, which delivered a 22.5% increase in profits year-on-year.

At the BGEO Group level, revenue growth was 36.6% year-on-year. Retail banking net interest income grew by 34.6%, offsetting a slight decline in corporate investment banking net interest income as we continue to rebalance the retail/corporate business mix. The net loan book increased by 19.9%, over the last twelve months, and by 17.4% on a constant-currency basis, and the retail bank now represents 62.6% of the Bank's gross loan book. We also continued to reposition the corporate bank to reduce concentration risk. Costs continue to be well managed, and the banking business cost to income ratio improved to 36.1%, from 37.9% a year ago and 37.5% in the fourth quarter of last year. Revenues from the investment businesses more than doubled as a result of strong business growth, both organic and via acquisitions, in the healthcare business and the consolidation of Georgia Global Utilities.

Overall banking business asset quality during the first quarter of the year remained robust, with the annualised cost of risk ratio at 2.4% in the quarter, compared to 2.3% in 1Q16, and 4.2% in 4Q16. This is a solid performance, against the backdrop of the recent Lari volatility, at a time when we are also gradually improving our non-performing loans coverage ratio.

In addition to the Group's strong earnings performance, returns have also continued to be high. In the banking business, the return on average equity was 23.5%, compared to 21.2% in the first quarter of 2016, largely reflecting the continued shift towards the higher return retail banking business. In the healthcare services business the EBITDA margin remained at 25.3%, notwithstanding the impact of the ongoing rapid roll-out of a number of hospital and outpatient clinic services. The Group continues to demonstrate its high growth and high return characteristics.

Within our investment businesses, Georgia Healthcare Group (GHG) again delivered a strong revenue performance, reflecting both good levels of organic growth (10.1% year-on-year) and the impact of the benefits of recent acquisitions, particularly in the pharmaceutical business, starting to be captured. This has led to the further diversification of GHG's revenues - an important objective for GHG. In January 2017, GHG completed the acquisition of the Pharmadepot chain of pharmacies to create, together with the GPC chain we acquired in mid-2016, the largest chain of pharmacies in Georgia with a market share by revenues of 29%. GHG is now also the largest purchaser of pharmaceutical products in Georgia, which creates significant cost and revenue synergy opportunities to be captured. GHG delivered quarterly EBITDA of GEL 25.1 million, and the business remains on track to deliver continued strong earnings progress and, achieve its target to more than double 2015 healthcare services revenues by 2018.

Our real estate business, m2 Real Estate, continues to develop its apartment projects very successfully, with its strong project execution and sales performance delivering total sales in the first quarter of US$10.1 million, compared to US$5.5 million in the first quarter of 2016. In our water utility and energy business, GGU, the management team continues to focus on improving energy efficiency and reducing water loss rates and delivered a net profit of GEL 7.7 million, a year-on-year increase of 39.4%.

The Group's capital position remains strong, with capital being held both in the regulated banking business and at the holding company level. Within the bank, the NBG (Basel 2/3) Tier 1 Capital Adequacy ratio was 11.2%4, and the Total Capital Adequacy ratio was 16.3%, both comfortably ahead of the Bank's minimum capital requirements. In addition, as of 5 May 2017, over GEL 300 million liquid assets were held at the Group level, which includes the Group's 2016 regular dividend of GEL c.99.5 million that is intended to be paid out in July 2017. From a funding perspective, the Bank's NBG Liquidity ratio was 37.4%, and the Liquidity Coverage ratio was 178.1%, both of which reflect the Bank's continuing strong liquidity position. Balance sheet leverage remained low at 6.4 times.

During the quarter the Group began to implement its recently approved two year US$50 million share buyback and cancellation programme. At the end of the first quarter, US$1.2 million of this programme had been completed.

From a macroeconomic perspective Georgia continues to deliver a strong performance. GDP growth expectations for Georgia in 2017 are now generally around 4-5%, significantly higher than the 2.7% growth delivered in 2016. In March 2017, real GDP growth was 5.3% year-on-year based on estimates of National Statistics Office of Georgia. Core inflation remains well contained at 3.3% in April, while headline inflation rose to 6.1% in April due to one-offs. Overall, in the first quarter of the year, GDP growth was 5.0%, compared with 3.3% growth in the first quarter of 2016. In addition, the Lari has recently strengthened against the US Dollar, after a period of volatility at the end of 2016 and the beginning of 2017. Growth in exports and remittances as well as continued growth in tourist arrivals, supported the Lari's strengthening, encouraging the National Bank of Georgia to purchase US$20 million in April, to mitigate the further appreciation of the Lari.

Supported by the improving macroeconomic performance in Georgia and the Group's continued focus on implementing its key strategic priorities, we remain well positioned to deliver good levels of earnings momentum from both the organic business growth in each of our banking and investment businesses, and from the benefits of recent strategic initiatives and acquisitions.

Irakli Gilauri,

Group CEO of BGEO Group PLC

4See the footnote 2 in Banking Business Highlights section on page 4

FINANCIAL SUMMARY

5Banking Business and Investment Business financials do not include inter-business eliminations. Detailed financials, including inter-business eliminations are provided on pages 31and 32

6Capital adequacy ratios include GEL 99.5mln distributed as dividend from the Bank to the holding level on 29 December 2016. These funds are earmarked for regular dividends in respect of the 2016 financial year and will be paid on 7 July 2017, subject to approval by the shareholders at BGEO's AGM on 1 June 2017. Excluding this amount, NBG (Basel 2/3) Tier I and Total CAR would be 10.1% and 15.2%, respectively, at 31 March 2017 and 9.1% and 14.4%, respectively, at 31 December 2016

DISCUSSION OF RESULTS

Discussion of Banking Business Results

The Group's Banking Business is comprised of several components. 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. The business targets the emerging retail, mass retail and mass affluent segments, together with small and medium enterprises and micro businesses. 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. Property and Casualty ("P&C") principally provides property and casualty insurance services to corporate clients and insured individuals in Georgia. BNB, comprising JSC Belarusky Narodny Bank, principally provides retail and corporate banking services in Belarus. The following discussion refers to the Banking Business only.

§ Banking Business revenue. We recorded strong quarterly revenue of GEL 221.4mln (up 20.2% y-o-y). Y-o-y revenue growth was primarily driven by the increase in net banking interest income resulting from the growth in our loan book, net banking foreign currency gain and the outstanding performance of our P&C insurance business

§ Net banking interest income. Our net banking interest income was up 24.1% in 1Q17 y-o-y. Net banking interest income was primarily driven by strong performance in our Retail Banking operations, which was slightly offset by the decline in CIB's net banking interest income

§ Our NIM was 7.4% in 1Q17, within our target range of 7.25% - 7.75%. 1Q17 loan yield and cost of funds were each down by 40bps y-o-y, while liquid assets yield increased by 30bps. However, 1Q17 NIM was lower by 10 bps y-o-y as a result of the NBG's decision in 2Q16 mandating an increase in minimum reserve requirements leading to an increased portion of liquid assets in total interest-earning assets. On a q-o-q basis, NIM was down by 20bps driven by 40bps decrease in loan yield, while cost of funds remained flat and liquid asset yield was up by 10bps

§ Loan yields. Loan yield stood at 14.0% for 1Q17 (down 40bps y-o-y and down 40bps q-o-q). This reflected 70bps decrease in the foreign currency denominated loan yield y-o-y, while the local currency denominated loan yield remained flat for the same period. As the share of local currency denominated loans in the total loan portfolio increased y-o-y, the effect of 70bps y-o-y decrease in foreign currency denominated loan yield was partially offset. The 40 bps decrease in loan yield q-o-q reflected the 60bps decrease in foreign currency denominated loan yield and 40 bps decrease in local currency denominated loan yield

§ Liquid assets yield. Our liquid asset yield increased to 3.4% (up 30bps y-o-y and up 10bps q-o-q). The foreign currency denominated liquid assets yield increased by 60pbs y-o-y as a result of the US Federal Reserve's decisions in December 2016 and March 2017 to raise interest rates by 50bps in aggregate, which triggered similar increases on interest rates paid by a) The National Bank of Georgia (the "NBG") on the Bank's obligatory reserves (foreign currency only) and b) correspondent banks on deposits placed by the Bank. However, this increase was partially offset by a decrease of the local currency denominated liquid assets yield by 40bps y-o-y and 0.8ppts y-o-y increase of the share of local currency denominated average liquid assets in 1Q17

§ Dollarisation. Dollarisation of our loan book decreased since last year as the demand for local currency denominated loans outpaced the demand for foreign currency denominated loans. The trend was supported by the Georgian government's "de-dollarisation" initiatives: a) a one-off program, effective from 15 January 2017 until 25 March 2017, allowing qualified borrowers to convert eligible US dollar denominated loans into GEL, at a discount compensated by the government, at the client's election and b) a new regulation, effective from 15 January 2017, restricting issuance of new loans in foreign currency with amounts less than GEL 100 thousand (equivalent) and representing approximately GEL 415mln (equivalent) of the Bank's loans based on 31 December 2016 data. At 31 March 2017, 33.5% of our net loans were denominated in GEL as compared to 27.6% at 31 March 2016 and 28.7% at 31 December 2016. The dollarisation of our average liquid assets decreased slightly to 61.0% in 1Q17, from 61.8% in 1Q16 - primarily due to a higher level of US Dollar liquidity accumulated at the beginning of the 2016 in connection with the liability management exercise of the Bank's outstanding Eurobonds, which was completed during the 3rd quarter 2016

§ Net Loans to Customer Funds and DFI ratio. Customer funds (client deposits and notes) increased by 12.7% y-o-y to GEL 5,591.7mln primarily driven by strong deposit generation in our Retail Banking operations where client deposits and notes grew by 25.9% y-o-y to GEL 2,393.8mln. We also increased our borrowings from DFIs by 23.5% y-o-y to GEL 1,143.4mln, in order to support growth in local currency lending. As a result, our Net Loans to Customer Funds and DFI ratio, which is closely monitored by management, stood at 96.1% (91.6% at 31 March 2016 and 95.3% at 31 December 2016)

§ Net fee and commission income. Net fee and commission income performance is mainly driven by the strong performance in our settlement operations supported by the success of our Express banking franchise. This was partially offset by a decline in the CIB's fees from guarantees and letters of credit, driven by the deconcentration efforts in the CIB segment. Excluding the income from guarantees and letters of credit, net fee and commission income was GEL 26.9mln for 1Q17, up 16.2% y-o-y

§ Net banking foreign currency gain. In line with the continued volatility of the GEL exchange rate, net banking foreign currency gain was up 10.8% y-o-y for 1Q17 and down 32.4% q-o-q. Volatility was more elevated in 4Q16 compared to 1Q16 and 1Q17. Retail Banking and the CIB businesses contributed 93.0% to the total 1Q17 net banking foreign currency gain

§ Net other banking income. The 23.5% q-o-q increase in net other banking income in 1Q17 was largely driven by the absence of losses on derivative financial instruments recorded in 4Q16

§ Gross insurance profit. Our P&C franchise, Aldagi, delivered record quarterly gross insurance profit in 1Q17. Net insurance premiums earned increased by 34.5% y-o-y and net insurance claims incurred increased by 34.0% y-o-y, driving y-o-y growth in gross insurance profit by 34.9%. The strong performance was mainly attributable to the improved quality of the insurance portfolio, which benefited from the termination of relationships with loss making clients

§ Operating expenses increased to GEL 80.0mln in 1Q17 (up 14.5% y-o-y and down 8.1% q-o-q). Growth in revenues outpaced growth in operating expenses leading to y-o-y positive operating leverage of 5.7% in 1Q17. This represents an improvement compared to y-o-y negative operating leverages of 3.3% and 6.8% in 1Q16 and 4Q16, respectively. 1Q17 operating expenses y-o-y and q-o-q changes were driven by:

- Increase in y-o-y salaries and employee benefits by 16.2% mainly reflects organic growth of our Retail Banking Business, while q-o-q decrease of 7.6% was attributable to seasonally slower activity of Retail Banking Business in 1Q17 compared to 4Q16

- Administrative expenses increased y-o-y by 15.8%, primarily driven by rent and repair and maintenance costs as compared with the same period last year. The increase was attributable to the combined effect of the larger branch network and the higher average quarterly exchange rate during 1Q17 as the vast majority of branch rental agreements are denominated in US Dollar. The decrease in q-o-q administrative expenses by 9.7% reflects higher seasonal marketing activities in 4Q16

§ Cost of Risk ratio. Banking Business Cost of Risk ratio was 2.4% in 1Q17, up 10bps y-o-y and down 180bps q-o-q. Cost of Risk was positively impacted by the GEL's appreciation against major foreign currencies during 1Q17. CIB Cost of Risk ratio was down 180bps y-o-y and 630bps q-o-q, while RB Cost of Risk ratio was up 90bps y-o-y and 140bps q-o-q, largely driven by headwinds from GEL's depreciation in 4Q16

§ Quality of the Banking Business loan book remained resilient in 1Q17 as evidenced by following closely monitored metrics:

- NPLs. NPLs were GEL 311.9mln, up 23.8% y-o-y and up 5.8% q-o-q. The q-o-q increase reflects increase in BNB's NPLs, as a result of the difficult economic environment in Belarus, and RB's NPLs

- NPLs to gross loans. NPLs to gross loans were 4.6% as of 31 March 2017, up 10 bps y-o-y and 40bps q-o-q. Our Retail Banking NPLs to gross loans stood flat at 1.7% as of 31 March 2017 and 31 March 2016, up from 1.4% as of 31 December 2016. The CIB NPLs to gross loans was 8.2%, compared to 7.4% as of 31 March 2016 and 8.0% as of 31 December 2016

- The NPL coverage ratio. The NPL coverage ratio stood at 87.1% as of 31 March 2017, compared to 86.0% as of 31 March 2016 and 86.7% as of 31 December 2016. Our NPL coverage ratio adjusted for the discounted value of collateral was 126.9% as of 31 March 2017, compared to 122.6% as of 31 March 2016 and compared to 132.1% as of 31 December 2016

- Past due rates. Our 15 days past due rate for retail loans stood at 1.4% as of 31 March 2017 compared to 1.1% as of 31 March 2016 and 1.2% as of 31 December 2016. 15 days past due rate for our mortgage loans stood at 0.9% as of 31 March 2017 compared to 0.6% as of 31 March 2016 and 0.6% as of 31 December 2016

§ The 197.3% y-o-y and 66.3% q-o-q increase in impairment charges on other assets and provisions reflects the impairment of a repossessed asset

§ Income tax (expense) benefit. The y-o-y and q-o-q movements in income taxes reflect the impacts of changes in corporate taxation model, approved by the Parliament of Georgia in May 2016, on our Banking Business deferred tax assets and liabilities

§ As a result of the foregoing, the 1Q17 Banking Business profit was GEL 86.9mln (up 24.7% y-o-y and up 15.4% q-o-q), while ROAE increased to 23.5% in 1Q17 (up 230bps y-o-y and up 340bps q-o-q)

§ BNB - the Group's banking subsidiary in Belarus - generated a profit of GEL 0.7mln in 1Q17 (down 84.3% y-o-y and up GEL 4.8mln q-o-q); BNB's earnings were negatively impacted by increased levels of cost of risk due to the weak macro-economic conditions in Belarus. BNB's loan book reached GEL 335.5mln at 31 March 2017, up 4.9% y-o-y, mostly reflecting an increase in corporate and consumer loans. Client deposits were GEL 235.9mln, up 2.2% y-o-y at 31 March 2017. The significant improvement in BNB's performance on a q-o-q basis was driven by the absence of one-off costs recorded in 4Q16 related to higher cost of risk, PPE impairment charges and losses from investment property revaluation. However, BNB continued to remain well-capitalised, with Capital Adequacy Ratios well above the requirements of its regulating Central Bank. As at 31 March 2017, total CAR was 15.8%, comfortably above 10% minimum requirement of the National Bank of the Republic of Belarus ("NBRB"), while Tier I CAR was 9.9%, above NBRB's 6% minimum requirement. Return on Average Equity ("ROAE") for BNB was 3.2% in 1Q17 (22.9% in 1Q16 and negative 21.9% in 4Q16)

§ In 1Q17, the Group's ownership in BNB increased from 80.0% to 95.0% following the exercise by the International Finance Corporation ("IFC") of the put option which was granted to IFC in July 2010 as part of its purchase of a 19.99% equity stake in BNB. The price paid by the Group for BNB's 15.0% equity stake amounted to USD c.6mln (GEL 16mln). Following the transaction, IFC continues to hold 4.99% of BNB's equity

Our Banking Business balance sheet remained highly liquid (NBG Liquidity ratio of 37.4%) and well-capitalised (Tier I ratio, NBG Basel 2/3 of 11.2%7) with a well-diversified funding base (Client Deposits and notes to Total Liabilities of 60.5%).

§ Liquidity. The NBG liquidity ratio stood at 37.4% at 31 March 2017 compared to 47.3% a year ago, and against a regulatory minimum requirement of 30.0%. Liquid assets increased to GEL 3,404.2mln at 31 March 2017, up 18.4% y-o-y, largely driven by a) the increase in obligatory reserves as a result of the change in respective NBG regulation in 2Q16 and b) increase in local currency corporate bonds, which are used by the Bank as collateral for short-term borrowings from the NBG

§ Diversified funding base. Short-term borrowings from the NBG grew by 173.2% y-o-y due to the increase in local currency sourcing from International Financial Institutions whose GEL-denominated bonds were pledged as collateral against NBG loans

§ Loan book. Our net loan book and financial lease receivables stood at GEL 6,470.8mln, up 19.9% y-o-y and down 3.2% q-o-q, with retail representing 62.6% of the total loan portfolio at 31 March 2017 (56.5% at 31 March 2016 and 60.9% at 31 December 2016), in line with our target to increase RB's share in total loan book to 65%. The growth on a constant-currency basis was 17.4% y-o-y and 2.1% q-o-q. While both local and foreign currency portfolios experienced strong y-o-y growth, local currency loan portfolio demonstrated outstanding y-o-y increase of 45.9%, which was partially driven by the Georgian government's "de-dollarisation" initiatives and our goal to increase the share of local currency loans in our portfolio

7Capital adequacy ratios include GEL 99.5mln distributed as dividend from the Bank to the holding level on 29 December 2016. These funds are earmarked for regular dividends in respect of the 2016 financial year and will be paid on 7 July 2017, subject to approval by the shareholders at BGEO's AGM on 1 June 2017. Excluding this amount, NBG (Basel 2/3) Tier I and Total CAR would be 10.1% and 15.2%, respectively, at 31 March 2017 and 9.1% and 14.4%, respectively, at 31 December 2016

Discussion of Segment Results

The segment results discussion is presented for Retail Banking (RB), Corporate Investment Banking (CIB), Utility & Energy Business (GGU), Healthcare Business (GHG) and Real Estate Business (m2 Real Estate).

Banking Business Segment Result Discussion

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, encompassing the emerging mass retail segment (through our Express brand), retail mass market segment and SME and micro businesses (through our Bank of Georgia brand), and the mass affluent segment (through our Solo brand).

Performance highlights

§ Retail Banking continued its strong performance across all major business lines and recorded a total revenue of GEL 141.2mln in 1Q17 (up 32.8% y-o-y)

§ Net banking interest income experienced a 34.6% y-o-y growth on the back of the strong growth in the Retail Banking loan book, while q-o-q growth was modest at 0.4% due to seasonal factors. Record quarterly net banking interest income was supported by the increase in the local currency loan portfolio, which generated 15.5ppts higher yield than foreign currency loan portfolio during 1Q17

§ The Retail Banking net loan book reached GEL 3,891.1mln, up 34.1% y-o-y. Our local currency denominated loan book grew at a faster pace (up 40.8% y-o-y) than the foreign currency denominated loan book (up 29.0% y-o-y). As a result, loan book dollarisation decreased to 54.2% at 31 March 2017 from 56.3% at 31 March 2016 and 60.8% at 31 December 2016

§ The loan book growth was a product of continued strong loan origination levels delivered across all Retail Banking segments:

- Consumer loan originations amounted to GEL 302.4mln in 1Q17, leading to an outstanding consumer loans balance of GEL 944.0mln at 31 March 2017, up 44.8% y-o-y

- Micro loan originations totalled GEL 236.5mln in 1Q17, resulting in an outstanding micro loans balance of GEL 872.8mln at 31 March 2017, up 55.1% y-o-y

- SME loan originations amounted to GEL 118.9mln in 1Q17, leading to an outstanding SME loans balance of GEL 463.4mln at 31 March 2017, up 29.2% y-o-y

- Mortgage loan originations totalled GEL 213.0mln in 1Q17, resulting in an outstanding mortgage loans balance of GEL 1,187.0mln at 31 March 2017, up 34.3% y-o-y

- Originations of loans disbursed at merchant locations amounted to GEL 42.7mln in 1Q17, resulting in outstanding loans disbursed at merchant locations of GEL 108.3mln at 31 March 2017, down 1.4% y-o-y (the lack of growth in the outstanding balance in this product reflects increased client conversions to consumer loans and credit cards)

§ Retail Banking client deposits increased to GEL 2,393.8mln, up 25.9% y-o-y, notwithstanding a decrease in the cost of deposits of 50bps y-o-y. The dollarisation level of our deposits decreased to 74.3% from 76.5% at 31 March 2016 and from 75.0% at 31 December 2016. This is in line with the current decreasing trend of cost on foreign currency denominated deposits (down 60 bps y-o-y and down 10 bps q-o-q). The spread between the cost of RB's client deposits widened to 1.8ppts during 1Q17 (GEL: 4.4%; FC: 2.6%) compared to 1.6ppts in 1Q16 (GEL: 4.8%; FC: 3.2%) and 1.3ppts in 4Q16 (GEL: 4.0%; FC: 2.7%). Local currency denominated deposits increased at a faster pace to GEL 616.4mln (up 37.7% y-o-y and 2.2% q-o-q), as compared to foreign currency denominated deposits that grew to GEL 1,777.4 mln (up 22.2% y-o-y and down 1.8% q-o-q)

§ Retail Banking NIM was 8.8% in 1Q17, down 40bps y-o-y and down 50bps q-o-q. The lower NIM y-o-y was attributable to 150bps decrease in loan yield, while cost of funds decreased by only 120bps. On a q-o-q basis, loan yield was down by 50bps and cost of funds was up by 20bps, thus, leading to 50bps decrease in NIM

§ The number of Retail Banking clients reached 2.2mln, up 8.2% y-o-y and up 2.2% q-o-q, while the number of total cards outstanding amounted to 2,099,488, up 8.0% y-o-y and up 2.1% q-o-q

§ Our express banking franchise, the major driver of Retail Banking's fee and commission income, added 16,645 Express Banking customers during 1Q17 and 51,203 clients since 1Q16, accumulating a total of 488,612 clients at 31 March 2017. The growth in the client base was achieved largely by the increased offering of cost-effective remote channels. The strong client growth supported an organic increase in our Retail Banking net fee and commission income to GEL 22.2mln in 1Q17, up 15.6% y-o-y

§ Our Express Banking business continues to deliver strong growth as we further develop our mass market Retail Banking strategy:

- In order to better serve the different needs of our Express Banking customers, we have expanded our payment services through various distance channels including ATMs, Express Pay Terminals, internet and mobile banking and the provision of simple and clear products and services to our existing customers as well as the emerging bankable population

- As of 31 March 2017, 1,315,489 Express Cards were outstanding, compared to 1,113,745 cards outstanding as of 31 March 2016 and 1,279,113 cards as of 31 December 2016. 129,128 Express Cards were issued in 1Q17, up 14.4% y-o-y and down 30.3% q-o-q

- The number of Express Pay terminals stood at 2,723 at 31 March 2017, compared to 2,627 terminals at 31 March 2016 and 2,729 at 31 December 2016. Express Pay terminals are an alternative to tellers, placed at bank branches as well as various other venues (groceries, shopping centres, bus stops, etc.), and are used for bank transactions such as credit card and consumer loan payments, utility bill payments and mobile telephone top-ups

- The utilisation of Express Pay terminals continued to grow in 1Q17. The volume of transactions reached GEL 968.8mln, up 46.2% y-o-y and up 3.5% q-o-q, while the number of transactions was 25.2mln, down 12.7% y-o-y and down 7.4% q-o-q. This decrease resulted from management's decision to introduce transaction fees on non-banking transactions processed through Express Pay terminals. However, while this introduction negatively affected the number of transactions, the decrease was more than offset by the total fees charged to the clients leading to 92.3% y-o-y increase in fee income from express pay terminals

- Increased Point of Sales ("POS") footprint to 8,814 desks and 4,740 contracted merchants as of 31 March 2017, up from 6,690 desks and 3,356 contracted merchants as of 31 March 2016 and up from 8,516 desks and 4,514 contracted merchants as of 31 December 2016

- The number of POS terminals reached 10,774, up 31.9% from 8,168 as of 31 March 2016 and up 4.0% from 10,357 as of 31 December 2016

- The volume of transactions through the Bank's POS terminals grew to GEL 266.1mln in 1Q17, up 50.9% y-o-y and down 8.3% q-o-q, reflecting the seasonality trend in 4Q16 given the clients' increased spending during the holidays

- The number of transactions via Internet banking increased to 1.7mln in 1Q17, up from 1.3mln in 1Q16 and flat compared to 1.7 mln in 4Q16, with transaction volume reaching GEL 437.4mln, up 101.7% y-o-y and flat q-o-q

- The number of transactions via mobile banking application reached 1.0mln in 1Q17, doubling from 0.5mln in 1Q16 and up from 0.9mln in 4Q16, with volume of transactions reaching GEL 94.4mln, up 162.6% y-o-y and up 5.3% q-o-q

§ The number of Solo clients reached 21,657 at the end of 1Q17, up 161.5% since its re-launch in April 2015. We have now launched 11 Solo lounges, of which 8 are located in Tbilisi, the capital city, and 3 in major regional cities of Georgia. In 1Q17, annualised profit per Solo client was GEL 1,865 compared to a profit of GEL 75 and GEL 59 per Express and mass retail clients, respectively. Product to client ratio for Solo segment was 6.8, compared to 3.2 and 1.7 for Express and mass retail clients, respectively. While Solo clients currently represent c.1.0% of our total retail client base, they contributed 22.1% to our retail loan book, 38.2% to our retail deposits, 12.7% to our net interest income and 13.5% to our net fee and commission income. Our goal is to significantly increase our market share in this segment, which stood below 13% at the beginning of 2015 when we launched Solo in its current format

§ RB cost to income ratio remained well-controlled and improved to 37.6% in 1Q17, down by 570 bps y-o-y and down 120bps q-o-q. The significant improvement resulted from the increasing utilisation of our Solo lounges coupled with the growth of Express Banking franchise, which has the most cost-efficient model among our three Retail Banking segments

§ RB cost of risk remains contained despite headwinds - RB cost of credit risk was GEL 33.7mln in 1Q17 (up 85.3% y-o-y and up 74.8% q-o-q). As a result, Cost of Risk ratio was 3.4% in 1Q17, up from 2.5% in 1Q16 and 2.0% in 4Q16. The increase in cost of risk mainly reflected the following two factors: a) increased pace of loan growth in express and micro express loan portfolio during 1Q17, which are characterized with the highest cost of risk ratios in the RB's loan portfolio and the highest loan yields and b) impact from a major fire at one of the largest shopping centres located in downtown Tbilisi, which destroyed the inventory of some of RB's Micro and SME clients and negatively affected their creditworthiness

§ As a result of the above described factors, Retail Banking profit totaled GEL 50.8mln in 1Q17 (up 34.5% y-o-y and down 25.3% q-o-q). Retail Banking continued to deliver an outstanding ROAE, which stood at 27.2% in 1Q17, compared to 24.3% in 1Q16 and 35.8% in 4Q16

Corporate Investment Banking (CIB)

CIB comprises (1) loans and other credit facilities to the country's large corporate clients as well as other legal entities, excluding SME and micro businesses. The services include fund transfers and settlements services, currency conversion operations, trade finance services and documentary operations as well as handling savings and term deposits for corporate and institutional customers. The Corporate Banking Business also includes finance lease facilities provided by the Bank's leasing operations (the Georgian Leasing Company) and (2) Wealth Management and the brokerage arm of the Bank, Galt & Taggart. Bank of Georgia Wealth Management provides private banking services to high-net-worth individuals and offers investment management products internationally through representative offices in London, Budapest, Istanbul and Tel Aviv. Galt & Taggart brings under one brand corporate advisory, private equity and brokerage services. In its brokerage business, Galt & Taggart serves regional and international markets, including hard-to-reach frontier economies.