Bank Of Georgia Group Regulatory News (BGEO)

BGEO Group PLC

3rd quarter and first nine months 2017 results

www.bgeo.com

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, together the "Group"). BGEO aims to deliver on a 4x20 strategy: (1) at least 20% ROAE from its Banking Business; (2) at least 20% growth of its Banking Business retail loan book; (3) at least 20% IRR; and (4) up to 20% of the Group's profit from its Investment Business. On 3 July 2017 BGEO announced its intention to demerge BGEO Group PLC into a London-listed banking business (the "Banking Business") and a London-listed investment business (the "Investment Business") by the end of the first half of 2018.

The Banking Business, currently representing at least 80% of the Group's profit, will comprise: a) retail banking and payment services, b) corporate investment banking and wealth management operations and c) banking operations in Belarus ("BNB"). JSC Bank of Georgia ("BOG" or the "Bank") is the core entity of the Group's Banking Business. The Banking Business will continue to target to benefit from the underpenetrated banking sector in Georgia primarily through its retail banking services.

The Investment Business, currently representing up to 20% of the Group's profit, will comprise the Group's stakes in Georgia Healthcare Group PLC ("Healthcare Business" or "GHG") - an LSE (London Stock Exchange PLC) premium-listed company, Georgia Global Utilities ("Utility and Energy Business" or "GGU"), m2 Real Estate ("Real Estate Business" or "m2"), Teliani Valley ("Beverage Business" or "Teliani") and Aldagi ("Property and Casualty Insurance Business" or "Aldagi"). Georgia's fast-growing economy provides opportunities in a number of underdeveloped local markets and the Investment Business will target to capture growth opportunities in the Georgian corporate sector.

COMPANY INFORMATION

BGEO Group PLC

Registered Address

84 Brook Street

London W1K 5EH

United Kingdom

www.BGEO.com

Registered under number 7811410 in England and Wales

Incorporation date: 14 October 2011

Stock Listing

London Stock Exchange PLC's Main Market for listed securities

Ticker: "BGEO.LN"

Contact Information

BGEO Group PLC Investor Relations

Telephone: +44(0)2031784052; +995322444190

E-mail: ir@BGEO.com

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

BGEO shareholders can access both the latest and historical prices via our website, www.BGEO.com

Name of authorised official of issuer responsible for making notification: Giorgi Alpaidze, Group CFO

CONTENT

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 and in its Half Year 2017 Results announcement. 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, including any future entity such as BGEO Investments PLC or Bank of Georgia PLC, 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.

BGEO Group PLC announces the Group's third quarter 2017 and first nine months 2017 consolidated results. Unless otherwise noted, numbers are for 3Q17 and comparisons are with 3Q16. 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

Solid results driven by improved credit quality and continued y-o-y growth in Investment Business revenues

Continued strength in economic activity during 3Q17  

§ The Georgian economy has delivered strong growth in 9M17 by expanding 4.7%, primarily driven by strong external demand and strengthened local consumer and business confidence. Exports increased 28.3% y-o-y, while tourism revenues increased to $2.2bln in 9M17 (up 28.5% y-o-y), reaching the 2016 full-year level, as a result of the unprecedented tourist inflows in 3Q17. Remittances also increased by 19.7% y-o-y in 9M17. Progress in structural reforms were acknowledged by the IMF team, following the first review under the current IMF program, and by Moody's, when it signalled confidence in the Georgian economy in September 2017 by upgrading Georgia's sovereign credit rating to Ba2 from Ba3, two notches below investment grade. Additionally, the World Bank also recognized Georgia's progress by ranking Georgia in 9th place globally within their Doing Business 2018 report. Georgia's ranking was the highest in the Europe and Central Asia region.

Holding company liquidity remains high

§ As of 30 September 2017, liquid assets of GEL 269mln were held at the holding company level, of which, GEL 258mln was unallocated and GEL 11mln was pledged as collateral for borrowings from local financial institutions

Solid capital returns

§ $7.9mln capital was returned to shareholders during 3Q17

§ $1.2mln capital was returned through the share buyback and cancellation programme during 3Q17. As of 30 September 2017, 115,608 shares were repurchased and cancelled for a total consideration of $5.0mln since the commencement of the programme

§ $6.7mln capital was spent on management trust buybacks in 3Q17

1As of 30 September 2017, loans and finance lease receivables growth on a constant currency basis was 17.2% and 3.8% on y-o-y and q-o-q basis, respectively

2 As of 30 September 2017, client deposits and notes growth on a constant currency basis was 28.8% and 13.6% on y-o-y and q-o-q basis, respectively

BANKING BUSINESS HIGHLIGHTS

Outstanding profit and balance sheet growth on the back of improved credit quality

§ The Banking Business asset quality further improved during 3Q17 and 9M17. NPLs to gross loans ratio decreased to 4.1% at 30 September 2017 from 4.4% at 30 September 2016 and 30 June 2017. NPL coverage ratio also improved to 93.6% at 30 September 2017 from 86.5% a year ago and from 90.2% at 30 June 2017, while the NPL coverage ratio adjusted for discounted value of collateral increased to 132.8% at 30 September 2017 from 131.1% and 131.5% at 30 September 2016 and 30 June 2017, respectively. The asset quality improvement positively impacted cost of risk ratio, which decreased to 2.0% in 3Q17 (2.3% in 3Q16 and 2.2% in 2Q17) and 2.2% in 9M17 (flat y-o-y)

§ The Banking Business generated record quarterly profit of GEL 91.9mln in 3Q17 (up 7.1% y-o-y and up 5.3% q-o-q) and GEL 262.4mln in 9M17 (up 17.0% y-o-y), while quarterly ROAE increased to 24.5% in 3Q17 (up 20bps y-o-y and up 100bps q-o-q) and to 23.7% in 9M17 (up 130bps y-o-y)

§ Retail Banking ("RB") delivered strong growth across all its business lines. Retail Banking revenue reached GEL 155.8mln in 3Q17, up 22.4% y-o-y and up 9.9% q-o-q, with nine month revenue totalling GEL 438.7mln, up 26.7% y-o-y. The number of Retail Banking clients reached 2.3mln at the end of 3Q17, up 8.8% from 2.1mln at the end of 3Q16 and up by 1.0% from 2Q17

§ Our Retail Banking product to client ratio increased to 2.1 in 3Q17 from 2.0 in 2Q17. We have continued the transformation of our retail banking operations from a product-based model into a client-centric model. We have now completed the implementation of the client-centric model in 59 branches and currently have 27 additional branches in the pipeline. We continue to see outstanding growth in sales volumes and the number of products sold to our clients in transformed branches, contributing to 38.2% y-o-y growth in retail loan book

§ The year to date loan book growth on a constant-currency basis reached 20.3% at 30 September 2017, exceeding our retail loan book growth target for 2017. As a result, RB's loan book share in the total portfolio reached 68.4% and was above our target of 65% at 30 September 2017 (60.2% at 30 September 2016 and 66.1% at 30 June 2017). The Retail Banking net loan book reached GEL 4,541.3mln at 30 September 2017, up 38.2% y-o-y and up 9.3% q-o-q. The growth on a constant-currency basis was 34.1% y-o-y, well above our strategic target of 20%+, and 7.8% q-o-q

§ Retail Banking client deposits increased to GEL 2,869.9mln at 30 September 2017, up 37.7% y-o-y and up 9.8% q-o-q. Growth on a constant-currency basis was 31.8% y-o-y and 7.6% q-o-q

§ On 15 September 2017, Bank of Georgia signed an agreement with Tbilisi City Hall for the exclusive right to operate the public transportation payment system in Tbilisi. In accordance with the agreement, Bank of Georgia will continue as the sole provider of payment support services to the public transportation network, and operate retail branches in Tbilisi metro stations for the next ten years. Bank of Georgia will implement a modern payments system for the public transportation network in Tbilisi, including payment processing using Visa and MasterCard cards, and create a digital platform for ticket reservations and purchases through mobile applications

§ Corporate Investment Banking ("CIB") largely achieved its de-concentration target at 30 September 2017 of the top 10 client exposure of 10.0% on the CIB's loan portfolio. CIB's Net loan book amounted to GEL 1,993.6mln at 30 September 2017, down 4.3% y-o-y, and down 2.2% q-o-q. The top 10 CIB client exposure was reduced to 10.4% at the end of 3Q17, down from 11.9% at 30 September 2016 and 11.1% at 30 June 2017 

§ Investment Management's Assets Under Management ("AUM") increased to GEL 1,817.8mln, up 29.1% y-o-y and up 9.1% q-o-q, reflecting higher bond issuance activity by our brokerage arm Galt & Taggart

§ On 13 September 2017 Moody's upgraded JSC Bank of Georgia's local-currency deposit rating to Ba2 from Ba3, and the Bank's foreign-currency deposit rating to Ba3 from B1. The Bank's senior unsecured foreign-currency rating was also upgraded to Ba2 from Ba3 with a stable outlook. The Bank's credit rating action followed Moody's upgrade of Georgia's sovereign local and foreign currency issuer ratings to Ba2 from Ba3 on 11 September 2017

INVESTMENT BUSINESS HIGHLIGHTS

§ Our healthcare business, GHG, continued to deliver on its strategic priorities across healthcare services and pharmacy businesses, while medical insurance business generated positive bottom line in 3Q17. Healthcare services EBITDA margin was 26% in 3Q17, compared to 30% in 3Q16 and 28% in 2Q17. Pharmacy business generated a record EBITDA margin of 8.3% in 3Q17, compared to 3.9% in 3Q16 and 8.0% in 2Q17

§ In 3Q17 the healthcare services business issued GEL 90 million local bonds, and c.90% of the proceeds were used to refinance previously issued bonds denominated in USD, which matured in May 2017, and borrowings from local commercial banks, which are a relatively more expensive source of funding. The remaining proceeds were allocated to finance planned ongoing capital expenditures

§ During 3Q17, GHG continued to invest in the development of the healthcare facilities. Healthcare services business spent a total of GEL 27.4mln on capital expenditures, primarily on the extensive renovations of Deka and Sunstone hospitals, as well as enhancing service mix and introducing new services to cater to previously unmet patient needs. Healthcare services EBITDA is expected to rebound gradually to previous levels following the completion of the two hospital investments at the end of 2017

§ Our utility and energy business, GGU, delivered a strong performance in 3Q17 & 9M17. In 3Q17, GGU continued its investment in the pipeline infrastructure, leading to continued growth in the regulated asset base and reduction of the respective water losses. GGU also continued its investment in additional capacity for electricity generation. The construction of 50MW HPP in north-western part of Georgia is in line with the set timeframe to have the HPP operational in December 2018. GGU is also on track on other HPP and wind projects currently under development

§ In August 2017, Georgian National Energy and Water Supply Regulatory Commission adopted new water and wastewater services tariff methodology. The new methodology is Regulatory Asset Base based and compensates for investment and maintenance of new and existing regulatory assets, stimulates efficiency in the network through incentivising reduction in controllable operating expenses and delivers fair returns to investors in the utility business. The first regulatory period will be set for three years effective from 1 January 2018 and GGU looks forward to operating in a stable environment under the new regime

§ Our real estate business, m2, achieved the best sales performance in its history during 3Q17. m2 sold a total of 231 apartments with a total sales value of US$ 16.9mln during 3Q17, compared to 141 apartments sold with total sales value of US$ 12.6mln in 3Q16 and 90 apartments with a total sales value of US$ 7.6mln in 2Q17. Additionally, m2 commenced construction works on a mixed-use development on Melikishvili Avenue in 3Q17, where it plans to open a four-star Ramada hotel, the first construction project to be undertaken by our in-house construction arm

§ Our property and casualty insurance business continued its organic growth primarily in the motor insurance, property insurance and credit life insurance businesses lines as Aldagi shifted its focus more to the retail market. New product development initiatives and enhancements of existing products, resulted in more than 13,000 livestock insurance policies and 1,255 travel and trip insurance policies sold across the country in 9M17

§ Our beverage business, Teliani, achieved another significant milestone during 2017 and launched lemonade production in August 2017, following the launch of its mainstream beer production in June 2017. Teliani is on track to brew Heineken and Krushovice beers in the first quarter of 2018 under a ten-year exclusive licence agreement to produce Heineken brands in Georgia and to sell into the Caucasus region countries. Revenues remain immaterial but are growing, and we expect to begin reporting separately on this segment in 2018

CHIEF EXECUTIVE OFFICER'S STATEMENT

The Group delivered another strong quarter of results that reflect an excellent performance from our Banking Business as well as increased momentum from our Investment Business. All the businesses in the Group continue to perform well and deliver against our key strategic priorities.

During the third quarter, the Group delivered revenue of GEL 330.4 million, up 22.6% year-on-year, and profit of GEL 112.8 million. Profit before tax and non-recurring items totaled GEL 125.3 million, a 9.0% increase year on year. In the first nine months of 2017, revenues totaled GEL 960.4 million, an increase of 35.4% and profit before tax and non-recurring items increased by 21.9% to GEL 372.9 million. Book value per share at the end of the quarter was GEL 62.99, up 12.4% year-on-year.

In the Banking Business, strong franchise growth in the Retail Bank supported third quarter revenue growth of 14.9% year-on-year, whilst profit before tax and non-recurring items grew by 15.9% to GEL 101.2 million over the same period. This performance was underpinned by the Retail Bank, where we continue to build our business in all segments and increased retail lending during the quarter by 9.3%. Loan yields have remained stable, and margins have therefore remained robust at 7.3%, within our target range, despite the continuing impact of high levels of excess liquidity. The Banking Business annualised cost of risk ratio in the third quarter was 2.0%, in line with our medium term cost of risk expectations. The Return on Average Equity in the Banking Business continues to improve each quarter and stood at 23.7% for the first nine months of the year, and at 24.5% in the third quarter. The Group's Investment Business continues to deliver strong revenue growth, up 38.4% year-on-year, supporting a 17.4% increase in EBITDA to GEL 56.4 million in the third quarter 2017. The Investment Business EBITDA increased by 69.1% to GEL 165.8 million in the first nine months of 2017.

From a macroeconomic perspective Georgia continues to deliver strong growth, estimated at 4.7% during the first nine months of 2017, with inflation remaining well contained excluding one-off factors. Foreign Direct Investment continues to flow into a wide variety of sectors, and tourist numbers - the most significant driver of US$ inflows for the country - continue to rise strongly, with tourism revenues totaling $2.2 billion in the first nine months of the year, an increase of 28.5%. The National Bank of Georgia has continued to buy US dollars to mitigate potential appreciation of the Lari and, during the first nine months of 2017 they bought approximately $130 million and Georgia's US dollar reserves continue to improve.

In the Banking Business, we have continued to deliver on our key strategic priorities. 3Q17 year-on-year revenue growth of 14.9% was particularly supported by the strong Retail Banking franchise growth, where revenue increased by 22.4% and customer lending on a constant currency basis continues to grow at more than 20% per annum. This offset the anticipated decline in the corporate loan portfolio as we wound down the Corporate Banking relationship with a small number of significant corporate borrowers. More importantly, we have made strong progress in reducing concentration risk in the Corporate Investment Banking, and have reduced the concentration of our top 10 corporate borrowers to only 10.4% of our lending portfolio. We have now exceeded our targeted rebalancing of the retail/corporate business mix to further improve the return profile of the Bank. Retail Banking now represents 68.4% of our customer lending and Corporate Banking represents 31.6%.

In addition to the strong retail lending growth, the Retail Banking made strong progress in building out its customer centric approach with the launch of its new loyalty reward program, Plus+ in July 2017 and continued its investment in digital penetration growth. Our Retail Banking product to client ratio also improved from 2.0 to 2.1 products per client over the last three months. In July 2017, we won the exclusive right to modernise the public transportation payment system in Tbilisi and continue as the sole provider of the Tbilisi Metro's payment support systems for the next ten years. In addition, Solo, our premium banking brand, has continued to deliver strong momentum, with customer numbers increasing to nearly 28,500, up 14% during the last quarter and up 68% over the last twelve months.

The improving growth and strength of the Georgian economy continues to support asset quality. The annualised cost of risk ratio in 3Q17 was 2.0%, compared to 2.2% in 2Q17. In addition, we continue to achieve a reduction in the ratio of NPLs to Gross Loans, which fell from 4.6% in the first quarter of 2017, to 4.4% in the second quarter, and 4.1% in the third quarter of 2017. Our NPL coverage ratios also continued to rise - from 87.1% at the end of the first quarter of 2017, to 90.2% at the end of the second quarter, and 93.6% at the end of the third quarter 2017.

In January 2018, the Bank will adopt International Financial Reporting Standard 9 (IFRS 9). IFRS 9 introduces a new 3 stage expected loss model, compared to the existing 2-stage incurred loss model under the current reporting standard International Accounting Standard 39 (IAS 39). The introduction of IFRS 9 is not expected to have a significant impact on the Bank's financial position. Capital ratios, which are calculated using local regulatory accounting standards, will be unaffected. Based on the preliminary estimates, this change in accounting standards will result in one-time GEL 44 to 58 million reduction of the Bank's shareholder equity. There is no change to the Bank's expected 2.0% through-the-cycle cost of risk ratio.

The Group's capital and funding position continues to remain strong, with capital being held both in the regulated Banking Business and at the holding company level. Within the Bank, the NBG (Basel II) Tier 1 Capital Adequacy ratio was 11.1%, up 50 basis points during the quarter, reflecting both the continued de-dollarisation of the Banking Business lending portfolio and the Banking Business high return on average equity. From a funding perspective, the Bank's NBG Liquidity ratio remained high at 44.4%, and the Liquidity Coverage Ratio was 143.4%, due to the significant excess liquidity held by the Banking Business.

The National Bank of Georgia is in the process of transitioning to Basel III standards, and is currently in discussions with regulated banks and other stakeholders to develop new capital adequacy requirements. Full details are expected to be announced towards the end of the year. No increase in capital requirements is expected in 2018. The key elements of the expected new requirements are:

§ A currency induced credit risk (CICR) buffer will be set instead of the current additional 75% risk-weighting of foreign exchange denominated loans

§ A Systemic Capital Charge in line with EU's CRD IV/CRR regulation is expected to be phased in from 31 December 2018 through 31 Dec 2021.

§ In addition NBG intends to introduce supervisory review and evaluation process for individual banks on a regular basis. The methodology is currently under discussion.

Bank of Georgia has strong capital ratios and high levels of internal capital generation. As a result, the transition to Basel III is not expected to affect the Bank's growth expectations or dividend policy.

Within our Investment Businesses, Georgia Healthcare Group has delivered net revenues of GEL 548.4 million in the first nine months of 2017, up 90.1% year-on-year, reflecting a combination of double-digit organic growth and the impact of acquisitions, particularly in the pharmacy business. The healthcare services EBITDA margin continues to be high at 26% in the third quarter, notwithstanding the drag created by the significant roll-out impact of the two major hospital renovations - Sunstone and Deka - and the ongoing roll-out of a nationwide chain of Polyclinics (outpatient clinics). In the pharmacy business we have made significant progress in the integration of our two recently acquired businesses, and the EBITDA margin of 8.3% in the third quarter has already successfully exceeded our target of "more than 8%" margin.

Our water utility and energy business, GGU, continued to focus on improving efficiency and delivered an 8.9% growth in revenue to GEL 99.1 million in the first nine months of 2017, compared to GEL 91.0 million a year ago. Over the same time period, EBITDA increased by 18.2% to GEL 51.9 million and profit increased by 35.9% to GEL 26.4 million. Our real estate business, m2 Real Estate, continues to demonstrate its strong execution skills and, in the first nine months of 2017, sold a total of 464 apartments with a total sales value of $34.6 million, in addition to further increasing its portfolio of yielding assets.

Our property and casualty insurance business, Aldagi, continues to develop a strong portfolio of new products, and this has supported a 26.3% y-o-y growth in net earned premiums in the first nine months of 2017 and Aldagi's position as the clear market leader in the fast-developing Georgian P&C insurance market. Our beverage business, Teliani, achieved another significant milestone in August 2017 when it launched lemonade production, following the launch of production of its first mainstream beer, ICY, into the local market in June 2017.

On 3 July 2017, the Group announced its intention to demerge BGEO Group PLC into two separately London-listed businesses: a banking business, Bank of Georgia PLC, and an investment business, BGEO Investments PLC. The Board believes a demerger of the businesses will deliver additional long-term value to shareholders by creating two distinct entities, each of which will have enhanced growth opportunities in the strongly growing Georgian economy. Both businesses are already leaders in their respective fields, with separate strategic, capital, and economic characteristics and strong and knowledgeable management teams. We expect the demerger to benefit the two businesses in a number of areas, most specifically by providing greater flexibility for each business to manage its own capital and human resources and pursue strategic options appropriate to its respective sector, whilst avoiding the potential for cross-business conflicts of interest. The Board believes that the demerger is the best way to enable the individual businesses to grow faster and develop independently over the next few years. We expect the demerger, which will be subject to shareholder approval, to take a number of months to implement and the process is currently expected to complete in the first half of 2018.

The Group has delivered another quarter of strong earnings momentum. Returns in both the Banking Business and the Investment Businesses continue to be high and the Group remains very well positioned to deliver a strong performance for the full year and beyond.

Irakli Gilauri,

Group CEO of BGEO Group PLC

FINANCIAL SUMMARY

3 Banking Business and Investment Business financials do not include inter-business eliminations. Detailed financials, including inter-business eliminations are provided on pages 35, 36 and 37

DISCUSSION OF RESULTS

Discussion of Banking Business Results

The Group's Banking Business is primarily comprised 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 retail, mass retail and mass affluent segments, together with small and medium enterprises and micro businesses. (2) 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. (3) BNB, comprising JSC Belarusky Narodny Bank, principally provides retail and corporate banking services to clients in Belarus.

Performance highlights

§ Strong Banking Business revenue. We recorded quarterly revenue of GEL 223.2mln in 3Q17 (up 14.9% y-o-y and up 5.3% q-o-q), ending the first nine months of 2017 with revenue of GEL 649.0mln (up 18.1% y-o-y). Y-o-y revenue growth both in 3Q17 and 9M17 was primarily driven by a strong increase in net banking interest income, which resulted from strong loan book growth, and increase in net fee and commission income

§ Net banking interest income. Our net banking interest income was up 21.8% y-o-y and up 4.7% q-o-q in 3Q17 and up 23.5% y-o-y in nine months of 2017. The q-o-q and y-o-y increases in net banking interest income were primarily driven by a strong growth of our Retail Banking loan book, which experienced 20.3% year to date constant currency growth as of 30 September 2017

§ Our NIM was 7.3% in both 3Q17 and 9M17. 3Q17 NIM was flat q-o-q and y-o-y reflecting the q-o-q flat loan yield and cost of funds, while 20bps y-o-y increase in 3Q17 loan yield was offset by 10bps increase in cost of funds. 9M17 loan yield remained flat y-o-y and liquid assets yield was up 30bps, while cost of funds was down 10bps y-o-y

§ Loan yield. Currency blended loan yield was 14.3% in 3Q17 (up 20bps y-o-y and flat q-o-q) and 14.2% in 9M17 (flat y-o-y). While local and foreign currency loan yields decreased y-o-y and q-o-q, the overall trend in loan yield reflects a continued shift towards high-yielding local currency denominated loans in the total loan portfolio mix

§ Liquid assets yield. Our liquid assets yield increased to 3.5% (up 40bps y-o-y and up 10bps q-o-q) in 3Q17 and to 3.4% (up 30bps y-o-y) in 9M17. The foreign currency denominated liquid assets yield increased by 30pbs y-o-y in 3Q17 and increased by 30 bps y-o-y in 9M17 as a result of the US Federal Reserve's decisions in December 2016, March 2017 and June 2017 to raise interest rates by 75bps 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. On the other hand, local currency denominated liquid assets yield, while remaining flat q-o-q, decreased 20bps y-o-y. That said, the currency blended liquid assets yield increased both q-o-q and y-o-y on the back of increased share of higher return local currency denominated liquid assets in the total liquid assets portfolio

§ Cost of funds. Cost of funds stood at 4.8% in 3Q17 (up 10bps y-o-y and flat q-o-q) and at 4.7% (down 10bps y-o-y) in 9M17. Despite the significant increase in cost of debt securities issued in 3Q17 and 9M17 following the issuance of GEL 500mln 11.0% Lari denominated notes in 2Q17 (up 130bps y-o-y and up 80bps q-o-q in 3Q17 and up 20bps y-o-y in 9M17), cost of funds remained largely flat as a result of a decrease in cost of client deposits and notes during respective periods (down 10bps y-o-y and q-o-q in 3Q17 and down 50bps y-o-y in 9M17)

§ Continued shift to the GEL denominated loan book, which increased to 38.7% of the total book at 30 September 2017, compared to 29.7% a year ago. The dollarisation of our loan book has 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 100,000 (equivalent). At 30 September 2017, 38.7% of our net loans were denominated in GEL as compared to 29.7% at 30 September 2016 and 36.8% at 30 June 2017

§ Net Loans to Customer Funds and DFI ratio. Customer funds (client deposits and notes) increased by 33.7% y-o-y and 15.8% q-o-q to GEL 6,549.9mln driven by strong deposit generation in both the Retail and Corporate Investment Banking operations. Retail banking client deposits and notes grew by 37.7% y-o-y and 9.8% q-o-q to GEL 2,869.9mln, while CIB client deposits grew by 28.2% y-o-y and 21.5% q-o-q to GEL 3,308.3mln. We also increased our borrowings from DFIs by 7.8% q-o-q to GEL 1,172.5mln. As a result, our Net Loans to Customer Funds and DFI ratio, which is closely monitored by management, remained strong at 90.0% (93.9% at 30 September 2016 and 97.6% at 30 June 2017) despite our growing loan book

§ 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 CIB's fees from guarantees and letters of credit in 9M17 y-o-y, driven by the de-concentration efforts in the CIB segment. Excluding CIB's income from guarantees and letters of credit, net fee and commission income was GEL 85.0mln (up 11.9% y-o-y) in 9M17. However, as the de-concentration of corporate risk targets have been achieved, the net fees and commission income from guarantees and letters of credit have demonstrated early signs of rebounding and reached GEL 4.6mln in 3Q17, up 9.8% y-o-y and up 32.5% q-o-q

§ Net banking foreign currency gain. In line with the volatility of the GEL exchange rate, the net banking foreign currency gain was down 9.1% y-o-y and up 1.7% q-o-q in 3Q17 and up 5.6% y-o-y in 9M17. RB and CIB businesses together contributed 85.8% and 87.4% to the total 3Q17 and 9M17 net banking foreign currency gain, respectively

§ Net other banking income. Net other banking income decreased by 36.3% y-o-y and increased by 153.4% q-o-q in 3Q17. The y-o-y decrease was largely driven by the higher gain from sale of securities recorded in 3Q16, partially compensated with higher placement fees generated by our brokerage arm Galt & Taggart in 3Q17, reflecting higher bond issuance activity, while the 153.4% q-o-q increase was supported by the absence of losses on derivative financial instruments in 3Q17. The 33.2% y-o-y decline in net other banking income in 9M17 was primarily driven by losses on derivative financial instruments recorded in 2Q17 and 3Q17, partially offset by higher placement fees of Galt & Taggart

§ Operating expenses increased to GEL 85.4mln in 3Q17 (up 17.5% y-o-y and up 5.7% q-o-q) and GEL 243.2mln in 9M17 (up 17.1% y-o-y). In 9M17, growth in revenues outpaced growth in operating expenses leading to y-o-y positive operating leverage of 1.0 percentage point, which represents an improvement compared to y-o-y negative operating leverage of 6.2% in 9M16. 3Q17 y-o-y and q-o-q and 9M17 y-o-y changes in operating expenses were driven by:

- an increase in salaries and employee benefits by 16.5% y-o-y and 6.6% q-o-q in 3Q17 and by 18.2% y-o-y in 9M17 mainly reflects organic growth of Retail Banking operations

- an increase in administrative expenses by 25.5% y-o-y in 3Q17 and by 19.3% y-o-y in 9M17, primarily driven by increased marketing, rent and repair and maintenance costs. The increase was attributable to the combined effect of the larger branch network and the higher average quarterly and nine months exchange rate during 3Q17 and 9M17 as the vast majority of branch rental agreements are denominated in US dollars

§ Cost of Risk ratio. The Banking Business cost of risk ratio was 2.0% in 3Q17, down 30bps y-o-y and down 20bps q-o-q. RB 3Q17 cost of risk ratio was down 40bps y-o-y and down 110bps q-o-q, while CIB cost of risk ratio was up 40bps y-o-y and up 180bps q-o-q. On a nine months basis, the Banking Business cost of risk ratio was 2.2%, flat y-o-y, primarily driven by 40bps increase in the RB cost of risk ratio, offset by 80bps decrease in CIB cost of risk ratio driven by overall improvement in the CIB loan portfolio quality

§ Quality of the Banking Business loan book improved in 3Q17 as evidenced by further improvement in the following closely monitored metrics: