Bank Of Georgia Group Regulatory News (BGEO)

Bank of Georgia

Group PLC

4th quarter and full year 2018

preliminary 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, the new parent company of BGEO Group PLC. The Group combined a Banking Business and an Investment Business prior to the Group demerger on 29 May 2018, which resulted in the Investment Business's separation from the Group effective from 29 May 2018.

The Group comprises: a) retail banking and payment services, b) corporate investment banking and wealth management operations, and c) banking operations in Belarus ("BNB"). JSC Bank of Georgia ("Bank of Georgia", "BOG" or the "Bank"), the leading universal bank in Georgia, is the core entity of the Group. The Group targets to benefit from superior growth of the Georgian economy through both its retail banking and corporate investment banking services and aims to deliver on its strategy, which is based on at least 20% ROAE and 15%-20% growth of its loan book.

About this Announcement

Bank of Georgia Group PLC announces the Group's fourth quarter 2018 and full year 2018 consolidated results. Unless otherwise noted, numbers are for 4Q18 and comparisons are with 4Q17. The results are based on International Financial Reporting Standards ("IFRS") as adopted by the European Union, are unaudited and derived from management accounts.

The information in this Announcement in respect of full year 2018 preliminary results, which was approved by the Board of Directors on 18 February 2019, does not constitute statutory accounts as defined in Section 435 of the UK Companies Act 2006. Company's and BGEO Group PLC's financial statements for the year ended 31 December 2017 were filed with the Registrar of Companies, and the audit reports were unqualified and contained no statements in respect of Sections 498 (2) or (3) of the UK Companies Act 2006. Bank of Georgia Group PLC's financial statements for the year ended 31 December 2018 will be included in the Annual Report and Accounts to be published in March 2019 and filed with the Registrar of Companies in due course.

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: currency fluctuations, including depreciation of the Georgian Lari, and macroeconomic risk; regional tensions and instability; loan portfolio quality; regulatory risk; liquidity risk; operational risk, cyber security, information systems and financial crime 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 2Q18 and 1H18 results announcement and in BGEO Group PLC's Annual Report and Accounts 2017. 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.

CONTENT

Group Demerger

On 29 May 2018, the demerger of Bank of Georgia Group PLC's Investment Business to Georgia Capital PLC became effective. The results of operations of the Investment Business prior to demerger, as well as the gain recorded by the Group as a result of the Investment Business distribution are classified under the "discontinued operations" line as a single amount in the consolidated income statement. In line with IFRS, comparative periods have been accordingly restated to reflect the reclassification of the Investment Business from "continuing operations" into "discontinued operations".

Transition to IFRS 9 Financial Instruments

During 4Q18, the Group revisited and changed its loan write-off policy as part of the IFRS 9 implementation programme: For mortgages and other loans secured by real estate the number of overdue days after which the balances are considered to be irrecoverable and are to be written off has been increased from 365 to 1460 days. This resulted in following:

1) Reinstatement of net loans to customers previously written-off in the amount of GEL 25.0 million as at 1 January 2018, the transition date to IFRS 9, which offsets the previously reported increase in loan loss provision at transition date. Therefore, the final impact recognised as a result of IFRS 9 adoption following the policy change as a reduction to shareholders' equity at the transition date amounted to GEL 6.5mln, gross of income tax (GEL 4.3mln, net of income tax)

2) In addition, the change in loan write-off policy resulted in the reinstatement of additional GEL 12.6mln net loan to customers previously written-off during nine months of 2018

As a result, previously reported quarterly results of 2018 have been restated for this change in write-off policy accordingly. The restatement impact on the income statement for the nine months 2018 was GEL 1.5mln increase in revenue, GEL 1.0mln increase in income tax expense and GEL 11.1mln net reversal of expected credit loss on loans to customers, which accounted for c.20bps impact on cost of credit risk ratio on a quarterly basis for each of 1Q - 3Q periods, as well as on nine months basis during 2018.

HIGHLIGHTS

Outstanding profitability and balance sheet growth momentum, supported by strong capital and liquidity positions

Georgia's economic performance remains strong - First ever current account surplus

GDP growth was strong at an estimated 4.8% in 4Q18. Economic activity was supported by double-digit growth in goods exports (up 22.6% y-o-y, accounting for 20.6% of GDP), tourism revenues (up 18.4% y-o-y, or 19.7% of GDP), and remittances (up 18.4% y-o-y, or 9.7% of GDP). Annual inflation remained below the NBG's 3.0% target for the full year, coming in at 1.5% in December 2018. Georgia reached an important milestone and recorded its first ever current account surplus of 0.3% of GDP in 3Q18. Solid external inflows enabled the NBG to accumulate foreign currency reserves throughout the year with the level reaching US$ 3.3 billion, a record high, at the end of December 2018. At the same time, the GEL started appreciating against the US Dollar by the end of the year. Georgia's growth outlook remains solid due to prudent economic policy-making, a strong banking sector, and the increased diversification of the economy.

1 2018 full year results adjusted for GEL 30.3mln demerger related costs, GEL 8.0mln demerger related corporate income tax gain, and GEL 30.3mln one-off impact of re-measurement of deferred tax balances (see details on page 12)

2 The Group completed its IFRS 9 implementation programme and adopted 'IFRS 9, Financial Instruments' standard from 1 January 2018. As allowed by IFRS 9, the Group did not restate prior-period data, therefore, comparatives are presented on an IAS 39 basis. In addition, 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 Group's loan portfolio position

3 As of 31 December 2018, loans and finance lease receivables grew on a constant currency basis by 19.0% y-o-y and 5.7% q-o-q

4 As of 31 December 2018, client deposits and notes increased on a constant currency basis by 12.5% y-o-y and 0.9% q-o-q

RESULTS HIGHLIGHTS

§ Strong performance. Profit before non-recurring items and income tax totalled GEL 131.8mln in 4Q18 (up 11.3% y-o-y and up 6.1% q-o-q) and GEL 492.6mln during 2018 (up 23.0% y-o-y), with profitability remaining high with 26.2% ROAE in 4Q18 (down 160bps y-o-y and down 60bps q-o-q) and 26.1%5 in 2018 (up 90bps y-o-y)

§ Strong capital position. Basel III Tier 1 and Total Capital Adequacy ratios stood at 12.2% and 16.6%, respectively, as of 31 December 2018, both above the minimum required level of 11.4% and 15.9%, respectively. At the same time Common Equity Tier 1 (CET1) ratio stood at 12.2% compared to a 9.5% minimum requirement at 31 December 2018 and already above the estimated fully-loaded CET1 requirement for 2021

§ Solid Asset quality. NPLs to gross loans ratio was 3.3% at 31 December 2018 (down from 3.5% at 30 September 2018). NPL coverage ratio was 90.5% at 31 December 2018 (91.7% at 30 September 2018), while the NPL coverage ratio adjusted for discounted value of collateral was 129.9% at 31 December 2018 (136.9% at 30 September 2018). The cost of credit risk ratio improved significantly to 1.1% in 4Q18, (down from 2.1% in 4Q17 and 2.0% in 3Q18) and to 1.6% in 2018 (down from 2.2% in 2017)

§ The loan book growth reached 21.4% y-o-y and 7.3% q-o-q at 31 December 2018. Growth on a constant-currency basis was 19.0% y-o-y and 5.7% q-o-q. Retail Banking loan book share in the total loan portfolio was 69.8% at 31 December 2018 (68.0% at 31 December 2017 and 69.8% at 30 September 2018)

§ Retail Banking ("RB") continued to deliver solid growth across its business lines. RB revenue reached GEL 188.4mln in 4Q18, up 7.1% y-o-y and up 1.3% q-o-q, with the 2018 revenue totaling GEL 723.5mln, up 17.7% y-o-y. The Retail Banking net loan book reached GEL 6,267.1mln at 31 December 2018, up 24.2% y-o-y and up 7.6% q-o-q. The growth was predominantly driven by mortgage and micro and SME lending as a result of the Bank's concentrated effort to grow these businesses following recent regulatory changes on unsecured consumer lending. The number of RB clients reached 2.4mln at 31 December 2018, up 5.4% y-o-y and up 1.4% q-o-q. At the same time, the RB client deposits increased to GEL 4,338.7mln at 31 December 2018, up 32.8% y-o-y and up 7.7% q-o-q

§ Corporate Investment Banking ("CIB") demonstrated further solid growth in 2018 after delivering on its risk de-concentration and loan portfolio repositioning targets in 2017. CIB's net loan book reached GEL 2,618.5mln at 31 December 2018, up 15.9% y-o-y and up 5.7% q-o-q. The growth on a constant-currency basis was 12.9% y-o-y and 3.7% q-o-q. The top 10 CIB client concentration was 9.8% at the end of 4Q18 (10.7% at 31 December 2017 and 9.9% at 30 September 2018)

§ Assets Under Management ("AUM") within the Group's Investment Management business, increased to GEL 2,271.5mln in 4Q18, up 22.3% y-o-y and up 4.2% q-o-q, reflecting an increase in client assets and bond issuances at Galt & Taggart, our brokerage subsidiary

§ De-dollarisation of the loan book and client deposits. Loan book in local currency accounted for 38.3% of the total book at 31 December 2018 (38.3% a year ago and 39.3% in the previous quarter). Client deposits in local currency represented 32.5% of the total deposit portfolio at 31 December 2018, compared to 30.5% at 31 December 2017 and 34.4% at 30 September 2018

§ Remote channels. We have actively continued the further development of our digital channels by introducing new features to both our mobile banking application and our internet bank. At the same time, we are introducing dedicated digital spaces in our branches to increase client penetration and incentivise offloading client activity to digital channels. As a result, the number of active internet and mobile banking users in 4Q18 reached 295,226 (up 34.5% y-o-y) and 333,698 (up 88.3% y-o-y), respectively. Both the number and volume of transactions through our mobile and internet banking continued to expand at 27.3% and 23.3% q-o-q, and 83.7% and 86.9% y-o-y, respectively, in 4Q18. In total, c.78% of daily banking transactions were executed through remote channels in 2018

§ Bank of Georgia became the first bank to launch the innovative payment mechanism "QR PAY". In 4Q18, BOG introduced a new payment method QR PAY to the local small business market, an alternative payment mechanism to the traditional point of sale terminal for small Georgian businesses that previously relied on cash transactions as a means for their customers to settle payments. For customers who use Bank of Georgia's mobile bank and a debit or credit card, settling payments with QR PAY application is simple, safe and user-friendly. Currently, there are already up to 800 small businesses connected to QR PAY

§ In 4Q18, in order to extend the scale of its payment system, BOG was licensed to offer its services to JCB Cards users through its terminals and ATMs. This inclusion of JCB cards in the Bank's payment services opens up access to around 117mln people from 190 countries. JCB is an international payment brand from Japan and given the increasing number of tourists from Asia in Georgia, the Bank is well equipped to offer them best-in-class service

§ The Banker publication named Bank of Georgia as the Bank of the Year 2018 in Central and Eastern Europe

5 2018 ROAE adjusted for GEL 30.3mln demerger related costs, GEL 8.0mln demerger related corporate income tax gain, and GEL 30.3mln one-off impact of re-measurement of deferred tax balances

CHIEF EXECUTIVE OFFICER'S STATEMENT

In the fourth quarter of 2018, the Group delivered another period of strong balance sheet and fee income growth, combined with superior profitability, achieved as a result of excellent customer franchise growth and good cost management in both the retail and corporate businesses. This has led to net profit from continuing operations for the quarter of GEL 114.8 million, an increase of 5.5% year-on-year and 3.3% compared to the third quarter of 2018.

During the quarter, the Group delivered revenue of GEL 273.1 million, up 4.9% year-on-year, reflecting both customer lending growth and good levels of fee and commission income. Profit before non-recurring items and income tax totalled GEL 131.8 million, a 9.8% increase year-on-year. For the full year 2018, revenues totalled GEL 1,030.4 million, an increase of 14.5%, and profit before non-recurring items and income tax increased by 25.1% to GEL 494.7 million. The Group's capability to deliver strong Return on Average Equity continues, and exceeded 26% in both the fourth quarter and for the full year.

From a macroeconomic perspective, Georgia continues to produce strong real GDP growth, estimated at 4.8% for 2018, with inflation remaining well contained at 1.5% in December 2018, comfortably below the National Bank of Georgia's target of 3.0% for the year. The Government's prudent macroeconomic policies continue to serve the country well, and the economy has remained extremely resilient to pressures in neighbouring countries, and some volatility in regional financial markets. Foreign Direct Investment continues to flow into a wide variety of sectors, and tourist numbers - the most significant driver of US Dollar inflows for the country - continue to rise strongly, with tourism revenues totalling $3.2 billion during the year. Solid external inflows have enabled the National Bank of Georgia to continue to buy US dollars and accumulate foreign currency reserves to a record $3.3 billion in December 2018. Perhaps most significantly, the country recorded its first ever current account surplus in the third quarter of 2018, an extremely positive macroeconomic development for Georgia.

Strong franchise growth in Retail Banking led to more than 7% customer deposit and customer lending growth during the quarter, and 24.2% customer lending growth and 32.8% client deposit growth year-on-year. On a constant currency basis, customer lending growth was still strong at 22.3% year-on-year, and 6.3% quarter-on-quarter. The Retail Banking's clear focus over the last few quarters has been on growing the mortgage and SME portfolios more rapidly than the unsecured consumer lending portfolios, and loan originations in these portfolios have been extremely strong. In the fourth quarter of 2018, the mortgage and SME portfolios grew by 12.7% and 7.9% quarter-on-quarter, respectively, driven by very targeted and capital efficient lending campaigns. Over the last 12 months, the mortgage portfolio increased by 48.8%, while SME portfolio growth totalled 25.1%.

The Retail Banking client base continues to expand reflecting the success of the Bank's digital penetration growth and the increased use of more cost efficient remote channels. As a result, the Retail Bank now has more than 2.4 million customers, an increase of more than 125,000 customers over the last 12 months. Our fully transformed, user-friendly, multi-feature mobile banking application, mBank, has had nearly 600,000 downloads during the last two years. In addition, we have now comfortably exceeded our targeted 40,000 Solo clients by the end of 2018, with over 44,000 clients already benefiting from Solo's lifestyle banking proposition.

We also continued to deliver strong progress in the Corporate Investment Banking (CIB) business, and lending growth is now more balanced between retail and corporate banking. Customer lending in CIB grew by 15.9% year-on-year, and 5.7% quarter-on-quarter. On a constant currency basis, these growth rates were 12.9% and 3.7%, respectively. In addition, we have also made further progress in reducing concentration risk in CIB, and have reduced the concentration of our top 10 corporate borrowers to only 9.8% of our lending portfolio. This stronger lending growth in CIB has also supported much improved net fee and commission income which, during 2018, increased by 17.4%, and has supported almost 30% growth in profit before non-recurring items and income tax.

Individual product loan yields have continued to remain broadly stable, and we expect this trend to continue into 2019. Our increasing focus on lending in the mortgage segment and to finer margin corporate and SME clients, has however led to a negative mix effect on overall loan yields and on the net interest margin, which was reduced by 40 basis points quarter-on-quarter to 6.0% in the fourth quarter of 2018. This shift in product mix, which we expect to continue during 2019, improves our asset quality metrics and, particularly in the case of the mortgage portfolio, reduces the risk-asset and capital intensity of our lending growth, which has enabled us, and we expect will continue to enable us, to maintain the Group's return on equity and superior profitability profile. Costs remain well controlled, and the Banking Business delivered positive operating leverage of 2.9 percentage points in 2018. The Bank has recently introduced a "Lean" project, which has already started to improve back office procedures, and introduce end-to-end process optimisation in the mortgage business. Over the last twelve months, the cost/income ratio has improved from 37.7% in 2017, to 36.7% in 2018.

Asset quality continues to improve, reflecting our good lending discipline and the ongoing strength of the economy. The annualised cost of credit risk ratio in the fourth quarter was 1.1%, and the full year cost of credit risk ratio was 1.6%, a significant improvement from 2.2% in 2017. The NPLs to gross loans ratio was 3.3% at the end of December 2018, 20 basis points lower than at the end of September 2018, and 50 basis points lower than a year ago. Coverage ratios remain robust, and we expect asset quality and credit metrics to remain strong over the medium-term, particularly as our product portfolio mix shifts more towards higher quality lending portfolios such as the mortgage portfolio.

The Group's capital and funding position remains strong. The NBG (Basel III) Total Capital Adequacy ratio increased by 70 basis points during the quarter to 16.6%, and the NBG (Basel III) Tier 1 Capital Adequacy ratio was 12.2%, a quarter-on-quarter increase of 120 basis points. Our capital ratios are comfortably ahead of our regulatory minimum requirement. We continue to generate high levels of internal capital as a result of both the Bank's high return on average equity, and the improved risk asset intensity of our lending growth. Over the medium term, we will focus on managing our capital ratios c.200 basis points over our minimum regulatory requirements.

During the last 12 months, the banking sector in Georgia has been working with the National Bank of Georgia to implement a number of regulatory changes relating to both retail lending guidelines, specifically updated caps on payment-to-income and loan-to-value ratios and an increase in the GEL 100,000 limit, to GEL 200,000, below which lending must be issued to borrowers in GEL, and to the introduction of Basel III capital adequacy requirements. All of these changes have now been introduced with the expectation that banks will see a shift towards lending to corporates and the SME sector, and in the mortgage sector, together with further progress in the de-dollarisation of bank balance sheets. The regulations also now allow the introduction of Additional Tier 1 capital ("AT1") into banks' capital base, which creates the opportunity to further optimise our capital structure through US dollar AT1 capital to hedge foreign exchange exposures within the capital base, and improve the quality of capital. With this in mind, we may explore the issuance of US-denominated AT1 securities in 2019.

As a result of the recent policy changes, we anticipate growth rates in the unsecured consumer sector to moderate, although we continue to expect to deliver solid growth in mortgages and SME lending. Overall, with the strong rates of growth already delivered this year, we now expect customer lending growth for the medium- to long-term to be comfortably within our 15-20% expected growth range, with lending growth expectations over the next twelve months to be closer to 15%.

At the 2019 Annual General Meeting, the Board intends to recommend an annual dividend for 2018 of GEL 2.55 per share payable in British Pounds Sterling at the prevailing rate. This represents a payout ratio of 30%, in the range of our dividend payout ratio target of 25-40%, and a 4.5% increase over last year's dividend.

Overall, the Group has delivered another year of strong franchise and earnings growth. Returns continue to be high and the Group remains very well positioned to continue to deliver good momentum and high returns.

Archil Gachechiladze,

CEO, Bank of Georgia Group PLC

18 February 2019

FINANCIAL SUMMARY

6 Banking Business and Discontinued Operations financials do not include inter-business eliminations. Detailed financials, including inter-business eliminations are provided on pages 21, 22 and 23

7 The full year 2018 profit from discontinued operations includes the results of operations of the Investment Business prior to demerger and GEL 90.7mln gain on Investment Business distribution

8 2018 full year results adjusted for GEL 30.3mln demerger related costs, GEL 8.0mln demerger related corporate income tax gain, and GEL 30.3mln one-off impact of re-measurement of deferred tax balances (see details on page 12)

9 Banking Business and Discontinued Operations financials do not include inter-business eliminations. Detailed financials, including inter-business eliminations are provided on pages 21, 22 and 23

10 The y-o-y decline in Book value per share as at 31 December 2018 is driven by the demerger of Investment Business to Georgia Capital PLC on 29 May 2018 and the issuance and allotment of additional 9,784,716 Bank of Georgia Group shares (equivalent to 19.9% of Bank of Georgia Group's issued ordinary share capital) to Georgia Capital

11 2018 full year results adjusted for GEL 30.3mln demerger related costs, GEL 8.0mln demerger related corporate income tax gain, and GEL 30.3mln one-off impact of re-measurement of deferred tax balances (see details on page 12)

DISCUSSION OF RESULTS

The Group's 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 revenue of GEL 273.1mln in 4Q18 (up 4.9% y-o-y), ending the year 2018 with revenue of GEL 1,030.0mln (up 13.3% y-o-y). Y-o-y revenue growth in 2018 was driven by a 10.0% increase in net interest income, which resulted from strong loan book growth. Additionally, net strong fee and commission income (up 16.5% y-o-y) and net client-driven foreign currency gains (up 50.4% y-o-y) also contributed to annual growth in revenues

§ Our NIM was 6.0% in 4Q18 and 6.5% in 2018. 4Q18 NIM was down 130bps y-o-y due to the 150bps y-o-y decrease in loan yield, largely reflecting our planned shift towards a higher quality, finer margin product mix on the back of tighter regulatory conditions for unsecured consumer lending, and higher EUR denominated loan origination in 3Q18, as well as a 20bps y-o-y increase in the cost of funds. On a q-o-q basis, loan yield decreased by 70bps, while cost of funds remained flat, resulting in 40bps decline in 4Q18 NIM q-o-q

§ Loan yield. Currency blended loan yield was 12.8% in 4Q18 (down 150bps y-o-y and down 70bps q-o-q) and 13.5% in 2018 (down 70bps y-o-y). The y-o-y and q-o-q decline in loan yields during the fourth quarter and on a twelve months basis in 2018, was attributable to a decrease in both local and foreign currency loan yields, which primarily reflects the change in product mix in our loan portfolio

§ Liquid assets yield. Our liquid assets yield was 3.8% in 4Q18 (up 40bps y-o-y and flat q-o-q) and 3.8% in 2018 (up 40bps y-o-y). The main contributor to the y-o-y trend in 2018 was the increase in the foreign currency denominated liquid assets yield (up 30bps y-o-y in 2018), reflecting the Federal Open Market Committee's decisions to raise interest rates, 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, starting from 12 July 2018, NBG reduced interest rates on foreign currency obligatory reserves (from US Fed rate minus 50bps to Fed rate minus 200bps, floored at zero for US Dollar reserves, and from ECB rate minus 20bps to ECB rate minus 200bps, floored at negative 60bps for EUR denominated reserves). As a result, the foreign currency denominated liquid asset yields declined by 10bps on a q-o-q basis and were flat on a y-o-y basis in 4Q18

§ Cost of funds. Cost of funds stood at 5.0% in 4Q18 (up 20bps y-o-y and flat q-o-q) and at 5.0% in 2018 (up 30bps y-o-y). Y-o-y increase both in 4Q18 and 2018 periods was primarily driven by an increase in the cost of amount due to credit institutions (up 140bps y-o-y in 4Q18 and up 90bps y-o-y in 2018) as a result of increased local currency denominated borrowings from Development Finance Institutions (DFIs), and an increase in the Libor rate during the period. In addition, y-o-y increase in cost of funds in 2018 also reflected the increase in cost of debt securities issued, following the issuance of GEL 500mln 11.0% Lari denominated notes in 2Q17 (up 40bps y-o-y in 2018) - a milestone transaction for Bank and Georgia

§ Net fee and commission income. Net fee and commission income reached GEL 41.3mln in 4Q18 (up 12.5% y-o-y and up 4.7% q-o-q) and GEL 153.2mln in 2018 (up 16.5% y-o-y). The growth was mainly driven by the strong performance in our settlement operations supported by the success of our Retail Banking franchise

§ Net foreign currency gain. In line with the increase of client-driven flows, as well as robust interest from foreign financial institutions in local currency, the net foreign currency gain was up 94.3% y-o-y and up 44.9% q-o-q in 4Q18, and up 50.4% y-o-y in 2018

§ Net other income. The y-o-y decline in net other income in 2018 was largely driven by net losses from derivative financial instruments (interest rate swap hedges) and investment securities recorded in 4Q18

§ Operating expenses increased to GEL 100.9mln in 4Q18 (up 1.1% y-o-y and up 3.8% q-o-q) and to GEL 378.5mln in 2018 (up 10.4% y-o-y). The growth in revenues outpaced the growth in operating expenses y-o-y both during 4Q18 and 2018, leading to positive operating leverage during these periods. Salaries and employee benefits increased by 8.9% y-o-y reflecting our core business growth, while administrative expenses increased by 12.9% y-o-y, primarily driven by increased costs on consultancy services in relation to the "Lean" project to achieve a step-change in operating efficiency, customer experience, and culture

§ Cost of credit risk ratio. The cost of credit risk ratio improved significantly to 1.1% in 4Q18, down 100bps y-o-y and down 90bps q-o-q. RB's cost of credit risk ratio was down 10bps y-o-y and down 70bps q-o-q, while CIB's cost of credit risk ratio was down 340bps y-o-y and down 170bps q-o-q. On a twelve-month basis, Banking Business cost of credit risk ratio was 1.6% in 2018, down 60bps y-o-y, driven by 40bps y-o-y improvement in RB's cost of credit risk ratio and 70bps y-o-y decline in CIB's cost of credit risk ratio

§ Cost of risk. The cost of risk in 4Q18 also includes a one-off charge of GEL 10.0mln relating to the write-down of legacy software and IT equipment

§ Quality of our loan book remains strong in 4Q18 as evidenced by the following closely monitored metrics:

§ BNB - the Group's banking subsidiary in Belarus - generated a profit of GEL 4.1mln in 4Q18 (up 14.5% y-o-y and up 37.5% q-o-q) and GEL 11.5mln in 2018 (up 11.4% y-o-y); BNB's earnings were positively impacted by decreased levels of cost of risk both during the quarter and in 2018, on the back of improved macro-economic conditions starting from the second half of 2017. For detailed financial results of BNB, please see page 24

§ BNB's loan book reached GEL 432.7mln at 31 December 2018, up 8.3% y-o-y and up 9.6% q-o-q, mostly reflecting an increase in consumer loans. Client deposits were GEL 389.0mln at 31 December 2018, up 25.5% y-o-y and up 7.1% q-o-q

§ BNB continues to remain strongly capitalised, with Capital Adequacy Ratios well above the requirements of its regulating Central Bank. At 31 December 2018, total CAR was 13.5%, above the 10% minimum requirement of the National Bank of the Republic of Belarus ("NBRB"), while Tier I CAR was 8.5%, above NBRB's 6% minimum requirement. Return on Average Equity ("ROAE") was 19.5% in 4Q18 (18.5% in 4Q17 and 15.2% in 3Q18) and 14.6% in 2018 (14.6% in 2017). Strong capitalisation and profitability allowed BNB to distribute a dividend in the amount of GEL 1.2mln in 1Q18 (GEL 1.2mln in 2017)

§ Overall, profit before non-recurring items and income tax totalled GEL 131.8mln in 4Q18 (up 11.3% y-o-y and up 6.1% q-o-q) and GEL 492.6mln in 2018 (up 23.0% y-o-y), while ROAE was 26.2% in 4Q18 (27.8% in 4Q17 and 26.8% in 3Q18) and 26.1%12 in 2018 (25.2% in 2017)

§ Net non-recurring items. Net non-recurring expenses amounted to GEL 57.3mln in 2018 (GEL 4.3mln in 2017), primarily comprising of 2Q18 demerger related costs (please see 2Q18 and 1H18 results announcement for details) and employee costs related to termination benefits of the Group's former CEO (acceleration of share-based compensation received before 31 December 2018) recorded in 4Q18

§ Income tax expense. Income tax expense amounted to GEL 10.3mln in 4Q18 (GEL 11.1mln in 4Q17 and GEL 9.3mln in 3Q18) and GEL 56.7mln in 2018 (GEL 26.6mln in 2017). The significant y-o-y increase in income tax expense in 2018 was primarily driven by the one-off impact of changes to the corporate taxation model applicable to financial institutions which was amended in June 2018. Please see the 2Q18 and 1H18 results announcement for details

12 2018 ROAE adjusted for demerger related expenses and one-off impact of re-measurement of deferred tax balances

Our balance sheet remains highly liquid (NBG Liquidity coverage ratio of 120.1%) and strongly capitalised (NBG Basel III Tier I ratio of 12.2%) with a well-diversified funding base (Client Deposits and Notes to Total Liabilities of 62.6%).

§ Liquidity. Liquid assets increased to GEL 4,540.0mln at 31 December 2018, up 4.5% y-o-y and down 3.3% q-o-q. The y-o-y growth was largely driven by an increase in local currency bonds, which are used by the Bank as collateral for short-term borrowings from the NBG, and additional proceeds as a result of the demerger-related pushdown of $350mln Eurobonds of JSC BGEO Group in March 2018. Management has successfully continued to deploy excess liquidity accumulated as a result of these proceeds. In addition, the y-o-y increase in liquid assets was also driven by the changes in minimum reserve requirements mandated by NBG since September 2018, whereby the foreign currency funds raised by local banks now carry an up to 25% reserve requirement depending on maturity. The NBG Liquidity coverage ratio increased to 120.1% at 31 December 2018 (112.4% at 31 December 2017 and 113.6% at 30 September 2018), well above the 100% minimum requirement level

§ Loan book. Our net loan book and finance lease receivables reached GEL 9,397.7mln at 31 December 2018, up 21.4% y-o-y and up 7.3% q-o-q. As of 31 December 2018, the retail book represented 69.8% of the total loan portfolio (68.0% at 31 December 2017 and 69.8% at 30 September 2018). Both local and foreign currency portfolios experienced strong y-o-y growth of 21.2% and 21.5%, 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 

§ Dollarisation of our loan book and client deposits. The retail client loan book in foreign currency accounted for 50.3% of the total RB loan book at 31 December 2018 (48.8% at 31 December 2017 and 48.9% at 30 September 2018), while retail client foreign currency deposits comprised 69.7% of total RB deposits at 31 December 2018 (72.1% at 31 December 2017 and 71.7% at 30 September 2018). At 31 December 2018, 82.3% of CIB's loan book was denominated in foreign currency (83.1% at 31 December 2017 and 81.7% at 30 September 2018), while 61.2% of CIB deposits were denominated in foreign currency (63.1% at 31 December 2017 and 55.4% at 30 September 2018). De-dollarisation is expected to pick-up the pace in 2019, on the back of the recent increase of local currency loan threshold from GEL 100,000 to GEL 200,000

§ Net Loans to Customer Funds and DFI ratio. Our Net Loans to Customer Funds and DFI ratio, which is closely monitored by management, remained strong at 99.6% (up from 92.4% at 31 December 2017 and up from 95.3% at 30 September 2018)

§ Diversified funding base. Debt securities issued grew by 24.8% y-o-y and increased by 9.6% q-o-q. The y-o-y increase was driven by the demerger-related pushdown of $350mln Eurobonds of JSC BGEO Group in March 2018

§ Capital Adequacy requirements. Basel III Tier 1 and Total Capital Adequacy ratios stood at 12.2% and 16.6%, respectively, as of 31 December 2018, as compared to minimum required level of 11.4% and 15.9%, respectively (11.0% and 15.9%, respectively, at 30 September 2018, as compared to minimum required levels of 9.9% and 14.9%, respectively). At the same time Common Equity Tier 1 (CET1) ratio stood at 12.2% compared to a 9.5% minimum requirement at 31 December 2018 and already above the estimated fully-loaded CET1 requirement for 2021

§ The Banker publication named JSC Bank of Georgia as the Bank of the Year 2018 in Central and Eastern Europe. One of the criteria for recognition was the Bank's successful transformation from a product focus to a client-centric business model which has resulted in more effective tailor-made services through the Bank of Georgia's multi-brand strategy. The Banker also outlined the Bank's achievements in creating digital platforms and loyalty programmes, which are an integral part of Bank of Georgia's client-centric business model and its focus on developing stronger customer relationships. The Banker distinguished Bank of Georgia, a London Stock Exchange listed company, for its best-in-class corporate governance standards and its competitive advantage in the local market in terms of attracting human and financial capital

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 four sub-segments: (1) the emerging retail segment (through our Express brand), (2) retail mass market segment; (3) SME and micro businesses - "MSME" (through our Bank of Georgia brand), and (4) the mass affluent segment (through our Solo brand).