Bank Of Georgia Group Regulatory News (BGEO)

BGEO Group PLC

4th quarter and full year 2017

preliminary results

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

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 its strategy: (1) at least 20% ROAE from its Banking Business; (2) 15%-20% growth of its Banking Business loan book; (3) at least 25% 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"), Bank of Georgia Group PLC, and a London-listed investment business (the "Investment Business"), Georgia Capital PLC, by the end of the first half of 2018.

The Banking Business 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 ("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, comprises the Group's stakes in Georgia Healthcare Group PLC ("Healthcare Business" or "GHG") - an LSE (a London Stock Exchange) 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 Georgia Capital PLC will target to capture growth opportunities in the Georgian corporate sector.

About this Announcement

BGEO Group PLC announces the Group's fourth quarter 2017 and full year 2017 preliminary consolidated results. Unless otherwise noted, numbers are for 4Q17 and comparisons are with 4Q16. 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 2017 preliminary results, which was approved by the Board of Directors on 15 February 2018, does not constitute statutory accounts as defined in Section 435 of the UK Companies Act 2006. The financial statements for the year ended 31 December 2016 were filed with the Registrar of Companies, and the audit report was unqualified and contained no statements in respect of Sections 498 (s) and 495 (3) of the UK Companies Act 2006. The financial statements for the year ended 31 December 2017 will be included in the Annual Report and Accounts to be published in March 2018 and filed with the Registrar of Companies in due course.

CONTENT

The Group has renamed its Investment Business as Georgia Capital. The two terms are used interchangeably in this report. In line with IFRS requirements, the Group reviewed the classification of its operating segments at 31 December 2017. Given the expectation, in line with Georgia Capital's strategy, that it is highly probable the Group will own less than a 50% stake in its healthcare business GHG at the end 20181. As a result, and in line with IFRS, the Group classified GHG as "disposal group held for sale" and its results of operations are reported under "discontinued operations" line as a single amount in the consolidated income statement. Comparative periods have been restated accordingly to reflect reclassification of GHG from "continuing operations" into "discontinued operations." Assets and liabilities held by GHG are also presented separately in the consolidated balance sheet as of 31 December 2017 under "assets of disposal group held for sale" and "liabilities of disposal group held for sale."

BGEO HIGHLIGHTS

Record annual results driven by strong performance across all businesses

Strong economic activity in Georgia has continued

§ Georgian economic growth has accelerated to 4.7% in 4Q17, from 4.4% in 3Q17. For the full year 2017, GDP growth strengthened to 4.8% from 2.8% in 2016

Bank of Georgia has delivered very strong franchise growth, particularly in the fourth quarter, with further improved returns

§ The Bank's loan book demonstrated 17.4% growth, on a constant currency basis, during 2017 (30.6% growth in Retail Banking); In 4Q17, the loan book growth amounted to 8.3% on a constant currency basis (8.7% growth in Retail and 9.2% growth in Corporate Investment Banking). The Bank's Return on average equity was 25.2% in 2017 and 27.8% in 4Q17

Strong strategic execution in the Investment Business

§ Each business within Georgia Capital continued to deliver on their strategic priorities ahead of the forthcoming demerger

Solid distributions to shareholders continue

§ $18.3mln was returned to shareholders during 4Q17 ($39.1mln returned in 2017)

1 The Group held 57% of GHG's equity stake as of 31 December 2017 (65% as of 31 December 2016).

2 As of 31 December 2017, loans and finance lease receivables growth on a constant currency basis was 17.4% and 8.3% on y-o-y and q-o-q basis, respectively.

3 As of 31 December 2017, client deposits and notes growth on a constant currency basis was 24.8% and 4.7% on y-o-y and q-o-q basis, respectively.

4 Refer to the Discussion of the Banking Business Results section for the background on NBG (Basel III) Tier I Capital Adequacy Ratio.

5 Includes profit before non-recurring items and income tax of discontinued operations, GHG.

BANKING BUSINESS HIGHLIGHTS

Outstanding profitability and balance sheet growth momentum

§ The Banking Business generated a record quarterly profit of GEL 107.1mln in 4Q17 (up 49.8% y-o-y and up 16.5% q-o-q) and GEL 369.5mln in 2017 (up 25.0% y-o-y), while quarterly ROAE reached 27.8% in 4Q17 (up 780bps y-o-y and up 270bps q-o-q) and 25.2% in 2017 (up 300bps y-o-y)

§ Asset quality improved during 4Q17 and FY17. NPLs to gross loans ratio decreased to 3.8% at 31 December 2017 (4.2% at 31 December 2016 and 4.1% 30 September 2017). NPL coverage ratio was strong at 92.7% at 31 December 2017 (86.7% a year ago and 93.6% at 30 September 2017), while the NPL coverage ratio adjusted for discounted value of collateral stood at 130.6% at 31 December 2017 (132.1% at 31 December 2016 and 132.8% at 30 September 2017). The asset quality improvement positively impacted the cost of risk ratio, which stood at 2.1% in 4Q17 (4.2% in 4Q16 and 2.0% in 3Q17) and 2.2% in 2017 (2.7% in 2016)

§ Retail Banking ("RB") continued to deliver strong growth across all its business lines. Retail Banking revenue reached GEL 176.0mln in 4Q17, up 19.1% y-o-y and up 13.0% q-o-q, with full year 2017 revenue totalling GEL 614.7mln, up 24.4% y-o-y. The number of Retail Banking clients reached 2.3mln at the end of 4Q17, up 8.1% from 2.1mln at the end of 4Q16 and up 2.7% from 3Q17

§ Our Retail Banking product to client ratio increased to 2.2 in 4Q17 from 2.0 in 4Q16 and 2.1 in 3Q17. In 4Q17 we have completed the transformation of our retail banking operations from a product-based model into a client-centric model, as well as the implementation of the client-centric model in our branches. As of 31 December 2017, we had 86 transformed branches. We continue to see outstanding growth in sales volumes and the number of products sold to our clients in these branches, contributing to 29.3% y-o-y growth in the retail loan book

§ The loan book growth on a constant-currency basis reached 17.4% at 31 December 2017. As a result, Retail Banking's loan book share in the total loan portfolio was 68.0% at 31 December 2017 (60.9% at 31 December 2016 and 68.4% at 30 September 2017). The Retail Banking net loan book reached GEL 5,044mln at 31 December 2017, up 29.3% y-o-y and up 11.1% q-o-q. The growth on a constant-currency basis was 30.6% y-o-y and 8.7% q-o-q

§ Retail Banking client deposits increased to GEL 3,267.3mln at 31 December 2017, up 35.4% y-o-y and up 13.8% q-o-q. Growth on a constant-currency basis was 37.4% y-o-y and 10.2% q-o-q

§ Corporate Investment Banking ("CIB") resumed growth in 4Q17 after delivering on its risk de-concentration and loan portfolio repositioning targets in 3Q17. CIB's net loan book amounted to GEL 2,260.1mln at 31 December 2017, down 5.6% y-o-y, but up 13.4% q-o-q. The top 10 CIB client exposure was 10.7% at the end of 4Q17, down from 11.8% at 31 December 2016. Consequently, CIB's profit increased to GEL 27.7mln in 4Q17 (up 175.3% y-o-y and up 42.3% q-o-q) and GEL 105.9mln in 2017 (up 19.9% y-o-y) and CIB ROAE reached 18.1% in 4Q17 (6.2% a year ago and 13.3% in 3Q17) and 17.6% in 2017 (up from 14.7% in 2016)

§ Investment Management's Assets Under Management ("AUM") increased to GEL 1,857.5mln, up 17.9% y-o-y and up 2.2% q-o-q, reflecting higher bond issuance activity by our brokerage arm Galt & Taggart

§ IFRS 9 implementation delivered - no impact on capital adequacy ratios. The Group has completed its IFRS 9 implementation programme and adopted IFRS 9, Financial Instruments from 1 January 2018. The Banking Business will recognise the estimated impact from IFRS 9 adoption of approximately GEL 31.5mln, gross of income tax, as a reduction to shareholders' equity at the transition date on 1 January 2018. As allowed by IFRS 9, the Group will not be restating prior-period data. IFRS 9 does not have any impact on regulatory capital and capital adequacy ratios. Through-the-cycle cost of risk is expected to remain unchanged. NPL coverage ratio, adjusted for additional IFRS 9 allowance, was 102.9% as at 31 December 2017

§ Amendments to Capital Adequacy requirements. In order to transition to Basel III, the National Bank of Georgia ("NBG") introduced new capital adequacy requirements in December 2017. As a result of the changes, Bank of Georgia became subject to the following minimum capital requirements at 31 December 2017:

§ Common Equity Tier 1 ratio 8.1%, expected to increase to 9.5% on 31 December 2018

§ Tier 1 ratio 9.9%, expected to increase to 11.4% on 31 December 2018

§ Total Capital ratio 12.4%, expected to increase to 15.6% on 31 December 2018

At 31 December 2017, Bank of Georgia's both Common Equity Tier 1 and Tier 1 ratios were 12.4%, while Total Capital ratio was 17.9%. Transition to Basel III is not expected to affect the Bank's growth prospects or its ability to maintain dividend distributions within the existing dividend policy payout range

INVESTMENT BUSINESS HIGHLIGHTS

§ Our utility and energy business, GGU, delivered a stable performance in 2017. In 4Q17, GGU continued its investments in water pipeline infrastructure, leading to continued growth in the regulated asset base and reduction of the respective water losses. Due to successfully implemented efficiency projects, GGU was able to significantly reduce its own electricity consumption in 2017. GGU also continued the construction works on the 50MW Mestiachala HPPs in north-western Georgia, while the 44.3MW Zoti HPPs entered their construction phase in 4Q17

§ In December 2017, the Georgian National Energy and Water Supply Regulatory Commission ("GNERC") approved new tariffs for water and waste-water services, which have been updated according to the new Regulatory Asset Base based methodology adopted by GNERC in August 2017. The new tariffs have been set for a three year regulatory period, effective from 1 January 2018. As a result, tariffs in Tbilisi have increased by 23.8% for residential customers and decreased by 0.4% for legal entities

§ Our real estate business, m2, achieved the best sales performance in its history during 2017. 2017 was record-breaking for m2 in terms of square meters sold, number of apartments sold and sales revenue. m2 sold a total of 165 apartments with a total sales value of US$ 14.5mln during 4Q17, compared to 112 apartments sold with total sales value of US$ 8.3mln in 4Q16 and 231 apartments with a total sales value of US$ 16.9mln in 3Q17. m2 successfully completed the construction of its first luxury residential project - Skyline in 4Q17

§ In 4Q17, m2 signed its largest ever franchise agreement as part of its "asset light" strategy and will construct and develop a residential complex under the m2 brand name on a third-party land plot to generate construction fees, sales commissions and a share from the project's overall profit

§ In 4Q17, m2 acquired a controlling stake in an upcoming lifestyle boutique hotel in a prime location of Tbilisi, which is expected to add at least 100 rooms to m2's portfolio and is expected to complete in the first quarter of 2019. The acquisition is in line with m2's strategy to increase its presence in the hospitality sector and capitalise on growing tourist activities in the country

§ In 4Q17, m2's construction arm was awarded its first major third-party construction agreement to construct the shell and core of a new shopping mall and business centre located in Tbilisi. The total amount of the contract is US$ 11.6mln and completion is planned for the first half of 2019

§ Aldagi delivered its best ever year as it continued organic growth primarily in the motor insurance, property insurance and credit life lines, as Aldagi shifted its focus more to the retail market. New product development initiatives and enhancements of existing products resulted in more than 19,000 livestock insurance policies and 3,334 travel and trip insurance policies sold across the country in 2017

§ In 4Q17 Aldagi signed major third-party partnership agreements with two Georgian banks, JSC Liberty Bank and JSC Credo Bank to successfully diversify its multi-channel distribution network, which will enable Aldagi to successfully tap Georgia's underpenetrated retail insurance segment

§ Our beverage business, Teliani, achieved significant milestones during 2017 and launched its mainstream beer and lemonade production in June 2017 and August 2017, respectively. Teliani is on track to brew Heineken and Krusovice beers in 2018 under a ten-year exclusive license agreement to produce Heineken brands in Georgia, and to sell into the Caucasus region countries. Teliani also continued to diversify its distribution portfolio, with the addition of the exclusive right to import and distribute Lavazza coffee in Georgia, and winning other non-alcoholic beverage distribution contracts in 2017

§ In February 2018, we acquired a 100% equity stake in a leading Georgian craft beer producer, Black Lion LLC (Black Lion). Black Lion is the largest producer of a premium class craft beer in Georgia that launched sales in the beginning of 2016 and sold approximately 300,000 litres of craft beer in 2017, primarily targeting restaurants and bars in Tbilisi

§ Our healthcare business, GHG, continued to deliver on its strategic priorities across its healthcare services and pharmacy businesses, while medical insurance business maintained positive EBITDA in 4Q17. Healthcare services EBITDA margin was 26.8% in 4Q17, compared to 31.9% in 4Q16 and 26.0% in 3Q17 reflecting the planned significant investment in new hospitals and polyclinics during 2017. Pharmacy business generated a record EBITDA margin of 10.2% in 4Q17, compared to 6.0% in 4Q16 and 8.3% in 3Q17

§ In January 2018, GHG's medical insurance arm signed new medical insurance agreement with the Georgian Ministry of Internal Affairs, the country's largest insurance client by number of insured customers of c.65,000. As a result, the number of GHG's insured individuals reached approximately 155,000

CHIEF EXECUTIVE OFFICER'S STATEMENT

In the fourth quarter of 2017, the Group delivered another extremely strong performance that resulted in record profit for the year of GEL 463 million and earnings per share of GEL 11.61, an increase of 11.5% year-on-year. This strength reflects an excellent performance from our Banking Business as well as growth momentum and strategic delivery from our Investment Businesses, which were supported by Georgia's strong macroeconomic performance and business outlook.

Group revenue in 2017 increased by 23.7% year-on-year to GEL 1.1 billion, which supported a 23.5% year-on-year increase in profit before tax from continuing operations to GEL 435.8 million. Book value per share at the end of 2017 was GEL 65.22, up 15.2% year-on-year. The Return on Average Equity in the Banking Business increased from 22.2% in 2016 to 25.2% in 2017. During the fourth quarter, the Group delivered revenue of GEL 305.1 million, up 14.8% year-on-year and up 11.9% quarter-on-quarter, and profit of GEL 118.8 million, up 33.9% year-on-year and 5.3% quarter-on-quarter.

In the Banking Business, 2017 was characterised by strong franchise growth in the Retail Banking operations, particularly in the fourth quarter, reflecting the continued strong performance of our business in all segments, and an increase in retail lending during the year of 29.3%, or 30.6% on a constant currency basis. In addition, in 3Q17 we completed our three year progamme to reduce concentration risk in our Corporate Investment Banking and consequently, started to deliver corporate lending growth in the last quarter of the year. Loan yields have continued to remain stable, and net interest margins have therefore remained robust at 7.3%. Costs have remained well-controlled, whilst ensuring continued investment in building an increasingly strong customer franchise. The Banking Business cost to income ratio remained very efficient at 37.7% for the year. The Banking Business cost of risk ratio in 2017 was 2.2%, in line with our medium term cost of risk expectations, and a significant reduction from 2.7% in 2016. In addition, we have continued to improve our asset quality and provisions coverage ratios. The Return on Average Equity in the Banking Business continued to improve on a quarterly basis, and stood at 25.2% for the year, and 27.8% in the fourth quarter.

The Group's Investment Business continued to deliver strong growth and performance, with EBITDA growing 55.7% year-on-year, and profit before non-recurring items and income tax, including discontinued operations increasing by 21.4% over the same period. Overall, the impact of a number of non-recurring items in 2016 affected year-on-year comparisons resulting in a reduction of 29.3% in net profit, to GEL 93.9 million in 2017.

From a macroeconomic perspective Georgia continues to deliver strong GDP growth, estimated at 4.8% in 2017. Annual inflation was at 6.7%, reflecting the one-off effect of an excise tax increase, while core inflation remained well-contained at 4.7% in 2017. 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 US$2.8 billion during the year, up 27.0% year-on-year. Despite Lari exchange rate volatility in the fourth quarter, the local currency regained value at the end of the year, as the external environment strengthened. The National Bank of Georgia (NBG) purchased approximately US$130 million in 2017, boosting reserves up 10.3% year-on year, to US$3.0 billion.

In the Banking Business, we have continued to deliver on all of our key strategic priorities. 2017 revenue growth of 17.5% was particularly supported by the strong Retail Banking franchise growth, where revenue increased by 24.4% and customer lending on a constant currency basis continues to grow at more than 20% per annum. This offsets the anticipated decline in the Corporate Investment Banking loan portfolio, as we wound down the banking relationship with a small number of significant corporate borrowers, earlier in 2017. 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 10.7% of our lending portfolio. We have now exceeded our targeted rebalancing of the retail/corporate portfolio mix to further improve the return profile of the Banking Business. Retail Banking now represents 68% of our customer lending and Corporate Investment Banking represents 32%.

In addition to the strong retail lending growth, the Retail Banking made strong progress in implementing its customer centric approach with the launch of its new loyalty reward program, Plus+ in July 2017 and continued investment in digital penetration growth. Our Retail Banking product to client ratio also improved from 2.0 to 2.2 products per client during the second half of 2017. 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 growth momentum, with customer numbers increasing to 32,104, up 12.7% during the fourth quarter and up 66.6% over the last twelve months. Solo is strongly on track to achieving its target of 40,000 Solo clients by the end of 2018.

The improving growth and strength of the Georgian economy continues to support asset quality. The annualised cost of risk ratio in 4Q17 was 2.1%, compared to 4.2% in 4Q16. In addition, we were able to reduce the ratio of NPLs to Gross Loans, which fell from 4.2% in December 2016, to 3.8% in December 2017. Our NPL coverage ratio also improved - from 86.7% at the end of December 2016, to 92.7% at the end of 2017.

In January 2018, the Bank adopted IFRS 9, which introduces a new three stage expected loss model, compared to the existing two-stage incurred loss model under the current International Accounting Standard 39. The introduction of IFRS 9 has not had an impact on the Banking Business financial position and capital ratios, which are calculated using local regulatory accounting standards. This change in accounting standards resulted in a one-off GEL 31.5 million reduction of the Banking Business shareholders equity. There is no change to the Banking Business 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. At the end of 2017, liquid assets totaling GEL 310 million were held at the holding company level. Within the Banking Business, the NBG (Basel II) Tier 1 Capital Adequacy ratio increased by 120 basis points to 10.3% during the year, reflecting both the continued de-dollarisation of the Banking Business lending portfolio and the Banking Business' high return on average equity and internal capital generation.

The National Bank of Georgia is currently in the process of transitioning to Basel III standards, and introduced new capital adequacy requirements in December 2017. Further details of the new requirements are mentioned on Page 16 of this release. On the basis of new regulation, the NBG (Basel III) Tier 1 capital adequacy ratio was 12.4% at 31 December 2017, compared to a new minimum Tier 1 capital requirement of 9.9%, which is expected to increase to 11.4% at 31 December 2018. 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 existing dividend payout policy.

Within our Investment Business, we now expect that, in line with our planned exit strategy for the business, it is highly probable that the Group will own less than a 50% stake in Georgia Healthcare Group ("GHG") at the end of 2018. As a result, GHG is now reported under "discontinued operations" in the Group's consolidated income statement. Within the business, GHG delivered a year of strong progress towards its planned investment and business roll-out in all the key areas in the Georgian healthcare system. GHG delivered net revenues of GEL 745.7 million during the year, an increase of 76.0%, reflecting a combination of solid organic growth and the impact of acquisitions. The healthcare services EBITDA margin continues to be strong at 26.4%, notwithstanding the dilutive effect of the significant roll-out of the two major hospital renovations - Tbilisi Referral Hospital and Deka - and the ongoing roll-out of a nationwide chain of polyclinics (outpatient clinics). In the pharmacy business, we have made significant progress towards the integration of our two recently acquired businesses, whilst avoiding any significant business disruption. As a result, the EBITDA margin of 8.6% for the year has already successfully exceeded our target of "more than 8%" margin.

Our water utility and energy business, GGU, continued to focus on improving efficiencies in the water utility business and delivered a 6.1% year-on-year growth in revenues, reaching GEL 135.0 million in 2017, compared to GEL 127.2 million last year, whilst achieving a 52% EBITDA margin. GGU has also continued to achieve efficiencies in its own energy consumption, to free up electricity for third-party sales, and has started a number of investments in additional capacity for electricity generation with the goal to establish a renewable energy platform. During 2017, GGU commenced construction of three hydro power plants, targeting c.100MW of planned additional capacity over the next few years.

Our real estate business, m2 Real Estate, continues to demonstrate its strong execution skills to unlock considerable value in the real estate development business. During 2017, m2 sold a total of 629 apartments with a total sales value of $49.1 million, in addition to further increasing its portfolio of yielding assets. As a result, m2 recorded a profit of GEL 23.7 million in 2017, up from GEL 10.9 million in the previous year. In addition, during the fourth quarter of 2017, the real estate business acquired a controlling stake in an upcoming lifestyle boutique hotel in a prime location in Tbilisi, signed its largest ever franchise agreement as part of its "asset light" strategy to construct and develop a residential complex under the m2 brand name on a third-party land plot in a densely populated Tbilisi suburb, and m2's construction arm gained its first major third-party construction agreement to construct the shell and core of a new shopping mall and business centre in Tbilisi's Saburtalo district. These developments underpinned an extremely successful year for the real estate business, and provide significant growth potential over the next few years.

Our property and casualty insurance business, Aldagi, continues development of a strong portfolio of new products, supporting 24.6% year-on-year growth in net earned premiums during 2017 and Aldagi's position as the clear market leader in the fast-developing Georgian P&C insurance market. Over the last few months, Aldagi has also enhanced its distribution capabilities by signing major third-party partnership agreements with two Georgian banks - Liberty Bank and Credo Bank - and this will support the further diversification of Aldagi's multi-channel distribution network.

Our beverage business, Teliani, increased its revenues by 102.5% year-on-year, excluding IFRS 15 impact, continued to diversify its distribution portfolio and launched its mainstream beer and lemonade production during 2017.

The Group Board expects to recommend a regular annual dividend for 2017 totaling c.GEL 120 million. This is in the range of our regular dividend payout ratio target of 25-40% paid from the Banking Business profits. Since 2010, the Group has grown its annual dividend per share by 40% CAGR on a GEL basis, and by 32% CAGR on a US Dollar basis. If the expected demerger is successfully implemented as planned, it is intended that Bank of Georgia PLC (the then new parent company of the Banking Business), will instead, shortly after the demerger is completed, declare and pay a dividend in a similar aggregate amount to shareholders then on the record. In the event that the demerger is for any reason not completed it is intended, subject to shareholder approval, that the Board would implement the payment of this dividend, which would represent a payment of GEL 3.1 per share, payable in British Pounds Sterling at the prevailing rate, a 19.2% increase over the 2016 dividend.

In addition to the regular annual dividend paid to shareholders, US$5.0 million was returned to shareholders by way of the buyback and cancellation of 115,608 shares during 2017, as part of the existing Board approved US$50 million buyback and cancellation programme. During 2017, the Group Employee Benefits Trust also purchased shares in the market totaling US$34.1 million.

In July 2017, the Group announced its intention to demerge BGEO Group PLC into two separately London-listed businesses: a banking business, Bank of Georgia Group PLC, and an investment business, Georgia Capital PLC. On 12 February, the Group announced that the Board has approved the implementation of the demerger, which is subject to shareholder approval at a General Meeting expected to be held in April 2018. The demerger is expected to complete before the end of June 2018. In its final year before the forthcoming demerger, supported by the continued macroeconomic performance of Georgia, BGEO Group has delivered another year of strong earnings momentum. Growth and returns in both the Banking Business and the Investment Businesses, now renamed Georgia Capital, continue to be high. Following the completion of the proposed demerger, I expect both companies independently to be extremely well positioned to continue their excellent recent track record for many years to come.

Irakli Gilauri,

Group CEO of BGEO Group PLC

FINANCIAL SUMMARY

6 Banking Business and Investment Business financials do not include inter-business eliminations. Detailed financials, including inter-business eliminations are provided on pages 38, 39 and 40.

7 NPL Coverage Ratio adjusted for IFRS 9 was 102.9% at 31 December 2017.

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 260.3mln in 4Q17 (up 16.1% y-o-y and up 16.6% q-o-q), ending the 2017 with revenue of GEL 909.3mln (up 17.5% y-o-y). Y-o-y revenue growth both in 4Q17 and 2017 was primarily driven by a strong increase in net banking interest income, which resulted from strong loan book growth, and increase in net other banking income. Additionally, net fee and commission income contributed to increase of Banking Business revenues in 4Q17 q-o-q and in 2017 y-o-y

§ Net banking interest income. Our net banking interest income was up 16.2% y-o-y and up 9.1% q-o-q in 4Q17 and up 21.4% y-o-y in 2017. The q-o-q and y-o-y increases were primarily driven by the strong growth of our Retail Banking loan book, which experienced 30.6% constant currency growth during 2017

§ Our NIM was 7.3% in both 4Q17 and 2017. 4Q17 NIM was down 30bps y-o-y reflecting the 10bps y-o-y decrease in loan yield and 20bps y-o-y increase in cost of funds. Loan yield and cost of funds remained flat q-o-q in 4Q17, resulting in a stable NIM. For the full year 2017, while both loan yield and cost of funds stayed flat and liquid assets yield was up 20bps compared to 2016, NIM was down 10bps y-o-y as a result of the NBG's decision in 2Q16 mandating an increase in minimum reserve requirements

§ Loan yield. Currency blended loan yield was stable at 14.3% in 4Q17 (down 10bps y-o-y and flat q-o-q) and 14.2% in 2017 (flat y-o-y). While local and foreign currency loan yields decreased y-o-y and q-o-q, the overall stable trend in the loan yield primarily reflected a continued shift towards high-yielding local currency denominated loans in the total loan portfolio mix

§ Liquid assets yield. Our liquid assets yield was 3.4% (up 10bps y-o-y and down 10bps q-o-q) in 4Q17 and in 2017 (up 20bps y-o-y). The foreign currency denominated liquid assets yield increased by 40pbs y-o-y in 4Q17 and in 2017 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 decreased 10bps y-o-y in 4Q17 and decreased by 20bps y-o-y in 2017. The currency blended liquid assets yield increased only 10bps y-o-y in 4Q17 and 20bps y-o-y in 2017 on the back of decreasing yields on higher return local currency denominated liquid assets, while the total liquid assets portfolio composition remained largely the same during the periods

§ Cost of funds. Cost of funds stood at 4.8% in 4Q17 (up 20bps y-o-y and flat q-o-q) and at 4.7% (flat y-o-y) in 2017. Despite the significant increase in cost of debt securities issued in 4Q17 and 2017 following the issuance of GEL 500mln 11.0% Lari denominated notes in 2Q17 (up 170bps y-o-y in 4Q17 and up 60bps y-o-y in 2017), cost of funds remained largely flat as a result of a decrease in the cost of client deposits and notes (down 10bps y-o-y and q-o-q in 4Q17 and down 30bps y-o-y in 2017)

§ Continued shift to the GEL denominated loan book, which increased to 38.3% of the total book at 31 December 2017, compared to 28.7% 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 programme, 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)

§ Net Loans to Customer Funds and DFI ratio. Customer funds (client deposits and notes) increased by 23.0% y-o-y and 8.1% q-o-q to GEL 7,078.1mln driven by strong deposit generation in both the Retail and Corporate Investment Banking operations. Retail banking client deposits and notes grew by 35.4% y-o-y and 13.8% q-o-q to GEL 3,267.3mln, while CIB client deposits grew by 13.0% y-o-y and 4.5% q-o-q to GEL 3,457.3mln. We also increased our borrowings from DFIs by 10.7% q-o-q to GEL 1,297.7mln. As a result, our Net Loans to Customer Funds and DFI ratio, which is closely monitored by management, remained strong at 92.4% (94.9% at 31 December 2016 and 90.0% at 30 September 2017) despite the strong growth of the 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 reflecting the de-concentration of our corporate risk

§ Net banking foreign currency gain. In line with the volatility of the GEL exchange rate, the net banking foreign currency gain was down 0.9% y-o-y and up 40.0% q-o-q in 4Q17 and up 3.4% y-o-y in 2017. RB and CIB businesses together contributed 87.4% to both the total 4Q17 and 2017 net banking foreign currency gain

§ Net other banking income. Net other banking income increased y-o-y and q-o-q to GEL 13.0mln in 4Q17 and to GEL 19.7mln in 2017 (up 61.7% y-o-y). The y-o-y and q-o-q increases in 4Q17 and y-o-y increase in 2017 was largely driven by a) GEL 4.5mln and GEL 1.5mln net gains on derivative financial instruments recorded in 4Q17 and 2017, respectively, and b) GEL 7.3mln revaluation gain from investment properties recorded in 4Q17

§ Operating expenses increased to GEL 99.7mln in 4Q17 (up 19.0% y-o-y and up 16.9% q-o-q) and GEL 342.9mln in 2017 (up 17.6% y-o-y). The growth in operating expenses outpaced growth in revenues, and consequently y-o-y operating leverage was negative both in 4Q17 and 2017 at 2.9 percentage points and at 0.1 percentage points, respectively. 4Q17 y-o-y and q-o-q and 2017 y-o-y changes in operating expenses were driven by: