Bank Of Georgia Group Regulatory News (BGEO)

Bank of Georgia

Group PLC

2nd quarter and half-year 2018 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 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 ("Bank of Georgia", "BOG" or the "Bank") is the core entity of the Group's Banking Business. The Banking Business 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: (1) at least 20% ROAE, and (2) 15%-20% growth of its loan book.

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 the Board of the 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 this 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 the 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. The 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

Bank of Georgia Group PLC announces the Group's second quarter 2018 and first half 2018 consolidated results. Unless otherwise noted, numbers are for 2Q18 and comparisons are with 2Q17. The results are based on International Financial Reporting Standards ("IFRS") as adopted by the European Union, are unaudited and derived from management accounts.

GROUP HIGHLIGHTS

Strong results driven by outstanding profitability and balance sheet growth momentum

Georgian economy continues to deliver strong growth momentum

§ Economic growth in Georgia accelerated to 5.7% in 1H18, delivering its fastest pace of growth since 2012. Booming tourism, impressive growth in goods exports and remittances remain major contributors to economic expansion, while on-going growth-enhancing reforms strengthen growth outlook. Annual inflation fell to 2.2% in June 2018 and is expected to remain close to the National Bank of Georgia's 3.0% target for the full year. The Lari appreciated by 5.4% against the US Dollar during 1H18 and the foreign exchange market remained stable over the period. Georgia's US$ reserves stood at US$ 3.0 billion at 30 June 2018

Demerger Effective

§ 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 2Q18 and 1H18 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." The Investment Business was already classified as "disposal group held for distribution" in the 1Q18 consolidated financial statements, as at that date the distribution of the Investment Business to the Group's shareholders was highly probable following the approval of the demerger at the 2018 Annual General Meeting on 30 April 2018. As a result, assets and liabilities held by the Investment Business as of 31 March 2018 were presented separately in the consolidated balance sheet under "assets of disposal group held for distribution" and "liabilities of disposal group held for distribution"

Interim Dividend  

§ On 31 July 2018, Bank of Georgia Group paid an interim dividend of GEL 2.44 per ordinary share (GBP 0.7585 per ordinary share) in respect of the period ended 30 June 2018 to ordinary shareholders of the Group. This implies a dividend yield of 4.0%, based on the closing price of the shares prior to the ex-dividend date (18 July 2018)

1 The decline in Book value per share as at 30 June 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

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-off expected credit loss (ECL) on contractually accrued interest income. These do not have effect on the net loans to customers balance. Management believes that netted-off balances provide best representation of the Group's loan portfolio position

3 As of 30 June 2018, loans and finance lease receivables growth on a constant currency basis was 21.5% and 2.8% on y-o-y and q-o-q basis, respectively

4 As of 30 June 2018, client deposits and notes on a constant currency basis increased by 25.4% y-o-y and decreased by 2.6% q-o-q

5 2Q18 and 1H18 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 5 and 12)

6 Profit from discontinued operations in 2Q18 and 1H18 includes the results of operations of the Investment Business prior to demerger and GEL 90.7mln gain on Investment Business distribution

RESULTS HIGHLIGHTS

§ Strong quarterly results. Profit before non-recurring items and income tax totalled GEL 120.0mln in 2Q18 (up 31.0% y-o-y and up 7.9% q-o-q) and GEL 231.2mln during the half year 2018 (up 27.8% y-o-y), while ROAE adjusted for demerger related expenses and one-off impact of re-measurement of deferred tax balances was 25.2% in 2Q18 (up 110bps y-o-y and down 70bps q-o-q) and 25.5% in 1H18 (up 160bps y-o-y)

§ Asset quality was very strong during 2Q18. NPLs to gross loans ratio decreased to 3.0% at 30 June 2018 (4.4% at 30 June 2017 and 3.1% at 31 March 2018). NPL coverage ratio stood at 110.5% at 30 June 2018 (111.4% at 31 March 2018 and 102.9% at 31 December 2017 adjusted for IFRS 9 impact), while the NPL coverage ratio adjusted for discounted value of collateral stood at 147.2% at 30 June 2018 (147.2% at 31 March 2018 and 131.5% at 30 June 2017). The asset quality improvement positively impacted the cost of risk ratio, which decreased to 1.7% in 2Q18 (2.2% in 2Q17 and 2.1% in 1Q18) and at 1.9% in 1H18 (2.3% in 1H17)

§ The loan book growth on a constant-currency basis reached 21.5% y-o-y and 2.8% q-o-q at 30 June 2018. Retail Banking loan book share in the total loan portfolio was 70.1% at 30 June 2018 (66.1% at 30 June 2017 and 69.3% at 31 March 2018)

§ Retail Banking ("RB") continued to deliver strong growth across all its business lines. Retail Banking revenue reached GEL 179.2mln in 2Q18, up 26.4% y-o-y and up 5.0% q-o-q, with half year 2018 revenue totaling GEL 349.9mln, up 23.6% y-o-y. The Retail Banking net loan book reached GEL 5,382.4mln at 30 June 2018, up 29.5% y-o-y and up 4.4% q-o-q. The growth on a constant-currency basis was 28.5% y-o-y and 3.7% q-o-q. The number of Retail Banking clients reached 2.4mln at the end of 2Q18, up 6.7% from 2.2mln at the end of 2Q17 and up 1.1% from 1Q18

§ Our Retail Banking product to client ratio increased to 2.2 in 2Q18, up from 2.0 in 2Q17. We continue to see solid growth in sales volumes and the number of products sold to our clients in our branches which have been transformed using our client-centric model, contributing to a 29.5% y-o-y growth in our retail loan book

§ Retail Banking client deposits increased to GEL 3,479.9mln at 30 June 2018, up 33.2% y-o-y and up 5.3% q-o-q. Growth on a constant-currency basis was 31.5% y-o-y and 4.2% q-o-q

§ Corporate Investment Banking ("CIB") continued further growth in 1H18 after delivering on its risk de-concentration and loan portfolio repositioning targets in 2017. CIB's net loan book amounted to GEL 2,251.8mln at 30 June 2018, up 8.9% y-o-y and flat q-o-q on constant currency basis. The top 10 CIB client concentration was 10.2% at the end of 2Q18, down from 11.1% at 30 June 2017 and 10.3% at 31 March 2018

§ Investment Management's Assets Under Management ("AUM") increased to GEL 1,993.9mln in 2Q18, up 19.7% y-o-y and up 8.6% q-o-q, reflecting higher bond issuance activity and servicing Georgia Capital by our brokerage arm Galt & Taggart

§ De-dollarisation of the loan book and clients deposits continued. Loan book in local currency accounted for 41.7% of the total book at 30 June 2018, compared to 36.8% a year ago and 41.3% in the previous quarter. The dollarisation of our loan book has decreased since last year as the demand for local currency denominated loans was stronger than the demand for foreign currency denominated loans, supported by the Government's de-dollarisation initiatives implemented at the beginning of last year and our goal to increase the share of local currency loans in our portfolio. Client deposits in local currency represented 37.9% of the total deposit portfolio at 30 June 2018, compared to 26.0% at 30 June 2017 and 33.8% at 31 March 2018

§ Bank of Georgia continued to attract local currency funding to further support the increased demand on the local currency lending and the de-dollarisation of its loan book. In 1H18, the Bank raised GEL 25mln financing with maturity of up to three years from a Swiss investment company Symbiotics to finance the Bank's micro, small and medium sized enterprises. Moreover, the Bank once again co-operated with Black Sea Trade and Development Bank and secured GEL 75mln, with tranches up to five years duration, to finance the Bank's SME lending. Finally, the Bank secured GEL 160mln local currency financing with maturity of five years from Nederlandse Financierings - Maatschappij Voor Ontwikkelingslanden N.V. (FMO) in July 2018

§ Amendment to the current corporate taxation model. On 12 June 2018, an amendment to the current corporate taxation model applicable to financial institutions, including banks and insurance businesses became effective. The change implies a zero corporate tax rate on retained earnings and a 15% corporate tax rate on distributed earnings starting from 1 January 2023, instead of 1 January 2019 as previously enacted in 2016. The change had an immediate impact on deferred tax asset and deferred tax liability balances attributable to previously recognised temporary differences arising from prior periods. The Group re-measured its deferred tax balances at 30 June 2018 and recognised a GEL 30.3mln one-off deferred income tax expense in 2Q18. This impact is a reversal of the one-off deferred tax gain recognised by the Group in 2016

CHIEF EXECUTIVE OFFICER'S STATEMENT

I am delighted that the Bank of Georgia Group has continued to perform strongly throughout the first half of 2018, at a time when the Group, on 29 May 2018, completed the demerger of Bank of Georgia Group PLC's Investment Business to Georgia Capital PLC. The Group is now a banking business at its core, and throughout the demerger process the Banking Business has continued on its recent strong growth, high return trajectory whilst also continuing to significantly improve asset quality in the lending portfolios.

This performance has been supported by strong economic growth in Georgia, with real GDP growth in the first half of the year an estimated 5.7%. Business confidence remains strong, exports continue to grow rapidly and tourist inflows were at unparalleled levels during the first half. Annual inflation is currently running at around 2.2%, and is expected to remain close to the National Bank of Georgia's 3% target for the year. In addition, the foreign exchange market has remained stable during the period and the Georgian Lari appreciated 5.4% against the US Dollar during the first half.

At the consolidated Bank of Georgia Group PLC level, profit during the half year totalled GEL 257.8 million, an increase of 11% on the first half of 2017. This number was however impacted by a number of one-off items, largely related to the demerger process, but also reflecting a change to the Georgian corporate taxation model. These items are discussed in more detail in the "Bank of Georgia Group Highlights" section of this report. Focusing on the core Banking Business, profit before non-recurring items and income tax totalled GEL 231.2 million during the first half of 2018, an increase of 28%. On the same basis, profit in the second quarter of 2018 totalled GEL 120.0 million, an increase of 31% year-on-year, and 8% quarter-on-quarter.

The Banking Business delivered a strong result in the second quarter, with an adjusted return on equity of 25.2%. The loan book grew 23% year-on-year, and 4% during the quarter, reflecting continued strong growth in Retail Banking, where the mortgage portfolio has increased by 50% over the last 12 months, and our renewed focus in corporate lending, which is now delivering high quality lending growth following the completion of our three year programme to reduce concentration risk at the end of last year. Whilst individual product loan yields have continued to remain stable, the banking sector's increasing focus on lending to finer margin corporate and SME clients, and in the mortgage sector, has led to a negative mix effect on the net interest margin, which was reduced by 10 basis points quarter on quarter to 6.9%. This shift in product mix, which we expect to continue, improves our asset quality metrics and we have seen stability in our net interest margin net of credit costs. Costs remain well controlled, and the Banking Business delivered positive operating leverage whilst continuing to invest in our strong customer franchise.

The Retail Banking customer franchise continues to grow strongly in all segments and delivered record quarterly net interest income of GEL 138.2 million in 2Q18. The Retail Banking product to client ratio increased to 2.2, compared to 2.0 in the first half of last year. This has been supported by increased penetration of our digital offers and the significantly increased use of our mobile banking application - mBank. In addition, we are firmly on track to deliver our targeted 40,000 Solo clients by the end of 2018, with over 39,000 clients already benefiting from Solo's concierge-style banking proposition.

Asset quality continues to improve significantly. The annualised cost of risk ratio in the first half of 2018 was 1.9%, and in the second quarter was 1.7%, now below our medium-term cost of risk expectations. This was achieved at the same time as improving other asset quality metrics, with non-performing lending reducing by 19% over the last twelve months, and the NPL Coverage ratio improving from 90% to 111% over the same period. The NPLs to Gross Loans ratio has also reduced significantly, from 4.4% to 3.0%, over the last 12 months.

The Bank's capital and funding position remains strong. The National Bank of Georgia transitioned to Basel III standards, and introduced new capital adequacy requirements in December 2017 and on the new basis, the NBG (Basel III) Total capital and Tier 1 capital adequacy ratios were 17.5% and 12.5%, respectively, at the end of the first half, significantly in excess of the Bank's minimum capital requirements. Bank of Georgia continues to have strong capital and liquidity ratios and high levels of internal capital generation.

Over the last few months, the National Bank of Georgia has been working with banking sector participants to create a greater focus on lending to corporate and SME clients, and in the mortgage sector as opposed to the unsecured consumer sector. In May 2018, NBG introduced temporary limits on retail loans disbursed with no formal proof of income whilst consultations with commercial banks take place towards the introduction of Retail Lending Guidelines, expected in early 2019. As a result of these policy changes, we anticipate growth rates in the unsecured consumer sector to moderate, while expecting continued solid growth in mortgage and SME lending. Overall, our expectations for the full year customer lending growth of 15-20% remain unchanged.

There are currently a number of macroeconomic and currency pressures affecting some of Georgia's trading partners, particularly Turkey. Georgia has a well-diversified economy and has no significant reliance on any single country or sector to drive its expected macroeconomic growth over the next few years. During 2017, Georgia's exposure to Turkey accounted for only 6.1% of GDP, through a combination of remittances, FDI, exports and tourist arrivals. The exchange rate of the Georgian Lari to the US Dollar has weakened slightly during the last month, but only to levels seen during the beginning of the year. We are currently expecting the GEL USD exchange rate to be approximately 2.70 at the end of the year. The Bank to date has not seen any impact of the regional economic turbulence on its asset quality performance or expectations, but we continue to closely monitor developments in Turkey, including spillover effects, if any, on the Georgian economy. The Bank has no material direct exposure to Turkey, while the indirect exposure is limited to GEL 180.6 million tender, performance and advance guarantees, related to road construction projects in Georgia that are cash funded by the Georgian Government and operated by Turkish contractors.

Georgia's macroeconomic growth drivers are robust, and we expect this trend to continue - supported by the Georgian Government's ongoing growth-oriented reform programme, and prudent economic and monetary policies. Bank of Georgia is well positioned to capitalise on this growth and continue to deliver solid franchise growth, strong operational and capital efficiency, and superior returns to shareholders into the second half of 2018 and over the medium-term.

Kaha Kiknavelidze,

CEO, Bank of Georgia Group PLC

15 August 2018

FINANCIAL SUMMARY

7 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

8 2Q18 and 1H18 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 5 and 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 2Q18 and 1H18 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 5 and 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 252.5mln in 2Q18 (up 19.1% y-o-y and up 6.8% q-o-q), ending the half year 2018 with revenue of GEL 488.9mln (up 14.8% y-o-y). Y-o-y revenue growth was primarily driven by an increase in net interest income, which resulted from strong loan book growth. Additionally, net fee and commission income, net foreign currency gain, and net other income increased strongly in 2Q18 - all contributing to growth in revenues

§ Net interest income. Net interest income was up 16.2% y-o-y and up 3.4% q-o-q in 2Q18 and was up 14.1% y-o-y in half year 2018. The y-o-y increase was primarily driven by the strong growth of our Retail Banking loan book, which experienced 28.5% y-o-y growth on constant currency basis

§ Our NIM was 6.9% in 2Q18 and 7.0% in 1H18. 2Q18 NIM was down 40bps y-o-y due to the 30bps y-o-y decrease in loan yield, largely reflecting our shift towards a higher quality, finer margin product mix and tighter lending conditions for unsecured consumer lending, and 20bps y-o-y increase in cost of funds. On a q-o-q basis, loan yield increased by 10bps, while cost of funds also increased by 20bps, resulting in 10bps decline in 2Q18 NIM q-o-q. On a half year basis, loan yield was down 20bps and cost of funds was up 20bps y-o-y, driving 30bps y-o-y decline in 1H18 NIM

§ Loan yield. Currency blended loan yield was 14.0% in 2Q18 (down 30bps y-o-y and up 10bps q-o-q) and was 13.9% during first half of 2018 (down 20bps y-o-y). The y-o-y decline in loan yield was attributable to decrease in both local and foreign currency loan yields, primarily reflecting the change in product mix in the loan portfolio. At the same time the overall loan yield was positively impacted by a continued shift towards high-yielding local currency denominated loans in the total loan portfolio mix

§ Liquid assets yield. Our liquid assets yield was 3.8% in 2Q18 (up 40bps y-o-y and up 20bps q-o-q) and 3.7% 1H18 (up 40bps y-o-y). The foreign currency denominated liquid assets yield increased by 60bps y-o-y and 30bps q-o-q in 2Q18 and increased by 50bps y-o-y in 1H18, as a result of 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. This increase was partially offset by decline in local currency denominated liquid assets yield, which decreased by 10bps y-o-y and remained flat q-o-q in 2Q18 and decreased by 30bps y-o-y in 1H18. However, starting from 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)

§ Cost of funds. Cost of funds stood at 5.0% in 2Q18 (up 20bps y-o-y and q-o-q) and at 4.9% in 1H18 (up 20bps y-o-y). Y-o-y increase both in 2Q18 and 1H18 was primarily driven by increase in cost of debt securities issued following the issuance of GEL 500mln 11.0% Lari denominated notes in 2Q17 (up 60bps y-o-y in 2Q18 and up 130bps y-o-y in 1H18), coupled with increase in cost of amount due to credit institutions (up 60bps y-o-y in 2Q18 and 1H18) as a result of increased local currency denominated borrowings from DFIs and increase in Libor rate during the period. On a quarterly basis, the cost of funds increase in 2Q18 was largely driven by an increase in the cost of client deposits and notes (up 20bps q-o-q in 2Q18) attributable to significant growth in local currency deposits, both in corporate and retail segments, as well as 30bps q-o-q increase in cost of amount due to credit institutions

§ Shift to the GEL denominated loan book and client deposits continued both in Retail Banking and Corporate Investment Banking. Retail client loan book in foreign currency accounted for 45.8% of the total RB loan book at 30 June 2018 (50.8% at 30 June 2017 and 46.0% at 31 March 2018), while retail client foreign currency deposits comprised 70.6% of total RB deposits at 30 June 2018 (71.4% at 30 June 2017 and 71.0% at 31 March 2018). At 30 June 2018, 80.2% of CIB's loan book was denominated in foreign currency (80.8% at 30 June 2017 and 80.7% at 31 March 2018), while 50.7% of CIB deposits were denominated in foreign currency (72.8% at 30 June 2017 and 60.2% at 31 March 2018)

§ 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 96.9% (down from 97.6% at 30 June 2017 and up from 91.8% at 31 March 2018)

§ Net fee and commission income. Net fee and commission income reached GEL 37.8mln in 2Q18 (up 20.5% y-o-y and up 9.7% q-o-q) and GEL 72.4mln during first half 2018 (up 17.5% y-o-y). The growth was mainly driven by the strong performance in our settlement operations supported by the success of our Express banking franchise

§ Net foreign currency gain. Net foreign currency gain was GEL 24.6mln in 2Q18 (up 27.5% y-o-y and up 53.5% q-o-q) and GEL 40.6mln during first half of 2018 (up 4.1% y-o-y)

§ Net other income. Net other income increased to GEL 3.7mln in 2Q18 and GEL 9.5mln during first half of 2018, largely driven by net gains from derivative financial instruments recorded in 2Q18 and 1H18, partially offset by net losses from sale of property, plant and equipment and investment properties over the same periods

§ Operating expenses increased to GEL 93.1mln in 2Q18 (up 15.3% y-o-y and up 6.6% q-o-q) and to GEL 180.5mln during first half of 2018 (up 14.4% y-o-y). The growth in revenues outpaced the growth in operating expenses both during 2Q18 and 1H18, leading to positive operating leverage during 1H18. Increase in salaries and employee benefits in 2Q18 and 1H18 mainly reflected the strong organic growth of Retail Banking operations. At the same time, 20.5% and 17.2% y-o-y increase in administrative expenses in 2Q18 and 1H18, respectively, was primarily driven by increased personnel training costs and legal and other professional services expenses

§ Cost of risk ratio. The cost of risk ratio was 1.7% in 2Q18, down 50bps y-o-y and down 40bps q-o-q. RB's 2Q18 cost of risk ratio was down 90bps y-o-y and down 40bps q-o-q, while CIB's cost of risk ratio was up 10bps y-o-y and down 70bps q-o-q. On a half year basis, Banking Business cost of risk ratio was 1.9% in 1H18, down 40bps y-o-y, primarily driven by 80bps y-o-y improvement in RB's cost of risk ratio, partially offset by 60bps y-o-y increase in CIB's cost of risk ratio

§ Quality of our loan book remains strong in 2Q18 as evidenced by following closely monitored metrics:

§ BNB - the Group's banking subsidiary in Belarus - generated a profit of GEL 2.0mln in 2Q18 (down 11.2% y-o-y and down 12.3% q-o-q) and GEL 4.3mln during first half of 2018 (up 46.8% y-o-y); BNB's earnings were positively impacted by decreased levels of cost of credit risk in 2Q18 and 1H18 y-o-y. While Belarus experienced weak macro-economic conditions in 2016 and 1Q17, the economy started to show signs of stabilisation during 2017. As a result, BNB's cost of credit risk significantly improved and was down 28.9% y-o-y in 2Q18 and down 65.9% y-o-y in 1H18

§ BNB's loan book reached GEL 394.5mln at 30 June 2018, up 6.7% y-o-y and up 4.5% q-o-q, mostly reflecting an increase in corporate and consumer loans. Client deposits were GEL 297.8mln at 30 June 2018, up 12.9% y-o-y and up 3.3% q-o-q. The y-o-y increase was primarily attributable to the agreement signed with BelSwissBank in June 2017, which allowed BNB to manage and service current and term deposit accounts and card operations of BelSwissBank's customers

§ BNB continues to remain strongly capitalised, with Capital Adequacy Ratios well above the requirements of its regulating Central Bank. At 30 June 2018, total CAR was 14.6%, above the 10% minimum requirement of the National Bank of the Republic of Belarus ("NBRB"), while Tier I CAR was 9.6%, above NBRB's 6% minimum requirement. Return on Average Equity ("ROAE") was 10.8% in 2Q18 (13.3% in 2Q17 and 12.3% in 1Q18) and 11.5% in 1H18 (8.7% in 1H17). Strong capitalisation and improved profitability allowed BNB to distribute 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 120.0mln in 2Q18 (up 31.0% y-o-y and up 7.9% q-o-q) and GEL 231.2mln during first half of 2018 (up 27.8% y-o-y), while ROAE adjusted for demerger related expenses and one-off impact of re-measurement of deferred tax balances, increased to 25.2% in 2Q18 (24.1% in 2Q17 and 25.9% in 1Q18) and 25.5% in 1H18 (23.9% in 1H17)

§ Net non-recurring items. Net non-recurring expenses amounted to GEL 44.0mln in 2Q18 (GEL 1.0mln in 2Q17 and GEL 2.9mln in 1Q18) primarily comprising of GEL 30.3mln of demerger related costs and GEL 13.5mln spending on a CSR project to support the fiber-optic broadband infrastructure development in rural Georgia, which will provide all regions across the country with full access to high speed internet and will contribute to further development of the economy and education

§ Income tax expense. Income tax expense amounted to GEL 27.5mln in 2Q18 (GEL3.3mln in 2Q17 and GEL 9.1mln in 1Q18) and GEL 36.6mln during first half of 2018 (GEL 7.7mln in 1H17). The significant increase in income tax expense both in 2Q18 and 1H18 was primarily driven by recognition of one-off impact of re-measurement of deferred tax balances in the amount of GEL 30.3mln as a result of amendment to the current corporate taxation model applicable to financial institutions in June 2018 (see details on page 5), partially offset by GEL 8.0mln demerger related corporate income tax gain

Our balance sheet remains highly liquid (NBG Liquidity ratio of 30.2%) and strongly capitalised (NBG Basel III Tier I ratio of 12.5%) with a well-diversified funding base (Client Deposits and notes to Total Liabilities of 62.0%).

§ Liquidity. Liquid assets increased to GEL 4,266.4mln at 30 June 2018, up 13.0% y-o-y and slightly down 5.5% 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 pushdown of $350mln Eurobonds of JSC BGEO Group in March 2018. Management successfully continued to deploy excess liquidity, accumulated as a result of these proceeds. The NBG average liquidity ratio was 30.2% for June 2018 (44.1% in June 2017 and 36.5% in March 2018), above the regulatory minimum requirement of 30.0%. That said, NBG liquidity ratio stood at 38.2% at 30 June 2018. At the same time, Liquidity coverage ratio was 129.8% at 30 June 2018 (135.2% at 31 March 2018), well above the 100% minimum requirement level

§ Diversified funding base. Debt securities issued grew by 16.3% y-o-y and decreased by 2.7% q-o-q. The y-o-y increase was driven by the above mentioned pushdown of $350mln Eurobonds from JSC BGEO Group in March 2018

§ Loan book. Our net loan book and finance lease receivables reached GEL 8,078.1mln at 30 June 2018, up 22.8% y-o-y and up 3.7% q-o-q. As of 30 June 2018, retail book represented 70.1% of the total loan portfolio (66.1% at 30 June 2017 and 69.3% at 31 March 2018). While both local and foreign currency portfolios experienced y-o-y growth, the local currency loan portfolio demonstrated a solid increase of 39.1% y-o-y and 4.8% q-o-q, partially driven by the Government's de-dollarisation initiatives and our goal to increase the share of local currency loans in our portfolio

§ Capital Adequacy requirements. Basel III Tier 1 and Total Capital Adequacy ratios stood at 12.5% and 17.5%, respectively, as of 30 June 2018, as compared to minimum required level of 9.9% and 15.0%, respectively (12.4% and 17.3%, respectively, at 31 March 2018)

§ Digitalisation. We actively continue the further development of our digital channels by introducing new features to both our mobile banking application and our internet bank on a quarterly basis. At the same time, we are introducing dedicated digital space in our branches to increase client penetration and incentivise offloading to digital channels. For details on digital penetration growth refer to page 16 of this announcement

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 itself 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).