Bank Of Georgia Group Regulatory News (BGEO)

BGEO Group PLC

2nd quarter and half-year 2017 results

www.bgeo.com

About BGEO Group

The Group: BGEO Group PLC ("BGEO"- LSE: BGEO LN) is a UK incorporated holding company of a Georgia-focused investment platform. BGEO invests, via its subsidiaries, in the banking and non-banking sectors in Georgia (BGEO and its subsidiaries, together the "Group"). BGEO aims to deliver on a 4x20 strategy: (1) at least 20% ROAE from its Banking Business; (2) at least 20% growth of its Banking Business retail loan book; (3) at least 20% IRR; and (4) up to 20% of the Group's profit from its Investment Business. On 3 July 2017 BGEO announced its intention to demerge BGEO Group PLC into a London-listed banking business (the "Banking Business") and a London-listed investment business (the "Investment Business") by the end of the first half of 2018.

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

The Investment Business, currently representing up to 20% of the Group's profit, will comprise the Group's stakes in Georgia Healthcare Group PLC ("Healthcare Business" or "GHG") - an LSE (London Stock Exchange PLC) premium-listed company, Georgia Global Utilities ("Utility and Energy Business" or "GGU"), m2 Real Estate ("Real Estate Business" or "m2") and Teliani Valley ("Beverage Business" or "Teliani"). In addition, Aldagi, which is the Group's property and casualty insurance business, is expected to be transferred from the Banking Business to the Investment Business. As a result, the Group's 2Q17 and HY17 results, including the comparative information, are prepared in light of the expected transfer and therefore, Aldagi is presented under the Investment Business results. Georgia's fast-growing economy provides opportunities in a number of underdeveloped local markets and the Investment Business will target to capture growth opportunities in the Georgian corporate sector.

COMPANY INFORMATION

BGEO Group PLC

Registered Address

84 Brook Street

London W1K 5EH

United Kingdom

www.BGEO.com

Registered under number 7811410 in England and Wales

Incorporation date: 14 October 2011

Stock Listing

London Stock Exchange PLC's Main Market for listed securities

Ticker: "BGEO.LN"

Contact Information

BGEO Group PLC Investor Relations

Telephone: +44(0)2031784052; +995322444190

E-mail: ir@BGEO.com

Auditors

Ernst & Young LLP

25 Churchill Place

Canary Wharf

London E14 5EY

United Kingdom

Registrar

Computershare Investor Services PLC

The Pavilions

Bridgewater Road

Bristol BS13 8AE

United Kingdom

Please note that Investor Centre is a free, secure online service run by our Registrar, Computershare, giving you convenient access to information on your shareholdings. Investor Centre Web Address - www.investorcentre.co.uk. Investor Centre Shareholder Helpline - +44 (0)370 873 5866

Share price information

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

Name of authorised official of issuer responsible for making notification: Giorgi Alpaidze, Head of Finance, Funding and Investor Relations

CONTENT

BGEO Group PLC announces the Group's second quarter 2017 and first half 2017 consolidated results. Unless otherwise noted, numbers are for 2Q17 and comparisons are with the 2Q16. The results are based on International Financial Reporting Standards ("IFRS") as adopted by the European Union, are unaudited and derived from management accounts.

BGEO HIGHLIGHTS

Strong results driven by improving macroeconomic environment and continued outstanding execution

Continued rebound in economic activity during 2Q17 and HY17. The Georgian economy gained traction in 1H17, growing by 4.5% as external demand stabilized and government initiatives strengthened consumer demand and business confidence. In 1H17, the combination of goods export growth, robust tourist arrivals, recovery in remittances and modest increase in imports improved the current account deficit and stabilized the currency. The GEL strengthened 1.6% during 2Q17, adding to the 7.6% appreciation during 1Q17 and reflecting favourable external conditions and the related uptick in growth. The National Bank of Georgia intervened with close to $90mln purchases in 1H17 to curb the GEL's appreciation pressure.

Inaugural local currency denominated international bond issuance by Bank of Georgia. On 24 May 2017, JSC Bank of Georgia priced GEL 500mln 11.0% notes due 2020 (the "Issuance"). The Issuance, described as a landmark transaction for Georgia, was the first international local currency bond offering from the wider CIS region (excluding Russia) in the past ten years.

As of 14 August 2017, GEL 255mln liquid assets were held at the holding company level, of which, GEL 218mln was unallocated and GEL 37mln was pledged as collateral for borrowings from local financial institutions.

Monetisation of GHG value on track. On 17 May 2017, we sold 9.5mln GHG shares (the "Sale"), representing approximately 7.2% of GHG's existing ordinary issued share capital, at a price of 330 pence per share. As a result of the Sale, the Group received total gross proceeds of GEL 98.0mln (US$ 40.4mln/GBP 31.4mln) and realized a gain of GEL 63.4mln (US$26.1mln), which was recorded through an increase in shareholders' equity in 2Q17. Following the Sale, we continue to hold 75,118,503 shares in GHG, or 57.0% of GHG's issued share capital.

$2.6 million capital returned to shareholders through buyback and cancellation programme during 2Q17. As of 30 June 2017, we have repurchased and cancelled 88,000 shares for a total consideration of $3.8mln since the commencement of the programme. An additional $6mln capital was returned through management trust buybacks in 2Q17.

1 As of 30 June 2017 loans and finance lease receivables growth on a constant currency basis was 17.4% and 2.7% on y-o-y and q-o-q basis, respectively

2 As of 30 June 2017 client deposits and notes growth on a constant currency basis was 15.7% and 2.3% on y-o-y and q-o-q basis, respectively

BANKING BUSINESS HIGHLIGHTS

Sustainable profit and balance sheet growth as loan book continues to shift to retail segment

§ Retail Banking ("RB") delivered strong growth across all its business lines. Retail Banking revenue reached GEL 141.8mln in 2Q17, up 25.6% y-o-y and up 0.4% q-o-q, with half year revenue totalling GEL 283.0mln, up 29.1% y-o-y. The number of Retail Banking clients reached 2.2mln at the end of 2Q17, up 9.4% from 2.0mln at the end of 2Q16 and up by 2.0% from 1Q17

§ Retail Banking achieved a new milestone as the retail loan book's share in the total portfolio reached 66% for the first time in the Bank's history and was above our target of 65% at 30 June 2017, two years ahead of time. The Retail Banking net loan book reached GEL 4,155.3mln at 30 June 2017, up 34.1% y-o-y and up 6.8% q-o-q. The growth on a constant-currency basis was 32.3% y-o-y, well above our strategic target of 20%+, and 7.6% q-o-q. RB's loan portfolio share reached 66.1% at 30 June 2017 (59.0% at 30 June 2016 and 62.6% at 31 March 2017)

§ Retail Banking client deposits increased to GEL 2,613.3mln at 30 June 2017, up 32.2% y-o-y and up 9.2% q-o-q. Growth on a constant-currency basis was 29.6% y-o-y and 10.4% q-o-q

§ New loyalty program Plus+ launched on 5 July 2017. Plus+ is part of RB's customer-centric approach and offers different status levels to customers and reward points that accumulate based on the client's business with the Bank and can be redeemed into partner companies' products and/or services, at client's request. We launched the program as part of our efforts to increase the Mass Retail segment's product to client ratio from 1.7 to 3.0

§ Solo - our premium banking brand - continues its strong growth momentum. As of 30 June 2017, the number of Solo clients reached 24,984, up 67.7% from 14,896 a year ago and up 15.4% from 21,657 at 31 March 2017. We are well on track to achieve our target of 40,000 Solo clients by the end of 2018. During 2Q17 we also launched Solo Club, a membership group within Solo, which offers exclusive access to Solo's products and offers ahead of other Solo clients at a higher fee. This includes American Express Platinum cards, which were also launched during 2Q17 and are available to Solo Club members only. At 30 June 2017, Solo Club had 944 members

§ Solo continues to invest in its lifestyle brand and hosted several exclusive events. Solo announced in 2Q17 that it will be organizing Sir Elton John's concert at Black Sea Arena, a brand new indoor arena located in western Georgia with the total capacity of over 9,000 people. The announcement was met with strong demand resulting in all tickets being sold out in less than two hours after the launch. As a result, Solo agreed an additional concert with Sir Elton John for the following day. Tickets for the second concert were also quickly sold out

§ Our Retail Banking product to client ratio remained at 2.0 in 2Q17, flat y-o-y and q-o-q. We continued the transformation of our retail banking operations from the product-based model into the client-centric model. We completed the implementation of the client-centric model in 38 branches as of 30 June 2017 and currently have twelve additional branches in pipeline. We continue to see outstanding growth in sales volumes and the number of products sold to our clients in transformed branches, contributing to 34.1% y-o-y growth in retail loan book

§ Continued investment in digital penetration growth. Bank of Georgia launched a new fully-transformed, user-friendly, multi-feature mobile banking application in May 2017. The new application allows customers to get instant access to online banking services, including balance checking, fund transfers, bill payments, top-up mobile phone balance, and etc. The new mobile banking application received very positive reception. Since its launch on 29 May 2017, and over the course of the following two months, approximately 141,000 downloads were made by the Bank's customers, while the previous application had less than 120,000 downloads since its launch. 755,000 online transactions were performed during the same period using the new application

§ Bank of Georgia won the exclusive right to operate the public transportation payment system in Tbilisi. In July 2017, Bank of Georgia won an auction, organised by Tbilisi City Hall, for the modernisation of the public transportation payment system in Tbilisi, Georgia. The Bank had a similar 10 year contract since 2007 and as a result of the win, Bank of Georgia will continue as the sole provider of payment support services to the public transportation network, and operate mass retail branches in Tbilisi metro (i.e. subway) stations for the next ten years. Bank of Georgia will pay a total consideration of GEL 22.2mln and, as part of the auction mandate, implement a modern payment system for public transportation network in Tbilisi, including payment processing using Visa and MasterCard cards, and create a digital platform for ticket reservations and purchases through mobile applications

§ Corporate Investment Banking's ("CIB") net loan book amounted to GEL 2,037.8mln at 30 June 2017, down 1.3% y-o-y, and down 8.5% q-o-q. On a constant-currency basis, the loan portfolio was down 3.5% y-o-y and down 7.3% q-o-q. Reductions were mainly related to winding down of the corporate banking relationship with two large borrowers together with CIB's risk deconcentration strategy. The top 10 CIB client exposure was reduced to 11.1% at the end of 2Q17, down from 11.3% at 30 June 2016 and at 31 March 2017. However, this deconcentration resulted in a decreased cost of risk, which positively impacted the CIB's ROAE, reaching 20.0% in 2Q17 (2Q16:17.2% and 1Q17: 18.3%) and 19.1% in 1H17 (1H16: 17.4%)

§ Investment Management's Assets Under Management ("AUM") increased to GEL 1,682.9mln, up 29.3% y-o-y and up 7.3% q-o-q, reflecting higher bond issuance activity by our brokerage arm Galt & Taggart

INVESMENT BUSINESS HIGHLIGHTS

Our healthcare business, GHG, continued to deliver strong revenue performance across healthcare services and pharmacy businesses, while the medical insurance business continued to refocus on more profitable clients.

§ GHG recorded net revenue of GEL 183.9mln (up 82.2% y-o-y and flat q-o-q) and GEL 369.8mln (up 113.6% y-o-y) during 2Q17 and 1H17, respectively. During 2Q17, GHG achieved further diversification of its revenues, whereby the total net revenue mix was 34%, 59% and 7% from the healthcare services business, the pharmacy business and the medical insurance business, respectively

§ GHG delivered EBITDA of GEL 26.1mln (up 54.6% y-o-y and up 4.1% q-o-q) and GEL 51.2mln (up 50.4% y-o-y) during 2Q17 and 1H17, respectively. The y-o-y growth was primarily driven by GHG's expansion into the Pharmacy business, which resulted in GHG becoming the number one player in the pharmacy market, similar to GHG's position in the healthcare services market

§ GHG reported profit before income tax of GEL 11.3mln (up 79.8% y-o-y and down 13.5% q-o-q) and GEL 24.3mln (up 44.9% y-o-y) during 2Q17 and 1H17, respectively

Our real estate business, m2, continued its strong residential project execution and development of portfolio of yielding assets. In 2Q17, m2 achieved sales of US$ 7.6mln, selling a total of 90 apartments, compared to US$ 8.8mln sales and 104 apartments sold in 2Q16. In 2Q17, m2 recognised net revenue of GEL 22.9mln3 (GEL 1.1mln in 2Q16 (see footnote 3 below for y-o-y difference in revenue recognition) and GEL 2.6mln in 1Q17) and delivered a net profit of GEL 21.6mln (GEL 0.2mln in 2Q16 and GEL 0.6mln in 1Q17). In 1H17, m2 recognised revenue of GEL 25.5mln (GEL 7.7mln in 1H16) and achieved a net profit of GEL 22.2mln (GEL 4.8mln in 1H16). The significant y-o-y and q-o-q increase in revenue and profit in 2Q17 was attributable to the GEL 21.3mln gain from revaluation of investment property (refer to the m2 segment discussion below for more details).

Our utility and energy business, GGU, delivered a strong revenue and cost-efficiency performance in 1H17 and achieved revenue of GEL 60.6mln (up 6.7% y-o-y), EBITDA of GEL 30.1mln (up 13.0% y-o-y) and profit of GEL 13.8mln (up 28.5% y-o-y)4.

Our property and casualty insurance business, Aldagi, delivered a strong performance and achieved net underwriting profit of GEL 7.2mln in 2Q17 (up 6.1% y-o-y and up 1.4% q-o-q) and GEL 14.3mln in 1H17 (up 15.0% y-o-y), EBITDA of GEL 4.3mln in 2Q17 (flat y-o-y and q-o-q) and GEL 8.6mln in 1H17 (up 15.2% y-o-y), and net profit of GEL 3.8mln in 2Q17 (up 29.9% y-o-y and up 2.4% q-o-q) and GEL 7.6mln in 1H17 (up 25.6% y-o-y).

Our beverages business, Teliani, achieved a significant milestone and launched its first mainstream beer production in June 2017 and is on track to accelerate its expansion into all of its three main segments. The newly launched beer, Icy, was well-received by the local market and continues to gain popularity and market share during the early days of its existence, achieving 16% market share by the end of July. Teliani is on track to brew Heineken in the first quarter of 2018 under a ten-year exclusive licence agreement to produce Heineken brands in Georgia and to sell in Caucasus region countries.

§ Teliani has continued to expand its product portfolio, with the noteworthy addition of the exclusive right to import and distribute Lavazza coffee in Georgia, and winning other non-alcoholic beverage distribution contracts to further diversify its distribution portfolio

4 Since BGEO owned 25% of GGU’s equity stake until July 2016, we reported our share of GGU’s profits under “profit from associates” in our income statement during this period. We started consolidating GGU’s financial results from 21 July 2016, when we completed the acquisition of the remaining 75% equity stake in GGU, as part of our Investment Business and included it in the segment results discussion as a separate business

CHIEF EXECUTIVE OFFICER'S STATEMENT

I am pleased that all of the Group's businesses have continued to perform strongly throughout the first half of 2017, supported by the robust and improving period of economic growth in the country. The Group's profit of GEL 231.8 million in the first half of the year increased by 16.9% compared to the first half of 2016 which also benefited from a number of one-off items. Excluding the impact of these net non-recurring items, profit before tax increased by 29.7%, reflecting 14.8% growth in the Banking Business and 100.4% growth in the Investment Business.

In the Banking Business half year profit before non-recurring items and income tax grew by 14.8% year-on-year supported, in particular by excellent franchise growth in the retail bank, which led to net interest income increasing by 24.4%. Margins have remained broadly stable, despite the continuing impact of high levels of excess liquidity and the issuance in May 2017 of the GEL 500 million Eurobond, as a greater share of retail loans in the total loan portfolio supported higher blended loan yield in the second quarter of 2017. The Return on Average Equity in the banking business was 23.4% for the first half of the year, compared to 21.4% in the first half of 2016. There was an even stronger performance in the Group's investment businesses where both EBITDA and profit before non-recurring items and income tax more than doubled in the first half.

From a macroeconomic perspective Georgia has delivered strong growth, estimated at 4.5% during the first half of 2017, with inflation remaining well contained excluding one-off factors. In addition, during the first half of the year, the Lari has remained strong against the US dollar, appreciating by 9.1%, 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, by over 30% in the first seven months of 2017. The National Bank of Georgia has continued to buy US dollars on a regular basis to mitigate further appreciation of the Lari. During the first half of the year they bought approximately $90 million and Georgia's US dollar reserves of $3.0 billion at 30 June 2017 increased to their highest level since 2013.

Turning to the business, at the BGEO Group level, half year revenue growth was 43.2% year-on-year, supported by a combination of strong organic growth and a number of acquisitions in the Investment Business. The Banking business delivered revenue growth of 19.8% as Retail banking net interest income increased by 33.9%, reflecting continued strong franchise and customer lending growth, and this offset the expected decline in the corporate loan portfolio as we wound down the corporate banking relationship with two significant corporate borrowers. We have now achieved our targeted rebalancing of the retail/corporate business mix to further improve the return profile of the Bank and reduce concentration risk in the corporate lending portfolio. Retail Banking now represents 66% of our customer lending and Corporate Banking represents 34%, and the rebalancing of our portfolio and the deconcentration of corporate risk targets have been achieved, with the Banking Business delivering a 23.5% return on average equity in the second quarter of 2017.

In addition to the strong retail lending growth, the Retail Bank made strong progress in building out its customer centric approach with the launch in July 2017 of its new loyalty reward program, Plus+ and continued its investment in digital penetration growth. In July 2017, we won the exclusive right to modernise the public transportation payment system in Tbilisi and continue as the sole provider of the Tbilisi Metro's payment support systems for the next ten years. In addition, Solo, our premium banking brand, has continued to deliver strong momentum, with customer numbers increasing to nearly 25,000, up 15.4% during the last quarter and up 67.7% over the last twelve months.

The strength of the Georgian economy has supported asset quality during the first half of the year, which has remained reasonably robust and in line with our expectations for a cost of risk ratio of c2.0% through the economic cycle. The annualised cost of risk ratio in 2Q17 was 2.2%, compared to 2.4% in 1Q17. In addition, we have started to achieve a reduction in the ratio of NPL's to Gross Loans, which fell from 4.6% in the first quarter of 2017, to 4.4% in the second quarter. Our provisions coverage ratios also continued to rise - from 87.1% at the end of the first quarter of 2017, to 90.2% at the end of the second quarter.

In addition to the strong earnings performance, the Bank's already high returns have further improved and, despite carrying almost GEL 800 million of excess liquidity, the return on average equity increased from 23.1% in the first quarter, to 23.5% in the second quarter, compared to 21.4% in the first half of 2016.

The Group's capital and funding position continues to remain strong, with capital being held both in the regulated banking business and at the holding company level. Within the bank, the NBG (Basel 2/3) Tier 1 Capital Adequacy ratio was 10.6%, 40 basis points higher than last year, partly reflecting the continued de-dollarisation of the Bank's lending portfolio and comfortably ahead of the Bank's minimum capital requirement. From a funding perspective, the Bank's NBG Liquidity ratio was 44.1%, and the Liquidity Coverage Ratio was 187.7%, reflecting the significant excess liquidity held by the Bank. The Bank also completed its first local currency Eurobond in May 2017 raising GEL 500 million which provides a strong Lari funding platform to continue growing the Group's more capital efficient Lari lending portfolios.

Within our Investment Businesses, Georgia Healthcare Group has continued in its significant business roll-out phase in a number of key areas and, in the first half of 2017, made strong progress in integrating its recent Pharmacy acquisitions and delivering key organic growth priorities, such as the Sunstone and Deka hospital redevelopment projects. All this has been achieved whilst adapting to recently implemented changes in Georgia's Universal Healthcare Programme and seeking to develop a more diverse stream of revenues, particularly in the pharmacy and Polyclinic businesses. In the first half of 2017, EBITDA of GEL 51.2 million represented a 50.4% increase half-on-half. In the healthcare services business, the EBITDA margin was 27.5% in the second quarter of 2017, compared to 25.3% in the first quarter of the year, despite the impact of our significant ongoing investment in the launch of the Sunstone and Deka hospital facilities.

GHG remains well positioned to deliver further progress in the second half of 2017 and, in particular, to more than double 2015 healthcare services revenues by 2018, whilst achieving a more than 30% EBITDA margin. In May 2017, the Group sold 9.5 million GHG shares, reducing its stake in GHG by 7.2% to 57.0%, and received gross proceeds of GEL98.0 million to realize a gain on sale of GEL63.4 million, which was recorded as an increase in the Group's shareholders' equity. This sale of GHG shares reflects the first tranche in the Group's strategy to monetise its investment in the business and the proceeds are being utilized towards the Group's previously announced $50 million share buyback and cancellation programme. As a result, GEL 218 million unallocated liquid assets were held at the Group level.

Our water utility and energy business, GGU, continued to focus on improving efficiency and delivered a 6.7% growth in revenues to GEL 60.6 million in the first half, compared to GEL 56.8 million in the first half of 2016. Over the same time period, EBITDA increased by 13.0% to GEL 30.1 million and profit increased by 28.5% to GEL 13.8 million. Our real estate business, m2 Real Estate, continues to demonstrate its strong execution skills and, in the first half of 2017, sold a total of 233 apartments with a total sales value of $17.7 million, in addition to further increasing its portfolio of yielding assets. The business also benefited from a revaluation of three under construction commercial properties in the second quarter of the year and, consequently, booked a profit of GEL 22.2 million for the first half of the year.

Our beverages business, Teliani, achieved a significant milestone in June 2017 when it launched its first mainstream beer, ICY, into the local market. The beer has been well received and is gaining popularity quickly, to support the long-term target of gaining 30% market share in the Georgian market. Our property and casualty insurance business, Aldagi, continues to develop a strong portfolio of new products, and this has supported a 26.4% y-o-y growth in net earned premiums in 2Q17 and Aldagi's position as the clear market leader in the fast-developing Georgian P&C insurance market.

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

Supported by the strength of Georgia's macroeconomic performance, the Group has delivered another half-year of strong business performance, and continued strong returns in both the banking business and the investment businesses which, in the second quarter of 2017, almost tripled profit before tax and non-recurring items, compared to the second quarter of last year. The Group is well positioned to continue to deliver this excellent performance in the second half of 2017 and beyond.

Irakli Gilauri,

Group CEO of BGEO Group PLC

FINANCIAL SUMMARY

5 Banking Business and Investment Business financials do not include inter-business eliminations. Detailed financials, including inter-business eliminations are provided on pages 33, 34 and 35

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 212.0mln in 2Q17 (up 19.5% y-o-y and flat q-o-q), ending the half year 2017 with revenue of GEL 425.8mln (up 19.8% y-o-y). Y-o-y revenue growth both in 2Q17 and half year 2017 was primarily driven by the increase in net banking interest income, which resulted from strong loan book growth, net fee and commission income and net banking foreign currency gain, and was partially offset by decreases in net other banking income

§ Net banking interest income. Our net banking interest income was up 24.5% y-o-y and flat q-o-q in 2Q17 and up 24.4% y-o-y in half year 2017. The y-o-y increase in net banking interest income was primarily driven by strong performance in our Retail Banking operations, supported by modest growth in CIB's net banking interest income

§ Our NIM was 7.3% in 2Q17, within our target range of 7.25% - 7.75%, withstanding some market pressures, particularly in the corporate segment. 2Q17 loan yield and liquid assets yield were up 20bps and 10bps y-o-y, respectively, while cost of funds remained flat y-o-y at 4.8%. However, 2Q17 NIM was down by 20 bps y-o-y as a result of the NBG's decision in 2Q16 mandating an increase in minimum reserve requirements leading to a decreased portion of average net loans and finance lease receivables in total average interest-earning assets (from 76.7% in 2Q16 to 74.2% in 2Q17). On a q-o-q basis, loan yield and liquid assets yield were up 30bps and 10bps, respectively, and cost of funds also increased by 20bps. However, NIM was down by 10bps q-o-q due to an increased portion of average liquid assets in total average interest-earning assets as a result of the increased excess liquidity driven by the proceeds from GEL 500mln Lari denominated bonds in June 2017

§ Loan yield. Currency blended loan yield increased to 14.3% in 2Q17 (up 20bps y-o-y and up 30bps q-o-q). While local and foreign currency loan yields decreased y-o-y and q-o-q, overall growth of loan yield y-o-y and q-o-q reflects continued shift in portfolio mix towards higher return local currency denominated loans. On a half year basis, due to increased competition, the loan yield decreased to 14.1%, or by 20bps y-o-y driven by 70bps and 50bps decline in the local and foreign currency denominated loan yields, respectively. Such decline was partially offset by the increased share of high-yielding local currency denominated loans in the total loan portfolio mix

§ Liquid assets yield. Our liquid assets yield increased to 3.4% (up 10bps y-o-y and q-o-q) in 2Q17 and to 3.3% (up 10bps y-o-y) in 1H17. The foreign currency denominated liquid assets yield increased by 40pbs y-o-y and 20bps q-o-q in 2Q17 and 40 bps y-o-y in 1H17 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

§ Cost of funds. Cost of funds stood at 4.8% in 2Q17 (flat y-o-y and up 20bps q-o-q) and at 4.7% (down 20bps y-o-y) in 1H17. The foreign currency denominated cost of funds decreased by 50bps y-o-y both in 2Q17 and 1H17 and by 10bps q-o-q in 2Q17. While the local currency denominated cost of funds stayed flat y-o-y both in 2Q17 and 1H17, it increased by 30bps q-o-q in 2Q17 as a result of a) an increase in cost of debt securities issued following the issuance of GEL 500mln 11.0% Lari denominated notes in 2Q17, b) an increase in cost of client deposits due to the market competition and c) the increased cost of amounts due to credit institutions as a result of increase in NBG's monetary policy rate

§ De-dollarisation efforts increased the GEL denominated loan book to 36.8% of the total at 30 June 2017, compared to 27.7% a year ago. Dollarisation of our loan book decreased since last year as the demand for local currency denominated loans outpaced the demand for foreign currency denominated loans. The trend was supported by the Georgian government's "de-dollarisation" initiatives: a) a one-off program, effective from 15 January 2017 until 25 March 2017, allowing qualified borrowers to convert eligible US dollar denominated loans into GEL, at a discount compensated by the government, at the client's election and b) a new regulation, effective from 15 January 2017, restricting issuance of new loans in foreign currency with amounts less than GEL 100,000 (equivalent). At 30 June 2017, 36.8% of our net loans were denominated in GEL as compared to 27.7% at 30 June 2016 and 33.5% at 31 March 2017

§ Net Loans to Customer Funds and DFI ratio. Customer funds (client deposits and notes) increased by 17.3% y-o-y and 0.6% q-o-q to GEL 5,655.3mln primarily driven by strong deposit generation in Retail Banking operations. Retail banking client deposits and notes grew by 32.2% y-o-y and 9.2% q-o-q to GEL 2,613.3mln, while CIB client deposits grew by 4.7% y-o-y, but were down 7.0% q-o-q to GEL 2,723.7mln. We also increased our borrowings from DFIs by 13.7% y-o-y to GEL 1,088.1mln, in order to support growth in local currency lending. As a result, our Net Loans to Customer Funds and DFI ratio, which is closely monitored by management, stood at 97.6% (95.3% at 30 June 2016 and 95.6% at 31 March 2017)

§ Net fee and commission income. Net fee and commission income performance is mainly driven by the strong performance in our settlement operations supported by the success of our Express banking franchise. This was partially offset by a decline in the CIB's fees from guarantees and letters of credit, driven by the deconcentration efforts in the CIB segment as we re-position our exposures to higher credit quality clients. Excluding the CIB's income from guarantees and letters of credit, net fee and commission income was GEL 28.6mln (up 9.4% y-o-y and up 6.0% q-o-q) in 2Q17 and GEL 55.6mln (up 13.0% y-o-y) in 1H17

§ Net banking foreign currency gain. In line with the behaviour of the GEL exchange rate, i.e. high volatility during 1Q17 and absence of volatility during 2Q17, the net banking foreign currency gain was up 16.9% y-o-y and down 2.1% q-o-q in 2Q17, respectively, and up 14.9% y-o-y in 1H17. RB and CIB businesses together contributed 85.4% and 88.2% to the total 2Q17 and 1H17 net banking foreign currency gain, respectively

§ Net other banking income. The 61.4% y-o-y and 65.3% q-o-q decrease in 2Q17 and 30.9% y-o-y decline in half year 2017 in net other banking income was largely driven by modest losses on derivative financial instruments recorded in 2Q17

§ Operating expenses increased to GEL 80.8mln in 2Q17 (up 19.6% y-o-y and up 4.8% q-o-q) and GEL 157.8mln in 1H17 (up 16.8% y-o-y). In 1H17, growth in revenues outpaced growth in operating expenses leading to y-o-y positive operating leverage of 2.9%, which represents an improvement compared to y-o-y negative operating leverage of 5.0% in 1H16. 2Q17 y-o-y and q-o-q and 1H17 y-o-y changes in operating expenses were driven by:

- an increase in salaries and employee benefits by 21.9% y-o-y and 7.3% q-o-q in 2Q17 and by 19.2% y-o-y in 1H17 mainly reflects organic growth of RB

- an increase in administrative expenses y-o-y by 18.8% in 2Q17 and by 16.4% in 1H17, primarily driven by marketing, rent and repair and maintenance costs as compared to the same periods last year. The increase was attributable to the combined effect of the larger branch network and the higher average quarterly and half year exchange rate during 2Q17 and 1H17 as the vast majority of branch rental agreements are denominated in US dollars

§ Cost of Risk ratio. Banking Business Cost of Risk ratio was 2.2% in 2Q17, up 20bps y-o-y and down 20bps q-o-q. CIB 2Q17 Cost of Risk ratio was down 100bps y-o-y and up 20bps q-o-q, while RB Cost of Risk ratio was up 80bps y-o-y, largely driven by headwinds from GEL's depreciation in 4Q16, and down 30bps q-o-q. On a half year basis, the Banking Business Cost of Risk ratio was 2.3%, up 20bps y-o-y in 1H17, primarily driven by 80bps increase in the RB Cost of Risk ratio, partially offset by improvement in the CIB loan portfolio quality performance

§ Quality of the Banking Business loan book remained strong in 2Q17 as evidenced by following closely monitored metrics: