Bank Of Georgia Group Regulatory News (BGEO)

Bank of Georgia

Group PLC

2nd quarter and half-year 2020 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, which comprises: a) retail banking and payment services; and b) corporate and investment banking and wealth management operations in Georgia; and c) banking operations in Belarus ("BNB"). JSC Bank of Georgia ("Bank of Georgia", "BOG" or the "Bank"), the leading universal bank in Georgia, is the core entity of the Group. In the medium to long-term, the Group targets to benefit from superior growth of the Georgian economy through both its retail banking and corporate and investment banking services and aims to deliver on its strategy, which is based on at least 20% ROAE and c.15% growth of its loan book.

2Q20 AND 1H20 RESULTS CONFERENCE CALL DETAILS

Bank of Georgia Group PLC announces the Group's consolidated financial results for the second quarter and the first half of 2020. Unless otherwise noted, numbers in this announcement are for 2Q20 and comparisons are with 2Q19. The results are based on International Financial Reporting Standards ("IFRS") as adopted by the European Union, are unaudited and derived from management accounts. This results announcement is also available on the Group's website at www.bankofgeorgiagroup.com.

An investor/analyst conference call, organised by the Bank of Georgia Group, will be held on 20 August 2020, at 14:00 UK / 15:00 CEST / 09:00 U.S Eastern Time.

Webinar instructions:

Please click the link to join the webinar: https://bankofgeorgia.zoom.us/j/95526745568

Webinar ID: 955 2674 5568

Or use the following international dial-in numbers available at: https://bankofgeorgia.zoom.us/u/acFso2de3t 

Webinar ID: 955 2674 5568#

Participants, who will be joining through the webinar, can use the "raise hand" feature at the bottom of the screen to ask questions. Participants, who will be joining through the international dial-in number, can dial *9 to raise hand and ask questions.

CONTENTS

FORWARD LOOKING STATEMENTS

This announcement contains forward-looking statements, including, but not limited to, statements concerning expectations, projections, objectives, targets, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, competitive strengths and weaknesses, plans or goals relating to financial position and future operations and development. Although Bank of Georgia Group PLC believes that the expectations and opinions reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations and opinions will prove to have been correct. By their nature, these forward-looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements. Important factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements, certain of which are beyond our control, include, among other things: macroeconomic risk, including currency fluctuations and depreciation of the Georgian Lari; regional instability; loan portfolio quality; regulatory risk; liquidity and funding risk; capital risk; operational risk, cyber security, information systems and financial crime risk; COVID-19 pandemic impact risk; climate change risk; and other key factors that indicated could adversely affect our business and financial performance, which are contained elsewhere in this document and in our past and future filings and reports of the Group, including the 'Principal risks and uncertainties' included in Bank of Georgia Group PLC's Annual Report and Accounts 2019 and in this announcement. No part of this document constitutes, or shall be taken to constitute, an invitation or inducement to invest in Bank of Georgia Group PLC or any other entity within the Group, and must not be relied upon in any way in connection with any investment decision. Bank of Georgia Group PLC and other entities within the Group undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required. Nothing in this document should be construed as a profit forecast. 

IMPACT OF COVID-19 GLOBAL PANDEMIC

The impact of the COVID-19 global pandemic over the last few months has significantly tested the resilience and character of Bank of Georgia, together with that of all of our colleagues and customers. Our performance during the second quarter of 2020 was therefore, significantly impacted by a number of factors:

§ Three very different economic realities in each different month in the second quarter, with signs of recovery in May and June

§ Extraordinary environment and measures implemented by the Georgian Government to address the COVID-19 crisis

§ Actions implemented by the Group to address the COVID-19 crisis

The Georgian Government took significant early actions to reduce the spread of the virus, which included flight bans, and school and business closures, which were essential to what has, so far, been an extremely well-managed response to the pandemic throughout the country. From a macroeconomic perspective, there was clearly a significant negative impact in all areas of the economy, resulting in a reduction of economic activity in April and May on the back of the lockdown restrictions put in force. However, the Government's immediate and successful response to the evolving COVID-19 pandemic enabled the domestic economy to reopen much faster than any other economy in the region, and we already saw a rebound in economic activity in June, after the release of restrictions and reopening of domestic tourism throughout the country. This was further followed by the announcement of the Government's anti-crisis stimulus plan, which includes a social assistance package for individuals, as well as tax exemptions and various funding mechanisms for businesses, and stimulus plans for various sectors of economy.

Local currency funding has experienced a significant pressure, resulting in an increase in interest rates in April and May, however, this impact was subsequently stabilised to more normal levels as a result of the new local currency funding instruments introduced by the National Bank of Georgia (the "NBG") to the market in order to support the GEL liquidity.

We are now experiencing a better than expected recovery in business activity, improving significantly in many key economic areas to close to pre-COVID-19 levels: remittances improved in May and grew significantly by 17.8% y-o-y in June; consumer demand improved in June based on banking card payment activities; and VAT turnover statistics (down 32.8% y-o-y in April, down 22.2% y-o-y in May, and down 6.2% y-o-y in June) also demonstrated a recovery in business activity, mostly in trade, construction, real estate and manufacturing sectors.

During the second quarter of 2020, the Georgian Lari has performed very well and appreciated by 7.0% against the US Dollar, mostly supported by the NBG's interventions, external funding support and strong remittance flows. There has been some careful reopening of international borders, but we do not expect to see any significant levels of international tourism during the remainder of 2020. As a result, we now expect to see the Georgian economy contract by 5.1% during 2020, followed by the GDP growth of c.5.0-5.5% in 2021, based on the estimates of our brokerage and investment arm, Galt and Taggart.

In order to respond to the pandemic outbreak, the Group has introduced a number of resilience protocols and a comprehensive Business Continuity Plan aimed at curbing the spread of COVID-19 in Georgia and mitigating the negative impact on our business and the community. We have put in place a number of initiatives to reduce physical interaction and prevent the spread of coronavirus, whilst maintaining the full banking capability required to support and assist our customers. This included additional safety measures and protocols introduced in our everyday working environment, fully moving back office staff to working from home in just two weeks, significantly enhancing the capacity of the call centre, temporarily closing the customer service support areas of express branches (mostly re-opened in June), with only the self-service terminals and ATM areas remaining open, implementing a three-month grace period on principal and interest payments on all retail loans to significantly reduce the requirement for customers to physically visit branches, applying more stringent risk assessment procedures during the lending process, incentivising the offloading of customer activity to digital channels through temporary removal of fees on transactions executed through our mobile and internet banking platforms since mid-March 2020, for a two-month period, among others.

The Bank maintained excess liquidity in the second quarter, primarily for 1) risk mitigation purposes, on the back of the ongoing COVID-19 crisis; and 2) the repayment of local currency Eurobonds due at the beginning of June 2020.

Our second quarter results therefore have been significantly impacted by the environment in which we operate and the measures we have put in place to manage the crisis. This quarter has been unprecedented and characterised by three different periods on the back of the changing environment in April, May and June, as described above. The largest impact was felt in the Retail Banking business, which was impacted by the slow-down of economic activity on the back of the Government's lock-down restrictions, temporary closure of the express branches (mostly re-opened in June), temporary removal of fees on transactions through digital channels, slower lending activity, three-months grace periods on loans, more expensive local currency funding, among others.

§ Net fee and commission income was down only 9.9% y-o-y in June 2020 following bigger decreases of 42.5% y-o-y in April, and 21.2% in May. This demonstrates strong recovery dynamics in our fee income generation since May, on the back of improved remittances in May and June, increased consumer demand in June as measured by banking card payment activities, and the recovery in VAT turnover statistics of local business

§ Client deposits increased significantly by 6.9% during the quarter (the growth on a constant-currency basis was 11.9% q-o-q), which demonstrates that the immediate outflow of customer funds in March 2020, was a temporary response to the COVID-19 outbreak shock, which quickly stabilised

We next outline the Group's second quarter and the first half of 2020 results highlights, a summary of those highlights and then the Chief Executive Officer's letter before going into the details. 

2Q20 AND 1H20 RESULTS HIGHLIGHTS

1 The income statement adjusted profit excludes GEL 4.0mln in 2Q19 and GEL 14.2mln in 1H19 one-off employee costs (net of income tax) related to former CEO and executive management termination benefits. The amount in 2Q19 is comprised of GEL 4.6mln (gross of income tax) excluded from salaries and other employee benefits and GEL 0.6mln tax benefit excluded from income tax expense. The amount in 1H19 is comprised of GEL 12.4mln (gross of income tax) excluded from salaries and other employee benefits, GEL 4.0mln (gross of income tax) excluded from non-recurring items and GEL 2.2mln tax benefit excluded from income tax expense. 2Q19 and 1H19 ROAE and ROAA have been adjusted accordingly. Full IFRS income statement is presented on page 20. Management believes that one-off costs do not relate to underlying performance of the Group, and hence, adjusted results provide the best representation of the Group's performance during second quarter and first half of 2019

2 Throughout this announcement, the gross loans to customers and respective allowance for impairment are presented net of expected credit loss (ECL) on contractually accrued interest income. These do not have an effect on the net loans to customers balance. Management believes that netted-off balances provide the best representation of the loan portfolio position

3 Cost/income ratio adjusted for GEL 4.6mln in 2Q19 and GEL 12.4mln in 1H19 one-off employee costs (gross of income tax) related to termination benefits of the former executive management

KEY RESULTS HIGHLIGHTS

§ Solid quarterly and half year performance notwithstanding the COVID-19 pandemic impact. The Group delivered resilient operating income before cost of risk of GEL 134.6mln during the second quarter of 2020 and GEL 303.4mln in the first half of 2020

§ Net interest margin. NIM was significantly down in the second quarter and the first half of 2020, primarily driven by decline during April and May, as a result of the significant reduction in retail lending activity and high levels of liquidity during the quarter

§ Net fee and commission income. The y-o-y and q-o-q decrease was mainly driven by decline in net fee and commission income from settlement and cash operations, as a result of slower customer activity due to COVID-19 pandemic, the temporary closure of our express branches and the temporary removal of fees on transactions executed through our mobile and internet banking platforms since mid-March 2020, for a two-month period, in order to reduce customer visits to branches and incentivise the transfer of customers' activity to digital channels. The decline was partially offset by the strong net fee generation from guarantees and letters of credit issued by our Corporate and Investment Banking business. In June, we have already seen strong recovery dynamics, as remittances improved in May and grew significantly by 17.8% y-o-y in June, and consumer demand improved in June as measured by banking card payment activities. VAT turnover statistics have also demonstrated a recovery in business activity, mostly in the trade, construction, real estate and manufacturing sectors. We therefore expect fee generation to improve going forward

§ Operating expenses increased by 6.7% y-o-y and were down 0.8% q-o-q in 2Q20, and increased by 10.9% y-o-y in 1H20 due to increased investment in IT and marketing, as well as some one-off spend related to COVID-19 mitigation measures. In the second quarter of 2020, we have initiated cost optimisation measures, the impact of which has not yet been reflected in the first half of 2020 results, therefore, we expect improvement in our cost to income ratio in the second half of the year

§ Net one-off loss on modification of financial assets. We recorded a GEL 38.7mln and GEL 1.0mln one-off net loss on modification of financial assets in March and April of 2020 in relation to the three-month payment holidays on principal and interest offered to our retail banking clients, as an immediate response to COVID-19 pandemic outbreak, in order to reduce the requirement for customers to physically visit Bank branches and reduce the risk of the virus spread. The net loss incurred as a result of these modifications has been classified as a non-recurring item in the income statement during the first half of 2020. For the accounting treatment rationale, see page 11 of this announcement

§ Loan book increased by 19.1% y-o-y and was down 4.1% q-o-q at 30 June 2020. Growth on a constant-currency basis was 14.7% y-o-y and 0.2% q-o-q. The y-o-y loan book growth reflected continued strong loan origination levels in Corporate, MSME and the mortgage segments during the pre-COVID-19 period, while the q-o-q trend reflects the slow-down of economic activity since March 2020 as a result of the COVID-19 pandemic outbreak

§ Client deposits and notes increased by 30.8% y-o-y and by 6.9% q-o-q at 30 June 2020. On a constant-currency basis, client deposits and notes grew by 25.8% y-o-y and by 11.9% q-o-q. Both y-o-y and q-o-q increase in deposit balances reflects a gradual increase in monthly deposit balances of both our individual and business customers since May 2020

§ Asset quality. The cost of credit risk was a net gain of 0.2% in 2Q20 (versus losses of 1.3% in 2Q19 and 7.4% in 1Q20) and was 3.5% 1H20 (1.5% in 1H19). The y-o-y increase in cost of credit risk ratio during the first half of 2020 was primary driven by the significant ECL provisions on loans to customers and finance lease receivables created for the full economic cycle during the first quarter of 2020, related to adverse macro-economic environment and expected negative impact on creditworthiness of borrowers as a result of the COVID-19 pandemic. These assumptions were further revisited during the second quarter to reflect the better visibility and the macro-economic forecast scenarios published by the National Bank of Georgia in May 2020. See details on assumptions used on page 10. The net gain of 0.2% of cost of risk ratio in 2Q20 was mainly related to a small reversal of provisions on the back of strengthening of local currency and amortisation of the loan portfolio in 2Q20

§ The NPLs to gross loans increased to 2.7% at 30 June 2020 (3.2% at 30 June 2019 and 2.1% at 31 March 2020). The NPL coverage ratio was 115.7% at 30 June 2020 (88.1% at 30 June 2019 and 147.2% at 31 March 2020) and the NPL coverage ratio adjusted for the discounted value of collateral was 166.3% at 30 June 2020 (131.5% at 30 June 2019 and 194.9% at 31 March 2020). The q-o-q dynamic was driven by the increase in non-performing borrowers during 2Q20, on the back of COVID-19 crisis, while the ECL provisions for the full economic cycle on loan portfolio were created already in the first quarter of 2020

§ Solid capital adequacy position. The Bank's capital adequacy ratios have been strong, and remain comfortably above minimum regulatory requirements. The Bank's Basel III Common Equity Tier 1, Tier 1 and Total capital adequacy ratios stood at 9.9%, 12.0% and 17.4%, respectively, all well above the minimum required levels of 6.9%, 8.7% and 13.3%, respectively, at 30 June 2020. The y-o-y decline in capital ratios was primarily due to a GEL 400mln general provision created in March 2020 under the local regulatory accounting basis in agreement with the NBG (and consistent with NBG's guidance for the Georgian banking sector in general) that covers its current expectation of estimated credit losses on the Bank's lending book for the whole economic cycle

§ Strong liquidity and funding position. The Bank's liquidity and funding positions have remained strong. As at 30 June 2020, the Bank's liquidity coverage ratio stood at 135.4% and net stable funding ratio at 136.6%, compared to the 100% minimum required level. The Bank maintained excess liquidity in 2Q20, primarily for 1) risk mitigation purposes, on the back of the ongoing COVID-19 crisis; and 2) the repayment of local currency Eurobonds due and repaid at the beginning of June 2020. The Bank has strong support from International Financial Institutions. It has already attracted a number of new long-term borrowings both in local and foreign currencies during the past few months of more than US$200 million, part of which has already been drawn-down in the first half of 2020. Furthermore, we are actively working with our partner financial institutions and expect to sign new long-term facilities of around US$400 million over the next few months, which will further improve our liquidity position and enable us to support our customers and the economy in which we operate during these unprecedented times

CHIEF EXECUTIVE OFFICER'S STATEMENT

The impact of the COVID-19 global pandemic over the last six months has significantly tested the resilience and character of Bank of Georgia Group, together with that of all of our colleagues and customers. Over the last six months, however, I am delighted with the way the Group has responded by supporting the Georgian economy, our customers and our colleagues.

From a macro-economic perspective, there was a significant reduction in economic activity in April and May this year on the back of the lockdown restrictions in force. The Georgian Government's immediate and successful response to the evolving COVID-19 pandemic enabled the domestic economy to reopen much faster than any other economy in the region. As a result, we are now experiencing a better than expected recovery, with business activity starting to improve significantly in June. During the second quarter of 2020, the Georgian Lari has performed very well and appreciated by 7.0% against the US Dollar, partly supported by the NBG's interventions, external funding support and stronger than expected remittance flows.

There has been some careful reopening of international borders, but we do not expect to see any significant levels of international tourism during the remainder of 2020. As a result, we now expect to see the Georgian economy contract by 5.1% during 2020, followed by the GDP growth of c.5.0-5.5% in 2021, based on the estimates of our brokerage and investment arm, Galt and Taggart.

Bank of Georgia Group's performance has been very robust throughout the first half of the year, having taken a significant ECL provision in the first quarter that we continue to expect to cover all expected credit losses through the full economic cycle, relating to the COVID-19 impact. Our performance during the second quarter of 2020 has been extremely resilient, delivering strong profitability during a time when the Georgian economy has experienced its worst reduction in economic activity for more than a few decades:

§ The balance sheet has remained strong and stable. On a constant currency basis, our customer lending has remained broadly flat q-o-q, as expected, and client deposits increased significantly by 11.9% during the quarter. Bank of Georgia is now the clear market leader in retail deposits

§ Operating income has been very resilient. Despite an extensive economic lockdown, operating income remained robust with operating income down 12.7% q-o-q in 2Q20, but broadly flat y-o-y on a six months basis in the first half of 2020

§ Net interest margin is now increasing. Having reduced significantly during April and May, as a result of the significant reduction in retail lending and high levels of liquidity, our net interest margin in July and August so far has been running c.30 basis points higher than the 4.2% margin in the second quarter of 2020

§ Our lending portfolios are performing better than expected. Asset quality is robust, and the significant ECL provision made in the first quarter is proving to be sufficient, despite the expected GDP contraction being slightly worse than initially anticipated. Our corporate, SME and Solo portfolios have all performed better than our initial expectations

§ Our capital ratios have improved significantly. During the second quarter of 2020, our capital ratios increased significantly, to levels well above our required minimum regulatory requirements

§ Our Return on Average Equity returned to more normal levels. In the second quarter of 2020, we delivered an annualised ROAE of 21.8%

Our mission and our strategy remain unchanged and we have actively continued the further development of our fully integrated digital strategy, an important focus for us, as we seek to digitise our full banking platforms. The use of our mobile banking and digital platforms has substantially increased throughout the period of the economic lockdown, and our market leading digital and mobile banking presence has become a significant source of competitive advantage.

Bank of Georgia has two clear strategic targets over the medium to long-term: to achieve at least 20% return on average equity, and to deliver c.15% growth in the loan book. Given our clear Georgia focus, our performance during 2020 will inevitably be affected by the local COVID-19 impact, but we have already resumed the delivery of our targeted profitability. Our performance and balance sheet is demonstrating strong robustness, asset quality is resilient and we remain comfortable, given our economic scenario stress-testing assumptions, with the adequacy of the significant ECL provision created in the first quarter. The Group is very well positioned for the future, with an outstanding team, coupled with strong funding and liquidity, and capital resources.

Archil Gachechiladze,

CEO, Bank of Georgia Group PLC

19 August 2020

DISCUSSION OF RESULTS

The Group's business is composed 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 and mass retail and mass affluent segments, together with small and medium enterprises and micro businesses. (2) Corporate and 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.

4 The cost/income ratio is adjusted for GEL 4.6mln in 2Q19 and GEL 12.4mln in 1H19 one-off employee costs (gross of income tax) related to termination benefits of the former executive management

Performance highlights

§ The Group generated operating income of GEL 239.7mln in 2Q20 (down 6.9% y-o-y and down 12.7% q-o-q), ending six months of 2020 with operating income of GEL 514.1mln (largely flat y-o-y). The y-o-y and q-o-q decline in operating income in all periods presented was primarily driven by the decrease in net interest income and net fee and commission income, on the back of slow-down of economic activity due to COVID-19 pandemic outbreak in March 2020

§ Our NIM was 4.2% in 2Q20 and 4.6% in 1H20. NIM was down 150bps y-o-y and 80bps q-o-q in 2Q20, and was down 120bps y-o-y in 1H20, primarily driven by decline in currency blended loan yields (down 160bps y-o-y and down 60bps q-o-q in 2Q20, and down 140bps y-o-y in 1H20) on the back of slower lending activity due to pandemic, coupled with increase in cost of funds (up 30bps y-o-y and up 10bps q-o-q in 2Q20, and up 20bps y-o-y in 1H20)

§ Loan yield. Currency blended loan yield was 10.2% in 2Q20 (down 160bps y-o-y and down 60bps q-o-q) and 10.6% in the first half of 2020 (down 140bps y-o-y). Y-o-y and q-o-q decline in loan yield during the second quarter of 2020 and the first half of 2020, was driven by the decline in both local and foreign currency loan yields, on the back of slow-down of lending activity due to COVID-19 pandemic 

§ Liquid assets yield. Currency blended liquid assets yield was 3.4% in 2Q20 (flat y-o-y and down 50bps q-o-q) and 3.7% in 1H20 (up 10bps y-o-y). On y-o-y basis both in 2Q20 and 1H20, liquid assets yield level was driven by increase in local currency denominated liquid assets yield, offset/partially offset by the decrease in foreign currency denominated liquid assets yield. Q-o-q decline in liquid assets yield in 2Q20 was due to decrease in both local and foreign currency denominated liquid assets yields. The local currency denominated liquid assets yield movement (up 140bps y-o-y and down 50bps q-o-q in 2Q20, and up 130bps y-o-y in 1H20) directly reflected the NBG's monetary policy rate movements (NBG increased monetary policy rate by cumulative of 250bps since September 2019, and reduced the policy rate twice by cumulative of 75bps in the second quarter of 2020). As for the foreign currency denominated liquid assets yield (down 100bps y-o-y and down 90bps q-o-q in 2Q20, and down 50bps y-o-y in 1H20), it largely reflected the cut in US Fed rate in March 2020 (NBG accrues interest rate on US Dollar obligatory reserves of the banks at US Fed rate upper bound minus 50bps)

§ Cost of funds. Cost of funds stood at 4.8% both in 2Q20 (up 30bps y-o-y and up 10bps q-o-q) and in 1H20 (up 20bps y-o-y). Increase in cost of funds in all periods presented was primarily driven by increase in cost of client deposits and notes (up 40bps y-o-y and q-o-q in 2Q20, and up 20bps y-o-y in 1H20), coupled with 40bps y-o-y increase in cost of amounts owed to credit institutions in 2Q20 and 1H20, partially offset by 30bps decrease in cost of amounts owed to credit institutions q-o-q in 2Q20 (NBG increased monetary policy rate by cumulative of 250bps since September 2019, and decreased policy rate twice by cumulative of 75bps in the second quarter of 2020). In addition, 20bps y-o-y increase in cost of debt securities issued also contributed to increase in cost of funds during the first half of 2020, as a result of the issuance of inaugural US$ 100 million Additional Tier 1 capital perpetual subordinated notes at the end of March 2019

§ Net fee and commission income. Net fee and commission income was GEL 32.9mln in 2Q20 (down 24.0% y-o-y and down 18.0% q-o-q) and GEL 73.0mln in the first half of 2020 (down 14.6% y-o-y). Both y-o-y and q-o-q decline in all periods presented was mainly driven by decrease in net fee and commission income from settlement and cash operations, as a result of slower customer activity due to COVID-19 pandemic and temporary removal of fees on transactions executed through our mobile and internet banking platforms since mid-March 2020, for a two-month period, in order to decrease the customer visits to branches and incentivise the transfer of customers' activity to digital channels. This decline was partially offset by the strong net fees and commission income generation from guarantees and letters of credit issued by our Corporate and Investment Banking business both in 2Q20 and in the first half of 2020. That said, we already see strong recovery dynamics since May 2020 (net fee and commission income was down 42.5% y-o-y in April, down 21.2% in May and down only 9.9% in June 2020), as remittances improved in May and June, and consumer demand improved in June as measured by banking card payment activities. VAT turnover statistics also demonstrated a recovery in business activity, mostly in trade, construction, real estate and manufacturing sectors. As such, we expect the fee generation to stabilise going forward

§ Net foreign currency gain. Net foreign currency gain was down by 15.7% y-o-y and by 25.8% q-o-q in 2Q20, primarily due to lower currency volatility and client-driven flows during the second quarter of 2020. On the other hand, the Group benefited from the high level of currency volatility in the first quarter of 2020, which contributed to a 6.9% y-o-y increase in net foreign currency gain during the first half of 2020

§ Net other income. Significant y-o-y increase in net other income in the second quarter and the first half of 2020, was primarily driven by higher net real estate gains on the back of higher income from operating leases in 2020. Furthermore, the Group recorded GEL 2.4mln gain from revaluation of investment property in the second quarter of 2020 (impact of changes in fair value on certain investment properties due to the lapse of the repurchase option granted to the former borrower), contributing to the increase of net other income in 2Q20 and 1H20

5 The adjusted profit in the table excludes GEL 4.0mln in 2Q19 and GEL 14.2mln in 1H19 one-off employee costs (gross of income tax) related to the former CEO and executive management termination benefits. The amount in 2Q19 is comprised of GEL 4.6mln (gross of income tax) excluded from salaries and other employee benefits and GEL 0.6mln tax benefit excluded from income tax expense. The amount in 1H19 is comprised of GEL 12.4mln (gross of income tax) excluded from salaries and other employee benefits, GEL 4.0mln (gross of income tax) excluded from non-recurring items and GEL 2.2mln tax benefit excluded from income tax expense

§ Operating expenses amounted to GEL 105.2mln in 2Q20, up 6.7% y-o-y and down 0.8% q-o-q, and GEL 211.2mln in 1H20, up by 10.9% y-o-y. The y-o-y increase both in 2Q20 and the first half of 2020 was primarily driven by increased investments in IT related resources as part of the Agile transformation process, focus on digitalisation and investments in marketing. In addition, we incurred extraordinary expenses during the first half of 2020 in relation to the safety measures implemented as a response to COVID-19 outbreak

§ Asset quality. The cost of credit risk ratio stood at net gain of 0.2% in 2Q20 (compared to losses of 1.3% in 2Q19 and 7.4% in 1Q20) and was 3.5% in the first half of 2020 (compared to 1.5% in 1H19). The significant increase in cost of credit risk ratio in 1H20 was driven by the reserve builds, created for the full economic cycle in both Retail and Corporate and Investment Banking segments in the first quarter of 2020, primarily related to deterioration of macro-economic environment and expected creditworthiness of borrowers as a result of the COVID-19 pandemic impact. This reflected additional reserves for retail customers, as well as borrowers operating across multiple sectors of the economy, with the largest impacts in tourism, trade, transportation, construction and real estate industries (see Group's 1Q20 results announcement for details of assumptions used to estimate the amount of reserves required for the whole economic cycle in the first quarter of 2020). As a result of these assumptions, we created additional reserves of GEL 220.2mln in the first quarter of 2020

In the second quarter of 2020, management revisited the assumptions used to estimate the amount of ECL provision in the first quarter to reflect the better visibility and the macro-economic forecast scenarios published by the NBG in May 2020. The following assumptions were used during the analysis in the second quarter:

- We used macro parameters based on the National Bank of Georgia's forecast scenarios - three scenarios (Baseline, Downside and Upside) with macro parameters for a three-year horizon with assigned respective probabilities. The weighted average of these scenario results were further considered in estimating expected credit losses (ECL):

- Given the unprecedented nature of the COVID-19 pandemic and the uncertainties associated with it, we re-considered the existing impairment model and applied management overlays to the methodology to reflect a COVID-19 effect in ECL. In particular, granting three-month payment holidays to borrowers was not automatically considered as a SICR event (i.e. a trigger to transfer the exposures from Stage 1 to Stage 2). We performed a more in depth analysis of the loan portfolio and identified pools of exposures (tourism and hospitality sectors, among others, as well as some of the retail customers) that are most likely to suffer from pandemic consequences in the short to medium term, and transferred these exposures to Stage 2. The same treatment was used for borrowers who lost their job and income due to COVID-19 pandemic outbreak and who were included on the list for Government compensation programme

- Further, to estimate the ECL for the above mentioned borrowers, in the downside scenario we assigned them Probability of Default (PD) of 1 and the ECL was calculated as a weighted average of the scenario results

- We also applied a 5% haircut in Baseline and 15% haircut in Downside scenarios to real estate collateral values in GEL to reflect the NBG's forecast on real estate prices and adjusted Cure and Recovery rates downwards

Based on these assumptions, the Group concluded that the additional reserve of GEL 220.2mln, already created in the first quarter of 2020, was sufficient. That said, the GEL 8.2mln net reversal of ECL on loans to customers and finance lease receivables in 2Q20, was primarily related to strengthening of local currency and the amortisation of the loan portfolio in the second quarter of 2020

As for the cost of risk of GEL 10.2mln recorded in 2Q20, the reversal of ECL on loan portfolio, was offset by ECL charges on other assets and provisions, driven by additional reserves recorded by the Group in respect of guarantees issued and other financial assets, and expenses accrued for certain legal fees in 2Q20

Given that we are operating in a rapidly changing environment with a high level of uncertainty with regards to both the length and the severity of the COVID-19 impact, we are monitoring the new facts and circumstances on a continuous basis and will be updating the market on any significant changes in our assessments in the coming months

§ Quality of our loan book is closely monitored by the below presented metrics. The q-o-q increase in NPLs to gross loans and decrease in NPL coverage ratios at 30 June 2020, was mainly driven by the increase in non-performing borrowers during the second quarter of 2020 on the back of COVID-19 pandemic outbreak, while the ECL provisions for the full economic cycle on loan portfolio were created already in the first quarter of 2020:

§ BNB - the Group's banking subsidiary in Belarus - continues to remain strongly capitalised, with capital adequacy ratios well above the requirements of the National Bank of the Republic of Belarus ("NBRB"). At 30 June 2020, total capital adequacy ratio was 14.9%, well above the 12.5% minimum requirement, while Tier I capital adequacy ratio was 10.0%, again above the NBRB's 7.0% minimum requirement. ROAE was 12.2% in 2Q20 (9.8% in 2Q19 and negative 0.6% in 1Q20) and 5.9% in 1H20 (10.8% in 1H19), reflecting the COVID-19 pandemic impact in the first quarter of 2020. For financial results highlights of BNB, see page 22. We note the political unrest that is currently occurring in Belarus. There has so far been no material impact on the performance of our business in Belarus, which is profitable and well-capitalised, but we will continue to monitor the situation closely

§ Net non-recurring items. Significant y-o-y increase in net non-recurring items during the first half of 2020 was primarily attributable to GEL 38.7mln and GEL 1.0mln one-off net loss on modification of financial assets in March and April of 2020, respectively, in relation to the three-month payment holidays on principal and interest offered to our retail banking clients, in order to reduce the requirement for customers to physically visit Bank branches and reduce the risk of COVID-19 virus spread. Interest continued to accrue on the outstanding principal of the loans and was distributed over the remaining period of each loan. The modification terms did not compound three-month accrued interest, and had therefore, under IFRS accounting, resulted in a one-off net loss on modification of loans to customers. This type of restructuring offered to our customers reflected the impact of the Bank's immediate social response to COVID-19 in Georgia, which management does not expect to recur. The net loss incurred as a result of these modifications has been classified as a non-recurring item in the income statement. In addition, in 1Q20, the Bank incurred GEL 1.2mln one-off costs to finance and donate 20,000 COVID-19 laboratory tests, 10 respirators, 50,000 face masks and 60,000 gloves to the Ministry of Health of Georgia, to support the battle to prevent the virus spread. These costs are also classified as non-recurring items

§ Overall, the Group recorded profit of GEL 114.7mln in 2Q20 (compared to profit adjusted for one-off costs of GEL 111.1mln6 in 2Q19 and a loss of GEL 99.9mln in 1Q20) and a profit of GEL 14.7mln in the first half of 2020 (compared to profit adjusted for one-off costs of GEL 223.4mln6 in 1H19). As such, the Group's ROAE was 21.8% in 2Q20 (22.9%6 in 2Q19 and negative profitability in 1Q20) and 1.4% in the first half of 2020 (23.7%6 in 1H19)

6 Profit and ROAE exclude GEL 4.0mln in 2Q19 and GEL 14.2mln in 1H19 one-off employee costs (gross of income tax) related to the former CEO and executive management termination benefits

Our balance sheet remains highly liquid (NBG liquidity coverage ratio of 135.4%) and strongly capitalised (NBG Basel III Tier I capital adequacy ratio of 12.0%) with a well-diversified funding base (client deposits and notes to total liabilities of 68.2%) at 30 June 2020.

§ Liquidity. Liquid assets stood at GEL 5,447.7mln at 30 June 2020, up 20.1% y-o-y and up 1.3% q-o-q. The notable increase over the year was in cash on hand, combined with excess liquidity deployed with credit institutions and in investment securities. The Bank maintained excess liquidity in 2020 primarily for 1) risk mitigation purposes on the back of the current COVID-19 crisis; and 2) the repayment of local currency Eurobonds due at the beginning of June 2020. The NBG Liquidity coverage ratio was 135.4% at 30 June 2020 (114.3% at 30 June 2019 and 121.2% at 31 March 2020), well above the 100% minimum requirement level

§ Loan book. Our net loan book and finance lease receivables amounted GEL 12,599.1mln at 30 June 2020, up 19.1% y-o-y and down 4.1% q-o-q. As of 30 June 2020, the retail loan book represented 65.8% of the total loan portfolio (67.2% at 30 June 2019 and 64.3% at 31 March 2020). Both local and foreign currency portfolios experienced solid y-o-y growth of 18.6% and 19.4%, respectively. The local currency loan portfolio growth was partially driven by the Government's de-dollarisation initiatives and our goal to increase the share of local currency loans in our portfolio. On a q-o-q basis, local currency denominated loan portfolio was largely flat, primarily due to the slow-down of economic activity as a result of the COVID-19 pandemic outbreak in March 2020, while foreign currency denominated loan book decreased by 7.0% q-o-q, mostly reflecting strengthening of the local currency during the second quarter of 2020

§ Dollarisation of our loan book and client deposits. The retail client loan book in foreign currency accounted for 45.6% of the total RB loan book at 30 June 2020 (45.9% at 30 June 2019 and 47.7% at 31 March 2020), while retail client foreign currency deposits comprised 67.8% of total RB deposits at 30 June 2020 (68.8% at 30 June 2019 and 71.5% at 31 March 2020). At 30 June 2020, 82.6% of CIB's loan book was denominated in foreign currency (83.6% at 30 June 2019 and 82.5% at 31 March 2020), while 51.9% of CIB deposits were denominated in foreign currency (63.2% at 30 June 2019 and 69.4% at 31 March 2020)

§ Net loans to customer funds and DFI ratio. Our net loans to customer funds and DFI ratio, which is closely monitored by management, stood at 94.5% at 30 June 2020 (104.7% at 30 June 2019 and 104.9% at 31 March 2020)

§ Diversified funding base. Debt securities issued decreased by 26.9% y-o-y and by 31.9% q-o-q at 30 June 2020. Both the y-o-y and q-o-q decrease was primarily driven by the repayment of GEL 500mln local currency Eurobonds at the beginning of June 2020. In addition, local currency strengthening in the second quarter of 2020 also contributed to the q-o-q decrease in debt securities issued at 30 June 2020

§ Solid capital position. At 30 June 2020, following the measures put in place by the NBG as part of the COVID-19 supervisory plan in March 2020 (see details on page 22 of the Group's 1Q20 results announcement), the Bank's Basel III Common Equity Tier 1, Tier 1 and Total capital adequacy ratios stood at 9.9%, 12.0% and 17.4%, respectively, all comfortably above the minimum required levels of 6.9%, 8.7% and 13.3%, respectively

- NBG supervisory plan - COVID-19 and related impact of the Bank's capital position. The Bank's actual capital adequacy position at 30 June 2020 consider the additional general provision of GEL 400mln (approximately 3.3% of the Bank's lending portfolio subject to provision under the local regulatory accounting standards) booked in March 2020, under the Bank's local regulatory accounting basis, which is used for calculation of the Bank's capital ratios, reflecting NBG's expectation of estimated credit losses on the Bank's lending book for the whole economic cycle, given current economic expectations

- Internal capital generation and dividends. The Group has a recent track record of strong profitability and capacity to generate high levels of internal capital. In March 2020, given the level of uncertainty with regard to the global impact of COVID-19 and the potential length of time of that impact, the Board of Directors decided not to recommend a dividend to shareholders at the 2020 Annual General Meeting, therefore, the Group will not be distributing 2019 dividends to shareholders this year

- Strengthening capital position through Tier 2 capital subordinated facility. In December 2019, the Bank signed a ten-year US$ 107mln subordinated syndicated loan agreement arranged by FMO - Dutch entrepreneurial development bank in collaboration with other participating lenders (the Bank's existing and new partner financial institutions). Of the total facility, US$ 52mln was drawn-down by the Bank and the regulatory approval on classification as a Bank Tier 2 capital instrument under the Basel III framework was received in December 2019. The Bank drew-down the second tranche of the facility in the amount of US$55mln and received the regulatory approval on classification from NBG in April 2020, which further improved the overall capitalisation of the Bank

- Below is presented the movement in capital adequacy ratios during the first half of 2020 considering the recent developments, as well as showing the potential impact of an additional 10% devaluation of GEL on different levels of capital:

DISCUSSION OF SEGMENT RESULTS

RETAIL BANKING (RB)

Retail Banking provides consumer loans, mortgage loans, overdrafts, credit card facilities and other credit facilities as well as funds transfer and settlement services and the handling of customer deposits for both individuals and legal entities (SME and micro businesses only). RB is represented by the following sub-segments: (1) the emerging and mass retail segment (through our Express and Bank of Georgia brands), (2) SME and micro businesses - MSME (through our Bank of Georgia brand), and (3) the mass affluent segment (through our SOLO brand).

7 The income statement adjusted profit excludes GEL 3.1mln in 2Q19 and GEL 10.1mln in 1H19 one-off employee costs (net-off income tax) related to the former CEO and executive management termination benefits. The amount in 2Q19 is comprised of GEL 3.5mln (gross of income tax) excluded from salaries and other employee benefits and GEL 0.4mln tax benefit excluded from income tax expense. The amount in 1H19 is comprised of GEL 8.6mln (gross of income tax) excluded from salaries and other employee benefits, GEL 2.9mln (gross of income tax) excluded from non-recurring items and GEL 1.4mln tax benefit excluded from income tax expense. The 2Q19 and 1H19 ROAE have been adjusted accordingly

8 The cost/income ratio is adjusted for GEL 3.5mln in 2Q19 and GEL 8.6mln in 1H19 one-off employee costs (gross of income tax) related to termination benefits of the former executive management

Performance highlights

§ Retail Banking generated operating income of GEL 136.5mln in 2Q20 (down 22.9% y-o-y and down 20.3% q-o-q) and GEL 307.7mln in 1H20 (down 13.6% y-o-y), reflecting the COVID-19 pandemic impact

§ RB's net interest income was down 23.1% y-o-y and down 13.2% q-o-q in 2Q20 and down 17.8% y-o-y in 1H20, primarily reflecting the slow-down in economic activity on the back of COVID-19 pandemic outbreak in March 2020. Net interest income still benefited from the growth of the local currency loan portfolio during the pre-COVID-19 period, which generated 8.3ppts and 8.5ppts higher yields than the foreign currency loan portfolio in 2Q20 and in 1H20, respectively

§ Retail Banking net loan book reached GEL 7,797.2mln at 30 June 2020, up 15.2% y-o-y and down 1.9% q-o-q. On a constant currency basis, retail loan book increased by 11.9% y-o-y and by 1.4% q-o-q in 2Q20. Local currency denominated loan book increased by 15.8% y-o-y and by 2.0% q-o-q, while the foreign currency denominated loan book grew by 14.3% y-o-y and was down by 6.3% q-o-q. As a result, the local currency denominated loan book accounted for 54.4% of the Retail Banking loan book at 30 June 2020 (54.1% at 30 June 2019 and 52.3% at 31 March 2020). Currently, the part of the Retail Banking loan portfolio which is most sensitive to foreign currency risk is largely de-dollarised

§ The loan portfolio composition reflects the shift towards a higher quality, lower margin product mix on the back of tighter lending conditions for unsecured consumer lending since 1 January 2019. The y-o-y loan book growth reflected strong loan origination levels in MSME and mortgage segments, as well as secured consumer lending during the pre-COVID-19 period. The y-o-y and q-o-q decline in the loan originations is reflective of the slow-down of the economic activity since March 2020 as a result of COVID-19 pandemic outbreak:

§ Retail Banking client deposits increased to GEL 5,962.0mln at 30 June 2020, up 19.5% y-o-y and remained largely flat q-o-q. The dollarisation level of our deposits decreased to 67.8% at 30 June 2020, compared to 68.8% at 30 June 2019 and 71.5% at 31 March 2020. The cost of foreign currency denominated deposits stood at 1.4% in 2Q20 (down 10bps y-o-y and up 10bps q-o-q) and in 1H20 (down 20bps y-o-y), while the cost of local currency denominated deposits increased by 120bps y-o-y and by 70bps q-o-q in 2Q20, and increased by 80bps y-o-y during first half of 2020. The spread between the cost of RB's client deposits in GEL and foreign currency widened to 5.0ppts during 2Q20 (GEL: 6.4%; FC: 1.4%), compared to 3.7ppts in 2Q19 (GEL: 5.2%; FC: 1.5%) and 4.4ppts in 1Q20 (GEL: 5.7%; FC: 1.3%). On a six months basis, spread widened to 4.6ppts in 1H20 (GEL: 6.0%; FC: 1.4%) compared to 3.6ppts in 1H19 (GEL: 5.2%; FC: 1.6%)

§ Retail Banking NIM was 4.0% in 2Q20 (down 220bps y-o-y and down 90bps q-o-q) and 4.4% in 1H20 (down 200bps y-o-y). The y-o-y and q-o-q decline in NIM in 2Q20 and 1H20 was mostly attributable to lower loan yields (down 180bps y-o-y and down 70bps q-o-q in 2Q20, and down 170bps y-o-y in 1H20). In addition, the cost of funds increased by 90bps y-o-y and by 10bps q-o-q in 2Q20, and by 70bps y-o-y in 1H20, primarily on the back of increased NBG monetary policy rate (NBG increased monetary policy rate by cumulative of 250bps since September 2019, although NBG reduced the policy rate twice by cumulative of 75bps in the second quarter of 2020)

§ Retail Banking net fee and commission income. Net fee and commission income generation decreased during the second quarter and the first half of 2020. This was primarily driven by slower customer activity due to COVID-19 pandemic and temporary removal of fees on transactions executed through our mobile and internet banking platforms since mid-March 2020, for a two-month period, in order to decrease customer visits to branches and incentivise the transfer of customers' activity to digital channels

§ RB's asset quality. Cost of credit risk ratio was 0.2% in 2Q20 (down from 1.6% in 2Q19 and from 7.4% in 1Q20) and 3.7% in 1H20 (up from 2.0% 1H19). The significant increase in cost of credit risk ratio in 1H20 was due to the IFRS 9 reserve builds, created for the full economic cycle in 1Q20, primarily related to deterioration of the macro-economic environment and expected creditworthiness of borrowers as a result of the COVID-19 impact. These assumptions were further revisited during the second quarter to reflect the better visibility and the macro-economic forecast scenarios published by the NBG in May, resulting in additional ECL for the Retail Banking segment in 2Q20

§ Our Retail Banking business continued to further focus our strategy towards continuous digitalisation, as demonstrated by the following performance indicators:

9 The users that log-in in internet and mobile bank at least once in three months

§ Y-o-y growth in client base to 2,540,721 customers at 30 June 2020 was due to the increased offering of cost-effective remote channels and substantially improving our positioning in many key areas. Based on the latest research, Bank of Georgia is regarded as the most trusted financial institution in Georgia

§ The number of outstanding cards increased by 2.6% y-o-y and by 0.8% q-o-q at 30 June 2020. The number of Loyalty programme Plus+ cards (launched in July 2017 as part of RB's client-centric approach), reached 956,728 as at 30 June 2020, up 32.6% y-o-y and up 5.5% q-o-q

§ Digital channels. We have actively continued the further development of our digital strategy and therefore, 96% of total daily transactions of individuals were executed through digital channels during the second quarter of 2020

- mBank and iBank digital penetration. The Bank continued introducing new features to mobile banking application and internet bank and introducing dedicated digital spaces in our branches to incentivise transferring client activity to digital channels. The focus in this direction further increased after the COVID-19 pandemic outbreak, which the Bank responded to with various activities, such as instructive videos, incentives and call centre support for customers educating them how to use these digital channels. As a result of increased investments and efforts in this direction, the number of active users, as well as the number and volume of transactions through these channels, mostly mobile bank, continued to expand

- The utilisation of Express Pay terminals. The Bank has a large network of self-service terminals throughout Georgia, which are used extensively by its customers. The decline in number of transactions both y-o-y and q-o-q in 2Q20 and in 1H20, was primarily due to the continuous migration of customers to mobile banking platform

§ Business iBank. In 2019, the Bank released a new business internet banking platform for MSME and corporate clients, which comes with many features designed to make its use an intuitive and smooth experience. Since then, we have focused our efforts on making the Business iBank even more useful for business transactions to further incentivise transfer of client activity to digital channels. In the second quarter of 2020, the number (down 10.6% y-o-y and down 7.1% q-o-q) and volume (down 6.5% y-o-y and down 10.5% q-o-q) of Business iBank transactions declined, primarily reflecting the slowdown in business activity on the back of COVID-19 crisis and temporary lockdown of the economy during the April-May period. On a six months basis, both the number and volume of transactions through Business iBank still grew by 5.3% and 3.7% y-o-y, respectively, and more than 96% of daily transactions of legal entities were executed through the internet bank in 1H20

§ In August 2020, Global Finance Magazine named Bank of Georgia Best Consumer Digital Bank in Georgia in 2020, including regional awards in sub-categories such as Best Online Product Offering, Best Online Investment Management Services, Best Digital Bank in Lending and Best Trade Finance Services in Central and Eastern Europe for 2020

§ Digital ecosystem development. Currently, our digital ecosystem rests on two pillars: retail and MSME. Under the retail pillar, we launched two platforms in 2019 - real estate platform area.ge and online marketplace platform extra.ge. Under the MSME pillar, we launched Optimo in 2019, a digital solution for MSME customers to run their business sales and solutions

- In 1Q20, the Group in response to COVID-19 outbreak accepted the social and commercial challenge to play a vital role in addressing accelerated digital service demand. Due to social distancing and restrictions imposed on commercial activities, the Group's digital ecosystem arm proactively restructured its operations and commercial offerings to adapt to the changing environment. Core focus fell on extra.ge, which after its acquisition in 2Q19, has been transformed into a vibrant and dynamic platform, one of the largest full-scale digital marketplaces in Georgia, and the full-scale re-launch was completed as planned in the first quarter of 2020. During the second quarter of 2020, extra.ge mainly focused on acquisition of market share. Through different active campaigns and initiatives, the platform doubled the network of merchants operating in the country to 400+ vendors, selling 42,000+ SKUs (Stock keeping units), as well as significantly increased the number of registered users, delivering 50% increase in cashless payments. The platform undergoes continuous upgrades to make the shopping experience more user-friendly and easy for customers. The Group is also planning to launch mobile application of extra.ge in the third quarter of 2020

- Following the COVID-19 outbreak, during the first quarter of 2020, the Group structured a unique digital solution for merchants who were faced by customer scarcity and a heavy burden of restrictions. With the packaged solution, branded as Adapter, the Group is offering a best-in-class solution to the merchants, who can now undergo fast and efficient transformation to digital sales with just a simple plug-in. Adapter combines an integration of Optimo, an effective inventory and order management platform, with extra.ge, a digital marketplace, through which merchants can sell their products directly to customers remotely. Adapter quickly gained interest and popularity amongst market players, small merchants, as well as large physical marketplaces, which is evident through active negotiations and already onboarded partners. Adapter was highly accepted by hundreds of retailers and producers, exceeding initially planned targets. The Group has also completed the development of Optimo RECA, tailored core inventory management automation solution for restaurants, cafes and hotels, which is planned to be launched in the third quarter of 2020

- COVID-19 outbreak has significantly decreased activity in the real estate sector, therefore, directly impacting area.ge's operations and performance. As such, in the second quarter of 2020, area.ge has refocused its strategy towards facilitating and accelerating the real estate sales. The team has developed multiple solutions for real estate developer companies, which connect them closely with brokers and other market players, such as banks and financial institutions that provide mortgage loans as part of their product offering. Currently, the team is working on multiple solutions in relation to the subsidised mortgage loan programme initiated by the Government of Georgia

- In the second quarter of 2020, the Group, 500 Startups and the Georgia's Innovation and Technology Agency have launched 500 Startups Acceleration programme. The programme implies screening, selecting and accelerating the development of both Georgian and international early stage start-ups operating within the region. 14 companies from different business verticals have joined the programme and with the participation of Digital Area ecosystem around US$ 1 million is planned to be invested in the programme for development of these companies till the end of this year

§ SOLO, our premium banking brand, was the least impacted business from our Retail Banking segments, and continued its growth and investment in its lifestyle brand. We have 11 SOLO lounges, of which 9 are located in Tbilisi, the capital of Georgia, and 2 in major regional cities of Georgia. The number of SOLO clients reached 56,207 at 30 June 2020 (48,953 at 30 June 2019 and 56,327 at 31 March 2020). At 30 June 2020, the product to client ratio for the SOLO segment was 5.0, compared to 2.1 for our retail franchise. While SOLO clients currently represent 2.2% of our total retail client base, they contributed 30.1% to our retail loan book, 39.4% to our retail deposits, 25.7% and 33.7% to our net retail interest income and to our net retail fee and commission income in 2Q20, respectively. The fee and commission income from the SOLO segment was GEL 5.5mln in 2Q20 (GEL 6.6mln in 2Q19 and GEL 6.1mln in 1Q20) and GEL 11.7mln in first half of 2020 (GEL 12.4mln in 1H19). SOLO Club, a membership group within SOLO, which offers exclusive access to SOLO products and offers ahead of other SOLO clients at a higher fee, continued to increase its client base. At 30 June 2020, SOLO Club had 5,562 members, up 15.8% y-o-y and slightly down 1.0% q-o-q

§ MSME banking. The number of MSME segment clients reached 225,480 at 30 June 2020, up 3.5% y-o-y and up 0.4% q-o-q. MSME's gross loan portfolio reached GEL 2,929.4mln (up 23.2% y-o-y and down 2.9% q-o-q) and client deposits and notes amounted to GEL 791.4mln (up 11.0% y-o-y and up 5.4% q-o-q) at 30 June 2020. The MSME segment generated operating income of GEL 41.1mln in 2Q20 (down 17.7% y-o-y and down 18.6% q-o-q) and GEL 91.6mln in the first half of 2020 (down 4.0% y-o-y in 1H19), decline primarily driven by the slow-down in business activity on the back of COVID-19 pandemic outbreak and the temporary lockdown of the economy during April-May period

§ As a result, Retail Banking recorded a profit in the amount of GEL 49.5mln in 2Q20 (compared to profit adjusted for one-off costs of GEL 77.5mln10 in 2Q19 and a loss of GEL 78.0mln in 1Q20), and a loss of GEL 28.6mln in the first half of 2020 (compared to profit adjusted for one-off costs of GEL 147.2mln10 in 1H19). Retail Banking ROAE was 16.4% in 2Q20 (compared to ROAE of 26.9%10 in 2Q19 and negative profitability in 1Q20). On a six months basis, RB's profitability was negative in 1H20, compared to outstanding ROAE of 26.2%10 in 1H19. Loss and negative profitability, respectively, in 1Q20 and 1H20, resulted primarily from the increased cost of risk and non-recurring costs associated with the COVID-19 pandemic impact recorded in the first quarter of 2020

10 Profit and ROAE exclude GEL 3.1mln in 2Q19 and GEL 10.1mln in 1H19 one-off employee costs (net of income tax) related to termination benefits of the former CEO and executive management

CORPORATE AND INVESTMENT BANKING (CIB)

CIB provides (1) loans and other credit facilities to Georgia's large corporate clients and other legal entities, excluding SME and micro businesses; (2) services such as fund transfers and settlements services, currency conversion operations, trade finance services and documentary operations as well as handling savings and term deposits; (3) finance lease facilities through the Bank's leasing operations arm, the Georgian Leasing Company; (4) brokerage services through Galt & Taggart; and (5) Wealth Management private banking services to high-net-worth individuals and offers investment management products in Georgia and internationally through representative offices and subsidiaries in Tbilisi, London, Budapest, Istanbul and Tel Aviv.