TBC Bank Group Regulatory News (TBCG)

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TBC BANK GROUP PLC ("TBC Bank")

2Q AND 1H 2020 UNAUDITED CONSOLIDATED FINANCIAL RESULTS  

Forward-Looking Statements

This document contains forward-looking statements; such forward-looking statements contain known and unknown risks, uncertainties and other important factors, which may cause the actual results, performance or achievements of TBC Bank Group PLC ("the Bank" or the "Group") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are based on numerous assumptions regarding the Bank's present and future business strategies and the environment in which the Bank will operate in the future. Important factors that, in the view of the Bank, could cause actual results to differ materially from those discussed in the forward-looking statements include, among others, the achievement of anticipated levels of profitability, growth, cost and recent acquisitions, the impact of competitive pricing, the ability to obtain necessary regulatory approvals and licenses, the impact of developments in the Georgian economic,the impact of COVID-19, the political and legal environment, financial risk management and the impact of general business and global economic conditions.

None of the future projections, expectations, estimates or prospects in this document should be taken as forecasts or promises nor should they be taken as implying any indication, assurance or guarantee that the assumptions on which such future projections, expectations, estimates or prospects are based are accurate or exhaustive or, in the case of the assumptions, entirely covered in the document. These forward-looking statements speak only as of the date they are made, and subject to compliance with applicable law and regulation the Bank expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained in the document to reflect actual results, changes in assumptions or changes in factors affecting those statements.

Certain financial information contained in this presentation, which is prepared on the basis of the Group's accounting policies applied consistently from year to year, has been extracted from the Group's unaudited management's accounts and financial statements. The areas in which the management's accounts might differ from the International Financial Reporting Standards and/or U.S. generally accepted accounting principles could be significant; you should consult your own professional advisors and/or conduct your own due diligence for a complete and detailed understanding of such differences and any implications they might have on the relevant financial information contained in this presentation. Some numerical figures included in this report have been subjected to rounding adjustments. Accordingly, the numerical figures shown as totals in certain tables might not be an arithmetic aggregation of the figures that preceded them.

Second Quarter and First Half of 2020 Unaudited Consolidated Financial Results Conference Call

TBC Bank Group PLC ("TBC PLC") publishes its unaudited consolidated financial results for the second quarter and half year of 2020 on Tuesday, 18 August 2020 at 7.00 am BST (10.00 am GET), while the results call will be held at 14.00 (BST) / 15.00 (CEST) / 9.00 (EST).

Please click the link below to join the webinar:

https://tbc.zoom.us/j/92746432667?pwd=bUs5SnRxeWp3Q3Y2V3NwMElZUmVIUT09

Webinar ID: 927 4643 2667

Password: 424396

Or use the following dial-ins:

o Georgia: +995 7067 77954 or +995 3224 73988 or 800 100 293 (Toll Free)

o Russian Federation: 8800 301 7427 (Toll Free) or 8800 100 6938 (Toll Free)

o United Kingdom: 0 800 260 5801 (Toll Free) or 0 800 358 2817 (Toll Free) or 0 800 031 5717 (Toll Free)

o US: 833 548 0282 (Toll Free) or 877 853 5257 (Toll Free) or 888 475 4499 (Toll Free) or 833 548 0276 (Toll Free)

Webinar ID: 927 4643 2667#, please dial the ID number slowly

Other international numbers available at: https://tbc.zoom.us/u/afRUs7Io5

The call will be held in two parts. The first part will be comprised of presentations and during the second part of the call, you will have the opportunity to ask questions. All participants will be muted throughout the webinar.

Webinar Instructions:

For those participants who will be joining through the webinar, in order to ask questions, please use the "hand icon" that you will see at the bottom of the screen. The host will unmute those participants who have raised hands one after another. After the question is asked, the participant will be muted again.

Call Instructions

For those participants who will be using the dial in number to join the webinar, please dial *9 to raise your hand.

Contacts

Table of Contents

2Q AND 1H 2020 Results Announcement

TBC Bank - Background

Financial Highlights

Letter from the Chief Executive Officer

Supporting stakeholders

Economic Overview

Unaudited Consolidated Financial Results Overview for 2Q 2020

Unaudited Consolidated Financial Results Overview for 1H 2020

Additional Disclosures

1) Subsidiaries of TBC Bank Group PLC

2) Our Ecosystems

3) Net gains from currency swaps

4) TBC Insurance

6) Main terms of shareholders' agreement with Yelo Bank

7) Loan book breakdown by stages according IFRS 9

Material Existing and Emerging Risks

Statement of Directors' Responsibilities

Unaudited Condensed Consolidated Interim Financial Statements

TBC Bank Group PLC ("TBC Bank")

TBC Bank Announces Unaudited 2Q and 1H 2020 Consolidated Financial Results

 European Union Market Abuse Regulation EU 596/2014 requires TBC Bank Group PLC to disclose that this announcement contains Inside Information, as defined in that Regulation.

The information in this announcement, which was approved by the Board of Directors on 17 August 2020, does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2019, which contained an unmodified audit report under Section 495 of the Companies Act 2006 (which did not make any statements under Section 498 of the Companies Act 2006) have been delivered to the Registrar of Companies in accordance with Section 441 of the Companies Act 2006.

TBC Bank - Background

TBC Bank is the largest banking group in Georgia, where 99.6% of its business is concentrated, with a 38.5% market share by total assets. It offers retail, corporate, and MSME banking nationwide.

These unaudited financial results are presented for TBC Bank Group PLC ("TBC Bank" or "the Group"), which was incorporated on 26 February 2016 as the ultimate holding company for JSC TBC Bank Georgia. TBC Bank became the parent company of JSC TBC Bank Georgia on 10 August 2016, following the Group's restructuring. As this was a common ownership transaction, the results have been presented as if the Group existed at the earliest comparative date as allowed under the International Financial Reporting Standards ("IFRS"), as adopted by the European Union. TBC Bank successfully listed on the London Stock Exchange's premium listing segment on 10 August 2016.

TBC Bank Group PLC's financial results are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and the Companies Act 2006 applicable to companies reporting under IFRS.

Please note that there is an important update set out in paragraph 9 of the Material Existing and Emerging Risks section on page 49.

Changes in accounting policies, IAS 16

In 2Q 2020, the accounting policy in relation to subsequent measurement of land, buildings and construction in progress was changed from the revaluation model to the cost model. This led to the restatement of appropriate balance sheet amounts in 1Q 2020 and 2019, while no material impact was recorded in the income statement.

Financial Highlights

In the first half 2020, our financial results were affected by the following non-recurring charges related to the COVID-19 pandemic:

· a net modification loss of financial instruments, in the amount of GEL 34.2 million (out of which GEL 30.6 million was accounted for in the first quarter and GEL 3.5 million in the second quarter) to reflect the decrease in the present value of cash-flows resulting from the loan repayment grace periods granted to borrowers; and

· an extra credit loss allowance booked in the first quarter, in the amount of GEL 215.7 million (or GEL 210.9 million for loans), to prepare for the potential impact of the COVID-19 pandemic on our borrowers. In the second quarter, we also created additional GEL 9.0 million COVID-19 related credit loss allowances for loans in our Azeri subsidiary, TBC Kredit. These charges resulted in additional COVID-19 related, not annulized cost of risk in the amount of 1.7% in 2Q and 1H 2020.

· Without the above mentioned COVID-19 related charges, ROE and ROA amounted to 19.6% and 2.8% respectively in 2Q 2020, while in 1H 2020, ROE and ROA stood at 21.2% and 3.0% respectively.

The financial performance measures presented in this report show our reported figures only, while the impact of the above mentioned COVID-19 related, non-recurring charges is discussed in our 2Q financial results presentation available at our Investor Relations website at www.tbcbankgroup.com under the Results Announcement section.

2Q 2020 P&L Highlights 

o Profit for the period amounted to GEL 126.2 million (2Q 2019: GEL 120.2 million)

o Return on average equity (ROE) stood at 19.5% (2Q 2019: 21.1%[1])

o Return on average assets (ROA) stood at 2.6% (2Q 2019: 3.0%1)

o Cost to income of TBC Bank Group PLC stood at 38.5% (2Q 2019: 40.2%)

o Standalone cost to income ratio of the Bank[2] was 32.3% (2Q 2019: 35.2%)

o Cost of risk stood at 0.0%[3] (2Q 2019: 1.1%)

o Net interest margin (NIM) stood at 4.3% (2Q 2019: 5.8%)

1H 2020 P&L Highlights 

o Profit for the period amounted to GEL 69.2 million (1H 2019: GEL 253.5 million)

o Return on average equity (ROE) stood at 5.2% (1H 2019: 22.8%[4])

o Return on average assets (ROA) stood at 0.7% (1H 2019: 3.3%4)

o Cost to income of TBC Bank Group PLC stood at 37.4% (1H 2019: 38.9%)

o Standalone cost to income ratio of the Bank2 was 31.9% (1H 2019: 35.7%)

o Cost of risk stood at 2.1%[5] (1H 2019: 1.3%)

o Net interest margin (NIM) stood at 4.7% (1H 2019: 6.0%)

Balance Sheet Highlights as of 30 June 2020

o Total assets amounted to GEL 19,813.4 million, up by 15.0% YoY

o Gross loans and advances to customers stood at GEL 13,635.4 million, up by 22.4% YoY or at 18.1% on a constant currency basis

o Net loans to deposits + IFI[6] funding stood at 105.3%, up by 13.9 pp YoY, and Regulatory Net Stable Funding Ratio (NSFR), effective from 30 September 2019, stood at 127.5%

o NPLs were 2.9%, down by 0.2 pp YoY

o NPLs coverage ratios stood at 134.7%, or 246.7% with collateral, on 30 June 2020 compared to 97.9% or 206.0% with collateral, as of 30 June 2019

o Total customer deposits amounted to GEL 10,420.3 million, up by 5.5% YoY or at 1.4% on constant currency basis

o The Bank's Basel III CET 1, Tier 1 and Total Capital Adequacy Ratios per NBG methodology stood at 10.0% 12.7% and 17.2% respectively, while minimum eased regulatory requirements amounted to of 6.9%, 8.7%, and 13.3%, respectively.

Market Shares as of June 2020[7]

o Market share by total assets reached 38.5%, down by 0.6 pp YoY

o Market share by total loans was 39.5%, up by 1.0 pp YoY

o Market share of total deposits reached 37.1%, down by 3.9 pp YoY

2Q 2020 operating highlights

o The number of affluent customers reached 91.0 thousand as of 30 June 2020, up by 173% YoY

o 96% of all transactions were conducted through digital channels (2Q 2019: 93%)

o The penetration ratio for internet or mobile banking[8] stood at 48% for 2Q 2020 (2Q 2019: 44%)

o The penetration ratio for mobile banking[9] stood at 45% for 2Q 2020 (2Q 2019: 39%)

* Certain amounts do not correspond to the 2019 consolidated financial statement as they reflect the change in accounting policy for PPE from revaluation model to cost method in 2Q 2020.

* Prior to change in PPE accounting policy from revaluation model to cost method, ROE stood at 20.7% and 22.3% for 2Q 2019 and 1H 2019, respectively, while ROA remained unchanged for both periods

** Ratio includes COVID-19 related TBC Kredit credit loss allowances for loans, in the amount of GEL 9.0 million, which given its non-recurring nature was not annualized

***Ratio includes COVID-19 related credit loss allowances for loans, in the amount of GEL 219.9 million, which given its non-recurring nature was not annualized

**** Prior to change in PPE accounting policy from revaluation model to cost method, Leverage stood at 7.3x for 2Q 2019 and 1H 2019

Letter from the Chief Executive Officer 

I would like to present our financial and operating results for the second quarter and first half of 2020 and update you on recent economic developments in the country. I am pleased to say that the Georgian economy has started its recovery from the negative impacts of the pandemic and the performance of the group in the second quarter also fills me with confidence.

Georgia continues to manage the COVID-19 crisis effectively. The number of new cases remains very low and Georgia has been recognized by the EU as one of 13 epidemiologically safe countries outside the EU. International flights are expected to resume gradually starting from August, though a substantial recovery in tourism inflows is expected only in 2021. At the same time, remittances increased by 17.8% in June and exports have demonstrated much stronger dynamics than expected. The recovery in the domestic demand also appears strong, judging from the June imports rebound and rapid macro and sector indicators such as the increase in consumer spending and remittances[12]. Based on initial estimates, GDP declined by 7.7% in June, while it dropped by 16.6% and 13.5% in April and May, respectively. For the full year 2020, we maintain our earlier projection of around a 4.5-5.5% contraction of the economy and expect it to mostly recover to pre-crises levels in 2021.

Government policies play an important role in mitigating the impact of the crisis. An updated state budget was approved in June with the 2020 deficit planned at 8.5%, mostly financed by additional external borrowings of about USD 1.6 billion. These additional funding would be sufficient even in case the performance of the economy is worse than assumed in the baseline scenario, part of which would be allocated to create a fiscal buffer of around 5% of GDP.Together with the fiscal stimulus, the monetary and the financial sector supervision policies have also been supportive. The NBG has continued to intervene to stabilize the currency rate during the pandemic. In addition, the NBG gradually cut the monetary policy rate to support GEL lending, while keeping a close eye on the inflation rate in the light of current uncertainties. The confidence in the banking system, as well as increasing capital and liquidity levels, continue to support the recovery.

Resilient financial performance

In the first half 2020, our financial results were affected by the following non-recurring charges related to the COVID-19 pandemic:

· a net modification loss of financial instruments, in the amount of GEL 34.2 million (out of which GEL 30.6 million[13] was accounted for in the first quarter and GEL 3.5 million[14] in the second quarter) to reflect the decrease in the present value of cash-flows resulting from the loan repayment grace periods granted to borrowers; and

· an extra credit loss allowance booked in the first quarter, in the amount of GEL 215.7 million (or GEL 210.9 million for loans), to prepare for the potential impact of the COVID-19 pandemic on our borrowers. In the second quarter, we also created additional GEL 9.0 million COVID- 19 related credit loss allowance in our Azeri subsidiary, TBC Kredit.

Consequently, in the first half 2020, our consolidated net profit stood at GEL 69.2 million. Over the same period, return on equity stood at 5.2% and return on assets stood at 0.7%.

In the second quarter 2020, our consolidated net profit amounted to GEL 126.2 million, up by 5% year-on-year. The growth in net profit was driven by recoveries in credit loss allowances and a reduction in operating expenses, which offset the reduction in operating income resulting from the slowdown in business activities due to the pandemic. Over the same period, we experienced pressure on our net interest margin, which decreased by 0.8pp quarter-on-quarter and stood at 4.3%, mainly due to high liquidity and respective pressure on GEL funding, a decrease in Libor and Fed rates, as well as an increase in the average GEL exchange rate QoQ.

On the positive side, in the second quarter 2020, our cost of risk stood at 0.0%[15] and our cost-to-income ratio amounted to 38.5%, down by 1.7 pp year-on-year due to our increased focus on cost efficiency. Also, the Bank's standalone cost-to-income ratio[16] stood at 32.3% in the second quarter 2020, down by 2.9 pp year-on-year. As a result, our return on equity stood at 19.5% and return on assets stood at 2.6% over the same period.

In constant currency terms, our loan book remained broadly stable on a quarter-on-quarter basis, growing by 1.9%, while our deposits decreased by 2.6%. As a result, our market share in total loans and total deposits stood at 39.5% and 37.1% respectively as of 30 June 2020.

Our liquidity and capital positions remain strong. As of 30 June 2020, our net stable funding (NSFR) and liquidity coverage ratios (LCR) stood at 128% and 125% respectively. As expected, in the second quarter, we started to generate significant buffers for our capital and our CET1, Tier 1 and total capital ratios increased by 0.5%, 0.8% and 0.9% respectively and stood at 10.0%, 12.7% and 17.2% correspondingly, comfortably above the minimum requirements.

Operating performance and recent developments

Our market leading internet and mobile banking services have proved crucial during the pandemic, allowing our customers to conduct most of their transactions remotely. As a result, the number of internet or mobile banking users increased by 13% YoY and reached 633,000[17], leading to a 48% penetration level.

In terms of our strategic progress, I am delighted to inform you that on 29 June 2020, we launched our banking operation in Uzbekistan, initially in a pilot mode for "friends and family", and plan to extend our services to the broader population in fall 2020. In line with our asset-light and highly digitalized strategy, we will be serving our customers mainly through our online platform, Space, while our smart, next generation branches will be used primarily for client relationship purposes. The first pilot branch has already opened.

I am also delighted to inform you that as a testimony to our commitment towards the highest standards of corporate social responsibility, TBC Bank became a member of the FTSE4Good Index Series[18] in June 2020. In addition, TBC Bank has been also rated as low risk in terms of its ESG performance by Sustainalytics[19] based on its most recent review on 4th March 2020.

Furthermore, I would like to inform you about changes in our management board and Board of Directors. Giorgi Shagidze, deputy CEO and CFO and member of the Board of Directors, intends to leave the group at the end of 2020 to explore other opportunities in a different field and/or geography. He will continue to perform his duties until the year-end in order to ensure a smooth transition to his successor. I would like to thank Giorgi for his crucial contribution towards bringing the group to the next level over the past 10 years and wish him success in his future endeavors. I would also like to welcome our new Independent Non-Executive Director, Abhijit Akerkar.  Mr Akerkar is an influential thought leader in Artificial Intelligence in banking and has 25 years of cross-disciplinary global experience operating at a strategic level at the forefront of technology with Lloyds Banking Group, McKinsey and Company, and HCL Technologies.

The board also intends to add one more independent non-executive director by the year-end and has commenced a search process to identify suitable candidates. The board intends to use this opportunity to further support diversity at the board level.

Finally, the bank was informed by the founders that they are taking steps to transfer their shares into a blind trust and expect this process to be completed before the year-end.

Outlook

Given the uncertainties associated with the COVID-19 pandemic, our focus in the short-term will be maintaining prudent capital and liquidity positions and, proactively managing asset quality and cost optimization. At the same time, we will concentrate our efforts on supporting existing customers to withstand the negative impacts of COVID-19 rather than the acquisition of new clients.

In the medium term (3 to 5 years), we remain committed to our guidance: ROE of above 20%, a cost to income ratio below 35%, a dividend payout ratio of 25-35% and loan book growth of around 10-15%.

I would like to finish my letter by expressing a deep appreciation to every single employee of the TBC Group for carrying on with their duties with professionalism and outstanding commitment during these challenging times.

Supporting stakeholders

Our stakeholders

TBC responded promptly to the spread of COVID-19 in its early stages by developing an anti-crisis plan for both employees and customers as well as extending its support to the community at large, while ensuring the financial stability of the Group, as discussed in the CEO letter.

Supporting our colleagues

First of all, for our front-offices staff, we have introduced appropriate social distancing and infection prevention measures

We also managed to change our operating model swiftly and started to move our back-office employees to remote working practices from mid-March. Already by the end of April, 95% of our back office-employees were working remotely. This turned out to be very effective, leading to increase in efficiency levels, creativity and employee happiness. We intend to extend this flexible working arrangement post pandemic whereby the majority of our staff can choose remote working.

We feel a responsibility towards the well-being of each of our 7,800 employees and therefore we have made a decision not to make any redundancies during this year. However, in order to keep our costs under control, senior management decided to forgo their entire bonuses for 2020 and LTIP grants for the 2020 cycle and also to reduce the bonuses of middle and back-office managers by 50% and 30%, respectively.

Supporting our customers

We have promptly mobilized all our efforts to provide full support to our customers and help them recover from the negative impacts of the COVID-19 pandemic. In this regard, with close cooperation with the National Bank of Georgia and the government, we have implemented the following initiatives:

· In March, we introduced a three-month grace period on principal and interest payments for individual and MSME customers as well as those corporate customers who are most affected by the current situation. The take-up rate per segments was as follows: 32%-corporate, 59%-MSME and 77%-retail;

· In addition, starting from June 10th, we extended the grace period for a further three months to our most vulnerable retail and micro customers, based on specific qualification criteria. The take-up rate per segments was as follows: 5%-corporate, 24%-MSME and 29%-retail;

· Since April, we have been actively participating in the government's support programme for MSME hotels, which envisages subsidies for 70-80% of interest on loans issued before 1st March 2020 for 6 months, based on certain criteria. In May, this programme was extended to large hotels as well. By the end of July, we have already received subsidies for around 265 loans, with a total outstanding loan amount of GEL 44 million.

· Since second half of July, the Bank is also participating in the government loan guarantee programme, which envisages supporting certain businesses, which do not have sufficient collateral for a loan or do not meet some other underwriting criteria. Under this programme, the government will guarantee the repayment of 90% of the principal amount in case of a new loan, and 30% in case of a restructured loan. A total of GEL 300 million has been allocated by the government to this programme; according to our estimates, 34% of this amount could be utilized by TBC Bank. By the end of July, we have received guarantees for 8 loans, with a total amount of GEL 6 million.

· From beginning of July, we started issuing loans under government support programmes for developers allowing customers to get a 4% interest subsidy or receive a 20% guarantee (in case of minimum 10% participation from the borrower side) for purchasing new apartments under GEL 200,000 for a duration of 5 years. By the end of July, we have disbursed around 283 such loans with a total amount of GEL 27 million.

Furthermore, we have provided additional incentives to our customers to use our market-leading digital banking platform, such as a temporary waiver of fees on money transfers and utilities payments in internet and mobile banking.

Supporting our communities

In order to support the Georgian population and reduce the damage caused by COVID-19, we have launched a special programme called #TBCforyou. Within the scope of this programme, we have undertaken several projects, including the following:

· More than 1,000 elderly people living in the capital and regions received food, medicine and other safety items;

· TBC has purchased 10,000 COVID-19 rapid tests and handed them over to the Ministry of Health;

· TBC has purchased laptops for 161 socially vulnerable students at six universities as well as for 100 socially vulnerable senior-grade students residing in different regions of Georgia. TBC will also cover their monthly internet fee until the end of the school year;

· TBC and VISA have launched a new initiative for companies called "Create your own online store", which helps companies to create their online store in a short period of time;

· A special platform was launched to allow people to support their favorite Georgian company by transferring money in return for a voucher, which they would be able to redeem once the business could operate normally.

Economic Overview

Economic growth

Real GDP increased by 2.2% in the first quarter of 2020, already reflecting the economic damage caused by the spread of COVID-19 globally, though maintaining the positive dynamics carried over from the strong growth in 2019 (5.1% YoY). Thereafter, as strict mobility restrictions were introduced, the economy contracted by 16.6% in April, 13.5% in May and 7.7% in June. Accordingly, the Georgian economy dropped by 5.8% in the first half months of 2020 YoY. All sectors of the economy registered declines as the economy continued to operate under the strict mobility restrictions during for most of May. The smaller decrease in GDP in June compared to the previous two months is attributable to the removal of most of the restrictions starting from the end of May. As most of the sectors have been allowed to reopen in June, the annual GDP decline should continue to moderate going forward. According to TBC Capital estimates, in the baseline scenario the GDP drop is expected to be 4.5-5.5% before recovering by 4.0-5.0% in 2021. So far, the actual numbers remain broadly consistent with TBC Capital projections.

External sector

The tourism industry has been hit the hardest as tourism inflows went down by an estimated 96.7% YoY in 2Q 2020, following a 26.1% drop in 1Q 2020. Regular flights remain halted and will only gradually start to recover in August. Epidemiological developments in neighboring countries, which make up almost half of the total tourism revenues, also remain challenging. Much of 2020 is likely to be lost for the tourism industry, with domestic tourism compensating for only a fraction of the loss. On the other hand, Georgia maintains an image of being a safe destination as the spread of COVID-19 is at very low levels. This, together with its proven potential as an attractive tourism destination, should help the country to regain its position relatively quickly once the virus is contained.

The spread of COVID-19 and related restrictions have translated into a sharp adjustment of external trade in 2Q 2020, with exports of goods down by 24.8% YoY and imports by 32.8% YoY. The decline of exports moderated to 14.0% YoY in June from a 31.3% YoY decline in May 2020. The fall in imports also softened to 17.2% YoY (-36.8% YoY in May). Despite a continued improvement in the balance of trade in goods, the rate of improvement is starting to worsen as the recovery of domestic demand is quite strong. At the same time, stronger than expected performance in the remittance inflows is observed. Specifically, remittance inflows fell by 10.9% YoY in 2Q 2020, reflecting limited economic activity in most remitting countries. However, a recovery within the quarter was apparent as it moved from a low point of -42.3% YoY in April 2020 to strong growth of 17.6% in June 2020, though some of the recovery in digital transfers could be due to the restrictions of physical travel.

FDI inflows in Georgia shrank by -41.7% YoY to USD 165.4 million in 1Q 2020, with the decline attributable to uncertainties related to COVID-19 along with one-off factors such as the completion of a BP pipeline project and transferring company ownerships from non-resident to resident units. The reinvestment of earnings made up slightly more than 80% of total FDI inflows, while debt and equity inflows shrank dramatically compared to the same period in the previous year.

The current account balance to GDP ratio stood at -11.0% in 1Q 2020, down 4.1 PP YoY. The widening CA deficit mostly reflects the worsened trade balance in goods (from -20.8% of GDP to -23.4% of GDP) as well as a lower surplus in services trade (from 9.7% of GDP to 6.6% of GDP), mostly on the back of declined tourism inflows. Current transfers somewhat improved, while the income account widened moderately. On the financing side, net FDI inflows almost halved from 6.4% of GDP in 1Q 2019 to 3.3% of GDP in 1Q 2020. At the same time, NBG selling reserves (2.6% of GDP) and other borrowings attracted mostly by commercial banks covered higher the CA deficit in 1Q 2020.

Fiscal stimulus 

Key budget parameters were revised substantially to accommodate a stimulus package to support the economy amid the COVID-19 related fallout. The budget deficit is currently projected at 8.5% of GDP for 2020, mostly to be financed by the additional external borrowing amounting to USD 1.6 billion. Higher spending will be diverted to both social spending as well as to support crisis-affected sectors. More importantly, secured funding is enough to finance the increased budget deficit, as well as to create a buffer of GEL 2.7 billion (5.4% of GDP), which will be available in case of further deterioration of the macro scenario, compared with the baseline one.

Credit growth

Bank credit growth also moderated to 13.9% YoY on FX adjusted terms as of June 2020, compared to 17.1% YoY growth by the end of 1Q 2020. In terms of the segments, corporate lending slowed to 22.6% from the 28.7% YoY growth registered in March 2020, while MSME lending also weakened to 14.1% YoY compared to 17.1% YoY in March. At the same time, retail lending, with 7.1% YoY growth by the end of 2Q 2020, remained relatively stable as weakening in the mortgage lending was partly offset by improving growth in non-mortgage loans. The latest indicators point to a recovery in mortgage credit, which was also supported by the relevant state housing stimulus package. However, on QoQ basis the growth was limited as expected.

Inflation, monetary policy and the exchange rate

Following an uptick in inflation in April and May 2020, mostly reflecting the increase of food prices, annual inflation retreated to 6.1% in June 2020 on the back of monthly decline of food prices as well as a continued fall in energy inflation. On the other hand, core inflation, the gauge of prices excluding energy and food, continued to accelerate to 6.6% YoY in June, compared to 3.7% YoY in March 2020. It is likely that the lagged effects of the undervalued exchange rate, coupled with the additional cost of companies related to the COVID-19 restrictions, are putting upward pressure on inflation. Despite some likely short-term effects of increasing costs, annual inflation is expected to continue to decline, reflecting the relative stability of the effective exchange rate, downward pressure from lower aggregate demand and the high base effects from the previous year. While commodity prices eased inflation pressures in the previous months, the effect going forward may reverse due to the solid recovery in oil and a number of other key commodity prices.

The NBG continued to ease monetary policy and delivered a 1.0 pp rate cut year-to-date, bringing the policy rate to 8.0% compared to 9.0% by the end of 2019. Despite still considerable uncertainties surrounding developments in aggregate demand, per the latest NBG projections, inflation is expected to decline towards the target rate of 3% in the first half of 2021.

As of the end of June 2020, the USD/GEL exchange rate of GEL depreciated by 17.0% YoY, while the EUR/GEL exchange rate depreciated by 5.5% YoY. The real effective exchange rate (REER) of the GEL weakened by 2.1% YoY in June 2020 while it appreciated by 1.4% MoM. The GEL REER likely remains undervalued from the medium as well as from the long-term perspective. NBG actively intervenes in the FX market to largely compensate the shortage of inflows. As of the end of July, NBG sold USD 270 million via the FX interventions (additional USD 11.5 million was sold on the interbank market without FX auctions in the first half of the year). NBG's International reserves, coupled with additional external borrowings in the amount of USD 1.6 billion as mentioned above, are expected to be sufficient to continue to supply FX to the market.

Going forward

According to the World Bank's Global Economic Prospects, which were updated in June 2020[20], the Georgian economy is expected to drop by 4.8% in 2020 and recover by 4% in 2021, which is broadly consistent with TBC Capital's projection of a 4.5-5.5% decline and a 4.0-5.0% recovery. Nevertheless, risks to the outlook remain considerable, but are likely mostly in the short term rather than the medium term. Once the virus is contained, the Georgian economy is likely to return to its trend growth rate of around 5.2%, as also indicated by the IMF's medium term projections[21]. Also, Georgia is well placed to benefit from some emerging opportunities related to potential changes in the structure of global supply chains as well as the increased tendency of teleworking.

More information on the Georgian economy and financial sector can be found at www.tbccapital.ge

Unaudited Consolidated Financial Results Overview for 2Q 2020

This statement provides a summary of the unaudited business and financial trends for 2Q 2020 for TBC Bank Group plc and its subsidiaries. The quarterly financial information and trends are unaudited.

TBC Bank Group PLC financial results are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and the Companies Act 2006 applicable to companies reporting under IFRS.

Changes in accounting policies, IAS 16

In 2Q 2020, the accounting policy in relation to subsequent measurement of land, buildings and construction in progress was changed from the revaluation model to the cost model. This led to the restatement of appropriate balance sheet amounts, in 1Q 2020 and 2019, while no material impact was recorded in the income statement.

Net Interest Income

In 2 Q 2020, net interest income amounted to GEL 184.4 million, down by 6.6% YoY and 11.3% on a QoQ basis.

The YoY increase in interest income by GEL 52.8 million or 15.5% was primarily related to an increase in interest income from loans, which was driven by an increase in the gross loan portfolio of GEL 2,494.0 million, or 22.4%. This was partially offset by a 1.3 pp drop in loan yields across all segments, mainly related to decrease in Libor rate, currency devaluation, change in segment mix towards corporate, as well as competition.

Over the same period, interest expense increased by GEL 62.9 million, or 42.0%, mainly driven by an increase in interest expense from Senior and AT1 Bonds issued in June and July 2019, respectively in the total amount of US$ 425 million, as well as an increase in the average balance of the NBG loan. Overall, the GEL cost of funding increased by 1.5 pp YoY mainly driven by an increase in the refinance rate as well as increased cost of GEL deposits. Over the same period, FC cost of funding remained unchanged despite the decrease in Libor rate, which was offset by cost of debt securities issued, as mentioned above.

The slight decrease in interest income on a QoQ basis by GEL 1.7 million or 0.4% was mainly triggered by a decrease in income from mandatory reserves placed at NBG due to the drop in the Federal funds rate. This decrease was partially offset by the increase in interest income from investment securities, in line with a growth in the respective portfolio of GEL 367.0 million or 17.9% over the same period.

QoQ interest expense increased by GEL 17.3 million, or 8.9%, which was primarily driven by increase in the interest expense on GEL borrowed funds from the NBG, related to an increase in the respective average balance mainly due to the change in GEL funding sources. This increase more than offset by the decrease in the refinance rate. The FC cost of funding remained unchanged despite a decrease in Libor rate, which was offset by a slight change in liability structure towards IFI funding.

Since 4Q 2019, we have re-classified net gains from currency swaps from other operating income to net interest income. In 2Q 2020, our net gains from currency swaps decreased by 43.1% YoY and 53.7% on a QoQ basis driven by the decline in the interest rate spread on the international markets, due to a decline in federal funds rate. More information about the re-classification is given in annex 3 on page 40.

In 2Q 2020, our NIM stood at 4.3%, down by 1.5 pp YoY and 0.8 pp on a QoQ basis.

Net fee and commission income

In 2Q 2020, net fee and commission income totalled GEL 39.5 million, down by 9.2% YoY and 9.3% QoQ.

The YoY decrease was mainly related to a reduction in other net fee and commission income due to a decrease in cash transactions, as well as a decline in net fee and commission income from card operations, on the back of the slow-down of economic activity due to the COVID-19 pandemic. Furthermore, starting from 4Q 2019 we reclassified certain fees from our Uzbek subsidiary Payme (Inspired LLC) from other sub-category to settlement transactions, in the amount of GEL 3.6 million in 2Q 2020. The decrease was partially offset by an increase in guarantees issued and letters of credit due to an increase in the respective portfolio.

On a QoQ basis, all major categories decreased due to the slowdown in business activities related to the COVID-19 pandemic. This effect was slightly offset by an increase in guarantees issued and letters of credit, due to increase in average portfolio. 

Other Non-Interest Income

Total other non-interest income decreased by 16.5% YoY and 32.5% QoQ, amounting to GEL 26.2 million in 2Q 2020.

Both the YoY and QoQ decreases were mainly related to a decline in net income from foreign currency operations. The former decrease was mainly attributable to the reduced scale of FX transactions across all segments, as a result of lower economic activities, as well as the reduced margin due to lower volatility.

Net insurance premium earned after claims and acquisition costs increased by 26.3% YoY, mainly related to the overall increase in the scale of the insurance business as well as decrease in claims during the lock-down period related to COVID-19 pandemic. More information about TBC insurance can be found in Annex 4 on page 41.

Credit Loss Allowance

Credit loss allowance for loans in 1Q 2020 amounted to GEL 241.0 million, out of which GEL 210.9 million was COVID-19 related as disused on page 5. The largest impact comes from the retail segment, followed by the MSME. In 2Q 2020, total credit loss allowance was mainly driven by MSME and corporate segments, which was offset by recovery of provisions in retail segment. In addition, 2Q credit loss allowances includes COVID-19 related TBC Kredit credit loss allowances for loans in the amount of GEL 9.0 million.

* Ratio includes COVID-19 related TBC Kredit credit loss allowances for loans, in the amount of GEL 9.0 million, which given its non-recurring nature was not annualized

** Ratio includes COVID-19 related credit loss allowances for loans, in the amount of GEL 210.9 million, which given its non-recurring nature was not annualized

NMF - no meaningful figures

Operating Expenses

In 2Q 2020, we continue to implement cost efficiency across all levels. As a result, in 2Q 2020 our operating expenses decreased by 11.9% YoY and 9.0% QoQ. The reduction was mainly related to decrease in administrative and other expenses due to the COVID-19 effects and included discretionary administrative expenses such as advertising, marketing and consultation services as well as the impact from renegotiated rent expenses per IFRS 16 in the amount of GEL 4.2 million.

As a result, in 2Q 2020, our cost to income ratio stood at 38.5%, down by 1.7 pp YoY and up by 2.0 pp QoQ, while our standalone cost to income stood at 32.3% down by 2.9 pp YoY and up by 0.8 pp on a QoQ basis.

* For the ratio calculation all relevant group recurring costs are allocated to the bank

NMF - no meaningful figures

Net Income

In 2Q 2020, we generated GEL 126.2 million in net profit up by 5.0% YoY, mainly due to recoveries in credit loss allowance and a decrease in operating expenses, which were offset by the reduction in operating income due to COVID-19 pandemic.

As a result, our ROE stood at 19.5%, down by 1.6 pp YoY, while ROA stood at 2.6%, down by 0.4 pp YoY.

*Prior to change in PPE accounting policy from revaluation model to cost method, ROE stood at 20.7% while ROA remained unchanged in 2Q 2019

Funding and Liquidity

As of 30 June 2020, the total liquidity coverage ratio, as defined by the NBG, was 124.8%, above the 100% limit, while the LCR in GEL and FC stood at 141.0% and 117.3% respectively, above the respective limits of 75% and 100%.

However, in the light of COVID-19 pandemic, starting from May 2019, NBG removed minimum requirement on GEL LCR of 75%, for one year period. Despite ease of requirement, our internal limit of 75% remains unchanged and we continue to operate with high liquidity buffers.

As of 30 June 2020, NSFR stood at 127.5%, compared to the regulatory limit of 100%, effective from September 2019.

* Prior to change in PPE accounting policy from revaluation model to cost method, Leverage stood at 7.8x as of 31 March 2020

Regulatory Capital

As expected, in 2Q we started to generate sufficient capital buffers and our CET1, Tier 1 and Total Capital ratios increased by 0.9%, 0.7% and 0.5% respectively QoQ.

In 2Q, CET1 increased by 7.4% QoQ mainly due to net income generation, while Tier1 and Total Capital grew by only 4.0% and 0.7% respectively, since AT1 bonds and subordinated loans are denominated in FX and are thus negatively affected by GEL appreciation.

The QoQ decrease in RWA was mainly driven by the GEL appreciation in 2Q.

Loan Portfolio

As of 30 June 2020, the gross loan portfolio reached GEL 13,635.4 million, down by 2.1% QoQ or up by 1.9% at a constant currency basis. The slowdown in lending relates to COVID-19 pandemic. The proportion of gross loans denominated in foreign currency decreased by 1.7 pp QoQ and accounted for 60.7% of total loans, while on a constant currency basis the proportion of gross loans denominated in foreign currency increased by 0.1 pp QoQ and stood at 62.3%.

As of 30 June 2020, our market share in total loans stood at 39.5%, up by 0.1 pp QoQ. Our loan market share in legal entities was 39.2%, up by 0.7 pp over the same period, and our loan market share in individuals stood at 39.9%, down by 0.4 pp QoQ.

Loan Portfolio Quality

Total PAR 30 decreased by 1.0 pp on QoQ basis and stood at 1.3%. The decrease was driven by an improved performance across all segments. Our total NPLs stood at 2.9% and remained flat QoQ. However, COVID-19 impact has not been yet realized in those ratios mainly due to grace period offered to our customers.

Cost of risk 

Total cost of risk decreased by 1.1 pp YoY and 2.6 pp on QoQ basis and stood at 0.0%. Cost of risk in 2Q also includes the COVID-19 related TBC Kredit credit loss allowances for loans, in the amount of GEL 9.0 million, which given its non-recurring nature has not been annualized.

In 2Q 2020, CoR was mainly driven by the charges in MSME and corporate segments, which were offset by reversal of credit loss allowances in retail segment.

* Cost of risk in 2Q 2020 includes COVID-19 related TBC Kredit credit loss allowances for loans, in the amount of GEL 9 million, which given its non-recurring nature has not been annualized

** Cost of risk in 1Q 2020 includes COVID-19 related credit loss allowances for loans, in the amount of GEL 210.9 million, which given its non-recurring nature has not been annualized

Deposit Portfolio

The total deposits portfolio decreased by 7.0% QoQ and amounted to GEL 10,420.3 million, while on a constant currency basis, the deposit portfolio decreased by 2.6 pp. Furthermore, the decrease in the corporate segment was related to high liquidity, as well as currency appreciation in 2Q 2020. Without currency effect, the corporate book would have decreased by 14.6% QoQ. We have not observed any material impact on our deposit portfolio due to COVID-19.

The proportion of deposits denominated in foreign currency dropped by 0.6 pp QoQ and accounted for 65.6% of total deposits, while on a constant currency basis the proportion of deposits denominated in foreign currency decreased by 0.9 pp QoQ and stood at 67.2%.

As of 30 June 2020, our market share in deposits amounted to 37.1%, down by 2.7 pp QoQ and our market share in deposits to legal entities stood at 35.9%, down by 6.3 pp over the same period. Our market share in deposits to individuals stood at 38.1%, up by 0.2% QoQ.

Segment definition and PL

Business Segments

The segment definitions are as follows:

· Corporate - a legal entity/group of affiliated entities with an annual revenue exceeding GEL 12.0 million or which have been granted facilities with more than GEL 5.0 million. Some other business customers may also be assigned to the corporate segment or transferred to the MSME segment on a discretionary basis;

· Retail - non-business individual customers; all individual customers are included in retail deposits;

· MSME - business customers who are not included in the corporate segment; or legal entities which have been granted a pawn shop loan; or individual customers of the fully-digital bank, Space; and

· Corporate centre and other operations - comprises the Treasury, other support and back office functions, and non-banking subsidiaries of the Group.

Business customers are all legal entities or individuals who have been granted a loan for business purposes.

Income Statement by Segments

Consolidated Financial Statements of TBC Bank Group PLC

* Certain amounts do not correspond to the 2019 consolidated financial statement as they reflect the change in accounting policy for PPE from revaluation model to cost method in 2Q 2020.

Consolidated Statement of Profit or Loss and Other Comprehensive Income

Consolidated Statement of Cash flows

Key Ratios

Average Balances

The average balances included in this document are calculated as the average of the relevant monthly balances as of each month-end. Balances have been extracted from TBC's unaudited and consolidated management accounts, which were prepared from TBC's accounting records. These were used by the management for monitoring and control purposes.

* Prior to change in PPE accounting policy from revaluation model to cost method, ROE stood at 20.7%, while ROA remained unchanged in 2Q 2019

** Cost of risk for 2Q 2020 includes COVID-19 related TBC Kredit credit loss allowances for loans, in the amount of GEL 9.0 million, which given its non-recurring nature has not been annualized

*** Cost of risk for 1Q 2020 includes COVID-19 related credit loss allowances for loans, in the amount of GEL 210.9 million, which given its non-recurring nature has not been annualized

**** Based on internal estimates

***** Prior to change in PPE accounting policy from revaluation model to cost method, Leverage stood at 7.8x and 7.3x for 1Q 2020 and 2Q 2019, respectively

Ratio definitions

1. Return on average total equity (ROE) equals net income attributable to owners divided by the monthly average of total shareholders' equity attributable to the PLC's equity holders for the same period; annualised where applicable.

2. Return on average total assets (ROA) equals net income of the period divided by monthly average total assets for the same period; annualised where applicable.

3. Return on average total equity (ROE) before credit loss allowance equals net income attributable to owners excluding all credit loss allowance divided by the monthly average of total shareholders 'equity attributable to the PLC's equity holders for the same period.

4. Cost to income ratio equals total operating expenses for the period divided by the total revenue for the same period. (Revenue represents the sum of net interest income, net fee and commission income and other non-interest income).

5. Net interest margin (NIM) is net interest income divided by monthly average interest-earning assets; annualised where applicable. Interest-earning assets include investment securities excluding corporate shares, net investment in finance lease, net loans, and amounts due from credit institutions. The latter excludes all items from cash and cash equivalents, excludes EUR mandatory reserves with NBG that currently have negative interest, and includes other earning items from due from banks.

6. Loan yields equal interest income on loans and advances to customers divided by monthly average gross loans and advances to customers; annualised where applicable.

7. Deposit rates equal interest expense on customer accounts divided by monthly average total customer deposits; annualised where applicable.

8. Yields on interest earning assets equal total interest income divided by monthly average interest earning assets; annualised where applicable.

9. Cost of funding equals total interest expense divided by monthly average interest bearing liabilities; annualised where applicable.

10. Spread equals difference between yields on interest earning assets (including but not limited to yields on loans, securities and due from banks) and cost of funding (including but not limited to cost of deposits, cost on borrowings and due to banks).

11. Cost of risk equals credit loss allowance for loans to customers divided by monthly average gross loans and advances to customers; annualised where applicable.

12. PAR 90 to gross loans ratio equals loans for which principal or interest repayment is overdue for more than 90 days divided by the gross loan portfolio for the same period.

13. NPLs to gross loans equals loans with 90 days past due on principal or interest payments, and loans with a well-defined weakness, regardless of the existence of any past-due amount or of the number of days past due divided by the gross loan portfolio for the same period.

14. NPLs coverage ratio equals total credit loss allowance for loans to customers calculated per IFRS 9 divided by the NPL loans.

15. NPLs coverage with collateral ratio equals credit loss allowance for loans to customers per IFRS 9 plus the total collateral amount of NPL loans (excluding third party guarantees) discounted at 30-50% depending on segment type divided by the NPL loans.

16. Credit loss level to gross loans equals credit loss allowance for loans to customers divided by the gross loan portfolio for the same period.

17. Related party loans to total loans equals related party loans divided by the gross loan portfolio.

18. Top 10 borrowers to total portfolio equals the total loan amount of the top 10 borrowers divided by the gross loan portfolio.

19. Top 20 borrowers to total portfolio equals the total loan amount of the top 20 borrowers divided by the gross loan portfolio.

20. Net loans to deposits plus IFI funding ratio equals net loans divided by total deposits plus borrowings received from international financial institutions.

21. Net stable funding ratio equals the available amount of stable funding divided by the required amount of stable funding as defined by NBG in line with Basel III guidelines.

22. Liquidity coverage ratio equals high-quality liquid assets divided by the total net cash outflow amount as defined by the NBG.

23. Leverage equals total assets to total equity.

24. Regulatory CET 1 CAR equals CET 1 capital divided by total risk weighted assets, both calculated in accordance with the Pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.

25. Regulatory tier 1 CAR equals tier I capital divided by total risk weighted assets, both calculated in accordance with the Pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.

26. Regulatory total CAR equals total capital divided by total risk weighted assets, both calculated in accordance with the Pillar 1 requirements of the NBG Basel III standards. The reporting started from the end of 2017. Calculations are made for TBC Bank stand-alone, based on local standards.

Exchange Rates

To calculate the QoQ growth of the Balance Sheet items without the currency exchange rate effect, we used the USD/GEL exchange rate of 3.2845 as of 31 March 2020. As of 30 June 2020 the USD/GEL exchange rate equalled 3.0552. For P&L items growth calculations without currency effect, we used the average USD/GEL exchange rate for the following periods: 2Q 2020 of 3.1395, 1Q 2020 of 2.9267, 2Q 2019 of 2.7393.

Unaudited Consolidated Financial Results Overview for 1H 2020

This statement provides a summary of the unaudited business and financial trends for 1H 2020 for TBC Bank Group plc and its subsidiaries. The quarterly financial information and trends are unaudited.

TBC Bank Group PLC financial results are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and the Companies Act 2006 applicable to companies reporting under IFRS.

Changes in accounting policies, IAS 16

In 2Q 2020, the accounting policy in relation to subsequent measurement of land, buildings and construction in progress was changed from the revaluation model to the cost model. This led to the restatement of appropriate balance sheet amounts, in 1Q 2020 and 2019, while no material impact was recorded in the income statement.

Net Interest Income

In 1H 2020, net interest income amounted to GEL 392.3 million, down by 1.6% YoY, whereby interest income increased by 16.2% and interest expense increased by 40.3%.

The YoY increase in interest income was primarily related to an increase in interest income from loans, which was driven by an increase in the gross loan portfolio by GEL 2,494.0 million, or 22.4%. This effect was partially offset by a 1.1 pp drop in loan yields across all segments, mainly related to a decrease in Libor rate, currency devaluation, change in segment mix towards corporate, as well as competition. 

Our interest expense increased by 40.3%, which was primarily related to an increase in interest expense from the Senior and AT1 Bonds issued in June and July 2019, respectively in the amount of US$ 425 million, as well as growth in the average balance of the NBG loan. The other contributor was an increase in interest expense from deposits due to an increase in respective portfolio of GEL 543.5 million. Overall, the GEL cost of funding increased by 1.3 pp YoY mainly driven by an increase in the refinance rate as well as the increased cost of GEL deposits. Over the same period, FC cost of funding increased by 0.1 pp despite the decrease in Libor rate, which was offset by cost of debt securities issued, as mentioned above.

In 1H 2020, our NIM stood at 4.7%, down by 1.3 pp YoY.

Net fee and commission income

In 1H 2020, net fee and commission income totalled GEL 83.1 million, down by 2.7% YoY.

The main driver for the YoY reduction was other net fee and commission income due to reduced cash transactions, as well as a decrease in fees from card operations on the back of a slow-down in economic activity due to the COVID-19 pandemic. Furthermore, starting from 4Q 2019 we reclassified certain fees from our Uzbek subsidiary Payme (Inspired LLC) from other sub-category to settlement transactions, in the amount of GEL 6.0 million in 1H 2020. This decrease was partially offset by an increase in fees from guarantees issued and letters of credit due to an increase in the respective portfolio.

Other Non-Interest Income

Total other non-interest income increased by 7.6% YoY and amounted to GEL 64.9 million in 1H 2020.

The YoY increase was mainly attributable to growth in net income from foreign currency operations and growth in the net insurance premium earned after claims and acquisition costs. The former increase was driven by an increase in the number and volume of FX transactions across all segments as well as increased the spread due to high volatility.

Net insurance premium earned after claims and acquisition costs increased by 27.4% YoY, mainly related to the overall increase of the insurance business as well as decrease in claims during the lock-down period related to COVID-19 pandemic. More information about TBC insurance can be found in Annex 4 on page 41.

Credit Loss Allowance

Total credit loss allowance in 1H 2020 amounted to GEL 259.1 million. This significant increase was driven by:

o an extra credit loss allowance booked in the first quarter, in the amount of GEL 215.7 million (or GEL 210.9 million for loans), to prepare for the potential impact of the COVID-19 pandemic on our borrowers; and

o COVID- 19 related credit loss allowances for loans in the amount of GEL 9.0 million, which was created in our Azeri subsidiary, TBC Kredit in the second quarter.

These impacts translated into additional 1.7% cost of risk, which given its non-recurring nature was not annualized.