Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information 44,000 clients now benefiting from SOLO’s lifestyle Over the medium term, we will focus on managing our banking proposition. We moved from a product-focused capital ratios c.200 basis points over the minimum to a client-centric approach and, going forward, we regulatory requirements. I was also very pleased, in March will strengthen this focus on client centricity. We are 2019, to successfully price a US$100 million offering of increasingly incorporating customer feedback into our Additional Tier 1 Capital notes to further improve our products and services in the shortest timeframe possible, capital base. thus building our focus on driving customer satisfaction as a key core competency. During the last 12 months, the banking sector in Georgia has been working with the NBG to implement a number of We also continued to deliver strong progress in the regulatory changes, which we agree with, relating to retail Corporate Investment Banking (CIB) business, and lending lending. Namely, caps on payment-to-income and loan- growth is now more balanced between Retail and Corporate to-value ratios have been updated and the GEL 100,000 Investment Banking. Customer lending in CIB grew by 15.9% limit, below which the loans must be issued in Georgian year-on-year. In addition, we have made further progress Lari, increased to GEL 200,000. In addition, Basel III in reducing concentration risk in CIB by decreasing the capital adequacy requirements have been put in place. concentration of our top ten corporate borrowers to only All of these changes have now been introduced with the 9.8% of our lending portfolio. This stronger lending growth expectation that Georgian banks will shift towards local in CIB has also supported much improved net fee and currency lending to corporates, the SME sector and commission income, which, during 2018, increased by 17.4% the mortgage sector, and further de-dollarise their and has contributed to almost 30% growth in profit before balance sheets. non-recurring items and income tax. As a result of the recent policy changes, we anticipate Our increasing focus on lending in the mortgage segment growth rates in the unsecured consumer sector to and to finer margin corporate and SME clients has moderate, although we continue to expect to deliver however led to a negative mix effect on overall loan yields solid growth in mortgages, particularly Lari mortgages and on the net interest margin, which was reduced by 80 and SME lending. Overall, with the strong rates of growth basis points year-on-year to 6.5%. This shift in product already delivered in 2018, we now expect customer lending mix, which we expect to continue during 2019, improves growth for the medium to long term to be within our our asset quality metrics and, particularly in the case of 15-20% expected growth range, with lending growth the mortgage portfolio, reduces the risk-asset and capital expectations over the next 12 months to be closer intensity of our lending growth. This enables us to support to 15%. This is expected to be supported by further the Group’s return on equity and superior profitability strong levels of economic growth in the country and profile. Individual product loan yields have continued underpinned by the Government accelerating capital to remain broadly stable, and we expect this trend to expenditure, which we expect to have a high private sector continue into 2019. Costs remain well controlled, and the investment multiplier. Banking Business delivered positive operating leverage of 2.9 percentage points in 2018. In 2018, the Bank introduced At the 2019 Annual General Meeting, the Board intends to project “Lean”, which has already started to improve back recommend a final dividend for 2018 of GEL 2.55 per share office procedures, and contribute to end-to-end process payable in British Pounds Sterling at the prevailing rate. optimisation in the mortgage business. Over the last This represents a payout ratio of 30% – well in the range 12 months, the cost to income ratio has improved from of our dividend payout ratio target of 25-40% and a 4.5% 37.7% in 2017, to 36.7% in 2018. This focus on delivering increase over the dividend paid after the Demerger. positive operating leverage will continue, leading to further expected improvements in our cost to income ratio. Overall, the Group has delivered another year of strong franchise and earnings growth. The returns continue to Asset quality continues to improve, reflecting our be high and the Group remains very well positioned to good lending discipline and the ongoing strength of the continue to deliver good momentum and high returns. economy. The full year cost of credit risk ratio was 1.6%, In particular, I expect to deliver this progress at the same a significant improvement from 2.2% in 2017. The NPLs to time as we have a clear focus on the common values that gross loans ratio was 3.3% at the end of December 2018 unite all key stakeholder groups in Bank of Georgia: our – 50 basis points lower than a year ago. The coverage customers, employees, management and shareholders. ratios remain robust and we expect asset quality and credit metrics to remain strong over the medium term, Sincerely yours, particularly as our product portfolio mix shifts more towards higher quality lending portfolios, such as the Archil Gachechiladze mortgage portfolio. Chief Executive Officer 27 March 2019 The Group’s capital and funding position remains strong. The NBG (Basel III) total capital adequacy ratio increased by 70 basis points during the fourth quarter 2018 to This Strategic Report as set out on pages 01 to 101 16.6%, and the NBG (Basel III) Tier 1 capital adequacy was approved by the Board of Directors on 27 March ratio was 12.2%. Our capital ratios are comfortably ahead 2019 and signed on its behalf by of our regulatory minimum requirement. We continue to generate significant levels of internal capital as a result Archil Gachechiladze of both the Bank’s high return on average equity and Chief Executive Officer the improved risk asset intensity of our lending growth. 27 March 2019 Annual Report 2018Bank of Georgia Group PLC 13