Strategic ReportStrategic ReportStrategic Report Financial Additional Overview Strategy Performance Governance Statements Information Identifying, prioritising and managing our risks to support our goals and strategic objectives We outline the principal risks and uncertainties that are most likely to have an impact on our strategic objectives, business model, operations, future performance, solvency and liquidity. These principal risks are described in the table that follows, together with the relevant strategic business objectives, key drivers/trends, material controls which have been put in place to mitigate the risks and the mitigation actions we have taken. It is recognised that the Group is exposed to risks wider than those listed. We disclose those which we believe are likely to have had the greatest impact on our business and which have been discussed in depth at the Group’s recent Board, Audit or Risk Committee meetings. The order in which the principal risks and uncertainties appear does not denote their order of priority. It is not possible to fully mitigate all of our risks. Any system of risk management and internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. Currency and macroeconomic environment PRINCIPAL RISK/ Macroeconomic factors relating to Georgia, including depreciation of the Lari against UNCERTAINTY the US Dollar, may have a material impact on our loan book. KEY DRIVERS/ The Group’s operations are primarily located in, and most of its revenue is sourced from, TRENDS Georgia. Macroeconomic factors relating to Georgia, such as changes in GDP, inflation and interest rates, may have a material impact on the quality of our loan portfolio, loan losses, our margins, and customer demand for our products and services. The Georgian economy delivered a solid 4.8% estimated real GDP growth in 2018, compared to real GDP growth of 4.8% in 2017 and 2.8% in 2016, according to Geostat. Uncertain and volatile global economic conditions could have substantial political and macroeconomic ramifications globally which in turn could impact the Georgian economy. In 2018, the Lari depreciated against the US Dollar by 3.3%, after appreciating by 2.1% in 2017. The volatility of Lari against Dollar has affected, and may continue to adversely affect, the quality of our loan portfolio, as well as increase the cost of credit risk and expected credit loss/impairment provisions. This is because our corporate, MSME and mortgage loan books are largely US Dollar-denominated and the majority of our customers’ income is Lari-denominated. The creditworthiness of our customers may be adversely affected by the depreciation of Lari against US Dollar, which could result in them having difficulty repaying their loans. The depreciation of Lari may also adversely affect the value of our customers’ collateral. As at 31 December 2018, approximately 82.3% and 50.3% of our Corporate Investment Banking and Retail Banking loans, respectively, were denominated in foreign currency (predominantly US Dollar), while US Dollar income revenue loans covered 6.2% of Retail Banking gross loans and 38.3% of Corporate Investment Banking gross loans. Our cost of credit risk was 1.6% in 2018 compared to 2.2% in 2017. Annual Report 2018Bank of Georgia Group PLC 61