Principal risks and uncertainties continued Loan portfolio quality PRINCIPAL RISK/ The Group may not be able to maintain the quality of its loan portfolio. UNCERTAINTY The quality of the Group’s loan portfolio may deteriorate due to external factors beyond the Group’s control such as negative developments in Georgia’s economy or in the economies of its neighbouring countries, the unavailability or limited availability of credit information on certain of its customers, any failure of its risk management procedures or rapid expansion of its loan portfolio (see other currency risk above). The Group’s Corporate Investment Banking loan portfolio is concentrated and to the extent that such borrowers enter into further loan arrangements with the Group, this will increase the credit and general counterparty risk of the Group with respect to those counterparties and could result in deterioration of the Group’s loan portfolio quality. Furthermore, the collateral values that the Group holds against the loans may decline, which may have an adverse effect on the business and financial position of the Group. KEY DRIVERS/ During 2018, the Group’s cost of credit risk ratio was 1.6%, as compared to 2.2% in 2017. TRENDS Expected credit loss/impairment charges and, in turn, the Group’s cost of risk could increase if a single large borrower defaults or a material concentration of smaller borrowers default. As of 31 December 2018, 2017 and 2016, the Group’s non-performing loans accounted for 3.3%, 3.8%, and 4.2% of gross loans, respectively. The Corporate Investment Banking loan portfolio is concentrated, with the Group’s top ten Corporate Investment Banking borrowers accounting for 9.8% of the loan portfolio (gross of allowances for impairment) as of 31 December 2018, as compared to 10.7% at 31 December 2017 and 11.8% at 31 December 2016. The top ten Corporate Investment Banking borrowers accounted for 34.5% of the Corporate Investment Banking gross loan portfolio as of 31 December 2018, as compared to 35.5% at 31 December 2017 and 32.1% at 31 December 2016. As of 31 December 2018, the Group held collateral against gross loans covering 85.7% of the total gross loans. The main forms of collateral taken in respect of Corporate Investment Banking loans are liens over real estate, property plant and equipment, corporate guarantees, inventory, deposits and securities, transportation equipment and gold. The most common form of collateral accepted in Retail Banking loans is a lien over residential property. Downturns in the residential and commercial real estate markets or a general deterioration of economic conditions in the industries in which the Group’s customers operate may result in illiquidity and a decline in the value of the collateral securing loans, including a decline to levels below the outstanding principal balance of those loans. In addition, declining or unstable prices of collateral in Georgia may make it difficult for the Group to accurately value collateral it holds. If the fair value of the collateral that the Group holds declines significantly in the future, it could be required to record additional provisions and could experience lower than expected recovery levels on collateralised loans past due more than 90 days. Further changes to laws or regulations may impair the value of such collateral. 64 Annual Report 2018Bank of Georgia Group PLC