Principal risks and uncertainties continued Liquidity risk PRINCIPAL RISK/ The Group is exposed to liquidity risk when the maturities of its assets and liabilities UNCERTAINTY do not coincide. Although the Group expects to have sufficient funding over the next 18 months and beyond to execute its strategy and to have sufficient liquidity over the next 18 months and beyond, liquidity risk is nevertheless inherent in banking operations and may be heightened by a number of factors, including an over-reliance on, or an inability to access, a particular source of funding, changes in credit ratings or market-wide phenomena, such as financial market instability. Credit markets worldwide have in recent years experienced, and may continue to experience, a reduction in liquidity and long-term funding as a result of global economic and financial factors. The availability of credit in emerging markets, in particular, is significantly influenced by the level of investor confidence and, as such, any factors that affect investor confidence (for example, a downgrade in credit ratings of the Bank, Georgia, or state interventions or debt restructurings in a relevant industry) could affect the price or availability of funding for the Group companies, operating in any of these markets. KEY DRIVERS/ The Group’s current liquidity may be affected by unfavourable financial market conditions. TRENDS If assets held by the Group in order to provide liquidity become illiquid or their value drops substantially, the Group may be required, or may choose, to rely on other sources of funding to finance its operations and future growth. Only a limited amount of funding, however, is available on the Georgian inter-bank market, and recourse to other funding sources may pose additional risks, including the possibility that other funding sources may be more expensive and less flexible. In addition, the Group’s ability to access such external funding sources depends on the level of credit lines available to it, and this, in turn, is dependent on the Group’s financial and credit condition, as well as general market liquidity. In terms of current and short-term liquidity, the Group is exposed to the risk of unexpected, rapid withdrawal of deposits by its customers in large volumes. Circumstances in which customers are more likely to withdraw deposits in large volumes rapidly include, among others, a severe economic downturn, a loss in consumer confidence, an erosion of trust in financial institutions or a period of social, economic or political instability. If a substantial portion of customers rapidly or unexpectedly withdraw their demand or term deposits or do not roll over their term deposits upon maturity, this could have a material adverse effect on the Group’s business, financial condition and results of operations. MITIGATION The Group manages its liquidity risk through the liquidity risk management framework, which models the ability of the Group to meet its payment obligations under both normal conditions and crisis. The Group has developed a model based on the Basel III liquidity guidelines. This approach is designed to ensure that the funding framework is sufficiently flexible to secure liquidity under a wide range of market conditions. Among other things, the Group maintains a diverse funding base comprising of short-term sources of funding (including Retail Banking and Corporate Investment Banking customer deposits, inter-bank borrowings and borrowings from the NBG) and longer-term sources of funding (including term Retail Banking and Corporate Investment Banking deposits, borrowing from international credit institutions, sales and purchases of securities and long-term debt securities). Client deposits and notes are one of the most important sources of funding for the Group. As of 31 December 2018, 2017 and 2016, 90.8%, 91.4%, and 91.5%, respectively, of client deposits and notes had contractual maturities of one year or less, of which 55.1%, 56.5%, and 53.9%, respectively, were payable on demand. However, as of the same dates, the ratio of net loans to client deposits and notes was 115.5%, 109.4%, and 116.1%, respectively, and the NBG liquidity coverage ratios were 120.9% and 112.4% as of 31 December 2018 and 2017, respectively. 66 Annual Report 2018Bank of Georgia Group PLC