Strategic ReportStrategic ReportStrategic Report Financial Additional Overview Strategy Performance Governance Statements Information Outstanding profitability and balance sheet growth momentum, supported by strong capital and liquidity positions The Group delivered another year of strong balance sheet and fee income growth, combined with superior profitability, achieved as a result of excellent customer franchise growth and good cost management in both the Retail and Corporate Investment Banking businesses. Returns continue to be high and the Group remains very well positioned to continue to deliver good momentum and high returns. Group Demerger On 29 May 2018, the Demerger of Bank of Georgia Group PLC’s Investment Business to Georgia Capital PLC became effective. The results of operations of the Investment Business prior to the Demerger, as well as the gain recorded by the Group as a result of the Investment Business distribution are classified under “discontinued operations” as a single amount in the consolidated income statement. In line with IFRS, comparative periods have been accordingly restated to reflect the reclassification of the Investment Business from “continuing operations” into “discontinued operations”. Transition to IFRS 9 Financial Instruments The Group completed its IFRS 9 implementation programme and adopted “IFRS 9, Financial Instruments” standard from 1 January 2018. As allowed by IFRS 9, the Group did not restate prior-period data, therefore, comparatives are presented on an IAS 39 basis. In addition, throughout this section, the gross loans to customers and respective allowance for impairment are presented net of expected credit loss (ECL) on contractually accrued interest income. These do not have an effect on the net loans to customers balance. Management believes that netted-off balances provide the best representation of the Group’s loan portfolio position. During 2018, the Group revisited and changed its loan write-off policy as part of the IFRS 9 implementation programme. For mortgages and other loans secured by real estate the number of overdue days after which the balances are considered to be irrecoverable and are to be written off has been increased from 365 to 1,460 days. This resulted in the reinstatement of net loans to customers previously written-off in the amount of GEL 25.0 million as at 1 January 2018, the transition date to IFRS 9, which offsets the previously reported increase in loan loss provision at transition date. Therefore, the final impact recognised as a result of IFRS 9 adoption following the policy change as a reduction to shareholders’ equity at the transition date amounted to GEL 6.5 million, gross of income tax (GEL 4.3 million, net of income tax). Income statement Bank of Georgia Group consolidated Banking Business1 Change Change GEL thousands unless otherwise noted 2018 2017 y-o-y 2018 2017 y-o-y Net interest income 741,753 672,535 10.3% 739,604 672,100 10.0% Net fee and commission income 152,662 130,050 17.4% 153,182 131,474 16.5% Net foreign currency gain 128,762 79,106 62.8% 129,437 86,060 50.4% Net other income 7,262 18,645 -61.1% 7,815 19,701 -60.3% Revenue 1,030,439 900,336 14.5% 1,030,038 909,335 13.3% Operating expenses (376,85)2 (338,798) 11.2% (378,51)7 (342,936) 10.4% Profit from associates 1,339 1,311 2.1% 1,339 1,311 2.1% Operating income before cost of risk 654,926 562,849 16.4% 652,860 567,710 15.0% Cost of risk (160,225) (167,296) -4.2% (160,225) (167,296) -4.2% Profit before non-recurring items and income tax 494,701 395,553 25.1% 492,635 400,414 23.0% Net non-recurring items (57,156) (4,300) NMF (57,328) (4,300) NMF Profit before income tax expense 437,545 391,253 11.8% 435,307 396,114 9.9% Income tax expense (56,665) (26,592) 113.1% (56,665) (26,592) 113.1% Profit from continuing operations 380,880 364,661 4.4% 378,642 369,522 2.5% Profit from discontinued operations2 107,898 98,788 9.2% – – – Profit 488,778 463,449 5.5% 378,642 369,522 2.5% Earnings per share (basic) 10.78 11.61 -7.1% 8.72 9.63 -9.4% Earnings per share (diluted) 10.71 11.07 -3.3% 8.66 9.18 -5.7% Earnings per share (basic) adjusted 3 9.92 9.63 3.0% Earnings per share (diluted) adjusted3 9.86 9.18 7.4% 1Banking Business financials do not include eliminations with Investment Business during the five months of 2018. 2The Group’s 2018 profit from discontinued operations includes the results of operations of the Investment Business prior to the Demerger and GEL 90.7 million gain on Investment Business distribution. 32018 results adjusted for GEL 30.3 million Demerger-related costs, GEL 8.0 million Demerger-related corporate income tax gain, and GEL 30.3 million one-off impact of remeasurement of deferred tax balances (see details on page 92). Annual Report 2018Bank of Georgia Group PLC 87