Strategic Report Strategic Report Strategic Report Financial Additional Overview Strategy Performance Governance Statements Information Performance highlights •Strong revenue of GEL 1,030.0 million in 2018 (up 13.3% y-o-y). Y-o-y revenue growthin 2018 was driven by a 10.0% increase in net interest income, which resulted from strong loan book growth. Additionally, net strong fee and commission income (up 16.5% y-o-y) and net client-driven foreign currency gains (up 50.4% y-o-y) also contributed to annual growth in revenues. •Our NIM was 6.5% in 2018. 2018 NIM was down 80bps y-o-y due to the 70bps y-o-y decrease in loan yield, largely reflecting our planned shift towards a higher quality, finer margin product mix on the back of tighter regulatory conditions for unsecured consumer lending, and higher EUR-denominated loan origination during the year, as well as a 30bps y-o-y increase in the cost of funds. •Loan yield. Currency blended loan yield was 13.5% in 2018 (down 70bps y-o-y). The y-o-y decline in loan yields during 2018, was attributable to a decrease in both local and foreign currency loan yields, which primarily reflects the change in product mix in our loan portfolio. •Liquid assets yield. Our liquid assets yield was 3.8% in 2018 (up 40bps y-o-y). The main contributor to the y-o-y trend in 2018 was the increase in the foreign currency denominated liquid assets yield (up 30bps y-o-y in 2018), reflecting the Federal Open Market Committee’s decisions to raise interest rates, which triggered similar increases on interest rates paid by a) The National Bank of Georgia (the “NBG”) on the Bank’s obligatory reserves (foreign currency only) and b) correspondent banks on deposits placed by the Bank. However, starting from 12 July 2018, NBG reduced interest rates on foreign currency obligatory reserves (from US federal funds rate (Fed rate) rate minus 50bps to Fed rate minus 200bps, floored at zero for US Dollar reserves, and from European Central Bank (ECB) rate minus 20bps to ECB rate minus 200bps, floored at negative 60bps for EUR-denominated reserves), which partially offset the increasing trend. •Cost of funds. Cost of funds stood at 5.0% in 2018 (up 30bps y-o-y). Year-on-year increase in 2018 was primarily driven by an increase in the cost of amount due to credit institutions (up 90bps y-o-y in 2018) as a result of increased local currency denominated borrowings from Development Finance Institutions (DFIs), and an increase in the Libor rate during the period. In addition, y-o-y increase in cost of funds in 2018 also reflected the increase in cost of debt securities issued (up 40bps y-o-y in 2018), following the issuance of GEL 500 million 11.0% Lari-denominated notes in 2Q17 – a milestone transaction for Bank and Georgia. •Net fee and commission income. Net fee and commission income reached GEL 153.2 million in 2018 (up 16.5% y-o-y). The growth was mainly driven by the strong performance in our settlement operations supported by the success of our Retail Baking franchise.n •Net foreign currency gain.In line with the increase of client-driven flows, as well as robust interest from foreign financial institutions in local currency, the net foreign currency gain was up 50.4% y-o-y in 2018. •Net other income.The y-o-y decline in net otherincome in 2018 was largely driven by net losses from derivative financial instruments (interest rate swap hedges) and investment securities recorded in 4Q18. Operating income before non-recurring items, cost of risk and profit for the period Change GEL thousands, unless otherwise noted 2018 2017 y-o-y Salaries and other employee benefits (215,816) (198,213) 8.9% Administrative expenses (113,264) (100,291) 12.9% Depreciation and amortisation (45,442) (40,974) 10.9% Other operating expenses (3,995) (3,458) 15.5% Operating expenses (378,517) (342,936) 10.4% Profit from associate 1,339 1,311 2.1% Operating income before cost of risk 652,860 567,710 15.0% Expected credit loss/impairment charge on loans to customers (139,499) (155,210) -10.1% Expected credit loss/impairment charge on finance lease receivables (164) (496) -66.9% Other expected credit loss/impairment charge on other assets and provisions (20,562) (11,590) 77.4% Cost of risk (160,225) (167,296) -4.2% Profit before non-recurring items and income tax 492,635 400,414 23.0% Net non-recurring items (57,328) (4,300) NMF Profit before income tax 435,307 396,114 9.9% Income tax expense (56,665) (26,592) 113.1% Profit 378,642 369,522 2.5% Annual Report 2018Bank of Georgia Group PLC 91