Overview of financial results continued •Operating expenses increased to GEL 378.5 million in 2018 (up 10.4% y-o-y) . The growth in revenues outpaced the growth in operating expenses y-o-y during 2018, leading to positive operating leverage during the year. Salaries and employee benefits increased by 8.9% y-o-y reflecting our core business growth, while administrative expenses increased by 12.9% y-o-y, primarily driven by increased costs on consultancy services in relation to the “Lean” project to achieve a step-change in operating efficiency, customer experience, and culture. •Cost of credit risk ratio.The cost of credit risk ratio improved significantly to 1.6% in 2018, down 60bps y-o-y. RB’s cost of credit risk ratio was down 40bps y-o-y while CIB’s cost of credit risk ratio was down 70bps y-o-y. •Cost of risk. The cost of risk in 2018 also includes a one-off charge of GEL 10.0 million relating to the write-down of legacy software and IT equipment. •Quality of our loan book remains strong in 2018as evidenced by the following closely monitored metrics: Change GEL thousands, unless otherwise noted 2018 2017 y-o-y Non-performing loans NPLs 318,356 301,268 5.7% NPLs to gross loans 3.3% 3.8% NPLs to gross loans, RB 2.1% 1.3% NPLs to gross loans, CIB 5.6% 7.5% NPL coverage ratio 90.5% 92.7% NPL coverage ratio adjusted for the discounted value of collateral 129.9% 130.6% Past due dates Retail loans – 15 days past due rate 1.1% 0.9% Mortgage loans – 15 days past due rate 0.7% 0.6% •BNB – the Group’s banking subsidiary in Belarus – generated a profit of GEL 11.5 million in 2018 (up 11.4% y-o-y). BNB’s earnings were positively impacted by decreased levels of cost of risk both during 2018, on the back of improved macroeconomic conditions starting from the second half of 2017. •BNB’s loan book reached GEL 432.7 million at 31 December 2018, up 8.3% y-o-y, mostly reflecting an increase in consumer loans. Client deposits were GEL 389.0 million at 31 December 2018, up 25.5% y-o-y. •BNB continues to remain strongly capitalised, with Capital Adequacy Ratios well above the requirements of its regulating Central Bank. At 31 December 2018, total CAR was 13.5%, above the 10% minimum requirement of the National Bank of the Republic of Belarus (“NBRB”), while Tier I CAR was 8.5%, above NBRB’s 6% minimum requirement. Return on Average Equity (“ROAE”) was 14.6% in 2018 (14.6% in 2017). Strong capitalisation and profitability allowed BNB to distribute a dividend in the amount of GEL 1.2 million in 2018 (GEL 1.2 million in 2017). •Overall, profit before non-recurring items and income tax totalled GEL 492.6 million in 2018 (up 23.0% y-o-y), while ROAE was 26.1% in 2018 (25.2% in 2017).8 •Net non-recurringitems. Net non-recurring expenses amounted to GEL 57.3 million in 2018 (GEL 4.3 million in 2017), primarily comprising of 2Q18 Demerger-related costs and employee costs related to termination benefits of the Group’s former CEO (acceleration of share-based compensation received before 31 December 2018) recorded in 4Q18. •Income tax expense. Income tax expense amounted to GEL 56.7 million in 2018 (GEL 26.6 million in 2017). The significant y-o-y increase in income tax expense in 2018 was primarily driven by the one-off impact of changes to the corporate taxation model applicable to financial institutions which was amended in June 2018. 82018 ROAE adjusted for Demerger-related expenses and one-off impact of remeasurement of deferred tax balances.. 92 Annual Report 2018Bank of Georgia Group PLC